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Harish Mahindra and Another Vs. Commissioner of Income-tax, Bombay City-ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 75 of 1971
Judge
Reported in(1981)25CTR(Bom)168; [1982]135ITR191(Bom); [1981]7TAXMAN89(Bom)
ActsIncome Tax Act, 1961 - Sections 45, 47, 48, 49, 55 and 55(2)
AppellantHarish Mahindra and Another
RespondentCommissioner of Income-tax, Bombay City-ii
Excerpt:
- - 45 subjects to the charge of income-tax the profits and gains arising on the transfer of 'a capital asset'.this would clearly show that profits and gains arising from the transfer of any capital asset were sought to be made chargeable to income tax under the head 'capital gains' save in the case of certain exceptions set out therein. section 48, which deals with the mode of computation of capital gains and deductions, clearly refers to the cost of acquisition of 'the capital asset' whereas the opening portion of sub-s. 55 refers to 'a capital asset'.this, in our view, would clearly show that the option given by cl......year ended 31st march, 1964, relevant to the assessment year 1964-65, the assessee sold 29,000 sub-divided shares of rs. 10 each at varying prices averaging to a sale price of rs. 17 per share, the total sale proceeds realized by the assessee amounting to rs. 4,93,000. as pointed out by the said tribunal, there is no dispute that the shares sold were the sub-divided original shares and not the new shares acquired by way of bonus shares. although it is not known whether the said 29,000 sub-divided shares of rs. 10 each sold by the assessee during the assessment year 1964-65 were derived from the original 600 shares of rs. 500 each acquired by the assessee prior to 1st january, 1954, or whether any of them were derived from the original 195 shares of rs. 500 each acquired by the assessee.....
Judgment:

Kania, J.

1. This is a reference made under s. 256(1) of the I.T. Act, 1961 (referred to hereinafter as 'the said Act'), made at the instance of the assessees. This reference arises from two appeals filed before the Income tax Appellate Tribunal by Harish Mahindra and Keshub Mahindra, respectively. These appeals were disposed of by the said Tribunal against the assessees, and the said assessees made applications to the said Tribunal for making a reference. It is on these applications that a consolidated statement of case has been prepared and furnished by the Tribunal. As the issues and facts involved in the cases of both the said assessees are the same, it is common ground that it is sufficient if the facts in the case of Harish Mahindra are set out. The said facts, giving rise to the said reference, are as follows :

Mahindra & Mahindra Ltd. was initially a private limited company. As per its balance-sheet as on 31st October, 1953, its paid-up capital consisted of 2,400 shares of Rs. 500 each. As per the balance-sheet of the said company as on 31st October, 1954, its paid-up capital was shown at Rs. 15 lakhs by way of 3,000 'A' ordinary shares of Rs. 500 each and full face value of Rs. 1,68,090 received in advance of allotment in respect of 16,809 'B' ordinary shares of Rs. 10 each. Thus, in April, 1955, the paid-up capital of the said company was Rs. 16,68,090 consisting of 3,000 'A' ordinary shares of Rs. 500 each and 16,809 'B' ordinary shares of Rs. 10 each. On 25th April, 1955, an agreement was entered into between the said company and the trustees of the shareholders for the conversion of the said company from a private limited company into a public limited company with a view to issuing an invitation to the public to subscribe to the share capital of the said company. The terms of this agreement are reflected in certain resolutions which were passed pursuant to the said agreement at an extraordinary general meeting of the shareholders of said company held on 15th June, 1955. Resolutions which are material for our purposes are at items Nos. 2,3,4 and 5 in the minutes of the extraordinary general meeting of the said company held on 15th June, 1955. By the resolutions at items Nos. 2 and 3, certain amendments were made to the memorandum of association and articles of association of the said company, respectively, whereby it was converted into a public limited company. By the resolution at item No. 4, existing issued 3,000 fully paid-up 'A' ordinary shares of Rs. 500 each were sub-divided into 1,50,000 shares of Rs. 10 each duly renumbered. By the resolution at item No. 5, reserves to the extent of Rs. 16,68,090 were capitalised and distributed amongst the members by allotting 1,66,809 shares credited as fully paid-up shares of Rs. 10 each to the members who are shareholders on 25th April, 1955, in proportion to the face value of the shares held by them.

2. On 31st October, 1953, the assessee, Harish Mahindra, was the holder of 600 shares of Rs. 500 each in the said company, and as on 31st October, 1954, the said assessee was the holder of 795 shares of Rs. 500 each. The aforesaid first-mentioned 600 shares were acquired by the said assessee prior to 1st January, 1954, at a cost of Rs. 3,00,000. Further, 195 shares were acquired by him after 31st October, 1953, and before 31st October, 1954, at a cost of Rs. 97,500. Although it is not known when the said further 195 shares were acquired, all the I.T. authorities appear to have assumed that they were acquired before 1st January, 1954. Thus, when the said company was converted into a public limited company the assessee held 795 'A' ordinary shares of Rs. 500 each acquired at a cost of Rs. 3,97,500. We propose to refer hereinafter to these shares as 'the original shares'. On 15th June, 1955, the original shares held by the assessee were sub-divided into 39,750 shares of Rs. 10 each, with the total paid-up value thereof remaining at the same figure of Rs. 3,97,500. This was as a result of the sub-division effected by the said resolution at item No. 4 of the said extraordinary general meeting. Immediately thereafter, on the same day, by the next resolution the assessee acquired further 39,750 new shares of Rs. 10 each, credited as fully paid-up shares without any cash consideration, on a capitalisation of the said company's reserves (referred to hereinafter as 'the bonus shares'). The assessee thus came to hold in the said company 79,500 shares of the face value of Rs. 10 each as at the end of June, 1955.

3. During the accounting year ended 31st March, 1964, relevant to the assessment year 1964-65, the assessee sold 29,000 sub-divided shares of Rs. 10 each at varying prices averaging to a sale price of Rs. 17 per share, the total sale proceeds realized by the assessee amounting to Rs. 4,93,000. As pointed out by the said Tribunal, there is no dispute that the shares sold were the sub-divided original shares and not the new shares acquired by way of bonus shares. Although it is not known whether the said 29,000 sub-divided shares of Rs. 10 each sold by the assessee during the assessment year 1964-65 were derived from the original 600 shares of Rs. 500 each acquired by the assessee prior to 1st January, 1954, or whether any of them were derived from the original 195 shares of Rs. 500 each acquired by the assessee between 31st October, 1953, and 31st October, 1954, the department has all along assumed that all the shares sold were derived from the original shares acquired before 1st January, 1954. In respect of the said assessment year the assessee claimed a capital loss of Rs. 1,13,390 on the sale of 29,000 sub-divided shares of Rs. 10 each on the footing that they constituted a capital asset which became the property of the assessee before 1st January, 1954, and that the fair market value of the said asset on 1st January, 1954, was Rs. 20.91 per share. The assessee claimed this capital loss on the basis that he was entitled to exercise the option to substitute the fair market value of the original shares on 1st January, 1954, for the cost of acquisition thereof. The ITO did not to allow the assessee's claim of capital loss of Rs. 1,13,390 and held that the assessee had, by disposing of the said shares, made a capital gain of Rs. 2,03,000 which the ITO brought to tax. It is pointed out by the Tribunal that although the order passed by the ITO is not clear, he seems to have taken the view that the said sub-divided shares sold by the assessee were not the original shares which had been acquired by the assessee prior to 1st January, 1954, and, hence, the said sub-divided shares sold by the assessee could not be regarded as an asset acquired by the assessee prior to 1st January, 1954, with the result that the option of substituting the fair market value as on 1st January, 1954, in the place of cost of acquisition was not available to the assessee.

4. On an appeal preferred by the assessee, the AAC accepted the contention of the assessee that the asset sold during the accounting year, namely, the said 29,000 sub-divided shares, were the same asset as was acquired by the assessee prior to 1st January, 1954, and, hence, the assessee was entitled to substitute the fair market value of the said asset on 1st January, 1954, for the cost of acquisition for the purpose of computation of capital gains. The AAC, however, took the view that the fair market value of the sub-divided shares on 1st January, 1954, had to be arrived at by determining the fair market value of the 795 original shares and spreading out the same over the 39,750 sub-divided shares and the 39,750 bonus shares. The AAC thus calculated the fair market value of the said sub-divided shares of Rs. 10 each after taking into account the bonus shares allotted to the assessee and by applying the principle of averaging. On this basis, the AAC also came to the conclusion that by the aforesaid transaction the assessee had made capital gains of Rs. 2,03,000.

5. On an appeal preferred by the assessee to the Tribunal, the Tribunal, inter alia, held that the sub-divided shares obtained by the assessee as aforestated were not acquired prior to 1st January, 1954, and, therefore, the option of substituting the fair market value as on 1st January, 1954, for the cost of acquisition of the said capital asset represented by the said sub-divided shares was not available to the assessee. The Tribunal held that the original shares held by the assessee constituted a different capital asset from the said sub-divided shares. The Tribunal further held that on the general principles of averaging the cost of acquisition of the sub-divided shares, in this case, had to be arrived at by spreading the original cost of Rs. 3,97,500 over the 39,750 sub-divided shares and the 39,750 bonus shares allotted to the assessee as aforesaid and that, on this basis, the cost of acquisition of the sub-divided shares in the present case was only Rs. 5 per share. On this basis the Tribunal took the view that by the disposal of the said 29,000 sub-divided shares the assessee had made a capital gain of Rs. 3,48,000.

6. The following three questions have been referred to us for determination arising from the judgment of the Tribunal :

'(1) Whether, on the facts and in the circumstances of the case, the option of substitution the fair market value of the asset on 1st January, 1954, for the cost of acquisition of the asset contemplated under section 55(2)(i) of the Income-tax Act, 1961, is available to the assessee ?

(2) If the answer to question No. 1 is in the negative, whether the principle of averaging the cost of acquisition of the asset under section 48(ii) of the Income-tax Act, 1961, is applicable in this case ?

(3) If the answer to question No. 1 is in the affirmative, whether the principle of averaging is applicable to the determination of the fair market value of the asset on 1st January, 1954, under section 55(2)(i) of the Income-tax Act, 1961 ?'

7. The submission of Mr. Dastur, the learned counsel for the assessee, is that the sub-divided shares sold by the assesse as aforestated constituted the same capital asset as was acquired by the assessee prior to 1st January, 1954. It was submitted by Mr. Dastur that a share held by a member of a limited company only represents his interest in the share capital of the company and hence a mere sub-division of the share does not result in bringing about a capital asset different from the sub-divided shares. It was submitted by Mr. Dastur that on sub-division all that really happens is that more share certificates might be issued in the place of one. It was urged by him that even a variation in the rights of a person holding a capital asset would not necessarily alter the nature or character of the capital asset. It was contended by him that where all shares are sub-divided, as in the present case, there is no change in the capital asset represented by the said shares as the interest of the shareholder in the capital of the company remains the same. It is urged by Mr. Dastur that, in the present case, as the original shares, which were sub-divided into the said 29,000 shares sold by the assessee, were acquired by the assessee prior to 1st January, 1954, or, at least, this basis has been accepted by the department, the option of substituting the fair market value of the original shares, from which the said 29,000 sub-divided shares were derived, as on 1st January, 1954, in the place of cost of acquisition thereof, should be available to the assessee. It was further contended by Mr. Dastur that, as the assessee had exercised the option of substituting the fair market value of the capital asset concerned on 1st January, 1954, in the place of the cost of acquisition thereof, the allotment of bonus shares after 1st January, 1954, was of no relevance in determining the fair market value of the sub-divided shares. It was, on the other hand, contended by Mr. Joshi, the learned counsel for the department, that the sub-divided shares constituted a different capital asset from the original shares and as the sub-divided shares were obtained by the assessee after 1st January, 1954, the option of substituting the fair market value of the capital asset concerned, as on 1st January, 1954, was not at all available to the asssessee.

8. Before considering the merits of the aforesaid submissions made by the respective counsel it will be useful to take a note of certain relevant statutory provisions at this stage. Section 45 of the said Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, with certain exceptions with which we are not concerned here, be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place. Section 47 lays down that certain transactions referred to therein are not to be regarded as transfers for the purposes of s. 45. Section 48 runs as follows :

'48. The income chargeable under the head 'Capital gains' shall be computed by deduction from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer ;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.'

9. The relevant provisions of sub-s. (2) of s. 55, as they stood at the relevant time read thus :

'55. (2) For the purposes of sections 48 and 49, 'cost of acquisition', in relation to a capital asset, -

(i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee; ...

(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on -

(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,

(b) the conversion of any shares of the company into stock,

(c) the reconversion of any stock of the company into shares,

(d) the sub-division of any of the shares of the company into shares of smaller amount, or

(e) the conversion of one kind of shares of the company into another kind,

means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.'

10. Under cl. (16) of s. 2 of the Indian Companies Act, 1913, 'Share' means the share in the share capital of the company and includes stock when a distinction between stock and shares is expressed or implied. The same definition is retained in cl. (46) of s. 2 of companies Act, 1956.

11. We propose to consider the first question as to whether, even on the assumption that the sub-divided shares were not the same capital asset as the original shares from which the sub-divided shares were derived, the assessee was precluded from exercising the option given under cl. (i) of sud-s. (2) of s. 55 set out above. In the present case, the capital asset transferred by the assessee consists of 29,000 sub-divided shares of the said company. As pointed out above, the sub-divided shares became the property of the assessee on the sub-division of all the original shares of the said company into shares of a smaller amount. Under the provisions of sub-cl. (d) of cl. (v) of sub-s. (2) of s. 55, the cost of acquisition of the sub-divided shares transferred by the assessee has to be calculated with reference to the cost of acquisition of the shares from which the sub-divided shares were derived, namely, the cost of acquisition of the said original shares, which, as pointed out earlier, have been assumed by the department to have been acquired by the assessee prior to 1st January, 1954. The question then is as to how the cost of acquisition of the original shares has to be arrived at and, whether in arriving at such cost of acquisition, the assessee is entitled to exercise the option of substituting the fair market value of the said shares as on 1st January, 1954. In this regard, it must be noticed that a perusal of the opening part of sub-s. (2) shows that it deals with the cost of acquisition in relation to 'a capital asset' Clause (i) provides that where 'the capital asset' which, in our view, must mean the capital asset referred to in the opening portion of sub-s. (2), namely, any capital asset whose cost of acquisition has to be determined for the purposes of ss. 48 and 49, became the property of the assessee before 1st January, 1954, 'the cost of acquisition' thereof means the cost of acquisition of that asset to the assessee or the fair market value of the said asset as on 1st January, 1954, at the option of the assessee. It was submitted by Mr. Joshi, in this connection, that the option available under cl. (i) aforesaid was only regarding the very capital asset which had been transferred by the assessee and not regarding the cost of acquisition of the capital asset from which the said capital asset transferred might have been derived in any of the manners set out in cl. (v). In our view, this submission of Mr. Joshi is not sustainable. It is significant that s. 45 subjects to the charge of income-tax the profits and gains arising on the transfer of 'a capital asset'. This would clearly show that profits and gains arising from the transfer of any capital asset were sought to be made chargeable to income tax under the head 'Capital gains' save in the case of certain exceptions set out therein. Section 48, which deals with the mode of computation of capital gains and deductions, clearly refers to the cost of acquisition of 'the capital asset' whereas the opening portion of sub-s. (2) of s. 55 refers to 'a capital asset'. This, in our view, would clearly show that the option given by cl. (i) of sub-s. (2) of s. 55 was not intended to restricted to be restricted only to the capital asset transferred by the assessee but was available, in a case where the said capital asset had become the property of the assessee in any of the manners set out in cl. (v) of the said sub-section, with respect to the determination of the cost of acquisition of the capital asset from which the capital asset transferred had been derived. In view of this, in our view, even if the sub-divided shares transferred by the assessee, as set out earlier, were not the same capital asset as constituted by the original shares from which the sub-divided shares were derived, the assessee was still entitled to exercise the option contained in cl. (i) of sub-s. (2) of s. 55 as the position taken as undisputed in this case is that the said original shares were acquired by the assessee prior to 1st January, 1954.

12. In the view which we have taken above regarding the exercise of the option to substitute the fair market value as on 1st January, 1954, in the place of the actual cost of acquisition, it is really not necessary for us to consider whether the sub-divided shares and the original shares from which the sub-divided shares were derived constituted the same capital asset. We may, however, state that it appears to us that, in view of the definition of the term 'share' contained in the Indian Companies Act, 1913, which definition has been retained by the Companies Act, 1956, a mere sub-division of shares would not render the sub-divided shares a new capital asset. Such sub-division does not, in any manner, affect the interest of the shareholder in the company or his relationship with the company. It is not as if, as a result to a sub-division of the shares, the share of the shareholder in the share capital of the company is either increased or decreased. All that happens is that instead of the share or interest of a shareholder in the share capital of the company being represented by a particular number of shares, it is, after the sub-division, represented by a larger number of shares. Thus when shares of a company of the face value of Rs. 100 each are sub-divided into shares of Rs. 10 each, all that happens is that the share or interest of a particular shareholder in the share capital of the company represented, let us say, by 10 shares of the face value of Rs. 100 each, comes to be represented by 100 shares of the face value of Rs. 10 each. In view of this, if we had been called upon to decide the aforesaid question, we would have been inclined to take the view that the sub-divided shares transferred by the assessee constituted the same capital asset as was constituted by the original shares held by the assessee, from which the sub-divided shares were derived. We are, however, not required to decide this question as we have already set out.

13. We propose finally to consider the question as to whether the issue of bonus shares on 15th June, 1955, in any manner affected the fair market value, as on 1st January, 1954, of the original shares from which the said 29,000 sub-divided shares transferred by the assessee were derived. In this regard, the matter is concluded by the decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO : [1971]82ITR788(SC) . In that case it was held that for the ascertainment of the fair market value of the shares in question on 1st January, 1954, any issue of bonus shares subsequent to that date was wholly extraneous and irrelevant and could not be taken into consideration. In view of this decision, it is common ground that as far as this court is concerned, we must proceed on the footing that the issue of the bonus shares on 15th June, 1955, in no manner affected the determination of the fair market value of the original shares as on 1st January, 1954, as the assessee had exercised the option of substituting the fair market value of the original shares from which the sub-divided shares which were transferred as set out earlier had been derived. The issue of bonus shares on a subsequent date, namely, 15th June, 1955, was wholly irrelevant to the determination of this fair market value. The question of applying the principle of averaging, on the basis of the issue of the issue of the said bonus shares, therefore, does not arise.

14. In the result, the questions referred to us our determination are answered as follows :

Question No. 1 : In the affirmative. Question No. 2 : Does not arise and we decline to answer the same. Question No. 3 : In the negative. The Department must pay to the assessees the costs of the reference.


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