1. This order shall also govern the disposal of M.C.C. 14 of 1981.
2. M.C.C. No. 411 of 1976 is a reference made by the Income-tax Appellate Tribunal referring the following questions of law to this court for its opinion :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that,--
(a) the assessee paid the excess over the market price for the shares of the Empire Dyeing and . in order to acquire the controlling interest in the company and that such controlling interest was a 'property' Under Section 2(14) of the Income-tax Act, 1961
(b) the controlling interest was not merely a side-effect of a block holding of shares and
(c) hence the 'cost' for computing capital loss or capital gains was Rs. 76 per share and not Rs. 100 per share as claimed by the assessee '
3. M.C.C. No. 14 of 1981 is a reference made at the instance of this court requiring the Tribunal to state the case and refer the following questions of law to this court:
'1. Whether, on the facts and in the circumstances of the case, the controlling interest of the assessee in the Empire Dyeing & . also passed on to the sons and husband of the assessee along with the shares sold to them
2. Whether exemption granted by Clause (iii) of Sub-section (1) of Section 15 of the Part B States (Taxation Concessions) Order, 1950, wouldalso include in its scope the income earned by way of capital gains realised on the sale of such plots '
4. The material facts giving rise to these references briefly are as follows:
The assessment years in question are 1967-68, 1969-70 and 1970-71. The assessee purchased 42,000 shares of M/s. Empire Dyeing and ., hereinafter referred to as the company, at the rate of Rs. 100 per share in the assessment year 1964-65 and 1,500 shares at the rate of Rs. 30 per share in the assessment year 1965-66. Thus, the total cost of 43,500 shares amounted to Rs. 42,45,000. The total capital of the company was divided into 60,000 shares of the face value of Rs. J 5 per share. As a result of the purchase of 42,000 shares, the assessee obtained a controlling interest in the company. In the assessment year 1967-68, the assessee sold 15,000 shares to her two minor sons in two lots. The sale price for the first lot was Rs. 30 per share, while the sale price for the other lot was Rs. 62 per share. On account of these sales, the assessee claimed capital loss of Rs. 9,54,000 in the assessment year 1967-68. In the assessment year 1969-70, the assessee again sold 800 shares at the rate of Rs. 56 per share to her minor sons and disclosed a capital gain of Rs. 9,600. In the assessment year 1970-71, the assessee sold 11,900 shares, and on the sale of these shares, the assessee disclosed a capital gain of Rs. 1,60,939. The ITO did not accept the figures of capital loss or capital gain as claimed by the assessee. The ITO found that the assessee had purchased the shares in 1963 at the rate of Rs. 100 per share when the market value of the shares was only Rs. 76 per share. According to the ITO, the extra price of Rs. 24 per share was paid by the assessee to acquire the controlling rights of the company. The ITO, therefore, held that the correct cost price of the shares sold in the assessment year 1967-68, after excluding the value of controlling rights, would be the prevailing market rate of Rs. 76 per share. On this basis, the ITO computed the capital loss sustained by the assessee for the assessment year 1967-68 at Rs. 5,94,000 as against Rs. 9,54,000 claimed by the assessee. Applying the same principle in the succeeding two years, the ITO computed the capital gains at Rs. 30,720 and Rs. 4,73,304 for the assessment years 1969-70 and 1970-71, respectively. Against the order of the ITO, the assessee preferred an appeal before the AAC, who upheld the order of the ITO. On further appeal, the Tribunal also upheld the view taken by the ITO. Hence, at the instance of the assessee, the Tribunal has referred the aforesaid question of law in M.C.C. No. 411 of 1976.
5. Before the Tribunal, an alternative contention was raised on behalf of the assessee that if controlling power was embedded in the capital asset, it passed on to those to whom the shares were sold and, on that basis also,the purchase price of Rs. 100 per share should have been taken as the cost of acquisition. The Tribunal did not allow the alternative case to be set up and the application for referring that question made by the assessee was also rejected. On an application made in that behalf, this court directed the Tribunal to state the case and refer the aforesaid question No. 1 in M.C.C. No. 14 of 1981 to this court for its opinion.
6. With regard to question No. 2 in M.C.C. No. 14 of 1981, the material facts are that the assessee sold five plots of land appurtenant to Yeshwant Niwas Palace for a total value of Rs. 9,41,625. In respect of these sales, the ITO computed the capital gains at Rs. 5,61,190. The assessee contended that the charge to capital gains was not attracted as the place was the official residence of the Ruler and the income therefrom was exempt under Section 15(1)(iii) of the Part B States (Taxation Concessions) Order, 1950, hereinafter referred to as the ' Taxation Concessions Order '. This claim was rejected by the ITO on the ground that exemption was in respect of the bona fide annual value of the official residence of the Ruler and not in respect of the capital gains. On appeal, the AAC and, on further appeal, the Tribunal also rejected that contention. An application for making a reference in that behalf was rejected by the Tribunal and hence on an application made to this court, the Tribunal was directed to refer the aforesaid question No. 2 in M.C.C. No. 14 of 1981 to this court. That is how all these questions have come up before us for consideration.
7. Learned counsel for the assessee urged that though the market price of a share of the company at the time of purchase of shares by the assessee was Rs. 76, yet for purchasing a block of 42,000 shares, the assessee had to pay Rs. 100 per share and hence the cost of acquisition of each share should have been held to be Rs. 100 and not Rs. 76 as found by the Tribunal. According to the learned counsel for the assessee, the acquisition of controlling interest was an incidence resulting from the acquisition of a block of shares and the Tribunal erred in holding that ' controlling interest ' by itself was a capital asset capable of being transferred. In reply, learned counsel for the department contended that controlling interest was ' property ' and the Tribunal was, therefore, right in holding that the price paid by the assessee for the shares of the company was inclusive of the price for the controlling interest acquired by the assessee.
8. Now, the question for consideration before the Tribunal was, what was the cost of acquisition of the shares in question for the purpose of computation of capital gains or capital loss. In this view of the matter, the question formulated by the Tribunal in M.C.C. No. 411 of 1976 should be reframed as follows to bring out the real issue involved in the case:
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of acquisition for computingcapital loss or capital gains was Rs. 76 per share and not Rs. 100 per share as claimed by the assessee ?'
9. Now, the Tribunal has found that the assessee had in fact paid the price of Rs. 100 per share when the assessee acquired the block of 42,000 shares of the company. It is true that the Tribunal has also found that the market price of the shares of the company at the material time was Rs. 76. But, if for acquiring a block of 42,000 shares the assessee was in fact required to pay Rs, 100 per share, then so far as the assessee was concerned, the cost of acquisition of each share was Rs. 100. The Tribunal, however, held that the sum of Rs. 100 did not represent the cost of acquisition of shares to the assessee because, the assessee acquired, in addition to the shares, a controlling interest in the company and, therefore, the excess amount paid by the assessee over the market price of the share represented the price of controlling interest. This view of the Tribunal proceeds on the assumption that controlling interest is a distinct capital asset which can be acquired or transferred independently of the shares. We see no justification for the view. Controlling interest is an incidence arising from holding a particular number of shares in a company. It cannot be separately 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 price of a share and if the transaction is genuine, as has been found in the present case, then, really speaking, the cost of acquisition of the block of shares purchased by the assessee is that which she has in fact paid for holding that block.
10. In support of its conclusion, the Tribunal has relied on the decision of the Supreme Court in New Era Agencies (P.) Ltd. v. CIT : 68ITR585(SC) . But that decision is distinguishable on facts. In that case, the question for consideration before the Supreme Court was whether a part of the consideration received by the assessee could be regarded as consideration for any other valuable right excepting the price of share sold by the assessee. The Supreme Court held that the contention of the assessee was untenable because no controlling power was held by the assessee. This decision cannot be held to be an authority for the proposition that ' controlling power ' is a distinct capital asset, transfer in respect of which can be effected without transferring the shares.
11. The other decision relied upon by the Tribunal is Baijnath Chaturbhuj v. CIT : 31ITR643(Bom) . In that case, it was found that the consideration received by the assessee was really a composite consideration for the transfer of shares and the assignment of managing agency. No doubt, there can be a case of composite consideration but in that case there shouldbe two distinct assets, each capable of being acquired or transferred separately. In our opinion, ' controlling interest ' by itself cannot be acquired or transferred. It is an incidence arising out of holding a particular number of shares and if for holding that number the assessee was required to purchase a block of 42,000 shares at the price of Rs. 100 for each share then Rs. 100 would, in our opinion, be the cost of acquisition of the share so far as the assessee is concerned. For these reasons, our answer to the question refrained by us in M.C.C. No. 411 of 1976 is in the negative and against the department.
12. As regards question No. 1 arising in M.C.C. No. 14 of 1981, learned counsel for the assessee conceded that if the question formulated in M.C.C. No. 411 of 1976 was answered in favour of the assessee, then question No. 1 framed in M.C.C. No. 14 of 1981 did not survive. We, therefore, decline to answer that question.
13. As regards question No. 2 in M.C.C. No. 14 of 1981, the contention advanced on behalf of the assessee was that the amount of capital gains was exempt from taxation by virtue of para. 15(1)(iii) of the Part B States (Taxation Concessions) Order, 1950. The answer to this question depends on the construction of the relevant provisions of para. 15 of the said Order, which read as follows :
' 15. (1) Any income falling within the following classes shall be exempt from income-tax and super-tax and shall not be included in the total income or total world income of the person receiving them :...
(iii) the bona fide annual value of the palaces of Rulers of Indian States which are declared by the Central Government as the official residences of such Rulers...'
14. From a perusal of the aforesaid provisions, it is clear that what has been exempted is the bona fide annual value of the palace of a Ruler of an Indian State which is declared by the Central Govt. as the official residence of such Ruler. The exemption could by no stretch of imagination be held to embrace income in the nature *of capital gains realised on the sale of land forming part of the official residence of a Ruler. In this view of the matter, the Tribunal was right in holding that the capital gains realised by the assessee on the sale of plots of land within the compound of Yeshwant Niwas Palace was not exempt from taxation by virtue of para. 15 (1)(iii) of the Taxation Concessions Order. Our answer to the second question in M.C.C. No. 14/81 is, therefore, in the negative and against the assessee.
15. References answered accordingly. Parties shall bear their own costs in both the references.