SHEKHAWATI GENERAL TRADERS LTD. vs. INCOME TAX OFFICER, COMPANY CIRCLE I, JAIPUR

CIVIL APPEAL No. 2039/1968Supreme Court[1972] 1 S.C.R. 92704 October 1971Bench: 2 JudgesAuthor: K.S. HEGDE, A.N. GROVER B7 pages
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What did the Supreme Court hold?

The Supreme Court allowed the appeals, setting aside the High Court's judgment and quashing the impugned notices. The Court held that under Section 55(2) of the Income Tax Act, 1961, the cost of acquisition for an asset held before January 1, 1954, is either the actual cost to the assessee or the fair market value of the asset on January 1, 1954, at the assessee's option. The assessee had correctly exercised this option, and the fair market value was duly determined. The Court found it incorrect to hold that the cost had to be averaged with bonus shares issued after January 1, 1954, as this ignored the statutory provisions of Sections 48 and 55(2). For ascertaining the fair market value on January 1, 1954, any event prior or subsequent to that date is wholly extraneous and irrelevant. The Court distinguished the case of Commissioner of Income-tax, Bihar v. Dalmia Investment Co. Ltd., stating it was not apposite to the present case, which was confined to the express provisions of Section 55(2). Furthermore, the Court held that the assessee was only bound to disclose material facts necessary for assessment under Section 147(a), and the information regarding bonus shares was irrelevant. For Section 147(b), there was no reason for the Income-Tax Officer to believe that income had escaped assessment based on the information provided. The operative direction was to quash the notices issued to the assessee.

What were the facts?

The assessee, Shekhawati General Traders Ltd., acquired ordinary shares in two companies before January 1, 1954. The assessee also received bonus shares and acquired right shares in subsequent years. For assessment year 1962-63, the assessee sold some of these shares and calculated their cost of acquisition at the market rate prevailing on January 1, 1954, resulting in a capital loss. The Income-Tax Officer initially allowed this loss to be carried forward. However, after approximately 2.5 years, the Income-Tax Officer issued a notice under Section 147 of the Income Tax Act, 1961, stating that income had escaped assessment. The officer believed the assessee wrongly used the market price as of January 1, 1954, ignoring bonus shares issued later, and that the cost should be averaged across all shares. The assessee contended it exercised its option under Section 55(2). The High Court dismissed the assessee's writ petition, finding the notice valid because bonus and right shares were not initially disclosed.

What were the issues?

1. Whether the assessee correctly computed the cost of acquisition of shares sold during assessment year 1962-63 by taking the fair market value as on January 1, 1954, as per Section 55(2) of the Income Tax Act, 1961, or if the cost should be averaged with bonus shares issued after that date, as contended by the Revenue. Assessee's contentions: The assessee argued that it had exercised its option under Section 55(2) of the Act, allowing it to take the fair market value as on January 1, 1954, as the cost of acquisition for shares held prior to that date. They maintained that events subsequent to January 1, 1954, such as the issuance of bonus shares, were irrelevant for determining the fair market value on that specific date. The assessee also argued that they were only obligated to disclose material facts necessary for assessment, not irrelevant ones, and that the information regarding bonus shares did not warrant the Income-Tax Officer's belief that income had escaped assessment under Section 147(a) or 147(b). Revenue's contentions: The Revenue contended that the cost of acquisition should be worked out by averaging the cost of the original shares with the bonus shares taken together, citing the Supreme Court's decision in Commissioner of Income-tax, Bihar v. Dalmia Investment Co. Ltd. They argued that the assessee's claim of cost was incorrect and that by following an erroneous method, the assessee had claimed and been allowed a capital loss instead of a capital gain.

Which sections of the Income-tax Act were involved?

Section 147,Section 55,Section 48

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A B c D E F G H 927 SHEKHAWATI GENERAL TRADERS LTD. v. INCOME TAX OFFICER, COMPANY CIRCLE I, JAIPUR October 4, 1971 [K. S. IIEGDE AND A. N. GROVER, JJ.] Income-tax Act, 1961-Sections 147 and 55 and its scope.

Jn 1949, the assessee company had acquired ·some ordinary shares of a company of the face value of Rs. 10/. each. On this holding the assessee had received certain bonus shares. The assessee further acquired a certain number of right shares of the same company in 1961. During the assessment year 1962-63 it sold a certain number of shares which it held prior to January 1, 1954 and calculated the cost price of the shares sold, at tho market rate prevailing on January 1, 1954. Similarly, the assessee acquired certain ordinary shares of another company before January 1, 1954 and received certain bonus shares lifter that date. During the assessment year 1962-63 it again sold some of these shares and calculated the cost of acquisition of the said shares at the market value prevailing on January 1, 1954. Thus, according to the assessee, by selling the shares of the ~o companies, it had suflj,,red a capital loss and the Income-tax Officer allowed the loss

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