COMMISSIONER OF INCOME TAX vs. RAM KUMAR AGGARWAL AND BROS.

CIVIL APPEAL No. 1453/1976Supreme Court1993 INSC 35402 November 1993Bench: 2 JudgesAuthor: B.P. JEEVAN REDDY, S.P. BHARUCHA COMMISSIONER OF10 pages
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What were the facts?

The assessee, a partnership firm dealing in shares, purchased all equity shares of Chrestian Mica Co. Ltd. in 1945 and took over its management. The assessee consistently treated these shares as stock-in-trade in subsequent assessment years. The company went into liquidation, and the assessee received a surplus amount from the liquidator in the previous year relevant to AY 1956-57. The Income Tax Officer included this surplus in the assessee's total income, considering the shares as stock-in-trade. The Appellate Assistant Commissioner upheld this. However, the Income Tax Appellate Tribunal deleted the addition. The High Court, on reference, ruled in favor of the assessee. The Revenue has appealed this decision.

What did the Supreme Court hold?

The Supreme Court allowed the appeal, setting aside the High Court's judgment. The Court held that when a company goes into liquidation and its assets are distributed among shareholders, what each shareholder receives is proportionate to their shareholding and is in lieu of their shares. If the assessee is a dealer in shares and holds them as stock-in-trade, any surplus amount received upon liquidation represents a revenue receipt and constitutes business income. The Court distinguished the case of Commissioner of Income Tax, U.P. v. Madan Gopal Radhey Lal, finding it not applicable. The Court approved the view taken by the Patna High Court in Dalmia Cement Paper Marketing Co. Ltd. v. Commissioner of Income Tax, Bihar and Orissa, 17 I.T.R. 141, which held that surplus over the purchase price of shares held as stock-in-trade, received on liquidation, represented revenue receipts. The Court answered all three questions referred to the High Court in the negative, in favor of the revenue and against the assessee. No issue was expressly left undecided.

What were the issues?

1. Whether, on the facts and in the circumstances, the Tribunal was justified in investigating the nature of shares held by the assessee in Chrestian Mica Co. Ltd. when both the assessee and tax authorities had treated them as stock-in-trade since AY 1949-50 and proceeded on that basis for AY 1956-57? (Question of law and fact, turning on the principle of consistency and estoppel in tax assessments). 2. Whether, on the facts and in the circumstances, the Tribunal was justified in law in holding that the shares held by the assessee in Chrestian Mica Co. Ltd. were not its stock-in-trade for dealing in shares? (Question of law, turning on the definition and treatment of stock-in-trade). 3. If the answer to question (2) is in the negative, whether the Tribunal was right in holding that the surplus amount of Rs. 32,25,550 was not assessable in the hands of the assessee? (Question of law, turning on the taxability of surplus on liquidation of stock-in-trade shares). Assessee's Contentions: The assessee argued that the admission and concession made by it to the effect that the shares were held as stock-in-trade was erroneous. (Not explicitly detailed, but implied by the High Court's decision in their favor). Revenue's Contentions: The Revenue contended that assets received by a shareholder on liquidation are in lieu of shares. Once shares are converted into money, the holder realizes the value of the shares. The Revenue relied on the principle that if shares are held as stock-in-trade, any surplus received on liquidation constitutes business income. The Revenue cited Commissioner of Income Tax, U.P. v. Madan Gopal Radhey Lal, 73 I.T.R. 652, and passages from Brogan v. Stafford Coal and Iron Co. Ltd., 41 Tax Cases 305, and Commissioner of Inland Revenue v. George Buell & Anr., 9 Tax Cases 27.

Which sections of the Income-tax Act were involved?

Section 2(6A),Section 2(22)

AI-generated summary — verify with the full judgment below

A COMMISSIONER OF INCOME TAX v. RAM KUMAR AGGARWAL AND BROS. NOVEMBER 2, 1993. B [B.P'. JEEVAN REDDY AND S.P. BHARUCHA, JJ.) . Income Tax Act, 1922 : Partnership fi~rchasing all equity shares of a company-Taking over its management-Shares of the company held as sto~k-in-trade-Liquiddtion of the company-Surplus received on liquida- C tion--Whether includible in the total income of the assessee.

Companies Act. 1956: Section 511-Shareholding in a company-Dis- tribution of assets-Proportionate to shareholding-After distribution share- holing comes to an end. D The respondent • Asessee, a partnership firm was dealing in shares.

In the year 1945, it purchased all the equity shares of a company and took . over its management. In all the subsequent assessment years, he took the stand that he held the said sh'iires as his stock-in-trade and obtained .certain benefit on that basis. The Company went into liquidator and the E assessee received surplus amount from the liquidator in the previous year ·relevant to AY 1956-57. In the assessment proceedings for the year 1956- 57, the assessee admitted again that the shares of the said company were held by it as stock-in-trade. On

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