9911796707
TMI Blog1987 (12) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... old 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 and F, Harvey Ltd. Shares 3000 shares held prior to 1st January, 1964 638 bonus shares issued in 1966(out of 3000 bonus shares received in1966) 22700 shares held prior too 1st January, 1964 11350 shares (bonus shares)issued in 1966 6000 shares (bonus shares)issued in 1969 7883 shares purchased in March, 1972 Total shares : 9638 Total shares : 41,933 He further found that when those two companies, Madura Mills Co. Ltd. and & F, Harvey Ltd., were amalgamated to form a new company, Madura Coats Ltd., on 1st July, 1974, the assessee got the following shares in Madura Coats Ltd.: "For 9638 shares (for 5 shares 8 Madura Coats Ltd. shares) 15,422 For 41933 shares (for every share 4 Madura Coats Ltd. shares) 1,67,732 1,83,154 Madura Coats Ltd. shares". The ITO further found that it is these 1,83,154 shares in Madura Coats Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder. 6. The Commissioner (A) held that he agreed with the computation of the 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, that the assessee's method of valuation of the original shares and the bonus shares subsequently issued was supported by the decisions of the Supreme Court in Dalmia Investments Co. Ltd.'s case, Shekhawati General Traders Ltd., Gold Mohore Investment Co, Ltd. And Gold Company Ltd.'s case. He further held that the assessee's method of arriving at the cost of the 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. vs. CIT (1972) 86 ITR 467 (Mad) and the decision of the Gujarat High Court in the case of CIT vs. Arvind Narottam Lalbhai Dalpatbhai Vada (1976) 105 ITR 378 (Guj). He also relied on the decision of the Tribunal, Madras Bench-B in the case of ITO, Commissioner, Circle, Madurai vs. The Papanasam Mills Co. Ltd. (In Liquidation) in ITA No. 1652/Mds/76-77 dt. 31st Aug., 1977, which approved the assessee's met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of the instant case and held that he did not agree with this statement of the ITO. He further held that the ratio of the decisions stated by the assessee squarely applied to the facts of the present case. 10. The Commissioner further held that the statute itself recognises a "double benefit", if there is any, since the statute authorises an assessee to substitute the fair market value of an asset as on 1st Jan., 1964 in the place of the actual cost of the assets acquired before 1st Jan., 1964 and that whatever benefit is conferred by the statute 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 the departmental feel aggrieved by this order of the Commissioner and hence the present appeals by them to the Tribunal. 12. In the departmental appeal, the Revenue has raised the following additional ground of appeal on 16th Dec., 1986: "The learned CIT(A) should have issued enhancement notice and enhanced the total amount of capital gains chargeable to tax holding that assessee is not entitled to substitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suance of the amalgamation made after 1st Jan., 1964? 2. Whether on the facts and in the circumstances of the case, the value of the bonus shares must be taken as the average of the value taken by substituting the market value as on 1st Jan., 1964 under 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 counsel for the intervenes on the question of the 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 submissions urged on both sides in the light of the authorities place before us. 16. In our view, the following are the issues 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 the option of substituting the fair market value of a capital asset as on 1st Jan., 1964 under s. 55(2)(i) of the IT Act is available to the present assessee in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial 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 facts on the basis of which the assessment has so for proceeded upto the second appellate stage. He pointed out that the departmental authorities, namely, the ITO, the IAC and the Commissioner (A) have all proceeded on the basis that the assessee was entitled to the statutory right of substituting the fair market value of the shares as on 1st Jan., 1964 under s. 55(2)(i) of the Act and the entire dispute was confined only to the method of computing the cost of acquisition of the original shares and bonus shares in the amalgamating companies. He therefore argued that the Revenue should not be allowed to raise 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(A) had only followed the orders of the Tribunal, Madras Benches in similar cases, such as the case of T.S. Srinivasan and other cases in TVS group and hence there was no question of any controversy of this issue being raised by the CIT(A) to ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1st Jan., 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 Tribunal in the case of Madura Coats Ltd., reported in (1986) 19 ITD 384 (Bom). 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 off three companies, namely (i) A&F Harvey Ltd., (2) J.P. Coats (India) Ltd., and (3) Madura Mills Co. Ltd., on 1st July, 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 objection of the learned counsel for the assessee that the Tribunal cannot do indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AC however rejected the claim of the assessee that the sale effected by the Commissioner came within the third proviso to s. 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 AAC was upheld. One of the points raised on behalf of the assessee before the Tribunal related to the power of the AAC 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 AAC did was merely a re-adjustment and that therefore there could be noi objection to his order on the ground of want of jurisdiction". Adverting to the powers of the Tribunal under the IT Act, the Supreme Court in Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 at 237 (SC) has observed: "The word "thereon" of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words 'pass such orders as the Tribunal thinks fit' include all the powers (except possibly th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to admit a new plea. For, the power to listen to a new contention and decide the appeal on that basis has been spelled out by the Supreme Court from the terms of the statute. The exercise of that power does not depend on the presence of any other factor, excepting that the new 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 fact 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 consideration thereof would call for further facts to be gone into. In Hukumchand Mills' decision (1967) 63 ITR 232, the Supreme Court laid down no fetter on the Tribunal's powers. That case, indeed, was a case where the new plea raised by the Department before the Tribunal could not be considered without a further investigation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment, 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 ITO for going into the factual and other considerations bearing 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 Lordships of the Madras High Court followed the three decisions of the Supreme Court in Hukumchand Mills Ltd.'s case referred to earlier and in CIT vs. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC) and CIT vs. Nelliappan (1967) 66 ITR 722 (SC). Their Lordships held that under s. 33(4) of the Indian IT Act, 1961, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or facet of the question raised in the appeals, namely, what is the true amount of capital gains to be taxed in the hands of the 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 raised by the Revenue in the additional grounds of appeal is directly based on an order of the Tribunal in the case of Madura Coats Ltd. reported in (1986) 19 ITD 384 (Bom), which was a case decided in favour of the Revenue, on facts and circumstances similar to the facts and circumstances in the present appeals. They do not require any further investigation or enquiry into fresh facts and additional evidence, but can be disposed of on the materials already on record in the light of the relevant provisions of the Act and the 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 the Revenue in the additional grounds of appeal as one aspect of the case by way of an argument raised by the Revenue in its appeal. We are, therefore, unable to agree with the objections raised by the assessee to the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the option of substituting the fair market value of the shares as on 1st Jan., 1964 as its cost of acquisition for the purposes of ss. 48 and 49 of the Act was not available to the assessee in the present case. Shri Mohanty submitted that this aspect of the matter was overlooked by the departmental authorities while making the assessment in the present case and that the Commissioner (A) ought to have taken note of this legal position which emerged on the facts of the present case and issued a notice of enhancement to determine the correct amount of capital gains derived by the assessee. 29. Adverting to cl. (c) of Expln. (i) to s. 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 1st July, 1974. He further submitted that s. 49(2) was a deeming provision, that it created a legal fiction for the limited purpose of determining the cost of acquisition of the shares in the amalgamated company with reference to the cost of acquisition to him of the shares in the amalgamating companies. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets 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 the amalgamated company should be the cost of acquisition in the 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 of shares in the amalgamated company should be equated to the cost of acquisition in the amalgamating company, the point as to when the shares became the property or the time of acquisition having been made irrelevant for that purpose. In this connection he referred us to s. 55(2)(v) of the Act and submitted that guidance may be had from this provision of law which deals with a new asset emerging from an old asset by way of sub-division or conversion etc., where the statutory right of substitution of the fair market value under s. 55(2)(i) was allowed by the Bombay High Court in the case of Harish Mahindra and Anr. vs. CIT (1981) 25 CTR (Bom) 168 : (1982) 135 ITR 191 (Bom). The learned counsel submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of the 'amalgamating company', (i.e. the company which merges into another company) who receive shares in the 'amalgamated 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 of these tax liabilities discourage amalgamations. For the purpose of facilitating the merger of uneconomic company units with other financially sound Indian companies in the interests of increased efficiency and productivity, it is proposed to make the following provisions in the law: XX XX (iv) No capital gains or loss will be computed in the case of the amalgamating company in respect of any capital assets transferred by it to the amalgamated company. XX XX (vi) The shareholders in the amalgamating company receiving shares in the amalgamated company in lieu of their original shareholdings will be liable to tax on capital gains only at the stage when they sell or otherwise transfer the shares in the amalgamated company and realise any capital gains thereon. Such capital gains will be computed by taking the 'cost of acquisition' thereof to be the cost of acquisition of the shares in the amalgamating com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particularly to harmonise the intention of the legislature, after reading s. 12B as a whole, it is but necessary that in order to secure synchrony, symmetry and harmony, it is but essential that the first transaction between the voluntary liquidators and the contributory should be excluded from the sphere of taxation, so that sub-s. (3) of s. 12B can work itself out without prejudicing and without affecting the fundamental canons of taxation. While considering a similar provision in the United States, Mr. Mertens in his 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 exchanges therein referred to since the exchange is treated by statute as merely a change of form, 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 spirit of s. 12B of the Act has to be brought to light in the instant case and if the principle is so understood and applied, it follows that the first transaction, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her who sells his shares one day after the date of amalgamation. The learned counsel submitted that the Revenue's interpretation would put the second shareholder into a hardship, for which there is no clear expression used by the legislature in s. 55(2)(i) of the Act. 34. Shri Ramamani next submitted with reference to the facts of the present case that the mandate of s. 49(2) of the Act was to equate the cost of 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 s. 49(2) did not say in what particular manner or 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 contended by the learned departmental representative. The learned counsel argued that if we are to determine the cost of acquisition of a capital asset as specified in s. 49(2), namely the shares of Madura Mills Co. Ltd. And A&F Harvey Ltd., they are the capital assets specified in s. 55(2)(i) of the Act. The learned counsel contended that we cannot read s. 49(2) without reading s. 55(2)(i) of the Act into the same, as the definition of "cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd persons holding shares in an amalgamated company fall in two different well-defined classifications and therefore the denial of option to the persons holding shares in the amalgamated company after 1st Jan., 1964 was quite reasonable. Shri Mohanty contended that the intention of the Parliament to deny this concession is quite evident and eloquent by its absence in s. 55(2), as cases falling under s. 49(2) of the Act are not provided for in s. 55(2), which has specifically provided for case falling under s. 49(1) in s. 55(2)(ii) of the Act. The learned departmental representative reiterated his submission about the operation of the fiction in s. 49(2) by relying on the decision of the Bombay High Court in CIT vs. Trikamlal Maneklal (1987) 63 CTR (Bom) 251. He therefore submitted that the Department was entitled to succeed on the contentions 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 provisions of the IT Act, 1961 that are relevant for the purpose of resolving the controversy raised in these appeals. The first provision of law is s. 2(1A) de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the previous year in which the transfer took place". Sec. 47(Vii) in so far as it is relevant for our purpose in set out below: "Transactions not regarded as transfer. 47. Nothing contained in s. 45 shall apply to the following transfers: XX XX (vii) any transfer by a shareholder, in a 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 him of any share or shares in the amalgamated company, and (b) the amalgamated company is an Indian company". The mode of computation and deductions is provided for in s. 48 of the 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 a result of the 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 of the capital asset and the cost of any improvement thereto". 38. Sec. 49 of the Act deals with cost with reference to certain modes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld the shares in the amalgamating company also. In other words, the mandate of this Expln. is that the period for which an assessee holds shares in an amalgamated 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 of the shares to decide the issue whether the said shares represented short term capital assets or long term capital assets. According to s. 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 w.e.f. 1st April, 1978 by the Finance (No. 2) Act of 1977. When we examine the period of holding of the shares transferred by the assessee in the present case during the previous year in the light of the aforesaid provisions contained in s. 2(42A) together with its Expln. (i)(c) of the Act, it would be clear that the assessee's holdings are (all) long term capital assets, as could be seen from the particulars of the shareholdings of the assessee with their dates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to pay nothing and therefore only the cost of the original shares in the two amalgamating companies would represent the true cost of acquisition of the shares in the amalgamated company, as deemed by s. 49(2) of the Act. The revenue therefore contends that the long term capital gains computed by the ITO and the CIT(A) are erroneous and wrong, as it should be much more than the figure of Rs. 4,67,441 computed by the ITO in the assessment order. 42. The contention of the Revenue can be understood properly if we set out the figures of cost of acquisition of the original shares as given in the particulars furnished by the assessee at pages 1 and 2 of the paper book: (i) Cost of acquisition of 3000 original shares in Madura Mills Co. Ltd., held prior to 1st Jan., 1964 Rs. 1,27,740 (ii) Cost of 22700 shares in A&FHarvey Ltd. held prior to 1st Jan., 1964 2,27,000 (iii) Cost of acquisition of 7883 shares in A&FHarvey Ltd. Issued in 1972 1,39,792 Total : Rs. 4,94,532 According to the Revenue, it is only this amount of Rs. 4,94,532 which represented the cost of acquisition of the shares of the amalgamated company according to the fiction created in s. 49(2) of the Act and that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital asset, to show how the assets held by the assessee in the present case are long term capital assets and not short term capital assets. There is no fiction involved in the said Expln. to s. 2(42A) of the Act. When the Act requires that the period of holding of a capital asset in the amalgamating company should also be included along with the period for 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 s. 49(2) of the Act ignoring the other facts which have to be taken into account in the light of the said cl. (c) of Expln. (i) to s. 2(42A) of the Act. The Department does not dispute the factual position that the original shares in the two amalgamating companies, namely Madura Mills Ltd. And A &F, Harvey Ltd., were held by the assessee prior to 1st Jan., 1964 having been acquired by him prior to that date. The definition of 'cost of acquisition' in s. 55(2)(i) of the Act is for the purposes of ss. 48 and 49 of the Act, as the opening words of the said provision of law discloses. There is nothing in s. 55(2) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 share of the amalgamated company, but only to that percentage admissible from the date of acquisition of the amalgamated share to the date of sale. This would be definitely inequities. To obviate this anomaly, one can only take recourse to the provisions contained in cl.(c) of Expln. (i) to s. 2(42A) and state that since for determining whether an asset is a short-term capital asset or not, the statute enjoins that the period from the date of acquisition to date of amalgamation should also be taken into consideration, it implies by fiction that the period of holding of share of the original company right upto the date of amalgamation, and thereafter till the date of sale or transfer is to be treated as a continuous holding of a capital asset which earlier was the share of the amalgamating company and which later became transformed into the share of the amalgamated company. When such period exceeds the stipulated tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to a case covered by s. 55(2)(v) of the Act, their Lordships held at page 198 of the reports, as follows: "It was submitted by Mr. Joshi, in this connection, that the option available under cl. (i) aforesaid was only regarding the very capital asset which had been transferred by 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 cl. (v). In out view, this submission of Mr. Joshi is not sustainable. It is significant that s. 45 subjects to the charge of income-tax the profits and gains arising on the transfer of "a capital asset". This would clearly show that profits and gains arising from the transfer of any capital asset were sought to be made chargeable to income-tax under the head "Capital gains" save in the case of certain exceptions set out therein. Sec. 48, which deals with the mode of computation of capital gains and deductions, clearly refers to the cost acquisition of "the capital asset", whereas the opening portion of sub-s. (2) of s. 55 refers to "a capital asset". This in our view, would clearly show that the option given by cl. (i) of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal in 19 ITD 384 would not stand in 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 CIT vs. Trikamlal Maneklal (1987) 63 CTR (Bom) 251, which was relied on by the learned departmental representative to contend that the fiction in s. 49(2) is confined to the cost of acquisition only and nothing more. We have perused this decision and we are unable to appreciate how this decision supports the contention of the Revenue. On the other hand, the following observations in paragraph 17 at page 254 of the reports support the contention of the assessee: "17. As we have stated, we find it difficult, with respect, to take the view that s. 48 provides for the taking into account of anything other than the actual cost of acquisition of the asset by the assessee, though the cost may in a given case be nil. The only legal fiction in this behalf is created by s. 49 and the fiction operates only in the circumstances set out therein. There is no warrant, we think, with respect, for a deemed cost of acquisition in circumstances not comprehended in s. 49 or s. 55". We may mention here that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether, as held by us. 48. Hence, on a reading of the provisions of s. 2(42A), Expln. (i)(c), s. 49(2) and s. 55(2)(i) of the Act together and applying the said provisions to the facts of the present case, we hold that the assessee is entitled to the statutory right of exercising his option to substitute the fair market value of the shares in Madura Mills Ltd. and A&F Harvey Ltd., as on 1st Jan., 1964 and that the departmental authorities, including the CIT(A), rightly took the fair market value of these shares as an 1st Jan., 1964, for the purpose of computing the long term capital gains chargeable to tax in the hands of the assessee. Accordingly, the second issue in the departmental appeal is decided in favour of the assessee and against the Revenue. 49. This takes us to the third issue as to the cost of acquisition of the bonus shares in the two amalgamating companies. Madura Mills Co. Ltd., and A&F Harvey Ltd., to the assessee for the purpose of computing the long term capital gains. 50. On this aspect of the case, Shri Mohanty, the learned departmental representative submitted that since the assessee had disposed of his entire shareholdings in the amalgamated company, the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 TVS and Sons, where the assessee transfers (all) his shareholdings enblock, as such an exercise would be purely an academic one. He therefore submitted that the Department was entitled to succeed on this point in vie of the decision of the Madras High Court in the case of TVS and Sons Ltd. 51. Shri S. Swaminathan, the learned counsel appearing for one group of Intervenes, submitted that on the facts of the present case the decision of the Madras High Court in 143 ITR 644 would not apply and that the decision that was directly applicable was the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case (1972) CTR (SC)120 : (1971) 82 ITR 788 (SC), as the original shares of the two amalgamating companies, namely Madura Mills Co. Ltd. And A&F Harvey Ltd., were acquired by the assessee prior to 1st Jan., 1964. The learned counsel submitted that he was interested in determining the cost of acquisition of the bonus shares in the present case, as it would affect the cases of similar assessees, on whose behalf he was intervening in this case. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usly rejected by the Supreme Court not only in Dalmia Investment Co. Ltd's case, but in later decisions 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. vs. 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 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 Jan., 1954, that when an assessee elects to adopt the market value as on 1st Jan., 1954, for the purpose of computation of capital gain or loss in the transfer of its originally acquired shares, he is in effect substituting the original cost and acquisition of such shares by another amount as allowed by the statute and the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 by 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 the 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 bonus shares in CIT vs. Chunilal Khushaldas (1974) 93 ITR 369 (Guj). 57. Referring to the decision of the Supreme Court in Shekhawati General Traders Ltd. 82 ITR 788, the learned counsel referred us to the facts of the case set out at pages 789 and 790 of the reports, and finally relied on the following passage app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio of the decision of the Supreme Court in Shekhawati General TradersLtd'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 Tribunal in their appellate order in the said case. The learned counsel submitted that as the decision of the Madras High Court in TVS & Sons 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 1st Jan., 1964 and of bonus shares issued subsequent to 1st January 1964. The learned counsel therefore submitted that the CIT(A) 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 separately as the deduction, apart from the fair market value of the shares as on 1st January, 1964 in the two amalgamating companies and that the said decision of the CIT(A) should be upheld. 59. Shri S. Padmanabhan, the learned counsel for ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d). We do not consider it necessary refer to this decision in detail, as it was rendered before the decision of the Supreme Court in Dalmia Investment Co. Ltd.'s case reported in the same volume 52-ITR-567. 61. Shri K.R. Ramamani the learned counsel for the assessee in these two appeals, submitted that the decisions of the Supreme Court in Shekhawati General Trader's case recognises the following three principles: (i) The issuance of bonus or right shares after 1st Jan., 1954 has to be ignored while determining the fair market value of the original shares as on 1st Jan., 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 Supreme Court in Shekhawati General Traders Ltd'. Case, there are two blocks of shares involved in the present case, namely the original shares that were held by the assessee in the two amalgamating companies prior to 1st Jan., 1964 and the other block consisting of bonu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act has 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 Traders' case Shri Ramamani submitted that the decision of the Madras High Court in 143 ITR 644 was inconsistent with the provisions of the statute contained in s. 55(2)(i) of the IT Act and was further opposed to the decision of the Supreme Court in Shekhawati General Trader's case. Therefore, the decision should be confined to its facts and it should not be extended to case of assessee like the present one. The learned counsel also argued that on the authority of this decision of the Madras High Court in 143-ITR-644 alone the Revenue was not entitled to succeed in the present appeals, if all the other decisions cited at the Bar on behalf of the assessee are to be ignored. He submitted that the decision of the (Mad) High Court would apply only to a case of actual cost acquisition and where there is no substitution of statutory cost of acquisition as envisaged in s. 55(2)(i) of the Act since the judgement of the High Court has proceeded on that basis only. 63. Shri Ramani Next reled on Salmondon Jurisprudence, (Twelfth Editi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shares collectively and find out the average price of the shares. The learned departmental representative submitted that the Delhi High Court has also taken similar view in Escorts Farms (Ramgarh) ltd. vs. CIT (1983) 35 CTR (Del) 170 : (1983) 143 ITR 749 (del). He also pointed out that the same view has been taken by the Special Bench of the Tribunal in the case reported in Rohiniben Trust vs. ITO (1985)23 TTJ (Bom) 427 (SB) : (1985) 13 ITR 830 (Bom) (SB). 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 assessee would not be entailed 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 TVS & Sons Ltd. relied on by him was rightly decided and there was no mistake in it. Finally he submitted that even if the department's additional ground of appeal is rejected, the Department was entitled to succeed, as the assessee would not be entitled to any further deduction on account of the cost of acquisiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inevitable get reduced pro tanto. In our view, the decision of the Madras High Court is directly applicable to the facts of the present case, as the assessee has transferred his entire shareholdings in Madura Coasts Ltd. 67. Though we find considerable force in the arguments advanced by the learned counsel on behalf of the assessee with reference to the decision of the Supreme Court in Shekhawati General Traders case which has been followed by Bombay, Calcutta and Delhi High Court, the decisions cited by them, we find ourselves unable to accept the same in view of the direct decision of the Madras High Court in the case of TVS & Sons Ltd. Which is in favour of the Revenue and against the assessee. We are unable to agree with the learned counsel that the decision of the Madras High Court would not apply to the facts of the present case and that the said decision should be confined as given on its own facts and on general principles, as contended by the learned counsel for the assessee. We are also unable to acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 which 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 observation of the Court were not strictly called for but they must nevertheless be regarded as binding." The learned counsel agree that while deciding the appeal of TVS & Sons Ltd. The Tribunal had followed the principles laid down in the decision of Sheekhawati General Traders Ltd's case by the Supreme Court and it has also referred to the same in the body of their order at several places. We are therefore unable to accept their contention that their Lordships of the Madras High Court were not aware of the decision of the Supreme Court in Shekhawati General Traders' case or the principles laid down in the said case and that those principles were applied by the Tribunal in the said case, merely because there is no specific reference to the decision of the Supreme Court in Shekhawati General Traders' case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uj) 293 : (1981) 127 ITR 1 (Guj) all benevolent circulars issued by the CBDT are binding on all ITO's and WTOs and all the persons employed in the execution of the WT Act, 1957 even if the circulars deviate from the legal position. He therefore submitted that the Commissioner (A) erred in accepting the assessee's contention and in directing the ITO 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 issued by the Board are binding on the officers of the Department, he pointed out that the 1967 circular relied on by the learned department representative was actually adverse to the assessee and was therefore not a benevolent one so far as the present assessee was concerned. It is for this reason he relied on the earlier circular which was really beneficial to the assessee's case and which has been followed by the CIT(A). In this connection, the learned counsel relied on para 5 at page 24 of the assessee's paper book of the order of the Tribunal, Madras Bench B in the case of M/s. Textile Paper Tub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s more than three years after the relevant date of valuation, namely 1st January 1964. Accordingly, we confirm the order of the CIT(A) on this issue and decide the same agasint 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 average of the values arrived at on yield method and break up value method of shares in respect of the valuation of the 22.700 shares in A & F Harvey Ltd. As on 1st Jan., 1964 referred to in issue No. (Iv). The learned counsel for the assessee, Shri Ramamani, relied on the decision of the Supreme Court in CGT vs. Smt. Kusumben D. Mahadevia (1980) 14 CTR (SC) 366 : (1980) 122 ITR 38 (SC) and contended that in view of this decision of the Supreme Court, the assessee is entitled to succeed in this point in this appeal. Shri Mohanty, the learned departmental representative relied on the order of the authorities below in support of this method of valuation adopted by the Revenue. 72. In our view, this issue has to be decided in favour of the assessee and against the Revenue, in view of the following decision of the Supreme Court in CGT vs. Smt. Kusumben D. Mahadevia whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t value of the orignal 22700 shares in A&F Harvey Ltd as on1st January 1964 as worked out by the assessee on yield basis at the rate of 6 per cent capitalisation. 8,15,384 (iii) Actual cost of acquisition of 7883 shares issued to the assessee in 1972 in A &F Harvey Ltd., about which there is no dispute. 13,39,792 Total cost of acquisition of the shares transferred. 10,56,036 Net sale consideration received by the assessee. 12,63,763 Less: Total cost of acquisition of shares worked out above. 10,56,036 Long term capital gains. Rs. 2,07,727 The ITO is directed to take the figure of long term capital gains at Rs. 2,07,727 in the place of Rs. 1,74,001 as determined by the CIT Appeals. To this extent, the department's appeal is allowed in part. 76. Before we take leave of this case, we consider it our pleasant duty to place on record our deep sense of appreciation for the able assistance we have received from the learned counsel Shri K.R. Ramamani appearing for the assessee, and Shri B. C. Mohanty, the learned departmental representative, representing the Revenue. They dwelt in the course of their persuasive arguments in depth, on all facts of the laws which had a bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal assets that has come about as a result of several welfare measures taken by the State, each of which involved large capital outlay which resulted in an increase in all round propriety. The hope is that this levy would set as a deterrent on increase of prices. 3. The capital gains is to be computed by deducting from the full value of the consideration to be received on the transfer of the capital asset, the cost of the acquisition of the aset and of any improvement made thereto. This is the mandate of s. 48 of the IT Act. It is, therefore, imperative to ascertain the cost of acquisition of an asset to compute the capital gain. If there is no cost of acquisition, then there is no capital gain. This is the settled law now as well as before too. But yet there may be situations where an assessee may acquire property in such a way as not to cost him anything like the ones stipulated in s. 49(1) to which I have adverted to, such as distribution of assets on partial partition of HUF or receipt of assets under a gift or Will or by succession, inheritance or devolution etc. In all these cases the assessee, who acquires the property, had not incurred any expenditure, but yet the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gain taxable under s. 45 of the IT Act. Again the question arises as to how the cost of acquisition of the shares in the amalgamated company should be determined in order to compute the capital gains as provided for in s. 49 of the IT Act. The legislature thought that the cost of acquisition of the shares in an amalgamated company shall be the cost of acquisition to him of the shares in the amalgamation company. In other words the idea built into sub-s. (1) of s. 49 of deeming the cost of acquisition to the previous owner, is also woven into the amalgamation of companies. It cannot now be said that the assessee acquired the shares in the amalgamated company without incurring any cost. The cost to him actually is the cost, he incurred in acquiring the shares in the amalgamating company and he by reason of agreeing to the amalgamation by surrendering his shares in the amalgamating company acquired the shares in the amalgamated company. Therefore, the cost of acquisition of the shares in the amalgamated company has to be none other than the cost of acquisition to him of those shares in the amalgamating company. This appears to be the reason behind enacting sub-s. (2) of s. 49 w. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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