Commissioner of Income-tax vs D.V. Paranjape

B.P. Colabawalla, J.—By this Income Tax Reference under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"), the following questions of law, arising out of the order of the Tribunal relating to the Assessment Year 1978-79, have been referred for opinion of this Court:-- "(A) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the re-opening of the assessment u/s. 147(a) of the Income-tax Act was valid in law inasmuch as the date of bonus shares was not disclosed and in rejecting the contention of the assessee that the reopening of assessment was invalid because:

(I) it was not done at the behest and direction of CIT without applying independent mind.

(II) The fact of issue of bonus shares was already declared in the immediately preceding year and there could not be "non-disclosure" of facts already known to the department and

(III) In the context of the fact that the entire controlling interest with entire shareholding was transferred, the date of issue of bonus shares was irrelevant and immaterial.

(B) Whether on the facts and in the circumstance of the case and on interpretation of agreement dated 28.11.1977 between the assessee and Thadani Group, the Tribunal was justified in rejecting the contentions of the assessee that the subject matter of transfer was the whole of controlling interest in PEFCO LTD. in the form of transfer of shares and that therefore the entire amount of gain was long term capital gain?

(C) Whether on the facts and in the circumstances of the case and on interpretation of agreement dated 28.11.1977 under reference, the Tribunal was justified in concluding that the controlling interest in the PEFCO LTD. was not by itself an asset but it was only an incidence consequent upon the holding of a particular number of shares and that therefore controlling interest cannot be perceived independent of transfer of shares and that the capital gain had to be calculated separately for original and bonus shares according to the date of holding?

(D) Whether the learned Third Member was justified in referring to the peculiar wording of the question referred to him by the learned differing Members and then holding that there was an agreement between them that there was a transfer of shares?

(E) Whether the Tribunal was right in holding that since the bonus shares were a new and separate asset the date of their acquisition was the date of their issue and it would not relate back to the date of acquiring original shares?"

To understand how these questions arise for our consideration, it would be necessary to set out few facts:--

The Assessees were the holders of all the shares of one M/s. Paranjpe Engineering & Foundry Co. Ltd. (PEFCO Ltd). On 30th October, 1976 the company issued bonus shares in the ratio of one bonus share for one original share. On 28th November, 1977 the Assessees (called vendors) agreed to sell all their shares (including the bonus shares) in PEFCO Ltd. to one Thirani Group (called purchasers). After the sale, the Assessee filed their returns. The material part of one of the returns was annexure "A" relating to capital gains. The Income Tax Officer completed the assessment granting exemption under Section 54(c) in respect of capital gains. The assessment order mentioned that "these shares originally acquired by the assessee in 1970 for Rs. 1,22,000/- including bonus shares............ The statements of the assessee are verified with the record and the claim of the assessee is accepted." Subsequently, on 14.11.1983, the Income Tax Officer issued a notice for re-opening the assessment under Section 148 on the ground that the bonus shares were issued in October, 1976 which were sold in November, 1977 and the period of holding of those shares was less than 36 months. He stated that the short term capital gains arising out of their transfer had escaped assessment by reason of the omission and failure on the part of the Assessee to disclose truly and fully all the material facts necessary for the assessment for that year. This notice was cancelled and another notice of re-opening was issued. The Assessee replied stating, inter alia that their interest, stake or holding in the company was a certain percentage in the total equity thereof and that full and true particulars about the sale of that interest viz. certain percentage in the equity of the company, had been given by the Assessee. The letter went on to state that the fact that the shares sold, including bonus shares, was known to the Income Tax Officer and the issue of those bonus shares was shown in the return and so was the dividend received thereon. It was contended that the Assessees'' interest in the company remained undisturbed 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, the income was received by way of long term capital gains and the question of escapement of that income did not arise. The Assessee stated that "I have fully and truly stated in the return that my interest or stock in the company with percentage was sold away." Despite this, the Income Tax Officer re-opened 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 specified assets. He has also observed that the assessee''s contentions were baseless in view of various judicial decisions according to which bonus shares are capital assets and they must be taken to be held by the shareholders from the date of issue and not from the date when original shares were issued. The Commissioner confirmed the Income Tax Officer''s order on the ground that although the assessee could have put forward its contention, it was the duty of the assessee to give particulars including date of the issue of the allotment of bonus shares in view of the decision of the Gujarat High Court in the case of Commissioner of Income Tax, Gujarat-I Vs. Chunilal Khushaldas, that the date of acquisition of bonus shares is the date of issue by their company. He also rejected the assessee''s contention that the Income-tax Officer could have discovered with due diligence some account books or other materials. The Commissioner recorded that the assessee had contended that the entire shareholding which involved controlling interest, had been transferred and that bonus shares were issued by transferring a part of the reserve account to capital account and both were shareholders'' funds. He specifically rejected the assessee''s appeal both on the reopening and on merits.

Though, five separate questions are referred by the Tribunal for the opinion of this Court, in effect, the Tribunal considered only three questions. The first question which was agitated by the Assessee, related to the validity of the re-opening of the assessments. The second question related to the merits of the case and involved the issue as to whether, what was transferred was only the rights of the shareholders or those rights along with the control over the company. The third question involved was whether the Assessees were entitled to the benefit of Section 54E of the Act in respect of the transfer of bonus shares. There was a difference of opinion between the learned Judicial Member and the learned Accountant Member. The learned Judicial Member held that the Assessee had not fully and truly disclosed the material facts, and therefore, the Assessing Officer was justified in re-opening the assessment under Sections 147 and 148 of the Act. On the other hand, the learned Accountant Member was of the opinion that such re-opening in the present case was legally invalid. On the second question, the Judicial Member held that the transfer of control was reflected in the higher price of the shares and the reality was not that the shares were transferred in addition to the control of the company, but the control was transferred in addition to the shares. He, therefore, held that the Assessee was not entitled to the benefit of Section 54E in respect of transfer of the bonus shares. On the other hand, the learned Accountant Member held that in view of the global nature of the transaction involving the transfer of the whole undertaking as a going concern, and since 100% controlling interest in a company was transferred from one group to another group, the entire resultant gain was in the nature of long term capital gains and was entitled to the benefit of Section 54E of the Act, in view of the fact that the entire sale proceeds were invested in the eligible assets. In view of the aforesaid differences of opinion, the matter was referred to the Hon''ble President under Section 255(4) of the Act. The Hon''ble President held that the transaction had resulted in the transfer of shares, and transfer of certain interest was only a consequence and incidence of the transfer of the shares. In view thereof, he held that the sale of bonus shares resulted in short term capital gain. In coming to this conclusion, the Hon''ble President relied upon a judgment of this court in the case of Manecklal Premchand Vs. Commissioner of Income Tax, . He also held that there was a failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessment in the original returns filed for the Assessment Year 1978-79, and therefore, re-assessment was justified in law. On the delivery of the opinion of the Third Member, the Assessees'' Appeals were disposed of in consonance with the view of the majority of the members, and accordingly, dismissed. This is how the Reference has come up before us.

The only issue that was canvassed before us by the Assessee was whether the sale of the bonus shares ought to be taxed as short term gains or as long term gains. Consequently, if they were to be taxed as long term gain, whether the Assessee was entitled to the benefit under Section 54E of the Act. On this issue, Mr. Naniwadekar, the learned counsel appearing on behalf of the Respondent/Assessee fairly conceded that this issue is covered against the Assessee by the judgment of this Court in the case of Manecklal Premchand (supra). In the said judgment, this Court, after relying upon a Gujarat High Court Judgment in the case of Chunilal Khushaldas (supra), held that the bonus shares issued by a company are acquired by a shareholder when they are issued, and they must be taken to be held by the shareholder from the date of their issue, and not from the date when the original shares in respect of which they are issued, were acquired by the shareholder.

In view of the clear dictum of this Court in the case of Manecklal Premchand (supra), we are of the view that Questions (B) to (E) will have to be answered in the affirmative, i.e. in favour of the Revenue and against the Assessee. Question (A) was fairly not pressed before us and hence we have not given any answer in relation thereto. The Income Tax Reference is disposed of accordingly. No order as to costs.