TMI Blog1987 (12) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 12,82,078 at Rs. 7 per share, as fixed by the Controller of Capital Issues, and that after deducting the expenses the net sale consideration amounted to Rs. 12,63,763. He further found that the shares sold by the assessee were originally part of the following shares: Old Madura Mills Co. Ltd. shares Old A and F, Harvey Ltd. Shares 3000 shares held prior to 1st January, 1964 638 bonus shares issued in 1966(out of 3000 bonus shares received in1966) 22700 shares held prior too 1st January, 1964 11350 shares (bonus shares)issued in 1966 6000 shares (bonus shares)issued in 1969 7883 shares purchased in March, 1972 Total shares : 9638 Total shares : 41,933 He further found that when those two companies, Madura Mills Co. Ltd. and F, Harvey Ltd., were amalgamated to form a new company, Madura Coats Ltd., on 1st July, 1974, the assessee got the following shares in Madura Coats Ltd.: "For 9638 shares (for 5 shares 8 Madura Coats Ltd. shares) 15,422 For 41933 shares (for every share 4 Madura Coats Ltd. shares) 1,67,732 1,83,154 Madura Coats Ltd. shares". The ITO furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's contention in extenso in paragraphs 4 to 9 of his order. 6. The Commissioner (A) held that he agreed with the computation of the cost of acquisition of the shares as worked out by the assessee as far as the shares of old Madura Mills Co. Ltd. were concerned. He was of the opinion that the method adopted by the assessee was the correct method, that the assessee's method of valuation of the original shares and the bonus shares subsequently issued was supported by the decisions of the Supreme Court in Dalmia Investments Co. Ltd.'s case, Shekhawati General Traders Ltd., Gold Mohore Investment Co, Ltd. And Gold Company Ltd.'s case. He further held that the assessee's method of arriving at the cost of the original shares and the bonus shares was also supported by the decision of the Madras High Court in the case of Madura Mills Co. Ltd. vs. CIT (1972) 86 ITR 467 (Mad) and the decision of the Gujarat High Court in the case of CIT vs. Arvind Narottam Lalbhai Dalpatbhai Vada (1976) 105 ITR 378 (Guj). He also relied on the decision of the Tribunal, Madras Bench-B in the case of ITO, Commissioner, Circle, Madurai vs. The Papanasam Mills Co. Ltd. (In Liquidation) in ITA No. 1652/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Courts relied on by the assessee was on (all) four with the facts of the instant case and held that he did not agree with this statement of the ITO. He further held that the ratio of the decisions stated by the assessee squarely applied to the facts of the present case. 10. The Commissioner further held that the statute itself recognises a "double benefit", if there is any, since the statute authorises an assessee to substitute the fair market value of an asset as on 1st Jan., 1964 in the place of the actual cost of the assets acquired before 1st Jan., 1964 and that whatever benefit is conferred by the statute to a citizen must be granted by the departmental officers. The Commissioner therefore held that the long term capital gains should be taken at Rs. 1,74,001 and partly allowed the assessee's appeal. 11. Both the assessee and the departmental feel aggrieved by this order of the Commissioner and hence the present appeals by them to the Tribunal. 12. In the departmental appeal, the Revenue has raised the following additional ground of appeal on 16th Dec., 1986: "The learned CIT(A) should have issued enhancement notice and enhanced the total amount of capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of acquisition in respect of shares held in an amalgamated company in pursuance of the amalgamation made after 1st Jan., 1964? 2. Whether on the facts and in the circumstances of the case, the value of the bonus shares must be taken as the average of the value taken by substituting the market value as on 1st Jan., 1964 under s. 55(2) in respect of the primary shares?" 15. We have heard Shri B.C. Mohanty, the learned departmental representative, and Shri K.R. Ramamani, the learned counsel for the assessee. We have also heard Shri S. Swaminathan and Shri S. Padmanabhan, the learned counsel for the intervenes on the question of the valuation of bonus shares referred to in the second question formulated and referred to the Special Bench, set out above. We have carefully considered the rival submissions urged on both sides in the light of the authorities place before us. 16. In our view, the following are the issues which arise for our consideration in these two appeals: (i) Admission of the additional grounds of appeal raised by the Revenue in the departmental appeal. (ii) Whether the option of substituting the fair market value of a capital asset as on 1st Jan., 1964 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as already been admitted by the Division Bench when it referred this case to the Special Bench. 18. Shri K.P. Ramamani, the learned counsel for the assessee opposed these contentions and argued that the additional grounds sought to reopen settled position on facts on the basis of which the assessment has so for proceeded upto the second appellate stage. He pointed out that the departmental authorities, namely, the ITO, the IAC and the Commissioner (A) have all proceeded on the basis that the assessee was entitled to the statutory right of substituting the fair market value of the shares as on 1st Jan., 1964 under s. 55(2)(i) of the Act and the entire dispute was confined only to the method of computing the cost of acquisition of the original shares and bonus shares in the amalgamating companies. He therefore argued that the Revenue should not be allowed to raise an entirely new plea, which was never raised by the departmental authorities and which the assessee had no occasion to meet earlier. He further argued that the CIT(A) had only followed the orders of the Tribunal, Madras Benches in similar cases, such as the case of T.S. Srinivasan and other cases in TVS group and hence th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve already set out the additional ground filed by the Department in paragraph 12 supra. As rightly stated by the learned departmental representative, the said additional ground is not happily worded. At the same time, it raises an important question of law as to the right of the assessee to substitute the fair market value of the shares as on 1st Jan., 1964 as his cost of acquisition in computing the long term capital gains derived by him from the sale of the shares during the year under appeal. Apparently, this additional ground has been prompted by the decision of the Tribunal in the case of Madura Coats Ltd., reported in (1986) 19 ITD 384 (Bom). That was a case of another shareholder by name J.P. Coats Ltd., an English company, who also received shares in Madura Coats Ltd., which was formed by the amalgamation off three companies, namely (i) A F Harvey Ltd., (2) J.P. Coats (India) Ltd., and (3) Madura Mills Co. Ltd., on 1st July, 1974. It cannot be disputed that (all) the facts for deciding the additional grounds of appeal are already on record and that it does not call for any further investigation into fresh facts and additional evidence. 22. We are fully aware of the force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. On the terms of s. 10(2)(Vii) this contention had to be upheld and it was so done. The AAC however rejected the claim of the assessee that the sale effected by the Commissioner came within the third proviso to s. 12B(1) and on this ground he computed the capital gains on the entire sum of Rs. 81,863 representing the entire difference between the written down value and the sale price. On further appeal to the Tribunal, this order of the AAC was upheld. One of the points raised on behalf of the assessee before the Tribunal related to the power of the AAC to enhance the assessment under the head "capital gains". This contention was rejected by the Tribunal and the first question referred to us seeks to raise this point. Learned counsel for the assessee however found that what the AAC did was merely a re-adjustment and that therefore there could be noi objection to his order on the ground of want of jurisdiction". Adverting to the powers of the Tribunal under the IT Act, the Supreme Court in Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 at 237 (SC) has observed: "The word "thereon" of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as follows: "We do not regard the last observation as a fetter on the Tribunal's jurisdiction to admit a new plea. For, the power to listen to a new contention and decide the appeal on that basis has been spelled out by the Supreme Court from the terms of the statute. The exercise of that power does not depend on the presence of any other factor, excepting that the new plea comes from a party to the appeal. Even in a case where fresh facts are called for to decide the new plea, the Tribunal would have jurisdiction to entertain that plea. How the Tribunal wishes to get at the relevant facts in order to decide the new point may be quite a different thing. The Tribunal may either remand the matter for the purpose, or proceed to investigate the fact themselves. In this part of the decision-making alone, there is scope for the play of the Tribunal's discretion. As to the very power to entertain a new plea, that is not to be ruled out, merely because a consideration thereof would call for further facts to be gone into. In Hukumchand Mills' decision (1967) 63 ITR 232, the Supreme Court laid down no fetter on the Tribunal's powers. That case, indeed, was a case where the new plea raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deducted in the computation of its assessable business profits of the year. On behalf of the Department, a preliminary objection was raised at the hearing to the effect that the Tribunal should not entertain this new plea by the assessee, since it has not been raised at any time earlier at any stage of the proceedings, either before the ITO or before the AAC. The Tribunal, however, overruled this preliminary objection to its jurisdiction and regarded the matter as one entirely within its discretion either to entertain or not to entertain. The Tribunal proceeded to observe that in the exercise of its discretion it was a fit case to allow the assessee to raise a new point in the appeal, but directed the case to be sent back to the ITO for going into the factual and other considerations bearing on this new point. This decision of the Tribunal was challenged by the Revenue before the High Court in the reference. While upholding the action of the Tribunal. Their Lordships of the Madras High Court followed the three decisions of the Supreme Court in Hukumchand Mills Ltd.'s case referred to earlier and in CIT vs. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC) and CIT vs. Nelliapp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue by way of the additional grounds of appeal on the facts of the present case is only one aspect or facet of the question raised in the appeals, namely, what is the true amount of capital gains to be taxed in the hands of the assessee having regard to (all) relevant statutory provisions on the sale of the shares held by him in Madura Coats Ltd., during the previous year. The issue raised by the Revenue in the additional grounds of appeal is directly based on an order of the Tribunal in the case of Madura Coats Ltd. reported in (1986) 19 ITD 384 (Bom), which was a case decided in favour of the Revenue, on facts and circumstances similar to the facts and circumstances in the present appeals. They do not require any further investigation or enquiry into fresh facts and additional evidence, but can be disposed of on the materials already on record in the light of the relevant provisions of the Act and the case law bearing on the subject. We therefore consider that it would be perfectly in conformity with law and just and proper to consider the issue raised by the Revenue in the additional grounds of appeal as one aspect of the case by way of an argument raised by the Revenue in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as he became the owner of these shares in the amalgamated company on 1st July, 1974 only. He therefore submitted that the option of substituting the fair market value of the shares as on 1st Jan., 1964 as its cost of acquisition for the purposes of ss. 48 and 49 of the Act was not available to the assessee in the present case. Shri Mohanty submitted that this aspect of the matter was overlooked by the departmental authorities while making the assessment in the present case and that the Commissioner (A) ought to have taken note of this legal position which emerged on the facts of the present case and issued a notice of enhancement to determine the correct amount of capital gains derived by the assessee. 29. Adverting to cl. (c) of Expln. (i) to s. 2(42A) of the Act, the learned departmental representative submitted that it was a special provision defining a short-term capital asset and that this provision would not make the shares sold by the assessee as acquired by him prior to 1st July, 1974. He further submitted that s. 49(2) was a deeming provision, that it created a legal fiction for the limited purpose of determining the cost of acquisition of the shares in the amalgamated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition to the previous owner. Shri Ramamani submitted that s. 49(2) provided for the change in the form of the assets of the same owner as in the case of shares of an amalgamated company. It further provided that in the case of amalgamation, the cost of acquisition of shares in the amalgamated company should be the cost of acquisition in the amalgamating company, by which provision, the emphasis was on the cost of acquisition of shares in the amalgamating company and the time at which it was acquired, is rendered inconsequential. Thus, once there is amalgamation, the cost of acquisition of shares in the amalgamated company should be equated to the cost of acquisition in the amalgamating company, the point as to when the shares became the property or the time of acquisition having been made irrelevant for that purpose. In this connection he referred us to s. 55(2)(v) of the Act and submitted that guidance may be had from this provision of law which deals with a new asset emerging from an old asset by way of sub-division or conversion etc., where the statutory right of substitution of the fair market value under s. 55(2)(i) was allowed by the Bombay High Court in the case of Harish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a company merging with another company under a scheme of amalgamation and, also, in the case of the shareholders of the 'amalgamating company', (i.e. the company which merges into another company) who receive shares in the 'amalgamated company' (i.e. the company in which the enterprise of the other company is merged) in lieu of their shareholdings in the amalgamating company. Some of these tax liabilities discourage amalgamations. For the purpose of facilitating the merger of uneconomic company units with other financially sound Indian companies in the interests of increased efficiency and productivity, it is proposed to make the following provisions in the law: XX XX (iv) No capital gains or loss will be computed in the case of the amalgamating company in respect of any capital assets transferred by it to the amalgamated company. XX XX (vi) The shareholders in the amalgamating company receiving shares in the amalgamated company in lieu of their original shareholdings will be liable to tax on capital gains only at the stage when they sell or otherwise transfer the shares in the amalgamated company and realise any capital gains th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their Lordships held as follows at page 637 of the reports : "In order to avoid such an anomaly and to effect a plausible reconciliation of the position and particularly to harmonise the intention of the legislature, after reading s. 12B as a whole, it is but necessary that in order to secure synchrony, symmetry and harmony, it is but essential that the first transaction between the voluntary liquidators and the contributory should be excluded from the sphere of taxation, so that sub-s. (3) of s. 12B can work itself out without prejudicing and without affecting the fundamental canons of taxation. While considering a similar provision in the United States, Mr. Mertens in his book on Law of Federal Income Taxation, Vol. 3, at page 458, states that the general theory is that where no gain or loss is recognised as resulting from the exchanges therein referred to since the exchange is treated by statute as merely a change of form, the new property received shall, for the purpose of determining gain or loss from a subsequent sale, be considered, as taking the place of the old property given up in connection with the exchange. Such an aid to interpretation of the letter and spirit of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would be contrary to law and unjust, as could be seen by comparing two shareholders, one who sells his shares one day before the date of amalgamation, and another who sells his shares one day after the date of amalgamation. The learned counsel submitted that the Revenue's interpretation would put the second shareholder into a hardship, for which there is no clear expression used by the legislature in s. 55(2)(i) of the Act. 34. Shri Ramamani next submitted with reference to the facts of the present case that the mandate of s. 49(2) of the Act was to equate the cost of acquisition of Madura Coats share to the cost of acquisition of the shares of Madura Mills Ltd. and A F Harvey Ltd. The learned counsel submitted that s. 49(2) did not say in what particular manner or way, the cost of acquisition of the shares of Madura Mills and A F Harvey Ltd. Should be computed so as to put a restraint on it, as contended by the learned departmental representative. The learned counsel argued that if we are to determine the cost of acquisition of a capital asset as specified in s. 49(2), namely the shares of Madura Mills Co. Ltd. And A F Harvey Ltd., they are the capital assets specified in s. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be construed strictly. He argued that there was nothing unreasonable in the denial of the option to the present assessee, as persons holding the original shares and persons holding shares in an amalgamated company fall in two different well-defined classifications and therefore the denial of option to the persons holding shares in the amalgamated company after 1st Jan., 1964 was quite reasonable. Shri Mohanty contended that the intention of the Parliament to deny this concession is quite evident and eloquent by its absence in s. 55(2), as cases falling under s. 49(2) of the Act are not provided for in s. 55(2), which has specifically provided for case falling under s. 49(1) in s. 55(2)(ii) of the Act. The learned departmental representative reiterated his submission about the operation of the fiction in s. 49(2) by relying on the decision of the Bombay High Court in CIT vs. Trikamlal Maneklal (1987) 63 CTR (Bom) 251. He therefore submitted that the Department was entitled to succeed on the contentions raised by it in the additional grounds of appeal. 37. Before we examine the contentions urged on both sides as set out above, we consider that it is necessary to refer to the spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fected in the previous year shall, save as otherwise provided in ss. 53, 54, 54B, 54D, 54E and 54F, 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". Sec. 47(Vii) in so far as it is relevant for our purpose in set out below: "Transactions not regarded as transfer. 47. Nothing contained in s. 45 shall apply to the following transfers: XX XX (vii) any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company if. (a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and (b) the amalgamated company is an Indian company". The mode of computation and deductions is provided for in s. 48 of the Act, which is quoted below: "Mode of computation and deductions. 48. The 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 the following amounts, namely : (i) expenditure incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in order to determine the nature of the shares held by an assessee in an amalgamated company as to whether they are short term capital asset or not it is necessary to take into account and include the period for which the assessee held the shares in the amalgamating company also. In other words, the mandate of this Expln. is that the period for which an assessee holds shares in an amalgamated company as well as the period for which he held the original shares in the amalgamating company, should be taken together to determine the period of his holding of the shares to decide the issue whether the said shares represented short term capital assets or long term capital assets. According to s. 2(42A), a capital asset is regarded as a short term capital asset if it is held by an assessee for not more than 36 months immediately preceding the date of its transfer. The period of holding the capital asset which was originally 60 months, was reduced to 36 months w.e.f. 1st April, 1978 by the Finance (No. 2) Act of 1977. When we examine the period of holding of the shares transferred by the assessee in the present case during the previous year in the light of the aforesaid provisions contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee held even prior to 1st Jan., 1964 and nothing more. The revenue further elucidates their point by pointing out that for receiving the bonus shares in the two amalgamating companies subsequent to 1st Jan., 1964 the assessee had to pay nothing and therefore only the cost of the original shares in the two amalgamating companies would represent the true cost of acquisition of the shares in the amalgamated company, as deemed by s. 49(2) of the Act. The revenue therefore contends that the long term capital gains computed by the ITO and the CIT(A) are erroneous and wrong, as it should be much more than the figure of Rs. 4,67,441 computed by the ITO in the assessment order. 42. The contention of the Revenue can be understood properly if we set out the figures of cost of acquisition of the original shares as given in the particulars furnished by the assessee at pages 1 and 2 of the paper book: (i) Cost of acquisition of 3000 original shares in Madura Mills Co. Ltd., held prior to 1st Jan., 1964 Rs. 1,27,740 (ii) Cost of 22700 shares in A FHarvey Ltd. held prior to 1st Jan., 1964 2,27,000 (iii) Cost of acquisition of 7883 shares in A FHarvey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to its logical conclusion and there is nothing either in s. 49(2) or in s. 55(2)(i) off the Act or any other provision of the Act, which prohibits such a conclusion. We had already referred to the provisions contained in cl. (c) of Expln. (i) to s. 2(42A) of the Act, which defines a short term capital asset, to show how the assets held by the assessee in the present case are long term capital assets and not short term capital assets. There is no fiction involved in the said Expln. to s. 2(42A) of the Act. When the Act requires that the period of holding of a capital asset in the amalgamating company should also be included along with the period for which a shareholder holds shares in the amalgamated company to determine the total period of its holding by the assessee, we do not find any justification for limiting or confining the operation of the fiction created in s. 49(2) of the Act ignoring the other facts which have to be taken into account in the light of the said cl. (c) of Expln. (i) to s. 2(42A) of the Act. The Department does not dispute the factual position that the original shares in the two amalgamating companies, namely Madura Mills Ltd. And A F, Harvey Ltd., were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 15 years 50 per cent More than 15 years but not more than 20 years 55 per cent Over 20 years 60 per cent If the stand of the Department is accepted, then it would mean that the period of holding would be only the dates from which the shares of the amalgamated company came into the possession of the assessee to the date of sale. The cost to be taken will be that of the original share. The difference between this and the sale price will be the capital gain. The percentage deduction, however, will not be allowed for the period, from the date of acquisition of the original share to the date of sale of the share of the amalgamated company, but only to that percentage admissible from the date of acquisition of the amalgamated share to the date of sale. This would be definitely inequities. To obviate this anomaly, one can only take recourse to the provisions contained in cl.(c) of Expln. (i) to s. 2(42A) and state that since for determining whether an asset is a short-term capital asset or not, the statute enjoins that the period from the date of acquisition to date of amalgamation should also be taken into consideration, it implies by fictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined for the purposes of ss. 48 and 49, became the property of the assessee before 1st Jan., 1954, "the cost of acquisition" thereof means the cost of acquisition of the asset to the assessee or the fair market value of the said asset as on 1st Jan., 1954, at the option of the assessee". Rejecting the contention of the Revenue that the option under s. 55(2)(i) was not available to a case covered by s. 55(2)(v) of the Act, their Lordships held at page 198 of the reports, as follows: "It was submitted by Mr. Joshi, in this connection, that the option available under cl. (i) aforesaid was only regarding the very capital asset which had been transferred by the assessee and not regarding the cost of acquisition of the capital asset from which the said capital asset transferred might have been derived in any of the manners set out in cl. (v). In out view, this submission of Mr. Joshi is not sustainable. It is significant that s. 45 subjects to the charge of income-tax the profits and gains arising on the transfer of "a capital asset". This would clearly show that profits and gains arising from the transfer of any capital asset were sought to be made chargeable to income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision rendered on an interpretation of the provisions contained in ss. 48 and 55(2)(i) of the Act and not merely on s. 55(2)(v) of the Act, as contended by the Revenue to distinguish the said decision before the Bombay Bench of the Tribunal in the case of ITO vs. Madura Coats Ltd. (1986) 19 ITD 384 (Bom). We also agree with the learned counsel that this decision of the Bombay Bench of the Tribunal in 19 ITD 384 would not stand in the way of our accepting the assessee's case in the present appeals. 45. We would like to refer to the decision of the Bombay High Court in the case of CIT vs. Trikamlal Maneklal (1987) 63 CTR (Bom) 251, which was relied on by the learned departmental representative to contend that the fiction in s. 49(2) is confined to the cost of acquisition only and nothing more. We have perused this decision and we are unable to appreciate how this decision supports the contention of the Revenue. On the other hand, the following observations in paragraph 17 at page 254 of the reports support the contention of the assessee: "17. As we have stated, we find it difficult, with respect, to take the view that s. 48 provides for the taking into account of anything other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of the Act, there is no such express provision conferring such right of option to cases covered by s. 49(2) of the Act, and therefore, the assessee is not entitled to this right of option This argument of the Revenue overlooks that the cases falling under the provisions of s. 49(2) would be comprehended by s. 55(2)(i) of the Act itself and that both these provisions would have to be read together, as held by us. 48. Hence, on a reading of the provisions of s. 2(42A), Expln. (i)(c), s. 49(2) and s. 55(2)(i) of the Act together and applying the said provisions to the facts of the present case, we hold that the assessee is entitled to the statutory right of exercising his option to substitute the fair market value of the shares in Madura Mills Ltd. and A F Harvey Ltd., as on 1st Jan., 1964 and that the departmental authorities, including the CIT(A), rightly took the fair market value of these shares as an 1st Jan., 1964, for the purpose of computing the long term capital gains chargeable to tax in the hands of the assessee. Accordingly, the second issue in the departmental appeal is decided in favour of the assessee and against the Revenue. 49. This takes us to the third issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a case essentially on the applicability of s. 147(a) of the Act for the purpose of reopening the assessment to bring to charge the income that had escaped assessment by way of capital gains and therefore would not apply to the present case. In the other two decisions, though the principle of averaging by spreading out the cost of the original shares over the original shares and the bonus shares was upheld, the said decisions would be of no avail to the assessee in the present case, as held by the Madras High Court in the case of TVS and Sons, where the assessee transfers (all) his shareholdings enblock, as such an exercise would be purely an academic one. He therefore submitted that the Department was entitled to succeed on this point in vie of the decision of the Madras High Court in the case of TVS and Sons Ltd. 51. Shri S. Swaminathan, the learned counsel appearing for one group of Intervenes, submitted that on the facts of the present case the decision of the Madras High Court in 143 ITR 644 would not apply and that the decision that was directly applicable was the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case (1972) CTR (SC)120 : (1971) 82 ITR 788 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 54. Regarding bonus shares, the learned counsel submitted that they had a cost of acquisition of their own, as has been laid down by the Supreme Court in CIT vs. Dalmia Investment Company Ltd. (1964) 52 ITR 567 (SC). He submitted that it is too late in the day for any one to contend that the cost of acquisition of the bonus shares is nil, as such a contention put forward by the parties has been unanimously rejected by the Supreme Court not only in Dalmia Investment Co. Ltd's case, but in later decisions also including, the decision in Shekhawati General Traders Ltd.'s case. The learned counsel submitted that the answer to the question as to what is the cost of acquisition of the bonus shares is directly provided in a number of decisions of the Calcutta High Court based on the decisions of the Supreme Court. The first decision relied on by him was in Sutlej Cotton Mills Ltd. vs. CIT (1979) 119 ITR 666 (Cal). In this case it was decided that in determining the cost of acquisition of the original shares, on which bonus shares have been issued. It can either be the acquisition of the original shares, on which bonus shares have been issued, it can either be the actual cost of acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method normally followed by the assessee in valuing the bonus shares is not relevant and that it was not also relevant that some of the original shares have been sold. The learned counsel relied on the following passage at page 534 of the reports in his favour: "Now we are here concerned with, firstly, the bonus shares which ranked pari passu, secondly, we are not concerned with the value of the old shares. Some of the original shares were sold before the year in question. We are also concerned with the profit resulting from the sale of bonus shares. This is important because it is not a a question of considering what is the profit embedded in the unsold stock either of shares or of stock-in-trade. It is a case of sale of an asset of a particular year. Therefore, it is not, in our opinion, very relevant to consider in what manner these stocks had been valued year by year, but, as the Supreme Court noted, what is the cost of acquisition of the particular asset which is sold and whose profit is due to be considered. Now, the cost of the acquisition of the bonus shares, in our opinion, is clearly laid down by the Supreme Court in the principle enunciated, as we have mentioned befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 1st Jan., 1954, will have to be taken into account which on the language of the statute it is not possible to do." 58. Basing himself on the aforesaid decision of the Supreme Court in Shekhawati General Trader's case and the decisions of the Calcutta High Court referred to above, Shri Swaminathan contended the at case of TVS Sons has not been correctly decided by the Madras High Court, as it is contrary to the ratio of the decision of the Supreme Court in Shekhawati General TradersLtd's case. The learned counsel submitted that their Lordships of the Madras High Court have not even adverted to this decision of the Supreme Court in their judgment, even though it has been cited before their Lordships, and also referred to and relied on by the Tribunal in their appellate order in the said case. The learned counsel submitted that as the decision of the Madras High Court in TVS Sons turned on entirely different facts, it was distinguishable on facts from the present case, wherein we are concerned with the valuation of original shares held before 1st Jan., 1964 and of bonus shares issued subsequent to 1st January 1964. The learned counsel therefore submitted that the CIT(A) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any capital gains arising on such transfer) be taken to be their fair market value as on the 31st day from the date on which the said shares were issued to him." The learned counsel submitted that the above passages indicated that the statute itself considered the cost of acquisition of bonus shares as nil. 60. Shri Padmanabhan next relied on the decision of the Madras High Court in CIT vs. Athi vs. Ramchandra Chettiar (1964) 52 ITR 96 (Mad). We do not consider it necessary refer to this decision in detail, as it was rendered before the decision of the Supreme Court in Dalmia Investment Co. Ltd.'s case reported in the same volume 52-ITR-567. 61. Shri K.R. Ramamani the learned counsel for the assessee in these two appeals, submitted that the decisions of the Supreme Court in Shekhawati General Trader's case recognises the following three principles: (i) The issuance of bonus or right shares after 1st Jan., 1954 has to be ignored while determining the fair market value of the original shares as on 1st Jan., 1954. (ii) The principle of determining the cost of acquisition of block of shares has been recognised. (Iii) The decision of the Supreme Court in Dalmia Investment co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the case of TVS Sons Ltd. has over-looked these principles laid down by the Supreme Court in Shekhawati General Traders''s case and therefore the said decision of the Madras High Court would not apply to the case of the present assessee. The learned counsel argued that even in the case of TVS Sons Ltd. there was a block of 1447 shares, which had to be valued as on 1st Jan., 1954 as they were held prior to that date. Apparently this fact has slipped the attention of all parties and the Court, as the said case would also be governed by the decision of the Supreme Court in Shekhawati General Traders' case Shri Ramamani submitted that the decision of the Madras High Court in 143 ITR 644 was inconsistent with the provisions of the statute contained in s. 55(2)(i) of the IT Act and was further opposed to the decision of the Supreme Court in Shekhawati General Trader's case. Therefore, the decision should be confined to its facts and it should not be extended to case of assessee like the present one. The learned counsel also argued that on the authority of this decision of the Madras High Court in 143-ITR-644 alone the Revenue was not entitled to succeed in the present app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR (Cal) 339 : (1981) 131 ITR 366 (Cal) it has been held that there was no distinction between the case of a dealer in shares and the case of an investor and that the cost would be the same. He pointed out that, that was also a case of determining the cost of acquisition of bonus shares and the Calcutta High Court held that the correct method of valuing bonus shares was to take the cost of the original shares, spread it over the original shares and bonus shares collectively and find out the average price of the shares. The learned departmental representative submitted that the Delhi High Court has also taken similar view in Escorts Farms (Ramgarh) ltd. vs. CIT (1983) 35 CTR (Del) 170 : (1983) 143 ITR 749 (del). He also pointed out that the same view has been taken by the Special Bench of the Tribunal in the case reported in Rohiniben Trust vs. ITO (1985)23 TTJ (Bom) 427 (SB) : (1985) 13 ITR 830 (Bom) (SB). He argued that the cost of acquisition of the bonus shares was embedded in the cost of acquisition of the original shares and therefore the assessee would not be entailed to any separate deduction on account of the cost of acquisition of the bonus shares in addition to the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase account, that the theory of averaging is a principle of costing resorted to, the determine the cost of the bonus shares alone, with a view to reckoning the result of any transaction in respect of bonus shares alone. Their Lordships further held that when the entire bloc of shares held by the shareholder is sold and in that sale all the bonus shares held by the share-holder also figure, there can be no occasion or necessity for determining the cost of bonus shares separately, that the whole cost of the shares including the bonus shares is already a known figure and that it would be an unnecessary refinement to ascertain the individual cost of each share because by getting at the average cost of bonus shares, the average cost of the original shares must inevitable get reduced pro tanto. In our view, the decision of the Madras High Court is directly applicable to the facts of the present case, as the assessee has transferred his entire shareholdings in Madura Coasts Ltd. 67. Though we find considerable force in the arguments advanced by the learned counsel on behalf of the assessee with reference to the decision of the Supreme Court in Shekhawati General Traders case which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal for the first time nevertheless formed part of the subject matter of the appeal.'' This observation, however, is matched by another observation made by the Supreme Court on the ambit of the Tribunal's jurisdiction. That enunciation, as we read the judgment, has to be found in the earlier passage which we have quoted. It is in that passage that the Supreme Court have clearly laid down that even though a plea is put forward for the first time before the Tribunal and is inconsistent with the pleas earlier made, the Tribunal has jurisdiction to try and determine important questions, whether on fact or on law, which relates to the assessment of the assessee and there was nothing in the Act which restricts the Tribunal to determining those questions which have been raised before the departmental authorities. It is in this particular passage that the Supreme Court have rendered a comprehensive idea of the scope of the Tribunal jurisdiction. It may be that the observation of the Court were not strictly called for but they must nevertheless be regarded as binding." The learned counsel agree that while deciding the appeal of TVS Sons Ltd. The Tribunal had followed the princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular was issued in suppression of all the earlier instructions for the guidance of the WTO and therefore the ITO had rightly followed these instructions by adopting 9 per cent rate for capitalisation while determining the fair market value of the shares as on 1st Jan., 1964. He argued that the CIT(A) erred in relying on the earlier circular in circular No. 6-D/WT 60 dt. 8th Aug., 1960 from Central Board of Revenue which was superseded by the later circular of 1967. Shri Mohanty submitted that according to the decision of the Gujarat High Court in Rajan Ramkrishna vs. CWT (1980) 17 CTR (Guj) 293 : (1981) 127 ITR 1 (Guj) all benevolent circulars issued by the CBDT are binding on all ITO's and WTOs and all the persons employed in the execution of the WT Act, 1957 even if the circulars deviate from the legal position. He therefore submitted that the Commissioner (A) erred in accepting the assessee's contention and in directing the ITO to adopt 6 per cent as the rate of capitalisation in the present case. 69. Shri Ramamani the learned counsel for the assessee submitted that while he did not dispute the proposition laid down by the Gujarat High Court that all the circulars issued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of capitalisation being taken at 6 per cent only and not at 9 per cent. In the order of the Tribunal in the case of Textile Paper Tube Company Ltd. relied on by the assessee's learned counsel, from which we have quoted above, it has been pointed out that the bank rate was only 4.5 per cent on 3rd Jan., 1963 and only 5 per cent on 26th Sept., 1964. Having regard to these factts, we are unable to a accept the contentions of the Revenue that they were right in adopting the rate of 9 per cent for capitalisation by relying on the later circular issued by the CBDT on 31st Oct., 1967, which is more than three years after the relevant date of valuation, namely 1st January 1964. Accordingly, we confirm the order of the CIT(A) on this issue and decide the same agasint the Revenue and in favour of the assessee. 71. The fifth issue arises out of the assessee's appeal and it relates to the question of taking the average of the values arrived at on yield method and break up value method of shares in respect of the valuation of the 22.700 shares in A F Harvey Ltd. As on 1st Jan., 1964 referred to in issue No. (Iv). The learned counsel for the assessee, Shri Ramamani, relied on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's appeal in ITA No. 2584 Mds 84, the Department has succeeded only in respect of issue No. (Iii) relating to the cost of acquisition of the bonus shares in Madura Mills co. Ltd. And A F Harvey Ltd. The other two issue raised by them in issue Nos. (ii) and (iv) have been decided against them and in favour of the assessee. Consequently, the long term capital gains that would be chargeable to tax in the hands of the assessee would amount to Rs. 2,07,727 as worked out below: (i) Fair market value of the original . 3000 shares in Madura Mills Co. Ltd, as on 1st January1964. 1,00,000 (ii) Fair market value of the orignal 22700 shares in A F Harvey Ltd as on1st January 1964 as worked out by the assessee on yield basis at the rate of 6 per cent capitalisation. 8,15,384 (iii) Actual cost of acquisition of 7883 shares issued to the assessee in 1972 in A F Harvey Ltd., about which there is no dispute. 13,39,792 Total cost of acquisition of the shares transferred. 10,56,036 Net sale consideration received by the assessee. 12,63,763 Less: Total cost of acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee shall be deemed to be the cost at which the previous owner of the property acquired it, as increased by the cost of any improvement of the asset incurred or borne by the previous owner or the assessee, as the case may be. The explanation added to this section explains to expression previous owner of the property' as the last previous owner of the capital asset.' It is to be remembered the acquisition of the assets under those modes of acquisition, that had not cost the assessee anything in terms of money, although those assets have got value in money' s worth. 2. The levy of capital gains is an anti-inflationery measure. It is intended to cure to the State a portion of appreciation, without effect on the part of assessee in the value of the capital assets that has come about as a result of several welfare measures taken by the State, each of which involved large capital outlay which resulted in an increase in all round propriety. The hope is that this levy would set as a deterrent on increase of prices. 3. The capital gains is to be computed by deducting from the full value of the consideration to be received on the transfer of the capital asset, the cost of the acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the section has sought to alleviate. It is to promote the amalgamations of un-economic units with economically sound units without having to pay any capital gains tax as a consequence of amalgamation. Although amalgamation of two companies does amount to a transfer, that transfer was sought to be excluded from the purview of capital gains tax only to encourage amalgamation of companies as mentioned above, but the shares allotted in the amalgamated company, as a consequence of amalgamation continue to be the assets of the assessee, except that there was an exchange of shares held by him in the amalgamating company, with the shares held in amalgamated company. The latter shares may be sold and it is possible to release a gain out of it. That gain is a capital gain taxable under s. 45 of the IT Act. Again the question arises as to how the cost of acquisition of the shares in the amalgamated company should be determined in order to compute the capital gains as provided for in s. 49 of the IT Act. The legislature thought that the cost of acquisition of the shares in an amalgamated company shall be the cost of acquisition to him of the shares in the amalgamation company. In other wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the option of the assessee, either as the cost of acquisition of the asset to the assessee, or the fair market value as on 1st Jan., 1964. In this case, by reason of s. 49(2) of the IT Act, the cost of acquisition of the shares in the amalgamated company is to be deemed to be the cost of acquisition of the shares in the amalgamating company. These shares in the amalgamating company were available even prior to 1st Jan., 1964. Therefore, it becomes abundantly clear that the cost of acquisition of these shares must at the option of the assessee, be taken either at the actual cost of the assets or their fair market value as on 1st Jan., 1964. Thus the controversy, whether the option provided for in s. 55(2) is available to the assessee, nor (sic) the question that the shares in the amalgamating company having come into existence only after 1st Jan., 1964, were not available before 1st Jan., 1964 and, therefore, the option provided for in s. 55(2) of the IT Act was not available, does not simply arise. This, I thought, is the layman's approach without getting embroiled into the semantics. It cannot be the case of the Revenue that the provisions of s. 49(2) would have no application t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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