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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 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

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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 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

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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 929 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. 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 930 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

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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. 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 931 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

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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. 932 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 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

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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.                             933 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 entitled to its  costs  in this Court.  Hearing fee one set. S.N.                                                 Appeals allowed., 934