TaxTMI 
TaxTMI 
2000 (2) TMI 79
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....er : "Whether, the Tribunal is right in holding that the appellant is not entitled to deduct the sum of Rs. 1,53,128 as the cost of bonus shares in addition to the cost of acquisition of original shares in the two amalgamated companies ?" We are concerned with the assessment of income of the assessee for the assessment year 1978-79 for which the previous year ended on April 5, 1978. The assessee in the return of income for the assessment year 1978-79 disclosed an income of Rs. 1,93,654 as dividend income, Rs. 2,187 as interest income and Rs. 54,599 as long-term capital gains on the sale of shares. In this tax case, we are not concerned with the mode of assessment of the dividend income and interest income offered by the assessee, but the dispute in this tax case reference centres round the mode of computation of long-term capital gains on the sale of shares. The Income-tax Officer determined the long-term capital gains at Rs. 4,67,411 which arose on the sale of shares held by the assessee as against the amount offered by the assessee at a sum of Rs. 54,599 and the difference arose because the Income-tax Officer found that during the previous year, the assessee had sold 1,8....
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.... 1,83,154 Madura Coats Ltd. shares. ---------- The Income-tax Officer found that the entire shares, viz., 1,83,154 shares in Madura Coats Limited were sold during the year of account and arrived at the cost of acquisition of the original shares held by the assessee in Madura Mills Ltd., and in A and F Harvey Ltd., as on January 1, 1964, and recomputed the cost of acquisition of the assessee's holdings at Rs. 7,96,322. The Income-tax Officer did not include any separate cost for the bonus shares of two companies as he was of the opinion that the cost of the bonus shares was included in the fair market value as on January 1, 1964, and he arrived at the long-term capital gains at Rs. 4,67,441 deducting a sum of Rs. 7,96,322 as the cost of acquisition from the net sale consideration of Rs. 12,63,....
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....l shares held in two amalgamating companies. The Appellate Tribunal ultimately directed the Income-tax Officer to take the figure of long-term capital gains at Rs. 2,07,727 in the place of Rs. 1,74,001 as determined by the Commissioner of Income-tax (Appeals). The Tribunal, in effect, allowed both the appeals preferred by the assessee and by the Revenue in part. On application filed by both the Revenue and the assessee, the Appellate Tribunal has stated a case and referred the two questions of law set out earlier. Learned counsel for the Revenue submitted that the assessee became the owner of the shares held in the amalgamated company by allotment of shares to him in the amalgamated company in a scheme of amalgamation in lieu of the shares held by him in the amalgamating companies. According to learned counsel for the Revenue, under section 49(2) of the Incometax Act, 1961 (for short, "the Act"), the cost of shares in the amalgamated company shall be deemed to be the cost of acquisition of shares in the amalgamating companies and the cost fixed under section 49(2) of the Act is a statutory cost and it cannot be varied unless provided by the statute. He referred to section 55(2)(....
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....in immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company." It is relevant to refer to the definition of the term, short-term capital asset in section 2(42A) of the Act and the said section in so far as it is relevant for the purpose of this case reads as under : "'short-term capital asset', means a capital asset held by an assessee for not more than sixty months immediately preceding the date of its transfer." Section 45 of the Act provides for levy of capital gains and the said section reads as under : "Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54C and 54D be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income....
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....n ; (iv) (omitted) ; (v) where the capital asset, being a share or a stock of a company, became the property of the assessee on--- (a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares, (b) the conversion of any shares of the company into stock, (c) the reconversion of any stock of the company into shares, (d) the sub-division of any of the shares of the company into shares of smaller amount, or (e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived." A fair reading of the definition of the term, "short-term capital" asset in section 2(42A) of the Act indicates that the period of holding of the shares in the amalgamating company should be clubbed along with the period of shares held in the amalgamated company for the purpose of determining whether the shares held by the assessee are short-term capital assets or long-term capital assets. The intention of the Legislature behind the provision is that there....
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....'amalgamated company' (i.e., the company in which the enterprise of the other company is merged) in lieu of their shareholdings in the amalgamating company. Some of these tax liabilities discourage amalgamations. For the purpose of facilitating the merger of uneconomic company units with other financially sound Indian companies in the interests of increased efficiency and productivity, it is proposed to make the following provisions in the law :... (iv) No capital gains or loss will be computed in the case of the amalgamating company in respect of any capital assets transferred by it to the amalgamated company,.... (vi) The shareholders in the amalgamating company receiving shares in the amalgamated company in lieu of their original shareholdings will be liable to tax on capital gains only at the stage when they sell or otherwise transfer the shares in the amalgamated company and realise any capital gains thereon. Such capital gains will be computed by taking the 'cost of acquisition' thereof to be the cost of acquisition of the shares in the amalgamating company." The intention of Parliament is to avoid imposition of tax liability on the allotment of shares to the shareho....
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.... the amalgamating company as on January 1, 1964, as the cost of the shares under section 55(2)(i) of the Act. Section 49(2) is intended to determine the cost of acquisition of shares of the amalgamated company, but that does not take away the right of the assessee to exercise his option under section 55(2)(i) of the Act in adopting the market value of the shares of the amalgamated' company as on January 1, 1964. We are of the opinion, by virtue of section 49(2) of the Act, the cost of the shares in the amalgamated company is deemed to be the cost of the shares in the amalgamating company and when the shares held by him in the amalgamated company were sold, the assessee had an option to take either the actual cost of the asset or the fair market value of the asset as on January 1, 1964. We therefore hold that the non-availability of an option under section 55(2)(ii) of the Act does not prevent the exercise of the option provided under section 55(2)(i) of the Act. The expression, "cost of acquisition" found in sections 48, 49 and 55 of the Act is a compendious expression and in the context of levy of capital gains, the general principle of law relating to the cost determination of ac....
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....indra's case [1982] 135 ITR 191, would apply to a case of transfer of shares held in the amalgamated company allotted in lieu of shares in the amalgamating company and the assessee is entitled to exercise the option under section 55(2)(i) of the Act as his original shares were acquired prior to January 1, 1964. We, therefore, hold that the Commissioner of Income-tax (Appeals) and the Appellate Tribunal committed no error in holding that the assessee is entitled to exercise the option under section 55(2)(i) of the Act. In so far as the question referred at the instance of the assessee is concerned, we are of the view that once the fair market value of the shares as on January 1, 1964, is determined, it remains an unalterable figure and any issue of bonus shares subsequent to that date is wholly extraneous and irrelevant and cannot be taken into consideration. This court in Mala Ramesh v. CIT [1995] 214 ITR 223 has taken the view that the value of the bonus shares is not to be separately ascertained when an entire block of shares including bonus shares held by the assessee were sold or transferred, and in such a situation, it is not necessary to ascertain the individual cost of ea....