(a) Income-tax---

----Capital gains---Understatement of consideration---Section 52(2) not applicable where consideration received for transfer of property has been declared correctly---Indian Income Tax Act, 1961, S.52.

Subsection (2) of section 52 of the Income Tax Act, 1961, can be invoked only where the consideration for the transfer of a capital asset has been understated by the assessee, or in other words, the full value of the consideration in respect of the transfer if shown at a lesser figure than that actually received by the assessee and the burden of proving such understatement or concealment is on the Revenue.

K. P. Varghese v. ITO (1981) 131 ITR 597 (SC) fol.

(b) Income-tax---

----Capital gains---Computation of capital gains---Sale of unquoted equity shares---Provision for gratuity deductible from value of assets for finding out break-up value of shares---Indian Income Tax Act, 1961, Ss.45 & 48.

On a sale of unquoted equity shares of a company the provisions for gratuity should be treated as a liability and should be deducted from the value of the assets for finding out the break-up value of the shares.

CIT v. S. Ram (1984) 147 ITR 278 (Mad.) fol.

(c) Income-tax---

----Capital gains---Long-term or short-term capital gains ---Assessee acquiring shares in a company before 1954---Merger of company with its holding company on 28-2-1971---Assessee given shares in holding company in exchange for his original shares---Sale of shares of holding company on 14-7-1973---Shares were long-term capital assets ---Assessee could exercise option of valuing shares at their cost on 1-1-1954--Bonus shares could not be taken into account for determining value of shares---Indian Income Tax Act; 1961, S.45.

For the assessment year 1974-75, the assessee, a Hindu undivided family, sold on July 14, 1973, 500 shares in a company, TVS. These 500 shares formed part of 721 shares, which the assessee got on February 28, 1971 on account of the merger of M, a subsidiary of TVS. In exchange for 721 shares in M, the assessee got 721 shares of TVS. The Income-tax Officer held that since the assessee acquired the shares, which were the subject matter of sale; on February 28, 1971, the sale had taken place within five years and hence the profits on sale made would be short-term capital gains and not long-term capital gains. The Tribunal, however, held that the shares were long-term capital assets. On a reference:

Held, that since the original shares in M were admittedly acquired before January 1, 1954, their value as on January 1, 1954, had to be adopted at the assessee's option. With regard to the original shares, there was no warrant for averaging the cost taking into account the bonus shares subse quently received by the assessee having regard to the decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO (1971) 82 ITR 788.

S. Ram v. CIT (1998) 230 ITR 353 (Mad.) fol.

Shekhawati General Traders Ltd. v. ITO (1971) 82 ITR 788 (SC) applied.

C. V. Rajan for the Commissioner.

S. Sridhar for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the value of shares as on January 1, 1954, should not be taken by averaging the cost taking into account the bonus shares received subsequently?

(2) Whether the Appellate Tribunal was right in holding the provision for gratuity should be treated as a liability and should be deducted from the value of the assets for finding out the break up value of the shares?

(3) Whether the Appellate Tribunal was right in holding that the provisions of section 52(2) could not be invoked in the assessee' case?"

In so far as question No.2 is concerned, the point for consideration is whether the provision for gratuity should be treated as a liability and should be deducted from the value of the assets for finding out the break-up value of the shares. A similar question came up for consideration before this Court in CWT v. S. Ram (1984) 147 ITR 278, wherein this Court held that the provisions of Explanation II(ii)(f) to rule ID of the Wealth Tax Rules, 1957, will not apply and for determining the value of unquoted shares for purposes of wealth tax, gift-tax and estate duty, their value will have to be ascertained under the break-up value method after deducting the provisions for gratuity based on actuarial valuation from the value of the assets of the company. Inasmuch as the order passed by the Tribunal on this aspect is in accordance with the decision of this Court cited supra, we answer question No.2 in the affirmative and against the Department.

In so far as question No.3 is concerned, the point for consideration is whether the provisions of section 52(2) can be invoked on the facts of this case. A similar question carne tip for consideration before the Supreme Court in K. P. Varghese v. ITO (1981) 131 ITR 597. Wherein the Supreme Court held that subsection (2) of section 52 of the Income Tax Act, 1961, can be invoked only where the consideration for the transfer of a capital asset has been understated by the assessee, or, in other words, the full value of the consideration in respect of the transfer is shown at a lesser figure than that actually received by the assessee, and the burden of proving such understatement or concealment is on the Revenue. The subsection has no application in the case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him. In the present case, on the facts, the Tribunal came to the conclusion that there is .no understatement or concealment. Therefore, the Tribunal held that the provisions .of section 52(2) of the Income Tax Act, 1961, would not be applicable to the facts of the case. Inasmuch as the order passed by the Tribunal on this point is in accordance with the above cited decision of the Supreme Court, we answer the question referred to us as question No.3 in the affirmative and against the Department.

In so far as question No. 1 is concerned, the point for consideration is whether the Tribunal was correct in holding that the value of the shares as on January 1, 1954, should not be taken by averaging the cost taking into consideration the bonus shares received subsequently. In the present case, for the assessment year 1974-75, the assessee, a Hindu undivided family, sold on July 14, 1973, 500 shares in T. V. Sundaram Iyengar & Sons (P.) Ltd., Madurai. Those 500 shares formed part of 721 shares, which the assessee got on February 28, 1971, on account of the merger of Madras Auto Service Private Ltd., a subsidiary of T. V. Sundaram Iyengar & Sons (P.). Ltd. In exchange for 721 shares of Madras Auto Service (P.) Ltd., the assessee got 721 shares of T. V. Sundaram Iyengar & Sons (P.) Ltd. The assessee computed the capital gains thereon at Rs.500 before applying section 80T. The Income-tax Officer held that since the assessee acquired the shares, which were the subject-matter of sale, on February 28, 1971, the sale had taken place within five years and hence the profits on sale made would be short-term capital gains and not long-term capital gains.

In the present case, the amalgamating company is Madras Auto Service Private Limited and the amalgamated company is T. V. Sundaram Iyengar and Sons. It is manifest that the 524 shares in T.V. Sundaram Iyengar and Sons acquired by the assessee consequent on the amalgamation of Madras Auto Service (Private) Ltd., with T. V. Sundaram Iyengar and Sons Ltd., in December, 1970, should be treated as long-term capital assets having been held by the assessee initially as Madras Auto Service (Private) Limited shares from before 1954, the total period being more than 60 months up to the date of sale (see section 2(42A)). The cost of acquisition of those T. V. S. Limited shares will be the cost of acquisition of the Madras Auto Service (P.) Ltd. shares (see section 55(2) read with section 47(vii)). Since the original Madras Auto Service (P.) Ltd. shares were admittedly acquired before January 1, 1954, their value as on January 1, 1954, has to be adopted at the assessee's option. With regard to the original shares, there is no warrant for averaging the cost taking into account the bonus shares subsequently received by the assessee having regard to the decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO (1971) 82 ITR 788. Therefore, 'the Tribunal held that the original shares in question were long-term capital assets for the purpose of capital gains in view of the provisions of sections 2(42A), 47, 49 and 55(2). The cost of acquisition of shares to the assessee for computing the capital gain should be the cost as on January 1, 1954, which the assessee had adopted. This view taken by the Tribunal is supported by an earlier decision of this Court in T. C. No. 249 of 1980, judgment dated December 12, 1996 (S. Ram v. CIT (1988) 230 ITR 353), wherein this Court, by following the decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO (1971) 82 ITR 788, held that the value of the original shares acquired before January 1; 1954, should be taken the value as on January 1, 1954, when the assessee exercised its option. For original shares, we cannot take the average value of both the original shares and the bonus shares. Inasmuch as the order passed by the Tribunal on this aspect is in accordance with the earlier decision of this Court cited supra, we answer the question referred to us as question No. 1 in the affirmative and against the Department: No costs.

M.B.A./4153/FC-

Order accordingly.