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TMI Blog1987 (12) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... e's figure of Rs. 54,599. 3. The Income-tax Officer found that during the previous year the assessee sold 1,83,154 shares in Madura Coats Ltd. for Rs. 12,82,078 at Rs. 7 per share, as fixed by the Controller of Capital Issues, and that after deducting the expenses the net sale consideration amounted to Rs. 12,63,763. He further found that the shares sold by the assessee were originally part of the following shares : "Old Madura Mills Co. Ltd. Shares Old A F Harvey Ltd. shares 3,000 shares held prior to 1-1-1964 22,700 shares held prior to 1-1-1964. 638 bonus shares issued in 1966 (out 11,350 shares (bonus shares ) issued in 1966 of 3,000 bonus shares received in 1966). 6,000 shares (bonus shares) issued in 1969. 7,883 shares purchased in March 1972. Total shares : 9,638. Total shares : 41,933 He further found that when these two companies, Madura Mills Co. Ltd. and A F Harvey Ltd., were amalgamated to form a new company, Madura Coats Ltd., on 1-7-1974, the assessee got the following shares in Madura Coats Ltd.; "For 9,638 shares (for 5 shares 8 Madura Coats Ltd. shares) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et out in detail the assessee's working as well as the Income-tax Officer's working of the cost of acquisition of the shares in question, as well as the computation of long-term capital gain by them and the assessee's contention in extenso in paragraphs 4 to 9 of his order 6. The commissioner (Appeal) held that he agreed with the computation of cost of acquisition of the shares as worked out by the assessee as far as the shares of old Madura Mills Co Ltd. were concerned. He was of the opinion that the method adopted by the assessee was the correct method, the assessee method of valuation of the original shares and the bonus shares subsequently issued was supported by the decision of Supreme court in Dalmia investment Co. Ltd.'s case, Shekhawati General Traders Ltd.'s case. Gold Mohore Investment Co. Ltd.'s case and Gold Co. Ltd.'s case. He further held that assessee's method of arriving at the cost original shares and the bonus shares was also supported by the decision of the Madras High Court in the case of Madura Mills Co. Ltd. and the decision of the Gujarat High Court in the case of CIT v. Arvind Narottam Lalbhai Dalpatbhai Vada [1976] 105 ITR 378. He also relied on the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im in this assessment order with the figure of Rs. 1,74,001. He further referred to the observation of the Income-tax Officer that none of the decision of the Supreme Court and High Court relied on by the assessee was on all fours with fact of the instant case and held that he did not agree with this statements of the Income-tax Officer he further held that the ratio of the decisions states by the assessee separately applies to fact of present case. 10. The Commissioner further held that the statue itself recognizes a "double benefit", it there is any, science the statue authorises an assessee to substitute the fair market value of an asset as on 1-1-1964 in the place of actual cost of the asset acquired before 1-1-1964 and that whatever benefit is confirmed by the statue to a citizen must be granted by the departmental officers. The Commissioner therefore held that the long-term capital gains should be taken at Rs. 1,74,001 and partly allowed the assessee's appeal. 11. Both the assessee and departmental feel aggrieved by this order of the commissioner and hence the present appeals by them to the Tribunal. 12. In the department appeal, the revenue has raise the following addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases, the assessee is entitled to the option u/s 55(2) to substitute the market value as on 1-1-1964 for the cost of acquisition in respect of share held in the amalgamated company in pursuance of the amalgamation made after 1-1-1964 ? 2. Whether, on the facts and in the circumstances of the case, the value of bonus shares must be taken as the average of the value taken by substituting the market value as on 1-1-1964 u/s 55(2) in respect of the primary shares ?" 15. We have heard Shri B. C. Mohanty, the learned departmental representative, and Shri K. R. Ramamani, the learned counsel for the assessee. We have also heard Shri S. Swaminathan and Shri S. Padmanabhan the learned counsels for the interveners on the question of valuation of bonus shares referred to in the second question formulated and referred to the Special Bench, set out above. We have carefully considered the rival submission urged on both sides in the light of the authorities placed before us. 16. In our view, the following are the issue which arise for our consideration in these two appeals : "(i) Admission of the additional grounds of appeal raised by the revenue in the departmental appeal. "(ii) Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed this case to Special Bench. 18. Shri K. P. Ramamani, the learned counsel for the assessee opposed these contentions and argued that the additional grounds sought to reopen settled position on fact on the basis of which the assessment has so far proceeded up to second appellate stage. He pointed out that the departmental authorities, namely, the Income-tax Officer, the Inspecting Asstt. Commissioner and the commissioner (Appeals) have all proceed on the basis that the assessee was entitled to the statutory right of substituting the fair market value of the share as on 1-1-1964 under section 55(2)(i) of the Act and the entire dispute was confined only to the method of computing the cost acquisition of the original shares and bonus share in the amalgamating companies. He, therefore, argued that the revenue should not be allowed to rise an entirely new plea, which was never raised by the departmental authorities and which the assessee had no occasion to meet earlier. He further argued that the CIT (Appeals) had only followed the orders of appellate Tribunal, Madras Benches in similar cases, such as the case of T. S. Srinivasan (HUF) and other cases in T. V. S. group and hence th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already on record. 21. We have already set out the additional ground filed by the department in paragraph 12 supra. As rightly stated by the learned departmental representative, the said additional ground is not happily worded. At the same time, it raises an important question of law as to the right of the assessee to substitute the fair market value of the shares as on 1-1-1964 as his cost of acquisition in computing the long-term capital gains derived by him from the sale of the shares during the year under appeal. Apparently, this additional ground has been prompted by the decision of the Appellate Tribunal in the case of Madura Coats Ltd. That was a case of another shareholder by name J. P. Coats Ltd., an English company, who also received shares in Madura Coats Ltd., which was formed by the amalgamation of three companies, namely (1) A F Harvey Ltd., (2) J. P. Coats (India) Ltd., and (3) Madura Mills Co. Ltd., on 1-7-1974. It cannot be disputed that all the facts for deciding the additional grounds of appeal are already on record and that it does not call for any further investigation into fresh facts and additional evidence. 22. We are fully aware of the force of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d there was no business carried on by the assessee during the year in which the assets were sold. On the terms of section 10(2)(vii) this contention had to be upheld and it was so done. The Assistant Appellate Commissioner however rejected the claim of the assessee that the sale effected by the Commissioner came within the third proviso to section 12B (1) and on this ground he computed the capital gains on the entire sum of Rs. 81,863 representing the entire difference between the written down value and the sale price. On further appeal to the Tribunal, this order of the Appellate Asstt. Commissioner was upheld. One of the points raised on behalf of the assessee before the Tribunal related to the power of the Appellate Assistant Commissioner to enhance the assessment under the head "Capital gains". This contention was rejected by the Tribunal and the first question referred to us seeks to raise this point. Learned counsel for the assessee however found that what the Appellate Asstt. Commissioner did was merely a re-adjustment and that therefore there could be no objection to his order on the ground of want of jurisdiction." Adverting to the powers of the Tribunal under the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of new point raise by the respondent to the appeal". Again, at page 23, after quoting from the earlier decision of the Madras High Court in CIT v. Madras Industrial Investment Corpn. Ltd. [1980] 124 ITR 454, their lordship further held as follows : We do not regard the last observation as a fetter on the Tribunal's jurisdiction to admit a new plea. For, the power to the listen to a new contention and decide the appeal on that basis has been spelled out by the Supreme Court from the term of the statute. The excise of that power does not depend on the presence of any other factor, excepting that the plea comes from a party to the appeal. Even in a case where fresh facts are called for to decide the new plea, the Tribunal would have jurisdiction to entertain that plea. How the Tribunal wishes to get at the relevant facts in order to decide the new point may be quite a different thing. The Tribunal may either remand the matter for the purpose, or proceed to investigate the facts themselves. In this part of the decision-making alone, there is scope for the play of the Tribunal's discretion. As to the very power to entertain a new plea, that is not to be ruled out, merely because a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to raise an additional ground of appeal, where it raised a plea that the sums of Rs. 4,56,810.14 and Rs. 55,657.69 which were provisions made in the relevant year towards gratuity liability should be deducted in the computation of its assessable business profits of the year. On behalf of the department, a preliminary objection was raised at the hearing to the effect that the Tribunal should not entertain this new plea by the assessee, since it has not been raised at any time earlier at any stage of the proceedings, either before the ITO or before the AAC. The Tribunal, However, overruled this preliminary objection to its jurisdiction and regarded the matter as one entirely within its discretion either to entertain or not to entertain. The Tribunal proceeded to observe that in the exercise of its discretion it was a fit case to allow the assessee to raise a new point in the appeal, but directed the case to be sent back to the Income-tax Officer for going into the factual and other considerations bearings on this new point. This decision of the Tribunal was challenged by the revenue before the High Court in the reference. While upholding the action of the Tribunal, their Lordsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court rightly entertained it". 26. In the light of the aforesaid decisions of the Supreme Court and Madras High Court, we are of the view that the issue raise by the revenue by way of one additional grounds of appeal on the facts of present case is only one aspect or fact of the question raise in the appeals, namely what is the true amount of capital gain to be taxed in the hands of assessee having regard to all relevant statutory provisions on the sale of the shares held by him in Madura Coats Ltd. during the previous year. The issue raise by revenue in the additional grounds of appeal is directly base on an order of the Appellate Tribunal in the case of Madura Coats Ltd. which was a case decided in favour of the revenue on fact and circumstances similar to the facts and circumstances the present Appeals. They do not require any further investigation or enquiry in to fresh facts and additional evidence, but can be dispose of an the material already on record in the light of the relevant provisions of the Act and case law bearing on the subject. We therefore consider that it would be perfectly in conformity with law and just and proper to consider the issue raised by revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2)(i) would be applicable, but this clause could not apply to the assessee's case as he became the owner of these shares in the amalgamated company on 1-7-1974 only. He therefore submitted that the option of substituting the fair market value of the shares as on 1-1-1964 as its cost of acquisition for the purpose of sec. 48 and 49 of Act was not available to the assessee in the present case. Shri Mohanty submitted that this aspect of the matter was over looked by the departmental authorities while making the assessment in the present case and that the commissioner (Appeals) ought have taken note of this legal position which emerged on the fact of the present case and issued a notice of enhancement to determined the correct amount of capital gains derived by the assessee. 29. Adverting to clause (c) of Explanation (i) to section 2(42A) of the Act, the learned departmental representative submitted that it was a special provision defining a short-term capital asset and that this provision would not make the shares sold by the assessee as acquired by him prior to 1-7-1974. He further submitted that section 49(2) was a deeming provision that it created a legal function for the limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost of acquisition of the asset in the hand of the assessee shall be with reference to the cost of acquisition to the previous owner. Shri Ramamani submitted that sec. 49 (2) provided for the change in front of the asset of the same owner as in the case of shares of an amalgamated company. It further provided that in the case of amalgamation, the cost of acquisition of shares in amalgamated company should be the cost of acquisition in amalgamating company, by which provision the emphasis was on the cost of acquisition of shares in the amalgamating company and the time at which it was acquired, is rendered inconsequential. Thus, once there is amalgamation, the cost of acquisition shares in the amalgamated company should be equated to the cost acquisition in the amalgamating company, the point to when the shares become the property or time of acquisition having been made irrelevant for that purpose. In this connection he referred us to section 55(2)(v) of the Act and submitted that guidance may be had from this provision of law which deal new asset emerging from an old asset by way of sub-division or conversion. etc. where the statuary right of substitution of the fair market valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any merging with another company under scheme of amalgamation and, also in the case shareholders of the 'amalgamating company' (i.e. the company which merges in the another company), who received in shares in the 'amalgamating company' (i.e. the Company in which the enterprise of the other company is merged), in lieu of their shareholdings in the amalgamating company. Some these tax liabilities discourage amalgamations. For the purpose of facilitating the merger of uneconomic company unit with other financially sound Indian companies in the interests of increased efficiency and productivity. it is propose to make the following provisions in the law : ** ** ** (iv) No capital gains or loss will be computed in the case of the amalgamating company in respect of any capital asset transferred by it to the amalgamated company. ** ** ** The shareholders in the amalgamating company receiving share in the amalgamated company in lieu of their original shareholding will be liable to tax on capital gain only at the stage when they sale or otherwise transfer the share in the amalgamated company and relies any capital gains thereon. Such capital gain will be computed by taking the 'cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reports : "In order to avoid such an anomaly and to effect plausible reconciliation of the position and particular to harmonise the intention of the Legislature, after reading section 12B as whole, it is but necessary that in order to secure synchrony, symmetry and harmony, it is essential that the first truncation between voluntary liquidator and the contributory should be excluded from the spare of taxation, so that sub-section (3) of section 12B can work it self out with prejudicing and with out affecting the fundamental canons of taxation. While considering a similar in the United States, Mr. Mertens in this book on law of Federal Income Taxation Vol. 3 at page 458, states that the general theory is that where no gain or loss is recognised as resulting from the exchange therein referred to since the exchange is treated by statute as merely a change of from, the new property received shall for the purpose of determining gain or loss from a subsequent sale, be considered as taking the place of the old property given up in connection with the exchange. Such an aid to interpretation of the letter and script of section 12B of the Act has to be brought to be light in the instant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trary to law and unjust, as could be seen by comparing two shareholder, one who sell his shares one day before the date of amalgamation, and another who sell his shares one day after the date of amalgamation. The learned counsel submitted that the revenue's interpretation would put the second shareholder in to hardship for which there is no clear expression use by the Legislature in section 55(2)(i) of the Act. 34. Shri Ramamani next submitted with the reference to the facts of the present case that the mandate of the section 49(2) of the Act was to equate the cost acquisition of Madura Coats share to the cost of acquisition of the shares of Madura Mills Ltd and A F Harvey Ltd. The learned counsel submitted that section 49(2) did not say in what particular manner of way the cost of acquisition of the shares of Madura Mills and A F Harvey Ltd should be computed so as to put a restraint on it as connected by the learn departmental representative. The learned counsel argued that if we are determine the cost acquisition of capital asset as specified in sec. 49(2), namely, the share of Madura Mills Co. Ltd and A F Harvey Ltd., they are the capital assets specified in section 55( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there was nothing unreasonable in the denial of the option to the present assessee, as person holding the original shares and person holding shares in an amalgamated company fall in two different well-defined classification and therefore the denial of option to the person holding shares in amalgamated company after 1-1-1964 was quit reasonable. Shri Mohanty connected that the intention of the parliament deny this concession in quit evident and eloquent by its absence in section 55(2), as cases falling under sec. 49(2) of the Act are not provided for in section 55(2), as which has specifically provided for cases falling under sec. 49(1) and section 55(2)(ii) of the Act. The learned departmental representative reiterated his submission about the operation of the function in sec. 49(2) by relying on the decision of the Bombay High Court in CIT v. Trikamlal Maneklal [1987] 63 CTR (Bom.) 251. He, therefore, submitted that the department was entitled to succeed on the contention raised by it in the additional grounds of appeal. 37. Before we examine the contentions urged on both sides as set out above, we consider that it is necessary to refer to the specific provision of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53,54 54B, 54D, 54F, 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 47(vii) in so far as it is relevant for our purpose is set out below : "Transaction not regarded as transfer. 47. Nothing contained in section 45 shall apply to the following transfers : ** ** ** (vii) any transfer of the shareholder, in the scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company if- (a) the transfer is made in consideration of the allotment to of any share or shares in the amalgamated company, and (b) the amalgamated company is an Indian company;" The mode of computation and deduction in provided for in section 48 of Act, which is quoted below : "Mode of computation and deductions. 48. The income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration received or accruing as result of transfer of the capital asset the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the nature of shares held by an assessee in an amalgamated company as to whether they are short-term capital asset or not, it is necessary to take into account and include the period for which the assessee held the shares in the amalgamating company also. In other words, mandate of this Explanation is that the period for which an assessee hold shares in an amalgamating company as well as the period for which he held the original shares in the amalgamating company, should be taken together to determine the period of his holding the shares to decide the issue whether the said shares represented short-term capital asset or long-term capital assets. According to the section 2(42A), a capital asset is regarded as a short-term capital asset if it is held by an assessee for not more than.36 months immediately preceding the date of its transfer. The period of holding the capital asset, which was originally 60 months, was reduced to 36 months with effect from 1-4-1978 by the Finance (No. 2) Act of 1977. When we examine the period of holding of the shares transfers by the assessee in the present case during the previous year in the light of the aforesaid provisions contained in sec. 2(42A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d nothing more. The revenue further elucidates their point by pointing out that for receiving the bonus shares in the amalgamating companies subsequent to 1-1-1964 the assessee had to pay nothing and therefore only the cost of original shares in the amalgamating companies would represent the true cost of acquisition of the shares in the amalgamated company, as the deemed by section 49(2) of the Act. The revenue therefore contends that the long-term capital gains computed by the Income-tax Officer and the CIT (Appeals) erroneous and wrong as it should much more than the figure of Rs. 4,67,441 computed by the Income-tax Officer in the assessment order. 42. The contention of the revenue can be understood properly if we set out the figure of cost of acquisition of the original shares as given the particulars furnished by the assessee at page 1 and 2 of the paper book : (i) Cost of acquisition of 3,000 original shares in Madura Mills Co. Ltd. held prior to 1-1-1964 Rs. 1,27,740 (ii) Cost of 22,700 shares in A F Harvey Ltd held prior to 1-1-1964 Rs. 2,27,000 (iii) Cost of acquisition of 7,883 shares in A F Harve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose, have to be deemed to have been included in the Act from April 1, 1952." In our view, the fiction created by section 49(2) of the Act should be carried to its logical conclusion and there is nothing either in sec. 49(2) or in sec. 55(2)(i) of the Act or any other provision of the Act, which prohibits such a conclusion. We had already referred to the provision contained in clause (c) of Explanation (i) to sec. 2(42A) of the Act which defined a short-term capital asset, to show how the assets held by the assessee in present case are long-term capital asset and not short-term capital assets. There is no fiction involved in the said Explanation to section. 2(42A) of the Act. When Act requires that the period of holding of the capital asset in the amalgamating company should also be included along with period of which a shareholder holds shares in the amalgamated company to determine the total period of its holding by the assessee, we do not find any justification for limiting or confining the operation of the fiction created in sec. 49(2) of the Act ignoring the other facts which have to be taken into account in the light of the said clause (c) of Explanation (i) to sec 2(42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment other than lands buildings More than 3 years but not more than 5 years 40% More than 5 years, but more than 10 years 45% More than 10 years, but not more than 15 years 50% More than 15 years but not more than 20 years 55% Over 20 years 60% If the stand of the department is accepted, then it would mean that the period of holding would be only the dates from which the shares of the amalgamated company come into the possession of the assessee to the date of sale. The cost to be taken will be that of the original share. The difference between this and the sale price will be the capital gain. The percentage deduction, however, will not be allowed for the period, from the date of acquisition of the original share to the date of sale of the amalgamated company, but only to that percentage admissible from the date of acquisition of the amalgamated share to the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that perusal of opening part of sub-sec. (2) shows that deals with cost of acquisition in relation to 'a capital asset'. Clause (i) provides that where 'the capital asset' which, in our view, must mean capital asset referred to the opening portion of sub-sec. (2), namely, any capital asset whose cost of acquisition has to be determine for the purposes of sec. 48 and 49, become of the assessee before 1st January, 1954, 'the cost of acquisition' thereof the asset to the assessee or the fair market value of the said asset as on 1st January, 1954, at the option of the assessee." Rejecting the contention of the revenue that the option under sec. 55(2)(i) was not available to case covered by sec. 55(2)(v) of the Act, their Lordship held at page 198 of the reports, as follows : "It was submitted by Mr. Joshi, in this connection, that the option available under clause (i) aforesaid only regarding the very capital asset which had been transferred only the assessee and not regarding the cost of acquisition of the capital asset from which the said capital asset transferred might have been derived in any of the manners set out in clause (v). In our view, this submission of Mr. Joshi is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se while answering the third question we agree with the learn counsel for the assessee, Shri K. R. Ramamani, that this decision of the Bombay High Court fully support contention of the assessee in the present case, as it was decision rendered on an interpretation of the previous contain in sec. 48 and 55(2)(i) of the Act and not merely on section 55(2)(v) of the Act as contained by the Revenue to distinguish the said decision before the Bombay Bench of the Appellate Tribunal in case of Madura Coats Ltd. We also agree with the learned causal that this decision of the Bombay Bench of the Tribunal in Madura Coats Ltd.'s. case would not stand the way of our accepting the assessee's case in the present appeals. 45. We would like to refer to the decision of the Bombay High Court in the case of Trikamlal Maneklal, which was relied on the learned by the departmental representative to contend that the function in section 49(2) confined to the cost of acquisition only and nothing more. We have pursed this decision and we are unable to appreciate how this decision support the contention of the revenue. On the other hand, the following observation in paragraph 17 at page 254 of the reports s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arn departmental representative in his submission that, whereas the benefit of option is given to cases covered by sec. 49(1) of the Act, as expressly provided in sec. 55(2)(ii) of the Act, there no such express provisions conferring such right of option to cases covered by section 49(2) of the Act and therefore the assess is not entitled to this right of option. This argument of the revenue overlook that the cases falling under the provision of sec. 49(2) of the Act it self and would be comprehended by section 55(2)(i) of the Act itself and that both these provisions would have to be read together, as held by us. 48. Hence, on reading of the provisions of the sections 2(42A), Explanation (i)(c), section 49(2) sec. 55(2)(i) of the Act together and applying the said provisions to the fact of the present case, we hold that the assessee is entitled to statutory right of exercising his option to substitute the fair market value of the shares in Madura Mills Ltd. A F Harvey Ltd., as on 1-1-1964 and that the departmental authorities, including the Commissioner of Income-tax (Appeals), rightly took the fair market value of these shares as on 1-1-1964 for the purpose of computing the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the first case was a case essentially on the applicability of section 147(a) of the Act for the purpose of reopening the assessment to bring to charge the income that had escaped assessment by way of capital gains and therefore would not apply to the present case. In the other two decisions, though the principal of averaging by spreading out the cost of original shares over the original shares and the bonus shares was upheld, the said decisions would be of no avail to the assessee in the present case, as held by the Madras High Court in the case of T. V. S. Sons Ltd. where the assessee transfers all his shareholdings en bloc, as such an exercise would be purely an academic one. He therefore submitted that the department was entitled to succeed on this point in view of the decision of the Madras High Court in the case of T. V. S. Sons Ltd. 51. Shri S. Swaminathan, the learned counsel appearing for one group of Interveners, submitted that on the facts of the present case the decision of the Madras High Court in T. V. S. Sons Ltd.'s case would not apply and that the decision of the Supreme Court in the Shekhawati General Traders Ltd.'s case, as the original shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they had a cost of acquisition of their own, as has been laid down by the Supreme Court in Dalmia Investment Co. Ltd.'s case. He submitted that it is too late in the day for any one of contend that the cost of acquisition of the bonus shares is nil, as such a contention put forward by the parties has been unanimously rejected by the Supreme Court not only in Dalmia Investment Co. Ltd.'s but in later decision also, including the decision in Shekhawati General Traders Ltd.'s case. The learned counsel submitted that the answer to the question as to what is the cost of acquisition of the bonus shares is directly provided in a number of decisions of the Calcutta High Court based on the decisions of the Supreme Court. The first decision relied on by him was in Sutlej Cotton Mills Ltd. v. CIT [1979] 119 ITR 666 (Cal.). In this case it was decided that in determining the cost of acquisition of the original shares, on which bonus shares have been issued, it can either be the actual cost of acquisition or at the choice of the assessee, the market value thereof on the 1st January, 1954, that when an assessee elects to adopt the market value as on 1-1-1954, for the purpose of computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s favour : "Now we are here concerned with firstly, the bonus shares which ranked pari passu, secondly, we are not concerned with the value of the old shares. Some of the original shares were sold before the year in question. We are also concerned with the profit resulting from the sale of bonus shares. This is important because it is not a question of considering what is the profit embedded in the unsold stock either of shares or of stock-in-trade. It is a case of sale of an asset of a particular year. Therefore, it is not, in our opinion, very relevant to consider in what manner these stocks had been valued year, but, as the Supreme Court noted, what is the cost of acquisition of the particular asset which is sold and whose profit is due to be considered. Now, the cost of acquisition of the bonus shares, in our opinion, is clearly laid down by the Supreme Court in the principle enunciated, as we have mentioned before." The learned counsel submitted that there was a useful discussion elucidating the nature of the bonus shares in CIT v. Chunilal Khushaldas [1974] 93 ITR 369 (Guj.). 57. Referring to the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers Ltd.'s case and the decisions of the Calcutta High Court referred to above, Shri Swaminathan contended that the case of T. V. S. Sons Ltd. has not been correctly decided by Madras High Court, as it is contrary to the ratio of the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case. The learned counsel submitted that their Lordships of the Madras High Court have not even adverted to this decision of the Supreme Court in their judgment, even though it has been cited before their Lordships, and also referred to and relied on by the Appellate Tribunal in their appellate order in the said case. The learned counsel submitted that as the decision of the Madras High Court in T. V. S. Sons Ltd.'s case turned on entirely different facts, it was distinguishable on facts from the present case, wherein we are concerned with the valuation of original shares held before 1-1-1964 and of bonus shares issued subsequent to 1-1-1964. The learned counsel, therefore, submitted that the CIT (Appeals) was right in accepting the assessee's contentions in the present case and in allowing separately the cost of acquisition of the bonus shares of the two amalgamating companies sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sages indicated that the statute itself considered the cost of acquisition of bonus shares as nil. 60. Shri Padmanabhan next relied on the decision of the Madras High Court in CIT v. Athi V. Ramachandra Chettiar [1964] 52 ITR 96. We do not consider it necessary to refer to this decision in detail, as it was rendered before the decision of the Supreme Court in Dalmia Investment Co. Ltd.'s case. 61. Shri K. R. Ramamani, the learned counsel for the assessee in these two appeals, submitted that the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case recognises the following three principles : (i) The issuance of bonus or right shares after 1-1-1954 has to be ignored while determining the fair market value of the original shares as on 1-1-1954. (ii) The principle of determining the cost of acquisition of block of shares has been recognised. (iii) The decision of the Supreme Court in Dalmia Investment Company's case would be inapplicable to a case where statutory cost of acquisition has to be considered. The learned counsel submitted that on the authority of this decision of the authority of this decision of the Supreme Court in Shekhawati General Traders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the present assessee. The learned counsel argued that even on the case of T. V. S. Sons Ltd. there was a block of 1447 shares, which had to be valued as on 1-1-1954 as they were held prior to that date. Apparently, this fact had slipped the attention of all parties and the court, as the said case would also be governed by the decision of the Supreme Court in Shekhawati General Trader Ltd.'s case. Shri Ramamani submitted that the decision of the Madras High Court in T. V. S Son's Ltd.'s was in consistent with the provisions of the statute contained in section 55(2)(i) of the Income-tax Act and was further opposed to the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case. Therefore, this decision should be confined to its facts and it should not be extended to cases of assessees like the present one. The learned counsel also argued that on the authority of this decision of the Madras High Court in T. V. S Sons Ltd.'s case alone the revenue was not entitled to succeed in the present appeals, if all the other decision cited at the Bar on behalf of the assessees are the ignored. He submitted that this decision of the Madras High Court would be apply onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of a dealer in shares and the case of an investor and that the cost would be the same. He pointed out that, that was also a case of determining the cost of acquisition of bonus shares and the Calcutta high Court held that the correct method of valuing bonus shares was to take the cost of the original shares, spread it over the original shares and bounce shares collectively and find out the average price of the shares. The learned departmental representative submitted that the Delhi High Court has also taken a similar view in Escorts Farms (Ramgarh) Ltd.'s case. He also pointed out that the same view has been taken by the Special Bench of the Tribunal in Rohiniben Trust v. ITO (1985) 13 ITD 830 (BOM.). He argued that the cost of acquisition of the bonus shares was embedded in the cost of acquisition of the original shares and therefore the assesses would not be entitled to any separate deduction on account of the cost of acquisition of the bonus shares, in addition to the cost of acquisition of the original shares as claimed by him. Shri Mohanty next submitted that the decision of the Madras High Court in the case of T. V. S Sons Ltd. relied on by him was rightly decided and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the theory of averaging is a principle of costing resorted to, to determine the cost of the bonus shares alone. with a view to reckoning the result of any transaction in respect of bonus shares alone. Their Lordships further held that when the entire block of shares held by a shareholders is sold and in that sale all the bonus shares held by the shareholders also figure, there can be no occasion or necessity for determining the cost of bonus shares separately, that the whole cost of the shares including the shares is already a known figure and that it would be an unnecessary refinement to ascertain the individual cost of each share because by getting at the average cost of bonus shares, the average cost of the original shares must inevitably get reduced pro tanto. In our view, this decision of the Madras High Court is directly applicable to the facts of the present case, as the assesses has transferred his entire shareholdings in Madura Coats Ltd. 67. Though we find considerable force in the argument advanced by the learned counsel on behalf of the assessees with reference to the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case, which has been followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, is matched by another observations made by the Supreme Court on the ambit of the Tribunal's jurisdiction. That enunciations, as we read the judgment, has to be found in the earlier passage which we have quoted. It is in that passage that the Supreme Court have clearly laid down that even though a plea is put forward for the first time before the Tribunal and is inconsistent with the please earlier made, the Tribunal has jurisdiction to try and determine important questions, whether on fact or on law, which relates to the assessment of the assessee and there was nothing in the Act which restricts the Tribunal to determining those questions who have been raised before the departmental authorities. It is in this particular passage that the Supreme Court have rendered a comprehensive idea of the scope of the Tribunal jurisdiction. It may be that the observations of the court were no strictly called for, but they must nevertheless be regarding as binding." The learned counsel agreed that while deciding the appeal of T. V. S. Sons Ltd.'s case the Appellate Tribunal had followed the principles laid down in the decision of Shekhawati General Traders Ltd.'s case by the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the earlier instructions for the guidance of the Wealth-tax Officers and therefore the Income-tax Officer had rightly followed these instructions by adopting 9 per cent rate for capitalisation while determining the fair market value of the shares as on 1-1-1964. He argued that the CIT (Appeals) erred in relying on the earlier circular in Circular No. 6-D/WT-60 dated 8-8-1960 from C. B. R. which was superseded by the later circular of 1967. Shri Mohanty submitted that according to the decision of the Gujarat High Court in Rajan Ramkrishana v. CWT [1981] 127 ITR 1 all benevolent circulars issued by the C. B. D. T. are binding on all Income-tax Officers and Wealth-tax Officers and all the persons employed in the execution of the Wealth-tax Act, 1957 even if the circulars deviate from the legal position. He therefore submitted that the Commissioner (Appeals) erred in accepting the assessee's contention and in directing the Income-tax Officer to adopt 6 per cent as the rate of capitalisation in the present case. 69. Shri Ramamani, the learned counsel for the assessee submitted that while he did not dispute the proposition laid down by the Gujarat High Court that all the circulars i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Central Board of Direct Taxes in No. 6(WT) /60 dated 8-8-1960, which is published in C. B. R. Bulletin, Part IV, a copy of which has also been furnished to us by the learned departmental representative. In the said Circular the Board has directed the rate of capitalisation being taken at 6 per cent only and not at 9 per cent. In the order of the Appellate Tribunal in the case of Textile Paper Tube Co. Ltd. relied on by the assessee's learned counsel, from which we have quoted above, it has been pointed out that the bank rate was only 4.5 per cent on 3-1-1963 and only 5 per cent on 26-9-1964. Having regard to these facts, we are unable to accept the contentions of the revenue that they were right in adopting the rate of 9 per cent for capitalisation by relying on the later circular issued by the Central Board of Direct Taxes on 31st October, 1967, which is more than three years after the relevant date of valuation, namely 1-1-1964. Accordingly, we confirm the order of the CIT (Appeals) on this issue and decide the same against the revenue and in favour of the assessee. 71. The fifth issue arises out of the assessee's appeal and it relates to the question of taking the ave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's appeal. 73. We come to the last issue which relates to the relief, if any, to be allowed in the appeals and the extent of such relief. 74. In view of our decision in favour of the assessee on issue No. (v), the assessee's appeal in ITA No. 2352/Mds/84 is allowed. 75. In the department's appeal in ITA No. 2584/Mds/84, the department has succeeded only in respect of issue No. (iii) relating to the cost of acquisition of the bonus shares in Madura Mills Co. Ltd. and A F Harvey Ltd. The other two issues raised by them in issue Nos. (ii) and (iv) have been decided against them and in favour of the assessee. Consequently, the long-term capital gains that would be chargeable to tax in the hands of the assessee would amount to Rs. 2,07,727 as worked out below : Rs. (i) Fair market value of the original 3000 shares in Madura Mills Co. Ltd as on 1-1-1964 1,00,000 (ii) Fair market value of the original 22,700 shares in A F Harvey Ltd. as on 1-1-1964 as worked out by the assessee on yield basis at the rate of 6 percent capitalisation. 8,15,384 (iii) Actual cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with a view to determining the cost of acquisition of certain capital assets acquired in certain modes. It speaks of assets on the total or the partial partition of a Hindu undivided family, or assets received under a gift or a will or by succession, inheritance or devolution or distribution of assets on the dissolution of a firm, body of individuals or other association of persons, distribution of assets on the liquidation of a company as also transfers to a revocable or irrevocable trust. In all these cases and in other cases, which I have left here from mention, the cost of acquisition of the assets to the assessee shall be deemed to be the cost at which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. The Explanation added to this section explains the expression 'previous owner of the property' as the 'last previous owner of the capital asset'. It is to be remembered that the acquisition of the assets under hose modes of acquisition, had not cost the assessee anything in terms of money, although those assets have got value in money's worth. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... donor and the donee in so far as determining the cost of acquisition is concerned, should be regarded as one and the same. Therefore, the cost of acquisition to the donor is directed to be adopted as the cost of acquisition to the donee. That was why a provision was made in section 49, for adopting of cost of acquisition of the previous owner including the cost of improvement as the cost of acquisition to the assessee in cases, where the assessee acquired the assets by the modes specified therein. 4. My learned brother has already and conspicuously referred to the object with which sub-section (2) of section 49 was enacted and the kinds of disabilities that the insertion of the section has sought to alleviate. It is to promote the amalgamations of uneconomic units with economically sound units without having to pay any capital gains tax as a consequence of amalgamation. Although amalgamation of two companies does amount to a transfer, that transfer was sought to be excluded from the purview of capital gains tax only to encourage amalgamation of companies as mentioned above, but the shares allotted in the amalgamated company, as a consequence of amalgamation continue to be the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifically provides that the meaning of the 'cost of acquisition' is for the purposes of sections 48, 49 and 50 of the Income-tax Act. Sub-section (2) of section 55 again specifically provides that, "for the purposes of sections 48 and 49, cost acquisition in relation to a capital asset shall be determined in the manner provided thereafter". Clause (i) of the section provides that where the capital asset became the property of the assessee before 1st day of January, 1964, means the cost of acquisition to the assessee for the fair market value of the asset on 1st day January, 1964, at the option the assessee". That means, if the capital asset became the property of the assessee before 1-1-1964, the cost of acquisition has to be taken at the option of the assessee, either as the cost of the acquisition of the asset to the assessee or the fair market value as on 1-1-1964. In this case, by the reason of section 49(2) of the Income-tax Act, the cost of acquisition of the shares in the amalgamated company is to be deemed to be the cost of acquisition of the shares in the amalgamating company. These shares in the amalgamating company were available even prior to 1-1-1964. Therefore, it beco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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