Commissioner of Income Tax vs T.S. Srinivasan (Decd.) and Others

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 :

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 January,

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 Commissioner of Wealth-tax and Others Vs. S. Ram and Others, , 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. Income Tax Officer, Ernakulam and Another,

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 January, 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 February, 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 February, 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 January, 1954,

their value as on 1st January, 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. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, . 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 January, 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 December, 1996 [S.

Ram vs. CIT, 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 January, 1954, should be taken the value as on 1st January, 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.