Commissioner of Income Tax vs Asbestos Cement Ltd.

Mrs. Sujata Manohar, J.—This is an application under s. 256(2) of the IT Act at the instance of the Revenue. The Revenue desires that the following questions should be raised by the Tribunal and referred to us.

"(1) Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the development rebate reserve (D.R. Reserve) appearing in the balance sheet as on 31st March, 1973 of Hindustan Ferodo Ltd. is nothing different in character from other reserves and thus includible in the reserves for the purpose of determination of cost of improvement of shares of the said company ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in setting aside the CIT''s order under s. 263 and restoring the IAC''s order dt. 18th Aug., 1976 to the extent indicated in question No. 1 above ?

(3) Without prejudice to the above two questions, whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the assessee''s appeal partly and holding that the development rebate reserve is includible in the general reserves for the purpose of arriving at the cost of improvement of the shares of Hindustan Ferodo Ltd. when in fact the assessee''s claim of cost of improvement of the shares does not survive in view of the Tribunal''s order dt. 23rd May, 1978 in ITA No. 2251/Bom/1976-77, by which the ITO''s working of computation of capital gains in the assessment order dt. 7th Jan., 1975 has been restored in toto ?"

The relevant assessment year is 1974-75. The assessee-company is a foreign company and is being assessed to Income Tax through its agents M/s Asbestos Cement Ltd. During the asst. yr. 1974-75, the assessee- company sold a total of 1,50,000 shares of an Indian company namely, Hindustan Ferodo Ltd. to the LIC of India and the UTI, (75,000 shares each to both the companies). The shares were sold at a price of Rs. 22 per share, which was the rate claimed to have been approved by the Government. The assessee-company had computed capital gains in Pound Sterling and then converted the figure to Indian rupees for the purpose of Indian taxation. In the computation of capital gains, the assessee-company in its original return of income dt. 29th June, 1974, had calculated, inter alia, the capital gains in Pound Sterling after considering the cost of improvement of these shares. However, the assessee-company filed a revised return in which the assessee- company withdrew its claim for deduction of cost of improvement of the shares while calculating capital gains. As per the revised return, therefore, capital gains were calculated without taking into account the cost of improvement of shares.

The ITO by his order dt. 7th Jan., 1975, therefore, completed the assessment by computing capital gains without taking into account the cost of improvement of these shares. We are not concerned in this reference with the other controversies which were raised relating to the calculation of capital gains. The order of the ITO, ''A'' Ward, Thane, is of 7th Jan., 1975.

Being aggrieved by this order the assessee-company filed an appeal before the AAC. The assessee-company in this appeal raised an additional ground to the effect that the cost of improvement of these shares should be allowed to the assessee-company as contemplated under s. 48(ii) of IT Act, 1961 as claimed in the original return of income filed by the assessee. (We are not concerned with the other grounds of appeal).

The AAC by his order dt. 18th Aug., 1976, allowed the appeal of the assessee-company. He directed the concerned ITO to deduct the cost of improvement of shares while working out the capital gains arising out of the sale of these shares. Accordingly, the matter was remanded and the IAC who had jurisdiction over the assessee-company gave effect to this order of the AAC. The IAC by his order dt. 24th Nov., 1976 allowed the cost of improvement of these shares as claimed by the assessee. In computing the cost of improvement of shares the IAC took into account development rebate reserve also.

The CIT, however, thereupon issued a notice under s. 263 of the IT Act asking the assessee-company to show cause why the order by the IAC should not be set aside and he be asked to give effect to the appellate order in accordance with law. The CIT after hearing the assessee-company passed an order dt. 30th Nov., 1977, directing the IAC to recompute capital gains without taking into account development rebate reserve while calculating the cost of improvement of these shares.

From this order the assessee filed an appeal before the Tribunal. The Tribunal by its order dt. 24th May, 1980, partly allowed the appeal of the assessee-company and set aside the order of the CIT as regards development rebate reserve. The Tribunal held that while calculating the cost of improvement of shares the development rebate reserve should also be taken into account.

In the meanwhile, however, from the order of the AAC dt. 18th Aug., 1976, the Department had filed an appeal before the Tribunal. One of the grounds of appeal was that the AAC should not have permitted the assessee-company to raise an additional ground relating to the cost of improvement being taken into account while calculating capital gains. In this appeal being Appeal No. 2251/Bom/1976-77, the Tribunal by its order dt. 23rd May, 1978, allowed the appeal of the Department and held, inter alia, that the AAC should not have permitted the additional ground relating to cost of improvements be raised. The Tribunal set aside the order of the AAC and restored the order of the ITO dt. 7th May, 1975. In other words, by this order of the Tribunal, capital gains were computed without taking into account the cost of improvement of shares. From this order the assessee-company applied for a reference under s. 256(1) of the IT Act which application was granted by the Tribunal. One of the questions which was referred to this High Court for determination was whether the AAC was justified in permitting the assessee- company to raise an additional ground of appeal relating to the cost of improvement of these shares.

This reference application from the order of the Tribunal of 23rd May, 1978 was pending in the High Court at the time when the Tribunal passed its order dt. 24th May, 1980 in respect of the appeal filed by the assessee from the CIT''s order under s. 263 of the IT Act, 1961. The Tribunal, therefore, in its order of 24th May, 1980, while holding that the cost of improvement would include the consideration of development rebate reserve, further observed that this direction of the Tribunal would be subject to the outcome of the reference application pending before this High Court in respect of the main order of the Tribunal of 23rd May, 1978.

This reference application has now been decided by the High Court and its judgment and order is reported as Asbestos Cement Ltd. Vs. Commissioner of Income Tax, . The High Court has, inter alia, answered the question relating to the additional ground of appeal being raised before the AAC in favour of the assessee. The Court has held that the AAC had the power to consider the additional ground raised by the assessee for the first time at the appellate stage. The High Court has also observed that the controversy regarding the addition of any cost of improvement of shares was not before it for determination because that question was not decided by the authorities below. In the light of its answer to that question this issue may have to be examined in accordance with law by the Tribunal or the AAC. In other words, the Tribunal will now have to consider the order of the AAC in respect of the additional ground of appeal on merits which the Tribunal has not yet done. The Tribunal will, therefore, have to consider whether in calculating capital gains in respect of these shares the cost of improvement will have to be taken into account or not ? Only if the Tribunal upholds the order of the AAC and comes to the conclusion that the cost of improvement of these shares has to be taken into account while calculating capital gains will the question arise as to whether development rebate reserve will have to be taken into account while calculating the cost of improvement. Obviously in the light of the second order of the Tribunal of 24th May, 1980, if the Tribunal now holds that the cost of improvement has to be considered while calculating capital gains, then the development rebate reserve will also have to be considered as forming part of the cost of improvement. To that extent, therefore, the Department is justified in coming at this stage before us by way of a reference on the question whether development rebate reserve forms a part of the cost of improvement of these shares.

However, the main question as to whether the cost of improvement should or should not be considered while calculating capital gains is yet to be decided by the Tribunal. If the Tribunal holds that the cost of improvement should not be considered, then the question of inclusion of development rebate reserve in the cost of improvement becomes academic. This question will have to be considered only if the Tribunal holds that the cost of improvement has to be taken into account while calculating capital gains. Possibly from any finding on this question, the aggrieved party can come by way of reference at that stage. Therefore, the appropriate stage for raising the questions which are before us today would be the stage after the Tribunal decides the main question as to whether the cost of improvement of shares is to be taken into account in the present case while calculating the capital gains from the sale of these shares. It will, therefore, be open to the Department at that stage to raise these questions. We do not see what useful purpose would be served by our considering these questions at the present time. Hence, no useful purpose would be served by entertaining the present application at this stage.

The rules is, therefore, discharged, subject to the above observations. In the circumstances there will be no order as to costs.