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1993 Supreme(Cal) 376
High Court Of Calcutta
AJIT KUMAR SENGUPTA, NURE ALAM CHOWDHURY
COMMISSIONER OF INCOME-TAX - Appellant
Versus
DUNCAN BROTHERS AND CO.LTD. - Respondent
Income-Tax Reference 99 Of 1992
Decided On : 08/11/1993
A.C.MOITRA, B.D.Halder, D.PAL, J.P.KHAITAN
The assessee has the option to claim deduction either in respect of the actual cost of acquisition of the capital asset or the fair market value of the capital asset as on January 1, 1964, and the Income-tax Officer had considered the cost of acquisition of the shares, which was Rs. 1 lakh.
Headnote:
CAPITAL GAINS - DEDUCTION - COST OF ACQUISITION OR FAIR MARKET VALUE - OPTION OF ASSESSEE - INCOME-TAX ACT, 1961, SECTION 49, 55(2).
Fact of the Case:
The assessee-company held shares in Duncan Brothers (Pakistan) Ltd., which was renamed Duncan Brothers (Bangladesh) Ltd. after the separation of Bangladesh from Pakistan. The company received compensation from the Custodian of Enemy Property in Bangladesh for these shares. The Income-tax Officer computed the capital gains by deducting the cost of acquisition of the shares from the compensation amount. Subsequently, the Commissioner of Income-tax revised the assessment, holding that the fair market value of the shares on January 1, 1964, was nil, and the entire compensation amount should be treated as capital gains. The Tribunal quashed the Commissioner's order, finding that the Income-tax Officer had correctly allowed the deduction of the cost of acquisition.
Finding of the Court:
The court held that the Commissioner of Income-tax erred in revising the assessment order, as the Income-tax Officer had correctly allowed the deduction of the cost of acquisition of the shares. The court noted that the assessee had the option to claim deduction either in respect of the actual cost of acquisition of the capital asset or the fair market value of the capital asset as on January 1, 1964, and the Income-tax Officer had considered the cost of acquisition of the shares, which was Rs. 1 lakh.
Issues: Whether the Commissioner of Income-tax was justified in revising the assessment order, holding that the fair market value of the shares on January 1, 1964, was nil, and the entire compensation amount should be treated as capital gains.
Ratio Decidendi: The court held that the Commissioner of Income-tax had no jurisdiction to direct the ascertainment of the cost of acquisition in relation to a capital asset on the basis of the fair market value as on January 1, 1964, unless the assessee exercises such option. The court noted that the option is given to the assessee whether to adopt the cost of acquisition of the asset to the assessee or the fair market value of the asset on January 1, 1964. The court also held that the Commissioner of Income-tax erred in proceeding on the basis that the Income-tax Officer had wrongly taken the fair market value of the shares as on January 1, 1964, at Rs. 1 lakh, when the Income-tax Officer had never taken the fair market value of the shares as on January 1, 1964, at Rs. 1 lakh.
Final Decision: The court answered the question referred to it in the affirmative and in favor of the assessee, holding that the Commissioner of Income-tax was not justified in revising the assessment order.
( 1 ) AT the instance of the Revenue, the following question has been referred by the Tribunal for the opinion of this court under Section 256 (2) of the Income-tax Act, 1961, for the assessment year 1981-82 :"whether, on the facts and in the circumstances of the case, the Tribunal was justified in quashing the order passed under Section 263 of the Income-tax Act, 1961 ?"
( 2 ) THE facts as found by the Tribunal are as under : The assessee-company was holding 5,000 shares of Duncan Brothers (Pakistan) Ltd. The said company was ultimately renamed as "duncan Brothers (Bangladesh) Ltd. " as a result of separation of Bangladesh from Pakistan. After the Indo-Pakistan conflict, the said company in East Pakistan came under the control of the Custodian of Enemy Property. The Custodian made a payment of Rs. 2,05,732 to the assessee-company as compensation for 5,000 shares held by it in Duncan Brothers (Bangladesh) Ltd. The cost of acquisition of the said shares by the assessee was Rs. 1,00,000. The Income-tax Officer, therefore, proceeded to determine the capital gains chargeable to tax in the hands of the assessee-company by deducting the cost of acquisition of Rs. 1,00,000 from the said compensation of Rs. 2,05,732. The capital gains of Rs. 1,05,732 was accordingly computed and charged to income-tax in the hands of the assessee-company in the assessment year 1981-82, vide order dated September 22, 1984, passed by the Income-tax Officer under Section 143 (3)/144b of the Income-tax Act, 1961.
( 3 ) SUBSEQUENTLY, the Commissioner of Income-tax initiated proceedings under Section 263 of the said Act on the ground that the Income-tax Officer while computing capital gains arising in respect of the aforesaid 5,000 shares of Duncan Brothers (Bangladesh) Ltd. , had incorrectly taken the fair market value of the said shares as on January 1, 1964, at Rs. 1,00,000. According to the Commissioner of Income-tax, the fair market value of the said shares as on January 1, 1964, was "nil" and, therefore, the entire compensation of Rs. 2,05,732 should have been assessed to income-tax as "capital gains" in the assessment year 1981-82. The Commissioner of Income-tax rejected several contentions advanced on behalf of the assessee-company and by his order dated March 27, 1987, directed the Income-tax Officer to recompute the capital gains in respect of the 5,000 shares and treat the entire compensation of Rs. 2,05,732 as chargeable to capital gains, since the fair market value of the said shares as on January 1, 1964, according to the Commissioner of Income-tax, was "nil" and the Income-tax Officer had committed an error in allowing deduction of Rs. 1,00,000 by way of fair market value of the said shares as on January 1, 1964.
( 4 ) ON appeal by the assessee-company before the Tribunal, it was found by the Tribunal that the Income-tax Officer allowed deduction of Rs. 1,00,000 from the gross compensation of Rs. 2,05,732 by way of cost of acquisition of the said shares by the assessee and not by way of fair market value thereof as on January 1, 1964, as stated by the Commissioner of Income-tax. The Tribunal found that the cost of acquisition of the said shares was admittedly Rs. 1,00,000. The Commissioner of Income-tax, while exercising his jurisdiction under Section 263 of the said Act, had proceeded on a wrong assumption of facts that the Income-tax Officer took the fair market value of the said 5,000 shares as on January 1, 1964, at Rs. 1,00,000. The Tribunal found, as a matter of fact, that the Income-tax Officer did not allow any deduction by way of fair market value of the said shares as on January 1, 1964. It was further found by the Tribunal that the assessee-company had contended before the Income-tax Officer that the fair market value of the said shares as on January 1, 1964, was Rs. 6,68,341 and on that basis, the assessee must be deemed to have suffered a long-term capital loss of Rs. 4,62,609 in respect of the aforesaid sh
