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Commissioner of Income-tax Vs. Avkash Nidhi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 105 of 1977
Judge
Reported in(1986)51CTR(Guj)301; [1986]160ITR729(Guj)
ActsIncome Tax Act, 1961 - Sections 2(14), 2(47), 11, 11(1A), 12, 12(2), 45, 60, 61, 62 and 63; Wealth Tax Act, 1957 - Sections 2
AppellantCommissioner of Income-tax
RespondentAvkash Nidhi
Appellant Advocate B.R. Shah, Adv.
Respondent Advocate K.C. Patel,; D.A. Mehta and R.; K. Patel, Advs.
Cases ReferredBank of Bihar v. State of Bihar
Excerpt:
(i) direct taxation - donation - sections 12 (1) and 12 (2) of income tax act, 1961 - whether donation made by donor-trust to assessee-trust towards corpus could be treated as income of assessee-trust - where donation by donor-trust to assessee-trust made with specific direction that it should be used for corpus or capital of donee-trust provisions of section 12 (2) would not be attracted - such donation could not be treated as income of assessee. (ii) investment - sections 2 (14), 11 (1a) and 256 (1) of income tax act, 1961 and section 2 of wealth tax act, 1957 - whether utilisation of amount received on sale proceeds of certain shares for redemption of charge on shares of another company could be treated as investment made on acquisition of purchase of capital asset - by utilising.....a.m. ahmadi, j.1. the assessee, avakash nidhi, is a public charitable trust. the reference concerns the assessment year 1972-73. during the said assessment year, the assessee disclosed the following donations, namely : valuers.(i) 200 ordinary shares of ahmedabad mfg. 80,900and calico printing co. ltd. received as capitaldonation from shreyas foundation subject to thecondition that the said shares be held as part of thecorpus of the trust(ii) 43 ordinary shares of karamchand 1,10,166prermchand pvt. ltd. received as capital donationfrom smt. leena a. sarabhai(iii) 60 ordinary shares of karamchand 54,680premchand pvt. ltd. received as capital donationsfrom smt. leena a. sarabhai subject tobank's loan and charge of rs. 80,5002. the assessee claimed that the value of these donations.....
Judgment:

A.M. Ahmadi, J.

1. The assessee, Avakash Nidhi, is a public charitable trust. The reference concerns the assessment year 1972-73. During the said assessment year, the assessee disclosed the following donations, namely :

ValueRs.(i) 200 ordinary shares of Ahmedabad Mfg. 80,900and Calico Printing Co. Ltd. received as capitaldonation from Shreyas Foundation subject to thecondition that the said shares be held as part of thecorpus of the Trust(ii) 43 ordinary shares of Karamchand 1,10,166Prermchand Pvt. Ltd. received as capital donationfrom Smt. Leena A. Sarabhai(iii) 60 ordinary shares of Karamchand 54,680Premchand Pvt. Ltd. received as capital donationsfrom Smt. Leena A. Sarabhai subject tobank's loan and charge of Rs. 80,500

2. The assessee claimed that the value of these donations aggregating to Rs. 2,45,746 is not liable to tax. The Income-tax Officer accepted the assessee's claim for the non-taxability of items Nos. (ii) and (iii) but so far as item No. (i) is concerned, he brought it to tax under section 12(2) of the Income-tax Act as it then stood. The assessee carried the matter in appeal. The Appellate Assistant Commissioner concurred with the view expressed by the Income-tax Officer and partly allowed the appeal in regard to the computation of capital gains tax. In further appeal, the Tribunal held that the view taken by the authorities below on the interpretation of section 12(2) of the Act as it then stood was not sustainable. The Revenue sought a reference under section 256(1) of the Act and, accordingly, the following question came to be referred for this court's decision :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that since the donations made by the donor-trust to the assessee-trust were towards the corpus or the capital fund of the assessee, such contributions cannot be treated as income of the assessee-trust ?'

3. In our view, this question is directly covered by the decision of this court in CIT v. Bal Utkarsh Society : [1979]119ITR137(Guj) .

4. Section 12(2), as it stood prior to its amendment by the Finance Act, 1972, read as under :

'Notwithstanding anything contained in sub-section (1), where any such contributions as are referred to in sub-section (1) are made to a trust or a charitable or religious institution by a trust or a charitable or religious institution to which the provisions of section 11 apply, such contributions shall, in the hands of the trust or institution receiving the contributions, be deemed to be income derived from property for the purposes of that section and the provisions of that section shall apply accordingly.'

5. Interpreting the provisions of section 12 as they stood before amendment, this court in the case of Bal Utkarsh Society's case : [1979]119ITR137(Guj) held that where shares are donated by the donor-trust to the assessee-donee-trust, with a specific direction that they should be used for the corpus or the capital of the donee-trust, the provisions of section 12(2) would not be attracted and the value of such shares cannot be treated as income of the assessee-trust. In taking this view, this court relied on the decision of the Allahabad High Court in Sri Dwarkadheesh Charitable Trust v. ITO : [1975]98ITR557(All) . The Allahabad High Court held that voluntary contributions made with a specific direction that they shall form part of the corpus of the donee-trust and accepted as such by the donee-trust are not voluntary contributions constituting income under sub-section (1) of section 12 of the Act because the subject-matter of the donation becomes part of the corpus or capital of the donee-trust and cannot, therefore, constitute income of the donee-trust. Such contributions cannot fall within the purview of section 12(2) of the Act.

6. In view of the above, since question No. (1) referred for our decision stands covered by this court's judgment in Bal Utkarsh Society's case : [1979]119ITR137(Guj) , we must answer the same in the affirmative, that is, in favour of the assessee.

7. That takes us to the other question which has been referred for our decision under section 256(1) of the Act. The facts bearing on the said question are that on March 23, 1972, Smt. Leenaben A. Sarabhai offered to donate 60 ordinary shares of Messrs. Karamchand Premchand Pvt. Ltd. of the value of Rs. 1,35,180 subject to an encumbrance of Rs. 80,500, an amount borrowed from Sheth Karamchand Premchand, a registered partnership firm. The net value of the properties donated was Rs. 54,680. On the same day, the donee-trust accepted the offer subject to the encumbrance as is evidenced by annexure 'H' to the statement of the case. While accepting the donation, the donee-trust further resolved that the charge of Sheth Karamchand Premchand on the aforesaid 60 shares should be discharged out of the sale proceeds of the shares of Ahmedabad Mfg. and Calico Printing Co. Ltd. Accordingly, the 200 ordinary shares of Ahmedabad . received by the donee-trust from Shreyas Foundation were sold for Rs. 80,990 and out of the sale proceeds, a sum of Rs. 80,500 came to be paid to the creditor, Sheth Karamchand Premchand. On the repayment of the loan, the share certificates concerning the 60 ordinary shares of Messrs. Karamchand Premchand Pvt Ltd., were taken possession of by the donee-trust. In the background of these facts, the second question which arises for our determination has been formulated as under :

'(2) Whether the net consideration received on the sale proceeds of the 200 ordinary shares of the Calico Mills and utilised for the redemption of the charge on shares of Karamchand Premchand Pvt. Ltd. could be treated as the investment made in acquisition of purchase of another capital asset as contemplated in section 11(1A) of the Income-tax Act, 1961 ?'

8. The contention of the assessee was that since the capital gains realised on the sale of the 200 ordinary shares of Calico Mills was utilised to redeem the 60 ordinary shares of Karamchand Premchand Private Ltd., in the custody of the creditor, Sheth Karamchand Premchand, the said capital gain could not be brought to tax in view of section 11(1A) of the Act. The Income-tax Officer was of the view that the provisions of sub-section (1A) of section 11 of the Act could not apply as the net consideration was not utilised for acquiring another capital asset. He, therefore, proceeded to consider the computation of capital gains and determined the same at Rs. 37,950 which he brought to tax. The assessee, therefore, appealed to the Appellate Assistant Commissioner who upheld the decision of the Income-tax Officer and directed that the capital gains should be recomputed by adopting the value of Rs. 90 per share on the basis of the average cost determined on the fair market value of the shares as on January 1, 1954. Against the said decision, the assessee approached the Tribunal in appeal. Examining the controversy in the light of the language of sub-section (1A) of section 11 read with section 2(14) of the Act and taking note of the undisputed fact that the assessee had utilised the sale proceeds realised by the sale of 200 ordinary shares of Calico Mills for redeeming the charge on the 60 shares of Karamchand Premchand Pvt. Ltd., it expressed the view that the assessee had acquired another capital asset by utilising the price of Calico shares inasmuch as it acquired the full bundle of the ownership rights over the said 60 shares. It, therefore, came to the conclusion that the assessee was entitled to exemption under section 11(1A) of the Act. In the view that it took, it set aside the decision of the Appellate Assistant Commissioner. The Revenue, feeling aggrieved by this opinion of the Tribunal, sought a reference under section 256(1)of the Act, whereupon the question extracted earlier came to be referred for our decision.

9. The facts, therefore, lie in a narrow compass. Smt. Leenaben A. Sarabhai donated 60 ordinary shares of Karamchand Premchand Pvt. Ltd. to the assessee-trust subject to an encumbrance of Rs. 80,500 of Sheth Karamchand Premchand. Because of this encumbrance, the net value of these 60 shares was estimated at Rs. 54,680. Smt. Leenaben was indebted to Sheth Karamchand Premchand in the sum of Rs. 80,500 on the overdraft account and had placed the 60 shares in question by way of security for the loan amount. After the 60 shares were donated to the assessee-trust, the latter disposed of 200 ordinary shares of Calico Mills for a consideration of Rs. 80,900 and from the price so realised, discharged the debt of Rs. 80,500 to Sheth Karamchand Premchand and obtained delivery of the 60 ordinary shares from the said firm. Sub-section (1A) of section 11 which is relevant for our purpose states that where a capital asset, being property held under trust, wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent : (i) where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain; or (ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset. This sub-section, therefore, by a deeming fiction provides that where a capital asset held under a trust for charitable or religious purpose is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, it shall be deemed that the capital gain arising from the transfer has been applied to a charitable or religious purpose for excluding from the total income of the previous year of the assessee in receipt of that income. Sub-section (l) of section 11 which is made subject to sections 60 to 63 states that income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India shall not be included in the total income of the previous year of the assessee in receipt thereof. The short question which, therefore, arises for determination in the context of sub-section (1A) of section 11 is, whether the net consideration received by the assessee-trust on the sale of capital asset, 200 ordinary shares of Calico Mil1s, could be said to have been utilised for acquiring another capital asset on the payment thereof to Sheth Karamchand Premchand for satisfaction of the loan of Rs. 80,500 obtained on the security of the 60 shares of Karamchand Premchand Pvt. Ltd. Section 2(14) defines a 'capital asset' to mean property of any kind held by an assessee, whether or not connected with his business, (i) to (v) thereunder, with which we are not presently concerned. The term 'transfer' prior to its amendment by the Taxation Laws (Amendment) Act, 1984, which became effective from April 1, 1985, included sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in relation to a capital asset. In the light of these definitions, we are required to consider whether the assessee-trust could be said to have acquired another capital asset by utilising the net consideration it received on the sale of 200 ordinary shares of Calico Mills.

10. Before we proceed to answer the above question, it is necessary to understand the real nature of the transaction between Smt. Leenaben A. Sarabhai on the one hand and Sheth Karamchand Premchand on the other in relation to the 60 ordinary shares of Messrs. Karamchand Premchand Pvt. Ltd. We have already pointed out earlier that Smt. Leenaben was indebted to the partnership firm of Messrs. Karamchand Premchand, inter alia, in the sum of Rs. 80,500 advanced against the security of the 60 shares in question. These shares were lying in the custody of the said partnership firm on March 23, 1972, when they came to be donated to the assessee-trust. In the letter, annex. 'J', dated March 7, 1972, addressed to Smt. Leenaben A. Sarabhai by Messrs. Karamchand Premchand, it is stated that the loan has been advanced on the pledge of share certificates along with blank transfer forms duly signed by the debtor. After the receipt of the donation, the assessee-trust addressed a letter, annex. 'N', dated March 25, 1972, to Sheth Karamchand Premchand stating that the shares were donated subject to the loan and charge of Rs. 80,500. By the said letter, a cheque in he sum of Rs. 80,500 was forwarded to the said firm in full discharge of the oubstanding liability and the firm was requested to return the shares along with the relative transfer documents. From the above documents, it becomes clear that the transaction was in the nature of a pledge.

11. Section 172 of the Contract Act defines a 'pledge' as the bailment of goods as security for payment of a debt or performance of a promise.'Bailment' under section 148 is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Section 173 entitles a pawnee, the right to retain the goods pledged, not only for payment of the debt or the performance of the promise but also for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. By section 176, the pawnee has been given a right to bring a suit against the pawner upon the debt or promise and retain the goods pledged as a collateral security; or sell the pledged goods after reasonable notice to the pawner if the pawner makes default in the payment of the debt or performance of the promise at the stipulated time. If the proceeds of the sale are less than the amount due in respect of the debt or promise, the liability of the pawner to pay the balance continues but if the proceeds are greater than the amount due, the pawnee is under an obligation to pay over the surplus to the pawner. However, till the pawnee has exercised the right to sell the pledged geods, section 177 entitles a pawner to redeem the goods. That section provides that if a time is stipulated for the payment of the debt, or performance of the promise for which the pledge is made, and the pawner makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of the same; but he must, in that case, pay, in addition, any expenses which have arisen from his default. The conspectus of the above provisions clearly establishes that in a pledge, there must be transfer of possession of goods to the pawnee by way of security for the payment of the debt, the pawnee being entitled to retain the goods till his debt is fully discharged and in the event of the pawner failing to discharge the debt within the stipulated time, the pawnee being entitled to sell the goods to recover the principal amount together with interest and all necessary expenses incurred in respect of and for the preservation of the pledged goods.

12. In Halsbury's Laws of England, third edition, volume 29, the following statement appears on page 218 :

'The pawnee has a special property or special interest in the thing pledged, while the general property therein continues in the owner. That special property or interest exists so that the pawnee can compel payment of the debt, or can sell the goods when the right to do so arises. This special property or interest is to be distinguished from the mere right of detention which the holder of a lien possesses, in that it is transferable in the sense that a pawnee may assign or pledge his special property or interest in the goods or may, as agent of the pawner, in due course, sell the goods....'

13. It would appear from this statement that where goods are pledged, the pawnee has a right to their possession and until the debt for which the pledge is a security is tendered or paid, the pawnee would be entitled to retain the goods. He would be at liberty to sell the goods after notice to the pawner if the latter fails to discharge his obligation of making payment within a stipulated time. The security is, therefore, available to the pawnee to satisfy the obligation in the event the pawner commits a default in payment of the debt within the stipulated time. If there is no stipulated time, it would be open to the pawnee to demand payment within a reasonable time after notice to the pawner failing which he would be entitled to sell the goods to recover his money. This position is clearly brought out by the Bombay High Court in Percy F. Fisher v. Ardeshir Hormasji Gazdar, AIR 1935 Bom 213, wherein the court held that the pawnee had a special property in the thing pledged, while the general property continued to remain with the owner. The pawnee was entitled to retain the goods pledged for payment of the debt, interest and the expenses incurred by him for the preservation of the goods. In Dwarika v. Bhagwati, AIR 1939 Rang 413, the legal position was aptly stated in the following words (p. 415) :

'... a pledge confers a special interest in the property pledged, that is to say, a right to sell the property if the loan be not repaid. If the pledgee sells, he does so by virtue and to the extent of the pledger's ownership and not with a new title of his own. He only holds possession for the purpose of securing to himself the advance which he has made. The pledgee has no right of foreclosure since he never had the absolute ownership at law. In a mortgage, the right to the property is transferred to the creditor; in the case of a pledge, the pledgee has no property in the pawn, but merely a right to sell.'

14. The High Court of Andhra Pradesh in Narasayyamma v. Andhra Bank : AIR1960AP273 , considered the distinction between a pledge and a mortgage and stated the position in law in paragraph 19 of the judgment as under (p. 277) :

'The essential distinction, therefore, between a pledge and a mortgage is that unlike a pledgee, a mortgagee acquires general property in the thing mortgaged subject to the right of redemption of the mortgagor. In other words, the legal estate in the goods mortgaged passes on to the mortgagee. But a pledgee has only the special property in the goods pledged, namely, the right of retainer of the goods as security, and in case of default, he must either bring a suit against the pawner or sell the goods after giving a reasonable notice.'

15. In Lallan Prasad v. Rahmat Ali : [1967]2SCR233 , the Supreme Court observed that once the debt is satisfied or the engagement extinguishes the pawn, the pawnee on such satisfaction is bound to deliver the property to the pawner. The pawner has an absolute right to redeem the property pledged upon tender of the amount advanced but that right would be lost if the pawnee has in the meantime lawfully sold the property pledged. The pawnee's right of sale, observed the Supreme Court, is derived from an implied authority from the pawner and such a sale is for the benefit of both the parties. It also pointed out that there was no difference between the common law of England and the codified law found in sections 172 to 176 of the Contract Act.

16. In the case of Bank of Bihar v. State of Bihar [1971] 41 Comp Cas 591 (SC), the Supreme Court referred to the statement in Halsbury's Laws of England extracted earlier and observed that the pawnee has special property and lien which is not of ordinary nature on the goods and so long as his claim is not satisfied, no other creditor of the pawner has any right to take away the goods or its price.

17. It will appear from the above discussion of the provisions of law and the decisions referred to that in the case of a pledge, the general property remains with the pawner and he is entitled to dividend, bonus and right issues, that is, to all accretions, since the title to the property does not pass to the pawnee. The pawnee has no property in the pawn. He has merely a right to sell if the debt is not discharged within the stipulated time. The security is one intermediate between a simple loan and a mortgage.

18. There is no dispute before us that the shares in question were pledged by Smt. Leenaben A. Sarabhai with Messrs. Karamchand Premchand, a partnership firm, as security for the loan advanced by the latter. To discharge the obligation under the pledge, the assessee-trust sold 200 ordinary shares of Calico Mills for a net consideration of Rs. 80,900 and discharged the debt by paying a sum of Rs. 80,500 to the creditor. The question then is, whether in doing so, the assessee-trust acquired a capital asset, that is, property, within the meaning of section 2(14) of the Act. 'Capital asset' is defined as property of any kind. Now, the term 'property' has a bewildering variety of uses; it sometimes means ownership of title and sometimes the thing over which ownership may be exercised. A owner may transfer to another certain rights which inhere to him by virtue of ownership in the property. He may grant a lease to a tenant, pledge valuables as security for a debt, grant to his neighbour a right to pass over his land, etc. These are described as encumbrances. Under a pledge, the possession of the thing is transferred to the creditor but the full ownership in the thing remains with the debtor notwithstanding the encumbrance. A pledge is merely an encumbrance created in favour of the creditor 'over' property which remains vested in the debtor. Once the debt is paid off, the shadow cast by the debt on the property disappears and the encumbrance ceases to exist. Unlike in the case of a mortgage, the creditor acquires no right in the thing pledged which would necessitate redemption. He has no right to foreclosure. Looked at from the creditor's point of view, the obligation may be a right but looked at from the debtor's point of view, it is merely a duty to pay the outstanding amount to the creditor. Can it then be said that when the assessee-trust paid the amount of Rs. 80,500 to the creditor, M/s. Karamchand Premchand, it acquired any capital asset so as to entitle it to claim the benefit of sub-section (1A) of section 11 of the Act The creditor had merely the right to retain the shares so long as the payment was not forthcoming. It also had the right to sell the shares after notice to realise the debt. However, so far as the debtor is concerned, it had to meet the obligation of payment and there was no question of acquiring any property, that is, a capital asset, while discharging that duty. The ownership in the shares remained with the pawrner and no part of the bundle of rights constituting the ownership had passed on to the pawnee when the shares were pledged as security for the debt incurred by Smt. Leenaben. The assessee-trust walked into the shoes of Smt. Leenaben when it accepted the donation with the encumbrance. By accepting the onerous gift, it undertook the liability to discharge the debt before the creditor sold the shares to recover his dues. By discharging its obligation under the pledge, no property or capital asset was acquired. Merely the way was cleared for receiving back the shares pledged with the creditor. We are, therefore, of the opinion that by paying the amount of Rs. 80,500 out of the net consideration of Rs. 80,900 received on sale of 200 ordinary shares of Calico Mills, the assessee-trust had merely discharged its obligation to pay the creditor and had not thereby acquired property, that is, a capital asset, so as to be entitled to exemption under sub-section (1A) of section 11 of the Act.

19. It was submitted by Mr. Patel that there was an extinguishment of the creditor's rights in the shares on the repayment of the amount of Rs. 80,500 and, hence, the rights of the owner got enlarged which considerably hiked up the value of the shares. Under section 2(47) of the Act, extinguishment of any rights in a capital asset is 'transfer' within the meaning of section 45 of the Act. Under the latter provision, any profits or gains arising from the transfer of a capital asset effected in the previous year is chargeable to income-tax under the head 'Capital gains'. Mr. Patel, therefore, submitted that on the acquisition of the shares from the creditor by repayment of the loan amount, there was an extinguishment of the right of the creditor in the shares and a corresponding acquisition of that right, that is, capital asset, by the assessee-trust. We are afraid we cannot agree with this line of reasoning for the simple reason that in the case of a pledge, the ownership, that is, full bundle of rights in the goods, always remains with the pawner and the pawnee has merely the right to retain the goods till the obligation to pay is discharged by the pawner and, in the event the pawner fails to discharge the obligation within the stipulated time, to sell the security for realising the dues. The pawnee does not have any right 'in' the property but has merely a special interest to retain the property till the debt is paid or to sell it, in the event the debtor fails to answer the obligation within the stipulated time. There is this special interest in the creditor, namely, to retain the shares till payment or to sell the shares in the event of default, but so far as the debtor is concerned, he has merely the obligation to seek the creditor and pay the outstanding amount. If the debtor discharges this obligation, he would be entitled to receive back the property from the creditor. However, it seems to us clear that no right in the property is created in favour of the creditor by the same being pledged by way of security for the loan advanced to the debtor. As observed by the Rangoon High Court in the case of Dwarika, AIR 1939 Rang 413, 'in the case of a pledge, the pledgee has no property in the pawn, but merely the right to sell'. We are, therefore, of the view that since the pawnee had no property in the pawn, there was no question of extinguishment of any right qua title to the thing pledged so as to amount to acquisition of a capital asset on discharge of the debt by the debtor.

20. The Tribunal placed reliance on the decision of the Supreme Court in Ahmed G. H. Ariff v. CWT : [1970]76ITR471(SC) , in support of its impugned order. In that case, certain beneficiaries under a wakf-alal-aulad received income from the wakf estate. During the relevant assessment years, the beneficiaries were not only assessed to income-tax in respect of the said income but were also assessed to wealth-tax on the premise of their aliquot share. The assessees raised two contentions, viz., (i) the right to receive a definite share of the net income from wakf estate was not 'asset' under section 2(e); and (ii) the right of the beneficiaries under the wakf was a mere annuity not capable under the Mahomedan law to be commuted into a lump sum and, therefore, stood excluded by virtue of section 2(e)(iv) from the definition of 'assets' under the Wealth-tax Act. Both these contentions were negatived by the High Court. In appeal, the Supreme Court held that the right to receive an aliquot share was 'property' under section 2(e) and, therefore, an asset. Dealing with the argument that the right was wholly personal to the beneficiaries and lacked the basic attributes of property, the Supreme Court observed (p. 476) :

'Now 'property' is a term of the widest import and, subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold or enjoy.'

21. The Supreme Court, therefore, confirmed the High Court's view that the right conferred on the beneficiaries by the wakf deed were property and, therefore, 'assets' under section 2(e). Dealing with the argument that the said right was a mere annuity incapable of commutation in lump sum, the Supreme Court held that the term must be understood in the sense it is judicially interpreted. So interpreted, the contention of the assessee was liable to be rejected. We find it difficult to appreciate how the Tribunal thought that this decision could be invoked to the support the contention of the assessee, more so because the facts are poles apart.

22. Reliance was next placed on behalf of the assessee on a decision of this court rendered in ClT v. Vania Silk Mills (P) Ltd. : [1977]107ITR300(Guj) . In that case, the assessee-company purchased machinery worth Rs. 2,81,741 and lent it on hire for an annual rent of Rs. 33,900 to Jasmine Mills. A fire broke out in the premises of the said mills causing extensive damage to the assessee's machinery. The mills had insured the machinery and on a settlement of the insurance claim, the assessee received a sum of Rs. 6,32,533 on account of the destruction of its machinery. The difference between the actual cost of the machinery and its written down value worked out to Rs. 2,62,781 and in the assessment proceedings for the assessment year 1967-68, this amount was shown in the assessee's return as profits chargeable to tax. The Income-tax Officer subjected an additional amount of Rs. 3,50,792, being the difference between the original cost of Rs. 2,81,741 and the amount realised, being Rs. 6,32,533, to tax as capital gains. The assessee contended that the question of capital gains did not arise since no transfer of capital asset within the meaning of section 45 read with section 2(47) of the Act had taken place. This contention found favour when the proceedings reached the Appellate Tribunal. The Tribunal while setting aside the order of the Income-tax Officer held that unless the transfer of a capital asset is effected by an assessee, section 45 would not come into play, since there was no voluntary act on the part of the assessee effecting the transfer. This court held that when there was an extinguishment of the assessee's rights in the property because of the destruction thereof by fire, it tantamounted to transfer within the meaning of section 2(47) read with section 45 of the Act. The court observed that the legislature had deliberatly chosen language of the widest amplitude so as to cover every possible transaction which results in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights - qualitative or quantitative - which the assessee has in a capital asset, whether such asset is corporeal or incorporeal. Mr. Patel submitted that on the satisfaction of the debt, the right of the creditor in the shares got extinguished and, to that extent, the value of the shares in the hands of the debtor stood enhanced and hence on the extinguishment of the right, there was a transfer of capital asset within the meaning section 2(47) of the Act. He emphasised the words 'qualitative or quantitative' to press home his point that on the discharge of the debt and extinguishment of the creditor's rights in the shares, the value of the shares in the hands of the debtor got enhanced which, in other words, improved the quality of the holdings. In our view, it amounts to begging the question because, as pointed out earlier, the creditor has no proprietary right in the property save and except the special interest of retention of the shares till payment and the right to sell as the agent of the pawner in the event the latter fails to satisfy the debt within the stipulated period. When the pawnee sells the property, he does so as the agent of the pawner and is, therefore, accountable for the surplus received by him after deducting the amount due to him. So far as the debtor is concerned, all that he does is to answer the obligation to seek his creditor and pay the debt. There is no addition to his bundle of rights because even after pledging the property in security for the debt incurred, the full ownership or title remained with him throughout and by paying the debt he does not add anything to the basket of rights constituting ownership or title. We are, therefore, of the view that this decision also does not advance the submission in the backdrop of the facts of this case.

23. Lastly our-attention was invited by Mr. Patel to this court's decision in Kartikey V. Sarabhai v. CIT : [1982]138ITR425(Guj) . In that case, the assessee had purchased three per cent. non-cumulative preference shares at Rs. 420 per share having a face value of Rs. 1,000. In 1965, a sum of Rs. 500 per preference share was paid off by the reduction of the share capital of the company. A further reduction was effected in the next year reducing the face value of the preference share to Rs. 50 only. Since the original shares were purchased at Rs. 420 per share, on the reduction of the face value to Rs. 50 per share, the assessee got back a sum of Rs. 950 per share. At the time of the second reduction, the face value was Rs. 500 which was reduced to Rs. 50 per share of which the reduced cost to the assessee was Rs. 80 per share. The question which arose for consideration was, whether there was any extinguishment of the right of the shareholders to the extent of the reduction of the face value of the preference shares and, if yes, whether the profits or gains arising therefrom became chargeable to income-tax as capital gains under section 45 read with section 2(47) of the Act. This court held that on the date of the reduction of the face value of the shares, there was a proportionate extinguishment as regards the right in praesenti to claim dividends on the basis of the shares held by the assessee. This extinguishment had a direct nexus to the decision of the company to reduce the share capital under section 100(1)(c) of the Companies Act, 1956. This court, therefore, held that as a result of the reduction of the share capital of the company and the consequential payment of the proportionate amount reducing the face value of the share to Rs. 50, the shareholder's right stood extinguished pro tanto and hence he was liable to capital gains. Mr. Patel submitted that if on account of the reduction in the share capital and the consequential reduction in the face value of the preference shares, there is an extinguishment of the shareholder's rights attracting the provision of section 45 read with section 2(47) of the Act, the same would be the position where there is an enlargement of the shareholder's right on the discharge of the debt to the pawnee. We do not agree with this submission for the simple reason that the value of the shares in the hands of the assessee remained the same no matter whether they were pledged at a given point of time or the debt was discharged subsequently. In terms of money, the value remained the same; if the shares stood pledged out of that very value, the debt would have to be repaid which would extinguish the debt. If the shares were not pledged, the assessee would receive the same amount for the shares. So far as the market value of the shares is concerned, it remained the same and what the assessee received was that very market value regardless of the question whether a debt had to be discharged or not. We, therefore, do not think that the mere fact that the shares were pledged affected the market value of the shares. In the case cited, since the face value of the shares stood reduced, there was a reduction in the market value of the share unlike in the present case. We, therefore, do not think that the decision on which reliance is placed can be of any assistance to the assessee.

24. For the above reasons, we answer the second question in the negative, that is, against the assessee and in favour of the Revenue. In view of this answer, the matter will go back to the Tribunal for a decision regarding the computation of capital gains. There will be no order as to costs.


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