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TMI Blog2000 (2) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that the appellant is not entitled to deduct the sum of Rs. 1,53,128 as the cost of bonus shares in addition to the cost of acquisition of original shares in the two amalgamated companies ?" We are concerned with the assessment of income of the assessee for the assessment year 1978-79 for which the previous year ended on April 5, 1978. The assessee in the return of income for the assessment year 1978-79 disclosed an income of Rs. 1,93,654 as dividend income, Rs. 2,187 as interest income and Rs. 54,599 as long-term capital gains on the sale of shares. In this tax case, we are not concerned with the mode of assessment of the dividend income and interest income offered by the assessee, but the dispute in this tax case reference centres round the mode of computation of long-term capital gains on the sale of shares. The Income-tax Officer determined the long-term capital gains at Rs. 4,67,411 which arose on the sale of shares held by the assessee as against the amount offered by the assessee at a sum of Rs. 54,599 and the difference arose because the Income-tax Officer found that during the previous year, the assessee had sold 1,83,154 shares in Madura Coats Ltd., for Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax (Appeals) held that the assessee was entitled to arrive at the cost of acquisition of the shares as well as the bonus shares separately and the method of valuation followed by the assessee regarding the cost of the original shares as well as the bonus shares was the correct one and the Income-tax Officer was not justified in taking the cost of the bonus shares as "nil". The Commissioner of Income-tax (Appeals) allowed the appeal preferred by the assessee in part. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue as well as the assessee preferred appeals before the Income-tax Appellate Tribunal. The Revenue in its appeal raised an additional plea that the Commissioner of Income-tax (Appeals) should have issued the enhancement notice and enhanced the total amount of capital gains chargeable to tax holding that the assessee was not entitled to substitute the January 1, 1964 valuation as the cost of acquisition in respect of the shares held by the assessee in the amalgamated company. Though a question was raised on behalf of the assessee regarding entertaining the additional ground raised by the Revenue, the Appellate Tribunal held that the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, the option available to substitute the fair market value as on January 1, 1964, under section 55(2)(i) is not available to the assessee. He also submitted that the provisions of section 55(2)(ii) of the Act are also not available as the said provisions deal with the property which become the property of the assessee by any one of the modes specified in section 49(1) of the Act, and since the assessee became the owner of the shares in the amalgamated company by the mode specified in section 49(2) of the Act, the provisions of section 55(2)(ii) are not applicable to the facts of the case. He, therefore, submitted that the Tribunal was not correct in holding that the assessee is entitled to substitute the market value of the shares as on January 1, 1964, relying upon the provisions of section 55(2)(i) of the Act. Learned counsel for the assessee, on the other hand, supported the order of the Income-tax Appellate Tribunal. Before considering the rival submissions of learned counsel for the parties, we consider that it is necessary to refer to the relevant provisions of the Act which are relevant for the purpose of deciding the controversy raised in this case. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as material for the purpose of the case, reads as under : "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 cost with reference to the mode of acquisition is provided under section 49 and section 49(2) reads as under : "49. (2) Where the capital asset being a share or shares in an amalgamated company which is an Indian company became the property of the assessee in consideration of a transfer referred to in clause (vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company." It is also necessary to refer to section 55 which defines the expression "cost of acquisition" which reads as under : "55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'.---(1) For the purposes of sections 48, 49 and 50,- (2) For the purposes of sections 48 and 49, 'cost of acquisition' in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies and that is the reason for the Legislature recognising the allotment of shares in the amalgamated company in lieu of shares in the amalgamating companies as not a transfer for the purpose of section 45 of the Act. The Legislature has gone one step further and the legislative mandate is that since the assessee had incurred certain cost by way of purchase of shares in the amalgamating company, the cost of shares in the amalgamated company shall be deemed to be the cost of acquisition of shares in the amalgamating companies. In other words, the cost of acquisition of shares in the amalgamated company is the cost of acquisition of shares in the amalgamating companies. A close study of various provisions set out above indicates that the Legislature has evolved a scheme to determine the cost of acquisition of an asset and it is well settled that without the determination of the actual cost of the asset transferred, the liability to capital gains cannot be determined. In so far as the shares held in an amalgamated company which is an Indian company, which became the property of the assessee by virtue of amalgamation, the cost of the shares shall be deemed to be the cost of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee in the amalgamating company and the amalgamated company is an Indian-company, the provisions of sections 2(1A), 2(42A) and 2(47) recognise that there is no transfer of shares and there is no acquisition of any new share by the shareholder. The intention of the Legislature is clear that the transaction of allotment of shares held in the amalgamated company in lieu of the shares in the amalgamating company is not a transfer and there is only a change in the holding of shares in the amalgamating company to the amalgamated company. In other words, there is no transfer and the period of holding of shares in the amalgamating company is taken into account along with the holding of shares in the amalgamated company to determine the question whether the shares are long-term capital assets or short-term capital assets. The legal effect in treating the shares in the amalgamated company should be given full effect to and the legal fiction should be given a logical conclusion and it is impossible to treat the shares held in the amalgamated company as distinct and separate shares from the shares held in the amalgamating company. The cost of acquisition of shares of the amalgama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of acquisition of the shares in the amalgamated company shall be deemed to be the cost of acquisition to him of the shares held in the amalgamating company. The cost of acquisition of shares held in the amalgamated company would be relevant at the time of transfer of the shares held by the assessee in the amalgamated company in the context of levy of capital gains and at that point of time, when the cost of acquisition of shares in the amalgamating company has to be determined, the assessee has an option either to adopt the actual cost of acquisition of shares in the amalgamating company or to adopt the fair market value of the shares as on January 1, 1964. The statutory right is not taken away by section 55(2)(ii) of the Act as the right is available to him under section 55(2)(i) of the Act. It is not possible to give a restricted meaning to the expression found in section 49(2) of the Act that the cost of shares shall be deemed to be the cost of acquisition of shares in the amalgamating company and that figure is an unalterable figure. In our opinion, section 49(2) of the Act and section 55(2)(i) of the Act should be read together. The Bombay High Court in Harish Mahindra v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re obtained after January 1, 1954, and where the assessee has exercised his option adopting the fair market value as prevalent as on January 1, 1954, it is not possible to adopt one value for the original shares, namely the value as on January 1, 1954, and another value for the bonus shares which was prevalent after January 1, 1954. This court held that once the value of the original shares was determined in accordance with the statutory provisions, then, the said value remains an unalterable figure and the said value should be adopted for the purpose of dividing the same by bonus shares as well as the original shares and any alteration to the above method would be hit by the provisions of section 55(2) of the Act. This court held that once the value has been determined under section 55(2) of the Act, that value should be taken into account and both the original shares and bonus shares should be clubbed together and the average value should be found by dividing the fair market value opted on January 1, 1954, by the total number of shares. The same view was taken in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC) ; Shekhawati General, Traders Ltd. v. ITO [1971] 82 ITR 788 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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