INCOME TAX OFFICER v. VIJAY M. MERCHANT
[Citation -1986-LL-0731-6]

Citation 1986-LL-0731-6
Appellant Name INCOME TAX OFFICER
Respondent Name VIJAY M. MERCHANT
Court ITAT
Relevant Act Income-tax
Date of Order 31/07/1986
Assessment Year 1971-72
Judgment View Judgment
Keyword Tags cost of acquisition • reassessment order • fair market value • preference shares • original return • cross-objection • capital asset • revenue audit • capital gain • capital loss • market price • cost price
Bot Summary: Equity shares, cumulative preference shares, deferred ordinary shares etc. After the shares were settled on trust there was reconstitution in the capital structure of the said company and different series of shares were issued for the existing shares. The audit note of the Department brought to the notice of the ITO that since the original shares which the assessee had acquired prior to 1st Jan., 19 54 and which were settled on trust had not been received back by the assessee at the time of revocation and that since the shares that were sold were different from those original shares acquired by the assessee prior to 1st Jan., 19 54, the market price as on 1st Jan., 19 54 could not be taken as cost of acquisition and that cost at which the shares had been originally acquired should have been taken as cost of acquisition. 19 71-72 you have declared long term capital gains of Rs. 1,56,657 on sale of certain shares of Bhor Industries Ltd. including the shares which were settled upon trust for the benefit of your nephew Shri C.K. Thakersey. Since the shares retaken over by you were the same shares settled upon the trust, you have wrongly exercised the right of substitution of market price for the cost of price by withholding certain facts at the time of original assessment. 12th May, 19 64 addressed to all the CIT. The position was clarified in the following words; Where one type of share is converted into another type of share, there is no transfer of a capital asset within the meaning of s. 2(47) of the IT Act, 19 61. In the present case when other type of shares were issued in place of shares that were settled on trust, no transfer had taken place.


R.L. SANGANI, J.M. This appeal by Department and cross objection by assessee were heard together. 2 . assessee is individual. assessment year is 19 71-72. accounting year ended on 31st March, 19 71. One of items of income was long term capital gains on sale of shares. shares were of two companies viz., M/s Bhor Industries Pvt. Ltd. and M/s Hakotronics P. Ltd. We are concerned with shares of M/s. Bhor Industries Pvt. Limited. capital gain disclosed in original return on sale of shares of company was Rs. 1,43,957. computation for this amount filed with return was as follows : Computation of capital gains on sale of investments Bhor Industries Pvt. Ltd. Sale of (i) proceeds of 120 3,24,000 . equity shares Less: Market . value as on 1-1- 19 99,428 . 54 (120x828.57) . . 2,24,572 . . Capital gain . 2,24,572 Sale (ii) proceeds of 173 1,73,000 . preference shares Less: Market value as on 1st . 2,53,654.54 . Jan., 19 54. 173x1465.98 . . 80,654.54 . . Capital loss . 80.6 . . . 1,43.9 This computation was accepted by ITO and assessment was completed. It is to be seen that in this computation cost of acquisition is taken at price as on 1st Jan., 19 54. Before we proceed further, it is necessary to give few more facts about shares that were sold. assessee had by indenture dt. 17th Sept., 19 56 settled certain shares of M/s. Bhor Industries Pvt. Ltd. on trust. income derived by trust was receivable by his nephew. shares which were settled were of different categories viz. equity shares, cumulative preference shares, deferred ordinary shares etc. These shares had been acquired by assessee prior to 1st Jan., 19 54. After shares were settled on trust there was reconstitution in capital structure of said company and different series of shares were issued for existing shares. Those shares were received by trustees for original shares. trust which was created by assessee was revocable after six years. That trust was in fact revoked by assessee by indenture dt. 1st April, 19 53. As result of this revocation shares of said company which were held by trustees were reverted to assessee and assessee again became owner o f those shares. These shares were then sold in relevant accounting year giving rise to capital gains with which we are concerned. 3. audit note of Department brought to notice of ITO that since original shares which assessee had acquired prior to 1st Jan., 19 54 and which were settled on trust had not been received back by assessee at time of revocation and that since shares that were sold were different from those original shares acquired by assessee prior to 1st Jan., 19 54, market price as on 1st Jan., 19 54 could not be taken as cost of acquisition and that cost at which shares had been originally acquired should have been taken as cost of acquisition. ITO treated this note as information received by him and reopened assessment. assessee objected to reopening of assessment on ground that said audit note could not form valid basis for reopening. ITO held that material facts were not truly and fully disclosed at time of original assessment and as such he had jurisdiction to reopen same under s. 147(b) of Act. He observed that since scrips of shares which were sold were not same which were originally settled upon trust, assessee could not be said to be in possession of Scrips held continuously from 1st Jan., 19 54, and as such, he was not entitled to substitute price as on 1st Jan., 19 54. He accordingly, treated original price at which shares had been acquired as price of acquisition and were calculated capital gains on that basis. 4. In appeal filed by assessee, CIT (A) held that all material facts had been truly and fully stated at time of original assessment and as such reopening was invalid under s. 147 (b) of Act. He accordingly, cancelled reassessment order. He did not express any opinion on merits of case. Department has now come in appeal before us. 5. We have heard parties. reason for reopening are stated by ITO in his letter dt. 16th Dec., 19 80 addressed to assessee in following words: "From perusal on records. I find that for asst. yr. 19 71-72 you have declared long term capital gains of Rs. 1,56,657 on sale of certain shares of Bhor Industries Ltd. including shares which were settled upon trust for benefit of your nephew Shri C.K. Thakersey. This trust was revoked on 1st April, 19 63 and scripts which were changed during period intervening between creation of trust and its revocation were retaken over by you. For purpose of cost of these scripts in connection with determination of capital gains, you have exercised option and substituted market price as on 1st Jan., 19 54 in place of cost of shares. Since shares retaken over by you were same shares settled upon trust, you have wrongly exercised right of substitution of market price for cost of price by withholding certain facts at time of original assessment. As result income of Rs. 1,28, 178 chargeable to capital gains tax has escaped assessment owing to your failure to disclose fully and truly all relevant material facts necessary for assessment." 6. It is to be seen that material allegation of ITO is as follows : "Since shares are taken over by you were not same shares settled upon trust, you have wrongly exercised right of substitution of market price for cost price by withholding certain facts at time of original assessment." allegation is that "certain facts" have been withheld by assessee. However, it is not mentioned as to what was that material fact which had not been disclosed at time of original assessment. fact that was allegedly withheld should have been clearly brought out by ITO because it is only failure to state truly and fully material facts by assessee that confers jurisdiction on ITO to reopen assessment under s. 147(a) of Act if all material facts are fully and truly stated, ITO is not entitled to reopen assessment under that provision. In present case, all material facts were on record. whole assessment file was before ITO. trust has been revoked in 19 63. There was circular by Government of India dt. 12th May, 19 64 (F. No. 12th Jan., 19 64 IT(AI) addressed to all CIT. position was clarified in following words; "Where one type of share is converted into another type of share (including conversion of debentures into equity shares), there is, in fact, no "transfer" of capital asset within meaning of s. 2(47) of IT Act, 19 61. Hence any profits derived from such conversion are not liable to capital gains tax under s. 45(1) of IT Act. However, when such newly converted share is actually transferred at later date, cost of acquisition of such share for purposes of computing capital gains shall be calculated with reference to cost of acquisition of original share of stock from which it is derived." Thus according to circular, when shares which are converted and are sold, capital gains are to be calculated on basis of cost of original shares. Thus factum of conversion does not make any material difference in calculating capital gains. question whether price as on 1st Jan., 19 54 could be substituted for price at which shares had been originally acquired prior to 1st Jan., 19 54 would depend upon interpretation of ss. 45, 49 and 55(2) of IT Act, 19 61. All facts necessary for deciding that question were already on record at time of original assessment, that is why in reasons recorded for reopening no specific fact was mentioned as fact which was not disclosed at time of original assessment. Thus, in substance reopening is on opinion of Revenue audit on question of law viz., whether on facts of this case, price prevailing on 1st Jan., 19 54 could be substituted for price at which shares had been originally acquired. Opinion of audit on this question of law would not form valid basis for reopening. Since there was no omission to state material facts, reopening under s. 147(a) was not justified. We, accordingly, confirm order of CIT (a) concelling reassessment order. 7. We now come to cross objection. In cross objection, ground raised is that CIT (A) ought to have recorded finding that assessee was entitled to substitute to market price as on 1st Jan., 19 54 for cost of acquisition. CIT (A) has not recorded said finding because of fact that according to him reopening itself was bad. Since assessee wants that this question should be finally decided on merits, we proceed to decide same. 8. As already stated Circular of Government of India, to which we have made reference above, clearly lays down that there is no transfer when one type of share is converted into another type of share. Consequently, in present case when other type of shares were issued in place of shares that were settled on trust, no transfer had taken place. There was substitution of new share in place of old shares. There is thus continuity. assessee was originally owner of shares. During period from 19 56 to 19 63, trustees were owners. On revocation of trust, assessee again became owner of shares. When he became owner on revocation of trust, he had not paid any price. Consequently, cost of acquisition would be deemed to be cost for which previous owner of shares acquired same. previous owners were trustees. They had also not acquired for any price. They acquire same from assessee. Consequently, cost of acquisition would be deemed to be cost for which assessee originally acquired those shares. This would be position under s. 49(1) r/w Explanation. Sec. 55(2)(ii) of Act laid down that for purposes of s. 49, cost of acquisition in relation to capital asset, where capital asset became property of assessee by any of modes specified in sub-s. (1) of s. 49, and capital asset by any of modes specified in sub-s. (1) of s. 49, and capital asset became property of previous owner before 1st Jan., 19 54 could be cost of capital asset to Previous owner or fair market value of assets as on 1st Jan., 19 54 at option of assessee. In present case, assessee would have option to substitute fair market value as on 1st Jan., 19 54, under this provision. He had substituted same in computation filed with original return. There was no error in said substitution and as such, opinion of ITO that assessee was not entitled to substitute fair market value as on 1st Jan., 19 54 was not correct. We accordingly confirm cancellation of reassessment order and restoration of original assessment order. 9. In result, appeal filed by Department is dismissed, while cross-objection filed by assessee is allowed. *** INCOME TAX OFFICER v. VIJAY M. MERCHANT
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