HARISH MAHINDRA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference made under S. 256(1) of the IT Act, 1961 (referred to hereinafter as

(2.) MAHINDRA and Mahindra Ltd. was initially a private limited company. As per its balance sheet as on 31st Oct., 1953, its paid up capital consisted of 2,400 shares of Rs. 500 each. As per the balance sheet of the said company as on 31st Oct., 1954, its paid up capital was shown at Rs. 15 lakhs by way of 3,000 "A" ordinary shares of Rs. 500 each and full face value of Rs. 1,68,090 received in advance of allotment in respect of 16,809 'B' ordinary shares of Rs. 10 each. Thus in April 1955, the paid up capital of the said company was of Rs. 16,68,090 consisting of 3,000 "A" ordinary shares of Rs. 500 each and 16,809 "B" ordinary shares of Rs. 10 each. On 25th April, 1955, an agreement was entered into between the said company and the trustees of the shareholders for the conversion of the said company from a private limited company into a public limited company with a view to issuing an invitation to the public to subscribe to the share capital of the said company. The terms of this agreement are reflected in certain resolutions which were passed pursuant to the said agreement at an extraordinary general meeting of the shareholders of the said company held on 15th June, 1955. Resolutions which are material for our purposes are at items Nos. 2, 3, 4 and 5 in the minutes of the extraordinary general meeting of the said company held on 15th June, 1955. By the resolutions at items Nos. 2 and 3, certain amendments were made to the memorandum of association and articles of association of the said company, respectively, whereby it was converted into a public limited company. By the resolution at item No. 4, existing issued

(3.) DURING the accounting year ended 31st March, 1964, relevant to the asst. year 1964 65, the assessee sold 29,000 sub divided shares of Rs. 10 each at varying prices averaging to a sale price of Rs. 17 per share, the total sale proceeds realized by the assessee amounting to Rs. 4,93,000. As pointed out by the Tribunal, there is no dispute that the shares sold were the sub divided original shares and not the new shares acquired by way of bonus shares. Although it is not known whether the said 29,000 sub divided shares of Rs. 10 each sold by the assessee during the asst. year 1964 65 were derived from the original 600 shares of Rs. 500 each acquired by the assessee prior to 1st Jan., 1954, or whether any of them were derived from the original 195 shares of Rs. 500 each acquired by the assessee between 31st Oct., 1953 and 31st Oct., 1954, the Department has all along assumed that all the shares sold were derived from the original shares acquired before 1st Jan., 1954. In respect of the said assessment year the assessee claimed a capital loss of Rs. 1,13,390 on the sale of 29,000 sub divided shares of Rs. 10 each on the footing that they constituted a capital asset which became the property of the assessee before 1st Jan., 1954, and that the fair market value of the said asset on 1st Jan., 1954, was Rs. 20.91 per share. The assessee claimed this capital loss on the basis that he was entitled to exercise the option to substitute the fair market value of the original shares on 1st Jan., 1954, for the cost of acquisition thereof. The ITO did not allow the assessee's claim of capital loss of Rs. 1,13,390 and held that the assessee had, by disposing of the said shares, made a capital gain of Rs. 2,03,000 which the ITO brought to tax. It is pointed out by the Tribunal that although the order passed by the ITO is not clear, he seems to have taken the view that the said sub divided shares sold by the assessee were not the original shares which had been acquired by the assessee prior to 1st Jan., 1954, and, hence, the said sub divided shares sold by the assessee could not be regarded as an asset acquired by the assessee prior to 1st Jan., 1954, and hence the said sub divided shares sold by the assessee could not be regarded as an asset acquired by the assessee prior to 1st Jan., 1954, with the result that the option of substituting the fair market value as on 1st Jan., 1954, in the place of cost of acquisition was not available to the assessee.