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income-tax Officer Vs. Master Gaurav Dalmia - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1984)7ITD233(Delhi)
Appellantincome-tax Officer
RespondentMaster Gaurav Dalmia
Excerpt:
1. this departmental appeal is against the order of the commissioner (appeals) and it relates to the assessment year 1977-78. the assessee is a minor who is assessed through his father and guardian shri m.h.dalmia. the first ground of appeal is that the commissioner (appeals) erred in treating the gain of rs. 5,583 as long-term capital gain and not as a trading profit. the assessee hold 13,300 equity shares of orissa cement ltd., out of which he sold 200 shares to his father and natural guardian on 29-10-1976 realising a capital gain of rs. 5,583.according to the assessee, this was a long-term capital gain but the ito held the assessee as a dealer in the shares and the above amount constituted a revenue profit in his hands. the assessee had contended that he had not sold any share of.....
Judgment:
1. This departmental appeal is against the order of the Commissioner (Appeals) and it relates to the assessment year 1977-78. The assessee is a minor who is assessed through his father and guardian Shri M.H.Dalmia. The first ground of appeal is that the Commissioner (Appeals) erred in treating the gain of Rs. 5,583 as long-term capital gain and not as a trading profit. The assessee hold 13,300 equity shares of Orissa Cement Ltd., out of which he sold 200 shares to his father and natural guardian on 29-10-1976 realising a capital gain of Rs. 5,583.

According to the assessee, this was a long-term capital gain but the ITO held the assessee as a dealer in the shares and the above amount constituted a revenue profit in his hands. The assessee had contended that he had not sold any share of Orissa Cement Ltd. n any of the two earlier years or two following years.

2. In the assessment year 1976-77, when the similar question arose and the department had assessed the profit as a business income, the AAC as well as the Tribunal had rejected the stand taken by the department. A reference application had also been rejected. The Commissioner (Appeals) looked into the history of the share transactions of the assessee right from the assessment year 1968-69 and considered the purchases as well as sales. Considering the absence of frequency of transactions, he held that the assessee could not be a dealer. In the case of shares in Orissa Cement Ltd., the transfer had taken place only in three years out of ten under consideration. He, therefore, held that the assessee was not a dealer in these shares. He also found that the transactions of these shares were within the close circle of relatives and not as a business transaction to gain profit. He, therefore, held that there was no business motive in the above transaction and, therefore, held that the income was to be assessed as long-term capital gain as assessed by the assessee.

3. Before us, it has been pointed out that the matter is covered by the order of the Tribunal in IT Appeal No. 876 (Delhi) of 1978-79. It was also pointed out there was no reference made to the High Court for the assessment year 1976-77. In the earlier year, the Tribunal had held that the profit gained by the assessee was in the nature of capital gains and not in the nature of business income. For the reasons given in that order, we uphold the order of the Commissioner (Appeals).

4. The second ground relates to the deletion of Rs. 1,83,384 which had been included by the ITO by invoking the provision of Section 2(24) (iv) of the Income-tax Act, 1961 ('the Act'). The ITO had found that 650 fully paid ordinary shares of Dalmia Diary Industries Ltd. (DDIL), were acquired by the assessee at the rate of Rs. 10 each. The ITO found that these shares were acquired from Dalmia Cement (Bharat) Ltd. (DCBL). He also found that the father of the assessee, Shri M.H.Dalmia, was the director of DCBL in the relevant year. The ITO further made an enquiry into the matter and observed that the shares of DDIL were never regularly quoted in the stock exchange. He found those shares quoted on 16-6-1976, 15-3-1977, 25-1-1978 and 30-1-1978. All these quotations were at the rate of Rs. 10 per share. The ITO further observed that the quotation of 16-6-1976 was not based on any transaction as a transaction noted by them had never taken place. The quotations in 1977-78, the ITO observed, was based on two transactions of sale of 100 share each and the quotation of 1978 was based on Calcutta quotation whose basis could not be ascertained. The ITO, therefore, held that these shares were not regularly quoted. The ITO observed that if the value of these shares was determined on the basis of the balance sheet dated 31-9-1976, the value of each share would come to Rs. 292.13. This valuation was by applying the break-up method.

The ITO, therefore, was of the view that by obtaining shares, having market value of Rs. 292.13 at Rs. 10, the assessee had acquired some benefit from DCBL and this benefit was assessable under Section 2(24) (iv).

5. On enquiry, the ITO learnt that DDIL was held by the DCBL till December 1974. DDIL was undergoing a long dispute with the National Bank of Pakistan over the realisation of sale proceeds of its two cement factories situated in Pakistan sold in 1962. The National Bank of Pakistan was a guarantor to the above sale agreement. The ITO observed that this dispute practically came to an end on 3-5-1976 when the National Bank of Pakistan at the directions of the London High Court deposited a sum of 35,49,634 in DDIL's bank account in Bank of India, London. This amount was, however, not accounted for in the balance sheet dated 30-9-1976. According to the ITO, Dalmias' planned to acquire the shares of DDIL after this case was decided. The ITO had found out that the capital of DDIL was reduced to Rs. 6 lakhs from Rs. 1.5 crores on 24-9-1974. The ITO was of the view that while DDIL was claiming loss as a result of reduction of its investment, it had not shown the amounts received in London as per the Court's order. The assessee challenged the determination of the market value of those shares on the basis of the Wealth-tax Rules, 1957 ('the Rules'). The ITO defended it on the ground that that was a reasonable way of doing so. The assessee had further contended that the balance sheet on 30-9-1976 should not be taken into consideration after including the amount received by the DDIL from the National Bank of Pakistan. The ITO observed that it was within the knowledge of Dalmias that the case had been won in London and, therefore, effort was made to acquire these shares. The ITO referred to the order of assessment in case of the company where some capital gain had been computed under Section 52(2) of the Act and the market value had been determined on the basis of a valuation report.

6. The assessee had contended before the ITO that there was no adequate response to the offer for the sale of 21,000 equity shares at their par value of Rs. 10 per share and at the same time new shares numbering 1,26,360 were also afloat in the market and available at Rs. 10. These shares, according to the assessee, were equal in rank. It had also been pointed out that the value of shares continued to be Rs. 10 in 1977 and the value went up to Rs. 55 by middle of 1970 when the full and correct picture had emerged. The ITO, however, did not accept the above plea as he found that 21,000 shares were eligible to get dividend for the assessment year 1974-75 while the other shares were not so eligible.

According to the ITO, the fact that some of the shares were still unsubscribed at Rs. 10 was no evidence to prove that the market value of these shares were not higher. According to him, people in general would not know about the progress of the case in Pakistan. He also pointed out that most of these shares were acquired by the Dalmias and that would show that these shares had substantial market value. The ITO, therefore, came to the conclusion that the assessee obtained benefit to the extent of Rs. 1,83,384 which was the difference between market value as determined by him and the consideration taken by the assessee and he held the same to be assessable under Section 2(24) (iv).

7. When the matter came before the Commissioner (Appeals), it was contended by the assessee that the facts mentioned in the order of the ITO were confusing and were full of surmises and conjectures. In this connection, the Commissioner (Appeals) referred to the relevant facts as stated in the assessee's letter dated 5-5-1980 addressed to the IAC raising objections to the draft assessment order. In this statement of the facts, it was brought out that DDIL needed fresh finance in view of the reduction in their capital by Rs. 1.44 crores. Such a reduction was confirmed by the Madras High Court. In order to make an offer to the public and to get the shares of the company listed in the Delhi Stock Exchange, the department concerned agreed to the listing of equity shares in the Delhi Stock Exchange on the understanding that the company would offer to the public a capital to the extent of Rs. 12.64 lakhs and public offer for sale of Rs. 2.10 lakhs worth of shares from the existing shareholdings of the promoters so as to constitute 49 per cent of the company's total issued capital. Further understanding was that 40 per cent of issued capital was to be distributed among over 880 shareholders. This agreement by the Government of India was contained in a letter dated 11-9-1975 and it referred to the company's undertaking contained in their letter dated 5-8-1975. In order to carry out the above proposal, the board of directors of DCBL by a resolution dated 7-11-1975 approved the proposal for sale of 21,000 equity shares held by it in DDIL to the public at their par value of Rs. 10 per share by an offer of sale to be advertised by the DDIL through a prospectus.

Such a prospectus offering fresh capital of 1,26,300 equity shares and the sale of 21,000 equity shares held by DCBL were issued on 17-2-1976 and the same was also filed with the registrar of the company. In this prospectus it was stated that an offer of sale of 21,000 equity shares to the public was made by DCBL through DDIL who were appointed for this purpose on 29-1-1976 as its constituted attorney under an irrevocable authority. Giving further facts, it was stated that the subscription list both in respect of shares offered for sale and the shares in the new issue closed on 3-4-1976. On that date, a total of 15,960 shares consisting of 2,050 out of the shares offered for sale and 13,910 out of the shares in DDIL's new issue of capital remained unsubscribed.

These unsold or unsubscribed shares were allocated to the underwriters concerned on the basis of their underwriting commitments and fresh applications were received through them on or about 20-4-1976 in fulfilment of their obligations. All the shares were allotted to the applicants in the meeting of DDIL held on 29-4-1976.

8. On the basis of the above facts, it was contended before the Commissioner (Appeals) that the provisions of Section 2 (24)(iv) were not applicable as there was no benefit arising to the assessee as a result of acquisition of these shares in DDIL. In this connection, it was pointed out that the entire block of 21,000 equity shares along with new issue had been offered to the members of the public through a prospectus and, thus, the shares of the company were available to the members of the public at Rs. 10 per share. In view of this, it was contended that there could be no question of any benefit when the shares were acquired by the assessee. It had further been contended that such benefit had not been obtained from the company. In this connection, it was pointed out that the DCBL had no option or choice in the sale of these shares after they had been offered to the public at par value. It was further pointed out that for the purposes of this sale, DDIL was constituted as the authority given in an irrevocable authority by DCBL. It had also been pointed out that there was no material to show that the market value of these shares was anything more than Rs. 10 per share at which the shares were available to the members of the public in large numbers. It had also been pointed out that at the relevant time the assessee had made its application and the shares were allotted to him, the DDIL was not a subsidiary company of DCBL. The Commissioner (Appeals) upheld this contention of the assessee and observed that it was not the case of the ITO that the DDIL made allotment in favour of the assessee at the behest of DCBL or any of its directors. The Commissioner (Appeals) further referred to the provision in the prospectus wherein it was stated that these 21,000 equity shares were offered to the members of public at Rs. 10 for each share, in order to comply with the stock exchange regulations for enlistment of the equity shares of the company on the Delhi Stock Exchange. The Commissioner (Appeals) held that in the circumstances, it could not be held that the assessee acquired the share in question from the DCBL.

9. It had further been contended before the Commissioner (Appeals) that after DCBL had constituted DDIL as its constituted authority by an irrevocable authority, the DCBL had no power in regard to the disposal of these shares by the DDIL. The Commissioner (Appeals) upheld this contention and came to the conclusion that the shares were acquired by the assessee from the DDIL and not from the DCBL. It was also pointed out that the assessee's father, Shri M.H. Dalmia, was a director of DCBL but not of DDIL. In this view also, he held that the provisions of Section 2(24)(iv) was not satisfied.

10. Regarding the question of valuation of these shares, the assessee had contended that he had not been offered any opportunity regarding the valuation of these shares by the Valuation Officer. It was further contended that the valuation on 30-9-1976 was not proper as the shares had been transferred on 25-5-1976. It was further pointed out that there were enough takers for these shares and it was in the interest of the underwriter that the balance of the shares were subscribed also. It had further been pointed out that the various requirements regarding listing of share in Delhi Stock Exchange have been satisfied and there was nothing to say that the market value of the shares had gone up at the relevant time. The valuation of the shares by the application of break-up method was also challenged and in this case the decision of the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahaclevia [1980] 122 ITR 38 was relied upon. It had further been pointed out that up to date information pertaining to the litigation against the National Bank of Pakistan was furnished in the prospectus and the subscribers and purchasers were aware of that position. It had further been pointed out that when as a result of the Court order the said bank deposited a sum of 35,49,634 in DDIL's account, the company had to furnish a counter bank guarantee for an equivalent amount. It had, therefore, been contended that at this stage it was merely a paper receipt and counter bank guarantee offset the above asset. It had further been argued that the application of the rules in the income-tax proceeding was not only improper but was not legal. It had been contended that the market value was clearly ascertainable on the basis of the public issue and the fact that the shares of the company were available in large numbers at Rs. 10 per share at the relevant time.

11. The Commissioner (Appeals) agreed with the submissions of the assessee and observed as under : In my view, the submissions and contentions as advanced by the learned representatives are quite weighty. I agree that in the case of this appellant, the valuation of the shares in question as on 30-9-1976 as done in the case of DCBL was not at all relevant.

Moreover, the basic question is that when the appellant made his application to DDIL and was allotted the shares applied for, whether the fair market value was above the par value. The facts and.

circumstances on record do not support the conclusion arrived at by the ITO that it was so, much less that the fair market price was Rs. 292.13 at the material time. By his letter dated 5-5-1980 to the IAC, the appellant had made a categorical statement regarding 15,960 shares having remained unsubscribed as on 3-4-1976 including 2,050 out of the shares belonging to DCBL which were offered for sale at the price of Rs. 10 per share. This statement was not at all controverted by the ITO as is apparent from the assessment order. It is equally important to note that the ITO has not disputed the bona fides of allotment of shares in pursuance of the public issue during March-April, 1976. For instance, the ITO has not even suggested that the applications made by members of the public in general were rejected or that the allotments were made only in favour of the Dalmia family group. It might be that by and large the shares went to Dalmias but for this the learned representatives were able to give a very plausible explanation, namely, that Dalmias could make applications as members of the public in general and furthermore when there were no takers (as evidenced by as many as 15,960 shares remaining unsubscribed and allocated to the underwriters on 3-4-1978), they had no alternative but to salvage the situation. In other words, on the basis of the facts and circumstances as apparent from the record, it is not possible to hold that during March-April, 1976 or even in May 1976 the shares of DDIL commanded and premium so as to put its fair market price at something above the par value, i.e., Rs. 10 per share. In this view of the matter, it follows that there could be no question of any benefit having been obtained by the appellant with regard to his acquisition of 650 equity shares of DDIL. It follows that Section 2(24) (iv) was not at all applicable in the instant case.

On the basis of the conclusions arrived at in paras 12 and 13 hereinabove, the disputed addition of Rs. 1,83,384 under Section 2(24)(iv) is deleted.

12. The departmental representative has submitted before us that the shares belonged to DCBL at the time of sale and the shares were, therefore, obtained from that company and not from DDIL. It was pointed out that the assessee was a minor and his father, Shri M.H. Dalmia, was a director of DCBL at the relevant time. Regarding question of benefit, it was submitted that the provisions of Section 2(24)(iv) were attracted as the fair market value of the shares has become more in view of the success of the company in litigation and the position of that success was known at the time of registration of these shares in the name of the assessee. It was contended that the money deposited by the Pakistan National Bank should have been taken into consideration in ascertaining the fair market value of the shares of DDIL. It was, therefore, contended that the Commissioner (Appeals) erred in deleting the addition of Rs. 1,83,384.

13. On behalf of the assessee, it was contended by the learned counsel, Shri Harihar Lal, that in the present case no benefit arose to the assessee as a result of his acquiring share at par value as offered in the prospectus. It was further contended that there was nothing to show that any benefit was obtained by the assessee from DCBL in which the father of the assessee was a director. It was contended that there was no agreement of volition on the past of the DCBL to transfer these shares to the assessee and the assessee acquired these shares as a member of public. Regarding the nature of offer made in the prospectus, the learned counsel for the assessee referred to the provisions of Section 64 of the Companies Act, 1956, which provides that where a company allots or agrees to allot any share with a view to all or any of those shares being offered for sale to the public, any document by which offer for sale to the public is made shall, for all purposes, be deemed a prospectus issued by the company. In this connection, it was pointed out that along with offer of sale of these shares there was also an offer to the public to subscribe to the new shares of the company by taking them at par. It was further contended that the shares open for subscription and the shares offered for sale were having the same value as there could be no difference in rights of the shareholders obtaining one or the other. In this connection, it was pointed out that even that at the open offer of Rs. 10 there were no adequate numbers of subscribers or purchasers of these shares. It would go against the theory advanced by the ITO that the fair market value of such shares was anything more than Rs. 10 at the relevant time when that shares were offered for subscription or sale or even at the time when they were allotted. A reference was made to the various parts of the prospectus and it was pointed out that the DDIL had been constituted as an attorney under irrevocable authority given by the DCBL for the sale of 21,000 shares at par. It was, therefore, clear that the shares were open to the public and any person could obtain them at Rs. 10 per share. The learned counsel further submitted that the provisions of the Wealth-tax Act, 1957, were not applicable and there was no justification to value the shares on the break-up method in the face of the offer in prospectus as well as the quotation in the stock exchange in the month of June 1976. He submitted that the valuation of shares by adopting break-up method was not correct when the fair market value could be obtained from more direct material and in this connection he referred to the decision of the Supreme Court in the case of Smt. Kusumben D. Mahadevia (supra). In this case, the Supreme Court had held that in the case of a company which is a going concern and whose shares are not quoted on the stock exchange, the profits which the company had been making and should be capable of making could ordinarily determine the value of its shares. The break-up value would not be appropriate for valuation of shares of such a company. Their Lordships had further held that where shares in public company are quoted on the stock exchange, the price prevailing on the valuation date would represent the value of the shares.

14. The learned counsel for the assessee referred to the prospectus where a clear reference had been made to the position of litigation regarding Pakistan assets. It had been stated that the company's claim against the National Bank of Pakistan stood around at Rs. 6.50 crores inclusive of interest and cost. It had further been clarified that the amount recoverable from the bank was not considered as bad, though it had been written off as a prudent and safe business policy. It was contended that though the matter had been decided by one Court, the litigation continued for some time and at the relevant time the DDIL had to give counter bank guarantee in order to receive the deposit from the National Bank of Pakistan. He contended that the uncertainty of the litigation continued at the relevant time. It was pointed out that the London High Court had decided the matter on 14th April, but that was not inclusive of the dispute. According to the learned counsel, it took more than one year after this for the litigation to come to a final conclusion. It was, therefore, contended that the ITO had been unduly influenced by the decision of the London High Court and by that time the prospectus had been issued and the whole offer was already before the members of the public. The company could not decline to allot the shares on the basis of the applications received. In conclusion it was, therefore, submitted that the ITO had not been able to make out a case of any benefit having been obtained by the assessee from the DCBL, in which his father was a director, as the shares were purchased at the open market rate at which it was available to every person in public.

He, therefore, supported the order of the Commissioner (Appeals) who had deleted the addition.

15. I have carefully considered the facts of the case and the arguments of the learned departmental representative as well as the learned counsel for the assessee. The issues which arise in the present case can be enumerated as under : (1) Whether the assessee obtained any benefit as a result of acquisition of 650 shares of DDIL (2) Whether on the facts of the case, the fair market value of the shares obtained was more than Rs. 10 each and whether the same has rightly been fixed under the Wealth-tax Rules (5) Whether the benefit, if any, has been obtained by the assessee from DCBL and (4) Whether the provisions of Section 2(24)(iv) were applicable to the facts of the case 16. The background of the fact has already been discussed above. The DDIL required more finance and at the same time desired their shares to be listed on the Delhi Stock Exchange. In this regard, they had entered into correspondence with the Government and proposed to make a public offer of capital to the extent of Rs. 12.64 lakhs and public offer for sale of Rs. 2.10 lakhs worth of shares from the existing shareholding of the promoters. This was to fulfil the condition that 49 per cent of the issued capital is distributed over large number of shareholders.

The Economic Affairs Department had agreed with the listing of DDIL shares at stock exchange on the fulfilment of the above condition. In order to give effect to the proposal of the company a prospectus was issued and it was published on 17-2-1976. In this prospectus, 1,26,360 equity shares of Rs. 10 were issued and in addition, 21,000 equity shares of Rs. 10 each were also put up for sale for which the offer DCBL had irrevocably constituted the assessee-company as its company.

The offer for sale of shares were made to comply with the stock exchange regulation and for enlisting of the equity shares of the company on the Delhi Stock Exchange. It was also clarified that the entire equity shares offered for as well as being issued shall rank pari passu in all respects, including payment of dividends except for the year 1974-75 with the existing issued equity shares of the company.

In this prospectus all the required information was given including the history of the company, the accounts of the earlier year, the position regarding Pakistan assets and the position of litigation in respect thereof. The normal conditions regarding underwriting brokerage, etc., were also there. It was also clarified that the shares of the company were freely transferable.

17. As already stated above, when subscription list closed on 3-4-1976, a total of 15,09,060 shares including 2,050 out of the shares offered for sale remained unsubscribed. The underwriter arranged for fresh application for the sale of these shares by 26-4-1976 and the sales were approved by the board of directors of DDIL at its meeting held on 29-4-1976.

18. Now taking the above circumstances into consideration, when a very large number of shares were open to the public at its par value of Rs. 10, can it be said that the assessee obtained any benefit by acquiring the shares meant for sale by paying the par value as paid by others The market value of the shares cannot be different from the value at which these shares were freely available in large numbers at the relevant time. Share is like any other commodity and its value depends on rule of supply and demand. Large number of shares were in supply and all these shares were not in demand as would be clear from the fact that thousand of shares remained unsubscribed when the subscription closed. It would be against the normal marketing principles to say that there would be no purchaser for a commodity worth several times more than offered price. It is difficult to consider any benefit arising in such circumstances. It is like a transport company providing transport at a parti-etihr rate and that facility being available to everybody in public. If a relative of a director uses that facility, it cannot be said that he has obtained any benefit from the company on the ground that such facility would cost more if provided by anybody else.

19. Apart from the above position, we have to find whether such a benefit has been obtained by the assessee from DCBL. The use of the term 'obtained' would mean that there should be some understanding or agreement between the company and the purchaser that some benefit was being conferred on the purchaser. In the present case, DCBL had made a public offer for the sale of 21,000 shares and it was open to the members of the public as such. Even at the rate of Rs. 10, all the shares were not subscribed or sold. It may also be mentioned that the sale of these shares was based on resolution dated 7-11-1975 when it was 'agreed that the shares would be offered for sale at par. The DDIL was appointed as the constituted authority for the purposes under an irrevocable authority. In these circumstances, it cannot be held that the assessee obtained any benefit from DCBL. It is true that on the date of sale to the assessee, the legal owner of the share was DCBL but it is not possible to hold that the assessee obtained these shares from DCBL.

20. The third issue in the above case is whether there was any material to hold that DCBL had transferred these shares to the assessee at Rs. 10 per share when the fair market value of such share was much more.

The ITO firstly held that the quotation of these shares on the Delhi Stock Exchange at Rs. 10 was not a bonafide quotation. He found that there were no large number of transactions in such shares at the relevant time. He referred to the quotation on 16-6-1976 and some later quotations which were at Rs. 10 per share. However, it is not clear why the ITO did not consider the availability of these shares in large numbers at Rs. 10 per share in the month of April 1976. After rejecting quotation value, the ITO referred to the valuation determined under Rule 2D of the rules for the purposes of charging capital gains in the case of DCBL. Apart from the fact that such inclusion of capital gains was deleted, the propriety of valuing the shares as on 31-9-1976 according to the rules cannot be understood. It has been held by the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahadevia (supra) that the break-up value would not be appropriate for the valuation of shares of a company which is a going concern because among the factors which governed the consideration of the buyer and the seller, the factor of break-up value hardly enters into consideration. According to the Supreme Court, the profit earning capacity of the company would ordinarily determine the value of its shares. There is no indication in the order of the ITO whether the profit earning capacity indicated any higher value. The method adopted by the ITO cannot, therefore, be approved.

21. The ITO proceeded to consider the dispute regarding the Pakistan assets with National Bank of Pakistan. The ITO has observed that this dispute practically came to an end on 3-5-1978 when the National Bank of Pakistan at the directions of the London High Court deposited a sum of 35,49,634 in DDIL's account in the Bank of India, London. The ITO further observed that this amount has not been accounted for in the books as on 30-9-1976 and according to him this was done to suppress a relevant fact. The ITO held that this payment, had to be taken into consideration for valuing the shares as on 30-9-1976. According to the ITO, the adjustment of amount received from National Bank of Pakistan was a very relevant and important factor affecting the value of the shares and could not be ignored. The ITO had further observed that these shares were not to rank pari passu with the other equity shares of DDIL. In this respect, he referred to the dividends for the assessment year 1974-75. Further, according to the ITO, the fact that the persons had not come forward to purchase these shares would not mean the value of these shares was not more than Rs. 10. According to him, the public was not aware of the company's dispute with the National Bank of Parkistan and its chances of winning the case. In this connection, he referred to the fact that most of these shares sold out of 21,000 had been subscribed by Dalmia.

22. From the arguments advanced by the ITO, it appears that in his eyes the subscription being open in respect of lakhs of shares at Rs. 10 per share was of no importance to indicate the fair market value of the shares. It is clear from the prospectus that the fresh subscription was to be treated in the same manner as newly purchased shares though the offered shares had right of participating in the dividend for the assessment year 1974-75. The dividends for the assessment year 1974-75 could be paid only to those shareholders who were on the registers of the company at the relevant time and the new subscribers could not be made eligible for such dividend. In other respects, these shares had equal value, equal voting and equal dividend earning capacity. It is not understood why the fact that large number of these shares were available at Rs. 10 per share and the fact that the people had not come forward to subscribe to these shares at that rate was not indicative of market value of these shares. In my opinion, the ITO has erred in coming to the above conclusion.

23. As regards the factor of Pakistan assets, it may be mentioned that this had been duly brought out in the prospectus which had been issued at a time when the case was still pending in the Court. It has not been suggested that any of the fact has been concealed or misrepresented in the prospectus. Now, the question is whether as a result of decision of the Court, the market value of the shares had gone up simultaneously.

It has not been suggested that the Court's decision was conclusive or final. The matter was still in dispute for another year or so. It was in this light that the Court had directed the Indian company to give an equal bank guarantee for getting the deposit from the National Bank of Pakistan. This situation had arisen when the shares had already been put in the market, the prospectus had been issued, the shares had been subscribed or sold in substantial number and only a few other shares had remained to be subscribed or sold. In my opinion, there is no material to hold that the market value of these shares was much more than the par value at the time when the shares were offered for sale or were actually purchased. In this connection, it may be noted that the prospectus means any document described or issued as a prospectus inviting offers from the public for the subscription or purchase of any share in a body corporate. Thus, the prospectus contemplates not only a subscription but also purchase of any shares. Section 64 specifically refers that the document containing offer of sales was to be deemed as prospectus. This requirement makes it necessary for the company to give all the necessary information regarding the sale of the shares in the same way as subscription to the new issue. Though, the prospectus itself is not a contract and it is an invitation to the public to make offers for subscribing or purchasing the company's shares, the offer from the public has to be in the light of and in conformity with the terms laid down in the prospectus. No purchaser or subscriber can come forward and say that he will subscribe or purchase the shares at a lower price or at a higher price. The formal offer is made by the purchaser who offers to purchase the shares at the stipulated rate. It has not been brought out in the assessment order that in the present case, the offer was made at the time when the fair market value of the shares had considerably gone up.

24. In view of the above discussions, I would hold that the assessee did not derive any benefit from the purchase of the above shares at the rates stipulated in the prospectus and moreover, there was no material to indicate that at the time of sale of these shares, the market value of these shares was more than the consideration shown in the prospectus. I am in agreement with the conclusion drawn by the learned Commissioner (Appeals) and I, therefore, dismiss the appeal filed by the department.


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