1968 (4) TMI 6 - HC - Income Tax

Notice under section 148 - prayer for quashing the notices and for restraining the Income-tax Officer from taking proceedings in persuance thereof

Summary

Issues Involved:

1. Validity of notices issued under Section 148 of the Income-tax Act, 1961.
2. Disclosure of material facts by the assessee.
3. Calculation of cost price of shares for capital gains.
4. Application of Supreme Court decisions in assessing capital gains.

Detailed Analysis:

1. Validity of Notices Issued Under Section 148 of the Income-tax Act, 1961:

The assessee filed writ petitions under Article 226 of the Constitution to quash notices under Section 148 issued by the Income-tax Officer, contending that the notices were erroneous and against the provisions of the Act. The respondent issued these notices based on the belief that the assessee's income chargeable to tax had escaped assessment within the meaning of Section 147. The court examined whether the Income-tax Officer had the jurisdiction to issue these notices under Section 147, which requires a "reason to believe" that income chargeable to tax has escaped assessment due to the assessee's failure to disclose fully and truly all material facts necessary for the assessment.

2. Disclosure of Material Facts by the Assessee:

The respondent argued that the assessee did not disclose in its return the acquisition of bonus and right shares on the original holding, which led to an incorrect calculation of the cost price of shares sold. The court noted that the assessee's failure to disclose these details constituted an omission of material facts necessary for the assessment. The court held that the Income-tax Officer had reason to believe that there was an escapement of income due to this omission, thereby justifying the issuance of notices under Section 148.

3. Calculation of Cost Price of Shares for Capital Gains:

The primary contention involved the method of calculating the cost price of shares for determining capital gains. The assessee calculated the cost price of shares sold based on the market value as of January 1, 1954. The respondent contended that the cost price should have been averaged over the original shares and the bonus shares, as laid down by the Supreme Court in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. The court agreed with the respondent's method, stating that the cost of original shares should be spread over the original and bonus shares collectively, which would result in a different calculation of capital gains or losses.

4. Application of Supreme Court Decisions in Assessing Capital Gains:

The court referred to the Supreme Court's decisions in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. and Emerald & Co. Ltd. v. Commissioner of Income-tax. In Dalmia Investment Co., the Supreme Court held that the real cost of bonus shares to the assessee cannot be taken as nil and should be averaged with the cost of original shares. The court found that the assessee's method of calculation was incorrect as it did not account for the bonus shares in the manner prescribed by the Supreme Court. The court distinguished the present case from Emerald & Co. Ltd., where no bonus shares were involved, and reaffirmed the applicability of the method laid down in Dalmia Investment Co.

Conclusion:

The court concluded that the Income-tax Officer had valid reasons to believe that there was an escapement of income due to the assessee's failure to disclose material facts and that the notices under Section 148 were justified. The writ petitions were dismissed with costs, upholding the respondent's method of calculating the cost price of shares for capital gains. The court emphasized the duty of the assessee to disclose fully and truly all material facts necessary for the assessment.