Calcutta High Court
Goodricke Group Ltd. (No. 2) ... vs Commissioner Of Income-Tax on 26 April, 1991
Equivalent citations: [1993]201ITR266(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1977-78, the following questions of law have been referred to this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss of Rs. 1,71,066 incurred by the assessee-company due to fluctuation of exchange rates in remittance of profit from India to its U. K. office was not an allowable deduction in its income-tax assessment for the assessment year 1977-78 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the loss of Rs. 368 incurred by the assessee-company in remittance of dividend was not an allowable deduction in the income-tax assessment ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, in computing long term capital gains arising out of the transfer of the original shares, the cost of acquisition of the original shares should be taken at the average cost determined by spreading over the actual cost of the original shares over the original shares and the bonus shares ?"
2. The first dispute covered by the first question relates to the assessee's claim of Rs. 1,71,066 representing the loss on the remittance of its profits to the U. K. The registered office of the assessee is situated in the U. K. But it had income by way of profits and gains from business in India. To the extent to which the assessee required the funds for the purpose of carrying on its business in India, it retained the requisite amount, and remitted the balance to its head office. In the course of this remittance, the assessee incurred a loss on account of difference in exchange rate. This was disallowed by the Inspecting Assistant Commissioner and the Commissioner of Income-tax (Appeals) on the ground that it was not laid out for the purpose of earning income.
3. The assessee came up in second appeal before the Tribunal and the Bench confirmed the orders of the authorities below with the following observations :
"5. We have considered the rival submissions and the facts and circumstances of the case. In the case of Sutlej Cotton Mills Ltd. , the Supreme Court has held that, where the profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of its circulating capital. But, if, on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. We are of the view that the principles laid down by the Supreme Court in the abovementioned case do not advance the case of the assessee, but actually support the departmental contention. It is relevant to note that the surplus profit remitted by the assessee-company to its head office in the U. K. was not required by the company for the purpose of its working capital in India. It is, therefore, clear that the amount remitted by the company to the U. K. did not represent a part of its trading asset or as part of its circulating capital embarked in the business. It cannot also be said that the surplus funds remitted by the company were held by it in India on revenue account. Hence, following the principles laid down by the Supreme Court in the abovementioned case, it would follow that the loss on account of the remittance of the surplus funds through fluctuations in exchange rates cannot be regarded as a trading loss or as a loss incidental to the carrying on of business by the assessee-company. It is also relevant to mention that the surplus funds were remitted by the company to the U. K. for the purpose of distribution by way of dividends or for investment outside India. The loss arising from such remittance cannot, therefore, be regarded as a loss on revenue account incurred by the company in the carrying on of its business. We, therefore, agree with the conclusion of the income-tax authorities that the loss on account of remittance claimed by the company cannot be regarded as an admissible deduction in the computation of its taxable profits. The decision of the Calcutta High Court in the case of Tingree Tea Co. Ltd. [1971] 79 ITR 294, relied upon by learned counsel for the assessee, is not relevant for the purpose of the present appeal as the question under consideration before us was not considered by the Calcutta High Court in the said case,"
4. A miscellaneous application moved by the assessee in this behalf was dismissed by an order of the Tribunal on April 7, 1982.
5. The first question came up for consideration in the case of this assessee in Income-tax Reference No. 226 of 1982 (Goodricke Group Ltd. (No. 1) v.
CIT [1993] 201ITR 261), where the judgment was delivered on August 14, 1990. Following the said decision, we answer the first question in the negative and in favour of the assessee.
6. The second dispute relates to the assessee's claim for a loss of Rs. 368 due to fluctuation in the exchange rate on remittance of dividends from India to the U. K. The Commissioner of Income-tax (Appeals ) rejected this claim on the same ground as in the case of the claim on remittance of profits. The Tribunal also upheld the order of the Commissioner of Income-tax (Appeals) for the same reasons.
7. In our view, the same principle as regards the loss suffered due to fluctuation in the exchange rate on remittance of profits will apply to a case where the loss has been suffered in remitting the dividend. We, therefore, answer the second question in the negative and in favour of the assessee.
8. The facts relating to the third question are as follows :
The third dispute relates to the cost of acquisition of 1,200 equity and 120, 132 and 435 bonus shares for the purpose of computing the long-term capital gains arising out of the transfer of the original shares. The assessee-company acquired 1,200 equity shares of Duncan Bros, and Co. Ltd. It was allotted bonus shares with reference to these shares, 120 shares on December 26, 1966, 132 on April 17, 1968 and 435 on August 28, 1974. The entire block of shares was sold by the company during the relevant previous year. It was contended that, for the purpose of computation of long-term capital gains, the cost of original shares should be taken to be the actual cost of acquisition and cost of bonus shares should be arrived at by spreading the cost of acquisition of original shares over the original shares and bonus shares. The Inspecting Assistant Commissioner and the Commissioner of Income-tax (Appeals) held that the cost of original shares could not be taken for computation of the cost of acquisition of those shares. On a second appeal, the Tribunal upheld this conclusion of the authorities.
9. Before the Tribunal, reliance was placed by the assessee on Sutlej Cotton Mills Ltd. v. CIT , and in the case of CIT v. Dahnia Inveshnent Co. Ltd. . The Tribunal was of the view that the aforesaid decisions of the Calcutta High Court and the Supreme Court, respectively, relied upon by the assessee do not deal with the exact question in dispute. According to the Tribunal, in the case of Dalmia Investment Co. Ltd. [1964] 52 ITR 567, the Supreme Court was only concerned with the question relating to the computation of the cost of acquisition of bonus shares allotted to the assessee in respect of the ordinary shares held by it. In Sutlej Cotton Mills.Ltd. [1979] 119 ITR 666, the Calcutta High Court was only concerned with the question relating to the determination of the cost of acquisition of the original shares on which the company had been allotted certain bonus shares.
10. At the hearing before us, the learned advocate for the assessee has drawn our attention to a decision of the Division Bench of this court in Smt. Protima Roy v. CIT [1982] 138 ITR 536. It is his contention that this decision concludes the controversy. The question in that case was whether the cost of acquisition of original shares was affected by subsequent issue of bonus shares.
11. In the present reference, we are concerned with a case where the assessee had sold not merely its bonus shares, as in the case of Dalmia Investment Co. Ltd. . or only its original shares, as in the case of Sutlej Cotton Mitts Ltd. and Smt. Protima Roy . But here the assessee has sold its entire block of shares, i.e., both the original shares acquired by the company as well as the bonus shares allotted to it in respect of the original shares.
12. The Division Bench of this court in Smt. Protima Roy [1982] 138 ITR 536 considered the decision of the Supreme Court as well as the High Court. We may extract the relevant passages from the judgment. There, the court observed as follows (at page 546) :
"Reliance was also placed on the decision in the case of CIT v. Gold Mohore Investment Co, Ltd. . There the balance-sheet of the assessee-company for the previous year ending on March 31, 1950, disclosed past losses amounting to Rs. 45,692. The Income-tax Officer held that such losses resulted from the failure of the assessee to properly account for some bonus shares received by it. It is important to bear in mind that there also the Supreme Court was concerned with the proper valuation of the bonus shares. The Income-tax Officer valued the bonus share at nil and held that the losses amounted to Rs. 6,509 and thereafter applied Section 23A of the Indian Income-tax Act, 1922, to the company and passed an order deeming a sum of Rs. 35,746 to have been declared as dividend. The Appellate Tribunal upheld the order of the Income-tax Officer. On a reference, inter alia, of the question whether the profits made by the assessee attracted the application of Section 23A, the High Court answered the question in the negative. On appeal, the Supreme Court held that when bonus shares were issued in respect of the ordinary shares held in a company by an assessee, there the cost to the assessee could not be taken to be nil or their face value. The proper method of valuation was to spread the cost of the old shares over the old shares and the new issues (viz., bonus shares) taken together if they ranked pari passu. The Supreme Court reiterated the same principle in the case of Dalmia Investment Co. , referred to hereinbefore. There also the Supreme Court was concerned with the cost of the bonus shares. In the case of CIT v. Gold Co. Ltd. [1970] 78 ITR 16, the Supreme Court held that where bonus shares were issued in respect of ordinary shares held by a dealer in shares who valued his stock at cost and the bonus shares ranhed pari passu with the ordinary shares, the correct method of valuing was to spread the cost of the ordinary shares over the original shares and the bonus shares collectively and ascertain the average price of those shares. The learned advocate for the Revenue sought to urge that in the previous appeal actually the illustration indicated that the court had proceeded on the basis "that the cost of the original shares would be depleted by the subsequent issue of the bonus shares. It would be improper on our part to read the ratio of the Supreme Court decision from the said illustration as the question of the cost of original shares was not before the Supreme Court. The question had also been previously considered by the Supreme Court as mentioned hereinbefore in the case of CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC), where also the question of the cost of bonus shares came up for consideration and the Supreme Court reiterated that where bonus shares were issued in respect of ordinary shares held by a dealer in shares who valued his stock at cost and the bonus shares ranked pari passu with the ordinary shares, the correct method of valuing the cost to the dealer of the bonus shares was to take the cost of the original shares, spread it over the original shares and bonus shares collectively and find out the average price of all the shares. There again, as we have mentioned before, the Supreme Court was concerned with the question of the cost of bonus shares in computing the capital gains.
13. We are here concerned with the question as to how the cost of the original shares is to be computed in case bonus shares are issued. How the bonus share is to be computed is not the dispute before us. So far as this question is concerned, namely, how the cost of the original shares would be computed, in our opinion, it must be done with regard to the terms of the Section, that is to say, the cost of acquisition of the original shares to the assessee as modified in cases, where applicable, by Sub-section (2) of Section 55. Subsequent deflation or inflation of the value of the shares by a subsequent event would not and cannot alter the original cost to the assessee. The frame of the Section does not permit such a theory to attribute the cost to the assessee in respect of the original shares to fluctuate with the value of the shares subsequently by the happening of such an event like the issuing of the bonus shares or otherwise. But this principle, in our opinion, has been clearly enunciated by the Supreme Court in the case of Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788, where the Supreme Court observed at page 792 of the report as follows :
"The assessee had exercised the option of the fair market value of the assets. The shares which had been sold by it of both the companies had indisputably become its property before the 1st day of January, 1954. Therefore, all that had to be determined was the fair market value on the 1st day of January, 1954, of those shares. This was duly determined and it was not disputed that that determination was made according to the rates prevailing in the market on the aforesaid date by the Income-tax Officer when he made his assessment order on July 20, 1964. Once the market value of the shares was ascertained or determined on the date given in Clause (i) of Section 55(2) that would be the cost of acquisition in relation to capital assets. Up to this point there is no controversy between the Revenue and the assessee, but, on behalf of the Revenue, an almost startling position has been advanced that while determining the fair market value on January 1, 1954, the issuance of bonus or right shares after that date on the basis of the holding of the assessee prior to January 1, 1954, should have been taken into account. In other words, as was explained in the letter of the Income-tax Officer dated January 4, 1967, while working out the capital gains, the cost had to be worked out by averaging the cost of the original shares amongst the original shares and the bonus shares taken together. Thus, according to the Revenue, after the issue of bonus shares the cost of the original holding had to be spread over all the shares-inclusive of the bonus or the right shares acquired on the original holding. Support for this view appears to have been found in the decision of this court in CIT v. Dalmia Investment Co. Ltd. ."
14. The Supreme Court thereafter at page 793 observed as follows :
"The High Court completely overlooked the fact that for the ascertainment of the fair market value of the shares in question on January 1, 1954, any event prior or subsequent to the said date was wholly extraneous and irrelevant and could not be taken into consideration. If the contention of the Revenue were to be accepted the acquisition of bonus shares subsequent to January 1, 1954, will have to be taken into account which on the language of the statute it is not possible to do."
15. What the Supreme Court was saying, according to the learned advocate for the Revenue, was only in the context of Section 55(2). We are unable to agree. What the Supreme Court was laying down about the language of the statute applied also to Section 45 as modified by Section 55(2) of the Act in cases where such Section was applicable. This has also been reviewed by this court in the case of Sutkj Cotton Mills Ltd. v. CIT , where the learned advocate for the assessee had contended before the court at page 675 as follows :
"Mr. R. N. Bajoria, learned counsel for the assessee, contended, on the other hand, on the authority of Shehhawati General Traders Ltd. , that the cost of acquisition of the original shares was immutable. It can be either the actual cost of acquisition or at the choice of the assessee the market value thereof on the 1st January, 1954. The latter value would only be substituted as permitted by the statute and would be deemed to be the cost of acquisition. Once this election was made, subsequent issue of bonus shares would have no effect on the cost of acquisition of the original shares and the capital gains on the transfer of such original shares had to be calculated on such cost. He submitted that the decision of the Supreme Court in Dalmia Investment Co. Ltd. [1964] 52 ITR 567, was applicable to the valuation of bonus shares only and not for computation of capital gains when original shares are transferred. He submitted further that in the said decision the computation of the Supreme Court was not for the purpose of calculation of capital gains but for the calculation of profits earned or loss suffered."
16. In our opinion, this represents the correct position as enunciated by the Supreme Court, as mentioned hereinbefore. The Division Bench in that case also observed at page 677, that the learned advocate for the Revenue sought to draw a distinction to the effect that the original cost of acquisition would ordinarily be diluted by a subsequent issue of bonus shares, but if the assessee exercised its option and elected, to treat the cost of acquisition of its original shares at the market value as on January 1, 1954, then such subsequent issue of bonus shares would not affect the said opted cost. The court noted that this apparent distinction did not appeal to them. We are in respectful agreement with this view of the court. In a recent unreported judgment of this court, to which I was a party, in Income-tax Reference No. 174 of 1976 (CIT v. Steel Group Ltd.) delivered on February 23, 1981 (since reported in [1981] 131ITR 234), my Lord Mr. Justice Guha observed as follows (at page 238) :
"Thus, having regard to the principle enunciated by the Supreme Court that while computing the capital gains the assessee was concerned with the cost of acquisition, that is, the price which was paid by the assessee for acquiring the capital asset on the date it was acquired subject to such adjustments as laid down under Section 55, the assessee has no concern with what would be the value of that asset on some subsequent occasion, in other words, subsequent events need not be taken into consideration. The ratio of this decision is followed by the Division Bench of this court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 119 ITR 666, though there may be some factual discrepancy, with which we are not concerned. Mr. Balai Pal also referred to the decision of the Bombay High Court in the case of IV. H. Brady and Co. Ltd. v. CIT [1979] 119 ITR 359. But having regard to the ratio of the Supreme Court decision and the Calcutta High Court decision referred to above, this decision has got no application ".
17. It will be clear from the aforesaid observations of this court that the court was concerned with the question how the cost of the original shares is to be computed in case bonus shares are issued.
18. In CIT v. Kishore Trading Co. Ltd. , the question was how bonus shares should be valued. The High Court held that the cost of the bonus shares had to be valued by spreading the cost of the original shares over the cost of the original shares and the bonus shares taken together, irrespective of the fact that the original shares had been sold and profit therefrom determined by taking their full cost to the assessee and of the fact that the assessee had been valuing the bonus shares at nil.
19. In the instant case, the Tribunal found that, under the method of determining the cost of acquisition canvassed by the assessee-company, the cost of acquisition of the entire block of shares (both the original as well as the bonus shares) would work out to much more than the actual cost of the original shares to the company. The assessee-company's contention is that, notwithstanding the fact that such cost of acquisition of the entire block may work out to more than the actual cost of acquisition of the original shares to the company, it was entitled to make such a claim. Neither in Sutlej Cotton Mills Ltd. nor in Dalmia Investment Co, Ltd. , relied on by the assessee, was such proposition ever raised, argued, considered or decided.
20. On the other hand, the issue before us stands concluded against the assessee by two decisions, one of the Supreme Court and the other of the Bombay High Court. In CIT v. Gold Co. Ltd. [1970] 78 ITR 16, the Supreme Court had held, as analysed by the Division Bench of this court in Smt. Protima Roy [1982] 138 ITR 536 that where bonus shares are issued in respect of ordinary shares and the bonus shares rank pari passu with the ordinary shares, the correct method of valuing the shares is to spread the cost of the original shares over the original shares and the bonus shares collectively and to ascertain the average price of all the shares. A similar view has been held by the Supreme Court in the case of Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62, also referred to in Smt. Protima Roy .
21. In W. H. Brady and Co. Ltd. v. CIT[1979] 119 ITR 359 (Bom), between 1922 and 1941, the assessee had bought 670 shares of a company at a cost of Rs. 1,33,146. In May, 1942, the assessee acquired further 670 shares as bonus shares by virtue of its possession of 670 shares. Between April 16, 1942, and April 30, 1946, the assessee bought further 765 shares of the company for the aggregate price of Rs. 3,22,252 and thus the company had a total holding of 2,105 shares of the company. On April 30, 1946, the assessee received another lot of 2,105 bonus shares. Between April, 1946, and February, 1960, the assessee acquired further 4,623 shares for the aggregate of Rs. 8,55,122. In the accounting year ending December 31, 1961, the assessee sold all the shares at the rate of Rs. 275 per share and realised Rs. 24,29,075. The assessee incurred an expenditure of Rs. 51,843 in connection with the sale of the shares.
22. For the assessment year 1962-63, the assessee claimed that his capital gains by the sale of the shares were only Rs. 5,99,899. In effect, the assessee treated the cost of acquisition of the bonus shares as nil and sought to exercise the option of substituting the market value of the asset as on January 1, 1954, under Section 48 and Section 55(2)(i) of the Income-tax Act, 1961, in respect of these shares in place of their cost of acquisition.
23. The Income-tax Officer spread the cost of the original shares over the whole lot of 2,680 shares which included 670 original shares and 2,010 bonus shares. Since the average cost according to this formula was much less than the market price of the shares as prevailing on January 1, 1954, he gave the assessee the benefit of the option of the market price as on January 1, 1954, in respect of this lot of 2,680 shares. In regard to the second lot of 765 shares bought between 1942 and 1946 and 765 bonus shares issued to the assessee in April, 1946, the average cost came to Rs. 210 per share. It was much higher than the market price of the shares as on January 1, 1954. The Income-tax Officer, therefore, did not substitute the market price as on January 1, 1954, in place of the original cost in respect of the second lot. In respect of the third lot also, the position was the same as in the case of the second lot, except that, in the third lot, there were no bonus shares. No substitution was, therefore, necessary in the case of the third lot. The Income-tax Officer thus determined the capital gains at Rs. 7,50,958.
24. In appeal, the Appellate Assistant Commissioner agreed with the assessee, but on further appeal the Appellate Tribunal restored the order of the Income-tax Officer. Before the Bombay High Court, a contention was raised by the assessee that the option to determine the cost of acquisition is with the assessee and in a case where the cost of acquisition of shares is to be determined, where the shares are partly purchased and partly received by the assessee as free bonus shares, it is open to the assessee so far as the shares purchased by him are concerned, to consider the cost of acquisition as the price paid by him, and in regard to the other shares received by him as bonus shares, to consider the cost of shares as prevailing on January 1, 1954. Such option entirely lies with the assessee and it is neither open to the taxing authorities nor to the Tribunal to interfere with that option exercised by the assessee.
25. This contention was-rejected by the Bombay High Court. The Bombay High Court, after considering the decisions of the Supreme Court in Dalmia Investment Co. Ltd. [19G4] 52 ITR 567 and Gold Mohore Investment Co. ltd. [1969] 74 ITR 62 held that, where the existing shares and the bonus shares ranked pari passu, the proper method of valuing the bonus shares was to take the amount spent by the shareholder in acquiring his original shares and to spread it over the old and new shares treating the new as accretions to the old and to treat the cost of the original shares as the cost of the old shares and bonus shares taken together.
26. We are, therefore, of the view that where an assessee sells the entire block of his shares, original shares as well as bonus shares, the appropriate method of computing the value of the shares would be to spread the cost of the original shares over the original shares and bonus shares collectively and to ascertain the average price of all shares.
27. We are, therefore, of the view that the Tribunal was right in upholding the method adopted in this case by the lower authorities in valuing the shares.
28. For the reasons aforesaid, we answer the third question in this reference in the affirmative and in favour of the Revenue.
29. There will be no order as to costs.
Shyamal Kumar Sen, J.
30. Iagree.