1993 (4) TMI 130 - AT - Income Tax

Summary

Issues Involved:
1. Whether the transaction was a transfer of shares or control over the company.
2. Whether the sale resulted in long-term or short-term capital gains.
3. Whether there was a failure to disclose fully and truly all material facts.
4. Whether the reassessments under Section 147(a) were justified in law.

Issue-wise Detailed Analysis:

1. Whether the transaction was a transfer of shares or control over the company:

The Tribunal examined whether the transaction involved the transfer of shares or control over the company. The agreement dated 28th November 1977 indicated that the assessees sold their shares to another group. The Tribunal noted that while the transfer of shares resulted in a change of control, the legal transaction was the sale of shares. The control over the company was a consequence of the transfer of shares, not a separate transaction. The Tribunal concluded that the transaction was primarily a transfer of shares, with control being an incidental effect.

2. Whether the sale resulted in long-term or short-term capital gains:

The Tribunal analyzed whether the capital gains from the sale of shares, including bonus shares, were long-term or short-term. The bonus shares were issued on 30th October 1976 and sold on 28th November 1977. According to judicial precedents, bonus shares are considered separate assets from the date of their issue. Therefore, the bonus shares were held for less than 36 months, making them short-term capital assets. Consequently, the capital gains arising from the sale of bonus shares were short-term, while the gains from the original shares were long-term.

3. Whether there was a failure to disclose fully and truly all material facts:

The Tribunal examined whether the assessees disclosed all material facts fully and truly. The assessees disclosed the issue of bonus shares and the dividends received thereon but did not disclose the date of issue of the bonus shares. The Tribunal held that the date of issue was a crucial fact necessary for determining the nature of the capital gains (short-term or long-term). The non-disclosure of this date constituted a failure to disclose fully and truly all material facts, justifying the reopening of the assessment under Section 147(a).

4. Whether the reassessments under Section 147(a) were justified in law:

The Tribunal considered whether the reassessments under Section 147(a) were justified. The initial assessments did not consider the short-term capital gains from the sale of bonus shares due to the non-disclosure of the date of issue. The CIT's letter to the ITO suggested examining the scope for action under Section 147(a) but did not constitute a direct order. The ITO, after receiving the information, independently decided to reopen the assessments. The Tribunal concluded that the reassessments were justified, as there was a failure to disclose material facts fully and truly, and the ITO had valid reasons to believe that income had escaped assessment.

Separate Judgments:

Judgment by Judicial Member:
The Judicial Member held that the transaction was a transfer of shares, resulting in both long-term and short-term capital gains. The non-disclosure of the date of issue of bonus shares justified the reassessment under Section 147(a).

Judgment by Accountant Member:
The Accountant Member disagreed, holding that the transaction was a transfer of controlling interest, resulting in long-term capital gains. He argued that the reassessment was invalid due to a change of opinion and lack of independent application of mind by the ITO.

Third Member's Opinion:
The President, acting as the Third Member, agreed with the Judicial Member, concluding that the transaction was a transfer of shares, resulting in both long-term and short-term capital gains. The non-disclosure of the date of issue of bonus shares justified the reassessment under Section 147(a).

Final Decision:
The majority opinion held that the transaction was a transfer of shares, resulting in both long-term and short-term capital gains. The reassessments under Section 147(a) were justified due to the failure to disclose fully and truly all material facts. The appeals were dismissed.