Law:

Section:

Section 4 of the Income-tax Act, 1961 [Corresponding to section 3 of the Indian Income-tax Act, 1922] - Income - Chargeable as - Assessment years 1952-53 and 1953-54 - Assessee company presented a scheme to manufacture diesel engine in India which was accepted by Government - Machinery was to be acquired from a foreign company - As foreign company was in financial difficulty, Govt. of India sanctioned certain foreign exchange - Assessee purchased entire share capital of foreign company and paid to it certain amount as loan - Foreign company floated a new company in India as its subsidiary - Entire assets of foreign company were acquired by said new company - Thereafter, foreign company transferred 100 shares of new company to assessee and loan made to it by assessee was treated as discharged - Above project could not materialised and abandoned - Rupee was devalued - Assessee company received certain surplus amount on account of sale of shares alloted to it by new company - Whether assessee-company never traded in shares of foreign company and purchase thereof did not form part of its trading activity - Held, yes - Whether surplus amount received by assessee company was, therefore, in nature of capital gains and thus not assessable in its hands - Held, yes FACTS The assessee company came across a suggestion regarding manufacture of diesel engine in India. The machinery was to be acquired from a foreign company (Machine company). The scheme propounded by the assessee-company was accepted by the Government of India and it was decided to sanction foreign exchange to the tune of five lakhs U.S. dollars, as the machine company was in financial difficulty. In 1948, the assessee company entered into an agreement with the shareholders of the machine company and purchased the entire share capital for 30,000 dollars. The balance of 4,20,000 dollars was paid over to the machine company as loan and a promissory note for the amount was taken. The machine company floated a new company as its subsidiary. Upon incorporation of the new company the entire machinery and other assets of the machine company were transferred to the new company. Thereafter, the machine company…

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