Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the value of the shares as on 1st Jan., 1954, should not be taken by averaging the cost taking into account the bonus shares received subsequently ?

High Court Of Madras

CIT vs. T.S. Srinivasan (Decd.) & Ors.

Sections 2(42A), 45(1), 48, 52(2), 55(2), WT 7

Asst. Year 1974-75

Thanikkachalam & S. M. Sidickk, JJ.

T.C. Nos. 983 to 985 of 1981

9th January, 1997

Counsel Appeared

C.V. Rajan, for the Revenue : S. Sridhar, for the Assessee

JUDGMENT

Thanikkachalam, J. :

At the instance of the Department, the Tribunal referred the following questions for the opinion of this Court under s. 256(1) of the IT Act, 1961 :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the value of the shares as on 1st Jan., 1954, should not be taken by averaging the cost taking into account the bonus shares received subsequently ?

Whether the Tribunal was right in holding that the provision for gratuity should be treated as a liability and should be deducted from the value of the assets for finding out the break up value of the shares? Whether the Tribunal was right in holding that the provisions of s. 52(2) could not be invoked in the assessee’s case ?”

Insofar as question No. 2 is concerned, the point for consideration is whether the provision for gratuity should be treated as a liability and should be deducted from the value of the assets for finding out the break-up value of the shares. A similar question came up for consideration before this Court in CWT vs. S. Ram (1983) 37 CTR (Mad) 158 : (1984) 147 ITR 278 (Mad) : TC 63R.462, wherein this Court held that the provisions of Expln. II(ii)(f) to r. 1D of the WT Rules, 1957, will not apply and for determining the value of unquoted shares for purposes of wealth-tax, gift-tax and estate duty, their value will have to be ascertained under the break-up value method after deducting the provision for gratuity based on actuarial valuation from the value of the assets of the company. Inasmuch as the order passed by the Tribunal on this aspect is in accordance with the decision of this Court cited supra, we answer question No. 2 in the affirmative and against the Department.

Insofar as question No. 3 is concerned, the point for consideration is whether the provisions of s. 52(2) can be invoked on the facts of this case. A similar question came up for consideration before the Supreme Court in K. P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) : TC 22R.105 wherein the Supreme Court held that sub-s. (2) of s. 52 of the IT Act, 1961, can be invoked only where the consideration for the transfer of a capital asset has been understated by the assessee, or, in other words, the full value of the consideration in respect of the transfer is shown at a lesser figure than that actually received by the assessee, and the burden of proving such understatement or concealment is on the Revenue. The sub-section has no application in the case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him. In the present case, on the facts, the Tribunal came to the conclusion that there is no understatement or concealment. Therefore, the Tribunal held that the provisions of s. 52(2) of the IT Act, 1961, would not be applicable to the facts of this case. Inasmuch as the order passed by the Tribunal on this point is in accordance with the above cited decision of the Supreme Court, we answer the question referred to us as question No. 3 in the affirmative and against the Department.

Insofar as question No. 1 is concerned, the point for consideration is whether the Tribunal was correct in holding that the value of the shares as on 1st Jan., 1954, should not be taken by averaging the cost taking into consideration the bonus shares received subsequently. In the present case, for the asst. yr. 1974-75, the assessee, an HUF, sold on 14th July, 1973, 500 shares in T. V. Sundaram Iyengar & Sons (P.) Ltd., Madurai. Those 500 shares formed part of 721 shares, which the assessee got on 28th Feb., 1971, on account of the merger of Madras Auto Service (P) Ltd., a subsidiary of T. V. Sundaram Iyengar & Sons (P.) Ltd. In exchange for 721 shares of Madras Auto Service (P) Ltd., the assessee got 721 shares of T. V. Sundaram Iyengar & Sons (P) Ltd. The assessee computed the capital gains thereon at Rs. 500 before applying s. 80T. The ITO held that since the assessee acquired the shares, which were the subject-matter of sale, on 28th Feb., 1971, the sale had taken place within five years and hence the profits on sale made would be short-term capital gains and not long-term capital gains.

In the present case, the amalgamating company is Madras Auto Service (P) Ltd., and the amalgamated company is T. V. Sundaram Iyengar & Sons. It is manifest that the 524 shares in T. V. Sundaram Iyengar & Sons acquired by the assessee consequent on the amalgamation of Madras Auto Service (P) Ltd., with T. V. Sundaram Iyengar & Sons Ltd., in December, 1970, should be treated as long-term capital assets having been held by the assessee initially as Madras Auto Service (P) Ltd. shares from before 1954, the total period being more than 60 months up to the date of sale [see s. 2(42A)]. The cost of acquisition of those T. V. S. Ltd. shares will be the cost of acquisition of the Madras Auto Service (P) Ltd. shares [see s. 55(2)] r/w s. 47(vii)]. Since the original Madras Auto Service (P) Ltd. shares were admittedly acquired before 1st Jan., 1954, their value as on 1st Jan., 1954, has to be adopted at the assessee’s option. With regard to the original shares, there is no warrant for averaging the cost taking into account the bonus shares subsequently received by the assessee having regard to the decision of the Supreme Court in Shekhawati General Traders Ltd. vs. ITO 1972 CTR (SC) 120 : (1971) 82 ITR 788 (SC) : TC 22R.514. Therefore, the Tribunal held that the original shares in question were long-term capital assets for the purpose of capital gains in view of the provisions of ss. 2(42A), 47, 49 and 55(2). The cost of acquisition of shares to the assessee for computing the capital gain should be the cost as on 1st Jan., 1954, which the assessee had adopted. This view taken by the Tribunal is supported by an earlier decision of this Court in T. C. No. 249 of 1980, judgment dt. 12th Dec., 1996 [S. Ram vs. CIT (1997) 143 CTR (Mad) 65], wherein this Court, by following the decision of the Supreme Court in Shekhawati General Traders Ltd.’s case (supra), held that the value of the original shares acquired before 1st Jan., 1954, should be taken the value as on 1st Jan., 1954, when the assessee exercised its option. For original shares, we cannot take the average value of both the original shares and the bonus shares. Inasmuch as the order passed by the Tribunal on this aspect is in accordance with the earlier decision of this Court cited supra, we answer the question referred to us as question No. 1 in the affirmative and against the Department.

No costs.

[Citation: 236 ITR 612]

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