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

- **Citation:** [1972] 1 S.C.R. 927
- **Court:** Supreme Court of India
- **Decided:** 1971-10-04
- **Bench:** K. S. Iiegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shekhawati-general-traders-ltd-v-income-tax-officer-company-circle-i-jaipur-5488
- **Pages:** 7

## Headnote

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 to be carried
forward by the assessee.
After nearly 2l years, the Income-tax Officer notified the assessee that
income chargeable to tax for the assessment year 1962-63 had escaped
assessment within s. 147 of the Income Tax Act, 1961 and wrote that
while wctking out the cost, the assessee wrongly claimed the prevalent
market price as on January I, 1954 ignoring the fact that the same shares
\\'ere given as bonus shares in later years after January l, 1954. According to the Income-tax Officer, the cost has to be worked at by averaging
the cost of the original shares, amongst the original shares and the bonus
shares taken together.
The assessee maintained that it had exercised its
option under s. 55(2) of the Act. Therefore, the cost of acquisition of
the ordinary shares of the two companies which had been acquired long
before January I, 1954 was taken at the fair market value as on that
date and the capital lpss was computed accordingly. The assessee, thereafter filed a writ petition before the High Cou'rt challenging the validity
of the notice issued under s. 14 7 of the Act.
The High Court dismissed the writ petition on the ground that since
the assessee had not shown the acquisition of bonus and right shares in
the Income-tax return, the Income-tax Officer had reason to believe that
the income chargeable to tax had escaped assessment and therefore, the
notice was valid.
Allowing the appeal,
HELD: (!) That the cost of acquisition under s. 55(2) of the Act,
is the cost of the asset to the assessee or the fair market value of the
asset on the 1st day of January, 1954 at the option of the assessee.
Therefore, in the present case, the assessee rightly applied its option and
the fair market value is duly determi....t. It is wrong to hold-that while
working out the capital gains, the cost had to be worked out by averaging the cost of the original shares among the original shares and the bdnus
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SUPREME COURT REPORTS
[l 9 72] l S.C.R.
shares taken together. ignoring the statutory provisions of ss. 48 and 55(2)
of the Act. For the ascertainment of the fair market value of the shares
in question, on Janua:ry 11 1954, any event prior to or subsequent to that
date is wholly extraneous and irrelevant. [932 FJ
(2) The assessee is bound to disclose under cl. (a) of s. 147 only
such material facts which are necessary for its assessment for the assess~
ment ye .. .:- :tnd not those facts which are irrelevant and extraneous fer
the putpose of assessment.
As regards cl. (b) of s. 147 from the information furnished by the asses~ee, there is no reason for the LT.0. to
believe that income chargeable to tax has escaped as11cssment for the
assessment year in question. [933 B-CJ
Conunissioner of Income.tax, Bihar v .. Da!n1ia lnvestlnent Co., 52
l.T.R. 567, referred to and distinguished.
C1v1L APPELLATE Ju&1so1cTION : Civil Appeals Nos. 2039
and 2040 of 1968.
Appeals from the judgment and order dated April 20, 1968
of the Rajasthan High Court in D.

## Text

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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 to be carried
forward by the assessee.
After nearly 2l years, the Income-tax Officer notified the assessee that
income chargeable to tax for the assessment year 1962-63 had escaped
assessment within s. 147 of the Income Tax Act, 1961 and wrote that
while wctking out the cost, the assessee wrongly claimed the prevalent
market price as on January I, 1954 ignoring the fact that the same shares
\\'ere given as bonus shares in later years after January l, 1954. According to the Income-tax Officer, the cost has to be worked at by averaging
the cost of the original shares, amongst the original shares and the bonus
shares taken together.
The assessee maintained that it had exercised its
option under s. 55(2) of the Act. Therefore, the cost of acquisition of
the ordinary shares of the two companies which had been acquired long
before January I, 1954 was taken at the fair market value as on that
date and the capital lpss was computed accordingly. The assessee, thereafter filed a writ petition before the High Cou'rt challenging the validity
of the notice issued under s. 14 7 of the Act.
The High Court dismissed the writ petition on the ground that since
the assessee had not shown the acquisition of bonus and right shares in
the Income-tax return, the Income-tax Officer had reason to believe that
the income chargeable to tax had escaped assessment and therefore, the
notice was valid.
Allowing the appeal,
HELD: (!) That the cost of acquisition under s. 55(2) of the Act,
is the cost of the asset to the assessee or the fair market value of the
asset on the 1st day of January, 1954 at the option of the assessee.
Therefore, in the present case, the assessee rightly applied its option and
the fair market value is duly determi....t. It is wrong to hold-that while
working out the capital gains, the cost had to be worked out by averaging the cost of the original shares among the original shares and the bdnus
928
SUPREME COURT REPORTS
[l 9 72] l S.C.R.
shares taken together. ignoring the statutory provisions of ss. 48 and 55(2)
of the Act. For the ascertainment of the fair market value of the shares
in question, on Janua:ry 11 1954, any event prior to or subsequent to that
date is wholly extraneous and irrelevant. [932 FJ
(2) The assessee is bound to disclose under cl. (a) of s. 147 only
such material facts which are necessary for its assessment for the assess~
ment ye .. .:- :tnd not those facts which are irrelevant and extraneous fer
the putpose of assessment.
As regards cl. (b) of s. 147 from the information furnished by the asses~ee, there is no reason for the LT.0. to
believe that income chargeable to tax has escaped as11cssment for the
assessment year in question. [933 B-CJ
Conunissioner of Income.tax, Bihar v .. Da!n1ia lnvestlnent Co., 52
l.T.R. 567, referred to and distinguished.
C1v1L APPELLATE Ju&1so1cTION : Civil Appeals Nos. 2039
and 2040 of 1968.
Appeals from the judgment and order dated April 20, 1968
of the Rajasthan High Court in D. B. Civil Writ Nos. 104 and 105
of 1967
S. Mitra, 0. P. Khaitan, N. R. Khaitan, B. P. Mahesh1vari and
R. K. Maheshwari, for the appellant (in both the appeals).
V. S. Desai, P. L. Juneja, R. N. Sachthey and B. D. Sharma;
for the respondent (in both the appeals).
The Judgment of the Court was delivered by
Grover, J.
These appeals by certificate from a judgment
of the Rajasthan High Court involve a common question relating
to the computation of capital gains in respect of sale of certain
shares.
It is necessary to refer to the facts in Civil Appeal No. 2039/
68 only.
The assessee is a company incorporated under the
Indian Companies Act 19,56 having its registered office at Jaipur.
For the assessment year 1962-63 relevant to the previous year
ending March 31, 1962 the assessee filed its return before the
Income-tax Officer. Company Circle No. 1, Jaipur.
On March
29, 1949. the assessee had acquired 12,000 ordinary shares of
the Orient Paper Mills of the face value of Rs. 10 each.
On this
holding it re-ccived 12,000 bonus shares on or about April
~'
1951.
It again received 60,000 bonus shares on or about June
4. 1954 and further acquired 25,200 right shares on June 26,
1961,.
It sold 22,000 shares during the assessment year 1962-63.
It i' common ground that these shares which were sold were out
of the 24 ,000 shares which it held prior to January 1, 1954. The
price realized on account of the sale of 22,000 shares during the
assessmu;t year 1962-63 was Rs. 8,45, 110/-. The assessee calculated the cost price of 22,000 shares sold by it at the market
rate prevailing on January 1, 1954 which came to Rs. 8,63,500/-.
The assessee had also acquired 15,000 ordinary shares of Birla
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SHEKHAWATI TRADERS V, I.T.O. (Grover, J.)
929
Jute Manufacturing Company before January 1, 1954. It got
41,250 bonus shares on original holding after January 1, 1954.
It further got 22,500 right shares for
the nominal value of
Rs. 3,60,000.
The assessee sold
15,000 shares during
the
assessment year 1962-63 and
the
sale
price realized
was
Rs. 4,54,130/-.
The assessee calculated
the cost price
of
15,000 shares sold by it at the market value prevailing on
January 1, 1954 which came to Rs. 6,45,000/-.
Thus according to the assessee the cost of acquisition of the said shares in the
two companies came to Rs. 15,09,400 while they were sold for
Rs. 12,09,240 and thereby the assessee suffered a capital loss of
Rs. 2,10,160.
The assessee filed a statement giving all these
details.
From that statement it was clear that the 22,000 shares
of the Orient Paper Mills and tbe 15,000 shares of the Birla Jute
Mfg. Co. which were sold during the assessment year 1962-63
were _those which it had acquired or received by way of bonus
shares prior to January 1, 1954.
The Income-tax Officer by his assessment order dated July 20,
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1964 accepted the statement furnished by the assessee and held
that it.had suffered a capital loss of Rs. 2,10,160/-
which was
directed to be carried forward.
By means of a notice dated
January 4, 1967 the Income-tax Officer informed the assessee
that he had reasons to believe that income chargeable to tax for the
assessment year 1962-63 had escaped assessment within
the
E meaning of _s. 147 of the Income-tax Act 1961, hereinafter called
the "Act''.
This notice was accompanied by a letter in which it
was stated :
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"While working out the cost you claimed the prevalent market price as on 1-1-1954 in complete disregard of the fact that the same shares had been given
bonus
shares in the subsequent years after 1-1-54.
The Supreme C:mrt had laid down in the case of Dalmia
Cement ( 1964) 52 ITR 567 that while working out the
capital gains the cost has to be worked out by averaging
cost of the original shares amongst the original shares,
and bonus shares. taken together.
Your claim of the
cost, therefore, was incorrect.
By following erroneous
method you
claimed and were
allowed loss
of
Rs.
2, 10,160 iri
assessment
year
1962-63
and
Rs. 45,176/- in assessment year 1964-65.
Against this
the cost in assessment year 1962-63 would come much
less and instead of capital losses a figure of capital gain
will get computed".
.
The assessee sent a letter dated February 9, 1967 to the Incometax Officer saying that it had exercised its option under s. 55(2)
of the Act and in accordance therewith the cost of acquisition of
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SUPREME COURT REPORTS
[ 1972] I S.C.R.
the ordinary shares of the two companies which had been acquired
and held by the assessee Jong before January 1, 1954 was taken
at the fair market value as on that date and the capital Joss was
computed accordingly.
It was pointed out that the judgment of
the Supreme Court referred to in the Jetter of the Income-tax
Officer had no relevance in the present case and that the notice
which had been issued under s. 147 of the Act was illegal and
without jurisdiction.
Subsequently the assessee filed a petition in
the High Court under Art. 226 of the Constitution challenging
the legality and validity of the notice issued under s. 14 7 of the
Act.
The High Court was of the view that since the acquisition of
bonus and right shares acquired by the assessee on the original
holding had not been shown in the income tax return it could be
said that the Income-tax Officer had reason to believe that the
income chargeable to tax had escaped assessment by reason of
the omission or ·failure on the part of the assessee to disclose
fully and truly all material facts necessary for its assessment. It
was contended on behalf of the assessee before the High Court
that it was altogether unnecessary for the assessee to have shown
the acquisition of bonus shares in the return filed by it for the
determination of the cost of acquisition of the shares held by it
and therefore the notice issued by the Income-tax Officer was
without jurisdiction.
G. M. Mehta J., disposed of the matter by
saying, "prima facie it cannot be said that the Income-tax Officer
had no reason to believe that there was an escapement of assessment on account of omission or failure on the part of the assessee
to disclose fully or truly all material facts necessary for the assessment for the years 1962-63 ........ requiring notice under s. 148
of the Income tax Act."
The other learned judge D. M. Bhandari
J. wrote a separate judgment expressing the opinion that the case
of the assessee was covered by s. 14 7 (a) and that it did not fall
withins. 147(b) of the Act.
The writ petition was dismissed.
It is somewhat unfortunate that the real points which arose for
determination in the present case did not engage the attention of
the learned judges of the High Court.
Section 45 of the Act
provides that any profits and gains arising from the transfer of a
capital asset effected in the previous year shall, save as otherwise
provided in ss. 53 and 54 be chargeable to income tax under the
head "Capital gains" and shall be deemed to be the income of the
previous year in which the transfer took place.
Section 48 deals
with the mode of computation and deductions.
It says that
income chargeable under the head "capital gains shall ~e
c~m
puted by deducting from the full value of the
cons1derat~on
received or accruing as a result of the transfer of 'the capital
asset following amounts, namely, (i) expenditure incurred wholly
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SHEKHAWATI TRADERS V, I.T.0. (Grover, J.)
931
and exclusively in connection with such transfer and (ii) the cost
of acquisition of the capital asset and the cost of any improvement
thereof.
The meaning of the cost of acquisition is explained by
s. 55(2) and for our purpose that sub-section with clause (i) need
be reproduced :
55(2) "For the purposes of sections 48 and 49,
"cost of acquisition", in relation to a capital asset,-
(i) where the capital asset became the property of
the assessee before the 1st day of January 1954
means the cost of acquisition of the asset to the
assessee or the fair market value of the asset on
the 1st day of January, 1954, at the option of
the assessee;
(ii)
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The assessee had exercised the option of the fair market value of
the assets. The shares which had been sold by it of both the companies had indisputably become its property before the first day
of January 1954.
Therefore all that had to be determined was
the fair market value on the first day of January 1954 of those
shares.
This was duly determined and it was not disputed that
that determination was made according to the rates prevailing in
the market on the aforesaid date by the Income-tax Officer when
he made his assessment order on July 20, 1964.
Once the market
value of the shares was ascertained or determined on the date
given in cl. (i) of s. 55 (2) that would be the cost of acquisition
in relation to capital assets.
Up to this point there is no controversy between the Revenue and the assessee but on behalf of
the Revenue an almost startling position has been advanced that
while determining the fair market value on January 1, 1954 the
issuance of bonus or right shares after that date on the basis of
the holding of the assessee prior to January 1, 1954 should have
been taken into account.
In other words as was explained in the
letter of the Income-tax Officer dated January 4,
1967 while
working out the capital gains the cost had to be worked out by
averaging the cost of the original shares amongst the original
shares and the bonus shares taken together.
Thus, according to
the Revenue, after the issue of bonus shares the cost of the origi-·
nal holding had to be spread over all the shares inclusive of the
bonus or the right shares acquired on the original holding. Support
for this view appears to have been found in the decision of this
Court in Commissioner of Income tax, Bihar v. Dalmia Investment
Co. Ltd.(').
(I) 52 l.T.R. 567.
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SUPREME COURT REPORTS
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The question which had to be decided in the above case was
entirely of a different nature.
The assessee there held ordinary
shares in Rohtas Industries Ltd. apart from holding shares by way
1)f investment and also as stock-in-trade of its business as a share
dealer.
In 1944 the assessee acquired 31,909 of these shares and
was holding them in January 1945. In that month the Rohtas
Industries Ltd. distributed bonus shar~ at the rate oi one ordinary
share for each original share.
So the assessee got 31, 909 bonus
shares.
Between that time and December 31, 194 7 the assessee
sold 14,650 of the original shares..
The assessee acquired some
newly issued shares in the years 1945 and 194 7.
The total holding of the assessee on January I, 1948 came to 1,10,747 shares
which in its books had been valued at Rs. 15,57,902. In arriving at this figme the assessee had valued the bonus shares at the
face value of Rs. IO/- each and the other shares at the actual
cost.
On January 29, 1948 the assessee sold all these shares for
the total sum of Rs. 15,50,458 and in its return for the year
1949-50 claimed a loss of Rs. 7,444 on the sale.
It was held by
the majority _that the bonus shares had to be valued by spreading
the cost of the old shares over the old shares and the bonus shares
taken togetjler if they ranked pari passu and if they did not the
price might have to be adjusted either in proportion of the face
value they bore or on equitable consideration based on the market
price before and after issue.
We have set out the facts of this
t:ase in detail in order to demonstrate that that decision was not
at all apposite for the purpose' of deciding the point which has
arisen in the present case.
No question arose there of the calculation of the capital gain or loss in accordance with the statutory
provisions in pari materia with ss. 48 and 55 (2) of the Act.
In
the present case we are confined to the express provisions of
s. 55 (2) relating to the manner in which the cost of acquisition
of a capital asset has to be detennined for the purpose of s. 48.
Where the capital asset became the property of the assessee before
the first day of January 1954 the assessee has two options. It
can decide whether it wishes to take the cost of the acquisition of
the asset to it as the cost of acquisition for the purpose of s. 48
or the fair market value of the asset on the first day of January
1954.
The word "Fair" appears to have been .used to indicate
that any artificially inflated value is not to be taken into account.
In the present case it is common ground that when the original
assessment order was made the fair market value of the shares in
question had been duly determined and accepted as correct by
the Income-tax Officer.
Under no principle or authority can
anything more be read into the provisions of s. 55(2)(i) in t~e
manner suggested by the Revenue based on the view expressed m
the Da/mia Investment Co's case('). The High Court com-
(!) [19 52] J.T.R. 567.
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SHEKHAWATI TRADERS v. I.T.O. (Grover, I.)
933
pletely overlooked the fact that for the ascertainment of the fair
market value of the shares in question on January 1, 1954 any
event prior or subsequent to the said date was wholly extraneous
and irrelevant and could not be taken into consideration. If the
contention of the Revenue were to be accepted the acquisition of
bonus shares subsequent to January 1, 1954 will have to be taken
into account which on the language of the statute it is not possible to do.
On this view of the matter there was no question of
the case of the assessee falling within clauses (a) or (b) of s. 147
of the Act.
The assessee is bound to disclose under cl. (a) only
such material facts which are necessary for.its, assessment for the
assessment ye&r and not those facts which are wholly irrelevant
and extraneous for the purpose of assessment.
As regards cl. (b)
also the information must be such as should lead the Income-tax
Officer to believe that income chargeable to tax has escaped
assessment.
The information, in the present case, relating to the
acquisition of the bonus shares subsequent to January l, 1954
could possibly furnish no reason to the Income-tax Officer to
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forn1 the belief that income chargeable to tax had escaped assessment for the assessment year in question.
For the reasons given above the appeals are allowed and the
judgment of the High Court is set aside.
The impugned notice
issued to the assessee jn each case shall stand quashed.
The
assessee shall be entitled to its costs ~n this Court.
Hearing fee
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one set.
S.N.
Appeals allowed.