COMMISSIONER OF INCOME TAX Vs. AMITBHAI GUNVANTBHAI

JUDGEMENT

(1.) These two references are interconnected as we will indicate in the course of this judgment and it is best to dispose of both of them by this common judgment. In IT Ref. No. 104 of 1974, made at the instance of the Revenue, the following question has been referred to us:

(2.) The facts giving rise to Reference No. 104 of 1974 may now be stated at this stage. We are concerned with the asst. yr. 1968-69, the year of account being Samvat Year 2023 (Oct.-Nov., 1966 to Oct.-Nov., 1967). The assessee is an individual. At the relevant time he was a minor. His natural guardian is Subodhbhai Mangaldas. Subodhbhai's brother, Gunvantbhai, had no son and Subodhbhai, the natural father, gave the assessee, Amitbhai, in adoption to Gunvantbhai and the adoption took place in 1964. Amitbhai was born in 1955. There were disputes amongst the members of the family to which the two brothers, Subodhbhai and Gunvantbhai, belonged and the disputes were referred to two arbitrators under the relevant terms of reference and the arbitrators were authorised to allocate the management of the different companies among the.different members of the family and also to determine the price of the shares of the companies in connection with the transfer of the holdings of the other members to a member or members to whom the management was to be allocated by the terms of the award. Navjivan Mills Limited was one of the companies, the management of which was in the hands of the group of Shantilal Mangaldas and that group was opposed to the group represented by Gunvantbhai Mangaldas and Subodhbhai Mangaldas. The assessee belonged to the group of Gunvantbhai Mangaldas and Subodhbhai Mangaldas. The arbitrators, by what they called their interim award dated 18th Feb., 1967, gave the management of Navjivan Mills Ltd. to the group of Gunvantbhai Mangaldas and Subodhbhai Mangaldas. This involved the purchase of the shares of Navjivan Mills Ltd. by the group of Gunvantbhai and Subodhbhai from Shantilal Mangaldas and the price which the arbitrators fixed for the shares of Navjivan Mills Ltd. was Rs. 80/- per share. According to the interim award of the arbitrators, 1990 shares of Navjivan Mills Ltd. were to be purchased by Gunvantbhai and Subodhbhai from the group of Shantilal Mangaldas. Out of these 1,990 shares, Gunvantbhai purchased 1,200 shares at Rs. 80/- per share out of the moneys belonging to the assessee. The shares were subsequently sold in the same accounting year, that is, Samvat Year 2023, at the price of Rs. 80/- per share. It may be noted that 1,200 shares were purchased on 1st April, 1967, at the rate of Rs. 80/- per share and were sold on 23rd May, 1967, at the rate of Rs. 88/- per share. Thus, immediately there was a short-term capital gain to the extent of Rs. 9,600/- to the assessee. By what the arbitrators called their supplementary award dated 10th Feb., 1969, the price of the shares of Navjivan Mills Ltd. was fixed at Rs. 50/- per share instead of Rs. 80/- per share. The price of shares of several other companies were also reduced and altered by the award dated 10th Feb., 1969. The assessee filed the return for the asst. yr. 1968-69, on 15th April, 1969, that is, after the final award, or what has been referred to as the supplementary award of 10th Feb., 1969, was made by the arbitrators, and, by that time, it was known that the price of the Navjivan Mills Ltd.'s shares had been reduced from Rs. 80/- per share to Rs. 50/- per share. It must be noted that by the supplementary award of 10th Feb., 1969, the price payable by the group of Subodhbhai and Gunvantbhai was reduced from Rs. 80/- per share to Rs. 50/- per share, so far as Navjivan Mills Ltd. was concerned. In view of the supplementary award, the ITO calculated the capital gains on the footing that the cost of acquisition per share was Rs. 50/- per share and assessed the income accordingly. Against the decision of the ITO the assessee took the matter in appeal before the AAC. On behalf of the assessee, before the AAC it was contended that the assessee was a party to the supplementary award of 10th Feb., 1969. It was secondly contended that the assessee did derive any benefit from the reduction in the price of the shares in question from Rs. 80/- to Rs. 50/-. It was contended in this connection that the benefit, if any, was received by Gunvantbhai Mangaldas, the adoptive father, who was benefited by the actual reduction of price and hence it was contended that the assessee could be assessed in respect of the capital gains arising from the reduction in the cost of the shares. The third contention before the AAC was that the capital gain on account of reduction in the cost of the shares arose in the year of account subsequent to the relevant accounting year and the capital gain made from the reduction of the prices could be taxable in the relevant accounting year for asst. yr. 1968-69 but in the subsequent year in which the supplementary award was received. The third contention was accepted by the AAC but he rejected the first two contentions of the assessee. As he accepted the third contention so far as asst. yr. 1968-69 was concerned, the AAC held that the capital gains were to be computed on the footing of the cost of the shares being Rs. 80/- per share and the capital gains were worked out to Rs. 9,600/-

(3.) Against the decision of the AAC the matter was taken in appeal by the Revenue and it was contended on behalf of the Department that the shares were purchased with the moneys belonging to the assessee and, therefore, the gain on account of the reduction in the cost price of shares as given by the supplementary award, which was retrospective in nature, should be assessable in the hands of the assessee. It was contended that the ITO was justified in assessing the capital gains at Rs. 45,600/-, that is, on the footing of the cost of the shares being Rs. 50/- per share. The Tribunal agreed with the view taken by the AAC and observed: