2005 (8) TMI 95 - HC - Income Tax

Computing the capital gain or loss sale of shares - (1) Whether, Tribunal was right in holding that, considering the provisions of sections 47, 49 and 55, the assessee-company was not entitled to exercise the option to substitute the fair market value as on January 1, 1964, of the shares of J&P Coats (India) Ltd., and A & F Harvey Ltd., as cost of acquisition of shares of Madura Coats Ltd. sold by it, under section 55 in computing the capital gain or loss? (2) whether, Tribunal was right in holding that for purpose of computing capital gains, the assessee-company was required to value the said shares sold by it on the basis of cost and not on the basis of yield method? Question no. 1 is answered I negative and in favour of assessee - Matter remanded

Issues Involved:
1. Whether the assessee-company was entitled to substitute the fair market value as on January 1, 1964, for the shares of J&P Coats (India) Ltd. and A&F Harvey Ltd., as the cost of acquisition of shares of Madura Coats Ltd. sold by it, under section 55 of the Income-tax Act, 1961.
2. Whether the assessee-company was required to value the shares sold by it on the basis of cost and not on the basis of yield method for the purpose of computing capital gains.

Detailed Analysis:

Issue 1: Substitution of Fair Market Value as on January 1, 1964

The primary question was whether the assessee-company could substitute the fair market value as on January 1, 1964, for the shares of J&P Coats (India) Ltd. and A&F Harvey Ltd., as the cost of acquisition of shares of Madura Coats Ltd. sold by it. The Tribunal held that the assessee-company was not entitled to this substitution, asserting that the shares sold were acquired in 1974, post-amalgamation, and thus could not be valued as of January 1, 1964.

The Tribunal's interpretation was based on sections 47, 49, and 55 of the Income-tax Act, 1961. The Tribunal concluded that since the shares were not in existence before January 1, 1964, the assessee could not exercise the option under section 55(2)(i) or (ii). This was challenged by the assessee, who argued that amalgamation does not amount to a transfer, and thus, the shares received post-amalgamation were the same as those held in the amalgamating companies.

The court referred to the judgment of the Madras High Court in H.F. Craig Harvey v. CIT, which supported the assessee's view, stating that the transaction of allotment of shares in the amalgamated company in lieu of shares in the amalgamating company is not a transfer. The period of holding and cost of acquisition should be considered from the original shares held in the amalgamating company. Consequently, the assessee could exercise the option to substitute the fair market value as on January 1, 1964, under section 55(2)(i).

The court found the Tribunal's reliance on the Harish Mahindra case misplaced, as the facts of the present case were more favorable to the assessee. The court concluded that the assessee was entitled to substitute the fair market value of the shares as on January 1, 1964, and answered the first question in the negative, in favor of the assessee.

Issue 2: Valuation Basis for Computing Capital Gains

The second issue was whether the Tribunal was correct in holding that the shares should be valued on the basis of cost and not on the yield method for computing capital gains. The Tribunal had declined to address this issue directly, as it was consequential to its primary finding that the assessee could not adopt the fair market value as on January 1, 1964.

Given that the court answered the first issue in favor of the assessee, it was necessary to address the valuation method. The Income-tax Officer had determined the cost of the shares based on their acquisition dates, rejecting the yield method proposed by the assessee. The Tribunal had upheld this, stating that the assessee could only use the cost paid for the shares.

However, the court noted that the Income-tax Officer's own admission showed that most of the shares were acquired before January 1, 1964, except for 1920 shares of Madura Mills Ltd. Thus, the fair market value option would apply to most shares. The court remanded the matter back to the Tribunal to reconsider the valuation method, taking into account the Supreme Court's observations in CWT v. Mahadeo Jalan and Bharat Hari Singhania v. CWT.

Conclusion:
The court concluded that the Tribunal erred in its findings and that the assessee was entitled to substitute the fair market value as on January 1, 1964, for the shares in question. The matter of the appropriate valuation method was remanded back to the Tribunal for reconsideration.

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