2000 (2) TMI 79 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to substitute the fair market value of shares as on January 1, 1964, for the purpose of computing capital gains.
2. Deductibility of the cost of bonus shares in addition to the cost of acquisition of original shares.

Detailed Analysis:

Issue 1: Entitlement to Substitute Fair Market Value of Shares

The primary question at the instance of the Revenue was whether the assessee could exercise the statutory right to substitute the fair market value of the shares in the amalgamating companies as on January 1, 1964, for computing capital gains. The court examined the provisions of sections 2(42A), 49(2), and 55(2)(i) of the Income-tax Act, 1961.

The Tribunal had held that the assessee was entitled to substitute the fair market value as on January 1, 1964, for the shares in Madura Mills Company Limited and A and F Harvey Limited. The court upheld this view, stating that section 49(2) deems the cost of acquisition of the shares in the amalgamated company to be the cost of acquisition of the shares in the amalgamating companies. This statutory right allows the assessee to exercise the option under section 55(2)(i) to adopt the fair market value as on January 1, 1964.

The court emphasized that the legislative intent behind these provisions was to facilitate amalgamations by reducing tax liabilities. The statutory right to substitute the market value as on January 1, 1964, was not taken away by section 55(2)(ii). The court concluded that sections 49(2) and 55(2)(i) should be read together, allowing the assessee to exercise the option to adopt the market value as on January 1, 1964.

Issue 2: Deductibility of Cost of Bonus Shares

The second question, at the instance of the assessee, was whether the Tribunal was correct in holding that the assessee was not entitled to deduct the sum of Rs. 1,53,128 as the cost of bonus shares in addition to the cost of acquisition of original shares.

The court referred to previous judgments, including Mala Ramesh v. CIT and S. Ram v. CIT, which held that the value of bonus shares should not be separately ascertained when an entire block of shares, including bonus shares, is sold. The fair market value as on January 1, 1964, remains an unalterable figure, and the cost of acquisition should be averaged over the total number of shares, including bonus shares.

The court reiterated that subsequent issues of bonus shares do not alter the original cost of acquisition of shares. Therefore, the assessee was not entitled to deduct the cost of bonus shares separately. The Tribunal's decision was in line with established legal principles, and the court found no infirmity in it.

Conclusion:

The court answered both questions in the affirmative, upholding the Tribunal's decisions. The Revenue's reference was answered against the Revenue, and the assessee's reference was answered against the assessee. Costs of Rs. 2,000 were awarded to both parties in their respective references.