1. In 1938 the managing agency of the Gujarat Cotton Mills Co. Ltd. was held by the firm of Shantilal Bhagwandas & Co. and by an agreement dated 18th January, 1938, this firm agreed to assign the managing agency and 4,736 shares of the company to Peeramal Chaturbhuj for a consideration of Rs. 7,51,000. On the 7th September, 1946, Peeramal Girdharlal & Co. entered into an agreement with Messrs. Chaturam & Sons and either by this agreement Peeramal Girdharlal & Co. agreed to relinquish their managing agency rights and to get Messrs. Chaturam & Sons appointed the managing agents. The agreement also provided that the vendors shall sell 65,012 shares of the company to the purchasers at the price of Rs. 65 per share. Now, the assessee is a partner in Peeramal Girdharlal & Co. and the Taxing Department sought to assess him to tax in respect of capital gains for the assessment year 1948-49 and what was contended by the Department was that for the purpose of capital gains the sale price of each share should be taken at Rs. 65, the price mentioned in the agreement. On the other hand, the assessee contended that the market value of these shares on the 7th September, 1946, was Rs. 46 per share and that was proper price which should be taken into consideration for determining what capital gains had been made by the assessee. The Tribunal accepted the contention of the Department and the assessee has come on this reference.
2. Now, the Tribunal has found as a fact, and there can be no dispute about it, that main object or rather the only object of the agreement of the 7th September, 1946, was to get the purchasers of these shares appointed the managing agents of the company. The Tribunal also points out in its order that this was not an ordinary agreement of purchase and sale of shares of the company entered into in the ordinary course of business, and the only reason why it has rejected the assessee's contention was that the parties did not apportion the price of Rs. 65 to the shares and to the managing agency. Under section 12B (2) for the purpose of computing capital gain the full value of the consideration of or which the sale, exchange or transfer of the capital asset is made has to be taken into account, and the short question what we have to consider is : What is the full value of the shares which were sold by the assessee suggest that the full value is necessarily the value which the parties place upon a capital asset. The full value must be the true value, not any artificial value, which parties for any purpose any assign to a particular capital asset. Here we have evidence that these shares were marketable and they had a market price which was Rs. 46 per share. The agreement also makes it clear that it was a composite agreement by which not merely the shares were being sold but the shares and the managing agency rights. Therefore, the consideration paid by the purchasers, viz., Rs. 65 per share, was not the consideration paid for the shares alone but it was a consideration that was paid for the shares and also for the relinquishment of the managing agency by the vendors. It is therefore not possible to accept the contention that the full value of shares within the meaning of section 12 (B) of the Act was Rs. 65 per share. The full value was the market value of Rs. 46 per share and an additional amount was paid by the purchasers because they obtained not only he shares but also the important right to manage the Gujarat Mills Co. Ltd. It is difficult to understand how the mere fact that the parties have not apportioned the consideration between the two assets which were being dealt with by this agreement can make any difference to the rights of the parties. The position might have been different if the market value of the shares could not be ascertained. Then it might be said that it is difficult to put a proper value upon the shares and to put a proper value for the consideration if the assignment or relinquishment if the managing agency. But when the market value is available and when it is known for what price these shares could be purchased or sold, there is no difficulty whatsoever in the apportionment.
3. Mr. Joshi's contention is that the capital asset which was being sold and in respect of which capital gain was made was not merely the shares but also the managing agency agreement, and therefore if Rs. 65 were obtained by the purchasers they obtained it in respect of the capital asset and the whole of the capital asset and the whole of the capital gain must be brought to tax. Now, it is not the case of the Taxing Department and it has never been their case that the capital asset in respect of which capital gain was made by the assessee and which is sought to be taxed as the shares and the managing agency. The whole of the reference is based upon the fact that the only capital asset we are concerned with the shares and not the managing agency. Therefore, we must separate the managing agency from the shares in considering what is the value to be pour upon the shares. Let us test the attitude taken up by the Department form this point of view. Assuming that the parties had put Rs. 5 or Rs. 10 as the value of the shares and they had valued the managing agency for the balance of the consideration, would the Department have accepted the artificial value put by the parties upon the shares if that value was far below the market value The position is the same here. The parties have put upon the shares a value which is much higher that the market value. Admittedly, it is an artificial value and it is artificial because the value put upon the shares is not the value of the shares alone but it is the composite consideration paid by the purchasers for obtaining the shares and also acquiring the managing agency. Under the circumstances, in our opinion, for the purpose of section 12 (B)(2) the sale price of the shares should be taken at Rs. 46 per share and not Rs. 65 per share.
4. A question was also raised that, if that be so, the purchase price to the assessee of these shares should also be determined on the same basis and for that purpose the value of the shares when they were transferred in 1938 should be taken into consideration. Now, the assessee is protected there by the proviso to section 12B (2) and that proviso gives him the option, that were the capital asset became the property of the assessee before the 1st day of January, 1939, he may substitute for the actual cost such fair market value which shall be deemed to be the actual cost to him of the asset on that date. Here, the assessee has exercised the option and he wants the purchase price to be taken as the fair market value prevailing on the 1st January, 1938. In doing so, the assessee is within his rights and the Department cannot insist that the assessee should be compelled to treat as the purchase price the actual cost of the shares in January, 1938.
5. Therefore, the answer to the question submitted to us will be that the sale price per each share should be taken at Rs. 46. The Commissioner to pay the costs of the reference.
6. No order on the notice of motion. No order as to costs.
7. Reference answered accordingly.