Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971 Equivalent citations: 1971 AIR 2389, 1972 SCR (1) 927, AIR 1971 SUPREME COURT 2389, 1971 TAX. L. R. 1551 Author: A.N. Grover Bench: A.N. Grover, K.S. Hegde PETITIONER: SHEKHAWATI GENERAL TRADERS LTD. Vs. RESPONDENT: INCOME TAX OFFICER, COMPANY CIRCLE I, JAIPUR DATE OF JUDGMENT04/10/1971 BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S. CITATION: 1971 AIR 2389 1972 SCR (1) 927 ACT: Income-tax Act, 1961-Sections 147 and 55 and its scope. HEADNOTE: In 1949, the assessee company had acquired some ordinary shares of a company of the face value of Rs. 10/- each. On this holding the assessee had received certain bonus shares. The assessee further acquired a certain number of right shares of the same company in 1961. During the assessment year 1962-63 it sold a certain number of shares which it held prior to January 1, 1954 and calculated the cost price of the shares sold, at the market rate prevailing on January 1, 1954. Similarly, the assessee acquired certain ordinary shares of another company before January 1, 1954 and received certain bonus shares after that date. During the assessment year 1962-63 it again sold some of these shares and calculated Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971  1 the cost of acquisition of the said shares at the market value prevailing on January 1, 1954. Thus, according to the assessee, by selling the shares of the two companies, it had suffered a capital loss and the Income-tax Officer allowed the loss to be carried for-ward by the assessee. After nearly 2 1/2 years, the Income-tax Officer notified the assessee that income chargeable to tax for the assessment year 1962-63 had escaped assessment within s. 147 of the Income Tax Act, 1961 and wrote that while working out the cost, the assessee wrongly claimed the prevalent market price as on January 1, 1954 ignoring the fact that the same shares were given as bonus shares in later years after January 1, 1954. According to the Income-tax Officer, the cost has to be worked at by averaging the cost of the original shares, amongst the original,shares and the bonus shares taken together. The assessee maintained that it had exercised its option under s.55(2) of the Act. Therefore, the cost of acquisition of the ordinary shares of the two companies which had been acquired long before January 1, 1954 was taken at the fair market value as on that date and the capital loss was computed accordingly. The assessee, thereafter filed a writ petition before the High Court challenging the validity of the notice issued under s. 147 of the Act. The High Court dismissed the writ petition on the ground that since the assessee had not shown the acquisition of bonus and right share-, in the Income-tax return, the Income-tax Officer had reason to believe that the income chargeable to tax had escaped assessment and therefore, the notice was valid. Allowing the appeal, HELD : (1) That the cost of acquisition under s. 55(2) of the Act, is the cost of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954 at the option of the assessee., Therefore, in the present case, the assessee rightly applied its option and the fair market value is duly determined. it is wrong to hold that while working out the capital gains, the cost had to be worked out by averaging the cost of the original shares among the original shares and the bonus 928 shares taken together, ignoring the statutory provisions of ss. 48 and 55(2) of the Act. For the ascertainment of the fair market value of the shares in question, on January 1, 1954, any event prior to or subsequent to that, date is wholly extraneous and irrelevant. [932 F] (2)The assessee is bound to disclose under cl. (a) of s. 147 only such material facts which are necessary for its assessment for the assessment year and not those facts which at)-, irrelevant and extraneous for the purpose of assessment. As regards cl. (b) of s. 147 from the infor- mation furnished by the assessee, there is no reason for the I.T.O. to believe that income chargeable to tax has escaped Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971  2 assessment for the assessment year in question. [933 B-C] Commissioner of Income-tax, Bihar v. Dalmia Investment Co., 52 I.T.R. 567, referred to and distinguished. JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2039 and 2040 of 1968. Appeals from the judgment and order dated April 20, 1968 of the Rajasthan High Court in D. B. Civil Writ Nos. 104 and 1 05 of 1967. S. Mitra, O. P. Khaitan, N. R. Khaitan, B. P. Maheshwari and R. K. Maheshwari, for the appellant (in both the appeals). V.S. Desai, P. L. Juneja, R. N. Sachthey and B. D. Sharma, for the respondent (in both the appeals). The Judgment of the Court was delivered by Grover, J. These appeals by certificate from a judgment of the Rajasthan High Court involve a common question relating to the computation of capital gains in respect of sale of certain shares. It is necessary to refer to the facts in Civil Appeal No. 2039/ 6 8 only. The assessee is a company incorporated under the Indian Companies Act 1956 having its registered office at Jaipur. For the assessment year 1962-63 relevant to the previous year ending March 31, 1962 the assessee filed its return before the Income-,tax Officer, Company Circle No. 1, Jaipur. On March 29, 1949, the assessee had acquired 12,000 ordinary shares of the Orient Paper Mills of the face value of Rs. 10 each. On this holding it received 12,000 bonus shares on or about April 28, 1951. It again received 60,000 bonus shares on or about June 4, 1954 and further acquired 25,200 right shares on June 26, 1961. It sold 22,000 shares during the assessment year 1962-63. It is common ground that these shares which were sold were out of the 24,000 shares which it held prior to January 1, 1954. The price realized on account of the sale of 22,000 shares during the assessment year 1962-63 was Rs. 8,45,110/-. The assessee calculated the cost price of 22,000 shares sold by it at the market rate prevailing on January 1, 1954 which came to Rs. 8,63,500 /-. The assessee had also acquired 15,000 ordinary shares of Birla Jute Manufacturing Company before January 1, 1954. It got 41,250 bonus shares on original holding after January 1, 1954. It further got 22,500 right shares for the nominal value of Rs. 3,60,000. The assessee sold 15,000 shares during the assessment year 1962-63 and the sale price realized was Rs. 4,54,130/-. The assessee calculated the cost price of 15,000 shares sold by it at the market value prevailing on January 1, 1954 which came to Rs. 6,45,000//-. Thus according to the assessee the cost of acquisition of the said shares in the two companies came to Rs. 15,09,400 while they were sold for Rs. 12,09,240 and thereby the assessee suffered a capital loss of Rs. 2,10,160. The assessee filed a statement giving all these details. Fromthat statement it was clear that the 22,000 shares of the OrientPaper Mills and the 15,000 shares of the Birla Jute Mfg. Co. which were sold during the assessment year 1962-63 were those which it had acquired or received by way of bonus shares prior to January 1, 1954. Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971  3 The Income-tax Officer by his assessment order dated July 20. 1964 accepted the statement furnished by the assessee and held that it had suffered a capital loss of Rs. 2,10,160/- which was directed to be carried forward. By means of a notice dated January 4, 1967 the Income-tax Officer informed the assessee that he had reasons to believe that income chargeable to tax for the assessment year 1962- 63 had escaped assessment within the meaning of s. 147 of the Income-tax Act 1961, hereinafter called the "Act". This notice was accompanied by a letter in which it was stated "While working out the cost you claimed the prevalentmarket price as on 1-1-1954 in complete disregardof the fact that the same shares had been given bonus shares in the subsequent years after 1-1-54.The Supreme Court had laid down in the case of Dalmia Cement (1964) 52 ITR 567 that while working out the capital gains the cost has to be worked out by averaging cost of the original shares amongst the original shares. and bonus shares taken together. Your claim of the cost, therefore, was incorrect. By following erroneous method you claimed and were allowed loss of Rs. 2,10,160 in assessment year 1962- 63 and Rs. 45,176/- in assessment year 1964- 65. Against this the cost in assessment year 1962-63 would come much less and instead of capital losses a figure of capital gain will get computed". The assessee sent a letter dated February 9, 1967 to the Income-tax Officer saying that it had exercised its option under s. 55(2) of the Act and in accordance therewith the cost of acquisition of the ordinary shares of the two companies which have been acquired and held by the assessee long before January 1, 1954 was taken at the fair market value as on that date and the capital loss was computed accordingly. It was pointed out that the judgment of the Supreme Court referred to in the letter of the Income-tax Officer had no relevance in the present case and that the notice which had been issued under s. 147 of the Act was illegal and without jurisdiction. Subsequently the assessee filed a petition in the High Court under Art. 226 of the Constitution challenging the legality and validity of the notice issued under s. 147 of the Act. The High Court was of the view that since the acquisition of bonus and right shares acquired by the assessee on the original holding had not been shown in the income tax return it could be said that the Income-tax Officer had reason to believe that the income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. It was contended on behalf of the assessee before the High Court that it was altogether unnecessary for the assessee to have shown the acquisition of bonus shares in the return filed by it for the determination of the cost of acquisition of the shares held by it and therefore the notice issued by the Income-tax Officer was without jurisdiction. G. M. Mehta J., disposed of the matter by saying, "prima facie it cannot be said that the Income-tax Officer had no reason to believe that there was an escapement of assessment on account of omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for the assessment for the years 1962-63........ requiring notice under s. 148 of the Income tax Act." The other learned judge D. M. Bhandari J. wrote a separate judgment expressing the opinion that the case of the assessee was covered by s. 147 (a) and that it did not fall within s. 147 (b) of the Act. The writ petition was dismissed. Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971  4 It is somewhat unfortunate that the real points which arose for determination in the present case did not engage the attention of the learned judges of the High Court. Section 45 of the Act provides that any profits and gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 53 and 54 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 48 deals with the mode of computation and deductions. It says that 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 following amounts, namely, (i) expenditure incurred wholly and exclusively in connection with such transfer and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereof. The meaning of the cost of acquisition is explained by s. 5 5 (2) and for our purpose that sub-section with clause (1) need be reproduced : 55(2) "For the purposes of sections 48 and 49, "cost of acquisition", in relation to a capital asset (i) where the capital asset became the property of the assessee before the 1st day of January 1954 means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee; The assessee had exercised the option of the fair market value of the assets. The shares which had been sold by it of both the companies had indisputably become its property before the first day of January 1954. Therefore all that had to be determined was the fair market value on the first day of January 1954 of those shares. This was duly determined and it was not disputed that that determination was made according to the rates prevailing in the market on the aforesaid date by the Income-tax Officer when he made his assessment order on July 20, 1964. Once the market value of the shares was ascertained or determined on the date given in cl. (1) of s., 5 5 (2) that would be the cost of acquisition in relation to capital assets. Up to this point there is no controversy between the Revenue and the assessee but on behalf of the Revenue an almost startling position has been advanced that while determining the fair market value on January 1, 1954 the issuance of bonus or right shares after that date on the basis of the holding of the assessee prior to January 1, 1954 should have been taken into account. In other words as was explained in the letter of the Income-tax Officer dated January 4, 1967 while working out the capital gains the cost had to be worked out by averaging the cost of the original shares amongst the original shares and the bonus shares taken together. Thus, according to the Revenue, after the issue of bonus shares the cost of the original holding had to be spread over all the shares inclusive of the bonus or the right shares acquired on the original holding. Support for this view appears to have been found in the decision of this; Court in Commissioner of Income tax, Bihar v. Dalmia Investment Co. Ltd.(1). (1)52 I.T.R. 567. The question which had to be decided in the above case was entirely, of a different nature. The assessee there held ordinary shares in Rohtas Industries Ltd. apart from holding shares by way of Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971  5 investment and also as stock-in-trade of its business as a share dealer. In 1944 the assessee acquired 31,909 of these shares and was holding them in January 1945. In that month the Rohtas Industries Ltd. distributed bonus shares at the rate of one ordinary share for each original share. So the assessee got 31,909 bonus shares. Between that time and December 31, 1947 the assessee sold 14,650 of the original shares. The assessee acquired some newly issued shares in the years 1945 and 1947. The total holding of the assessee on January 1, 1948 came to 1,10,747 shares which in its books had been valued at Rs. 15,57,902. In arriving at this figure the assessee had valued the bonus shares at the face value of Rs. 10 /'- each and the other shares at the actual cost. On January 29, 1948/ the assessee sold all these shares for the total sum of Rs. 15,50,458 and in its return for the year 1949-50 claimed a loss of Rs. 7,444 on the sale. It was held by the majority that the bonus shares had to be valued by spreading the cost of the old shares over the old shares and the bonus shares taken together if they ranked pari passi and if they did not the price might have to be adjusted either in proportion of the face value they bore or on equitable consideration based on the market price before and after issue. We have set out the facts of this case in detail in order to demonstrate that that decision was not at all apposite for the purpose of deciding the point which has arisen in the present case. No question arose there of the calculation of the capital gain or loss in accordance with the statutory provisions in Pari materia with ss. 48 and 55(2) of the Act. In the present case we are confined to the express provisions of s. 55(2) relating to the manner in which the cost of acquisition of a capital asset has to be determined for the purpose of s. 48. Where the capital asset became the property of the assessee before the first day of January 1954 the assessee has two options. It can decide whether it wishes to take the cost of the acquisition of the asset to it as the cost of acquisition for the purpose of s. 48 or the fair market value of the asset on the first day of January 1954. The word "Fair" appears to have been used to indicate that any artificially inflated value is not to be taken into account. In the present case it is common ground that when the original assessment order was made the fair market value of the shares in question had been duly determined and accepted as correct by the Income- tax Officer. Under no principle or authority can anything more be read into the provisions of s. 55 (2) (i) in the manner suggested by the Revenue based on the view expressed in the Dalmia Investment Co's case(3). The High Court corn- (1)[1952] I.T.R. 567. pletely overlooked the fact that for the ascertainment of the fair market value of the shares in question on January 1, 1954 any event prior or subsequent to the said date was wholly extraneous and irrelevant and could not be taken into consideration. If the contention of the Revenue were to be accepted the acquisition of bonus shares subsequent to January 1, 1954 will have to be taken into account which on the language of the statute it is not possible to do. On this view of the matter there was no question of the case of the assessee falling within clauses (a) or (b) of S. 147 of the Act. The assessee is bound to disclose under cl. (a) only such material facts which are necessary for its assessment for the assessment year and not those facts which are wholly irrelevant and extraneous for the purpose of assessment. As regards cl. (b) also the information must be such as should lead the Income-tax Officer to believe that income chargeable to tax has escaped assessment. The information, in the present case, relating to the acquisition of the bonus shares subsequent to January 1, 1954 could possibly furnish no reason to the Income-tax Officer to form the belief that income chargeable to tax had escaped assessment for the assessment year in question. For the reasons given above the appeals are allowed and the. judgment of the High Court is set aside. The impugned notice issued to the assessee in each case shall stand quashed. The assessee shall be Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971  6 entitled to its costs in this Court. Hearing fee one set. S.N. Appeals allowed., Shekhawati General Traders Ltd vs Income Tax Officer, Company Circle I, ... on 4 October, 1971  7