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Addl. Commissioner of Income-tax, Karnataka Vs. Maharashtra Apex Corporation Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Referred Case Nos. 70 and 122 of 1976
Judge
Reported in[1979]116ITR616(KAR); [1979]116ITR616(Karn)
ActsIncome Tax Act, 1961 - Sections 4
AppellantAddl. Commissioner of Income-tax, Karnataka
RespondentMaharashtra Apex Corporation Ltd.
Appellant AdvocateS.R. Rajasekharamurthy, Adv.
Respondent AdvocateG. Sarangan, Adv.
Excerpt:
- karnataka state minorities commission act, 1994 sections 4(3), (4) & 18(2)(b) & karnataka state minorities commission rules, 2000, rule 4: [p.d. dinakaran, c.j. & v.g. sabhahit, j] member nominated to minorities commission omission to make provisions by framing rule, for payment of salary held, when the act provides for payment of salary to person nominated as member, he cannot be denied salary merely because there is no rule providing for it. state is under obligation to frame rules for payment of salary to member......for rs. 41,328 in the year 1958. by the end of the year 1968, the assessee had realised by way of annual instalments the entire sum of rs. 41,328 which had been laid out for the purchase of these bonds. during the accounting years relevant to the assessment years 1970-71 and 1972-73, the assessee received rs. 4,280 and rs. 4,230 respectively by way of annual instalments. 5. since the assessee had realised by 1968, the entire amount paid for purchase of these bonds, the ito treated the annual instalments of rs. 4,280 and rs. 4,230 as income receipts and levied the tax on them. the assessee's claim that these two instalments were in the nature of capital receipt and not liable to tax, was rejected by the ito and the aac, but found favour with the tribunal. the reasoning of the tribunal.....
Judgment:

D.M. Chandrashekhar, C.J.

1. These two references by the Income-tax Appellate Tribunal, Bangalore Bench (hereinafter referred to as 'the Tribunal'), are at the instance of the revenue and they relate to the same assessee for two different assessment years and involve the same question.

2. The question referred in I.T.R.C. No. 70 of 1976 reads :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,280 received by the assessee during the relevant accounting year was assessable to tax under the I.T. Act ?'

3. The question referred in I.T.R.C. No. 122 of 1976 is practically the same except that the sum received by the assessee was Rs. 4,230.

4. The facts material for the decision of these two references are briefly these. The assessee, Maharashtra Apex Corporation Ltd., was carrying on the business of banking. It transferred its banking business to the Syndicate Bank Ltd. in the year 1953. The consideration received for such transfer was utilised by the assessee for investment in securities and for money lending. The assessee also received deposits. The securities purchase by the assessee included two categories of bonds issued by the Uttar Pradesh Government towards payment of compensation for abolition of Zamindari. Under both those categories of bonds, the compensation was payable in equal instalments spread over 40 years. The first category of bonds did not carry any interest while the second category of bonds carried interest at 2 1/2 per cent. per annum. The face value of both those categories of bonds was Rs. 1,10,000, but were purchased by the assessee for Rs. 41,328 in the year 1958. By the end of the year 1968, the assessee had realised by way of annual instalments the entire sum of Rs. 41,328 which had been laid out for the purchase of these bonds. During the accounting years relevant to the assessment years 1970-71 and 1972-73, the assessee received Rs. 4,280 and Rs. 4,230 respectively by way of annual instalments.

5. Since the assessee had realised by 1968, the entire amount paid for purchase of these bonds, the ITO treated the annual instalments of Rs. 4,280 and Rs. 4,230 as income receipts and levied the tax on them. The assessee's claim that these two instalments were in the nature of capital receipt and not liable to tax, was rejected by the ITO and the AAC, but found favour with the Tribunal. The reasoning of the Tribunal for treating these annual receipts as capital receipts was that the purchase of these bonds was not in the course of the business of the assessee, that it was also not shown that the assessee had borrowed any money for the purchase of these bonds and that their purchase could not be regarded as an adventure in the nature of trade. The Tribunal sought to derive support from the decision of the Supreme Court in G. Venkataswami Naidu & Co. v. CIT : [1959]35ITR594(SC) .

6. In these references, the learned standing counsel who appeared for the revenue contended that the purchase of these bonds by the assessee was an adventure in the nature of trade. He maintained that under the memorandum of association of the assesses company, it had the power to buy and sell securities and that these bonds were purchased with the intention of making profit because their market prices were very much below their face values and the assessee knew that these bonds would fetch much higher amounts than what had been paid to purchase them.

7. On the other hand, Sri. G. Sarangan, learned counsel for the assessee contended that the mere fact that the memorandum of association of the company permitted the assesses company to buy and sell securities, did not make the purchase of these bounds a trading transaction and that since the assessee had already discontinued its banking business, the purchase of these bonds did not amount to change of investment, and that these annual payments received by the assessee could not be regarded as profits arising from change of investment. It was also contended by Sri Sarangan that the purchase of these bonds by the assessee was only for investment of surplus funds after it ceased to carry on banking business and hence could not be regarded as an adventure in the nature of trade.

8. The real question that arises for determination in these references is whether the annual payments received by the assessee during these two years should be regarded as income receipts or capital receipts or partly as income receipts or partly as capital receipts. The answer to this question can be found in Andrew Scoble v. Secretary of State of India [1903] 4 TC 618 in which the facts were very similar to those in the present case. There, the contract between the East India Company and the G.I.P. Railway Company provided that at the expiration of a certain period the East India Company had the option to give to the railway company the notice of its intention to purchase the railway and the works. The British Government which succeeded to the East India Company, exercised such option. Thereupon, a compensation of Pounds 34 million was paid in equal annual instalments spread over a number of years. Question arose whether income-tax was payable on the full amount of each annual instalment or only so much of it as represented income. In the Court of Appeal, Stirling L. J. observed that on the face of the contract it appeared that each annual instalment contained principal money and a portion of interest which could be readily ascertained by a competent actuary. This view was affirmed by the House of Lords. Lord Lindley observed that such annual payment was nothing more than the payment of equal instalments of the purchase money with interest and that such instalments were not at all profits or gains but were partly payments of principal money and partly profit in the shape of interest.

9. In the light of the aforesaid elucidation, the annual instalments received by the present assessee should, in our opinion, be regarded as partly payment of the amount of compensation and partly interest thereon. In other words, the payment represented capital coupled with interest. As stated by Goddard L.J. in Southern-Smith v. Clancy [1940] 24 TC 1 ; [1941] 9 ITR (Supp) 73, such annual payment should be dissected and tax should be charged on so much of it as represents interest only.

10. However, the learned standing counsel submitted that since in the earlier years no part of such annual payments were subject to tax until the assessee had recouped the amount it had paid for the purchase of those bonds, the entire instalments received subsequently should be treated as profits. The mere fact that the income-tax authorities had not levied in earlier years tax on the portion of such annual payments which represented interest, would not alter the character of such annual payments, namely, that they represented partly capital payment and partly interest.

11. In our opinion, the annual payments received by the assessee in respect of these bonds, represent partly capital and partly interest and income-tax is payable only on the portion representing interest. The income-tax authorities have to ascertain what proportion of such annual payments represents interest.

12. As a result of the foregoing discussion, our answer to the two questions referred to us, is as follows :

'On the facts and in the circumstances of the case, only that portion of the annual payments received by the assessee during the said accounting years, which represents interest, is assessable to the tax under the Income-tax Act and the portion which represents capital, is not assessable to such tax.'

13. In the circumstances of these references, we direct the parties to bear their own costs.


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