Commissioner of Income Tax vs Lady Hirabai C. Jehangir

T.D. Sugla, J.—The questions of law referred to us in this reference at the instance of the Department read thus :

"(i) Whether, on the facts and in the circumstances of the case, the assessee suffered capital loss of Rs. 41,92,021 ?

(ii) Whether, on the facts and in the circumstances of the case, capital loss of Rs. 41,92,021 was liable to be set off against capital gains of Rs. 4,07,527 in the assessment year 1966-67 ?"

During the previous year relevant to the assessment year 1964-65, the assessee sold 4,509 shares of the face value of Rs. 100 each, three shares of the face value of Rs. 50,000 each and three shares of the face value of Rs. 40,000 each of Cowasjee Jehangir Co., (Pvt.) Ltd., for a sum of Rs. 32,54,892. She exercised the option in the matter of computing the capital gains with reference to the market value of these shares as on January 1, 1954 instead of the cost price. The market value of these shares as on January 1, 1954 was Rs. 74,73,930. Finding, however, that in March, 1958, the face value of each of the above variety of shares was reduced by 90%, the amount representing the said 90% being refunded to the shareholders in cash or in kind, the Income Tax Officer held that the market value of these shares as on January 1, 1954, should be taken at 1/10th of the then market value, i.e., at Rs. 7,47,393. Thus as against the assessee''s claim that she suffered a capital loss of Rs. 41,92,021, the Income Tax Officer computed the capital gains at Rs. 25,07,499.

During the previous year relevant to the assessment year 1966-67, the assessee earned capital gains amounting to Rs. 4,07,527 which she wanted to set off against the capital loss suffered by her in the assessment year 1964-65 amounting to Rs. 41,92,021. This claim was disallowed by the Income Tax Officer as he had not accepted the assessee''s claim of capital loss of Rs. 41,92,021 for the assessment year 1964-65.

The Appellate Assistant Commissioner did not accept the assessee''s claim in full and the matter was carried further to the Tribunal According to the Tribunal, the real issue involved in the appeal for the assessment year 1964-65 was whether the shares which were sold by the assessee in the previous year were the very shares of which the market value as on January 1, 1954, was admittedly Rs. 74,73,390. In other words, whether the shares maintained their identity throughout the period. The subsequent fact of the payment of the capital equal to 90% of the face value in 1958, according to the Tribunal, did not, in any way, alter the continuity and/or identity of the shares. The identity and continuity remaining the same, the Tribunal further held that the market value of the shares as on January 1, 1954, was the value to be taken into account for the purposes of computing the capital gain or loss in the assessee''s case. For its conclusion, the Tribunal derived support from the Supreme Court''s decision in the case of Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, . As a natural corollary, the Tribunal allowed the assessee''s appeal for the assessment year 1966-67.

It is fairly stated by Mr. Bhatia, learned counsel for the Department, that it was not possible for him to argue that the identity of the shares was lost or was not maintained because of what happened in 1958. The assessee continued to possess the very shares held by her long before January 1, 1954, and which she sold during the previous year relevant to the assessment year 1964-65. The assessee had, therefore, the option to ask for substitution of the fair market value as on January 1, 1954, in place of the cost/purchase price for the purpose of computing the gain or loss. It is true that the repayment of capital equal to 90% of the face value of the shares in March, 1958, did affect the value of the shares as on January 1, 1954. Since, however, in view of the admitted position that the identity of shares remained the same and, in any event, the extent of interest represented by each share in the assets of the company certainly remained the same and having regard to the fact that reduction in the face value of shares was an event subsequent to January 1, 1954, it is not possible to import the subsequent facts for the purposes of valuing these shares as on January 1, 1954. It is, as we have already stated, not in dispute that the shares sold during the previous year are the shares which the assessee owned and possessed from long before January 1, 1954. Once that fact is accepted, the valuation of these shares as on January 1, 1954, will have to be as it was on that day and no adjustment in that regard would be justified on account of subsequent events. The Tribunal, in our view, correctly drew support in this regard from the Supreme Court''s decision in Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, .

Accordingly, both the questions are answered in the affirmative and in favour of the assessee.

No order as to costs.