M/S ESCORTS FARMS (RAMGARH) LTD. vs. THE COMMISSIONER OF INCOME TAX, NEW DELHI

CIVIL APPEAL No. 1124/1987Supreme Court1996 INSC 111826 September 1996Bench: 2 JudgesAuthor: B.P. JEEVAN REDDY, K.S. PARIPOORNAN MIS ESCORTS FARMS16 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the High Court was justified in law in holding that the valuation made by the Revenue regarding the cost of the original shares was proper and valid. The Court affirmed that the subsequent issue of bonus shares has the effect of altering the original cost of acquisition. The principle of averaging the cost over old and new bonus shares, as laid down in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. (52 ITR 567) and other cases, applies as a general rule when the assessee claims to deduct the actual cost of acquisition instead of the statutory cost. The Court clarified that the character of the owner of the shares as an 'investor' or 'dealer' is of no consequence. The Court also distinguished the case of Shekhawati General Traders Ltd. v. I.T.O. (1971) 82 ITR 788, stating it cannot be applied where the assessee did not and could not exercise the option of the statutory cost of acquisition. The appeals were dismissed.

What were the facts?

The assessee, Escorts Farms (Ramgarh) Ltd., an investor in shares, sold shares of Escorts Limited in assessment years 1967-68 and 1968-69. The assessee declared capital gains by treating the actual cost of the original shares as its cost of acquisition. The Income Tax Officer (ITO) disagreed and computed capital gains differently. This computation was upheld by the Appellate Assistant Commissioner and the Appellate Tribunal. The Tribunal referred two questions of law to the High Court. The High Court answered the first question in favour of the Revenue, holding the ITO's valuation of the original shares' cost to be proper. The assessee appealed this decision.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in determining the cost of acquisition of the original shares by spreading the original cost over the original and bonus shares and then averaging the same, thereby calculating capital gains at Rs. 32,100 and Rs. 12,450 for assessment years 1967-68 and 1968-69 respectively? (Question of law turning on Section 45 and Section 48 of the Income Tax Act, 1961). 2. If the answer to question No. 1 is in the negative, whether the assessee was justified in taking the value of the shares at their original cost under Section 45 of the Income Tax Act, 1961? (Question of law turning on Section 45 of the Income Tax Act, 1961). Assessee's Contention: The assessee argued that the High Court overlooked that for ascertaining the fair market value of shares on January 1, 1954, prior or subsequent events were irrelevant. They contended that the acquisition of bonus shares subsequent to January 1, 1954, could not be taken into account under the statute. They relied on the principle that if the statutory cost of acquisition is opted for, subsequent bonus shares cannot affect the issue. Revenue's Contention: The Revenue contended, and the High Court agreed, that the valuation made by the Revenue regarding the cost of the original shares was proper and valid. They argued that the subsequent issue of bonus shares has the effect of altering the original cost of acquisition. The Revenue relied on the principle of averaging the cost over original and bonus shares as enunciated in Dalmia Investment Co.'s case.

Which sections of the Income-tax Act were involved?

Section 2(14),Section 45,Section 48,Section 55(2)

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A MIS ESCORTS FARMS {RAMGARH) LTD. v. THE COMMISSIONER OF INCOME TAX, NEW DELHI SEPTEMBER 26, 1996 B [B.P. JEEVAN REDDY AND K.S. PARIPOORNAN, JJ.] Income Tax Ac~ 1961-Sections: 2(14),45 (1), 48 and 55 (2}-Capital gain~omputation of-Capital assets-Shares-Shares purchased after 1954--Subsequently, bonus shares issued in respect of the original C shares-Declaration of capltal gains by treating the actual cost of the original . '" shares as its cost of acquisitio~on-acceptance of the declaration by the Reve11ue Authoritie~on~putation of the original shares by ITO co11finned by the Appellate Tribu11a~n refere11ce, High Court answered inf avour of Reve11ue--Decision of the High Court assailed-Held, the principles of averag- D i11g by spreadi11g the cost over the old shares and the new bonus shares as enunciated in Dalmia Investment Co.'s case will apply as general rule-The subsequent issue of the bonus shares has the effect of altering the original cost of acquisition of the shares-171e character of owner of the shares as an 'investor' or as a 'dealer' is of no consequence. E 'lbe appellant purc:hased the original shares after 1954. Bonus F shares were also issued

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