Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs Vijay M. Merchant on 31 July, 1986
Equivalent citations: [1986]19ITD510(MUM)
ORDER
R.L. Sangani, Judicial Member
1. This appeal by the department and the cross-objection by the assessee were heard together.
2. The assessee is an individual. The assessment year is 1971-72. The accounting year ended on 31-3-1971. One of the items of income was long-term capital gains on sale of shares. The shares were of two companies, viz., Bhor Industries (P.) Ltd. and Hakotronics (P.) Ltd. We are concerned with shares of Bhor Industries (P.) Ltd. The capital gain disclosed in the original return on sale of the shares of the company was Rs. 1,43,957. The computation for this amount filed with the return was as follows :
Computation of capital gains on sale of investments-Bhor Industries (P.) Ltd.
Rs. Rs.
(i) Sale of proceeds of 120
equity shares 3,24,000
Less : Market value as on
1-1-1954(120 x 828.57) 99,428
2,24,571
Capital gain 2,24,571
(ii) Sale proceeds of 173
preference shares 1,73,000.00
Less : Market value as on
1-1-1954 (173 X 1465.98) 2,53,654.54
(-)80,614.54
Capital loss (-)80,614
1,43,957
This computation was accepted by the ITO and the assessment was completed. It is to be seen that in this computation the cost of acquisition is taken at the price as on 1-1-1954. Before we proceed further, it is necessary to give few more facts about the shares that were sold. The assessee had by indenture dated 17-9-1956 settled certain shares of Bhor Industries (P.) Ltd. on trust. The income derived by the trust was receivable by his nephew. The shares which were settled were of different categories, viz., equity shares, cumulative preference shares, deferred ordinary shares, etc. These shares had been acquired by the assessee prior to 1-1-1954. After the shares were settled on trust there was reconstitution in the capital structure of the said company and different series of shares were issued for the existing shares. Those shares were received by the trustees for the original shares. The trust which was created by the assessee was revocable after six years. That trust was in fact revoked by the assessee by indenture dated 1-4-1963. As a result of this revocation the shares of the said company which were held by the trustees were reverted to the assessee and the assessee again became owner of these shares. These shares were then sold in the relevant accounting year giving rise to capital gains with which we are concerned.
3. The audit note of the department brought to the notice of the ITO that since the original shares which the assessee had acquired prior to 1-1-1954 and which were settled on trust had not been received back by the assessee at the time of revocation and that since the shares that were sold were different from those original shares acquired by the assessee prior to 1-1-1954, the market price as on 1-1-1954 could not be taken as cost of acquisition and that cost at which the shares had been originally acquired should have been taken as cost of acquisition. The ITO treated this note as information received by him and reopened the assessment. The assessee objected to the reopening of the assessment on the ground that the said audit note could not form valid basis for reopening. The ITO held that material facts were not truly and fully disclosed at the time of original assessment and as such, he had jurisdiction to reopen the same under Section 147(a) of the Income-tax Act, 1961 ('the Act'). He observed that since scrips of shares which were sold were not the same which were originally settled upon the trust, the assessee could not be said to be in possession of the scrips held continuously from 1-1-1954, and as such, he was not entitled to substitute the price as on 1-1-1954. He, accordingly, treated the original price at which the shares had been acquired as price of acquisition and calculated the capital gains on that basis.
4. In the appeal filed by the assessee, the Commissioner (Appeals) held that all the material facts had been truly and fully stated at the time of original assessment and, as such, reopening was invalid under Section 147(6). He, accordingly, cancelled the reassessment order. He did not express any opinion on merits of the case. The department has now come in appeal before us.
5. We have heard the parties. The reasons for reopening are stated by the ITO in his letter dated 16-12-1980 addressed to the assessee in the following words :
From the perusal on records, I find that for the assessment year 1971-72 you have declared long-term capital gains of Rs. 1,56,657 on sale of certain shares of Bhor Industries (P.) Ltd. including the shares which were settled upon trust for the benefit of your nephew Shri C.K. Thakersey. This trust was revoked on 1-4-1963 and the scrips which were changed during the period intervening between the creation of trust and its revocation were retaken over by you. For the purpose of the cost of these scrips in connection with the determination of capital gains, you have exercised an option and substituted the market price as on 1-1-1954 in place of the cost of the shares.
Since the shares retaken over by you were the same shares settled upon the trust, you have wrongly exercised the right of substitution of market price for the cost price by withholding certain facts at the time of original assessment. As a result an income of Rs. 1,28,178 chargeable to capital gains tax has escaped assessment owing to your failure to disclose fully and truly all the relevant material facts necessary for the assessment.
6. It is to be seen that the material allegation of the ITO is as follows :
Since the shares are taken over by you were not the same shares settled upon the trust, you have wrongly exercised the right of substitution of market price for the cost price by withholding certain facts at the time of original assessment.
The allegation is that 'certain facts' have been withheld by the assessee. However, it is not mentioned as to what was that material fact which had not been disclosed at the time of original assessment. The fact that was allegedly withheld should have been clearly brought out by the ITO because it is only failure to state truly and fully the material facts by the assessee that confers jurisdiction on the ITO to reopen the assessment under Section 147(a). If all material facts are fully and truly stated, the ITO is not entitled to reopen the assessment under that provision. In the present case, all the material facts were on record. The whole assessment filed was before the ITO. The trust has been revoked in 1963. There was a circular by the Government dated 12-5-1964 [F. No. 12/l/64-IT(Al)] addressed to all the Commissioners. The position was clarified in the following words :
Where one type of share is converted into another type of share (including conversion of debentures into equity shares), there is, in fact, no 'transfer' of a capital asset within the meaning of Section 2(47) of the Income-tax Act, 1961. Hence, any profits derived from such conversion are not liable to capital gains tax under Section 45(1) of the Income-tax Act. However, when such newly converted share is actually transferred at a later date, the cost of acquisition of such share for the purposes of computing the capital gains shall be calculated with reference to the cost of acquisition of the original share of stock from which it is derived.
Thus, according to the circular, when the shares which are converted and are sold, capital gains are to be calculated on the basis of cost of original shares. Thus, the factum of conversion does not make any material difference in calculating the capital gains. The question whether the price as on 1-1-1954 could be substituted for the price at which the shares had been originally acquired prior to 1-1-1954 would depend upon the interpretation of Sections 45, 49 and 55(2) of the Act. All facts necessary for deciding that question were already on record at the time of original assessment ; that is why in the reasons recorded for reopening no specific fact was mentioned as fact which was not disclosed at the time of original assessment. Thus, in substance the reopening is on the opinion of the revenue audit of a question of law, viz., whether on the facts of this case, price prevailing on 1-1-1954 could be substituted for the price at which the shares had been originally acquired. Opinion of audit on this question of law would not form valid basis for reopening. Since there was no omission to state the material facts, reopening under Section 147(a) was not justified. We, accordingly, confirm the order of the Commissioner (Appeals) cancelling the reassessment order.
7. We now come to the cross-objection. In the cross-objection, the ground raised is that the Commissioner (Appeals) ought to have recorded a finding that the assessee was entitled to substitute the market price as on 1-1-1954 for the cost of acquisition. The Commissioner (Appeals) has not recorded the said finding because of the fact that according to him the reopening itself was bad. Since the assessee wants that this question should be finally decided on merits, we proceed to decide the same.
8. As already stated the circular of the Government to which we have made reference above, clearly lays down that there is no transfer when one type of share is converted into another type of share. Consequently, in the present case when other type of shares were issued in place of shares that were settled on trust, no transfer had taken place. There was substitution of new shares in place of the old shares. There is, thus, continuity. The assessee was originally the owner of the shares. During the period from 1956 to 1963, the trustees were the owners. On revocation of the trust, the assessee again became the owner of the shares. When he became the owner on revocation of trust, he had not paid any price. Consequently, the cost of acquisition would be deemed to be the cost for which the previous owner of the shares acquired the same. The previous owners were the trustees. They had also not acquired for any price. They acquired the same from the assessee. Consequently, the cost of acquisition would be deemed to be the cost for which the assessee originally acquired those shares. This would be the position under Section 49(1), read with the Explanation. Section 55(2)(ii) lays down that for the purposes of Section 49, cost of acquisition in relation to a capital asset, where the capital asset became the property of the assessee by any of the modes specified in Sub-section (1) of Section 49, and the capital asset became the property of the previous owner before 1-1-1954 could be the cost of the capital asset to the previous owner or the fair market value of the assets as on 1-1-1954 at the option of the assessee. In the present case, the assessee would have option to substitute the fair market value as on 1-1-1954, under this provision. He had substituted the same in the computation filed with the original return. There was no error in the said substitution and, as such, the opinion of the ITO that the assessee was not entitled to substitute the fair market value as on 1-1-1954 was not correct. We, accordingly, confirm the cancellation of the reassessment order and restoration of the original assessment order.
9. In the result, the appeal filed by the department is dismissed, while the cross-objection filed by the assessee is allowed.