TMI Blog1993 (4) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of them holding the number of equity shares set opposite their respective names in Sch. I hereto. And whereas the purchasers have at the request of the Company agreed to purchase the said 6000 equity shares on the terms and conditions hereinafter mentioned. Now this agreement witnesseth and it is hereby agreed by and between the parties hereto as follows: 1. Each of the vendors shall sell and the purchasers shall purchase the number of equity shares in the company set out opposite his or her name in Sch. I hereto being 6000 equity shares in the aggregate at the price of Rs. 392. (Rupees three hundred and ninety two only) per share free from all charges or encumbrances or liens and with all rights attaching thereto. 2. The said 6000 equity shares agreed to be sold are fully paid up and represent 100% of the equity share capital of the company and carry that percentage of the votes cast at general meetings of the company." There are clauses in this agreement stating the factual position regarding the assets and liabilities of the company. Thereafter there are clauses whereby vendors undertook to indemnify the company and purchasers against depletion or diminution in valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d even after receiving the bonus shares and that therefore the interest in the company i.e. percentage in the company's equity subsisted as such for more than 36 months before the date of transfer. Therefore, according to the assessee, income was received by way of long-term capital gains and the question of escapement of that income did not arise. The assessee has stated that "I have fully and truly stated in the return that my interest or stock in the company with percentage was sold away". The letter has specifically pointed out the above sentence in the ITO's order. The assessee vide letter dt. 30th Dec., 1980 inter alia stated that the shares were held as investment and requested the ITO not to consider the dividend as income nor capital gains as business income. The ITO, however, reopened the assessment rejecting the assessee's objection on the ground that the assessee had "misled the Department by saying vaguely in the return that the share in the equity capital" had been sold and that "the assessee intentionally gave false information saying that the share capital had been sold and the entire consideration was nothing but long-term capital gains which was invested in specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the ITO was expected to look into aforesaid details and that, therefore, the full disclosure had been made so that there was no case for reopening. He pointed out a letter dt. 11th Oct., 1983 from the CIT to the ITO wherein it has been pointed out that bonus shares held by the assessee were for less than 36 months. He submitted that this information was got from the CIT from the record and that, therefore, the assessment must be considered to have been made under s. 143(3). He also submitted that in view of the aforesaid letter of the CIT it must be said that the ITO had not exercised his independent mind which was necessary as laid down in the case of Chunilal Onkarmal (Pvt.) Ltd. vs. ITO Ors. (1983) 139 ITR 380 (MP). He also pointed out the ITO's letter dt. 6th Dec., 1983 whereby notice dt. 14th Nov., 1983 had been cancelled and subsequently issued notice for reopening on 6th Dec., 1983 and submitted that reopening could not be done twice on the same facts. According to the assessee's counsel since the assessee had stated that there was a transfer of the interest in the company and the Revenue had stated that the transfer was of shares, that was merely a difference of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sments were correctly made was not correct. He also contended that the provision in s. 143(1) regarding the reference to past record was merely meant for items like depreciation and other matters referred to in cl. (iv). In our view the assessment can be reopened if the circumstances justify and it makes no difference whether they have been made under s. 143(3) or 143(1). The learned Departmental Representative is quite right also in stating that the reference to past record in s. 143(1) is for the purpose of items mentioned in sub-cl. (iv). Further, s. 143(1) uses the word "may" and so it gives an option to the ITO to make the assessment inter alia by referring to the record of past assessments. Therefore, the reopening cannot be ruled out on that ground. Consequently the reliance by the learned counsel on the fact that for asst. yr. 1977-78 the disclosure had been made regarding the issue of bonus shares in the return for asst. yr. 1977-78 would not prevent the ITO from reopening the assessment this year. The return for every year is separate and so is the record. Further, if the assessee was relying on the earlier disclosures nothing prevented her from disclosing it again this y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue of the bonus shares. The assessee has not done this. It has relied upon certain arguments. Those should have been made after making all the crucial disclosure regarding the date of the issue of bonus shares. Those arguments or even belief, however bona fide, would not absolve the assessee from the duty to disclose that crucial fact viz. the date of issue of bonus shares. Although the assessee might have called his shareholdings as a percentage of interest in a bona fide manner, since he was claiming benefit under s. 54E of the IT Act, which [r/w s. 2(29A)] refers to the shares, the balance of reasoning is in favour of the view that the assessee should have disclosed the dates of issue of bonus shares in his return for the assessment year in question. The duty of the assessee is to disclose truly and fully all the material facts and it is particularly in performing the second part of the duty that the assessee has failed. It is true that the ITO by making enquiries could have ascertained the date of issue of the bonus shares but the Supreme Court in the case of Indo Aden Salt Mfg. Trading Co. P. Ltd. vs. CIT (1986) 58 CTR (SC) 9 : (1986) 159 ITR 624 (SC) has held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rights differ with the number of shares held. 9. The assessee's counsel rejoined by stating that the agreement has to be read as a whole in order to ascertain the true nature of the transaction. He submitted that the cases cited by the learned Departmental Representative regarding the rights of shareholders were distinguishable because they did not take into account the administrative rights which were also transferred in this case because the entire holding had been transferred. 10. We have already held that the reopening in this case was justified. The next question is regarding the merits of the assessee's case. That case needs to be clearly spelt out. The contention is that by reason of the fact that all the shares in the company which were held by the assessee group were transferred to another group, what has in fact been transferred is interest of one group in the company to another and that being so it would be neither true nor realistic to say that the shares were transferred. Since it was not the shares which was the subject-matter of the sale, the distinction between the original and bonus shares lost its significance. Before the ITO, the contention was that the bon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t control over the company was transferred is only a consequence of the transfer of the shares. That control does not have a separate existence from the ownership of the shares. The extent and nature of the control varies with the extent of the shareholding. The most complete control over the management and affairs of the company goes with the complete ownership of all the shares of the company. The ownership of small number of shares would give only the voting rights in that proportion and complete control over the management only means the totality of all the voting rights of the shares; nothing more and nothing less. Therefore, the transfer of control cannot outweigh the fact of transfer of shares. It is the ownership of the shares which is the basis for the control over the company. The assessee has chosen to express holding of the shares as a percentage of the interest in the company. That percentage of interest is nothing but a totality of the shares held by the assessee expressed in terms of percentage of the total shares of the company. It is true that shareholding in common parlance may be referred to as interest in the company but that is the layman's expression which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the interest. This argument, again like the earlier one, at first appears to be reasonable but not so when examined closely. In the above case before the High Court the interest of property was a consequence of the ownership of the shares. Thus the former was separate from the latter. While the petitioner contended that it had transferred only the shares, the High Court held that it had also transferred the interest in the immovable property. In the present case, however, it is the contention of the assessee that it was interest in the company and not the shares which were transferred. Moreover, in that case the shares were only five in number of the value of Rs. 50 each while the consideration for the transfer was Rs. 9,46,900. It is in these circumstances that the Court held that the document of transfer was conveyance or transfer of interest in immovable property. But for the right to occupy the premises the transfer consideration would not have been of this huge amounts. In the present case although the price paid per share is higher i.e. Rs. 392 than the break-up value per share i.e. Rs. 290, the difference is not so much as in the Bombay High Court case so as to lead to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ietory character. A shareholder is a co-owner of the company not of its assets which, in view of the nature of the company as a legal person, are vested in the company and the extent of his rights and duties as co-owner is measured by the amount of his shareholding, so that all the shareholders of the company constitute its proprietors and the amount due from all of them to the company is equal to the issued capital of the company. 3. Normally 'share' denotes right of participation in capital of the company. It also denotes other rights in the management of the company. When a company capitalises its accumulated profits and issues bonus shares to its shareholders, it does not entail release of any of the company's assets. The company merely increases its capital while retaining the amounts available for distribution as dividends. The bonus share only gives the shareholder an extra share in the capital of the company. It simply confers a title to a certain proportion of the surplus assets if and when a general distribution takes place as in winding up. The company does not part with any of its capital or assets, the profits remain in the company after being transmuted into capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. is manufacturing engineering goods and is a going concern. As per cl. 3, its profitability and financial worth is reflected by the profit loss account and the balance sheet as on 31st May, 1977 and also the unaudited results of the company for the period from 1st June, 1977 to 31st Aug., 1977 prepared and initialled by Shri S.D. Paranjape, the Managing director of the company. This clause reveals that it is the business undertaking as reflected by financial statements which was transferred as a going concern on a platter so to say. For, otherwise, there is no relevance nor is it necessary for furnishing financial worth statement and profitability statement of the concern as was done in this case. 9. Clause 4 of the agreement provides that the sale shall be completed on or before 28th Nov., 1977 on vendors furnishing duly audited balance sheet as on 31st May 1977 and profits loss account for the year ended 31st May, 1977 by the auditor of the company. Therefore, it is clear the purchaser wanted to ascertain the financial worth of the undertaking or business as a whole before concluding the transaction. 10. Clause 5 of the agreement shows that the vendors have stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % controlling interest in the company as they were holding 100% shares of the company. The en bloc price fixed per share was Rs. 392 which is higher than the prevailing market value of the shares and whose break-up value has been arrived at Rs. 290 per share. Since the company is a going concern, the break-up value is not proper valuation according to well-known authorities of Supreme Court and Bombay High Court. 18. The Supreme Court in the case of Ramnarain Sons (P) Ltd. vs. CIT (1961) 41 ITR 534 (SC) considered the transaction of purchase of shares and acquisition of managing agency and held that both the assets were of capital nature. It held that, if the intention was to obtain control over the managing agency, acquisition of shares was integrated with the acquisition of managing agency. The Supreme Court held that the High Court was right in holding that the acquisition of managing agency was an acquisition of capital asset. This decision shows the intention of the transaction is criterion to come to the conclusion whether it was for obtaining the control over the managing agency or not. If it is the former, the acquisition of shares was incidental. The Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 483 of J.P. Bhatnagar's Direct Taxes Circulars, Vol. 1. Further the agreement as such does not specify the price for bonus shares but the price for the shares enbloc inclusive of the bonus shares. Palmer's Company Law, 21st Edition at page 885 reads as under: "A bonus or a rights issue of shares or debentures, both for the purposes of short and long-term gains, is not treated as involving any disposal and thus does not attract tax, but on a subsequent sale the original shares and the new holding are treated as the same asset acquired as the original shares were acquired." 20. In the facts and circumstances of the case, therefore, the entire capital gains arising on the transaction is in the nature of long-term capital gains and, inasmuch as, the assessees have invested the respective sale proceeds in eligible assets, the exemption under s. 54E is admissible to them. The Bombay High Court in the case of J.B. Greaves vs. CIT (1963) 49 ITR 107 (Bom) held that the entire consideration for transfer of shares and managing agency was capital gains only. 21. Coming to the merits of the case that in view of my conclusion that the undertaking as a whole has been sold by the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. In that case the bonus shares were issued on 5th Sept., 1961 and they were sold on 12th Sept., 1961 within a week's time. There is no dispute about the rationale of that decision. The point is whether that decision is relevant and applicable to the case of the assessees where 100% of the shareholdings were transferred en bloc or the entire undertaking has been sold as a going concern. Following respectfully the judgment of the Madras High Court, I am of the opinion that it is not open to the Assessing Officer especially when the bonus shares were not sold separately to go into the question of determination of short-term capital gains arising on sale of bonus shares by applying the principle of averaging laid down by the Supreme Court in the case of CIT vs. Dalmia Investment Co. Ltd.. In the global context of the transaction under consideration, in my opinion, the ITO has gone on fishing expedition to find out the short-term capital gains arising out of the transactions by apportioning the sale consideration for the transfer of which there is no evidence on record. 23. Regarding the validity of reassessment proceedings, it is clear that the reassessment in the case of Mrs. Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asst. yr. 1978-79. In that case, he could have come to the conclusion that the case could not be completed under s. 143(1) accepting the income returned. Simply because, s. 143(1) assessment contemplates adjustment of certain items specified in cl. (iv) thereof for which purpose alone the ITO has to look into past record does not mean that it is open to the ITO to complete initial or first assessment under s. 143(1) in respect of items covered by cl. (iv) of s. 143(1) and later on take recourse to reassessment under s. 147(a) in respect of items not covered by cl. (iv) of s. 143(1). The only option to the ITO is to complete under s. 143(1) or s. 143(3) and not under ss. 143(1) and 147(a). 25. The relevant portion of the letter of the CIT dt. 11th Oct., 1983 is reproduced for appreciation. Letter dt. 11th Oct., 1983 by the CIT to the ITO "Re: Evasion of tax by Paranjape group of PEFCO Foundry Chemicals Co. Ltd. 2. In the relevant period, the shareholders cleverly avoided mentioning the number of equity shares sold on 22nd Nov., 1977. Instead, they mentioned a percentage of the equity capital sold by them, e.g., Smt. Y.D. Paranjape stated that 6.6% of the share of equit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If there is no warrant for reassessment proceedings as stated earlier, the question of going into the merits of quantum of income assessed by applying the principles of costing laid down by the Supreme Court also does not arise. In this view of the matter, therefore, I am of the opinion that reassessment proceedings were not valid in law and, therefore, fit to be cancelled. 26. The percentage of interest of the shareholder in company remained the same even after declaration of bonus shares. When bonus shares are issued capitalising accumulated profits, on one hand it is treated as an accretion to the original shares in the hands of the shareholder, but on the other hand, there is a pro tanto diminution of the shareholders' interest in the reserves out of which the bonus shares are issued. After the bonus issues, the assets of the company and the shareholders' funds remained at the same level. In other words, the property of the company is not diminished and the shareholders' interest is not increased. Thus, the interest of each shareholder remains the same. The only change is in the evidence which represents that interest. Now, the bonus shares and the original shares together re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion providing otherwise, to be an adventure or concern in the nature of trade merely because those taking part in it have their eyes fixed on the fiscal advantage of avoiding income-tax. 28. In view of the aforesaid reasons stated by me, I do not agree with any of the observations, statements, conclusions and decision of my learned brother contained in paragraphs 11, 12 and 13 of his order. On the other hand, in view of the global nature of transaction involving the transfer of the whole undertaking as a going concern, it is 100% of controlling interest in a controlled company which was transferred by transferring the aggregate of 100% of shareholding from a group to another group and, therefore, the entire resultant gain is in the nature of long-term capital gains. However, as the entire sale proceeds were invested in eligible assets, the assessees are entitled to exemption under s. 54E. Applying the principle of Supreme Court in the case of Mugneeram Bangur Co., it is not open to ITO to attribute a portion of the sale consideration to the sale of bonus shares and tax it as short-term capital gains. Accordingly, the reassessments under s. 147(a) were not warranted in law and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f difference of opinion, namely, whether the transaction was a transfer of all the shares or it was a transaction to obtain the control over the company but not of the shares. The assessees were the holders of the shares of one company called Paranjape Engg. Foundry Co. Ltd. On 30th Oct., 1976, this company issued bonus shares in the ratio of one bonus share for one original share. On or about 28th Nov., 1977, the assessees herein agreed to sell their shares to another group called Thirani group. To effect this sale, an agreement was entered into on 28th Nov., 1977 between the assessees called vendors on one part and Thirani called purchasers on the second part and the above named company on the third part. The preamble of this agreement provided: "Whereas authorised share capital of the company is Rs. 10,00,000 consisting of 10,000 equity shares of Rs. 100 each. And Whereas the issued subscribed and paid up share capital of the company is Rs. 6,00,000 divided into 6,000 equity shares of Rs. 100 each. And Whereas the vendors are the holders of the said 6,000 equity shares of the company. And Whereas the vendors are desirous of selling their aggregate holding of the said 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessees had not disclosed full facts particularly the fact relating to the date of issue of the bonus shares, and since all the shares were sold along with the bonus shares, a short-term capital gain arose on the sale of the bonus shares which should have been quantified and brought to tax, whereas, according to the assessee, since the entire shareholding was sold as a slump sale, such sale resulted only in a long-term capital gain and since the entire sale proceeds were invested in specified assets within a stipulated time-frame, even the long-term capital gain was not liable to tax under the provisions of s. 54E of the IT Act. This controversy led to the reopening of the assessments under s. 147 of the IT Act. 4. In response to notices issued under s. 148, the assessees pleaded that the bonus shares, though a short-term capital asset within the meaning of that expression as defined in the IT Act, having been held for a period of less than 36 months, nonetheless, it did not attract short-term capital gains tax, inasmuch as, when the entire shareholding was sold including the bonus shares, the difference that existed or was supposed to have existed between the original shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO were upheld by the CIT(A). 6. In so far as the conclusion of the Bench on the first point of difference of opinion is concerned, the learned Judicial Member took the view for elaborate reasons given in his order that the transfer of shares amounted to sale of shares although in the process transfer of control was also involved and reflected and that it was not the shares that were transferred in addition to the control but the control was transferred in addition to the shares. He, therefore, held against the assessee and in favour of the Revenue on this point. All the arguments addressed to him to show that there was a transfer of the control, were not accepted by him. I shall deal with the reasons a little later. 7. The learned Accountant Member, in a language which could have been avoided, to criticise the observations made by the learned Judicial Member, held that the entire transaction was that of transfer of 100% controlling interest by way of sale by the assessees to another group and that this transaction resulted in generating only a long-term capital gain and that, since the entire proceeds of the gain were invested in specified assets, the entire long-term capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to issuing directions by the higher authorities to the lower authorities to reopen the assessment and, therefore, there was no application of mind by the ITO independent of the instructions given by the superior authorities. This was held to be an additional reason to hold that the reopening of assessment was bad in law. These are, in sum, the main features of the conclusions reached by the learned Accountant Member in contrast to the conclusions reached by the learned Judicial Member. 8. I have already indicated above as to how this difference of opinion led to the formation of the first point, viz., to repeat, whether the transaction of transfer of all the shares was a transaction of transfer of shares or a transaction of transfer of the control over the company and not on the shares. 9. The manner in which this point was framed by the learned Brothers shows that the transaction was in fact a transaction of transfer of shares, because the opening words of the point of difference are that the transaction was a "transaction of transfer of all the shares". What they were differing on was the effect of the interpretation of "transfer of shares." Thus, the point of diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Tribunal, that the controlling interest in a company is always an incidence arising from the holding of a particular number of shares of the company; it cannot be separately acquired or transferred, meaning that it is not an asset capable of being 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 value of the shares, then, the cost of acquisition of the block of shares purchased is what the assessee had paid for holding that block provided always that the transaction is genuine. The High Court held that the cost of acquisition of the shares to the assessee was Rs. 100 per share and not Rs. 76 as held by the Tribunal. This decision is, therefore, an authority for the proposition, which was well accepted by the Accountants as well as the commercial world all over, that controlling interest in a company is not by itself an asset but is only an incidence consequent upon the holding of a particular number of shares and, therefore, controlling interest cannot be perceived independent of the transfer of shares. Since the members have agreed, accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f dividends as and when declared and to receive their capital in the course of winding up as contributories after satisfying the requirements of creditors, the owner of the assets, viz., the company, will have to be regarded, and is regarded under the Companies Act, as the owner of the assets and, therefore, the period for the purpose of determining whether an asset is a long-term capital asset or a short-term capital asset has to be reckoned only with reference to the date of acquisition by the company and not by the shareholders. It was for this reason, in my view, the asset, viz., land, purchased a few weeks before the date of the sale of all the shares could only be considered by itself whether as a short-term capital asset or as a long-term capital asset and it cannot be said that because the entire shares were sold and thereby there was a transfer of controlling interest, the asset purchased a few weeks before the date of sale could not be regarded as an independent transaction without reference to the company, the owner of the asset. If this distinction in the legal position between the shareholder and the company is borne in mind, it will be clear that the transfer of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In other words, by issuing bonus shares, the value of the original shares will come down. The agreement of sale dt. 28th Nov., 1977, which was referred to copiously and clause by clause by the learned Accountant Member in his order, does not refer anywhere to the sale of bonus shares independent of original shares. It speaks of the sale of the entire shareholding which included the bonus shares also. If bonus shares and original shares can be mixed together in such a way that they become one and the same without any distinction in law or in fact, then only one can say that the agreement of sale dt. 28th Nov., 1977, gave rise to a long-term capital gain. As I have endeavoured earlier to show that bonus shares have to be seen separately from the original shares, and that was also the judicial opinion, the issue of bonus shares and their sale did result in a short-term capital gain. It will not be out of place for me to mention here that the learned counsel for the assessee conceded that bonus shares, if could be seen distinctly, are short-term capital assets giving rise to short-term capital gains. 12. The Bombay High Court in the case of Manecklal Premchand vs. CIT (1990) 81 CTR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the record that the assessee had not disclosed the date of issue of the bonus shares, I felt that my prima facie view acquired strength. In a case where the issue concerned was computation of capital gains, nothing could be more important for disclosure than the date of issue of the shares. 14. It is now an admitted fact that neither in the return nor at any point of time thereafter was the date of issue of bonus shares disclosed, although the fact of issue of bonus shares was mentioned. It is no doubt true that the ITO with due diliegence could have acquired this information, but on whose shoulders does the responsibility lie to disclose this information, if this information is regarded as vital? I am of the opinion that the date of issue of bonus shares is vital for the purpose of calculation of either short-term or long-term capital gains and the obligation to disclose this vital information was squarely put upon the assessee by the very specific terms of s. 147. Expln. 1 to s. 147 provides: "Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this reference to me as whether there is a full and true disclosure of all material facts by the assessee on his own. 16. The learned Accountant Member made some references to the relevance of the issue of bonus shares in para 21 of his differing order in which he said that when the undertaking as a whole was sold and the consideration was paid for 100% of the shareholding and when there was no price separately fixed for bonus shares, the question of finding out the date of issue of bonus shares and consequently the question of computing short-term capital gains on the sale of such shares did not arise. As I have already said, this could not be a correct view in view of the decisions of the Bombay and Gujarat High Courts expressing a contrary view. Since the foundation for his view was the sale of the undertaking as a whole without fixing separate price for the bonus shares, but since the bonus shares were to be regarded separately as new assets which came into existence from the date of their issue, this reasoning was not available for the learned Accountant Member to come to his conclusion. Consequently, the date of issue of the bonus shares does arise and it assumes importance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to refer to two decisions, one by the Madhya Pradesh High Court, Indore Bench, in the case of Chunnilal Onkarmal (Pvt) Ltd. vs. ITO (1983) 139 ITR 380 (MP), and the other by the Patna High Court, Ranchi Bench, in the case of Sheo Narain Jaiswal Ors. vs. ITO (1989) 176 ITR 352 (Pat). Both these decisions have a bearing upon the view expressed by the learned Accountant Member on the validity of the reopening of the assessment. He held that the reopening of assessment by the ITO was at the behest of the CIT, i.e., higher authorities, and, therefore, there was no application of mind by the ITO and consequently the reopening was invalid. That was the view given in these two cases. In the case before the Madhya Pradesh High Court, the High Court held that the ITO, on the facts of that case, had not formed any belief that there had been a failure to disclose material facts and had issued the notice under s. 148 of the IT Act under the direction of the CIT and, therefore, the notice of reassessment was invalid and was liable to be quashed. The same is the view expressed by the Patna High Court also. In this case, the CIT and the Addl. CIT held the view that a particular amount shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s may be seen from the above figures were held by the assessee for less than 36 months. The shareholders further made a false statement in the return that the date of acquisition was 18th Dec., 1969 and 21st April, 1970. Here again, technically they may be right in the sense that when a company issues bonus shares, nothing goes out of the pockets of the company, but the fact remains that the assessee became holders of the bonus shares only on October, 1976. The shareholders claimed exemption under s. 54E which is allowable only in respect of long-term capital gains. The short-term capital gains have, thus, escaped assessment altogether. As this escapement of income from assessment is the result of a false statement in the return filed by the assessee, you are requested to examine the scope for action under s. 147(a) and also the scope for launching prosecution under s. 277." It will be seen from this letter written by the CIT to the ITO that the CIT is only requesting the ITO "to examine the scope for action under s. 147(a) and also the scope for launching prosecution under s. 277". There is no specific direction to reopen the assessment which the ITO was duty bound to do. The IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scope for action under s. 147(a). He would have directly given a direction to reopen the assessment under s. 147(a). One may argue that the request made by the CIT to examine the scope for action under s. 147(a) is almost equal to a command. But, in my opinion, this is not legally correct, because the ITO, on verification of the correct facts, may still come to a different conclusion and by conveying that conclusion to the CIT convince him that there was no escapement of income. I am, therefore, of the opinion that this letter, on the strength of which the learned Accountant Member came to the conclusion that the ITO was acting only at the behest of the CIT in reopening the assessments and, therefore, the reassessments were invalid, does not seem to be the correct position. 20. Another point made was that notices under s. 148 were first issued in this case and later on cancelled and again issued and, therefore, they were bad. What actually happened was that the notices under s. 148 were first issued only in two cases without first obtaining the sanction of the CIT. As they were illegal from the procedural angle, they were cancelled. They were again issued after observing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f was bona fide, because the non-disclosure need not be wilful or deliberate in order to give jurisdiction to the ITO under s. 147. Even an innocent mistake committed can give jurisdiction to the ITO to invoke the provisions of s. 147. The Calcutta High Court further held that the jurisdiction of the ITO to issue notice under s. 148 arises immediately after the omission to file the return or the failure to disclose all the material facts therein and no subsequent act on the part of the assessee can take away that jurisdiction. When the assessee fails to submit a correct and complete return in the manner required by s. 139, the assessee commits the default of non-disclosure fully and truly of all material facts. It has not been shown to us that this decision had not been followed later on or reversed. Therefore, the law is that when there is a failure on the part of the assessee to furnish the return under s. 139 correctly and completely by filling in all the columns, there will be failure on the part of the assessee to disclose fully and truly all the material facts, because the return is a legal form and all the required information to the ITO is specifically provided for therein ..... X X X X Extracts X X X X X X X X Extracts X X X X
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