Income Tax Appellate Tribunal - Pune
Mrs. Mangla S. Paranjape And Ors. vs Income-Tax Officer on 1 July, 1993
Equivalent citations: [1993]47ITD67(PUNE)
ORDER
K.R. Dixit, Judicial Member
1. This is an interesting case, where although the shares of a company were sold, it is the contention of the assessees that it was not the shares which were sold but a certain per-centage of interest in a company was sold. It arises out of the levy of tax on capital gains from the transfer of the shares. How this contention arises, we shall presently see.
2. The assessees were the holders of all the shares of one Messrs. Paranjpe Engg. and Foundry Co. Ltd. (hereinafter referred to as "the company"). On October 30, 1976, the company issued bonus shares in the ratio of one bonus share for one original share. On November 28, 1977, the assessees (collectively called vendors), agreed to sell all their shares to one Thirani group (collectively called purchasers). The material parts of that agreement are reproduced below :
"And whereas the vendors are desirous of selling their aggregate holding of the said 6,000 equity shares of Rs. 100 each fully paid-up, each of them holding the number of equity shares set opposite their respective names in Schedule I hereto.
And whereas the purchasers have at the request of the company agreed to purchase the said 6,000 equity shares on the terms and conditions hereinafter mentioned.
Now, this agreement witnesseth and it is hereby agreed by and between the parties hereto as follows :
1. Each of the vendors shall sell and the purchasers shall purchase the number of equity shares in the company set opposite his or her name in Schedule I hereto being 6,000 equity shares in the aggregate at the price of Rs. 392 (rupees three hundred and ninety-two only) per share free from all charges or incumbrances or liens and with all rights attaching thereto,
2. The said 6,000 equity shares agreed to be sold are fully paid-up and represent 100 per cent. of the equity share capital of the company and carry that percentage of the votes cast at general meetings of the company."
3. There are clauses in this agreement stating the factual position regarding the assets and liabilities of the company. Thereafter, there are clauses whereby the vendors undertook to indemnify the company and the purchasers against depletion or dimunition in value of the assets resulting from and claims against the company enumerated therein. Clauses 9 and 14 of the agreement are as follows :
" 9. The vendors and the purchasers shall procure that the director or directors of the purchasers' choice or the director or directors representing them on the board of directors of the company give effect to and comply with (including by exercise of their voting rights) the provision of this agreement.
14. The vendors shall not carry on any business in the name which is similar to or resembles the name of the company or which is confusing and shall not trade in a manner as would give an impression to the outsiders that such business has or had any concern or connection with the business of the company."
4. Schedule I to the above-referred extract.
5. The assessees filed their returns. Material part of one of the returns is (annexure "A") capital gains.
6. The Income-tax Officer completed the assessment, granting exemption under Section 54E in respect of capital gains. That assessment order mentions :
"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."
7. Subsequently, on November 14, 1983, the Income-tax Officer issued a notice for reopening the assessment under Section 148 on the ground that bonus shares were issued in October, 1976, which were sold in November, 1977, and so the period of holding of those shares was less than 36 months. He has 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 reopening was issued. The assessees replied stating, inter alia, that their interest in 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, has been given by the assessees. The letter goes on to state that the shares sold included bonus shares which fact 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 is contended therein 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, income was received by way of long-term capital gains and the question of escapement of that income did not arise. The assessee has stated that "I have fully and truly stated in the return that my interest or stock in the company with percentage was sold away". The letter has specifically pointed out the above sentence in the Income-tax Officer's order. The assessee, vide letter dated December 30, 1980, inter alia, stated that the shares were held as investment and requested the Income-tax Officer not to consider the dividend as income nor capital gains as business income. The Income-tax Officer, however, reopened 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 that 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 the original shares were issued. The Commissioner has 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 CIT v. Chunilal Khushaldas [1974] 93 ITR 369 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 has 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. The Commissioner has paraphrased this to say, this is something like exchange of 100 rupee note for two fifty rupee notes, but stated that it was relevant for determining the rate of acquisition of bonus shares and that although controlling interest might be relevant for valuation of shares, it was not for the determination of the date of acquisition of the bonus shares particularly in view of the aforesaid decision of the Gujarat High Court. He has specifically rejected the assessee's appeal both on reopening and on merits.
8. Before us, learned counsel for the assessee first of all made his submission on the question of reopening. He showed a chart which was filed by the assessee with his return for the assessment year 1977-78 wherein it was mentioned that the assessee (Mrs. Mangla Paranjpe) held 1,200 equity shares and that, in the period relevant to that assessment year, the same number of bonus shares were issued and that similar statements were submitted in the case of other assessees. He stated that four out of five returns were accepted under Section 143(1). He referred to Section 143(1)(a) as it stood at the relevant time wherein it has been provided that the Income-tax Officer should make the assessment also with reference to record, if any, of past years. On this basis, he submitted that the Income-tax Officer was expected to look into the aforesaid details and that, therefore, a full disclosure had been made so that there was no case for reopening. He pointed out to a letter dated October 11, 1983, from the Commissioner to the Income-tax Officer wherein it has been pointed out that bonus shares held by the assessee were for less than 36 months. He submitted that this information was got from the Commissioner from the record and that, therefore, the assessment must be considered to have been made under Section 143(3). He also submitted that, in view of the aforesaid letter of the Commissioner, it must be said that the Income-tax Officer had not exercised his independent mind which was necessary as laid down in the case of Chunnilal Oukarnal (Put.) Ltd. v. ITO [1983] 139 ITR 380 (MP). He also pointed out the Income-tax Officer's letter dated December 6, 1983, whereby notice dated November 14, 1983, had been cancelled and subsequently issued notice for reopening on December 6, 1983, and submitted that reopening could not be done twice on the same facts. According to the assessee's counsel since the assessee had stated that there was a transfer of the interest in the company and the Revenue had stated that the transfer was of shares, that was merely a difference of opinion which did not justify the reopening. He relied on the following two decisions of the Bombay High Court :
Sir Bansilal and Co. v. Prabhu Dayal, ITO [1990] 185 ITR 287 and Technocraft Industries v. G. S. Tung, Second ITO [1990] 185 ITR 465.
9. On merits, he first of all submitted that in the case of Chunilal [1974] 93 ITR 369 (Guj), on which the Department had relied and that of Manechlal Premchand (Decd.) v. CIT [1990] 186 ITR 554 (Bom), which had applied that case was pending for consideration in the Supreme Court. He also submitted that the question was in regard to the date of issue of bonus shares whereas here the assessee's contention was that separation of original and bonus shares was immaterial because the assessee had transferred his interest in the company.
10. He drew our attention to the publication called Stock Exchange Official Directory wherein it has been mentioned that :
"On November 28, 1977, Messrs. Paranjpe Enterprises sold their interest in the company to Thirani Family and their associates."
11. On this basis, he submitted that, in commercial terminology, shares were referred to as interest. He also referred to a certificate issued by Pefco Industries Ltd., wherein it has been mentioned that Paranjpe Enterprises meant the Paranjpe family consisting of seven persons five of whom are the above assessees and that this group owned and managed the company. He relied upon the decision in Hanuman Vitamins Foods Pvt. Ltd. v. State of Maharashtra, AIR 1990 Bom 204 ; [1989] Mah. LJ 935, wherein it has been held that, when shares of a Housing Co-operative Society were transferred, the stamp duty under the Bombay Stamp Act payable would be on the valuation which took into account the value of the immovable property on which the shareholders had a right of occupation. He submitted, on this basis, that what was important was not the form, viz., the shares, but the substance of the transaction, i.e., the assessee's interest which had been transferred collectively with the other assessees which gave control of the company to the purchasers.
12. The learned Departmental Representative began his reply by pointing out that the assessment in the case of Mrs. Mangla Paranjpe, although under Section 143(3), was made after the assessment in the case of other assessees under Section 143(1) and that, therefore, the contention of the assessee's counsel that those assessments were correctly made was not correct. He also contended that the provision in Section 143(1) regarding the reference to past record was merely meant for items like depreciation and other matters referred to in Clause (iv). In our view, the assessment can be reopened if circumstances justify the same and it makes no difference whether it has been made under Section 143(3) or 143(1). The learned Departmental Representative is quite right also in stating that the reference to past record in Section 143(1) is for the purpose of items mentioned in Sub-clause (iv). Further, Section 143(1) uses the word "may" and so it gives an option to the Income-tax Officer to make the assessment, inter alia, by referring to the record of past assessments. Therefore, the reopening cannot be ruled out on that ground. Consequently, the reliance by learned counsel on the fact that, for the assessment year 1977-78, the disclosure had been made regarding the issue of bonus shares in the return for the assessment year 1977-78, would not prevent the Income-tax Officer from reopening the assessment this year. The return for every year is separate and so is the record. Further, if the assessee was relying on the earlier disclosures, nothing prevented her from disclosing it again this year, if the bona fides of the assessee are to be accepted. The decision in the case of Chunnilal [1983] 139 1TR 380 (MP). relied upon by learned counsel, has no application in this case because, in that case, there was no evidence to show that, in the return filed by the assessee, particulars given were not correct and that there had been a failure to disclose material facts necessary for the assessment. Further, in the note of the Income-tax Officer, no reasons were stated and it was not even recorded that the Income-tax Officer had the requisite belief. Therefore, the decision does not rest on the fact that the Commissioner had given direction to the Income-tax Officer to reopen the assessment. Regarding the assessee's contention that reopening cannot be done twice on the same facts, we must say that there is no prohibition in the Act. It is not as if the assessee has been punished or penalised again on the same facts. Moreover, the assessee has responded to those earlier notices as his reply shows. Therefore, the validity for reopening has to be decided by ascertaining whether the material facts have been fully and truly disclosed by the assessee or not. Regarding the argument that this was merely a difference of opinion between the assessee and the Income-tax Officer, the former contending that this was a case of transfer of interest while the latter holding that this was a transfer of shares, we may say that this is the crucial issue in this case. The liability to tax depends on that issue and it cannot be called merely a matter of opinion, so as not to make Section 147 irrelevant. Learned counsel had submitted that the assessee was expected to give only primary information and not any inference to be drawn from that information. He submitted that, whether it was a short or long-term capital gains was merely a matter of inference or opinion regarding which there was no duty cast on the assessee for disclosure. In our view, all the facts that are necessary for drawing that inference have to be disclosed. The above copy of the return shows that the assessee had not mentioned the date of the issue of bonus shares. Now, the assessee had claimed benefit of Section 54 and that benefit is available only in case of capital gains resulting in sale of long-term capital assets. Therefore, in order to decide whether any asset in each of the assessees assets, which were sold, were long-term asset or not, it was necessary for the assessee to disclose in the return the date of the issue of the bonus shares. The assessee has not done this. It has relied upon certain arguments. Those should have been made after making all the crucial disclosures regarding the date of the issue of bonus shares. Those arguments or even belief, however, bona fide, would not absolve the assessee from the duty to disclose crucial facts, viz., the date of issue of bonus shares. Although the assessee might have called his shareholdings as a percentage of interest in a bona fide manner, since he was claiming benefit under Section 54E of the Income-tax Act, 1961, which read with Section 2(29A) refers to shares, the balance of reasoning is in favour of the view that the assessee should have disclosed the dates of issue of the bonus shares in his return for the assessment year in question. The duty of the assessee is to disclose truly and fully all material facts and it is particularly in performing the second part of the duty that the assessee has failed. It is true that the Income-tax Officer, by making enquiries, could have ascertained the date of issue of the bonus shares but the Supreme Court in the case of Indo-Aden Salt Mfg. and Trading Co. P. Ltd. v. CIT [1S86] 159 ITR 624, has held that the fact that the Income-tax Officer could have ascertained the correct position by further probing did not exonerate the assessee from disclosing fully and truly all the material facts.
13. Regarding the merits, the learned Departmental Representative, first of all pointed out what the rights of the shareholders are. In that connection, he referred to Section 2(46) of the Companies Act and the decision in the case of CIT v. Standard Vacuum Oil Co. [19661 59 ITR 685 (SC) at page 691. He also submitted that the shareholder has no interest in the assets of the company, relying on Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 (SC) observation at page 5. He specifically made a reference to the word "share" in the agreement and submitted that, therefore, this transaction involved sale of shares although the assessee had called the subject-matter of sale as interest in the company. He said that it was a bundle of rights. He relied on the Supreme Court decision in Krishna Beharilal (Decd.) v. Gulabchand, AIR 1971 SC 1041, where it has been laid down that the ordinary rule of construction of a document is to give effect to the normal and natural meaning of the words employed in the document. He submitted that the controversy regarding the form and substance was not new but that, according to the above decision of the Supreme Court, one cannot go beyond the words in the contract and the Stock Exchange Directory had no legal sanction. He submitted that it was not open to any party to go beyond the words in the agreement. Referring to the assessee's argument that, by reason of the sale of all the shares, a special resolution could be passed by the purchasers which could have been by the vendor before the sale, he submitted that it could be done also where the holders of the shares did not have majority shares because the requisite majority was only of those members who were present and voting. Regarding the Bombay High Court decision in the case of Hanuman Vitamins, AIR 1990 Bom 204, he submitted that, it was a decision under the Stamp Act and it was mentioned in the instrument of transfer that the transferor had certain rights in respect of immovable property. He also submitted that the number of shares held by the members of the Co-operative Housing Society was the same irrespective of the area of that immovable property which was not the case in the case of a company where the nature of the rights differ with the number of shares held.
14. The assessee's counsel rejoined by stating that the agreement has to be read as a whole in order to ascertain the true nature of the transaction. He submitted that the cases cited by the learned Departmental Representative regarding the rights of shareholders were distinguishable because they did not take into account the administrative rights which were also transferred in this case because the entire holding had been transferred.
15. We have already held that the reopening in this case was justified. The next question is regarding the merits of the assessee's case. That case needs to be clearly spelt out. The contention is that by reason of the fact that all the shares in the company which were held by the assessee group were transferred to another group, what has in fact been transferred is the interest of one group in the company to another and that being so it would be neither true nor realistic to say that the shares were transferred.
16. Since it was not the shares which were the subject-matter of the sale, the distinction between the original and bonus shares lost its significance. Before the Income-tax Officer, the contention was that the bonus shares were an offshoot of the original shares the percentage of interest in the company remaining the same. Both the contentions come to the same thing that the assessee-company was the holder of a certain percentage.
17. In this connection, there are certain facts which have to be noted. All the shares of the company were transferred in a single transaction and they were held by persons in one group, i.e., the assessees. They are transferred to another group. The agreement does not mention the transfer of specific shares owned by one assessee in the group to another person in the transferee group. Therefore, the transfer is of all the shares in a bulk by one group to another. This is not a transaction which is a total of the individual transfer by one member of a group to another member of a group. It can fairly be said that no member of the assessee-group would have transferred the shares to any members of the purchasers group but for an agreement among the members of the assessee-group to sell all the shares to the purchaser-group. Thus over and above the plain and simple fact of transfer of shares by using the usual share transfer forms and the agreement which speaks of only the transfer of shares, there is a certain fact which, though not written, is writ large on the transaction, and that fact is that the entire control over the company and virtually the undertaking was sold, so the submission was that the transfer of shares loses its relevance. Moreover, there is a clause in this agreement by which the assessee undertook not to carry on any business in a name similar to that of the company and not to trade in a manner as would give an impression to outsiders that the business has or had any connection with the business of the company. Thus the argument that it was not the shares which were sold but the entire interest of the holders thereof with all its consequences in the form of valuable control over the company which was transferred assumes significance and is deserving of consideration.
18. We have given anxious thought to this argument but we find that, though attractive at the first impression, it suffers from certain infirmities. It is the total collection of shares which gives the control and it is the company which owned the undertaking. We cannot, therefore, overlook the fact that it was the shares which were the subject-matter of transfer. The fact that control over the company was transferred is only a consequence of the transfer of the shares. That control does not have a separate existence apart from the ownership of the shares. The extent and nature of the control varies with the extent of the shareholding. The most complete control over the management and affairs of the company goes with the complete ownership of all the shares of the company. The ownership of a small number of shares would give only the voting rights in that proportion and complete control over the management only means the totality of all the voting rights of the shares ; nothing more and nothing less. Therefore, the transfer of control cannot outweigh the fact of transfer of shares. It is the ownership of the shares which is the basis for the control over the company. The assessee has chosen to express the holding of the shares as a percentage of the interest in the company. That percentage of interest is nothing but a totality of the shares held by the assessee expressed in terms of a percentage of the total shares of the company. It is true that shareholding, in common parlance, may be referred to as interest in the company, but that is the layman's expression which has no legal significance. The statement in the Stock-Exchange Directory is no more than that. The assessee has share certificates evidencing the ownership of the shares. The Companies Act refers to ownership of shares, while the Income-tax Act with which we are here concerned refers to shares in the company and the assessee cannot avoid the levy of tax on capital gains by using another term. The interest or holding in a company is divided in terms of shares with specific numbers to facilitate transfer and ensure liquidity. Therefore, part of that interest in the company is separated in the form of shares. The assessees in converting their original undertaking into a limited company have enjoyed all the benefits resulting therefrom and has therefore to accept the consequences. It is true that, under the agreement, the assessee had agreed not to carry on similar business as that of the company or as indicated above. That, however, is only in order that the value of the shares in the hands of the purchasers should not be reduced.
19. Now, coming to the decision of the Bombay High Court in the case of Hanuman Vitamins, AIR 1990 Bom 204 (hereinafter referred to as "the petitioner"), the facts in the case were that the petitioner transferred its shares in a housing society the membership of which entitled the shareholders to the right to occupy specific premises in a building owned by the society. The petitioner contended that this was merely a transfer of shares, while the Superintendent of Stamps held that it was a conveyance of property and liable to stamp duty. The High Court held that there was intrinsic material in the document itself to indicate that what had been transferred was not merely the shares but also the right to occupy the premises. The court noticed that the bye-laws of the society provided that no flat could be allotted to a person who was not a member of the society holding not less than a certain number of shares. In these circumstances, the court held that the document of transfer, in addition to being transfer of shares, incorporated within itself the conveyance of property in substance and effect. On this basis, learned counsel argued that it was not the form but the substance which was material and so we must hold that it was not the shares but the interest of the assessee in the company which was transferred. He had also argued that the transfer of shares was only a way of transferring the interest. This argument, again like the earlier one, at first appears to be reasonable but is not so when examined closely. In the above case before the High Court, the interest in property was a consequence of the ownership of the shares. Thus the former was separate from the latter. While the petitioner contended that it had transferred only the shares, the High Court held that it had also transferred the interest in the immovable property. In the present case, however, it is the contention of the assessee that it was interest in the company and not the shares which were transferred. Moreover, in that case, the shares were only five in number of the value of Rs. 50 each while the consideration for the transfer was Rs. 9,46,900. It is in these circumstances that the court held that the document of transfer was a conveyance or transfer of interest in immovable property. But for the right to occupy the premises, the transfer consideration would not have been of this huge amount. In the present case, although the price paid per share is higher, i.e., Rs. 392, than the break-up value per share, i.e., Rs. 290, the difference is not so much as in the Bombay High Court case so as to lead to the conclusion that the substance of the transaction was not the transfer of the share.
20. The transfer of control is reflected in the higher price of the shares. The reality is not that the shares were transferred in addition to (much less instead of) the control but that the control was transferred in addition to the shares. These appeals have been heavily contested. The balance of reasoning is in favour of the Revenue. Therefore, we hold that the assessee is not entitled to the benefit of Section 54E in respect of transfer of the bonus shares.
21. The appeals are dismissed.
T.V.K. Natarajachandran, Accountant Member
22. I have carefully gone through the order proposed by my learned Brother, but I am unable to agree with the reasons given and the conclusions drawn by him to hold that the assessees failed to disclose fully and truly all material facts and that the assessee is not entitled to the benefit of exemption under Section 54E in respect of transfer of bonus shares and thus dismissing the appeals of the assessees. In my view, the reassessments initiated by the Assessing Officer and confirmed by the first appellate authority and upheld by my learned Brother proceeded on erroneous assumptions and presumptions and, therefore, the conclusions drawn by them are incorrect, unjustified and unwarranted. In other words, the reassessment proceedings were misconceived, misdirected and unwarranted both in law and the facts and circumstances of the case and, therefore, they are fit to be quashed. Having expressed my opinion, I proceed to state the reasons for coming to the aforesaid conclusion.
23. First of all, I shall deal with the crucial issue whether it is a controlling interest in the company, Messrs. Paranjape Engineering and Foundry Co. Ltd., that was transferred as contended for the assessee or only shares as contended by the Revenue. Although a company is a statutory person and the assets are legally vested in the company, none the less a shareholder is a co-owner of the company which is similar to the position of a trustee in the case of a specific trust in whom the property of the trust is legally vested though the beneficiaries are the de facto owners of the property. In this sense, the shareholders of the company constitute its proprietors. In this connection, Palmer's Company Law, 21st edition, at page 21, reads as under :
"A share is a thing in action of proprietary character. A shareholder is a co-owner of the company--not of its assets which, in view of the nature of the company as a legal person, are vested in the company--and the extent of his rights and duties as co-owner is measured by the amount of his shareholding, so that all the shareholders of the company constitute its proprietors and the amount due from all of them to the company is equal to the issued capital of the company."
24. Normally "share" denotes right of participation in the capital of the company. It also denotes other rights in the management of the company. When a company capitalises its accumulated profits and issues bonus shares to its shareholders, it does not entail release of any of the company's assets. The company merely increases its capital while retaining the amounts available for distribution as dividends. The bonus share only gives the shareholder an extra share in the capital of the company. It simply confers title to a certain proportion of the surplus assets if and when a general distribution takes place as in winding up. The company does not part with any of its capital or assets, the profits remain in the company after being transmuted into capital. On a subsequent sale, the original shares and the bonus shares are treated as the same asset acquired as the original shares were acquired, because both the original and bonus shares constituted the capital of the company. After the issue of bonus shares, the capital of the company is enlarged so also the shares held by the shareholders. If the bonus shares are issued in the ratio of 1 : 1 ranking pari passu, the percentage of shareholding or the controlling interest in the company remains unaltered.
25. In the case of the assessees, they were the proprietors of the company so to say because they held 100 per cent. of the shares of the company and also 100 per cent. controlling power in the company which goes with the shareholding. The agreement dated November 28, 1977, is between D. V. Paranjape and his group and S. K. Thirani and his group, the company, Messrs. Paranjpe Engineering and Foundry Co. Ltd., being the consenting party to the transaction. The issued capital of the said company is Rs. 6,00,000 divided into 6,000 equity shares of Rs. 100 each consisting of both the original equity shares and bonus shares ranking pari passu. The assessees who are vendors owned 100 per cent. of the issued capital and, as per Clause 1, they agreed to sell "the aggregate holding of 6,000 equity shares at the rate of Rs. 392 per share".
26. In Clause 2 of the agreement, it is stated that 100 per cent. of the equity shares agreed to be sold were fully paid-up carrying 100 per cent. of the votes cast at the general meetings. This is significant as 100 per cent. of the controlling interest in the company was transferred.
27. Clause 7(xvi) of the agreement shows that the company is a controlled company as defined in Section 17 of the Estate Duty Act, 1953. This is the clue to the issue. It is the controlling interest and not the shares which was transferred.
28. Clause 9 provides that the vendors and the purchasers shall procure that the director or directors of the purchasers' choice or the director or directors representing them on the board of directors of the company give effect to and comply with (including by exercise of their voting rights) the provisions of this agreement. Consequently, some of the assessees who are holding the posts of managing director or technical director have lost their jobs and the consideration received also covers compensation for loss of employment which is in the capital field.
29. Messrs. Paranjape Engineering and Foundry Co. P. Ltd. is manufacturing engineering goods and is a going concern. As per Clause 3, its profitability and financial worth is reflected by the profit and loss account and the balance-sheet as on May 31, 1977, and also the unaudited results, of the company for the period from June 1, 1977, to August 31, 1977, prepared and initialled by Shri S. D. Paranjape, the managing director of the company. This clause reveals that it is the business undertaking as reflected by financial statements which was transferred as a going concern on a platter so to say. For, otherwise, there is no relevance nor is it necessary for furnishing financial worth statement and profitability statement of the concern as was done in this case.
30. Clause 4 of the agreement provides that the sale shall be completed on or before November 28, 1977, on the vendors furnishing the duly audited balance-sheet as on May 31, 1977, and profit and loss account for the year ended May 31, 1977, by the auditor of the company. Therefore, it is clear that the purchaser wanted to ascertain the financial worth of the undertaking or business as a whole before concluding the transaction,
31. Clause 5 of the agreement shows that the vendors have stated that there are no encumbrance on the property of the company except that set out in Clause 7(ii).
32. Clause 6 provides to the purchaser facilities for inspection of accounts, records, documents, etc., of the company for being satisfied about the correctness of the worth of the business.
33. Clause 7 reveals that both the vendors and the company have jointly declared about the worth of the immovable and movable assets of the company and liabilities, if any, attached to them and the outstanding debt, liabilities, etc., and the basis of valuation of the stock-in-trade, etc, Thus the financial conditions of the business were declared by the assessees and the company.
34. Clause 8 of the agreement shows that the vendors have undertaken to indemnify both the purchaser and the company against depletion or diminution in the value of assets of the company and also from claims of estate duty/income-tax or other taxes or other demand or liability of the company for the period up to transfer.
35. Clause 9 provides for substitution of directors of the purchasers' choice in order to give effect to the provisions of this agreement.
36. Clause 14 provides that the vendors (the assessees) shall not carry on any business in a name which is similar to or resembles the name of the company to avoid confusion to outsiders that such business has any concern or connection with the business of the company. This is a forbearance clause hot to compete in business of similar name. This clause gives the clue that it is the business undertaking as such which was transferred or the controlling interest therein for which the vendors had undertaken not to carry on business in similar name.
37. It is an elementary rule or compelling rule or settled rule that the instrument like the statute is to be read as a whole to find out the intention of the parties or the Legislature, Lord Halsbury said in Charles Robert Leader v. George F. Duffey [1888] 13 AC 294 (HL), at page 301 :
"That you must look at the whole instrument and, inasmuch as there may be inaccuracy and inconsistency, you must, if you can, ascertain what is the meaning of the instrument taken as a whole in order to give effect, if it be possible to do so, to the intention of the framer of it."
38. Thus, reading the agreement as a whole, it will be clear that the main purpose and intention of the vendors was to transfer the undertaking or 100 per cent. controlling interest in the company as they were holding 100 per cent. shares of the company. The en bloc price fixed per share was Rs. 392 which is higher than the prevailing market value of the shares and whose break-up value has been arrived at at Rs. 290 per share. Since the company is a going concern, the break-up value is not the proper valuation according to well-known authorities of the Supreme Court and the Bombay High Court.
39. The Supreme Court in the case of Ramnarain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534, considered the transaction of purchase of shares and acquisition of managing agency and held that both the assets were of capital nature. It held that, if the intention was to obtain control over the managing agency, acquisition of shares was integrated with the acquisition of managing agency. The Supreme Court held that the High Court was right in holding that the acquisition of the managing agency was an acquisition of a capital asset. This decision shows that the intention of the transaction is a criterion to come to the conclusion whether it was for obtaining the control over the managing agency or not. If it is the former, the acquistion of shares was incidental. The Supreme Court, in the case of CIT v. National Finance Ltd. [1962] 44 ITR 788, held that the controlling interest is of enduring nature and, therefore, a capital asset. In the case of Baijnath Chaturbhuj v. CIT [1957] 31 ITR 643, the Bombay High Court considered the composite agreement for purchase of shares and acquisition of managing agency. There the shares were agreed to be sold for Rs. 65 per share. However, for the purpose of computation of capital gains, the full value of the shares which is the fair market value was taken at Rs. 46 per share as that figure was ascertainable. Their Lordships have held that both the shares and managing agency are capital assets and controlling interest is an "important right" which is enduring in nature. The Madhya Pradesh High Court in the case of Smt. Maharani Ushadevi v. CIT [1981] 131 ITR 445, held that the acquisition of controlling interest was incidental to acquisition of shares and took the entire consideration as the cost of purchase of shares. However, the ratio of the Supreme Court in Ram-narain Sons (P.) Ltd. [1961] 41 ITR 534 is binding. The Supreme Court in the case of Raja Bahadur Kamahhya Narain Singh v. CIT [1970] 77 ITR 253 held that the profit made on the sale of shares acquired with the intention of obtaining control over the management and not for dealing in them would be on capital account and not on revenue account. In view of the above court rulings, it is clear that the transaction resulted in long-term capital gains.
40. In these circumstances, I conclude that the whole of the undertaking or 100 per cent. of controlling interest in the company has been transferred as a matter of fact and in substance, though in the form of transfer of shares. Accordingly, the principles laid down by the Supreme Court in the cases of CIT v. Mugneeram Bangur and Co. (Land Department) [1965] 57 ITR 299 and CIT v. West Coast Chemicals and Industries Ltd. [1962] 46 ITR 135 would be applicable to these cases also. In Mugneeram's case [1965] 57 ITR 299 (SC), the whole of the concern was sold for a slump price and no portion of the price was attributable to the stock-in-trade. The Supreme Court held that the business is sold as a going concern and the excess may not be the business profit but will be capital gain chargeable to tax. This decision of the Supreme Court has been explained with approval in the Board's Circular No. 23-D(LXXV III-6) of 1965 reproduced at page 483 of J. P. Bhatnagar's Direct Taxes Circulars, Vol. 1. Further the agreement as such does not specify the price for bonus shares but the price for the shares en bloc inclusive of the bonus shares. Palmer's Company Law, 21st edition, at page 885, reads as under :
"A bonus or a rights issue of shares or debentures, both for the purposes of short and long-term gains, is not treated as involving any disposal and thus does not attract tax, but on a subsequent sale the original shares and the new holding are treated as the same asset acquired as the original shares were acquired."
41. In the facts and circumstances of the case, therefore, the entire capital gains arising on the transaction is in the nature of long-term capital gains and, inasmuch as the assessees have invested the respective sale proceeds in eligible assets, the exemption under Section 54E is admissible to them. The Bombay High Court, in the case of J. B. Greaves v. CIT [1963] 49 ITR 107 held that the entire consideration for transfer of shares and managing agency was capital gains only.
42. Coming to the merits of the case that, in view of my conclusion that the undertaking as a whole has been sold by the proprietors and the consideration was paid for 100 per cent. of the shareholding held by the assessees and there was no price fixed for bonus shares as such, the question of finding out the date of issue of bonus shares and the question of taxing the short-term capital gains on sale of such bonus shares did not arise. The question of date of issue of bonus shares is relevant only when the bonus shares are sold as such. Similarly, the question of finding out the cost of bonus shares or the determination of the average price of bonus shares, that is, the average cost of the bonus shares by allocating the cost of the original shares over the original shares and bonus shares together as laid down by the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 arises only when the bonus shares and the original shares are sold separately and not when all of them are sold en bloc. The decision of the Madras High Court in the case of CIT v. T. V. S. and Sons Ltd. [1983] 143 ITR 644 is an authority for this proposition. In that case, the entire shares held by that assessee were compulsorily acquired by the Government of India on account of nationalisation of insurance companies. In that context, the Madras High Court observed at page 648 as follows:
". . . '. reckoning of the cost of bonus shares would at all arise for consideration in a case where the totality of the shareholder's holdings are sold as one block or otherwise acquired in a single transaction."
43. At page 645, it has been observed as under :
"The theory of averaging is a principle of costing resorted to to determine the cost of the bonus shares alone with a view to reckoning the result of any transaction in respect of bonus shares alone. But when the entire block of shares held by a shareholder is sold and in that sale all the bonus shares held by the shareholder also figure, there can be no occasion or necessity for determining the cost of the bonus shares separately. "
44. The Revenue and my learned Brother relied heavily on the judgment of the Gujarat High Court in the case of CIT v. Chunilal Khushaldas [1974] 93 ITR 369 which was concerned only with the question of sale of bonus shares and it has held that the bonus shares are acquired only when issued and they are held from the date of issue and not from the date of issue of the original shares. It is necessary to highlight the facts of that case. In that case, the bonus shares were issued on September 5, 1961, and they were sold on September 12, 1961, within a week's time. There is no dispute about the rationale of the decision. The point is whether that decision is relevant and applicable to the case of the assessees where 100 per cent. of the shareholdings were transferred en bloc or the entire undertaking has been sold as a going concern. Following respectfully the judgment of the Madras High Court, I am of the opinion that it is not open to the Assessing Officer especially when the bonus shares were not sold separately to go into the question of determination of short-term capital gains arising on sale of bonus shares by applying the principle of averaging laid down by the Supreme Court in the case of Dahnia Investment Co. Ltd. [1964] 52 ITR 567. In the global context of the transaction under consideration, in my opinion, the Income-tax Officer has gone on a fishing expedition to find out the short-term capital gains arising out of the transactions by apportioning the sale consideration for the transfer of which there is no evidence on record.
45. Regarding the validity of reassessment proceedings, it is clear that the reassessment in the case of Mrs. Mangla G. Paranjape is not warranted in law, inasmuch as the Income-tax Officer has completed the original assessment on February 9, 1981, under Section 143(3). The assessment order, inter alia, reads as under :
" During the year, the assessee has sold out the shares of PAFCO Ltd. for Rs. 9,56,480. These shares were originally acquired by the assessee in 1970 for Rs. 1,22,000 including bonus shares. As full amount of capital gain invested in fixed deposits and purchased shares in the company and units, the assessee has claimed exemption under Section 54E. . . . The statements of the assessee are verified with the record and the claim of the assessee is accepted."
46. Therefore, the Income-tax Officer himself has applied his mind, so to say, on the question of bonus shares and sale thereof while completing the original assessment itself on February 9, 1981. Therefore, the reassessment proceedings in the case of the assessee are not warranted in law because it is only a change of opinion. The learned Departmental Representative has also not offered any argument in this regard. The assessment of D. V. Paranjape (Hindu undivided family) was completed under Section 143(3) on January 9, 1979. It is an admitted fact that the assessees had filed the statements containing the acquisition of shares and also bonus shares in the return filed for the assessment year 1977-78. Learned counsel for the assessees contended that the position of intimation of acquisition of bonus shares is the same for all the other assessees under consideration. In view of this factual position, it is not open to the Income-tax Officer to reopen the assessments of all the assessees ignoring the factual data of acquistion of bonus shares already available in the assessment record for 1977-78. Simply on the ground that the original assessments in some of the assessees' cases were made under Section 143(1) and, therefore, there was no application of mind, it is not open to the Income-tax Officer to reopen the assessment under Section 147(a). In any case, while completing the original assessments under Section 143(1), the Income-tax Officer is expected to look into the immediate past record, that is for the assessment year 1977-78, wherein details of acquisition of bonus shares were already reported by the assessee. If he had merely looked into or seen the statements, he would have certainly come to the conclusion without applying "due diligence" of mind that bonus shares have been issued for the assessment year 1977-78 and which were sold in the assessment year 1978-79. In that case, he could have come to the conclusion that the case could not be completed under Section 143(1) accepting the income returned. Simply because Section 143(1) assessment contemplates adjustment of certain items specified in Clause (b)(iv) thereof for which purpose alone the Income-tax Officer has to look into past record, it does not mean that it is open to the Income-tax Officer to complete the initial or the first assessment under Section 143(1) in respect of items covered by Clause (b)(iv) of Section 143(1) and later on take recourse to reassessment under Section 147(a) in respect of items not covered by Clause (b)(iv) of Section 143(1). The only option to the Income-tax Officer is to complete the assessment under Section 143(1) or 143(3) and not under Sections 143(1) and 147(a).
47. The relevant portion of the letter of the Commissioner of Income-tax dated October 11, 1983, is reproduced for appreciation.
48. Letter dated October 11, 1983, by the Commissioner of Income-tax to the Income-tax Officer.
"Re : Evasion of tax by Paranjape group of PEFCO Foundry and Chemicals Co. Ltd.
...........
...........
...........
2. In the relevant period, the shareholders cleverly avoided mentioning the number of equity shares sold on November 22, 1977.
Instead they mentioned a percentage of the equity capital sold by them, e.g., Smt. Y. D. Paranjape stated that 6.6 per cent. of the share of equity capital was sold by her. This statement is technically correct but suppresses the vital information about the bonus shares which as may be seen from the above figures were held by the assessee for less than 36 months. The shareholders further made a false statement in the return that the date of acquisition was December 18, 1969, and April 21, 1970. Here again, technically they may be right in the sense that when a company issues bonus shares, nothing goes out of the pocket of the company, but the fact remains that the assessees became holders of the bonus shares only in October, 1976. The shareholders claimed exemption under Section 54E which is allowable only in respect of long-term capital gains. The short-term capital gains have, thus, escaped assessment altogether. As this escapement of income from assessment is the result of a false statement in the return filed by the assessee, you are requested to examine the scope for action under Section 147(a) and also the scope for launching prosecution under Section 277."
49. Considering the subject-matter and findings of the Commissioner of Income-tax, it is clear that escapement of short-term capital gains was pointed out to the Income-tax Officer and remedial action under Section 147(a) was at least suggested if not directed. A compliance report was also called for. In the circumstances, the inference of direction by a superior authority to a subordinate is an irresistible conclusion. Therefore, the reassessments were not valid, because the Income-tax Officer had not judiciously and independently entertained the belief of escapement of income. Therefore, the plea taken by learned counsel for the assessee that there was no independent mind applied by the Income-tax Officer to the issue of reassessment proceedings is quite valid. Section 147 proceedings contemplates that the Income-tax Officer must have reasons to believe that the income had escaped assessment and it is purely a judicious application of mind to the facts of the case and not to be dictated by any superior authority. Since the assessees all belong to the same group and the facts and circumstances regarding allotment of bonus shares in the assessment year 1977-78 and sale of shares in the assessment year 1978-79 are all the same, it is no longer open to the Income-tax Officer to take a different view in the reassessment proceedings after once having applied his mind and accepted the claim of exemption under Section 54E arising out of the transfer of shares including the bonus shares. If there is no warrant for reassessment proceedings as stated earlier, the question of going into the merits or quantum of income assessed by applying the principles of costing laid down by the Supreme Court also does not arise. In this view of the matter, therefore, I am of the opinion that reassessment proceedings were not valid in law and were, therefore, fit to be cancelled.
50. The percentage of interest of the shareholder in the company remained the same even after declaration of bonus shares. When bonus shares are issued capitalising accumulated profits, on the one hand, they are treated as an accretion to the original shares in the hands of the shareholder but, on the other hand, there is a pro tanto diminution of the shareholders' interest in the reserves out of which the bonus shares are issued. After the bonus issues, the assets of the company and the shareholders' funds remain at the same level. In other words, the property of the company is not diminished and the shareholders' interest is not increased. Thus, the interest of each shareholder remains the same. The only change is in the evidence which represents that interest. Now, the bonus shares and the original shares together represent the same proportionate interest which the original shares represented before the issue of the bonus shares. The Commissioner of Income-tax, in his letter dated October 11, 1983, also admitted that the statement in the return that certain percentage of interest in the company was sold is technically correct. After the issue of the bonus shares, the significance of difference of bonus shareholding as such disappears because the shares rank pari passu and after the issue of bonus shares the holder becomes the holder of shares and the character of the shares originally may have been the bonus shares. In this view of the matter, I am of the opinion that there is no failure to disclose fully and truly all the material facts relevant to the assessment year and there is no warrant for drawing the conclusion that income had escaped on account of failure to disclose full and true material facts by the assessees. Therefore, the reassessments are not justified. Reliance is placed on the judgment of the Bombay High Court in the case of Khan Bahadur Hormasji Maneckji Dossabhoy Hormasji Bhiwandiwalla and Co. v. B. K. Sahu, IAC [1991] 188 ITR 203. The ratio of the Supreme Court in the case of Indo-Aden Salt Mfg. and Trading Co. P. Lid. v. CIT [1986] 159 ITR 624 applied to a case where the correct portion of the earth work and masonry work or proportion thereof was not furnished by that assessee which was a very vital and primary fact for the purpose of granting depreciation. This position is not applicable to the case of these assessees.
51. The transaction under consideration is not an ordinary transaction of shares in the normal course of business but an extraordinary transaction involving the entire business undertaking as a going concern as evident from the intent and purport of various clauses of the agreement which have been highlighted supra. The mere fact that the parties to the transaction might have aimed to gain a fiscal advantage therefrom would not detract from the genuineness of the transaction. In this connection, it is apt to reproduce the relevant passage contained at page 440 in the book on "Principles of Statutory Interpretation", 4th edition, by Justice Guru Prasanna Singh :
"A transaction which by the acts done is of the nature of a trading transaction and is genuine and not sham does not cease, in the absence of a statutory provision providing otherwise, to be an adventure or concern in the nature of trade merely because those taking part in it have their eyes fixed on the fiscal advantage of avoiding income-tax."
52. In view of the aforesaid reasons stated by me, I do not agree with any of the observations, statements, conclusions and decision of my learned Brother contained in paragraphs 11, 12 and 13 of his order. On the other hand, in view of the global nature of the transaction involving the transfer of the whole undertaking as a going concern, it is 100 per cent. of controlling interest in a controlled company which was transferred by transferring the aggregate of 100 per cent. of the shareholding from one group to another group and therefore the entire resultant gain is in the nature of long-term capital gains. However, as the entire sale proceeds were invested in eligible assets, the assessees are entitled to exemption under Section 54E. Applying the principles of the Supreme Court in the case of Mugneeram Bangur and Co. [1965] 57 ITR 299, it is not open to the Income-tax Officer to attribute a portion of the sale consideration to the sale of bonus shares and tax it as short-term capital gains. Accordingly, the reassessments under Section 147(a) were not warranted in law and not justified on the merits of the case and they are cancelled.
53. In the earnest endeavour to ascertain the truth of the transaction and to bring to tax the resultant gain of the transaction, one should not miss the woods of long-term capital gains while looking for the trees of short-term capital gains.
54. As a result, the appeals are allowed.
ORDER OF REFERENCE TO THIRD meMBER
55. We, the Members of the Income-tax Appellate Tribunal, Pune Bench, Pune, have differed in opinion on the following points. The case is referred to the President of the Income-tax Appellate Tribunal for hearing on such points by one or more of the other Members of the Income-tax Appellate Tribunal :
" 1. Whether the transaction of transfer of all the shares was a transaction of transfer of shares or a transaction of transfer of the control over the company and not of the shares ?
2. Whether the agreement of sale dated November 28, 1977, resulted in long-term capital gains or short-term capital gains ?
3. Whether, in the facts and circumstances of the case, there was failure on the part of the assessee to disclose fully and truly all the material facts for assessment in the original returns filed for the assessment year 1978-79 or not ?
4. Whether, in the facts and circumstances of the case, the reassessments under Section 147fa) are justified in law or not ?"
ORDER OF THIRD MEMBER G. Krishnamurthy, President
56. The Members of the Pune Bench as then constituted, heard these appeals but could not agree on the following points and the points of difference of opinion were referred to me as third Member under Section 255(4) of the Income-tax Act, 1961 ;
"1. Whether the transaction of transfer of all the shares was a transaction of transfer of shares or a transaction of transfer of the control over the company and not of the shares ?
2. Whether the agreement of sale dated November 28, 1977, resulted in long-term capital gains or short-term capital gains ?
3. Whether, on the facts and circumstances of the case, there was failure on the part of the assessee to disclose fully and truly all the material facts for assessment in the original returns filed for assessment year 1978-79 or not ?
4. Whether, on the facts and circumstances of the case, the reassessments under Section 147(a) are justified in law or not ?"
57. I have heard this case at length and I record my opinion on those points along with my reasons below.
58. I shall first take-up the first point of difference of opinion, namely, whether the transaction was a transfer of all the shares or it was a transaction to obtain control over the company but not of the shares. The assessees were the holders of the shares of a company called Paranjape Engg. and Foundry Co. Ltd. On October 30, 1976, this company issued bonus shares in the ratio of one bonus share for one original share. On or about November 28, 1977, the assessees herein agreed to sell their shares to another group called Thirani group. To effect this sale, an agreement was entered into on November 28, 1977, between the assessees called vendors on the one part and Thirani called purchasers on the second part and the above named company on the third part. The preamble of this agreement provided :
"Whereas authorised share capital of the company is Rs. 10,00,000 consisting of 10,000 equity shares of Rs. 100 each.
And, whereas, the issued subscribed and paid-up share capital of the company is Rs. 6,00,000 divided into 6,000 equity shares of Rs. 100 each.
And, whereas, the vendors are the holders of the said 6,000 equity shares of the company.
And, whereas, the vendors are desirous of selling their aggregate holding of the said 6,000 equity shares of Rs. 100 each fully paid-up, each of them holding the number of equity shares set opposite their respective names in Schedule I hereto.
And, whereas, the purchasers have at the request of the company agreed to purchase the said 6,000 equity shares on the terms and conditions hereinafter mentioned,"
59. Clauses 1 and 2 of the agreement provided for the sale and purchase of these shares at Rs. 392 per share free from all charges or incumbrances or liens and with all rights attaching thereto. The said Clauses 1 and 2 read :
"1. Each of the vendors shall sell and the purchasers shall purchase the number of equity shares in the company set out opposite his or her name in Schedule I hereto being 6,000 equity shares in the aggregate at the price of Rs. 392 (rupees three hundred and ninety-two only) per share free from all charges or incumbrances or liens and with all rights attaching thereto.
2. The said 6,000 equity shares agreed to be sold are fully paid-up and represent 100, per cent. of the equity share capital of the company and carry that percentage of the votes cast at general meetings of the company."
60. After providing for the usual safeguards both for and on behalf and for the benefit of the sellers and purchasers in Clauses 3 to 8, Clause 9 provided that the vendors and the purchasers shall procure that the director or directors of the purchasers' choice or the director or directors representing them on the board of directors of the company give effect to and comply with (including by exercise of their voting rights) the provisions of this agreement. The other important covenant was to be found in Clause 14 of the agreement which provided :
" 14. The vendors shall not carry on any business in a name which is similar to or resembles the name of the company or which is confusing and shall not trade in a manner as would give an impression to the outsiders that such business has or had any concern or connection with the business of the company."
61. There are several other clauses with which I am not directly concerned.
62. The assessments in these cases were originally completed under Section 143(1) and later reopened under Section 147 of the Income-tax Act to bring to tax what, according to the Revenue authorities, is a short-term capital gain arising on the sale of bonus shares included in the sale of the above shares, which had escaped assessment. According to the Income-tax Officer, the assessees had not disclosed full facts, particularly the fact relating to the date of issue of the bonus shares, and since all the shares were sold along with the bonus shares, a short-term capital gain arose on the sale of the bonus shares which should have been quantified and brought to tax whereas, according to the assessee,. since the entire shareholding was sold as a slump sale, such sale resulted only in a long-term capital gain and since the entire sale proceeds were invested in specified assets within the stipulated time-frame, even the long-term capital gain was not liable to tax under the provisions of Section 54E of the Income-tax Act. This controversy led to the reopening of the assessments under Section 147 of the Income-tax Act.
63. In response to notices issued under Section 148, the assessees pleaded that the bonus shares, though a short-term capital asset within the meaning of that expression as defined in the Income-tax Act, having been held for a period of less than 56 months, none the less, it did not attract short-term capital gains tax inasmuch as, when the entire shareholding was sold including the bonus shares, the difference that existed or was supposed to have existed between the original shares and the bonus shares vanished. The Income-tax Officer rejected this contention. He held that the bonus shares received by the assessee were independent and distinct capital assets and on their sale a capital gain arose and that could only be considered as a short-term capital gain. For this view, he placed reliance upon a decision of the Gujarat High Court in the case of CIT v. Chunilal Khushaldas [1974] 93 ITR 369. He computed the short-term capital gain at Rs. 4,17,240 and brought it to tax.
64. The assessees then appealed to the Commissioner (Appeals) contending, inter alia, that the reopening of the assessments under Section 147 was not justified either on facts or in law, because the assessees had at all material times made a full and true disclosure of all the material facts of the issue of bonus shares. The attention of the Commissioner (Appeals) was drawn to the fact that the assessees mentioned in the returns of income about the issue of bonus shares and the disclosure of the dividend received thereon. They pleaded that, since the acquisition of bonus shares was within the knowledge of the Income-tax Officer by reason of the above facts, there could not be a non-disclosure of a fact which was very much within the knowledge of the Income-tax Officer. The Commissioner (Appeals) was not satisfied with this explanation. According to him, it is not so much the disclosure of the issue of the bonus shares or the dividend received therefrom that was material as the date of the allotment of the bonus shares because it was from the date of allotment of bonus shares, the period for which they are held could be decided in order to determine whether they are short-term capital assets. It was the duty of the assessee to disclose that date. Since that was a material fact and since that material fact was not disclosed, thus rendering the bringing to tax of short-term capital gains thereon impossible, the reopening of the assessment was valid in law and on facts. He also placed reliance upon the decision of the Gujarat High Court in Chunilal Khushaldas [1974] 93 ITR 369 for the view that the bonus shares should be taken as an asset separate and distinct from the original shares and, on the sale of the bonus shares, there was short-term capital gain. Another point that was made before the Commissioner (Appeals) but was rejected by him was that, when the entire shareholding was sold, there was a transfer of the controlling interest but there was no transaction of sale. Thus, the assessments made by the Income-tax Officer were upheld by the Commissioner (Appeals).
65. In so far as the conclusion of the Bench on the first point of difference of opinion is concerned, the learned Judicial Member took the view for elaborate reasons given in his order that the transfer of shares amounted to sale of shares although in the process transfer of control was also involved and reflected and that it was not the shares that were transferred in addition to the control but that the control was transferred in addition to the shares. He, therefore, held against the assessee and in favour of the Revenue on this point. All the arguments addressed to him to show that there was a transfer of the control, were not accepted by him. I shall deal with the reasons a little later.
66. The learned Accountant Member, in a language which could have been avoided, to criticise the observations made by the learned Judicial Member, held that the entire transaction was that of transfer of 100 per cent. controlling interest by way of sale by the assessees to another group and that this transaction resulted in generating only a long-term capital gain and that since the entire proceeds of the gain were invested in specified assets, the entire long-term capital gain was exempt by virtue of the provisions of Section 54E of the Income-tax Act. He gave very elaborate reasons for his conclusions placing strong reliance upon the decisions of the Supreme Court in the case of CIT v. Mugneeram Bangur and Co. (Land Department) [1965] 57 ITR 299, Ramnarain Sons (P.) Ltd. v. CIT [1961] 41 ITR 534, and lastly in the case of Smt. Maharani Ushadevi v. CIT [1981] 131 ITR 445, decided by the Madhya Pradesh High Court. In the process of his discussion, he placed reliance upon many foreign cases as well as on the observations made by Lord Halsbury in the case of Charles Robert Leader v. George F. Duffey [1888] 13 AC 294 (HL), at page 301. He also placed strong reliance upon the clauses of the agreement to show that there was only a change of controlling interest. Since, according to him, there was only a transfer of controlling interest, the question as to when the bonus shares were issued and whether the bonus shares have to be separately valued and whether the bonus shares could be considered as short-term capital assets so as to bring to tax the capital gains arising thereon as short-term capital gain independent of the other transactions became irrelevant. In this context, he saw no reason or the necessity to disclose the date of issue of bonus shares. According to him, the non-disclosure of the date of issue of bonus shares not having been necessary, the assessee could not be said to have failed to disclose fully and truly all the material facts necessary for making the assessment and consequently, the Department was not justified in taking recourse to Section 147 to reopen the assessment. He held that there was a full and true disclosure of all material facts by the assessee, that the reopening of assessment was bad in law, that there was no short-term capital gain and that bonus shares could not be regarded as independent of other transactions for the exclusive purpose of considering them as short-term capital asset and since the proceeds thereof were invested in exempted assets as provided for in Section 54E of the Income-tax Act, the entire capital gain was exempt from tax. In the course of discussion, he dealt with another issue raised before the Tribunal, viz., whether the reopening of assessment was at the instance of higher authorities or by the Income-tax Officer suo motu. On the strength of the evidence that was placed before the Tribunal, he construed it as amounting to issuing directions by the higher authorities to the lower authorities to reopen the assessment and, therefore, there was no application of mind by the Income-tax Officer independent of the instructions given by the superior authorities. This was held to be an additional reason to hold that the reopening of assessment was bad in law. These are in sum the main features of the conclusions reached by the learned Accountant Member in contrast to the conclusions reached by the learned Judicial Member.
67. I have already indicated above as to how this difference of opinion led to the formation of the first point, viz., to repeat, whether the transaction of transfer of all the shares was a transaction of transfer of shares or a transaction of transfer of the control over the company and not on the shares.
68. The manner in which this point was framed by the learned Brothers shows that the transaction was in fact a transaction of transfer of shares, because the opening words of the point of difference are that the transaction was a "transaction of transfer of all the shares". What they were differing on was the effect of the interpretation of "transfer of shares". Thus, the point of difference was in two parts : one part related to the transfer of shares and the other part related to the interpretation of it, i.e., whether there was a transfer of control, impliedly meaning that control is capable of being transacted in for consideration like an asset. It cannot be said that there can be a transfer of the controlling interest without the transfer of shares. There cannot be a transfer of controlling interest unless shares are transferred in a particular number from one group of shareholders to another group of shareholders. When a particular group of shareholders acquires a majority interest in a company, their voting power increases and that voice will prevail over the management and that voice is popularly and commercially known as "controlling interest". This controlling interest is only an incidence of transfer of shares and cannot be seen or enjoyed or exercised independent of or de hors the transfer of shares. Normally, shareholding having voting power of more than 50 per cent. is considered as controlling interest, in the case of a company registered under the Companies Act. A company becomes a juristic person having perpetual succession and common sea! independent of the shareholders. The shareholders will have a right only to vote and receive the dividends if declared by the board of directors and will have a right to receive their capital in the event of winding up, but no shareholder can, during the subsistence of the company, claim to be an owner of any particular asset. This legal position has been very clearly enunciated by the Madhya Pradesh High Court in the famous case of Smt. Maharani Ushadevi v. CIT [1981] 131 ITR 445. In that case, the assessee purchased 42,000 shares of a company in order to acquire a controlling interest in that company, by paying Rs. 100 per share while the market value of the shares was only Rs. 76 per share. The question arose as to what was the value of the shares thus purchased and whether any controlling interest was purchased treating the difference between the market value and the purchase value as attributable to the controlling interest. The Income-tax Appellate Tribunal held that the excess paid by the assessee over the market value represented the value of the controlling interest and consequently did not constitute the cost of acquisition of the shares. On a reference, the Madhya Pradesh High Court held, disagreeing with the view expressed by the Tribunal, that the controlling interest in a company is always an incidence arising from the holding of a particular number of shares of the company ; it cannot be separately acquired or transferred, meaning that it is not an asset capable of being acquired or transferred. It flows from the fact that a number of shares are held by a person. If, for acquiring that number of shares, a person is required to pay more than the market value of the shares, then, the cost of acquisition of the block of shares purchased is what the assessee had paid for holding that block provided always that the transaction is genuine. The High Court held that the cost of acquisition of the shares to the assessee was Rs. 100 per share and not Rs. 76 as held by the Tribunal. This decision is, therefore, an authority for the proposition, which was well accepted by accountants as well as the commercial world all over, that controlling interest in a company is not by itself an asset but is only an incidence consequent upon the holding of a particular number of shares and, therefore, controlling interest cannot be perceived independent of the transfer of shares. Since the Members have agreed, according to me and my understanding of the orders written by them and the manner in which the point of difference was worded, that there is no difference of opinion between them on the first part, viz., that there was a transfer of shares, I hold that, in this case, there was a transfer of shares from the assessees' group to another group called Thirani which was also evidenced unequivocally by the agreement referred to above. This answers the first part of the question. Even otherwise, when all the shares held by all the shareholders of the assessee-company are sold for a consideration, how can it be viewed otherwise than as a sale of shares ? What went with the sale of shares is the controlling interest which cannot be seen as a separate and distinct asset.
69. The learned Accountant Member had given very elaborate reasons in his order to show that there was a transfer of controlling interest. In a way, the learned Judicial Member also held the same view. While I agree that, with the transfer of the shares by way of sale, the controlling interest also had changed hands, I do not propose to go into all the reasons given by the learned Accountant Member to show either by implication or expressly that the controlling interest was an asset capable of being transferred independent of the shares. What weighed most with the learned Accountant Member was that, when controlling interest in a controlled company was transferred by transferring the entire shareholding from one group to another group, the entire gain should be considered as a long-term capital gain. Let me test this proposition by taking up an illustration. Taking for example, the case of a company which had sold all its shares to another company, purchased an immovable asset, say, a land or a building, just a few weeks before the date of sale of its shares. Can it be said that that asset was not a short-term capital asset at all because all the shares were sold ? As I have pointed out earlier, the company being a legal personality distinct from its shareholders, the shareholders do not own any particular asset and all the assets are owned by the company in its capacity as a juristic person having the legal sanction to sue and be sued. When the assets are held by the company and not by the shareholders and when the company is the owner of the assets, the rights of the shareholders being confined only to the receipt of dividends as and when declared and to receive their capital in the course of winding up as contributories after satisfying the requirements of creditors, the owner of the assets, viz., the company, will have to be regarded, and is regarded under the Companies Act, as the owner of the assets and, therefore, the period for the purpose of determining whether an asset is a long-term capital asset or a short-term capital asset has to be reckoned only with reference to the date of acquisition by the company and not by the shareholders. It was for this reason, in my view, that the asset, viz., land, purchased a few weeks before the date of the sale of all the shares could only be considered by itself whether as a short-term capital asset or as a long-term capital asset and it cannot be said that because the entire shares were Sold and thereby there was a transfer of controlling interest, the asset purchased a few weeks before the date of sale could not be regarded as an independent transaction without reference to the company, the owner Of the asset. If this distinction in the legal position between the shareholder and the company is borne in mind, it will be clear that the transfer of the controlling interest will have nothing to do with the computation of the period during Which the assets are held by the company for the purpose of determining whether it is a long-term capital gain or a short-term capital gain. The decision of the Madhya Pradesh High Court in Maharani Ushadevi v. CIT [198l] 131 ITR 445, referred to earlier, provides, in my opinion, a complete answer to this question. I, therefore, hold that the second part also, viz., whether there was a transfer of the controlling interest or not has to be answered in the affirmative but without impinging upon the position to compute the capital gain on the transfer of the bonus shares which are considered as a separate and distinct asset capable of yielding a short-term capital gain as decided by the Madhya Pradesh High Court. Thus, in sum, my view on the first point of difference of opinion is that this transaction resulted in the transfer of shares, the transfer of controlling interest being a consequence or incidence of it.
70. The way in which the second point of difference was framed in a way overlaps with the manner in which the first point of difference was framed, because it says : "Whether the agreement of sale dated November 28, 1977, resulted in long-term capital gains or short-term capital gains". The answer to this question Is to be found only when reference is had to the point in controversy, viz., whether the company's shares could be considered as a separate and distinct capital asset and whether they could be considered as sold separately from other assets and, if so, whether, on their sale, a long-term capital gain arose or a short-term capital gain arose, I have already held that the bonus shares are distinct from the original shares and there is a plethora of case-law on this point which I think I need not now refer to, because it is settled law that bonus shares are different from original shares except that, for the acquisition of bonus shares, neither any payment is involved nor the company issuing the bonus shares releases any of its assets. It is only conversion of the general reserves of a particular company into bonus shares by allotting them to the shareholders in a particular ratio. Cases have arisen as to how they should be valued for the purposes of income-tax and again it is settled law that they should be valued by spreading the value of the original shares among the original shares and the bonus shares. In other words, by issuing bonus shares, the value of the original shares will come down. The agreement of sale dated November 28, 1977, which was referred to copiously and clause by clause by the learned Accountant Member in his order, does not refer anywhere to the sale of bonus shares independent of original shares. It speaks of the sale of the entire shareholding which included the bonus shares also. If bonus shares and original shares can be mixed together in such a way that they become one and the same without any distinction in law or in fact, then only one can say that the agreement of sale dated November 28, 1977, gave rise to a long-term capital gain. As I have endeavoured earlier to show that bonus shares have to be seen separately from the original shares and that was also the judicial opinion, the issue of bonus shares and their sale did result in a short-term capital gain. It will not be out of place for me to mention here that learned counsel for the assessees conceded that bonus shares, if they could be seen distinctly, are short-term capital assets giving rise to short-term capital gains.
71. The Bombay High Court, in the case of Manecklal Premchand v. CIT [1990] 186 ITR 554, 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 that case, the bonus shares were received by the assessee during the previous year relevant to the assessment year 1970-71 and were sold during the same previous year. It was held by the Bombay High Court that the gains arising therefrom were assessable as short-term capital gains. The Bombay High Court followed the earlier decision of the Gujarat High Court in the case of Chunilal Khushaldas [1974] 93 ITR 369. Inasmuch as the judicial opinion has been that bonus shares 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, I am of the view that the agreement of sale dated November 28, 1977, did result in short-term capital gains, as the bonus shares were also sold along with the other shares under this very agreement. I felt no need to discuss individually the points raised by the learned Accountant Member on this issue, because to agree with his view would mean that the bonus shares should be taken as if they are being held from the date of acquisition of the original shares. This would negate the judicial view expressed on this subject by the Bombay and Gujarat High Courts as well as the Calcutta High Court as referred to above.
72. The third point of difference of opinion is whether there is a failure on the part of the assessee to disclose fully and truly all the material facts for assessment in the original return filed for assessment year 1978-79 or not. The prima fade view I got on going through the material on record is that there was a failure on the part of the assessee to disclose the material facts. I formed that view notwithstanding the facts that the factum of issue of bonus shares as well as the dividends received on the bonus shares were both declared in the returns and that was enough to hold that the assessee had done his part to the entire satisfaction of the legal requirements. But, when I came to know in the course of arguments and on verification of facts on the record that the assessee had not disclosed the date of issue of the bonus shares, I felt that my prima facie view acquired strength. In a case where the issue concerned was computation of capital gains, nothing could be more important for disclosure than the date of issue of the bonus shares.
73. It is now an admitted fact that neither in the return nor at any point of time thereafter was the date of issue of bonus shared disclosed, although the fact of issue of bonus shares was mentioned. It is no doubt true that the Income-tax Officer with due diligence could have acquired this information, but on whose shoulders does the responsibility lie to disclose this, information, if this information is regarded as vital ? I am of the opinion that the date of issue of bonus shares is vital for the purpose of calculation of either short-term or long-term capital gains and the obligation to disclose this vital information was squarely put upon the assessee by the very specific terms of Section 147. Explanation 1 to Section 147 provides :
"Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso."
74. In this case, the assessee has produced before the Income-tax Officer evidence that there was issue of bonus shares and also shown the dividends received on those bonus shares. The Income-tax Officer could have with due diligence discovered the date of issue of the bonus shares. The disclosure of the issue of bonus shares without the date of the issue will not necessarily amount to disclosure within the meaning of the proviso, although the Legislature, by the use of the adverb "necessarily", did not rule out the possibility of a case where the Assessing Officer could have, from the production of account books and other evidence, discovered the necessary information which circumstance would then take away such a case from the purview of Explanation 1. In other words, Explanation 1 will not apply to all cases. The Legislature contemplated some cases where the production before the Assessing Officer of account books or other evidence could be considered as proper disclosure without casting a responsibility upon the assessee to disclose anything further.
75. It is now settled law that the responsibility of an assessee is to disclose the primary facts necessary to make the assessment and it is not the responsibility of the assessee to inform or instruct the Assessing Officer to draw the necessary inferences from those disclosed primary facts. Here, it can be said that the primary fact is the disclosure of the issue of bonus shares, but that would not satisfy the requirement of disclosing the date of issue. When the reopening of the assessment was for the purpose of bringing to tax the short-term capital gains arising on the sale of the bonus shares, the date of issue of the bonus shares assumes significance and becomes a relevant fact the non-disclosure of which can, in my opinion, be said to be non-disclosure fully and truly of all the material facts. Very forceful arguments were addressed to me during the hearing that, when the issue of bonus shares was within the knowledge of the Income-tax Officer, there was no further necessity for the assessee to inform the Income-tax Officer about what he already knew. This argument does not take into account the vital question of the date of issue of the bonus shares. The fact that the Income-tax Officer could have discovered this date of issue by questioning the assessee, is not as much relevant for the purpose of this reference to me as whether there is a full and true disclosure of all material facts by the assessee on his own.
76. The learned Accountant Member made some references to the relevance of the issue of bonus shares in paragraph 21 (see page 23) of his differing order in which he said that when the undertaking as a whole was sold and the consideration was paid for 100 per cent. of the shareholding and when there was no price separately fixed for bonus shares, the question of finding out the date of issue of bonus shares and consequently the question of computing short-term capital gains on the sale of such shares did not arise. As I have already said, this could not be a correct view in view of the decisions of the Bombay and Gujarat High Courts expressing a contrary view. Since the foundation for his view was the sale of the undertaking as a whole without fixing a separate price for the bonus shares, but since the bonus shares were to be regarded separately as new, assets which came into existence from the date of their issue, this reasoning was not available for the learned Accountant Member to come to his conclusion. Consequently, the date of issue of the bonus shares does arise and it assumes importance. He next held that the question of date of issue of bonus shares would be relevant only when the bonus shares were sold as such. Again, placing reliance upon the judgments of the Bombay and Gujarat High Courts referred to above, the bonus shares become the asset of the assessees only from the date of their issue and, therefore, the question of date of issue had become very relevant. The relevancy of the date of issue of the bonus shares would not depend upon whether a separate price was fixed for the bonus shares or not. This question of price of bonus shares would assume importance only after it was decided whether, on the sale of these shares, there was a short-term capital gain or a long-term capital gain. It is also difficult for me to agree with the view expressed by the learned Accountant Member that the determination of the average price of bonus shares would become relevant only when the bonus shares and the original shares are sold separately and not when all of them are sold en bloc. Although the learned Accountant Member, referred to the decision of the Gujarat High Court in CIT v. Chunilal Khushaldas [1974] 93 ITR 369 and noted the facts, he distinguished it on the strength of the decision of the Madras High Court by holding that when 100 per cent. of the shareholding was sold, there would not be any relevance of the issue of bonus shares separately. This distinction, in my view, is not proper and correct, inasmuch as the Madras High Court decision was given with reference to valuation of bonus shares when all the shares were sold. But, that decision does not anywhere say that bonus shares would not be considered as separate assets from the date of their issue. Neither the fact of the disclosure of the issue of bonus shares nor the fact of the disclosure of the dividends received therefrom nor the production of the agreement dated November 28, 1977, would, in my opinion, satisfy the requirement of disclosing fully and truly all material facts when the most important point, viz., the date of issue of bonus shares, was not disclosed. The non-disclosure may be intentional or unintentional, but that is not the issue. The issue is whether the disclosure of the date of issue of bonus shares is material or not. In my opinion, it is material and its non-disclosure would amount to failure on the part of the assessee to fully and truly disclose all the material facts.
77. In this context, I may have to refer to two decisions, one by the Madhya Pradesh High Court, Indore Bench, in the case of Chunnilal Onkarmal (Pvt) Ltd. v. ITO [1983] 139 ITR 380, and the other by the Patna High Court, Ranchi Bench, in the case of Sheo Narain Jaiswal v. ITO [1989] 176 ITR 352. Both these decisions have a bearing upon the view expressed by the learned Accountant Member on the validity of the reopening of the assessment. He held that the reopening of the assessment by the Income-tax Officer was at the behest of the Commissioner of Income-tax, i.e., higher authorities, and, therefore, there was no application of mind by the Income-tax Officer and consequently the reopening was invalid. That was the view given in these two cases. In the case before the Madhya Pradesh High Court, the High Court held that the Income-tax Officer, on the facts of that case, had not formed any belief that there had been a failure to disclose material facts and had issued the notice under Section 148 of the Income-tax Act under the direction of the Commissioner and, therefore, the notice of reassessment was invalid and was liable to be quashed. The same is the view expressed by the Patna High Court also. In this case, the Commissioner of Income-tax and the Additional Commissioner of Income-tax held the view that a particular amount should be assessed to tax but the Income-tax Officer expressed the opinion that it should not be assessed and the Income-tax Officer ultimately submitted a proposal under Section 147 of the Income-tax Act expressing doubts and difficulties regarding taxability of the amount in question and asked for instructions and, in obedience to those instructions, initiated reassessment proceedings. The Patna High Court held that the concerned Income-tax Officer never formed the requisite belief that there had been escapement of income or that the income had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly the material facts for the assessment for that year. The reassessment proceedings were declared invalid and were quashed.
78. Here, in this case, what happened was that the original assessment in the case of Mrs. Mangla S. Paranjape was completed on February 9, 1981, under Section 143(3). The assessment order provided :
"During the year the assessee has sold out the shares of PEFCO Ltd. for Rs. 9,56,480. These shares were originally acquired by the assessee in 1970 for Rs. 1,22,000 including bonus shares. As full amount of capital gain invested in fixed deposits and purchased shares in the company and units. The assessee has claimed exemption under Section 54E.... The statements of the assessee are verified with the record and the claim of the assessee is accepted."
79. The learned Accountant Member says that when the assessee had disclosed all the material facts and when the Income-tax Officer was satisfied by applying his mind and had completed the original assessment, being aware of the fact that there was an issue of bonus shares, there was no escapement of income and the reassessment proceedings were not warranted in law inasmuch as the reopening was only due to change of opinion. Thereafter, the letter written by the Commissioner of Income-tax dated October 11, 1983, to the Income-tax Officer came on the record and it was reproduced in paragraph 25 of the Accountant Member's order, which read (see page 25) :
"Re : Evasion of tax by Paranjape group of PEFCO Foundry and Chemicals Co. Ltd.
............
............
............
2. In the relevant period, the shareholders cleverly avoided mentioning the number of equity shares sold on November 22, 1977. Instead they mentioned a percentage of the equity capital sold by them, e.g., Smt. Y. D. Paranjape stated that 6.6 per cent. of the share of equity capital was sold by her. This statement is technically correct but suppresses the vital information about the bonus shares which as may be seen from the above figures were held by the assessee for less than 36 months. The shareholders further made a false statement in the return that the date of acquisition was December 18, 1969, and April 21, 1970. Here again, technically they may be right in the sense that when a company issues bonus shares, nothing goes out of the pockets of the company, but the fact remains that the assessees became holders of the bonus shares only in October, 1976. The shareholders claimed exemption under Section 54E which is allowable only in respect of long-term capital gains. The short-term capital gains have, thus, escaped assessment altogether. As this escapement of income from assessment is the result of a false statement in the return filed by the assessee, you are requested to examine the scope for action under Section 147(a) and also the scope for launching prosecution under Section 277."
80. It will be seen from this letter written by the Commissioner to the Income-tax Officer that the Commissioner was only requesting the Income-tax Officer "to examine the scope for action under Section 147(a) and also the scope for launching prosecution under Section 277". There is no specific direction to reopen the assessment which the Income-tax Officer was duty-bound to do. The Income-tax Officer acquired the information through the letter of the Commissioner dated October 11, 1983, that there was a possibility of escapement of income. Having thus acquired the information, he proceeded to reopen the assessment after having been satisfied that there was in fact escapement of income by the non-disclosure of the date of issue of bonus shares. The learned Accountant Member construed this letter as a direction by a superior authority to a subordinate and, therefore, he held that the reopening proceedings were not valid, placing reliance upon the rulings given by the two High Courts referred to above.
81. I am unable to agree with the view of the learned Accountant Member that merely because the Income-tax Officer had received information from a higher authority, the receipt of that information which was in the form of a suggestion was to be construed as a direction. The Income-tax Officer can receive information from any source, there is no bar on the receipt of information from the higher authorities. The requirement of Section 147(a) is that the Income-tax Officer must have reason to believe that income chargeable to tax had escaped assessment. He can form that belief on the basis of information gathered from any source. There is no bar that the information received from a superior authority should not be made use of. The Income-tax Officer has got a very vast machinery to help him to gather information about the activities of assessees under his charge and the information can come to him from several sources, may be from examination of accounts of other assessees, may be from decisions of the High Courts and the Supreme Court, may be from information gathered by the information collecting agencies working within the Department like survey, etc., or from higher authorities when they happen to examine the assessments of the assessees or other related connected assessees. It is impossible to define the parameters of the information. What is, therefore, to be seen is whether the Income-tax Officer in this case received information as a consequence of which he held the belief that income chargeable to tax had escaped assessment or he was directed to make an assessment irrespective of his belief as in the case of the Patna High Court in Sheo Narain Jaiswal v. ITO [1989] 176 ITR 352 ? I am of the opinion, reading the letter of the Commissioner of Income-tax carefully, that the Commissioner was only helping the Income-tax Officer by supplying him with information as otherwise he would not have suggested to examine the scope for action under Section 147(a). He would have directly given a direction to reopen the assessment under Section 147(a). One may argue that the request made by the Commissioner to examine the scope for action under Section 147(a) is almost equal to a command. But, in my opinion, it is not legally correct, because the Income-tax Officer, on verification of the correct facts, may still come to a different conclusion and, by conveying that conclusion to the Commissioner, convince him that there was no escapement of income. I am, therefore, of the opinion that this letter, on the strength of which the learned Accountant Member came to the conclusion that the Income-tax Officer was acting only at the behest of the Commissioner in reopening the assessments and, therefore, the reassessments were invalid, does not seem to be the correct position.
82. Another point made was that notices under Section 148 were first issued in this case and later on cancelled and again issued and, therefore, they were bad. What actually happened was that the notices under Section 148 were first issued only in two cases without first obtaining the sanction of the Commissioner of Income-tax. As they were illegal from the procedural angle, they were cancelled. They were again issued after observing the procedure prescribed under the Act. Therefore, this point also is not available to hold that the reassessment proceedings were bad in law. I find merit in the contention advanced on behalf of the Revenue that, when the return was not properly filled in, it was held that the return so filed was plainly and manifestly a breach of the obligation imposed by Section 139(1) of the Income-tax Act requiring the assessee to furnish a return of income in the prescribed form and when the non-disclosure was held to have resulted in the failure of the assessee to disclose material facts and, therefore, being guilty of concealment of income attracting penalty under Section 271(1)(c), as held by the Supreme Court in CIT v. Smt P.K. Kochammu Amma [1980] 125 ITR 624. I see no reason or difference in holding that, when a material fact about the date of issue of bonus shares was a requirement in the return and when it was not disclosed, it does amount to failure to disclose fully and truly all material facts and there was a breach of the obligation under law by putting a lid upon the comprehension of this legal requirement.
83. In ITO v. Sudhir Kumar Bhose [1972] 84 ITR 60 (Cal), the facts were that the Income-tax Officer issued a notice under Section 148 of the Income-tax Act, 1961, to the assessee proposing to make a reassessment for the reason that in the return filed by the assessee for the concerned assessment year, Part VII, i.e., particulars of capital gains, was not filled in. The assessee filed a writ petition challenging the notice. A single judge accepted the petition and quashed the notice holding that the assessee had disclosed the particulars in respect of a transaction of house property at the hearing before the Income-tax Officer and the Income-tax Officer had never made a complaint that the assessee had failed to disclose the purchase price or fair market price of the property. On appeal, it was contended that the assessee believed bona fide that no capital gain was involved in the transaction and, therefore, he did not fill in Part VII of the return.
The Calcutta High Court held that the very fact that the assessee failed to fill up Part VII of the return may be, prima facie, evidence of nondisclosure of material facts to give jurisdiction to the officer. The question whether there was in fact any capital gain made by the assessee was immaterial at that stage, nor was the question whether the assessee's belief was bona fide, because the non-disclosure need not be wilful or deliberate in order to give jurisdiction to the Income-tax Officer under Section 147. Even an innocent mistake committed can give jurisdiction to the Income-tax Officer to invoke the provisions of Section 147. The Calcutta High Court further held that the jurisdiction of the Income-tax Officer to issue notice under Section 148 arises immediately after the omission to file the return or the failure to disclose all the material facts therein and no subsequent act on the part of the assessee can take away that jurisdiction. When the assessee fails to submit a correct and complete return in the manner required by Section 139, the assessee commits the default of nondisclosure fully and truly of all material facts. It has not been shown to us that this decision had not been followed later on or reversed. Therefore, the law is that when there is a failure on the part of the assessee to furnish the return under Section 139 correctly and completely by filling in all the columns, there will be failure on the part of the assessee to disclose fully and truly all the material facts, because the return is a legal form and all the required information to the Income-tax Officer is specifically provided for therein and it has to be specifically given by the assessee in respect of each column and if it is not done, there will be failure. If this is the law, I fail to see how the non-disclosure of the date of issue of the bonus shares, which is very vital for the computation of short-term capital gains, can be absolved.
84. The learned Departmental Representative, during the course of arguments, brought to my notice two relevant facts to show that there was application of mind by the Income-tax Officer after the suggestion from the Commissioner of Income-tax was received and there was no application of mind by the Income-tax Officer when he made the original assessment. After the information was received from the Commissioner, the Income-tax Officer took his own time and did not complete the assessment immediately. He made his own enquiries and then only started the proceedings, while the Income-tax Officer who made the assessment originally did not make any enquiries about the issue of bonus shares, as the assessment order passed by him does not show anything about such an enquiry. These facts are also relevant to show that the reassessment proceedings could not be held to be invalid for want of application of mind by the Income-tax Officer in reopening the assessments. The Departmental Representative further argued that the learned Accountant Member's observation that the Income-tax Officer should have verified the past record to find out whether the bonus shares were issued or not and at what point of time, was not a proper observation, because it went beyond the scope of Section 143(1) under which provision the assessment was originally completed. I find merit in this submission. The Departmental Representative further pointed out that even the agreement of sale on which reliance was placed by the assessee was not produced at the original assessment stage but it was produced only during the reassessment proceedings and, therefore, the arguments based upon the agreement should not be countenanced at all to show that the assessee had made a full and true disclosure.
85. Therefore, I finally conclude that merely because the Commissioner of Income-tax drew the Income-tax Officer's attention to a particular fact and required him to examine it, it does not amount to a direction given to the Income-tax Officer so as to say that the Income-tax Officer had not applied his mind. For these reasons, I hold that there was a failure on the part of the assessees to disclose fully and truly all material facts necessary for assessment in the original returns filed for the assessment year 1978-79.
86. Now, the last point of difference is whether, in the facts and circumstances of the case, the reassessment under Section 147(a) is justified in law or not. I have sufficiently discussed this issue while expressing my opinion on point No. 3 and since points Nos. 3 and 4 converge on the same issue, and for the reasons given therein, I hold that, on the facts and in the circumstances of the case, the reassessments under Section 147(a) are justified in law.
87. The matter will now go before the regular Bench for disposal of the appeals in accordance with the opinion of the majority on these points.