Full Judgment Text
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PETITIONER:
SHEKHAWATI GENERAL TRADERS LTD.
Vs.
RESPONDENT:
INCOME TAX OFFICER, COMPANY CIRCLE I, JAIPUR
DATE OF JUDGMENT04/10/1971
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
HEGDE, K.S.
CITATION:
1971 AIR 2389 1972 SCR (1) 927
ACT:
Income-tax Act, 1961-Sections 147 and 55 and its scope.
HEADNOTE:
In 1949, the assessee company had acquired some ordinary
shares of a company of the face value of Rs. 10/- each. On
this holding the assessee had received certain bonus shares.
The assessee further acquired a certain number of right
shares of the same company in 1961.
During the assessment year 1962-63 it sold a certain number
of shares which it held prior to January 1, 1954 and
calculated the cost price of the shares sold, at the market
rate prevailing on January 1, 1954.
Similarly, the assessee acquired certain ordinary shares of
another company before January 1, 1954 and received certain
bonus shares after that date. During the assessment year
1962-63 it again sold some of these shares and calculated
the cost of acquisition of the said shares at the market
value prevailing on January 1, 1954. Thus, according to the
assessee, by selling the shares of the two companies, it had
suffered a capital loss and the Income-tax Officer allowed
the loss to be carried for-ward by the assessee.
After nearly 2 1/2 years, the Income-tax Officer notified
the assessee that income chargeable to tax for the
assessment year 1962-63 had escaped assessment within s. 147
of the Income Tax Act, 1961 and wrote that while working out
the cost, the assessee wrongly claimed the prevalent market
price as on January 1, 1954 ignoring the fact that the same
shares were given as bonus shares in later years after
January 1, 1954. According to the Income-tax Officer, the
cost has to be worked at by averaging the cost of the
original shares, amongst the original,shares and the bonus
shares taken together. The assessee maintained that it had
exercised its option under s.55(2) of the Act. Therefore,
the cost of acquisition of the ordinary shares of the two
companies which had been acquired long before January 1,
1954 was taken at the fair market value as on that date and
the capital loss was computed accordingly. The assessee,
thereafter filed a writ petition before the High Court
challenging the validity of the notice issued under s. 147
of the Act.
The High Court dismissed the writ petition on the ground
that since the assessee had not shown the acquisition of
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bonus and right share-, in the Income-tax return, the
Income-tax Officer had reason to believe that the income
chargeable to tax had escaped assessment and therefore, the
notice was valid.
Allowing the appeal,
HELD : (1) That the cost of acquisition under s. 55(2) of
the Act, is the cost of the asset to the assessee or the
fair market value of the asset on the 1st day of January,
1954 at the option of the assessee., Therefore, in the
present case, the assessee rightly applied its option and
the fair market value is duly determined. it is wrong to
hold that while working out the capital gains, the cost had
to be worked out by averaging the cost of the original
shares among the original shares and the bonus
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shares taken together, ignoring the statutory provisions of
ss. 48 and 55(2) of the Act. For the ascertainment of the
fair market value of the shares in question, on January 1,
1954, any event prior to or subsequent to that, date is
wholly extraneous and irrelevant. [932 F]
(2)The assessee is bound to disclose under cl. (a) of s.
147 only such material facts which are necessary for its
assessment for the assessment year and not those facts which
at)-, irrelevant and extraneous for the purpose of
assessment. As regards cl. (b) of s. 147 from the infor-
mation furnished by the assessee, there is no reason for the
I.T.O. to believe that income chargeable to tax has escaped
assessment for the assessment year in question. [933 B-C]
Commissioner of Income-tax, Bihar v. Dalmia Investment Co.,
52 I.T.R. 567, referred to and distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2039 and
2040 of 1968.
Appeals from the judgment and order dated April 20, 1968 of
the Rajasthan High Court in D. B. Civil Writ Nos. 104 and 1
05 of 1967.
S. Mitra, O. P. Khaitan, N. R. Khaitan, B. P. Maheshwari
and R. K. Maheshwari, for the appellant (in both the
appeals).
V.S. Desai, P. L. Juneja, R. N. Sachthey and B. D.
Sharma, for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Grover, J. These appeals by certificate from a judgment of
the Rajasthan High Court involve a common question relating
to the computation of capital gains in respect of sale of
certain shares.
It is necessary to refer to the facts in Civil Appeal No.
2039/ 6 8 only. The assessee is a company incorporated
under the Indian Companies Act 1956 having its registered
office at Jaipur. For the assessment year 1962-63 relevant
to the previous year ending March 31, 1962 the assessee
filed its return before the Income-,tax Officer, Company
Circle No. 1, Jaipur. On March 29, 1949, the assessee had
acquired 12,000 ordinary shares of the Orient Paper Mills of
the face value of Rs. 10 each. On this holding it received
12,000 bonus shares on or about April 28, 1951. It again
received 60,000 bonus shares on or about June 4, 1954 and
further acquired 25,200 right shares on June 26, 1961. It
sold 22,000 shares during the assessment year 1962-63. It
is common ground that these shares which were sold were out
of the 24,000 shares which it held prior to January 1, 1954.
The price realized on account of the sale of 22,000 shares
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during the assessment year 1962-63 was Rs. 8,45,110/-. The
assessee calculated the cost price of 22,000 shares sold by
it at the market rate prevailing on January 1, 1954 which
came to Rs. 8,63,500 /-. The assessee had also acquired
15,000 ordinary shares of Birla
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Jute Manufacturing Company before January 1, 1954. It got
41,250 bonus shares on original holding after January 1,
1954. It further got 22,500 right shares for the nominal
value of Rs. 3,60,000. The assessee sold 15,000 shares
during the assessment year 1962-63 and the sale price
realized was Rs. 4,54,130/-. The assessee calculated the
cost price of 15,000 shares sold by it at the market value
prevailing on January 1, 1954 which came to Rs. 6,45,000//-.
Thus according to the assessee the cost of acquisition of
the said shares in the two companies came to Rs. 15,09,400
while they were sold for Rs. 12,09,240 and thereby the
assessee suffered a capital loss of Rs. 2,10,160. The
assessee filed a statement giving all these details. Fromthat
statement it was clear that the 22,000 shares of the OrientPaper
Mills and the 15,000 shares of the Birla Jute Mfg. Co.
which were sold during the assessment year 1962-63 were
those which it had acquired or received by way of bonus
shares prior to January 1, 1954.
The Income-tax Officer by his assessment order dated July
20. 1964 accepted the statement furnished by the assessee
and held that it had suffered a capital loss of Rs.
2,10,160/- which was directed to be carried forward. By
means of a notice dated January 4, 1967 the Income-tax
Officer informed the assessee that he had reasons to believe
that income chargeable to tax for the assessment year 1962-
63 had escaped assessment within the meaning of s. 147 of
the Income-tax Act 1961, hereinafter called the "Act". This
notice was accompanied by a letter in which it was stated
"While working out the cost you claimed the
prevalentmarket price as on 1-1-1954 in
complete disregardof the fact that the same
shares had been given bonus shares in the
subsequent years after 1-1-54.The Supreme
Court had laid down in the case of Dalmia
Cement (1964) 52 ITR 567 that while working
out the capital gains the cost has to be
worked out by averaging cost of the original
shares amongst the original shares. and bonus
shares taken together. Your claim of the
cost, therefore, was incorrect. By following
erroneous method you claimed and were allowed
loss of Rs. 2,10,160 in assessment year 1962-
63 and Rs. 45,176/- in assessment year 1964-
65. Against this the cost in assessment year
1962-63 would come much less and instead of
capital losses a figure of capital gain will
get computed".
The assessee sent a letter dated February 9, 1967 to the
Income-tax Officer saying that it had exercised its option
under s. 55(2) of the Act and in accordance therewith the
cost of acquisition of
930
the ordinary shares of the two companies which have been
acquired and held by the assessee long before January 1,
1954 was taken at the fair market value as on that date and
the capital loss was computed accordingly. It was pointed
out that the judgment of the Supreme Court referred to in
the letter of the Income-tax Officer had no relevance in the
present case and that the notice which had been issued under
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s. 147 of the Act was illegal and without jurisdiction.
Subsequently the assessee filed a petition in the High Court
under Art. 226 of the Constitution challenging the legality
and validity of the notice issued under s. 147 of the Act.
The High Court was of the view that since the acquisition of
bonus and right shares acquired by the assessee on the
original holding had not been shown in the income tax return
it could be said that the Income-tax Officer had reason to
believe that the income chargeable to tax had escaped
assessment by reason of the omission or failure on the part
of the assessee to disclose fully and truly all material
facts necessary for its assessment. It was contended on
behalf of the assessee before the High Court that it was
altogether unnecessary for the assessee to have shown the
acquisition of bonus shares in the return filed by it for
the determination of the cost of acquisition of the shares
held by it and therefore the notice issued by the Income-tax
Officer was without jurisdiction. G. M. Mehta J., disposed
of the matter by saying, "prima facie it cannot be said that
the Income-tax Officer had no reason to believe that there
was an escapement of assessment on account of omission or
failure on the part of the assessee to disclose fully or
truly all material facts necessary for the assessment for
the years 1962-63........ requiring notice under s. 148
of the Income tax Act." The other learned judge D. M.
Bhandari J. wrote a separate judgment expressing the
opinion that the case of the assessee was covered by s. 147
(a) and that it did not fall within s. 147 (b) of the Act.
The writ petition was dismissed.
It is somewhat unfortunate that the real points which arose
for determination in the present case did not engage the
attention of the learned judges of the High Court. Section
45 of the Act provides that any profits and gains arising
from the transfer of a capital asset effected in the
previous year shall, save as otherwise provided in ss. 53
and 54 be chargeable to income tax under the head "Capital
gains" and shall be deemed to be the income of the previous
year in which the transfer took place. Section 48 deals
with the mode of computation and deductions. It says that
income chargeable under the head "capital gains shall be
computed by deducting from the full value of the
consideration received or accruing as a result of the
transfer of the capital asset following amounts, namely, (i)
expenditure incurred wholly
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and exclusively in connection with such transfer and (ii)
the cost of acquisition of the capital asset and the cost of
any improvement thereof. The meaning of the cost of
acquisition is explained by s. 5 5 (2) and for our
purpose that sub-section with clause (1) need be reproduced
:
55(2) "For the purposes of sections 48 and 49,
"cost of acquisition", in relation to a
capital asset
(i) where the capital asset became the
property of the assessee before the 1st day of
January 1954 means the cost of acquisition of
the asset to the assessee or the fair market
value of the asset on the 1st day of January,
1954, at the option of the assessee;
The assessee had exercised the option of the fair market
value of the assets. The shares which had been sold by it
of both the companies had indisputably become its property
before the first day of January 1954. Therefore all that
had to be determined was the fair market value on the
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first day of January 1954 of those shares. This was
duly determined and it was not disputed that that
determination was made according to the rates prevailing in
the market on the aforesaid date by the Income-tax Officer
when he made his assessment order on July 20, 1964.
Once the market value of the shares was ascertained or
determined on the date given in cl. (1) of s., 5 5 (2)
that would be the cost of acquisition in relation to
capital assets. Up to this point there is no controversy
between the Revenue and the assessee but on behalf of the
Revenue an almost startling position has been advanced that
while determining the fair market value on January 1, 1954
the issuance of bonus or right shares after that date on
the basis of the holding of the assessee prior to January
1, 1954 should have been taken into account. In other
words as was explained in the letter of the Income-tax
Officer dated January 4, 1967 while working out the
capital gains the cost had to be worked out by averaging
the cost of the original shares amongst the original shares
and the bonus shares taken together. Thus, according to the
Revenue, after the issue of bonus shares the cost of the
original holding had to be spread over all the shares
inclusive of the bonus or the right shares acquired on
the original holding. Support for this view appears to have
been found in the decision of this; Court in Commissioner
of Income tax, Bihar v. Dalmia Investment
Co. Ltd.(1).
(1)52 I.T.R. 567.
932
The question which had to be decided in the above case was
entirely, of a different nature. The assessee there held
ordinary shares in Rohtas Industries Ltd. apart from holding
shares by way of investment and also as stock-in-trade of
its business as a share dealer. In 1944 the assessee
acquired 31,909 of these shares and was holding them in
January 1945. In that month the Rohtas Industries Ltd.
distributed bonus shares at the rate of one ordinary share
for each original share. So the assessee got 31,909 bonus
shares. Between that time and December 31, 1947 the
assessee sold 14,650 of the original shares. The assessee
acquired some newly issued shares in the years 1945 and
1947. The total holding of the assessee on January 1, 1948
came to 1,10,747 shares which in its books had been valued
at Rs. 15,57,902. In arriving at this figure the assessee
had valued the bonus shares at the face value of Rs. 10 /’-
each and the other shares at the actual cost. On January
29, 1948/ the assessee sold all these shares for the total
sum of Rs. 15,50,458 and in its return for the year 1949-50
claimed a loss of Rs. 7,444 on the sale. It was held by the
majority that the bonus shares had to be valued by spreading
the cost of the old shares over the old shares and the bonus
shares taken together if they ranked pari passi and if they
did not the price might have to be adjusted either in
proportion of the face value they bore or on equitable
consideration based on the market price before and after
issue. We have set out the facts of this case in detail in
order to demonstrate that that decision was not at all
apposite for the purpose of deciding the point which has
arisen in the present case. No question arose there of the
calculation of the capital gain or loss in accordance with
the statutory provisions in Pari materia with ss. 48 and
55(2) of the Act. In the present case we are confined to
the express provisions of s. 55(2) relating to the manner in
which the cost of acquisition of a capital asset has to be
determined for the purpose of s. 48. Where the capital
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asset became the property of the assessee before the first
day of January 1954 the assessee has two options. It can
decide whether it wishes to take the cost of the acquisition
of the asset to it as the cost of acquisition for the
purpose of s. 48 or the fair market value of the asset on
the first day of January 1954. The word "Fair" appears to
have been used to indicate that any artificially inflated
value is not to be taken into account. In the present case
it is common ground that when the original assessment order
was made the fair market value of the shares in question had
been duly determined and accepted as correct by the Income-
tax Officer. Under no principle or authority can anything
more be read into the provisions of s. 55 (2) (i) in the
manner suggested by the Revenue based on the view expressed
in the Dalmia Investment Co’s case(3). The High Court corn-
(1)[1952] I.T.R. 567.
933
pletely overlooked the fact that for the ascertainment of
the fair market value of the shares in question on January
1, 1954 any event prior or subsequent to the said date was
wholly extraneous and irrelevant and could not be taken into
consideration. If the contention of the Revenue were to be
accepted the acquisition of bonus shares subsequent to
January 1, 1954 will have to be taken into account which on
the language of the statute it is not possible to do. On
this view of the matter there was no question of the case of
the assessee falling within clauses (a) or (b) of S. 147 of
the Act. The assessee is bound to disclose under cl. (a)
only such material facts which are necessary for its
assessment for the assessment year and not those facts which
are wholly irrelevant and extraneous for the purpose of
assessment. As regards cl. (b) also the information must be
such as should lead the Income-tax Officer to believe that
income chargeable to tax has escaped assessment. The
information, in the present case, relating to the
acquisition of the bonus shares subsequent to January 1,
1954 could possibly furnish no reason to the Income-tax
Officer to form the belief that income chargeable to tax had
escaped assessment for the assessment year in question.
For the reasons given above the appeals are allowed and the.
judgment of the High Court is set aside. The impugned
notice issued to the assessee in each case shall stand
quashed. The assessee shall be entitled to its costs in
this Court. Hearing fee one set.
S.N. Appeals
allowed.,
934