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investment Corporation of India Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1982)1ITD880(Mum.)
Appellantinvestment Corporation of India
Respondentincome-tax Officer
Excerpt:
1. the following question has been referred to the special bench of the appellate tribunal, bombay, in investment corporation of india ltd. v.ito [it appeal nos. 464 (bom.) of 1981, 1966 (bom.) of 1980 and 465 (bom) of 1981] under section 255(3) of the income-tax act, 1961 ("the act") : whether the 'negative cost' incurred by way of foregoing of dividends from the profits of the company should be allowed under section 48(17) of the income-tax act, 1961 in computing the capital gains in the case of transfer of the shares? 2. asbestos cement ltd., as agents to turner & newalla ltd., bombay, and blundell permoglaze holdings ltd., bombay, are the interveners.3. during the accounting periods relevant to the assessment years 1975-76, 1976-77 and 1977-78, the assessee-company, namely,.....
Judgment:
1. The following question has been referred to the Special Bench of the Appellate Tribunal, Bombay, in Investment Corporation of India Ltd. v.ITO [IT Appeal Nos. 464 (Bom.) of 1981, 1966 (Bom.) of 1980 and 465 (Bom) of 1981] under Section 255(3) of the Income-tax Act, 1961 ("the Act") : Whether the 'negative cost' incurred by way of foregoing of dividends from the profits of the company should be allowed under Section 48(17) of the Income-tax Act, 1961 in computing the capital gains in the case of transfer of the shares? 2. Asbestos Cement Ltd., as agents to Turner & Newalla Ltd., Bombay, and Blundell Permoglaze Holdings Ltd., Bombay, are the interveners.

3. During the accounting periods relevant to the assessment years 1975-76, 1976-77 and 1977-78, the assessee-company, namely, Investment Corporation of India Ltd., sold certain shares held by it in various companies and declared capital losses amounting to Rs. 13,17,729, Rs. 28,27,202 and Rs. 16,30,352, respectively. While computing these losses, the assessee took into consideration the "cost of the improvement" of the shares, representing profits retained by the companies concerned in the form of reserve and not distributed amongst the shareholders. In this context, the assessee relied upon the decision of the Appellate Tribunal in the case of Tata Iron & Steel Co.

Ltd. v. ITO [IT Appeal Nos. 2725 and 3137 (Bom.) of 1973-74]. In that case, the Tribunal had held as follows: The third alternative argument of Mr. Palkhivala that the cost of the Sankey shares should include the cost of improvement therein must, however, be accepted. Section 48 provides for taking the cost of acquisition of capital asset as well as the cost of any improvement thereto into account in computing capital gain. The nature of the cost of improvement to be so taken into account would depend upon the nature of improvement effected in the capital asset.

Since all capital assets are not of a like nature and cover a very wide range beyond enumeration, the improvements effected in different categories of capital assets widely differ from each other. The nature of the cost to the assessee in effecting such improvements also correspondingly covers a very wide range. In the case of a share, the improvement in the share would be improvement in its earning capacity. It is materially the earning capacity of a company which limits or widens the scope for distribution of dividend and the distribution of dividend is one of the major factors regulating the price of the shares. The improvement in the earning capacity of a company results from the simultaneous operation of several factors. The strengthening of the financial position of the company by retention and ploughing back of profit without distribution of dividend or by adopting a conservative policy regarding distribution of dividend is undoubtedly one of the important factors improving the earning capacity of a company. This can only be achieved by the self-denial of the shareholders to higher distribution of dividend to which they would be otherwise entitled. The importance of this factor which is beyond dispute is further illustrated and confirmed by the recent promulgation of the Dividend Control Ordinance. The financial position of a company is thus built up step by step over a number of years by the shareholders denying to themselves higher dividend. The ploughing back of the profit thus gradually improves the earning capacity of the company which ultimately results in the higher quotation of share. It is common knowledge that the quotations of shares depend upon the reserves build up by the company from its past profits. But for such renunciation of their right to dividend or higher dividend and sacrifices on the part of the shareholders reserves cannot be built up and the financial position of the company cannot be strengthened and the earning capacity cannot be improved. This is not to suggest that this is the only factor which advances or arrests the earning capacity or progress of the company. At the same time, it cannot be denied that it is one of the major factors which improves the financial position of the company. Now this is done by the shareholders by denying to themselves the beneit of higher distribution of dividend. The distribution of low dividend and forgoing higher dividend is the cost voluntarily suffered and incurred by the shareholders in improving the shares. It is no doubt a negative cost suffered and incurred by the shareholders. But it is nonetheless the cost incurred by the shareholders for improving the shares. When payment from one's pocket for effecting improvement in one's capital asset is taken into account in the computation of capital gain, there is no reason why forgoing any income in order to effect improvement in one's capital asset should not similarly be considered for the purpose. What difference does it make if instead of retaining and ploughing back the profits, the shareholders receive larger dividends and utilise the same in contributing more capital to the company for purchasing right shares. In the former case the same result is achieved but receiving of larger dividend and then contributing it for acquisition of right shares is dispensed with. It is not that in every case the improvement in the shares is wholly or partially brought about in such a manner. In cases where, however, this is done, the cost negatively incurred by the shareholders in improving their shares cannot be ignored.

Negative expenditure is not at all different from a positive expenditure and both the concepts of expenditure are well recognised under the Act. Taking the past dividend history of Sankey Electrical Stampings Ltd., and the reserves built up by it year after year, we are of the opinion that a large part of the improvement in shares is the result of negative cost incurred by the shareholders.

4. The ITO observed that the department had not accepted the decision of the Tribunal in the aforesaid case. He, therefore, rejected the method of computation of the capital gains/capital loss on the sale of the shares and worked out the capital gains/capital loss of the assessee without taking into consideration the "cost of improvement" of the shares as claimed by the assessee.

5. On appeal, the AAC remarked that shareholders of a company had no absolute right or entitlement as such to any profits of the company, that they were entitled to only such dividends as may be recommended by the board of directors and that they had no power to force the directors to increase the quantum of dividend at the time of the annual general meeting. He further observed that the market price of the shares was governed and influenced by various factors and that the dividend declared by a company or the extent of reserves built up by it was only one of such factors. He was, therefore, of the view that when the shareholders were not entitled to any dividend as a matter of right, there could be no question of "self-denial" of their entitlement or any "sacrifice" on their part in forgoing the profits. According to him, therefore, the alleged renunciation of profits by the shareholders did not result in any improvement of the cost of the shares. He also observed that the "cost of improvement" of the capital asset under Section 48(a) of the Act meant the "positive" cost and not the "negative" cost of improvement. He, therefore, upheld the order of the ITO for each of the assessment years under consideration.

6. On an appeal by the assessee, the Appellate Tribunal, Bombay Bench "D", was, prima fade, of the view that the arguments advanced by the AAC carried weight and that the decision in the case of TISCO, referred to above, required reconsideration by a larger Bench. This is how the point at issue has come up before us for decision.

7.1 Before us the learned counsel for the assessee, Shri B.A.Palkhivala, relied upon the decision of the Appellate Tribunal in the case of Tata Iron & Steel (supra) and reiterated the arguments advanced by the Tribunal in support of its findings in that case. In order to appreciate the arguments of Mr. Palkhivala, we may reproduce Sections 48 and 55 of the Act. They read as follows : 48. The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : - (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.

(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in Sub-section (1) of Section 49, by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head 'Interest on securities', 'Income from house property', 'Profits and gains of business or profession', or 'Income from other sources' and the expression 'improvement' shall be construed accordingly.

Shri Palkhivala urged that, in order to attract the provisions of Section 55(1)(b)(ii), three conditions must be satisfied. In the first instance, the asset concerned must be a capital asset. Secondly, the expenditure incurred to improve the asset must be of a capital nature and, thirdly, the expenditure must result in the additions or alterations to the capital assets. He explained that there was a clear distinction between a corporeal property and an incorporeal property and so the nature of the addition or improvement made to these properties must necessarily be different. He averred that, in the case of a share, the improvement or addition, as contemplated under Section 48(ii), read with Section 55(1)(b)(ii), could be made only by strengthening the financial position of the company concerned and, thus, increasing the value of its shares. According to him, the financial position of the company could be strengthened by increasing its reserves which object could, in turn, be achieved if the shareholders did not fully appropriate the profits and agreed to divert the same to the reserves of the company.

He urged that there might be some other factors which could improve the financial position of a company but the diversion of its profits to its reserves could not be ignored. According to him, therefore, the forgoing of the profits by the shareholders for the purpose of increasing the reserves of the company was in the nature of "negative expenditure" which was incurred by the shareholders for the purpose of strengthening the financial position of the company and hence enhancing the value of its shares. He, thus, submitted that this negative expenditure should be added to the cost of the acquisition of the shares while determining the capital gains on their sale under Section 7.2 Shri Palkhivala further contended that the directors of the company merely acted as trustees of the shareholders who were, in fact the masters of the company inasmuch as they could remove the directors and even amend the articles of association in order to get any amount of profits by way of dividends. According to him, therefore, it could not be said that the shareholders had no right to get the dividend according to their wishes and that, in any case, even if a particular percentage of dividend was superimposed on them by the directors and the balance of the profits was taken to the reserves of the company, this would be a case of "compulsory" expenditure akin to the payment of Municipal or Corporation taxes in the case of income from house property. Shri Palkhivala, therefore, urged that such surrender of profits, whether voluntarily or compulsorily, constituted "expenditure" as held by the Punjab and Haryana High Court in CIT v. Justice S.C.Mittal [1980] 121 ITR 503 and the same had to be taken into consideration as "cost of improvement" of the shares while computing capital gains under Section 48(a) read with Section 55(1)(b)(ii).

8.1 The learned counsel for the interveners, Shri S.E. Dastur, supported the case of Shri B.A. Palkhivala. He further submitted that the declaration of dividends out of the reserves was subject to certain restrictions imposed by Section 205A(3) of the Companies Act and the rules made by the Government in this behalf and, as such, the diversion of the profits to the reserves could not be considered to be mere "postponement" of the dividends. According to him, the surrender of the profits by the shareholders, whatever may be the treatment of the reserves later on, constitute "expenditure" at the relevant time and the same augmented the financial position of the company and enhanced the value of the shares. In other words, the additions to the reserves tantamounted to "cost of improvement" of the shares within the meaning of Section 48(ii) read with Section 55(1)(b)(ii).

8.2 Shri Dastur also referred to the commentary at page 352 of The Law and Practice of Income-tax by Kanga and Palkhivala and contended that, irrespective of the provisions of Section 55, the Josses suffered by the shareholders on account of the diversion of the profits to the reserves must be taken into consideration while computing their net gain on the sale of the shares, according to the ordinary principles of commercial accountancy ; otherwise one would not arrive at the true profits and gains. In this context, he referred to the decision of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT[ 1967] 63 ITR 651. In that case, the assessee who was not a dealer in shares, held by way of investment 710 ordinary shares in the Tata Iron & Steel Co. Ltd. The company made an offer to her by which she was entitled to apply for 710 new ordinary shares at a premium with an option of either taking the shares or renouncing them, wholly or partly, in favour of others. The appellant renounced her right to all the 710 shares on 12-6-1956, and realised Rs. 45,262.50. When this amount was sought to be wholly taxed as a capital gain, the appellant claimed that on the issue of the new shares, the value of her old shares depreciated, since the market quotation of the old shares which was Rs. 253 per share on 1-6-1956, fell to Rs. 198.75 on 4-6-1956, and that as a result of this depreciation she suffered a capital loss in the old shares to the extent of Rs. 37,630 which she was entitled to set off against the capital gain of Rs. 45,262.50. In the alternative, she claimed that the right to receive the new shares was a right which was embedded in her old shares and, consequently, when she realised the sum of Rs. 45,262.50 by selling her right, the capital gain should be computed after deducting from that amount the value of the embedded right which became liquidated. On these facts, it was held by the Supreme Court that the assessee was entitled to deduct from the sum of Rs. 45,262.50 the loss suffered by way of depreciation in the old shares. It was also held by the Supreme Court that in working out capital gains or loss, the principles that have to be applied were those which were a part of the commercial practice, or which an ordinary man of business will resort to when making computation for his business purposes.

8.3 The alternative contention of Shri Dastur was that if it were to be held that the share of a company was such a capital asset that it was not capable of improvement at an ascertainable cost, then no capital gain was at all leviable as held by the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] IS ITR 294 and the Bombay High Court in the case of Evens Prater & Co. Ltd. [IT Reference No. 146 of 1970 and 66 of 1979].

9.1 The learned representative of the department Shri Joshi, on the other hand, submitted that the expression "expenditure" appearing in Section 55(1)(5)(ii) must be construed as "positive" expenditure and not "negative" expenditure. According to him for taking advantage of the provisions of Section 48(ii), the assessee must incur some positive expenditure to enhance the value of the capital asset. In other words, any negative or notional expenditure alleged to have been incurred by an assessee, could not be taken into consideration while computing the capital gains on the sale of the capital asset. In this connection, he referred to the decision of the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66. This authority lays down that "spending" in the sense of "paying out or away" of money is the primary meaning of "expenditure" and "expenditure" is what is paid out or away and something which has gone irretrievably. According to Shri Joshi, the authority of the Punjab and Haryana High Court in the case of Justice S.C. Mittal (supra) was not applicable to the present case.

9.2 Shri Joshi further submitted that the shareholders had no vested or absolute right to claim any profits and as such the question of their "forgoing" or "surrendering" the same did not arise. He referred to the commentary at page 289 of Gore Browne on Companies, 42nd edition, and urged that a company was in no way bound to distribute its profits up to the hilt, that it could carry such profits partly or wholly to reserve or other uses even though the Articles did not expressly provide for the same and that a statement in the Articles of Association that the "profits" available for dividends shall be applied in a certain way among the shareholders was not enough to disturb this rule. Shri Joshi further referred to pages 291 to 295 of the aforesaid commentary and submitted that a company may think it wise to build up reserves, that its decision in this regard would depend on the particular circumstances of the case and the company may, without any substantial authority contained in the Articles, carry profits to reserves and either use the reserve in the business or invest it in such a way as the directors may think fit. Again, the reserves may be used to make up losses. In fact, the reserve is undivided profit and may be treated as profit at the disposal of the company. Shri Joshi also referred to the commentary at pages 662 to 666 of Palmer's Company Law, 21st edition, and urged that the profits available for dividends have been held to mean the profits which the directors consider should be distributed after making provision for the past losses and that the profits carried to reserve remain profits unless capitalized. Thus, the plea of Shri Joshi, in the final analysis, was that the directors of a company had full discretion to declare whatever dividend they considered proper in the interests of the company and the shareholders had no right to interfere with their discretion if the same was exercised fairly. In other words, the shareholders did not sacrifice or surrender any profits as they could not claim the same as a matter of right. Again, according to him, the creation of reserve consequent upon the non-distribution of profits amongst the shareholders was, at best, postponement of the dividends and as such, the situation did not envisage any expenditure or loss to the shareholders.

9.3 Thirdly, Shri Joshi' submitted that there could not be any addition or alteration to the value of the shares simply because the profits were taken to the reserves instead of being distributed among the shareholders. According to him, there could be many other factors, political and commercial, which could affect the stock-exchange and increase or decrease the value of the shares irrespective of the financial position of the company concerned. He, therefore, pleaded that the assessee-company had not incurred any "expenditure" which enhanced the value of the shares held by it and as such in the cost of the improvement of the shares, as claimed by the assessee, could not be deducted from the sale price of the shares for computing the capital gains.

11. There is no doubt that the shares in question constitute "capital asset" and any expenditure incurred to enhance their value would constitute expenditure of capital nature, as contemplated under Section 55(1)(6)(17). Thus, the decision of the case hinges on the question whether the assessee had incurred any expenditure to enhance the value of the shares sold by it. This question raises two points for consideration. They are as follows: 1. Whether the expenditure contemplated under Section 55(1)(6)(17) includes what may be called "negative expenditure".

2. Whether the assessee had, by forgoing any profits due to it, incurred expenditure and whether this expenditure had enhanced the value of the shares eventually sold by it.

12. As regards the first point, it is true that the Supreme Court has held in the case of Indian Molassess (supra) that spending in the sense of paying out or away of money is the primary meaning of "expenditure" and "expenditure" is what is paid out or away and is something which has gone irretrievably. But this authority does not totally exclude the possibility of "negative expenditure" like forgoing or losing of profits from being considered as expenditure. This is evident from the word "primary" used in the said authority. Thus, the expenditure does not necessarily mean an amount gone out of the pocket of the assessee.

It would include a case where the assessee forgoes his dues or incurs a loss of his normal income. This may be illustrated with the aid of certain cases. In the case of Tamplin & Sons Brewery (Brighton) Ltd. v.Nash 32 TC 41 (HL) certain premises were taken on lease by the assessee for the purpose of subletting the same to persons who would be vending the assessee's manufactures and wares and such sub-leases were granted at concessional rents in order to induce the sub-leases to market the assessee's products. It was held that the loss sustained by the assessee on the rentals, being the difference between the head rents paid by him and the sub-rents realised, would be a permissible deduction. Further, it has been held by the Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 that if the managing agent of a company entitled under the agency agreement to payment of a certain sum of commission from the managed company waives a certain portion thereof and agrees to accept something less, the portion so waived might be regarded as expenditure. Again, it has been held by the Punjab and Haryana High Court in the case of S.C. Mittal (supra) that an assessee who occupies his own house and thus disentitles himself to the rent which he would have been entitled to if he had not occupied the same himself, suffers expenditure in that regard and would be entitled to the benefit under Section [0(13 A) of the Act. The authority cited by the department, i.e., Indian Molasses (supra), is distinguishable inasmuch as, in that case, the arrangement for the expenditure was so planned that the money paid by the assessee could revert to him on the happening of certain contingencies. It was, in these circumstances that it was held by the Supreme Court that the payment did not constitute an admissible expenditure. Thus, in view of the authorities referred to by the learned representative of the assessee, we are of the opinion that the profits forgone by an assessee or losses suffered by him may be treated as expenditure incurred by him in certain circumstances depending upon the facts of each case.

14.1 The next question for consideration is whether the assessees concerned have, in fact, incurred any "expenditure" to improve the cost of the shares eventually sold by them. In our opinion, the answer to this question should be in the negative. The assessee could be considered to have incurred "negative expenditure" as envisaged above, only if they had "forgone" or "surrendered" the profits of the companies in which they were the shareholders. In the turn, the assessees could "forgo" or "surrender" the profits only if they were entitled to get the same as a matter of right. Now, a shareholder is not legally competent to claim the profits of the company by way of dividend unless and until it is declared. In other words, before a dividend is declared, a shareholder has no legal right to claim the profits of the company and as such, the question of his forgoing or surrendering such profits does not arise. According to the commentary at page 662 of Palmer's Company Law (21st Edition), the expression "divisible profits" means the profits which the law allows the company to distribute to the shareholders by way of dividends and the expression profits available for dividends means the profits which the directors consider should be distributed after making provision for past losses, for reserves or for other purposes. Thus it is for the board of directors to recommend the dividends and a shareholder cannot compel the directors to declare more dividend than what they consider to be reasonable in the interests of the company. According to the commentary at pages 353 and 381 of the Guide to the Companies Act, 1956 by A. Ramaiya, 77th edition, the right to claim dividend will arise only if a dividend is declared and the board of directors recommends the payment of a dividend in its general meeting. The shareholders may, in the general meeting, reduce the percentage of dividend but they cannot overrule the recommendations of the board of directors and increase the amount of dividend. Again, if notwithstanding ample profits, the board of directors perversely or improperly refuses to recommend a reasonable dividend, the company cannot interfere with the board's discretion in the general meeting. Nor can an article take away the power of the directors and vest it in the shareholders as it will be inconsistent with Section 270(1 )(v) (sic.) of the Companies Act which confers the power to recommend the dividend only on the directors. If the directors act mala fide, the only course open to the shareholders is to remove them and bring about a change in the board so as to enable it to act in a reasonable manner. But so far as the profits are concerned, the shareholders cannot claim more than what is recommended by the directors, as dividend. Again, according to the commentary at pages 289 to 296 of Gore-Browne on Companies, 42nd edition, a company is, no way, bound to distribute the profits "up to the hilt" and a dividend is not payable until it has been declared.

Thus, it cannot be said that the shareholders have got an unlimited power to claim and enjoy the profits as they desire. Their right to profit will arise only after a dividend is declared and the declaration of the dividend depends upon the recommendations of the directors.

Unless and until the dividend is so declared, no shareholder has any claim against the company in respect thereof-Mathai Chandy v. Hill Land Motor Union ILR [1955] TC 73. Thus, when the shareholders do not have an absolute right to the profits of the company before the declaration of the dividend, how can it be said that they have "foregone", "surrendered" or "lost" the profits which were transferred to the reserve before they became legally due to them '? There can be no question of "self-sacrifice" or "renunciation" or "loss in respect of a property which a person cannot claim as a matter of right. In these circumstances, we reject the contention of the assessee concerned that they incurred "negative expenditure" by foregoing or losing the profits which were transferred to the reserves instead of being distributed as dividends.

14.2 The case of the assessee is still weaker in respect of the statutory reserves which must be created out of the available profits.

For instance, Section 205(1) of the Companies Act requires that the dividend must be declared or paid after providing for depreciation in accordance with the provisions of Section 205(2). Again, Section 205(2A) provides that no dividend shall be declared or paid by a company for any financial year except after the transfer to the reserve of the company of a certain percentage of its profits. Apparently, when some profits of the company have to be compulsorily transferred to certain reserves under the law, it can hardly be argued that the shareholders make any sacrifice by foregoing those profits. Thus, the contention of the assessees that the transfer of the profits to the reserve necessarily entails negative expenditure, on the part of the shareholders, is not acceptable.

15. Even if we presume for the sake of argument that the shareholders are legally entitled to the profits before the declaration of the dividends, it does not advance the case of the assessee for the simple reason that the mere transfer of the profits to the reserve does not tantamount to an irretrievable loss to the shareholders. All that happens is that the profits instead of being distributed amongst the shareholders, are kept in reserve on their behalf for being utilised in their interest at some future date. The expression "reserve", according to the commentary at page 381 of the Guide to the Companies Act by A.Ramaiya means "to keep for future use", "to store up for some time", "to refrain from using and enjoying at once" or "to keep back and hold over to a later time", etc. Again, according to Webster's New international Dictionary, 2nd edition, the expression "reserve" means "to preserve". Thus when the profits are transferred to the reserves, they are merely preserved and not lost. In other words, the profits do not lose their character as such by merely being taken to the reserve.

This is amply demonstrated by the fact that the amounts so transferred to the reserve of a company can be distributed amongst the shareholders even as profits in a subsequent year, though subject to certain restrictions that may be placed on the distribution of such profits as under Section 205A(3). According to commentary at page 666 of Palmer's Company Law, 21st addition, the profits carried to reserve remain profits unless capitalized and these profits if not irrevocably capitalized could still be dealt with as profits. To the same effect is the commentary at page 288 of Gore-Browne on Companies, 42nd edition.

Thus, there being no absolute bar to the utilisation of the reserve fund as dividend at some time in future, we do not subscribe to the view of the assessees that the transfer of undistributed profits to the reserve occasions any loss to the shareholders. We are, therefore, unable to accept the contention of the assessee that such a loss should be taken into consideration as positive loss or negative expenditure while computing the capita] gain on the sale of their shares. The decision of the Supreme Court in the case of Kapadia (supra) is of no avail to the assessee because there is nothing in common between the facts of that case as narrated in para 9.2 above and the facts of the present case. That apart the proposition of law laid down by the Supreme Court in that authority that the capital gain, like business profits, should be computed on ordinary principles of commercial practice is not disputed. But when, as held above, there is no loss to the shareholders on the transfer of the profits to the reserves, the question of taking into account such a loss in the computation of capital gains on the sale of shares does not arise.

16. The argument of the learned representatives of the assessees that the transfer of the undistributed profits to the reserves strengthens the value of the shares does not also clinch the issue in their favour.

As rightly stated by the learned representative of the department, the market value of the shares is governed and influenced by variety of factors. Augmenting the reserve by transferring the profits may be only one of these factors, but this is not the only factor. The political and commercial factors may also play a significant role in raising or lowering the value of the shares. Instances are not lacking when the shares of the companies are quoted even below par in spite of substantial holding of reserves and regular declarations of dividends.

On the contrary, with little or no reserve, the shares of certain companies may be quoted at a rate higher than their face value due to speculation or some other reasons. Thus, the higher value of the shares cannot be attributed solely to the sacrifice of the shareholders by foregoing higher dividend.

17. In view of the above discussion, we conclude that when the profits of company are transferred to its reserves, the shareholders do not incur any expenditure to improve the cost of their shares within the meaning of Section 55(1)(6)(ii), read with Section 48(ii). We, therefore, answer the question referred to us in the negative.

18. This brings us to the alternative contention of Shri Dastur. He emphatically urges that no taxable gain arises under Section 45 on the transfer of shares as the computation provisions in Section 48 are inapplicable to the case of an asset like a share in a limited company.

In this behalf, he relies upon the decision of the Supreme Court in the case of Srinivasan Shetty (supra) and the decision of the Bombay High Court in the case of Evens Eraser (supra). We, however, decline to adjudicate upon this issue as the same is not the subject-matter of the reference to this Special Bench.

19. In the result, the appeals filed by the Investment Corporation of India are dismissed.

20. The cases of the intervenes, namely, Asbestos Cement Ltd. and Blundel Parmoglaze, involve some other points also. They will, therefore, be decided by the respective Benches before which they are pending.


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