TMI Blog1979 (11) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... hat he had suffered long-term capital loss on sale of certain bonus shares. The ITO, ' C ' Ward, jodhpur, by his order dated December 15, 1970 (annex. A), assessed the petitioner for the said assessment year on a total income of Rs. 1,98,381. He held, inter alia, that the petitioner had made no fresh purchase of shares during the year but had sold certain shares of Maharaja Shree Umaid Mills Ltd., between the period March 5, 1969, and March 30, 1969, at the price quoted in the official report and quotations of the Calcutta Stock Exchange Association Ltd., and had thereby incurred a loss of capital gains (long-term nature) of Rs. 1,57,792, which would be carried forward. Aggrieved by the assessment order on certain other points with which we are not concerned, the assessee-petitioner filed an appeal before the AAC of Income-tax, Range A, Jaipur, who by his order dated June 14, 1971 (annex. B), dismissed the appeal. Thereafter, by his order dated October 14, 1971, the ITO rectified his order dated December 15, 1970, under s. 154 of the Act. However, on March 28, 1974, the petitioner received a notice dated March 27, 1974, under s. 147 of the Act (annex. C) from the ITO, C-Ward, Jodhp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to state that it was represented to him on behalf of the assessee that the shares of Maharaja Shree Umaid Mills Ltd. were regularly quoted in the stock exchange and that the sale was effected by the assessee at the prevalent market rate. A share quotation list was also shown to him and, in these circumstances, he accepted the version given by the assessee without making any further inquiry regarding the market rates of the shares, as, at that time, there was no material before him to suspect that the fair market value of the shares was higher than the sale price given out by the assessee. He has further stated that on March 26, 1974, he received a letter through Shri C. S. Jain, IAC, jodhpur Range, jodhpur, from Shri S. M. Bagai, Deputy Director, Directorate of Inspection (Investigation), Special Cell, New Delhi, dated March 21, 1974, along with some annexures and also a telegram by Shri Bagai from Calcutta giving certain information regarding the shares of Maharaja Shree Umaid Mills Ltd., Pali, which had been collected by the said director, Shri S. M. Bagai. The telegram by Shri Bagai from Calcutta indicated that on inquiries he had found that the shares of the said company wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad him to believe that the income chargeable to tax had escaped assessment. It is only the opinion of Shri Bagai contained in the letter, Ex. A-1, but based on no material, that has led to the issuance of the impugned notice. In this connection, he has submitted that the impugned notice has been issued on account of vague feeling and suspicion entertained by Shri Bagai as well as the ITO, that the quoted value of the shares was not the prevalent market value. Such a vague feeling and suspicion, it is urged, cannot give rise to a belief based on reasonable ground. It is submitted that there was no error in the original assessment proceedings and that the ITO had not committed any error of law in making the quoted value of the shares as the basis for determining the prevailing market value. He has argued that the ITO did not apply his mind to the facts of the case but issued the notice merely on the basis of Shri Bagai's letter dated March 21, 1974. It is submitted by him that the notice for reopening the assessment has been given only on the ground that the alternative method of valuing the shares on the basis of break-up value should have been adopted instead of quoted value. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent. of the value so declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer : Provided that this sub-section shall not apply in any case (a) where the capital asset is transferred to the Government, or (b) where the full value of the consideration for the transfer of the capital asset is determined or approved by the Central Government or the Reserve Bank of India and the adequacy of the full value of the consideration so determined or approved is not questioned by the assessee." As stated above, the case of the revenue is that the fair market value of the shares transferred by the assessee as on the date of the transfer exceeded the full market value of the consideration declared by the assessee in respect of the transfer of the shares by an amount of not less than fifteen per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riving at a valuation. (4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declare dividends, if the set-back is temporary, then it is perhaps possible to take the estimate of the value of the shares before set-back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses. (5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process. (6) As in Attorney-General of Ceylon v. Mackie [1952] 2 All ER 775 (PC), a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends. In setting out the above principles, we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such section 147 of the Act of 1961 would get attracted. After giving the matter our earnest consideration, we find it difficult to accept the above contention. It was open, as already mentioned, to the Income-tax Officer at the time of making the original assessment, to adopt one of the three methods mentioned in rule 33 for computing the taxable income of the assessee. Discretion was vested by rule 33 in the Income-tax Officer for the purpose of making his choice of the methods, and the same was to be exercised in a proper and judicious manner. There is nothing before us to show that the discretion was not exercised by the said officer in a proper or judicious manner. It is also not suggested that the Income-tax Officer was actuated by some oblique motive. From the mere fact that the method selected by him was such as resulted in lower tax liability to the assessee compared to the liability which would have resulted from the adoption of the other method, it would not follow that the discretion was not exercised in a proper and judicious manner. The taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not in a partisan manner. Although i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, among the factors which govern the consideration of the buyer and the seller where the one desires to purchase and the other wishes to sell, the break-up value of a share as on liquidation hardly enters into consideration where the shares are of a going concern. The basic yield method in cases where shares are quoted and transactions take place on the share market may not be different, but where shares are not quoted, it is, in these latter cases, that the yield must be determined after taking into account various other factors. Now, in the present case, the ITO made the following observations at the time of making the assessment: "Shares which have been sold are all quoted on stock exchange at the prevailing market rates and are verified from the quotations lists. " The assessee's case is that the quotation list was placed before the ITO at the time of assessment. It is further submitted that the shares of the company were regularly quoted on the Calcutta Stock Exchange. In support of this assertion the assessee has relied upon bye-laws 18 and 20 of the bye-laws of the Calcutta Stock Exchange which read as under: " Quotations 18.-The prices of securities dealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the ITO made any further inquiries or collected any material before issuing the impugned notice. It is, therefore, necessary to closely examine the contents of the letter, Ex. A-1, which is reproduced below in extenso: " S. M. Bagai, Deputy Director Through special messenger most immediate D.O. No. DI(I)/SCB(1)Inv/91-73-74/,1847 Directorate of Inspection (Investigation), Special Cell, 4th Floor, Super Bazar, Connaught Circus, New Delhi, dated the 21st March, 1974. My dear Jain, Sub.-Maharaja Shree Umaid Mills Ltd., Pali I have received your D.O. No. C-Misc. (56)/73-74/229 dated 19th March, 1974, today through a special messenger enclosing a statement regarding transfer of shares of the captioned company and also statement regarding shareholding of that company on various dates. You have just confirmed to me on telephone that you have retained a copy of the statements for your own record. 2. I am enclosing herewith a statement containing certain financial information regarding the captioned company which has been extracted from the Bombay Stock Exchange Directory. According to this statement the paid up equity capital of the company is Rs. 72,00,000 divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case J. get some more relevant information, I shall send the same to you and the I. A. C., Bikaner, directly. Meanwhile I would request you to kindly obtain the value of the shares of the company as on 31-3-1969 by the break-up method and by the maintainable profit method. These two values may be worked out on the basis of Circular No. 2(W.T.) of 1967 and communicated to me telegraphically C/o. Shri V. Subramanyan, IAC, Range XXI, Aayakar Bhawan, P-7, Chowringhee Square, Calcutta. You may also convey this information to the CIT, Rajasthan, and the IAC, Bikaner, so that the information reaches the concerned Wealth-tax Officers, Income-tax Officers and Gift-tax Officers, who would be concerned with the case of the other shareholders in Rajasthan. With regards, Yours sincerely, (Sd.) S. M. Bagai. Encl. : as above. Shri C. S. Jain, I. A. C., Jodhpur." The first point brought out in this letter is that the book value per equity share rose from Rs. 318.55 for the year ending 31st December, 1965, to Rs. 401, for the year ending 31st December, 1970, and thus the earning per share rose from Rs. 8.37 to Rs. 44, per share during this period. The dividend percentage also ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to in the letter. Admittedly, no inquiries were made by the ITO after receipt of the letter, Ex. A-1, so as to constitute " information" giving rise to a reasonable belief in the mind of the ITO. The mere fact that the quotation of the shares in the Calcutta Stock Exchange had fallen is not at all a clinching circumstance to give rise to a reasonable belief that the transactions were manipulated. At the most, this fact may have led Shri Bagai to suspect that the transactions may be manipulated but that, in our opinion, cannot constitute a material for forming a belief that income chargeable to tax has escaped assessment. In Smt. Nirmala Birla v. WTO [1976] 105 ITR 483 (Cal) [FB], a similar question had arisen as to whether reopening of the assessment was justified on the ground that the market quotations were manipulated and based on collusive transactions. The court came to the conclusion that there was material before the officer, particularly in view of the internal application of his mind, on account of which it could not be held that the officer did not form his own belief. The learned Chief justice, who wrote the leading judgment, has referred to a mass of evidence c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1968] 67 ITR 11 (SC), it was held that the expression " information" in the context in which it occurs must mean instruction or knowledge derived from an external source concerning facts or particulars or as to law relating to a matter bearing on the assessment. It was further observed that the High Court exercising jurisdiction under art. 226 of the Constitution has power to set aside a notice issued under s. 147(b) of the I.T. Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. In Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC), it was observed that two conditions must be satisfied before the ITO can act under s. 34(1)(b) (which is equivalent to s. 147(b) of the Act of 1961 must have information which comes into his possession subsequent to the making of the original assessment order, and that information must lead to his belief that income chargeable to tax has escaped assessment. In ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, the Supreme Court observed as follows (p. 448) : As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was amended and the new s. 59, for the first time, gave power to the Controller to assess or reassess the property escaped in assessment. The Asst. Controller then issued a notice to the trustees in exercise of the powers conferred by s. 59 of the Act on the ground that property chargeable to estate duty had escaped assessment by reason of undervaluation. It was contended on behalf of the department that the opinion expressed by the CBR about the correct mode was " information " which led to the appellant entertaining a reasonable belief that the property assessed to estate duty had been undervalued. It was held that the opinion expressed by the Board of Revenue as to valuation was clearly " information " in the sense in which that expression has been held to have been used in these enactments. In our opinion, the rationale of that case has no application to the facts and circumstances of the present case. In the first place, the order of the Board of Revenue was an order passed inter partes by a Tribunal which was exercising quasi-judicial function. Therefore, the opinion of the Board expressed in the appeal filed by the trustees was held to constitute " information ". Shri Baga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if, on reappraising the material considered by him during the original assessment, the ITO discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this court in Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC), CIT v. A. Raman Co. [1968] 67 ITR 11 (SC) and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831 (SC) and we do not believe that the law has since taken a different course. Any observation in Kalyanji Mavji Co. v. CIT [1976] 102 ITR 287 (SC), suggesting the contrary, do not, we say with respect, lay down the correct law." Learned counsel for both the parties have cited a number of authorities on the point as to what constitutes " information " within the meaning of s. 147 of the Act, but we do not consider it necessary to discuss all of them, as, in our view, having regard to the state of law now settled by a series of decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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