9911796707
TMI Blog1980 (11) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... company. As per its balance-sheet as on 31st October, 1953, its paid-up capital consisted of 2,400 shares of Rs. 500 each. As per the balance-sheet of the said company as on 31st October, 1954, its paid-up capital was shown at Rs. 15 lakhs by way of 3,000 " A " ordinary shares of Rs. 500 each and full face value of Rs. 1,68,090 received in advance of allotment in respect of 16,809 " B " ordinary shares of Rs. 10 each. Thus, in April, 1955, the paid-up capital of the said company was Rs. 16,68,090 consisting of 3,000 " A " ordinary shares of Rs. 500 each and 16,809 " B " ordinary shares of Rs. 10 each. On 25th April, 1955, an agreement was entered into between the said company and the trustees of the shareholders for the conversion of the said company from a private limited company into a public limited company with a view to issuing an invitation to the public to subscribe to the share capital of the said company. The terms of this agreement are reflected in certain resolutions which were passed pursuant to the said agreement at an extraordinary general meeting of the shareholders of the said company held on 15th June, 1955. Resolutions which are material for our purposes are at i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,500 shares of the face value of Rs. 10 each as at the end of June, 1955. During the accounting year ended 31st March, 1964, relevant to the assessment year 1964-65, the assessee sold 29,000 sub-divided shares of Rs. 10 each at varying prices averaging to a sale price of Rs. 17 per share, the total sale proceeds realized by the assessee amounting to Rs. 4,93,000. As pointed out by the said Tribunal, there is no dispute that the shares sold were the sub-divided original shares and not the new shares acquired by way of bonus shares. Although it is not known whether the said 29,000 sub-divided shares of Rs. 10 each sold by the assessee during the assessment year 1964-65 were derived from the original 600 shares of Rs. 500 each acquired by the assessee prior to 1st January, 1954, or whether any of them were derived from the original 195 shares of Rs. 500 each acquired by the assessee between 31st October, 1953, and 31st October, 1954, the department has all along assumed that all the shares sold were derived from the original shares acquired before 1st January, 1954. In respect of the said assessment year the assessee claimed a capital loss of Rs. 1,13,390 on the sale of 29,000 sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal, inter alia, held that the sub-divided shares obtained by the assessee as aforestated were not acquired prior to 1st January, 1954, and, therefore, the option of substituting the fair market value as on I St January, 1954, for the cost of acquisition of the said capital asset represented by the said sub-divided shares was not available to the assessee. The Tribunal held that the original shares held by the assessee constituted a different capital asset from the said sub-divided shares. The Tribunal further held that on the general principles of averaging the cost of acquisition of the subdivided shares, in this case, had to be arrived at by spreading the original cost of Rs. 3,97,500 over the 39,750 sub-divided shares and the 39,750 bonus shares allotted to the assessee as aforesaid and that, on this basis, the cost of acquisition of the sub-divided shares in the present case was only Rs. 5 per share. On this basis the Tribunal took the view that by the disposal of the said 29,000 sub-divided shares the assessee had made a capital gain of Rs. 3,48,000. The following three questions have been referred to us for determination arising from the judgment of the Tribunal: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option of substituting the fair market value of the capital asset concerned on 1st January, 1954, in the place of the cost of acquisition thereof, the allotment of bonus shares after 1st January, 1954, was of no relevance in determining the fair market value of the sub-divided shares. It was, on the other hand, contended by Mr. Joshi, the learned counsel for the department, that the sub-divided shares constituted a different capital asset from the original shares and as the sub-divided shares were obtained by the assessee after 1st January, 1954, the option of substituting the fair market value of the capital asset concerned, as on 1st January, 1954, was not at all available to the assessee. Before considering the merits of the aforesaid submissions made by the respective counsel, it will be useful to take a note of certain relevant statutory provisions at this stage. Section 45 of the said Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, with certain exceptions with which we are not concerned here, be chargeable to income-tax under the head " Capital gains " and shall be deemed to be the income of the previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out above. In the present case, the capital asset transferred by the assessee consists of 29,000 sub-divided shares of the said company. As pointed out above, the sub-divided shares became the property of the assessee on the sub-division of all the original shares of the said company into shares of a smaller amount. Under the provisions of sub-cl. (d) of cl. (v) of sub-s. (2) of s. 55, the cost of acquisition of the subdivided shares transferred by the assessee has to be calculated with reference to the cost of acquisition of the shares from which the sub-divided shares were derived, namely, the cost of acquisition of the said original shares, which, as pointed out earlier, have been assumed by the department to have been acquired by the assessee prior to 1st January, 1954. The question then is as to how the cost of acquisition of the original shares has to be arrived at and, whether in arriving at such cost of acquisition, the assessee is entitled to exercise the option of substituting the fair market value of the said shares as on 1st January, 1954. In this regard, it must be noticed that a perusal of the opening part of sub-s. (2) shows that it deals with the cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 55 as the position taken as undisputed in this case is that the said original shares were acquired by the assessee prior to 1st January, 1954. In the view which we have taken above regarding the exercise of the option to substitute the fair market value as on 1st January, 1954, in the place of the actual cost of acquisition, it is really not necessary for us to consider whether the sub-divided shares and the original shares from which the sub-divided shares were derived constituted the same capital asset. We may, however, state that it appears to us that, in view of the definition of the term " share " contained in the Indian Companies Act, 1913, which definition has been retained by the Companies Act, 1956, a mere sub-division of shares would not render the sub-divided shares a new capital asset. Such sub-division does not, in any manner, affect the interest of the shareholders in the company or his relationship with the company. It , is not as if, as a result of a sub-division of the shares, the share of the shareholder in the share capital of the company is either increased or decreased. All that happens is that instead of the share or interest of shareholder in the share c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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