9911796707
TMI Blog1983 (2) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... e similar question arose and the department had assessed the profit as a business income, the AAC as well as the Tribunal had rejected the stand taken by the department. A reference application had also been rejected. The Commissioner (Appeals) looked into the history of the share transactions of the assessee right from the assessment year 1968-69 and considered the purchases as well as sales. Considering the absence of frequency of transactions, he held that the assessee could not be a dealer. In the case of shares in Orissa Cement Ltd., the transfer had taken place only in three years out of ten under consideration. He, therefore, held that the assessee was not a dealer in these shares. He also found that the transactions of these shares were within the close circle of relatives and not as a business transaction to gain profit. He, therefore, held that there was no business motive in the above transaction and, therefore, held that the income was to be assessed as long-term capital gain as assessed by the assessee. 3. Before us, it has been pointed out that the matter is covered by the order of the Tribunal in IT Appeal No. 876 (Delhi) of 1978-79. It was also pointed out there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections of the London High Court deposited a sum of pound 35,49,634 in DDIL's bank account in Bank of India,London. This amount was, however, not accounted for in the balance sheet dated30-9-1976. According to the ITO, Dalmias' planned to acquire the shares of DDIL after this case was decided. The ITO had found out that the capital of DDIL was reduced to Rs. 6 lakhs from Rs. 1.5 crores on24-9-1974. The ITO was of the view that while DDIL was claiming loss as a result of reduction of its investment, it had not shown the amounts received inLondonas per the Court's order. The assessee challenged the determination of the market value of those shares on the basis of the Wealth-tax Rules, 1957 ('the Rules'). The ITO defended it on the ground that that was a reasonable way of doing so. The assessee had further contended that the balance sheet on30-9-1976should not be taken into consideration after including the amount received by the DDIL from the National Bank ofPakistan. The ITO observed that it was within the knowledge of Dalmias that the case had been won inLondonand, therefore, effort was made to acquire these shares. The ITO referred to the order of assessment in case of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the public a capital to the extent of Rs. 12.64 lakhs and public offer for sale of Rs. 2.10 lakhs worth of shares from the existing shareholdings of the promoters so as to constitute 49 per cent of the company's total issued capital. Further understanding was that 40 per cent of issued capital was to be distributed among over 880 shareholders. This agreement by the Government of India was contained in a letter dated11-9-1975and it referred to the company's undertaking contained in their letter dated5-8-1975. In order to carry out the above proposal, the board of directors of DCBL by a resolution dated7-11-1975approved the proposal for sale of 21,000 equity shares held by it in DDIL to the public at their par value of Rs. 10 per share by an offer of sale to be advertised by the DDIL through a prospectus. Such a prospectus offering fresh capital of 1,26,300 equity shares and the sale of 21,000 equity shares held by DCBL were issued on17-2-1976and the same was also filed with the registrar of the company. In this prospectus it was stated that an offer of sale of 21,000 equity shares to the public was made by DCBL through DDIL who were appointed for this purpose on29-1-1976as its con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her referred to the provision in the prospectus wherein it was stated that these 21,000 equity shares were offered to the members of public at Rs. 10 for each share, in order to comply with the stock exchange regulations for enlistment of the equity shares of the company on the Delhi Stock Exchange. The Commissioner (Appeals) held that in the circumstances, it could not be held that the assessee acquired the share in question from the DCBL. 9. It had further been contended before the Commissioner (Appeals) that after DCBL had constituted DDIL as its constituted authority by an irrevocable authority, the DCBL had no power in regard to the disposal of these shares by the DDIL. The Commissioner (Appeals) upheld this contention and came to the conclusion that the shares were acquired by the assessee from the DDIL and not from the DCBL. It was also pointed out that the assessee's father, Shri M.H. Dalmia, was a director of DCBL but not of DDIL. In this view also, he held that the provisions of section 2(24)(iv) was not satisfied. 10. Regarding the question of valuation of these shares, the assessee had contended that he had not been offered any opportunity regarding the valuation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 at the material time. By his letter dated 5-5-1980 to the IAC, the appellant had made a categorical statement regarding 15,960 shares having remained unsubscribed as on 3-4-1976 including 2,050 out of the shares belonging to DCBL which were offered for sale at the price of Rs. 10 per share. This statement was not at all controverted by the ITO as is apparent from the assessment order. It is equally important to note that the ITO has not disputed the bona fides of allotment of shares in pursuance of the public issue during March-April, 1976. For instance, the ITO has not even suggested that the applications made by members of the public in general were rejected or that the allotments were made only in favour of the Dalmia family group. It might be that by and large the shares went to Dalmias but for this the learned representatives were able to give a very plausible explanation, namely, that Dalmias could make applications as members of the public in general and furthermore when there were no takers (as evidenced by as many as 15,960 shares remaining unsubscribed and allocated to the underwriters on 3-4-1978), they had no alternative but to salvage the situation. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rees to allot any share with a view to all or any of those shares being offered for sale to the public, any document by which offer for sale to the public is made shall, for all purposes, be deemed a prospectus issued by the company. In this connection, it was pointed out that along with offer of sale of these shares there was also an offer to the public to subscribe to the new shares of the company by taking them at par. It was further contended that the shares open for subscription and the shares offered for sale were having the same value as there could be no difference in rights of the shareholders obtaining one or the other. In this connection, it was pointed out that even that at the open offer of Rs. 10 there were no adequate numbers of subscribers or purchasers of these shares. It would go against the theory advanced by the ITO that the fair market value of such shares was anything more than Rs. 10 at the relevant time when that shares were offered for subscription or sale or even at the time when they were allotted. A reference was made to the various parts of the prospectus and it was pointed out that the DDIL had been constituted as an attorney under irrevocable authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een unduly influenced by the decision of the London High Court and by that time the prospectus had been issued and the whole offer was already before the members of the public. The company could not decline to allot the shares on the basis of the applications received. In conclusion it was, therefore, submitted that the ITO had not been able to make out a case of any benefit having been obtained by the assessee from the DCBL, in which his father was a director, as the shares were purchased at the open market rate at which it was available to every person in public. He, therefore, supported the order of the Commissioner (Appeals) who had deleted the addition. 15. I have carefully considered the facts of the case and the arguments of the learned departmental representative as well as the learned counsel for the assessee. The issues which arise in the present case can be enumerated as under : "(1) Whether the assessee obtained any benefit as a result of acquisition of 650 shares of DDIL ? (2) Whether on the facts of the case, the fair market value of the shares obtained was more than Rs. 10 each and whether the same has rightly been fixed under the Wealth-tax Rules ? (3) Whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration, when a very large number of shares were open to the public at its par value of Rs. 10, can it be said that the assessee obtained any benefit by acquiring the shares meant for sale by paying the par value as paid by others ? The market value of the shares cannot be different from the value at which these shares were freely available in large numbers at the relevant time. Share is like any other commodity and its value depends on rule of supply and demand. Large number of shares were in supply and all these shares were not in demand as would be clear from the fact that thousand of shares remained unsubscribed when the subscription closed. It would be against the normal marketing principles to say that there would be no purchaser for a commodity worth several times more than offered price. It is difficult to consider any benefit arising in such circumstances. It is like a transport company providing transport at a particular rate and that facility being available to everybody in public. If a relative of a director uses that facility, it cannot be said that he has obtained any benefit from the company on the ground that such facility would cost more if provided by anybody e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. According to the Supreme Court, the profit earning capacity of the company would ordinarily determine the value of its shares. There is no indication in the order of the ITO whether the profit earning capacity indicated any higher value. The method adopted by the ITO cannot, therefore, be approved. 21. The ITO proceeded to consider the dispute regarding thePakistanassets with National Bank ofPakistan. The ITO has observed that this dispute practically came to an end on3-5-1978when the National Bank ofPakistanat the directions of the London High Court deposited a sum of pound 35,49,634 in DDIL's account in the Bank of India,London. The ITO further observed that this amount has not been accounted for in the books as on30-9-1976and according to him this was done to suppress a relevant fact. The ITO held that this payment had to be taken into consideration for valuing the shares as on30-9-1976. According to the ITO, the adjustment of amount received from National Bank ofPakistanwas a very relevant and important factor affecting the value of the shares and could not be ignored. The ITO had further observed that these shares were not to rank pari passu with the other equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the prospectus had been issued, the shares had been subscribed or sold in substantial number and only a few other shares had remained to be subscribed or sold. In my opinion, there is no material to hold that the market value of these shares was much more than the par value at the time when the shares were offered for sale or were actually purchased. In this connection, it may be noted that the prospectus means any document described or issued as a prospectus inviting offers from the public for the subscription or purchase of any share in a body corporate. Thus, the prospectus contemplates not only a subscription but also purchase of any shares. Section 64 specifically refers that the document containing offer of sales was to be deemed as prospectus. This requirement makes it necessary for the company to give all the necessary information regarding the sale of the shares in the same way as subscription to the new issue. Though, the prospectus itself is not a contract and it is an invitation to the public to make offers for subscribing or purchasing the company's shares, the offer from the public has to be in the light of and in conformity with the terms laid down in the prospectu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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