1987 (12) TMI 91 - AT - Income Tax

Tribunal rulings on capital gains, valuation methods, and bonus shares costs.

HF. CRAIG HARVEY. Versus THIRD INCOME TAX OFFICER.

The Tribunal admitted the Revenue's additional grounds of appeal, allowed the assessee's right to substitute market value for cost of acquisition, ... - Issues Involved:1. Admission of additional grounds of appeal by the Revenue.2. Entitlement to the option under Section 55(2) to substitute the market value as on 1st January 1964 for the cost of acquisition in respect of shares held in an amalgamated company.3. Cost of acquisition of bonus shares in Madura Mills Co. Ltd. and A&F Harvey Ltd. for computing long-term capital gains.4. Rate of capitalization to be adopted for valuing original shares held in A&F Harvey Ltd. as on 1st January 1964.5. Permissibility of taking the average of values arrived at by yield method and break-up value method for shares in A&F Harvey Ltd.6. Relief to be allowed in the appeals and the extent of such relief.Issue-wise Detailed Analysis:1. Admission of additional grounds of appeal by the Revenue:The Tribunal considered the additional grounds raised by the Revenue, which questioned the CIT(A)'s failure to issue an enhancement notice regarding the valuation of shares held by the assessee in the amalgamating company. The Tribunal noted that the additional grounds raised a pure question of law based on facts already on record and did not require further investigation. The Tribunal, following the principle that a new plea can be entertained if it arises from the subject matter of the appeal, admitted the additional grounds of appeal filed by the Revenue.2. Entitlement to the option under Section 55(2) to substitute the market value as on 1st January 1964 for the cost of acquisition in respect of shares held in an amalgamated company:The Tribunal held that the assessee is entitled to the statutory right of substituting the fair market value of the shares as on 1st January 1964 for the cost of acquisition of shares in the amalgamating companies. This conclusion was based on the interpretation of Sections 48, 49(2), and 55(2)(i) of the Income Tax Act, which collectively support the assessee's right to exercise this option. The Tribunal rejected the Revenue's contention that the fiction created by Section 49(2) should be limited and not extend to the benefit of substitution under Section 55(2)(i).3. Cost of acquisition of bonus shares in Madura Mills Co. Ltd. and A&F Harvey Ltd. for computing long-term capital gains:The Tribunal, while acknowledging the arguments based on various judicial precedents, ultimately followed the Madras High Court's decision in CIT vs. TVS & Sons Ltd., which held that when the entire shareholding, including original and bonus shares, is sold en bloc, the cost of acquisition of bonus shares need not be determined separately. Consequently, the Tribunal decided this issue in favor of the Revenue, holding that the assessee is not entitled to a separate deduction for the cost of acquisition of bonus shares.4. Rate of capitalization to be adopted for valuing original shares held in A&F Harvey Ltd. as on 1st January 1964:The Tribunal upheld the CIT(A)'s decision to adopt a 6% capitalization rate for valuing the original shares in A&F Harvey Ltd. as on 1st January 1964. This decision was based on the earlier circular issued by the Central Board of Direct Taxes (CBDT) and the prevailing bank rates during the relevant period. The Tribunal rejected the Revenue's reliance on a later circular that prescribed a 9% capitalization rate, as it was issued after the relevant valuation date.5. Permissibility of taking the average of values arrived at by yield method and break-up value method for shares in A&F Harvey Ltd.:The Tribunal decided this issue in favor of the assessee, relying on the Supreme Court's decision in CGT vs. Smt. Kusumben D. Mahadevia, which held that a combination of the yield method and break-up value method for valuing shares is not a valid principle. The Tribunal, therefore, directed that the valuation should not be based on an average of the two methods.6. Relief to be allowed in the appeals and the extent of such relief:The Tribunal, after resolving the issues, determined that the long-term capital gains chargeable to tax in the hands of the assessee should be Rs. 2,07,727. This figure was arrived at by considering the fair market value of the original shares as on 1st January 1964, the actual cost of acquisition of additional shares, and the net sale consideration received by the assessee. The Tribunal directed the Income Tax Officer to adopt this figure in place of the one determined by the CIT(A).Conclusion:The Tribunal allowed the assessee's appeal regarding the average valuation method and the capitalization rate, while partly allowing the Revenue's appeal concerning the cost of acquisition of bonus shares. The final long-term capital gains to be taxed were adjusted accordingly.