TMI Blog2001 (1) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... res in 1989. It retained these shares as stock-in-trade in its Balance sheet till 30-6-1988 and on 1-7-1988, these shares were converted into capital asset at the rate of Rs.17 per share. Out of these shares, during this year, the assessee sold 68740 shares on which capital gains were shown. While working out the capital gains, the assessee adopted the fair market value as on 1-4-1981 as per the provisions of section 55(2)(b). The Assessing Officer held that the assessee was not entitled to exercise this option because as on that date, these shares were held by the assessee as stock-in-trade and not as capital assets. According to the Assessing Officer, capital asset does not include stock-in-trade as per section 2(14). Since the shares were treated as stock-in-trade by the assessee upto 306-1988, it cannot be said that there was any capital asset in existence prior to this date. Therefore, for the purpose of computing long term capital gain, the first year of acquisition of capital asset has to be taken as financial year 1988-89. Since the capital asset has come into existence only on 1-7-1988, the market value of these shares as on 1-4-1981 cannot be adopted as provided under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares has to be reckoned only on the basis of 'average value'. As the original shares of 68740 and bonus shares of 68740 on conversion became capital asset on 1-7-1988 and later on further bonus shares were acquired in the year 1989, the average cost of original and bonus shares will be taken as per Annexure 2 attached to the assessment order." The CIT (Appeals) concluded that the indexed cost of acquisition will be worked out as under: (i) In respect of shares converted into investments on 1-7-1988, indexation will be allowed from the year 1988-89 to the year of transfer on the average cost as stated above. (ii) In respect of bonus shares acquired in 1989, indexation will be allowed from 1989-90 to the year of transfer on the average cost as stated above. 5. Aggrieved by the orders of the authorities below, the assessee is in appeal before this Tribunal. Dr. Sunil Pathak, the learned counsel for the assessee, submitted that as per the provisions of section 48(ii) what is deductible from the consideration received as a result of the transfer of the capital asset is the cost of acquisition thereof. This word implies the cost which the assessee is required to pay to acquire th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation was the same. He, therefore, submitted that the indexation be allowed from 1-4-1981 onwards and not from 1-7-1988 as done by the ClT (Appeals). 6. As regards the capital gains on Bonus shares, the learned counsel submitted that as regards the original shares which were held from the date prior to 1-4-1981 the fair market value as on 1-4-1981 should be adopted as the cost of acquisition and that cost is to be spread over the original and the Bonus shares for the purposes of computing the cost of acquisition of the Bonus shares. So far as the original shares are concerned, the fair market value as on 1-4-1981 which is adopted as the cost of acquisition as per provisions of section 55(2)(h) does not undergo any change because of the Bonus shares issued after 1-4-1981. For this proposition, he relied upon the following decisions: (1) Shekhawati General Traders Ltd v. ITO [1971] 82 ITR 788 (SC); (2) CIT v. G.N. Venkatapathy [1997] 225 ITR 952 (Mad.); (3) S. Ramz v. CIT[1998] 230 ITR 353 (Mad.). 7. Shri Naresh Kumar, the learned senior D.R. strongly supported the orders of the authorities below. He submitted that as per section 1(14 of the Income-tax Act, stock-in-trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 45, as per the decision of the Hon'ble Supreme Court in Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506. This is also true by applying the ratio in reverse of the decision of the Hon'ble Supreme Court in the case of Bai Shirinbai K. Kooka. Therefore, since the assessee itself has chosen to adopt Rs.17 as the cost of acquisition of the shares at the time of conversion into capital asset, there is no requirement of substituting any other cost for computing the capital gain. He, therefore, further emphasised that the date of acquisition for the purpose of computing the capital gain of such share will, therefore, be 1-7-1988, i.e., the date, when the stocks were converted into investment. 9. Shri Naresh Kumar further submitted that the reliance placed by Dr. Pathak on the Gujarat High Court decision in Ranchhodbhai Blzaijibhai Patel's case and of the Bombay High Court in Keshavji Karsondas case is not correct for the following reasons: (1) These judgments were delivered when old provision of section 48(ii) were on the statute when there was nothing in the statute to allow indexed cost of acquisition. (2) The issue before the Hon'ble High Courts was about the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as shares are concerned. Therefore, in view of the above, the decisions relied upon by the assessee do not apply to the facts of the case. 10. Regarding the determination of the cost of Bonus shares, the learned senior D.R. submitted that the reliance placed by the counsel of the assessee on the decision of the Supreme Court in Shekhawati General Traders Ltd's case and of the Madras High Court in G.N. Venkatapathy's case, is misplaced. According to the learned senior D.R. the correct decision to be applied will be the decision of the Supreme Court in the case of Escorts Farms (Ramgarh) Ltd. 11. According to the learned senior D.R. in the case of Bonus shares acquired in 1989, the indexation will have to be allowed from financial year 1989-90 only, since as per the decision of the Gujarat High Court in CIT v. Chunilal Khushaldas [1974] 93 ITR 369, these shares came into existence in 1989 and are deemed to be held only from that year. 12. As a rejoinder, Dr. Pathak submitted that the interpretation given by the learned senior D.R. to Explanation (iii) to section 48 is incorrect, According to Dr. Pathak, the Explanation clearly states that the indexation is allowable from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value in view of the above decision and for the present controversy, therefore, this decision has no applicability. 14. As regards the contention of the learned D.R. that in the cases before the Bombay High Court or Gujarat High Court, when section 48 was being interpreted, the asset was agricultural land, while in the assessee's case the asset is in the form of shares and hence there is a difference in facts, the learned counsel submitted that there is no difference at all, because on the facts of the case, both these assets do not constitute 'the capital asset' as on 1-4-1981 and, therefore, the decisions in the above cases will be squarely applicable to the facts of the assessee's case. 15. Regarding the indexation of Bonus shares, it was submitted by the learned counsel that the contention of the learned senior DR. that Explanation (iii) has made a difference to the position of law on this issue is incorrect. Further, the D.R.'s contention that the decision of Supreme Court in the case of Escorts Ltd. would be applicable is also incorrect, because in that case the original shares were acquired after 1-4-1981 and hence that decision was different. In fact, in that case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not counted. Applying the same principles, the period for which the capital asset is held as stock-in-trade, index cost will not be available. 17. In Escorts Ltd.'s case, the Hon'ble Supreme Court has, inter alia, held as under: "There is a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions - both under section 10(2)(vi) and section 10(2)(xiv) of the 1922 Act or both under section 32(1)(ii) and section 35(1)(iv) of the 1961 Act. The use of the words 'in respect of the same previous year' in clause (a) of the proviso to section 10(2)(xiv) of the 1922 Act and section 35(2)(iv) of the 1961 Act is to indicate that there is a basic scheme, unspoken but clearly underlying the Acts, that the two allowances cannot be and are not intended to be granted in respect of the same asset or expenditure. These provisions mandate that the assessee should, in a case where the assessee qualifies for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Karsondas' case, we agree with the learned senior DR. that the ratio laid down in those judgments is no more applicable to the facts of the present case. Dr. Pathak emphasised on the following extract from the judgment of the Gujarat High Court: "There are no two different acquisitions of property, one is a non capital asset and the other is a capital asset. The property is acquired by the assessee only once and merely its character changes in the sense that, whereas, originally it was a non-capital asset it now becomes capital asset." Relying upon the above extract, the learned counsel submitted that the shares in this case were property of the assessee and this was acquired only once i.e. in the year 1977 when the firm M/s. Kalyani Brothers transferred 68740 shares to the assessee-company. No doubt, the property is purchased only once, but it will be the nature of the property which will determine the computation of capital gains. Property is a term of wide import and property includes capital asset and stock-in-trade. Capital gain is to be computed with reference to the property as capital asset and not property as stock-in-trade. Hence, we do not agree with the learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Escorts Farms (Ramgarh) Ltd.'s case as follows: "In this case, the High Court has found that the original shares sold were admittedly purchased after 1954 and, therefore, the option of taking the fair market value as on January 1, 1954 (the statutory cost), was not available to the assessee. It appears to us that the principles laid down in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC), cannot be applied to a case where the assessee did not and could not exercise the option of the statutory cost of acquisition in the place of the actual cost of acquisition. The said decision is distinguishable. In view of the larger Bench decisions of this court, it is fairly clear that where bonus shares are issued and some of the original shares are sold subsequently, their actual cost has to be reckoned only on the basis of 'average value', (as held in Dalmia Investment and other cases) except, in rare cases, where 'actual cost' is notionally adopted or determined as it existed on the relevant statutory date Shekhawati General Traders Ltd v. ITO [1971] 82 ITR 788 (SC). In the instant case, the High Court was justified in law in holding so and in further holding that the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 55(2)(aa)(b)(ii) were clearly applicable and the sale consideration was taxable as capital gains. The CIT(A) referred to the letter of offer for debenture for the issue of NCDs by BFL and held as under: "From the terms of the letter of offers for debenture which has been issued on the right basis to the shareholders, it is clear that detachable coupon certificates creates a future right to acquire shares at the time of further issue. The detachable coupons are inextricably linked with the existing shareholdings when the appellant made investment in the NCDs. The coupons were allotted along with NCDs by virtue of holding shares by an equity shareholder who was entitled to subscribe to one debenture for every seven equity shares. By subscribing to the debentures, the shareholder becomes entitled to apply and get allotted one equity share of Rs.10 at premium not exceeding Rs.40 and right for entitlement to subscribe to the shares at future date was therefore an entitlement to subscribe a financial asset as mentioned in section 55(2)(aa)(b)(ii). Such an entitlement to subscribe to the financial assets could be renounced in favour of any person before the actual date of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andas (P.) Ltd. [1983] 142 ITR 702 (Bom.), and (vi) New Era Agencies (P.) Ltd. v. CIT[1968] 68 ITR 585 (SC). The learned counsel further submitted that the same CIT(A) for the earlier assessment year 1994-95 had allowed the assessee's claim in the case of a group concern (Yusmarg Investment Trading (P.) Ltd. Pune) placed at pages 201 to 203 of the paper book. However, for this year, the CIT(A) has disallowed the claim by relying upon the provisions of section 55(2)(aa)(ii). He submitted that sub-section (2)(aa)(iiia) was brought on the statute book by Finance Act, 1995 with effect from 1-4-1996 and has no application to the year under appeal, i.e. 1995-96. 25. Shri Naresh Kumar, the learned senior D.R. strongly supported the order of the CIT(A). He submitted that the coupons which the assessee-company had sold were received alongwith the non-convertible debentures of BFL. The warrants entitled the assessee to acquire equity shares of BFL at a cost to be decided by BFL. These coupons were separately traded. He submitted that the CIT(A) rightly rejected the contention of the assessee and held that provisions of section 55(2)(aa), (b)(ii) are clearly applicable arid the sale c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned as under: "These warrants are issued with the host instruments, namely, convertible or non-convertible debentures, preference shares, equity shares or other instruments and traded separately on the stock exchanges. Generally, no upfront payment is required to be made against the warrants." In the same Book, taxation aspect has been discussed in para 2.42 on page 3 2 as follows: "Under the current tax laws, warrants are treated at par with equity shares. The cost of acquisition for the primary market investor is treated as Nil whereas for the secondary market investor, the actual price paid for the warrant is treated as the cost. Where warrants are issued alongwith NCDs and the NCDs are disposed at a loss, the capital loss on NCDs can be adjusted against the capital gains on warrants." No doubt, a tradable warrant confers a right - a valuable right which can be traded in the market. We also agree that it is not a dead right, but a live and a valuable right. But the warrant confers only a future, uncertain, volatile inchoate right and not an existing right. It cannot be acquired at the time of allotment by paying an identifiable price or cost. In fact, a tradeable warrant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. It cannot be separately acquired or transferred. it flows from the fact that a number of shares are held by a person. If for acquiring that number of shares a person is required to pay more than the market price of the share, then the cost of acquisition of the shares is that which he has in fact paid for holding that block." 28. Coming to the finding of the CIT(A) that provisions of section 52(2)(aa)(ii) are applicable, we hold that the above provisions are not applicable in this case, because the coupons were not issued by virtue of holding debentures of the shares. These were mere accompaniments to the debentures and hence the basic condition of section 52(2)(aa)(ii) itself is not satisfied. Clause (ii) is applicable in the case of renouncing the rights entitlement, in this case, the coupons. We have gone through the sample forms for the rights renouncements and the sale of coupons and it is noted that the coupons were to be transferred alongwith the transfer forms unlike the rights renouncements and therefore, from this context also, this clause (ii) is not applicable to the sale of coupons in this case. In our opinion, if at all any clause in section 55(2)(aa) is ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n time to advance the amount till December 1994. Secondly, the assessee should have tried to recover interest free advance already given to KCPL or adjusted it against this deal. (iv) KCPL, during the course of its proceedings, has claimed that amount received from the assessee is interest free. This raises doubt about the real intention of the agreement, especially in view of the fact that the agreement is between two companies controlled by the same group of people. (v) As per accounts maintained by the assessee, it was found that on the date of alleged agreement, the assessee already had debit balance with that company amounting to Rs.5.62 crores on the opening day and during the year under consideration, the assessee has paid another amount of Rs.78.42 lakhs. However, as per the agreement, the assessee was to advance Rs.10 crores. It is not understood as to why the debit balance outstanding was not adjusted against amount payable as per agreement. In view of the above, the Assessing Officer observed that the interest bearing loans taken from BFL and KSL were with a view to reduce taxable income. He further held that the agreement has also been framed in such a way to redu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestments in Scrips made by KCPL till advances are repaid or option is exercised. 34. As regards the contention of the Assessing Officer that there was no need to advance the amount when there was already a debit balance of Rs.5,62,05,888 with KCPL, the learned counsel submitted that the amount was advanced free of interest and in the past KCPL had also advanced amount to the assessee free of interest. The investment of Rs.5.62 crores was out of the assessee's own funds. Thus, the assessee did not link this amount with stock investments because when approached, KCPL also hinted that fresh investments be made if the assessee wanted to make a foray in stock market. According to the learned counsel, there is nothing wrong in the commercial world about such transactions. Dr. Pathak further submitted that there was no practice of taking interest free loans or advances from BFL or KSL which were public limited companies. The Assessing Officer has certainly erred in holding that there was such a practice. In the investment companies of the group, the loans were given from one to another without interest on many occasions, but no such interest free loan was taken from BFL or KSL. On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments. He drew our attention to the figures of BSE Index on pages 137 and 138 of paper book. He submitted that the CIT(A) is not justified in holding that the agreement was only on paper. He submitted that it was a genuine agreement and it was duly acted upon by the assessee. He further submitted that the CIT(A) erred in concluding that the agreement was sham and therefore interest has to be disallowed. The assessee had entered into real transactions and these transactions were not entered on the basis of a pretence and accordingly, the CIT(A) is not justified in brushing aside the agreement which was duly acted upon by the assessee. 36. Shri Naresh Kumar, the learned senior D.R. strongly supported the order of the CIT(A). He submitted that the advance given was in April 1994 itself, i.e., much before the date of 31-12-1994, when the real operation of buying shares was to begin. The manner in which the period before 31-12-1994 is to be regulated remains out of context of the agreement. The assessee was required to pay Rs.10 crores only by December 1994, yet the assessee chose to pay this amount in April 1994. By preponing the payment, the assessee does not stand to gain in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38. Shri Naresh Kumar further submitted that it is interesting to note that in its books of account, KCPL has riot shown it as advance against shares. No note to this effect has been given in the balance-sheet of KCPL. No future liability in respect of the reduction in cost of 2596 has been accounted for in the books of account of the KCPL, even though KCPL is under the same management. In fact, in its assessment proceedings, KCPL has shown it only as interest free advance. Thus, conflicting statements by two companies under the same management would show the sham nature of the agreement. The learned senior D.R. submitted that the agreement should be read keeping in view the surrounding circumstances and in support of this contention, he relied upon the judgment of the Hon'ble Supreme Court in CITv. Durga PrasadMore [1971] 82 ITR 540. 39. We have considered the rival submissions and perused the facts on record. The main reason for disallowing the interest on the Inter Corporate Deposits from BFL (Rs.9.35 crores) and from KSL (Rs.5.35 crores) is that the agreement entered into with KCPL was a sham agreement. We have gone through the agreement and we have also reproduced the salie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL had also advanced amounts to the assessee free of interest. The investment of Rs.5.62 crores was out of company's own funds. Thus, the assessee did not link this amount with stock investments because when approached, KCPL also hinted that fresh investments be made if the assessee wanted to make a foray in stock market. In our opinion, there is nothing wrong in the commercial world about such transactions. It is because it is the prerogative of the assessee how to run its business and the Assessing Officer cannot force upon the assessee to adjust the earlier amount against the transaction. 41. Reliance has been placed by the authorities below that KCPL has shown these loans as interest free in its assessment proceedings. We fail to see as to how this stand contradicts with the assessee's stand. The funds were interest free and that is why KCPL admitted. Thus, this reasoning of the Assessing Officer confirmed by the CIT(A) and reiterated by the learned senior D.R. is also of no use to the Revenue for disallowance. 42. As regards the contention of the learned senior D.R. that the assessee was already in finance business and hence it could have invested the money itself in share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no justification for the impugned additions of Rs.56,90,959 (BFL) and Rs.70,90,274 (KSL). We accordingly delete the same. 44. Ground No. 9 reads as under: "The Id. CIT(A) erred in holding that interest under sections 234B and 234C is mandatory and erred in confirming the levy even when there was no express direction in the order of such levy and when these sections were not attracted on the facts of the case at all." This ground is consequential in nature. The Assessing Officer is directed to charge interest under sections 234B and 234C after taking into consideration the relief allowed in this order. 45. In the result, the appeal is allowed in part. Per Singhal (J.M.): 46. After going through the order proposed by my Id. brother very carefully, I have not been able to persuade myself to agree with the conclusions findings arrived at by him in Paras 16 to 20 of that order for the reasons given hereafter. 47. The question for our consideration relates to the determination of the cost of acquisition of original shares purchased prior to 1-4-1981 and bonus shares received after 1-4-1981. With reference to the original shares, it has been held by my Id. brother that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of the rival parties, the Case Law referred to as well as the relevant provisions of the Statute, it is not possible for me to agree with the legal findings given by my Id. brother. Admittedly, the original shares were acquired by the assessee prior to 1-4-1981. The only objection against the assessee is that prior to 1-7-1988, such shares were held as stock-in-trade and not as capital asset. So the crux of the matter is whether this factor goes against the assessee. The cost of the acquisition has been defined by section 55(2)(b). Relevant portion of the same is being reproduced as under: "55(2)(b) ........... (a) ............ (b) in relation to any other capital asset,-- (i) where the capital asset became the property of the assessee before the 1st day of April, 1981, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee." The bare reading of the above section shows that relevant date is the date when the capital asset became the property of the assessee. In my considered opinion, the asset becomes the property of the assessee only once that is when it is purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t necessary that it should have been a capital asset on the date of acquisition by the assessee. The words 'cost of acquisition of the capital asset' used in section 55(2) emphasize two aspects - one is 'acquisition' and the other is 'cost'. The reference clearly is to the time when the capital asset was acquired. Where the property transferred was not a capital asset on the date of its acquisition but became one subsequently, only its character has changed, and there cannot be two different acquisitions of the property, one as a non-capital asset and the other as a capital asset. It would be wrong to introduce such a legal fiction, as it would be plainly contrary to the language of section 48(ii) read with section 45. The intention of the Legislature must be gathered from the words used. It is well-settled that what is unexpressed by the Legislature must be taken as unintended." The perusal of the above judgment clearly shows that the only condition which must be satisfied is that the property purchased should be capital asset on the date of transfer and it is therefore, not necessary that it should be capital asset also on the date of acquisition. This decision has been follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen it is acquired by other modes specified in section 49, it is the year in which the previous owner acquired it. (2) The only condition to be satisfied is that asset must be capital asset only on the date of transfer. (3) It is not necessary that it should also be capital asset on the date of acquisition or on the statutory date. (4) Where the asset was acquired prior to this statutory date under section 55(2)(b), the assessee is entitled to opt the fair market value on such statutory date despite the fact that it was not capital asset on such date and became capital asset much after this statutory date. As far as provisions of Explanation (iii) to section 48 are concerned, in my view, such provisions are not at all apposite for determining the cost of acquisition. Such provisions read as under: (iii) " indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; A bare reading of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee as a result of transfer of silver bars and shares to the Trustees. The relevant observations of their Lordships were as under:- "As regards the first contention, we are of opinion that the appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the appellant derived no income from it. He may have stored up a future advantage for himself but as the transactions were not business ones and as he derived no immediate pecuniary gain the State cannot tax them, for under the Income-tax Act the State has no power to tax a potential future advantage. All it can tax is income, profits and gains made in the relevant accounting year." In view of the above observations, it cannot be said that the assessee obtained any benefit by valuing the shares at cost on the date of conversion. In fact, no profit accrues to the assessee till shares are sold. There are also no provisions in the Income-tax Act to the effect that profits would be deemed to accrue on the date of conversion of stock in trade into investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Co. Ltd [1964] 52 ITR 567. This action of the Assessing Officer was challenged in the Writ Petition before the High Court and ultimately, the matter reached the Supreme Court. Their Lordships at page 793 held as under: "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 section 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 section 55(2)(i) in the manner suggested by the revenue based on the view expressed in the Dalmia Investment Co's case. The High Court completely overlooked the fact that for the ascertainment of the fair market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bonus shares has the effect of altering the original cost of acquisition of the shares as held by this court in CIT v. Dalmia Investment Co. Ltd [1964] 52 ITR 567 and other cases." 57. In view of the above discussion, it is held that assessee was entitled to opt the fair market value as on 1-4-1981 since the shares sold by the assessee became the property of the assessee prior to 1-4-1981. Once such option was exercised, such statutory cost cannot be changed in any circumstance whatsoever. There is no dispute of the fact that fair market value as on 1-4-1981 was Rs.52.50 per share. Therefore, the assessee is entitled to deduction of statutory cost of acquisition at Rs.52.50 per share subject to further indexation by taking assessment year 1981-82 as base year. It is clarified that revenue has allowed indexation by taking assessment year 1989-90 as base year on the ground that asset became capital asset on 1-7-1988. Since it is held by me that shares acquired by the assessee became the property of the assessee prior to 1-4-1981 and the assessee was entitled to opt the fair market value as on 1-4-1981, the assessee is entitled as consequence thereof to substitute the said cost by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s spread over the original shares and bonus shares in determining the cost of bonus shares. The assessee showed loss on the sale of shares which was accepted by the Assessing Officer. Later on the order of the Assessing Officer was scrutinised by the CIT, order of Assessing Officer was erroneous in as much as the cost of bonus shares should have been computed by spreading over the actual cost and not the fair market value as on 1-1-1964. The Tribunal, however, held that method of computing the cost of bonus shares by the assessee was correct one. Hence, the order of CIT under section 263 was quashed. On reference to the High Court, it was held that the Tribunal was right in holding that cost of bonus shares was to be computed by spreading over the statutory cost of acquisition over the original shares and bonus shares and not the actual cost of acquisition. Such conclusion was arrived at by the High Court after applying the ratio of Supreme Court judgment in the case of Shekhawati General Trader's Ltd. and following its earlier decision in the case of CIT v. Prema Ramanujam [1991] 192 ITR 692 (Mad.). This issue again came up before the Madras High Court in the case of S. Ram wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares issued in 1981 should be ascertained by spreading over this statutory cost over 1,37,480 shares and therefore, the same should be taken at Rs.26.25 per share while the cost of bonus shares issued in 1989 may be taken at Rs.13.12 per share. This contention of the Id. counsel for the assessee cannot be accepted. The principle of spreading over the cost of the acquisition is that number of holding in the hands of assessee may be increased from time to time but the value of such holding remains constant. By issue of bonus shares, neither the company becomes poorer nor the shareholders become richer. The Hon'ble Supreme Court in the case of Dalmia Investment Co. Ltd. quoted with approval at page 579 of the report the following observations of the Supreme Court of United States in the case of Eisner v. Macomber [1920] 252 US 189: "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholder. Its property is not diminished, and their interests are not increased... The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 Per Chhibber, Accountant Member - As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following questions may be referred to a Third Member or to pass such orders as the President may desire: "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e., 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by Indexed Cost of acquisition by taking assessment year 1981-82 as base year? (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, then whether Index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989?" JANNHAVI INVESTMENTS (P.) LTD'S CASE Per Chhibber, Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alyani Exports Investments (P.) Ltd., Pune [ITA No. 30/PN/99]. For the reasons given in that dissenting note, it is held as under: 1. That assessee is entitled to opt for fair market value as on 1-4-1981 as cost of acquisition in respect of original shares purchased prior to 1-4-1981. 2. That the aforesaid cost of acquisition shall be further substituted by indexed cost of acquisition as per the provisions of Explanation (iii) to section 48 by taking assessment year 1981-82 as base year. 3. That for determining the cost of Bonus Shares, the cost of acquisition of the original shares shall be taken as fair market value on 1-4-1981 and the same shall be spread over the original shares and Bonus shares as per the guidelines given by me in para 61 of the dissenting note. 4. That the aforesaid cost of Bonus Shares shall be further substituted by indexed cost of acquisition as per the guidelines given in para 63 of my dissenting note. 5. All other observations made in the said dissenting note shall apply mutatis mutandis to the present case. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Per Chhibber, Accountant Member - As there is a difference of opinion between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands of the assessee. 6. The facts and the arguments of both the sides are identical to those discussed by us in our order of date in ITA No. 30/PN/99 in the case of Kalyani Exports Investments (P.) Ltd. Pune (a group case). As such, ouraforesaid decision will apply mutatis mutanadis to the facts of the present case. For the detailed reasons give therein, we hold that there is no justification for the impugned addition of Rs.14,90,403. This ground accordingly succeeds and the assessee gets a relief of Rs.14,90,403. 7. In the result, the appeal is allowed in part. Per Singhal (J.M.): 8. After going through the order proposed by my learned brother very carefully, I have not been able to pursuade myself to agree with the conclusions and findings arrived at by him in para 4 of that order for reasons given hereafter. 9. The question for our consideration relates to the determination of the cost of acquisition of original shares purchased prior to 1-4-1981 and Bonus shares received after 1-4-1981. This issue has been discussed in detail by me in the dissenting note in the case of Kalyani Exports Investments (P.) Ltd. Pune [ITA No. 30/PN/99]. For the reasons given in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is entitled to opt the fair market value on the statutory date i.e., 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by indexed Cost of acquisition by taking assessment year 1981-82 as base year? (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, whether Index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989?" 2. The facts in ITA No. 30/PN/99 may be noticed. The assessee is a company. It had acquired 68,740 shares of Bharat Forge Ltd. in March 1977 on the dissolution of a firm by name Kalyani Brothers, of which it was a partner. On 20-6-1981, bonus shares were issued in the ratio of 1: 1. Thus the holding went up to 1,37,480 shares. Again in October 1989, another bonus issue was made in the same ratio and thus the holding went up to 2,74,960 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, over-ruling, in the process, the contention of the assessee based on Shekhawati General Traders Ltd.'s case. 6. The working of the capital gains as per the Assessing Officer is given in an Annexure to the assessment order. 7. The CIT (Appeals) upheld the action of the Assessing Officer on the ground that it was in accordance with the provisions of the income-tax Act. He further held that on the basis of the judgment of the Supreme Court in Bai Shirinbai K. Kooka's case, the difference between the market rate of Rs.50 per share as on the date of conversion and the purchase price of Rs.17 would have been taxable as business income, being appreciation of the value of the stock-in-trade. As regards the cost of bonus shares, he agreed with the Assessing Officer that Escorts Farms (Ramgarh) Ltd.'s case applied. He concluded that the indexed cost of acquisition will be worked out as below: (a) in respect of shares converted into capital assets on 1-7-1988, indexation will be allowed from the year 1988-89 to the year of transfer on the average cost as per Escorts'decision; (b) in respect of bonus shares acquired in 1989, indexation will be allowed from 1989-90 to the year o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' case and the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case relied upon by the learned counsel for the assessee is no more applicable to the facts of the present case. 11. As regards the other aspect, viz., the cost of bonus shares, the learned A.M. held that the ratio of the Supreme Court decision in Escorts Farms (Ramgarh) Ltd.'s case applied to the present case and not that of Shekhawati General Traders Ltd.'s case or that of the Madras High Court in G.N. Venkatapathy's case. Since on 1-4-1981 the shares were not held as capital assets, the option of substituting the fair market value on that date as cost was not available to the assessee. In the case of bonus shares acquired in 1989, he held that the indexation will have to be allowed in that year, as held by the Gujarat High Court in Chunilal Khushaldas'case. 12. The learned J.M. differed from the decision of the learned A.M. on both issues. As regards the cost of original shares, the learned J.M. held that a capital asset can become the property of the assessee only once and this happened when it was purchased. He referred to section 49 to indicate that when the asset becomes the property by any mode other t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Id. JM was of the view that the principle laid down by the Supreme Court in Shekhawati General Traders Ltd.'s case applied to the case and not that of Escorts Farm (Ramigarh) Ltd.'s case. The latter decision was distinguished by him on the ground that in that case the shares sold by the assessee were admittedly purchased after the statutory date i.e., 1-1-1954 (which was the date as per section 55 as it stood at the relevant time). The Supreme Court itself in Escorts Farms (Ramgarh) Ltd.'s case distinguished Shekhawati General Traders Ltd.'s case on this ground The Id. JM applied Shekhawati's principle to the present case since the assessee had purchased the shares before 1-4-1981 which was not the case in Escorts Farm is (Ramgarh) Ltd. and held at para 57 that the assessee was entitled to opt for the market value of the shares as on 1-4-1981. This was Rs.52.50 per share. He further held as a consequence that the assessee is entitled to substitute the cost as on 1-4-1981 by the indexed cost of acquisition, taking the. base year as 1981-82. He directed accordingly. 17. With regard to the second issue, the cost of acquisition of the bonus shares issued after 1-4-1981, the Id. JM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a different point of time. There can be only one acquisition of an asset and that when the assessee acquires it for the first time, irrespective of its character at that point of time. It was therefore, held that what is relevant for the purpose of capital gains is the cost of acquisition and not the date at which the asset became a capital asset. The decision of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case was followed by the Bombay High Court. In the decision of the Gujarat High Court, it was held that the only condition to be satisfied for attracting section 45 is that the property transferred must be a capital asset at the date of transfer and it is not necessary that it should also have been a capital asset at the date of acquisition. The Bombay High Court also held that the words "the capital asset" in section 48(ii) are identificatory and demonstrative of the asset, intended only to refer to the property that is the subject of capital gains levy and not indicative of the character of the property at the time of acquisition. It was clearly held that there cannot be two dates of acquisition of the same asset - one as non-capital asset and again as capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said Explanation is not apposite to the determination of the cost of acquisition. 22. In my view, the Id. JM is right in holding that there is no double-benefit to the assessee if it is permitted the option of adopting the fair market value of the shares as on 1-4-1981. The difference between the market value and the conversion price could not have been, at any rate, brought to tax in view of the law laid down in Sir Kikabhai Premchand's case to the effect that no man can make a profit out of himself. If the assessee is not liable to be taxed in respect of an amount according to the law of the land, as declared by the Supreme Court, that does not amount to any benefit or concession extended to him. It is then his right not to be taxed. If the taxing authorities could not have taxed him at the point of conversion, they cannot be heard to say that when he is given the option to substitute the market value as on 1-4-1981 he gets another "benefit", thus taking a "double-benefit". The right to claim the fair market value as on 1-4-1981 to be substituted is a statutory right which can be exercised when the prescribed conditions are fulfilled. Thus the assessee is protected by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he difference between Shekhawati General Traders Ltd.'s case and Escorts Farms (Ramgarh) Ltd.'s case lies in the fact that in the former, the original shares were purchased before the statutory date (1-1-1954 at that time) whereas in the latter they were purchased after the statutory date in fact. Their Lordships in Escorts Farms (Ramgarh) Ltd.'s case, distinguished Shekhawati General Traders Ltd's case on this ground. This has been brought out by the Id. JM in his dissenting order and I fully subscribe to his view on this aspect of the case. To put it briefly, if the shares are acquired after the statutory date, any subsequent issue of bonus will affect the cost, as laid down earlier by the Supreme Court in Dalima Investment Co. Ltd.'s case. But if the shares were acquired prior to the statutory date, any issue of bonus shares subsequent to that date will not have the effect of altering the statutory cost. In such a case, it is the statutory cost that has to be spread over the original and bonus shares for ascertaining the cost of the bonus shares. This principle was laid down in Shekhawati General Traders Ltd.'s case and followed by the Madras High Court in two decisions, GN. Ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Explanation (iii) to section 48, as interpreted by him. I have already expressed my agreement with his interpretation of Explanation (iii). Accordingly I also agree with his view expressed in para 63 of the order that the indexation in respect of the bonus shares issued in June, 1981 has to be done taking the financial year 1981-82 (assessment year 1982-83) as the base year. 28. For the aforesaid reasons, I agree with the views expressed by the Id. JM on all the issues posed by the two questions referred to me. Both the questions are answered in the affirmative. 29. The answers to the questions posed in the other two appeals, with similar facts, are also in the affirmative. All the three appeals will now be placed before the original Bench for appropriate orders. KALYANI EXPORTS INVESTMENTS (P.) LTD.'S CASE Per Chhibber, Accountant Member.-As there was a difference of opinion between the Accountant Member and the Judicial Member, following questions were referred to a Third Member: "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e. 1-4-1981 as cost of acquisition in respect of original shares purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and against the Revenue. 3. In the result, the appeal is partly allowed. RAJGAD TRADING (P.) LTD.'S CASE Per Chhibber, Accountant Member.--As there was a difference of opinion between the Accountant Member and the Judicial Member, following questions were referred to a Third Member: "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e. 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by indexed cost of acquisition by taking assessment year 1981-82 as base year? (2) Whether on facts and in taw, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, whether index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989?" 2. The learned Judicial Member, Shri R.V. Easwar, sitting as Third Member by his opinion dated 13-10-2000 has concur ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
