1993 (4) TMI 44 - HC - Income Tax

Summary

Issues Involved:
1. Determination of the cost of acquisition of shares for the Hindu undivided family (HUF) when shares are thrown into the common stock by a coparcener.
2. Applicability of Section 49(1) of the Income-tax Act, 1961.
3. Interpretation of the doctrine of throwing into the common stock under Hindu law.

Issue-wise Detailed Analysis:

1. Determination of the Cost of Acquisition of Shares:

The primary issue in this case was whether the Tribunal was justified in determining the cost of the shares at the market rate as on December 31, 1969, or if it should be taken as nil. The assessee, a Hindu undivided family, had not shown any income by way of capital gains in its return of income after selling the shares. The Income-tax Officer computed the capital gains by taking the cost of the shares to be the same as the original acquisition cost by Ashok Kumar Jalan, i.e., Rs. 1.76 per share, and spread this cost over the entire holding, resulting in a cost of 88 paise per share for the HUF. The Appellate Assistant Commissioner upheld this view, considering the throwing of shares into the common stock as a gift under Section 49(1) of the Act. However, the Tribunal, relying on the Supreme Court's decision in Goli Eswariah v. CGT, held that this act did not amount to a gift and thus Section 49(1) was not applicable. The Tribunal then determined the cost based on the market value of the shares as of December 31, 1969.

2. Applicability of Section 49(1) of the Income-tax Act, 1961:

Section 49(1) deals with the cost of acquisition of capital assets in certain transactions where the assessee acquires property without incurring any cost. The Tribunal initially held that this section was not applicable because the throwing of shares into the common stock did not constitute a gift. The High Court examined whether any fiction created by the Legislature under Section 49(1) could apply. It was noted that Clause (iv) of Section 49(1), inserted by the Taxation Laws (Amendment) Act, 1975, applied only to cases where a coparcener threw his property into the common stock after December 31, 1969. Since the shares in question were thrown into the common stock on December 31, 1969, this clause was not applicable. The court also determined that the other clauses of Section 49(1) did not apply, as they dealt with partition, gifts, wills, and succession, which were not relevant to the present case.

3. Interpretation of the Doctrine of Throwing into the Common Stock:

The court referred to the Supreme Court's decision in Goli Eswariah v. CGT, which clarified that throwing separate property into the common stock of a Hindu undivided family is a unilateral act that does not constitute a gift under the Transfer of Property Act. This act of blending separate property with coparcenary property does not involve any consideration and thus does not incur any cost to the family. Consequently, the cost of such an asset to the HUF should be considered nil. The court reviewed various High Court decisions, including those from Delhi, Madras, Gujarat, and Bombay, which had differing views on this issue. Ultimately, the court agreed with the Bombay High Court's reasoning in CIT v. Trikamlal Maneklal (HUF), which held that the cost of acquisition should be nil if the actual cost of acquisition is nil.

Conclusion:

The High Court concluded that the Tribunal was not justified in determining the cost of shares at the market rate on December 31, 1969, and it should have taken the cost as nil. The court emphasized that the throwing of shares into the common stock did not fall under any of the specific transactions listed in Section 49(1) of the Income-tax Act. The judgment was delivered with no costs, and it was noted that the assessee could make further submissions at the stage of passing the order under Section 260 of the Act.