M/S. BENNETT COLEMAN & CO. LTD, MUMBAI v. THE ADDL CIT RG 1(1), MUMBAI

ITA 3013/MUM/2007 | 2002-2003
Pronouncement Date: 30-09-2011 | Result: Allowed

Appeal Details

RSA Number 301319914 RSA 2007
Assessee PAN AAACB4373Q
Bench Mumbai
Appeal Number ITA 3013/MUM/2007
Duration Of Justice 4 year(s) 5 month(s) 12 day(s)
Appellant M/S. BENNETT COLEMAN & CO. LTD, MUMBAI
Respondent THE ADDL CIT RG 1(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 30-09-2011
Date Of Final Hearing 07-01-2010
Next Hearing Date 07-01-2010
Assessment Year 2002-2003
Appeal Filed On 18-04-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI SPECIAL BENCH B MUMBAI BEFORE SHRI D. MANMOHAN VICE PRESIDENT SHRI R.S.SYAL ACCOUNTANT MEMBER & SHRI T.R.SOOD ACCOUNTANT MEMBER I.T.A.NO.3013/MUM/2007 A.Y 2002-03 BENNETT COLEMAN & CO. LTD. TIMES OF INDIA BLDG. DR. D. N. ROAD MUMBAI 400 001. PAN: AAACB 4373 Q VS. THE ADDL. COMMISSIONER OF I.T. RANGE- 1(1) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI ARVIND SONDE & SHRI S. VENKATRAMAN RESPONDENT BY : SHRI PAVAN VED. DATE OF HEARING: 16-08-2011 DATE OF PRONOUNCEMENT: 30-09-2011 O R D E R PER T.R.SOOD AM: THIS SPECIAL BENCH HAS BEEN CONSTITUTED BY THE HON 'BLE PRESIDENT TO CONSIDER THE FOLLOWING QUESTION: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE THE CIT(A) WAS JUSTIFIED IN DECLARING LONG TERM CAPITAL LOSS OF RS .22 21 85 693/- ON ACCOUNT OF REDUCTION IN PAID UP EQUITY SHARE CAPITAL? 2. AT THE COMMENCEMENT OF THE HEARING IT WAS NOTI CED BY THE BENCH THAT THE QUESTION IS NOT VERY HAPPILY FRAMED AND T HEREFORE THIS WAS PUT TO THE PARTIES. BOTH THE PARTIES AGREED THAT THE QUEST ION REFERRED BY HON BLE PRESIDENT IMPLIES THAT WE HAVE TO ANSWER THE SUBSTA NTIAL ISSUE AS TO WHETHER REDUCTION OF CAPITAL WOULD LEAD TO CLAIM FOR LONG T ERM CAPITAL LOSS. BOTH THE PARTIES REQUESTED THAT WE CAN PROCEED WITH THE HEAR ING WITHOUT REFRAMING THE QUESTION. THEREFORE WE ARE PROCEEDING WITH THE SAM E QUESTION ON THE I.T.A.NO.3013/M/07 (S.B) 2 UNDERSTANDING THAT ISSUE INVOLVED IS WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE LD. CIT(A) ERRED IN DISALLOWING THE CL AIM OF LONG TERM CAPITAL LOSS. 3. FACTS NECESSARY FOR THE DISPOSAL OF THE ISSUE ON HAND ARE STATED IN BRIEF. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAD CLAIMED LONG TERM CAPITAL LOSS AMOUNTING TO RS.22 21 85 693/-. IT IS NOT IN DISPUTE THAT ASSESS EE MADE AN INVESTMENT OF RS.2484.02 LACS IN EQUITY SHARES OF A GROUP COMPANY VIZ. TIMES GUARANTEE LIMITED [FOR SHORT TGL]. UNDER SEC.100 OF THE COMPA NIES ACT 1956 TGL APPLIED FOR REDUCTION OF EQUITY SHARE CAPITAL AND A PPROACHED THE HON'BLE BOMBAY HIGH COURT FOR APPROVAL OF THE SAME. THE HON 'BLE HIGH COURT APPROVED THE PETITION OF TGL AND ALLOWED REDUCTION IN ITS SHARE CAPITAL BY 50% BY REDUCING THE FACE VALUE OF EACH EQUITY SHARE FROM RS.10/- TO RS.5/- . CONSEQUENTLY ASSESSEES INVESTMENT IN TGL GOT REDU CED FROM RS.2484.02 LACS TO RS.1242.01 LACS. AFTER APPLYING THE INDEXATION A SUM OF RS.22 21 85 693/- WAS CLAIMED AS LONG TERM CAPITAL LOSS. ON A QUERY A S TO HOW THIS LOSS WAS ALLOWABLE IT WAS MAINLY CONTENDED THAT IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF KARTIKEYA V. SARABHAI [228 ITR 163]- WHEREIN IT WAS HELD THAT REDUCTION IN FACE VALUE OF SHARES WOU LD AMOUNT TO TRANSFER- SUCH LOSS WAS ALLOWABLE. RELIANCE WAS ALSO PLACED O N THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. G. NAR SIMHAN (DECD) AND ORS. [236 ITR 327] WHEREIN SIMILAR VIEW WAS TAKEN. 4. THE ASSESSING OFFICER AFTER CONSIDERING THESE S UBMISSIONS WAS OF THE OPINION THAT IN THE CASE OF KARTIKEYA V. SARABHAI [ SUPRA] THE COURT WAS CONCERNED WITH THE REDUCTION OF NON-CUMULATIVE PREF ERENCE SHARES. THEREFORE ACCORDING TO THE ASSESSING OFFICER THIS WAS MERELY A CASE INVOLVING REDUCTION I.T.A.NO.3013/M/07 (S.B) 3 IN FACE VALUE OF PREFERENCE SHARES AND ACCORDINGLY SAME SHOULD NOT BE APPLIED PARTICULARLY BECAUSE THE HON'BLE COURT HAD ALSO OBSERVED THAT IN TERMS OF SEC.87[2][I] THE VOTING RIGHTS WERE ALSO REDUCED PROPORTIONATELY ON THE RESOLUTION WHICH EFFECTED THE RIGHTS OF PREFERENCE SHAREHOLDERS WHEREAS IN CASE OF EQUITY SHARES THERE IS NO REDUCTION IN TH E RIGHTS OF SUCH EQUITY SHAREHOLDERS. HE FURTHER OBSERVED THAT IN THE PRESE NT CASE ASSESSEE HAS NOT RECEIVED ANY CONSIDERATION FOR REDUCTION IN THE VAL UE OF SHARES NOR ANY PART OF THE SHARES HAVE BEEN PASSED TO ANYONE ELSE. THIS MEANS THAT THERE WAS NO CHANGE IN THE RIGHTS OF THE ASSESSEE VIS--VIS O THER SHAREHOLDERS AND THEREFORE NO TRANSFER HAD TAKEN PLACE AND THUS A SSESSEE WAS NOT ENTITLED TO THE CLAIM OF LONG TERM CAPITAL LOSS. 5. ON AN APPEAL SIMILAR SUBMISSIONS WERE MADE BEFO RE THE LD. CIT(A) WHO UPHELD THE ACTION OF THE ASSESSING OFFICER ON S IMILAR REASONING. 6. BEFORE US LD. COUNSEL SHRI ARVIND SONDE ADVERT ED OUR ATTENTION TO PAGES 30 TO 31 OF THE ASSESSMENT ORDER AND ALSO PAR AS 17.2 TO 17.5 OF THE APPELLATE ORDER TO POINT OUT THAT THE CLAIM OF LON G TERM CAPITAL LOSS HAS BEEN REJECTED MAINLY ON THE GROUND THAT NO TRANSFER HAD TAKEN PLACE. THEN HE REFERRED TO PAGE 60 OF THE PAPER BOOK -WHICH IS A C OPY OF A NOTICE OF ANNUAL GENERAL MEETING OF TGL- WHICH SHOWS THAT A SPECIAL RESOLUTION WAS PROPOSED FOR REDUCTION OF SHARE CAPITAL U/S.100 OF THE COMPA NIES ACT 1956 SUBJECT TO THE APPROVAL OF THE ORDER OF HON'BLE BOMBAY HIGH CO URT; IT WAS PROPOSED THAT SHARE CAPITAL OF THE COMPANY HAS TO BE REDUCED FROM RS.179862990 DIVIDED INTO 17986299 EQUITY SHARES OF RS.10/- EACH TO RS. 8993149 DIVIDED INTO 17986299 EQUITY SHARES OF RS.5/- EACH BY CANCELLI NG THE CAPITAL TO THE EXTENT OF RS.5/- PER EQUITY SHARE. THUS TGL REDUCED THE F ACE VALUE OF EACH EQUITY I.T.A.NO.3013/M/07 (S.B) 4 SHARE FROM RS.10/- TO RS.5/-. AFTER REDUCTION OF CA PITAL TWO EQUITY SHARES OF RS.5/- EACH WERE CONSOLIDATED INTO ONE EQUITY SHAR E. THUS IT RESULTED IN REDUCTION BY WAY OF REDUCING INITIALLY THE FACE VA LUE OF EACH SHARE OF RS.10/- TO RS.5/- EACH AND THEN BY CONSOLIDATING SUCH EQUIT Y SHARES OF RS.5/- EACH INTO ONE EQUITY SHARE OF RS.10/- FULLY PAID. HE ADV ERTED OUR ATTENTION TO EXPLANATORY NOTES (PAGE 61 OF PB) WHICH SHOWS THAT CARRIED FORWARD LOSS OF RS.42 96 53 000/- WAS ALSO WRITTEN OFF BY REDUCING THE AMOUNT OF REDUCTION OF SHARE CAPITAL AMOUNTING TO RS.8 99 31 495/- AND FUR THER THE BALANCE SUM WAS WRITTEN OFF BY UTILISING THE SHARE PREMIUM ACCOUNT. IN FACT TGL HAD SUFFERED LOSS AND THE WHOLE PROPOSAL AND PURPOSE OF REDUCTIO N IN SHARE CAPITAL WAS TO WRITE OFF THE LOSSES. LEARNED COUNSEL REFERRED TO P AGES 62 TO 71 OF THE PAPER BOOK WHICH IS COPY OF THE ORDER OF THE HON'BLE HIG H COURT THROUGH WHICH THE HIGH COURT ALLOWED THE PETITION FOR REDUCTION OF TH E CAPITAL. THEN HE REFERRED TO PAGE 73 WHICH IS A COPY OF INTIMATION LETTER ISS UED BY TGL THROUGH WHICH ASSESSEE COMPANY WAS INTIMATED REGARDING THE REDUCT ION OF SHARE CAPITAL AND IT WAS POINTED OUT THAT ASSESSEES HOLDING IN TGL B EFORE REDUCTION WHICH WAS 13474799 HAS BEEN REDUCED TO 6737399 AND THE SAME H AS BEEN CREDITED IN THE DEMAT FORM IN ASSESSEES DEMAT ACCOUNT. THEN HE REFERRED TO PAGE 74 WHICH IS A COPY OF THE SCHEDULE E REFLECTING THE I NVESTMENTS BY THE ASSESSEE COMPANY AS ON 31-03-2001 WHERE AGAIN TGL SHARES WER E SHOWN AT 1 34 74 799 AND THE BOOK VALUE OF THE INVESTMENT HA S BEEN SHOWN AT RS.24 84 01 810/-. THIS HAS BEEN REDUCED IN THE YEA R ENDING 31-03-2002 FOR WHICH HE REFERRED TO PAGE 75 OF THE PAPER BOOK WHE REIN THE INVESTMENT IN TGL SHARES AT 6737399 HAS BEEN SHOWN AT RS.12 42 00 905/-. HE ARGUED THAT THIS FACT CLEARLY SHOWS THAT SHARE CAPITAL IS REDUC ED BY THE COMPANY (TGL) IN I.T.A.NO.3013/M/07 (S.B) 5 TERMS OF SEC.100 OF THE COMPANIES ACT 1956 WHICH H AS BEEN APPROVED BY THE HON'BLE HIGH COURT. THE COMPANY WAS ACCORDINGLY ALL OTTED 67 37 399 NEW SHARES IN PLACE OF OLD SHARES AT 1 34 74 799. HE AL SO FILED A COPY OF THE TRANSACTION STATEMENT ISSUED BY THE HDFC BANK LTD. WHICH IS A COPY OF THE DEMAT ACCOUNT OF THE ASSESSEE WITH THE BANK WHEREIN FIRST ON 20-11-2001 67 73 799 SHARES HAVE BEEN REDUCED FROM THE OPENING BALANCE OF 1 34 74 799 SHARES. FURTHER 67 37 399 SHARES HAVE BEEN SHOWN AS CREDIT. HE POINTED OUT THAT EVEN ISIN NO. HAS CHANGED FROM INE 289C01025 TO INE 289C01017 WHICH BASICALLY MEANS THAT NEW SHARES AR E DIFFERENT SHARES BECAUSE DIFFERENT ISIN INE NO. HAS BEEN ALLOTTED. O N A QUERY BY THE BENCH HE FILED A COPY OF THE CLARIFICATION ISSUED BY THE SEB I AND POINTED OUT AT PARA-29 WHEREIN IT HAS BEEN CLARIFIED AS UNDER: ISIN [INTERNATIONAL SECURITIES IDENTIFICATION NUMB ER] IS A UNIQUE IDENTIFICATION NUMBER ALLOTTED FOR A SECURITY [E.G INE 383C01018]. EQUITY- FULLY PAID-UP EQUITY PARTLY PAID UP EQUITY WITH D IFFERENTIAL VOTING/DIVIDEND RIGHTS ISSUED BY THE SAME ISSUER WILL HAVE DIFFEREN T ISIN. THUS LEARNED COUNSEL CONTENDED THAT OLD SHARES HAV E BEEN REPLACED WITH NEW SHARES WHICH IS A REDUCED NUMBER AND THIS SHOUL D BE TREATED AS EXCHANGE OF SHARES WHICH IS CLEARLY COVERED BY THE DEFINITION OF TRANSFER AND ONCE THE SHARES HAVE BEEN TRANSFERRED IT IS A BASIC CONDITION FOR ATTRACTING SEC.45 THEN THE LOSS INCURRED ON THE SAME SHOULD B E TREATED AS CAPITAL LOSS. 7. LD. COUNSEL SHRI SONDE SUBMITTED THAT THE DECISI ONS OF HON'BLE SUPREME COURT IN THE CASES OF KARTIKEYA V. SARABHAI [SUPRA] CIT VS. G. NARSIMHAN (DECD) AND ORS. [SUPRA] AND ANARKALI SARABHAI VS. C IT [224 ITR 422] HAVE BEEN DISTINGUISHED BY THE ASSESSING OFFICER AS WELL AS THE CIT(A) MAINLY ON THE GROUND THAT THESE DECISIONS RELATE TO REDUCTION IN FACE VALUE OF PREFERENCE SHARES AND THEREFORE THEY ARE NOT APPLICABLE TO THE FACTS OF ASSESSEES CASE. I.T.A.NO.3013/M/07 (S.B) 6 HE SUBMITTED THAT HON'BLE SUPREME COURT IN THE CAS E OF KARTIKEYA V. SARABHAI [SUPRA] OBSERVED THAT DEFINITION OF TRANS FER GIVEN IN SEC.2[47] IS AN INCLUSIVE DEFINITION AND INTER ALIA PROVIDES THAT RELINQUISHMENT OF AN ASSET OR EXTINGUISHMENT OF ANY RIGHT THEREIN WOULD ALSO AMOU NT TO TRANSFER OF A CAPITAL ASSET. APEX COURT FURTHER NOTICED THAT TO INVOKE OF THE PROVISIONS OF SECTION 45 R/W 2(47) SALE OF A CAPITAL ASSET IS NOT A NECESSAR Y CONDITION.. AFTER REFERRING TO VARIOUS OBSERVATIONS OF THE COURT HE POINTED OUT THAT EVEN REDUCTION IN THE VALUE OF PREFERENCE SHARES WAS HELD TO BE A CASE OF TRANSFER. HE THEN SUBMITTED THAT SIMILAR VIEW WAS TAKEN IN THE CASE O F ANARKALI SARABHAI VS. CIT [SUPRA]. 8. THE LD. COUNSEL FURTHER SUBMITTED THAT EVEN IF I T IS ASSUMED THAT THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT I N THE CASE OF PREFERENCE SHARES ARE NOT APPLICABLE THE PRINCIPLE LAID DOWN IN THE CASE OF CIT VS. G. NARSIMHAN (DECD) AND ORS. SQUARELY APPLIES SINCE THE ISSUE THEREIN WAS REGARDING REDUCTION OF EQUITY SHARE CAPITAL. HE FIL ED PAPER BOOK NO.2 IN WHICH COPIES OF THE ASSESSMENT ORDER AS WELL AS COPY OF T HE ORDER OF THE TRIBUNAL IN THE CASE OF CIT VS. G. NARSIMHAN (DECD) AND ORS. WE RE ANNEXED. HE REFERRED TO THE ASSESSMENT ORDER AND ORDER OF THE TRIBUNAL A ND POINTED OUT THAT IN THIS CASE ALSO EQUITY SHARE CAPITAL OF THE COMPANY WAS R EDUCED AND WHEN THE MATTER FINALLY TRAVELLED TO HON'BLE APEX COURT IT W AS HELD THAT IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF KA RTIKEYA V. SARABHAI [SUPRA] EVEN REDUCTION IN EQUITY SHARE CAPITAL WOUL D AMOUNT TO TRANSFER AND BY APPLYING THIS DECISION THE LOSS CLAIMED BY T HE ASSESSEE IS ALLOWABLE BECAUSE SAME HAS ARISEN FROM REDUCTION OF EQUITY SH ARE CAPITAL. I.T.A.NO.3013/M/07 (S.B) 7 9. HE FURTHER REFERRED TO THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. GRACE COLLIS & ORS. [248 ITR 323]. HE CARRIED US THROUGH THE FACTS AND THE QUESTION RAISED BEFORE THE HONBLE CO URT AND SUBMITTED THAT THE COURT AFTER CONSIDERING ANOTHER DECISION OF THAT C OURT IN THE VAS OF VANIA SILK MILLS PVT. LTD. VS. CIT [191 ITR 647] OBSERVED THA T THE DEFINITION OF TRANSFER CLEARLY CONTEMPLATES EXTINGUISHMENT OF RIGHTS IN A CAPITAL ASSET DISTINCT AND INDEPENDENT OF SUCH EXTINGUISHMENT CONSEQUENT UPON THE TRANSFER THEREOF. THE COURT FURTHER OBSERVED THAT THE EXPRESSION 'EXT INGUISHMENT OF ANY RIGHT THEREIN' CAN BE EXTENDED TO MEAN EXTINGUISHMENT OF RIGHT INDEPENDENT OF OR OTHERWISE THAN ON ACCOUNT OF TRANSFER. THUS EVEN E XTINGUISHMENT OF RIGHT IN A CAPITAL ASSET WOULD AMOUNT TO TRANSFER AND IN THE CASE BEFORE US SINCE ASSESSEES RIGHT GOT EXTINGUISHED PROPORTIONATELY TO THE REDUCTION OF CAPITAL IT WOULD AMOUNT TO TRANSFER. RELIANCE WAS PLACED ON THE FOLLOWING THREE DECISIONS OF THE TRIBUNAL WHEREIN SIMILAR VIEW WAS EXPRESSED; FOLLOWING THE DECISIONS OF KARTIKEYA V. SARABHAI [SUPRA] CIT VS. G. NARSIMHAN (DECD) AND ORS. ANARKALI SARABHAI VS. CIT AND OF CIT VS. GRACE COLLIS & ORS. [SUPRA] IT WAS HELD THAT REDUCTION OF CAPITAL WOULD AMOUNT TO TRANSFER AND ACCORDINGLY CAPITAL LOSS WAS HELD TO BE ALLOWABLE. I. ZYMA LABORATORIES LTD. VS. ADDL. CIT 7 SOT 164 [MUM ] II. DCIT VS. M/S POLYCHEM LTD. ITA NO.4212/M/07 [MUM] A ND III. GINNERS & PRESSER LTD. VS. ITO ITA NO.398/M/07 & 41 93/M/07 10. DURING THE COURSE OF HEARING IT WAS POINTED OUT THAT THE CAPITAL LOSS HAS NOT BEEN DISALLOWED BY THE ASSESSING OFFICER ON THE ONLY GROUND THAT IT DID NOT AMOUNT TO TRANSFER BUT MAINLY ON THE POINT THAT ASSESSEE HAD NOT RECEIVED ANY CONSIDERATION I.E. BY APPLYING THE PR INCIPLE LAID DOWN BY THE I.T.A.NO.3013/M/07 (S.B) 8 HON'BLE SUPREME COURT IN THE CASE OF B. C. SRINIVAS A SETTY [128 ITR 294] WHEREIN IT WAS HELD THAT IF COMPUTATION PROVISION F AILS CAPITAL GAINS CANNOT BE ASSESSED U/S.45. 10. BENCH POINTED OUT TO THE DECISION OF HON'BLE GU JARAT HIGH COURT IN THE CASE OF CIT VS. MOHANBHAI PAMABHAI [91 ITR 393] AND THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF THE BOMBAY BURMAH TRADING CORPORATION LTD. VS. CIT [147 TAXATION REPORTS 570] . 11.TO CLARIFY THE DOUBTS POSED BY THE BENCH THE LD. COUNSEL SUBMITTED THAT THE HON'BLE SUPREME COURT IN THE CASE OF B. C. SRI NIVASA SETTY [SUPRA] WAS CONCERNED WITH THE TRANSFER OF GOODWILL AND HELD TH AT IT WAS NOT POSSIBLE TO ASCERTAIN THE COST OF GOODWILL AND THEREFORE IT WAS NOT POSSIBLE TO APPLY THE COMPUTATIONAL PROVISION. HE STRESSED THAT THE PROPO SITION WAS NOT THAT IF NO CONSIDERATION WAS RECEIVED THEN NO GAIN CAN BE COMP UTED BUT THE PROPOSITION WAS THAT IF ANY OF THE ELEMENT IN COMPUTATION PROVI SION COULD NOT BE ASCERTAINED THEN COMPUTATION PROVISION WOULD FAIL A ND SUCH GAIN COULD NOT BE ASSESSED TO CAPITAL GAINS TAX. IN THIS REGARD HE F URTHER REFERRED TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CADELL WEAVING MILL CO. P. LTD. & ORS. VS. CIT [249 ITR 265] WHEREIN TH E ISSUE WAS WHETHER SURRENDERING OF TENANCY RIGHTS WOULD BE TAXED AS CA SUAL INCOME OR IT CAN BE SUBJECTED TO CAPITAL GAINS TAX. HE INVITED OUR ATTE NTION TO PAGE 285 OF THE REPORT AND POINTED OUT THAT ULTIMATELY COURT OBSERV ED THAT FULL VALUE OF THE CONSIDERATION OF THE TENANCY RIGHTS COULD NOT BE AS SESSED BECAUSE THEN THE TAX IS NOT LEVIED ON CAPITAL GAIN BUT IT IS BEING L EVIED ON CAPITAL VALUE OF THE ASSET WHICH IS NOT PERMISSIBLE. HONBLE COURT IN TURN RELIED UPON THE DECISION HON'BLE SUPREME COURT IN THE CASE OF CIT V S. B. C. SRINIVASA SETTY I.T.A.NO.3013/M/07 (S.B) 9 [SUPRA] TO HOLD THAT IF COST OF ACQUISITION IS NOT ASCERTAINABLE COMPUTATION PROVISION FAILS AND AMOUNT RECEIVED ON SURRENDER OF TENANCY RIGHTS IS NOT TAXABLE. ON FURTHER APPEAL THIS DECISION HAS BEEN CONFIRMED BY THE SUPREME COURT IN THE CASE REPORTED AT 273 ITR 1. HE ALSO RE FERRED TO THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF DCI T VS. BPL SANYO FINANCE LTD. [312 ITR 63]. IN THIS CASE THE ASSESSEE WAS HO LDING SHARES OF IDBI WHICH WERE PARTLY PAID-UP AND ASSESSEE DID NOT PAY THE CA LL AMOUNT CALLED BY THE COMPANY AND THEREFORE THE SHARES WERE FORFEITED. THIS WAS CLAIMED AS SHORT TERM CAPITAL LOSS WHICH WAS NOT ALLOWED BY THE AO. THE HONBLE HIGH COURT HOWEVER HELD THAT FORFEITURE OF SHARES WOULD AMOUNT TO TRANSFER IN TERMS OF SEC.2[47] BECAUSE ASSESSEE WOULD BE DEEMED TO HAVE ACQUIRED RIGHTS IN SHARES WHEN SAME WERE ALLOTTED AND ONCE SUCH SHARES WERE FORFEITED THEN SUCH RIGHT GOT EXTINGUISHED WHICH WOULD AMOUNT TO TRANSFER 12. THE LD. COUNSEL OF THE ASSESSEE ALSO REFERRED T O THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. M OHANBHAI PAMABHAI [SUPRA] AND POINTED OUT THAT IN THIS CASE ALSO WHA T THE COURT MEANT WAS THAT WHEN CONSIDERATION WAS NOT ASCERTAINABLE THEN THE PROVISIONS FOR CHARGING THE CAPITAL GAINS WOULD FAIL. HOWEVER IN THE CASE OF THE ASSESSEE CONSIDERATION WAS ASCERTAINABLE IN THE SENSE THAT SAME SHOULD BE TAKEN AS ZERO. WHILE ADDRESSING THE BENCH ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF THE BOMBAY BURMAH TRADING CORP ORATION LTD. VS. CIT [SUPRA] HE SUBMITTED THAT SINCE IT WAS A VERY SHOR T JUDGMENT AND FACTS ARE NOT DISCUSSED THEREFORE HE WOULD NOT LIKE TO COMM ENT. HOWEVER HE SUBMITTED THAT IF IN THE CASE OF ZERO CONSIDERATION IF TRANSFER OF A PARTICULAR ASSET DID NOT ATTRACT THE LEVY OF CAPITAL GAIN THE N WHY CLAUSE [III] WAS INSERTED I.T.A.NO.3013/M/07 (S.B) 10 TO SEC.47 [WHICH PROVIDES THAT TRANSACTIONS PROVIDE D IN THAT PROVISION SHALL NOT BE CONSIDERED AS TRANSFER] BY WHICH ANY TRANSFER OF A CAPITAL ASSET BY WAY OF A GIFT IS EXEMPT BECAUSE IN CASE OF GIFT NO CONSIDE RATION WOULD BE INVOLVED. IF THE IDEA WAS NOT TO SUBJECT ZERO CONSIDERATION TRAN SACTION TO CAPITAL GAIN TAX U/S.45 THEN THERE WAS NO NEED FOR CLAUSE [III] FOR GIFTS IN SEC.47. HE CONCLUDED HIS ARGUMENTS BY SUBMITTING THAT DURING T HE PROCESS OF REDUCTION OF SHARE CAPITAL TRANSFER HAS DEFINITELY TAKEN PLA CE AND CONSIDERATION RECEIVED BY THE ASSESSEE SHOULD BE CONSIDERED AS ZERO AND T HEREFORE CAPITAL LOSS SHOULD BE ALLOWED. 13. ON THE OTHER HAND LD. SR. DR SHRI PAVAN VED SU BMITTED THAT IN THIS CASE CAPITAL HAS BEEN REDUCED BY THE COMPANY IN TWO PHASES. THE FACE VALUE OF SHARES WAS REDUCED FROM RS.10/- EACH TO RS.5 EAC H WHICH MEANS THE CAPITAL WAS REDUCED BY 50% AND THEN SUCH TWO SHARES OF RS.5/- EACH WERE CONSOLIDATED INTO ONE SHARE AND SUCH NEW SHARE HAS BEEN ALLOTTED TO THE COMPANY. HOWEVER THE VALUE OF THE ASSETS OF THE CO MPANY REMAINED SAME BEFORE AND IMMEDIATELY AFTER SUCH REDUCTION AND THE REFORE NO LOSS WAS CAUSED TO THE ASSESSEE. HE FURTHER ARGUED THAT AFTE R ALL A SHARE MEANS PROPORTIONATE SHARE OF AN ASSET OF THE COMPANY. IN THIS REGARD HE REFERRED TO SEC.84 OF THE COMPANIES ACT 1956 WHICH DEFINES THA T A SHARE CERTIFICATE SHALL BE PRIMA FACIE EVIDENCE OF THE MEMBERS TO SUCH SHAR E. SINCE SHARE OF THE ASSESSEE IN THE COMPANYS ASSETS HAVE NOT GONE DOWN THEREFORE NO LOSS CAN BE SAID TO HAVE BEEN INCURRED BY THE ASSESSEE. HE F URTHER EXPLAINED THIS PROPOSITION BY POINTING OUT THAT WHEN A PERSON IS O WNER OF A HOUSE THE SAME IS EVIDENCED BY THE TITLE DEED. HE POSED A QUERY WH ETHER IT CAN BE SAID WITH REFERENCE TO THE TITLE DEED THAT A PERSON IS ONLY O WNER OF THAT DEED THE I.T.A.NO.3013/M/07 (S.B) 11 OBVIOUS ANSWER WOULD BE NO. THE ANSWER WOULD BE THA T THROUGH THAT TITLE DEED THE PARTICULAR PERSON IS HOLDING OWNERSHIP OF THE HOUSE. SIMILARLY THROUGH OWNERSHIP OF SHARES ASSESSEE IS HOLDING PRO PORTIONATE SHARE IN ASSETS OF THE COMPANY WHICH HAVE NOT GONE DOWN AND THEREF ORE NO LOSS HAS BEEN SUFFERED. MERE REDUCTION OF SHARE CAPITAL AT BEST C AN LEAD TO A NOTIONAL LOSS. 14. THE LD. SR. DR FURTHER INVITED OUR ATTENTION TO CLAUSE [V] OF SUB SECTION (2) TO SECTION 55 WHICH DEFINES COST OF ACQUISITION IN CASE OF SHARES IN THE EVENT OF CONSOLIDATION DIVISION OR CONVERSION OF ORIGINAL SHARES; AS PER THIS CLAUSE ORIGINAL COST HAS TO BE TAKEN AS COST OF PR ESENT ACQUISITION. IN CASE BEFORE US THEREFORE THE COST OF ACQUISITION WOULD REMAIN SAME TO THE ASSESSEE IN TERMS OF THIS PROVISION AND IF THE LOSS ON REDUCTION OF SHARE CAPITAL IS ALLOWED AT THIS STAGE AND IN FUTURE IF SUCH SHAR ES ARE SOLD THEN THE ASSESSEE CAN AGAIN TAKE THE ORIGINAL COST AS COST O F ACQUISITION WHICH WOULD MEAN DOUBLE BENEFIT TO THE ASSESSEE WHICH IS NOT P ERMISSIBLE UNDER THE LAW AND IN THIS REGARD HE REFERRED TO THE DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF ESCORTS LTD. VS. UOI [199 ITR 43]. 15. HE FURTHER SUBMITTED THAT WHENEVER A COMPANY IS SUES BONUS SHARES NO CAPITAL GAIN IS CHARGEABLE ON THE SAME ON MERE RECE IPT OF SUCH BONUS SHARES AND CAPITAL GAIN IF ANY CAN BE CHARGED ONLY AT TH E STAGE WHEN SUCH BONUS SHARES ARE SOLD BY SUCH ASSESSEE. SIMILAR PRINCIPLE NEEDS TO BE APPLIED IN THE CASE WHEN ASSESSEES SHAREHOLDING IS REDUCED ON RED UCTION OF SUCH CAPITAL. HE ALSO ARGUED THAT AT BEST IN CASE BONUS SHARES AR E SOLD BY AN ASSESSEE COST OF THE SAME HAS TO BE TAKEN ON THE BASIS OF AV ERAGE COST AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. DALMIA INVESTMENT CO. LTD. [52 ITR 567]. THIS MEANS THAT IN CASE OF BONUS SHARES THE COST OF SHARE GETS I.T.A.NO.3013/M/07 (S.B) 12 ADJUSTED AND ULTIMATELY COST OF ACQUISITION IS TAKE N AT AVERAGE VALUE AND SAME PRINCIPLE WOULD APPLY ON REDUCTION OF SHARE CAPITAL AND IN THAT CASE THE AVERAGE COST OF BALANCE HOLDING AFTER SUCH REDUCTIO N OF CAPITAL WOULD INCREASE AND THE LOSS CAN BE RECKONED ONLY WHEN SUCH SHARES ARE TRANSFERRED FOR A CONSIDERATION. HE SUBMITTED THAT THIS PRINCIPLE HAS BEEN FURTHER AFFIRMED BY THE HON'BLE SUPREME COURT IN THE CASE OF MISS DHUN DADABHOY KAPADIA VS. CIT [63 ITR 651]. IN THIS CASE WHEN THE ASSESSEE W AS ALLOTTED RIGHT SHARES THE ASSESSEE INSTEAD OF SUBSCRIBING TO SUCH RIGHT S HARES SOLD SUCH RIGHTS IN THE MARKET AT A PREMIUM. A QUESTION AROSE WHETHER S UCH PREMIUM WOULD BE TAXABLE OR THE REDUCTION IN THE VALUE OF SHARES WHI CH ARE HELD BY THE ASSESSEE HAS TO BE CONSIDERED FOR THE PURPOSE OF COMPUTING T HE CAPITAL GAINS TAX. THE HONBLE COURT ULTIMATELY HELD THAT GAIN HAS TO BE U NDERSTOOD IN THE SIMILAR WAY AS UNDERSTOOD BY THE COMMERCIAL WORLD AND ULTIM ATELY IT WAS HELD THAT THE PARTICULAR RECEIPT OF SALE OF RIGHT TO SUBSCRIB E TO RIGHT SHARES IS REQUIRED TO BE REDUCED BY FALL IN THE VALUE OF EXISTING SHAR EHOLDING. FOLLOWING THE SAME PRINCIPLE AT BEST IN ASSESSEES CASE THE VALUE OF REDUCED SHAREHOLDING CAN BE INCREASED I.E. COST OF ACQUISITION CAN BE INCREASED BUT THE LOSS CANNOT BE ALLOWED BECAUSE AT THE STAGE OF REDUCTION OF CAPIT AL IT IS ONLY A NOTIONAL LOSS. 16. IN THE REJOINDER LD. COUNSEL REFERRED TO PAGE 77 OF THE PAPER BOOK WHICH GIVES COMPUTATION OF CAPITAL LOSS INCURRED ON REDUCTION OF SHARE CAPITAL OF TGL SHARES AND POINTED OUT THAT COST HAS BEEN TA KEN ON THE BASIS OF COST TO THE ASSESSEE WHICH HAS BEEN INDEXED AS PER THE P ROVISIONS OF SEC.48 AND THEREFORE NO DOUBLE BENEFIT HAD BEEN OBTAINED BY T HE ASSESSEE AND SUCH COST HAS BEEN FURTHER REDUCED FROM THE VALUE OF INV ESTMENT AS POINTED OUT EARLIER. THEREFORE THERE IS NO QUESTION OF FURTHER DOUBLE BENEFIT. HE GAIN I.T.A.NO.3013/M/07 (S.B) 13 EMPHASIZED THAT IT IS A SIMPLE CASE OF TRANSFER IN TERMS OF DECISIONS OF HON'BLE SUPREME COURT IN THE CASES OF KARTIKEYA V. SARABHAI [SUPRA] CIT VS. G. NARSIMHAN (DECD) AND ORS. AND ANARKALI SARABHAI VS . CIT [SUPRA] AND OF CIT VS. GRACE COLLIS & ORS. [SUPRA] AND THEREFORE LOS S SHOULD BE ALLOWED. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS IN THE LIGHT OF MATERIAL ON RECORD AS WELL AS THE DECISIONS CITED BY BOTH THE P ARTIES. INITIALLY THE LD. COUNSEL ARGUED THAT SHARE CAPITAL OF TGL WAS REDUCE D FROM RS.17 98 62 990/- DIVIDED INTO 17986299 EQUITY SHARES OF FACE VALUE O F RS.10/- EACH TO RS.8 99 31 495/- DIVIDED INTO 17986299 OF RS.5/- EA CH PAID UP. THIS MEANS BASICALLY THE CAPITAL WAS REDUCED BY REDUCING THE F ACE VALUE OF RS.10/- PAID UP OF EACH SHARE TO RS.5/- PAID UP OF EACH SHARE. A S A SECOND STEP SUCH SHARES(RS 5/- PER SHARE) WERE AGAIN CONSOLIDATED IN TO RS.10 PAID UP SHARE AND NUMBER OF SHARES WERE REDUCED TO 89 93 149. THE LD. COUNSEL HAD ARGUED THAT BASICALLY THE ORIGINAL SHARES GOT EXTIN GUISHED AND IN FACT NEW SHARES HAVE BEEN ISSUED BY TGL. IF THE ARGUMENT IS THAT EARLIER SHARES HAVE BEEN REPLACED OR SUBSTITUTED BY NEW SHARES THEN THE SAME WOULD NOT AMOUNT TO TRANSFER AT ALL. IN THAT CASE IT WOULD BE MEREL Y A CASE OF SUBSTITUTION OF ONE KIND OF SHARE WITH ANOTHER KIND OF SHARE WHICH HAS BEEN RECEIVED BY THE ASSESSEE BECAUSE OF ITS RIGHTS TO THE ORIGINAL SHAR ES ON THE REDUCTION OF CAPITAL. THIS POSITION WAS CLARIFIED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. RASIKLAL MANEKLAL (HUF) [177 ITR 198] I N THAT CASE THE ASSESSEE WAS HOLDING 90 SHARES IN ONE S. COMPANY OF FACE VAL UE OF RS.100/- EACH. PURSUANT TO THE SCHEME OF AMALGAMATION SANCTIONED B Y THE HIGH COURT THE HOLDERS OF THE SHARES IN S. COMPANY WERE TO BE ALLO TTED ONE SHARE OF RS.125/- EACH OF NS COMPANY FOR TWO SHARES IN S. COMPANY AND S. COMPANY WAS TO I.T.A.NO.3013/M/07 (S.B) 14 BE DISSOLVED. THE ASSESSEE IN THAT CASE WAS ALLOTTE D 45 SHARES IN N.S COMPANY. A QUESTION AROSE WHETHER THIS WOULD AMOUN T TO TRANSFER AND THE HON'BLE SUPREME COURT HELD THAT THERE WAS NEITHER A N EXCHANGE NOR A RELINQUISHMENT IN THIS TRANSACTION. THE HON'BLE S UPREME COURT OBSERVED AS UNDER: AN EXCHANGE INVOLVES THE TRANSFER OF PROPERTY BY ONE PERSON TO ANOTHER AND RECIPROCALLY THE TRANSFER OF PROPERTY BY THAT OTHER TO THE FIRST PERSON. THERE MUST BE A MUTUAL TRANSFER OF OWNERSHIP OF ONE THING FOR THE OWNERSHIP OF ANOTHER. A RELINQUISHMENT TAKES PLACE WHEN THE OWNER WITHD RAWS HIMSELF FROM THE PROPERTY AND ABANDONS HIS RIGHTS THERETO. IT PRESUM ES THAT THE PROPERTY CONTINUES TO EXIST AFTER THE RELINQUISHMENT. WHERE UPON AMALGAMATION THE COMPANY IN WHICH THE ASSESSEE HOLDS SHARES STAND DISSOLVED THERE IS NO RELINQUISHMENT BY THE ASSESSEE . THE APEX COURT HAD ALSO OBSERVED THAT IN CASE OF EX CHANGE THAT ONE PERSON TRANSFERS A PROPERTY TO ANOTHER PERSON IN EXCHANGE OF ANOTHER PROPERTY THE PROPERTY CONTINUES TO BE IN EXISTENCE. IN THAT CASE SHARES OF S. COMPANY HAD CEASED TO BE IN EXISTENCE AND THEREFORE THE TRANSAC TION DID NOT INVOLVE ANY TRANSFER. SIMILARLY IN THE CASE BEFORE US IF ARGUME NT OF ASSESSEE IS ACCEPTED THEN THE OLDER SHARES WITH DIFFERENT ISIN NUMBER CE ASES TO EXIST AND NEW SHARES WITH A DIFFERENT ISNI NUMBERS HAVE BEEN ISSU ED AND THEREFORE IT CANNOT BE CALLED A CASE OF EXTINGUISHMENT OR RELINQ UISHMENT AND IT IS A MERE CASE OF SUBSTITUTION OF ONE KIND OF SHARE WITH ANOT HER. IN CASE BEFORE US ALSO ASSESSEE GOT THE NEW SHARES ON THE STRENGTH OF ITS RIGHTS WITH THE OLD SHARES AND THEREFORE SAME WOULD NOT AMOUNT TO TRANSFER. 18. HOWEVER THE MAIN THRUST OF THE ARGUMENT ON BEH ALF OF THE ASSESSEE IS THAT THE REDUCTION OF CAPITAL WOULD AMOUNT TO TRANS FER IN VIEW OF THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASES OF KARTIK EYA V. SARABHAI [SUPRA] AND ANARKALI SARABHAI VS. CIT [SUPRA] CIT VS. G. N ARSIMHAN (DECD) AND ORS. I.T.A.NO.3013/M/07 (S.B) 15 [SUPRA] AND OF CIT VS. GRACE COLLIS & ORS. [SUPRA]. IT MAY BE NECESSARY TO OUTLINE THE FACTUAL MATRIX AND THE CONCLUSION REACH ED IN THE CASE OF CIT VS. G. NARSIMHAN (DECD) AND ORS. BECAUSE THAT WAS ALSO A CASE OF REDUCTION OF SHARE CAPITAL AND THAT TOO IN RESPECT OF EQUITY SHA RES. 19. IN THAT CASE THE COURT WAS CONCERNED WITH THE I SSUE WHETHER REDUCTION OF FACE VALUE OF EQUITY SHARE FROM RS.1000/- EACH T O RS.210/- EACH AFTER REDUCTION OF SHARE CAPITAL WHICH WAS DULY APPROVED BY THE HIGH COURT WOULD AMOUNT TO TRANSFER. IT IS IMPORTANT TO NOTE THAT IN THIS CASE ON REDUCTION OF CAPITAL CERTAIN ASSETS WERE ALSO GIVEN TO THE SHAR EHOLDERS IN THE FORM OF PROPERTY PAYMENT OF CASH AND/OR ADJUSTMENT OF DEBIT BALANCES . WHEN THE MATTER TRAVELLED TO HON'BLE SUPREME COUR T FOLLOWING THE DECISION OF KARTIKEYA V. SARABHAI [SUPRA] THE APEX COURT HELD THAT SUCH REDUCTION OF CAPITAL WOULD CONSTITUTE TRANSFER AND ANY PROFIT OR GAIN ARISING FROM THE TRANSFER OF CAPITAL ASSET IS LIABLE TO BE TAXED U/S.45. IN THE ABOVE MENTIONED CASE 90 NON-CUMULATIVE PREFEREN CE SHARES OF THE FACE VALUE OF RS.1000/- WERE PURCHASED AT A PRICE OF RS .420/- PER SHARE FROM A COMPANY CALLED SARABHAI LIMITED. IN 1965 A SUM OF RS.500/- PER PREFERENCE SHARES WAS PAID TO THE ASSESSEE UPON REDUCTION OF SHARE CAPITAL AND THE FACE VALUE OF PREFERENCE SHARES WAS REDUCED TO RS.50/- P ER SHARE AND FURTHER PAYMENT OF RS.450/- PER SHARE WAS MADE TO THE ASSES SEE. THE ITO WAS OF THE OPINION THAT THE SUM OF RS.450/- PER SHARE WHIC H WAS RECEIVED NOW WAS LIABLE TO BE TAXED UNDER THE HEAD CAPITAL GAIN. H OWEVER ASSESSEE CONTENDED THAT SINCE NO TRANSFER HAD TAKEN PLACE IN TERMS OF SEC.2 [47] NO TAX COULD BE IMPOSED. WHEN THE MATTER TRAVELLED TO HON'BLE SUPRE ME COURT IT WAS HELD THAT DEFINITION OF TRANSFER U/S.2 [47] WAS INCLUSIV E AND WOULD INCLUDE I.T.A.NO.3013/M/07 (S.B) 16 RELINQUISHMENT OF AN ASSET OR EXTINGUISHMENT OF ANY RIGHT THEREIN. IT WAS FURTHER OBSERVED THAT EVEN PREFERENCE SHAREHOLDERS HAVE RIGHT TO VOTE ON RESOLUTIONS WHICH WOULD EFFECT THE RIGHT OF PREFERE NCE SHAREHOLDER U/S. 87(2)(A) 87(2)(B) AND 87(2)(C). THEREFORE THE RIGH TS OF PREFERENCE SHAREHOLDERS ARE CURTAILED TO THAT EXTENT. A CAREFU L ANALYSIS OF THE ABOVE DECISION INDICATES THAT WHENEVER THERE IS REDUCTION OF SHARES AND UPON PAYMENT BY COMPANY TO COMPENSATE THE VALUE EQUIVALE NT TO REDUCTION APART FROM THE EFFECT ON SHAREHOLDERS' RIGHTS TO VOTE ETC . A TRANSFER CAN BE SAID TO HAVE TAKEN PLACE. HOWEVER THE QUESTION IS WHETHER THE SAME CAN STILL ATTRACT SEC.45? THE ANSWER IS GIVEN BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. MOHANBHAI PAMABHAI [SUPRA]. IN THIS CASE TH E ISSUE WAS WHETHER THERE IS A TRANSFER IF A PARTICULAR PARTNER RETIRED FROM THE FIRM AND HIS SHARE IN THE PARTNERSHIP WAS WORKED OUT BY TAKING THE PROPOR TIONATE VALUE OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LI ABILITY AND PRIOR CHARGES. THE ITO WAS OF THE OPINION THAT THE AMOUNT RECEIVED BY THE ASSESSEE TO THE EXTENT WHICH INCLUDED HIS PROPORTIONATE SHARE IN TH E VALUE OF THE GOODWILL IS LIABLE TO BE TAXED AS CAPITAL GAIN. WHEN THE MATTER TRAVELLED TO THE HIGH COURT THEIR LORDSHIPS OBSERVED AT PAGES 404 & 405 AS UN DER: BUT EVEN IF WE ARE WRONG IN TAKING THIS VIEW AND T HE CORRECT VIEW IS THAT WHEN A PARTNER RETIRES FROM THE PARTNERSHIP HIS INT EREST IN THE PARTNERSHIP ASSETS IS EXTINGUISHED AND THERE WAS THEREFORE IN THE PRESENT CASE TRANSFER' OF INTEREST OF EACH OF THE ASSESSEES IN THE GOODWILL WHEN THE ASSESSEES RETIRED FROM THE FIRM THE AMOUNT RECEIVE D BY EACH ASSESSEE IN RESPECT OF HIS SHARE IN THE VALUE OF THE GOODWILL M UST STILL BE HELD TO BE OUTSIDE THE PALE OF CHARGEABILITY TO CAPITAL GAINS TAX. IT IS NOT EVERY TRANSFER OF A CAPITAL ASSET WHICH ATTRACTS THE CHAR GE OF CAPITAL GAINS TAX. SECTION 45 WHICH IS THE CHARGING SECTION UNDO UBTEDLY PROVIDES THAT ANY PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD 'C APITAL GAINS'. BUT SECTION 48 SHOWS THAT THE TRANSFER THAT IS CON TEMPLATED BY SECTION 45 IS A TRANSFER AS A RESULT OF WHICH CONSI DERATION IS RECEIVED BY THE ASSESSEE OR ACCRUES TO THE ASSESSEE. SECTION 48 PROVIDES THE I.T.A.NO.3013/M/07 (S.B) 17 MODE OF COMPUTATION OF CAPITAL GAINS BY ENACTING TH AT THE INCOME CHARGEABLE TO TAX AS CAPITAL GAIN SHALL BE COMPUTED BY DEDUCTING FROM THE 'FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET' THE FO LLOWING AMOUNTS NAMELY: (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSI VELY IN CONNECTION WITH SUCH TRANSFER ; AND (II) THE COST O F ACQUISITION OF THE CAPITAL ASSET AND THE COST OF ANY IMPROVEMENT THERE TO. THE AMOUNTS SPECIFIED IN CLAUSES (I) AND (II) ARE TO BE DEDUCTE D FROM THE ' CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER OF THE CAPITAL ASSET ' FOR THE PURPOSE OF DETERMINING THE PROFITS OR GAINS CHARGEABLE TO TAX. IT IS THEREFORE CLEAR THAT THE TRANSFER OF A CAPITAL ASSET IN ORDER TO ATTRACT THE CAPITAL GAINS TAX M UST BE A TRANSFER AS A RESULT OF WHICH CONSIDERATION IS RECEIVED BY THE ASSESSEE OR ACCRUES TO THE ASSESSEE. IF THERE IS NO CONSIDERATI ON RECEIVED OR ACCRUING TO THE ASSESSEE AS A RESULT OF THE TRANSFE R THE MACHINERY SECTION ENACTED IN SECTION 48 WOULD BE WHOLLY INAPP LICABLE AND IT WOULD NOT BE POSSIBLE TO COMPUTE PROFITS OR GAINS A RISING FROM THE TRANSFER OF THE CAPITAL ASSET. THE TRANSACTION IN O RDER TO ATTRACT THE CHARGE OF TAX AS CAPITAL GAINS MUST THEREFORE CLE ARLY BE SUCH THAT CONSIDERATION IS RECEIVED BY THE ASSESSEE OR ACCRUE S TO THE ASSESSEE AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. W HERE TRANSFER CONSISTS IN EXTINGUISHMENT OF A RIGHT IN THE CAPITA L ASSET THERE MUST BE AN ELEMENT OF CONSIDERATION FOR SUCH EXTINGUISHM ENT FOR THEN ONLY IT WOULD BE A TRANSFER EXIGIBLE TO CAPITAL GAI NS TAX. THUS IT BECOMES ABSOLUTELY CLEAR THAT EVEN IF A TR ANSFER HAD TAKEN PLACE UNLESS AND UNTIL SOME CONSIDERATION IS RECEIVED TH E TRANSFER OF SUCH ASSET WOULD NOT ATTRACT THE PROVISIONS OF SEC.45. THE REV ENUE HAS CHALLENGED THIS POSITION IN APPEAL BEFORE THE HON'BLE SUPREME COURT AND THE COURT DISMISSED THE APPEAL OF THE REVENUE IN ADDL. C.I.T. VS. MOHAN BHAI & PAMA BHAI [165 ITR 166] IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI VS. CIT [156 ITR 509]. DECISION OF H ON'BLE GUJARAT HIGH COURT WAS NOT APPROVED BY THE HON'BLE SUPREME COURT WHI LE ADJUDICATING THE CASE OF B. C. SRINIVASA SETTY ON ANOTHER POINT I.E. WHE THER BUILDING OF GOODWILL IN A BUSINESS WHICH DID NOT COST ANYTHING COULD STILL BE REGARDED AS CAPITAL ASSET FOR THE PURPOSE OF CHARGING THE SAME UNDER THE HEAD CAPITAL GAINS. HOWEVER AS FAR AS PROPOSITION THAT A TRANSFER CANNOT BE SUB JECTED TO PROVISIONS OF SEC.45 IN THE ABSENCE OF CONSIDERATION STILL REMAIN S VALID. IT MAY NOT BE OUT OF I.T.A.NO.3013/M/07 (S.B) 18 PLACE TO REFER TO THE COMMENTARY ON INCOME TAX LAW FIFTH EDITION VOLUME- 2 PAGE 2772 BY CHATURVEDI & PITHISARIA WHEREIN IT HAS BEEN OBSERVED AS UNDER: TRANSFERS NOT CHARGEABLE .- IT IS NOT EVERY TRANSFER OF A CAPITAL ASSET WHIC H ATTRACTS THE CHARGE OF CAPITAL GAINS TAX. ALTHOUGH SECTION 45 PROVIDES THE GENERALITY OF THE CHARGE IT IS FOLLOWED BY SEVERAL SECTIONS EXONERATING THE CHARGE UNDER STIPULATED CIRCUMSTANCES. SECTION 48 P ROVIDES THE MODE OF COMPUTATION AND IN DOING SO IT EXCLUDES EXPENDITUR E INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER AS ALSO THE COST OF ACQUISITION OF AS WELL AS ANY IMPROVEMENT TO THE CAPITAL ASSET CO NCERNED. THE TRANSFER OF A CAPITAL ASSET IN ORDER TO ATTRAC T THE CAPITAL GAINS TAX MUST BE A TRANSFER AS A RESULT OF WHICH CONSID ERATION IS RECEIVED BY THE ASSESSEE OR ACCRUES TO THE ASSESSEE. WITHOUT THE ELEMENT OF CONSIDERATION NO TRANSFER WILL ATTRACT CAPITAL GAI NS TAX [CIT V. MOHANBHAI PAMABHAI (1973) 91 ITR 393 404 (GUJ) N OT APPROVED ON ANOTHER POINT IN (1981) 128 ITR 294 (S.C)] IN ANY CASE TO UNDERSTAND THE MATTER FURTHER WE S HALL GO THROUGH THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F SUNIL SIDDHARTHBHAI VS. CIT [SUPRA]. IN THIS CASE THE ISSUE INVOLVED WAS W HETHER TRANSFER OF PERSONAL CAPITAL ASSETS TO THE FIRM TOWARDS CONTRIBUTION OF CAPITAL WOULD CONSTITUTE TRANSFER AND WHETHER SUCH TRANSFER WOULD ATTRACT CA PITAL GAIN TAX? THE COURT HELD THAT SUCH CONTRIBUTION OF CAPITAL ASSET OF A P ARTNER INTO THE FIRM WOULD DEFINITELY CONSTITUTE A TRANSFER BECAUSE IN THAT CA SE THE PARTNERS INTEREST IN SUCH ASSET IS REDUCED FROM EXCLUSIVE INTEREST TO A SHARED INTEREST. IN RESPECT OF TAXABILITY OF THIS TRANSFER THREE ARGUMENTS WER E MADE BEFORE THE HON'BLE COURT WHICH ARE BEING EXTRACTED FROM PAGE 515 OF TH E REPORT OF THE ABOVE JUDGMENT IN THE CASE OF SUNIL SIDDHARTHBHAI VS. CIT [SUPRA] AS UNDER: 1. THERE MUST BE A TRANSFER OF A CAPITAL ASSET EITHE R UNDER THE GENERAL LAW OR WITHIN THE DEFINITION IN CLAUSE [47] OF SECT ION 2 OF THE INCOME- TAX ACT. 2. CONSIDERATION MUST BE RECEIVED OR MUST ACCRUE AS A RESULT OF THE TRANSFER AND THE CONSIDERATION MUST BE CAPABLE OF B EING DETERMINED IN MONETARY TERMS IN ORDER THAT THE COMPUTATION OF CAPITAL GAINS MAY BE MADE AS REQUIRED BY SECTION 48. 3. PROFITS OR GAINS MUST ARISE FROM THE TRANSFER AND M UST BE EMBEDDED IN THE CONSIDERATION. I.T.A.NO.3013/M/07 (S.B) 19 SINCE THE POINT RAISED IN THE FIRST ARGUMENT IS NOT MATERIAL REGARDING THE ISSUE INVOLVED BEFORE US THEREFORE IT WOULD SUFFICE TO POINT OUT THAT THE HON'BLE COURT HELD THAT SUCH CONTRIBUTION OF THE CAPITAL BY WAY OF TRANSFER OF PERSONAL CAPITAL ASSETS INTO THE FIRM WOULD CONSTITUTE TRANS FER. IN RESPECT OF THE 2 ND AND 3 RD ARGUMENTS THE HON'BLE SUPREME COURT OBSERVED AT PA GES 520 TO 522 AS UNDER: ON THE BASIS OF THAT PROPOSITION LEARNED COUNSEL F OR THE ASSESSEE HAS URGED THAT S.45 IS NOT ATTRACTED IN THE PRESENT CASE BECA USE TO COMPUTE THE PROFITS OR GAINS UNDER S.48 THE VALUE OF THE CONSIDERATION RECEIVED BY THE ASSESSEE OR ACCRUING TO HIM AS A RESULT OF THE TRANSFER OF T HE CAPITAL ASSET MUST BE CAPABLE OF ASCERTAINMENT IN MONETARY TERMS. THE CON SIDERATION FOR THE TRANSFER OF THE PERSONAL ASSETS IS THE RIGHT WHICH ARISES OR ACCRUES TO THE PARTNER DURING THE SUBSISTENCE OF THE PARTNERSHIP T O GET HIS SHARE OF THE PROFITS FROM TIME TO TIME AND AFTER THE DISSOLUTIO N OF THE PARTNERSHIP OR WITH HIS RETIREMENT FROM THE PARTNERSHIP TO GET THE VAL UE OF A SHARE IN THE NET PARTNERSHIP ASSETS AS ON THE DATE OF THE DISSOLUTIO N OR RETIREMENT AFTER A DEDUCTION OF LIABILITIES AND PRIOR CHARGES. THE CRE DIT ENTRY MADE IN THE PARTNER'S CAPITAL ACCOUNT IN THE BOOKS OF THE PARTN ERSHIP FIRM DOES NOT REPRESENT THE TRUE VALUE OF THE CONSIDERATION. IT I S NOTIONAL VALUE ONLY INTENDED TO BE TAKEN INTO ACCOUNT AT THE TIME OF DE TERMINING THE VALUE OF THE PARTNER'S SHARE IN THE NET PARTNERSHIP ASSETS ON TH E DATE OF DISSOLUTION OR ON HIS RETIREMENT A SHARE WHICH WILL DEPEND UPON A DE DUCTION OF THE LIABILITIES AND PRIOR CHARGES EXISTING ON THE DATE OF DISSOLUTI ON OR RETIREMENT. IT IS NOT POSSIBLE TO PREDICATE BEFORE HAND WHAT WILL BE THE POSITION IN TERMS OF MONETARY VALUE OF A PARTNER'S SHARE ON THAT DATE. A T THE TIME WHEN THE PARTNER TRANSFERS HIS PERSONAL ASSET TO THE PARTNER SHIP FIRM THERE CAN BE NO RECKONING OF THE LIABILITIES AND LOSSES WHICH THE F IRM MAY SUFFER IN THE YEARS TO COME. ALL THAT LIES WITHIN THE WOMB OF THE FUTUR E. IT IS IMPOSSIBLE TO CONCEIVE OF EVALUATING THE CONSIDERATION ACQUIRED B Y THE PARTNER WHEN HE BRINGS HIS PERSONAL ASSET INTO THE PARTNERSHIP FIRM WHEN NEITHER THE DATE OF DISSOLUTION OR RETIREMENT CAN BE ENVISAGED NOR CAN THERE BE ANY ASCERTAINMENT OF LIABILITIES AND PRIOR CHARGES WHIC H MAY NOT HAVE EVEN ARISEN YET. IN THE CIRCUMSTANCES WE ARE UNABLE TO HOLD THAT TH E CONSIDERATION WHICH A PARTNER ACQUIRES ON MAKING OV ER HIS PERSONAL ASSET TO THE PARTNERSHIP FIRM AS HIS CONTRIBUTION T O ITS CAPITAL CAN FALL WITHIN THE TERMS OF S.48. AND AS THAT PROVISION IS FUNDAMENTAL TO THE COMPUTATION MACHINERY INCORPORATED IN THE SCHEME RE LATING TO THE DETERMINATION OF THE CHARGE PROVIDED IN S.45 SUCH A CASE MUST BE REGARDED AS FALLING OUTSIDE THE SCOPE OF CAPITAL GA INS TAXATION ALTOGETHER. THE THIRD CONTENTION OF LEARNED COUNSEL FOR THE ASS ESSEE IS THAT NO PROFIT OR GAIN CAN BE SAID TO ARISE TO A PARTNER WHEN HE BRIN GS HIS PERSONAL ASSET INTO A PARTNERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL . IT IS URGED THAT THE CAPITAL GAINS CHARGEABLE UNDER S.45 ARE REAL CAPITAL GAINS COMPUTED ON THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING AND THAT THE CA PITAL GAINS MUST BE I.T.A.NO.3013/M/07 (S.B) 20 EMBEDDED IN THE CAPITAL ASSET. IN MISS DHUN DADABHOY KAPADIA V. CIT (1967) 63 I.T.R.. 651 THE APPELLANT HELD BY WAY OF INVESTMENT SOME ORDINARY SHARES IN A LIMITED COMPANY. AN OFFER WAS MADE BY T HE COMPANY TO HER BY WHICH SHE WAS ENTITLED TO APPLY FOR AN EQUAL NUMBER OF NEW ORDINARY SHARES AT A PREMIUM WITH AN OPTION OF EITHER TAKING THE SH ARES OR RENOUNCING THEM IN FAVOUR OF OTHERS. THE APPELLANT RENOUNCED HER RI GHTS TO ALL THE SHARES AND REALISED RS. 45 262.50. WHEN THIS AMOUNT WAS SOUGHT TO BE WHOLLY TAXED AS A CAPITAL GAIN THE APPELLANT CLAIMED THAT ON THE ISSU E OF THE NEW SHARES THE VALUE OF HER OLD SHARES DEPRECIATED AND THAT AS A R ESULT OF THE DEPRECIATION SHE SUFFERED A CAPITAL LOSS IN THE OLD SHARES WHICH SHE WAS ENTITLED TO SET OFF AGAINST THE CAPITAL GAIN OF RS. 45 262.50. IN THE A LTERNATIVE SHE CLAIMED THAT THE RIGHT TO RECEIVE THE NEW SHARES WAS A RIGHT WHI CH WAS EMBEDDED IN HER OLD SHARES AND CONSEQUENTLY WHEN SHE REALISED THE S UM OF RS. 45 262.50 BY SELLING HER RIGHT THE CAPITAL GAIN SHOULD BE COMPU TED AFTER DEDUCTING FROM THAT AMOUNT THE VALUE OF THE EMBEDDED RIGHT WHICH B ECAME LIQUIDATED. THIS COURT UPHELD THE CLAIM OF THE APPELLANT THAT SHE WA S ENTITLED TO DEDUCT FROM THE SUM OF RS. 45 262.50 THE LOSS SUFFERED BY WAY O F DEPRECIATION IN THE OLD SHARES. THE COURT PROCEEDED ON THE BASIS THAT IN WO RKING OUT CAPITAL GAIN OR LOSS THE PRINCIPLES WHICH HAD TO BE APPLIED ARE TH OSE WHICH ARE A PART OF COMMERCIAL PRACTICE OR WHICH AN ORDINARY MAN OF BUS INESS WOULD RESORT TO WHEN MAKING COMPUTATION FOR HIS BUSINESS PURPOSES. IT WILL BE NOTICED THAT THIS PRINCIPLE WAS APPLIED BY THE COURT IN A CASE W HERE A CAPITAL GAIN WAS SOUGHT TO BE TAXED UNDER THE INCOME TAX ACT. THAT P ROFITS OR GAINS UNDER THE INCOME TAX ACT MUST BE UNDERSTOOD IN THE SENSE OF R EAL PROFITS OR GAINS THAT IS TO SAY ON THE BASIS OF ORDINARY COMMERCIAL PRIN CIPLES ON WHICH ACTUAL PROFITS ARE COMPUTED A SENSE IN WHICH NO COMMERCIA L MAN WOULD MISUNDERSTAND HAS BEEN REGARDED AS A PRINCIPLE OF GENERAL APPLICATION AND THERE IS A CATENA OF CASES OF THIS COURT WHICH AFFI RMS THAT PRINCIPLE. REFERENCE MAY BE MADE TO CALCUTTA CO. LTD. V. CIT (1959) 37 I .T.R. 1 (S.C) CIT V. BAI SHIRINBAI K. KOOKA (1962) 46 I.T.R. 86 [S.C] POON A ELECTRIC SUPPLY CO. LTD. V. CIT (1965) 57 I.T.R. 521 [S.C] (1973) 89 I.T.R. 266 [S.C] AND BAFNA TEXTILES V. ITO (1975) 98 I.T.R. 1 [KAR]. THUS FROM THE ABOVE IT IS CLEAR THAT THE COURT REL IED ON THE PRINCIPLES LAID DOWN IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] A ND HELD THAT UNLESS AND UNTIL THE CONSIDERATION WAS PRESENT THE COMPUTATION PROVISION OF SEC.48 WOULD NOT BE WORKABLE AND THEREFORE SUCH TRANSFER COULD NOT BE SUBJECTED TO TAX. THE COURT FURTHER WENT ON TO HOLD THAT UNLESS AND U NTIL THE PROFITS OR LOSSES ARE REAL SAME CANNOT BE SUBJECTED TO TAX. 20. IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] A PARTNERSHIP FIRM WAS CARRYING ON THE BUSINESS OF MANUFACTURING AND SELLI NG OF AGARBATTIS VIDE INSTRUMENT OF A PARTNERSHIP DEED DATED 28 TH JULY 1954 AND NO VALUATION WAS MADE FOR THE GOODWILL AND IT WAS PROVIDED THAT GOOD WILL WILL BE VALUED ONLY ON I.T.A.NO.3013/M/07 (S.B) 21 DISSOLUTION. THE PERIOD OF PARTNERSHIP WAS EXTENDED AND WHEN THE FIRM WAS DISSOLVED IN 1965 GOODWILL OF THE FIRM WAS VALUED A T RS.1 50 000/- AND A NEW PARTNERSHIP BY THE SAME NAME WAS CONSTITUTED WHICH TOOK OVER ALL ASSETS INCLUDING THE GOODWILL AND LIABILITIES OF THE DISSO LVED FIRM. THIS GOODWILL WAS NOT INCLUDED AS CAPITAL GAIN IN THE HANDS OF THE DI SSOLVED FIRM BY THE ITO BUT A REVISIONARY ORDER WAS PASSED BY THE COMMISSIONER IN WHICH IT WAS DIRECTED TO MAKE FRESH ASSESSMENT AFTER TAKING INTO ACCOUNT THE CAPITAL GAIN ARISING ON THE SALE OF GOODWILL. THE HEAD NOTE OF THE ABOVE JU DGMENT READS AS UNDER: ALL TRANSACTIONS ENCOMPASSED BY S. 45 MUST FALL UND ER THE GOVERNANCE OF ITS COMPUTATION PROVISIONS. A TRANSACTION TO WHICH THOS E PROVISIONS CANNOT BE APPLIED MUST BE REGARDED AS NEVER INTENDED BY S. 45 TO BE THE SUBJECT OF THE CHARGE. WHAT IS CONTEMPLATED BY S.48[II] IS AN ASSET IN THE ACQUISITION OF WHICH IT IS POSSIBLE TO ENVISAGE A C OST: IT MUST BE AN ASSET WHICH POSSESSES THE INHERENT QUALITY OF BEING AVAILABLE ON THE EXPENDITURE OF MONEY TO A PERSON SEEKING TO ACQUIRE IT. NONE OF THE PROVISIONS PERTAINING TO THE HEAD CAPITAL GAINS S UGGESTS THAT THEY INCLUDE AN ASSET IN THE ACQUISITION OF WHICH NO COST AT ALL CAN BE CONCEIVED. WHEN GOODWILL GENERATED IN A NEW BUSINESS IS SOLD AND TH E CONSIDERATION BROUGHT TO TAX WHAT IS CHARGED IS THE CAPITAL VALUE OF THE AS SET AND NOT ANY PROFIT OR GAIN. FURTHER THE DATE OF ACQUISITION OF THE ASSET IS A MATERIAL FACTOR IN APPLYING THE COMPUTATION PROVISIONS PERTAINING TO C APITAL GAINS; BUT IN THE CASE OF GOODWILL GENERATED IN A NEW BUSINESS IT IS NOT POSSIBLE TO DETERMINE THE DATE WHEN IT COMES INTO EXISTENCE. THUS IT IS CLEAR THAT UNLESS AND UNTIL A PARTICULA R TRANSACTION LEADS TO COMPUTATION OF CAPITAL GAINS OR LOSS AS CONTEMPLATE D BY SECTIONS 45 AND 48 THE SAME WOULD NOT ATTRACT CAPITAL GAIN TAX. 21. NOW IN THE CASE BEFORE US THE ASSESSEE HAS NOT RECEIVED ANY CONSIDERATION FOR REDUCTION OF SHARE CAPITAL. WHAT HAS HAPPENED IS THAT ULTIMATELY THE NUMBER OF SHARES HELD BY THE ASSESSE E HAS BEEN REDUCED TO 50% AND NOTHING HAS MOVED FROM THE SIDE OF THE COMP ANY TO THE ASSESSEE. THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT THE DE CISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. MOHANBHAI PAMABHAI [SUPRA] IS NOT I.T.A.NO.3013/M/07 (S.B) 22 APPLICABLE BECAUSE IN THE CASE BEFORE US IT WAS P OSSIBLE TO ASCERTAIN THE CONSIDERATION BY ENVISAGING THE SAME AS ZERO. IN TH IS REGARD HE RELIED ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF CADELL WVG. MILL PVT. LTD. VS. CIT [SUPRA] AND IN PARTICULAR REFER RED TO THE OBSERVATIONS AT PAGES 284 AND 285 OF THE REPORT WHEREIN IT WAS OBSE RVED THAT WHOLE OF THE VALUE OF THE CAPITAL ASSET TRANSFERRED COULD NOT BE BROUGHT TO TAX BECAUSE THAT WOULD AMOUNT TO TAXING THE VALUE OF ASSET AND NOT PROFIT AS CONTEMPLATED IN SEC.45. IN THIS CASE THE ISSUE INVO LVED WAS WHETHER THE COMPENSATION RECEIVED ON SURRENDER OF STATUTORY TEN ANCY RIGHTS IS CHARGEABLE AS CASUAL INCOME U/S.10[3] OR IT SHOULD BE CHARGED U/S.45. THE COURT AFTER EXAMINING THE ISSUE IN DETAIL HELD THAT AMOUNT RE CEIVED ON SUCH SURRENDER IS CHARGEABLE ONLY U/S.45. THE COURT OBSERVED THAT WHO LE VALUE OF THE COMPENSATION COULD NOT BE CHARGED U/S.56 BECAUSE SA ME WAS CHARGEABLE U/S.45 AND THE DECISION OF THE HON'BLE SUPREME COUR T IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] WAS APPLIED. IT WAS ALSO NO TED THAT IN FACT SEC.55 [2][A] ITSELF WAS AMENDED BY FINANCE ACT 1994 W.E. F. 1-04-1995 AND THE COST OF ACQUISITION OF TENANCY RIGHTS WAS TO BE TAK EN AT NIL THEREFORE THIS PROVISION COULD NOT BE APPLIED RETROSPECTIVELY. THU S IT IS CLEAR THAT THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] WAS FOLLOWED IN PRINCIPLE WHEREIN IT HAS BEEN HELD THAT IF COMPUTATION PROVISION OF SEC.48 FAILS THEN SUCH TRANSACTION CA NNOT BE BROUGHT TO TAX U/S.45. THE COURT SPECIFICALLY DECLINED TO ENTERTAI N THE ARGUMENT THAT COST OF TENANCY RIGHT SHOULD BE TAKEN AT ZERO BECAUSE THAT WOULD AMOUNT TO CHARGING OF CAPITAL VALUE OF THE ASSET AND NOT CAPITAL GAIN. IN THE CASE OF REDUCTION OF CAPITAL NOTHING MOVES FROM THE COFFERS OF THE COMPA NY AND THEREFORE IT IS A I.T.A.NO.3013/M/07 (S.B) 23 SIMPLE CASE OF NO CONSIDERATION WHICH CANNOT BE SUB STITUTED TO ZERO. IT IS PERTINENT TO NOTE THAT AFTER THE DECISION OF HON'BL E SUPREME COURT IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] THE LEGISLATURE H AS INTRODUCED SPECIFIC PROVISION WHEREIN COST OF ACQUISITION OF GOODWILL WAS TO BE TAKEN AT NIL. SIMILAR AMENDMENTS WERE MADE TO SPECIFY THE COST WI TH REFERENCE TO TRADEMARK COST OF RIGHT TO MANUFACTURE OR PRODUCE OR PROCESS ANY ARTICLE OR THING ETC. THEREFORE WHEREVER LEGISLATURE INTENDE D TO SUBSTITUTE THE COST OF ACQUISITION AT ZERO SPECIFIC AMENDMENT HAS BEEN MA DE. IN THE ABSENCE OF SUCH AMENDMENT IT HAS TO BE INFERRED THAT IN THE CA SE OF REDUCTION OF SHARES WITHOUT ANY APPARENT CONSIDERATION THAT TOO IN A S ITUATION WHERE THE REDUCTION HAS NO EFFECT ON THE RIGHT OF SHAREHOLDER WITH REFERENCE TO THE INTRINSIC RIGHTS ON THE COMPANY IT IS ALWAYS POSS IBLE TO ARGUE THAT COST OF ACQUISITION CANNOT BE ASCERTAINED AND THEREFORE P ROVISIONS OF SEC.45 WOULD NOT BE APPLICABLE. SINCE NO AMENDMENT HAS BEEN MADE IN RESPECT OF CONSIDERATION PRINCIPLES LAID DOWN BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. MOHANBHAI PAMABHAI [SUPRA]- LATER CONFIRMED BY THE HON'BLE SUPREME COURT IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] AND ALSO IN THE CASE OF SUNIL SIDDHARTHBHAI VS. CIT [SUPRA]- ARE AP PLICABLE.E. IF THE CONSIDERATION CANNOT BE ASCERTAINED THEN PROVISION S OF SEC.45 WOULD NOT APPLY. NO DOUBT LEARNED COUNSEL FORCEFULLY SUBMITTE D THAT THE LEGISLATURE HAS LISTED OUT ALL TRANSACTIONS WHICH ARE NOT REGARDED AS TRANSFER SUCH AS GIFTS ETC (SEC.47-III) AND PER CONTRA ANY OTHER TRANSFER EVEN WITHOUT SPECIFIC OR ZERO CONSIDERATION SHOULD BE CONSIDERED FOR TAXATION U/S 45 BUT WE FIND NO FORCE IN IT. THE SITUATION REGARDING NON ASCERTAINMENT OF AN Y OF THE ELEMENT OF SEC.48 CAME TO LIGHT ONLY AFTER THE PRONOUNCEMENT OF THE D ECISION OF THE HON'BLE I.T.A.NO.3013/M/07 (S.B) 24 SUPREME COURT IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA]. PERHAPS LEGISLATURE INTENDED TO EXEMPT ONLY GIFTS FROM SUBJECT MATTER O F CAPITAL GAINS AND THAT IS WHY CLAUSE (III) TO SEC.47 MUST HAVE BEEN PUT IN TH E STATUTE. IN ANY CASE THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF THE BOMBAY BURMAH TRADING CORPORATION LTD. VS. CIT [SUPRA] IS DIRECTLY ON THE ISSUE WHEREIN THIRD QUESTION REFERRED BEFORE THE COURT RE ADS AS UNDER: 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT WHERE IN A CASE OF COMPULSORY ACQUISITION BY GOVERNMENT WITHOUT COMPENSATION NO CAPITAL LOSS WIL L ENSURE? THIS QUESTION WAS ANSWERED BY THE HON'BLE COURT VID E PARA WHICH READS AS UNDER: 4. SO FAR AS THE THIRD QUESTION IS CONCERNED THE SAME IS COVERED BY THE RATIO OF THE DECISION OF THE SUPREME COURT IN B. C. SRINIVASA SETTY [1981] 128 ITR 294. THE ANSWER TO THE QUESTION IS THEREFORE SELF-EVIDENT. QUESTIONS NOS.1 2 AND 3 ARE NOT PREFERABLE QUESTIONS OF LAW. THUS FROM THE ABOVE IT IS CLEAR THAT WHEN NO CONSI DERATION IS RECEIVED NO LOSS CAN BE ALLOWED IN VIEW OF THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] WHICH WAS FOLLOWED IN ABOVE DECISION. IN FACT ASSESSEE HAS NOT SUFFER ED ANY LOSS ON REDUCTION OF SHARE CAPITAL WHICH WE SHALL SEE LITTLE LATER. 22. RELIANCE WAS ALSO PLACED BEFORE US ON THE DECIS ION OF DCIT VS. BPL SANYO FINANCE LTD. [SUPRA]. IN THIS CASE THE COURT WAS CONCERNED WITH THE ISSUE WHERE ASSESSEE HAD APPLIED FOR ONE LAKH EQUIT Y SHARES OF IDBI LTD. IN RESPONSE TO THE PUBLIC ISSUE. THE ASSESSEE WAS ALLO TTED 89 200 SHARES AGAINST THE APPLICATION OF ONE LAKH SHARES AND SHARE APPLIC ATION MONEY WAS APPROPRIATED ACCORDINGLY. THE ASSESSEE WAS ASKED TO REMIT THE BALANCE SUM OF RS.83 46 000/- FOR ISSUANCE OF THE SHARES AND SI NCE THE ALLOTMENT MONEY WAS NOT PAID IDBI LTD. CANCELLED THE ALLOTMENT AND FORFEITED THE SHARES. A I.T.A.NO.3013/M/07 (S.B) 25 QUESTION AROSE WHETHER SUCH FORFEITURE WOULD AMOUNT TO CAPITAL LOSS. THE HON'BLE KARNATAKA HIGH COURT OBSERVED THAT A BINDIN G CONTRACT EXISTED BETWEEN THE ASSESSEE AND IDBI LTD. AND ONCE SHARES WERE CANCELLED THIS WOULD AMOUNT TO TRANSFER AND ACCORDINGLY THE CAPITA L LOSS WAS ALLOWED. AS OBSERVED EARLIER IN THE CASE BEFORE US SHARES HAVE NOT BEEN CANCELLED BUT ONLY NUMBER OF SHARES HAS BEEN REDUCED AND ASSESSEE AT BEST WOULD SUFFER ONLY A NOTIONAL LOSS. FURTHER IN THIS CASE THE PRI NCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF B. C. SRINIVAS A SETTY [SUPRA] HAVE NOT BEEN CONSIDERED. MOREOVER THE HON'BLE KARNATAKA HI GH COURT DECIDED THIS ISSUE ON THE BASIS OF DECISION OF HON'BLE SUPREME C OURT IN THE CASE OF CIT VS. GRACE COLLIS & ORS. [SUPRA]. IN THAT CASE THE FACT S WERE THAT ASSESSEES WERE SHAREHOLDERS OF AMBASSADOR SEAMEN SHIP PVT. LTD. AN D THAT COMPANY GOT AMALGAMATED WITH COLLIS LINES PVT. LTD. WITH THE AP PROVAL OF HON'BLE KERALA HIGH COURT. AS PER THE SCHEME OF AMALGAMATION ALL ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANY WERE TO VEST IN THE AMALGA MATED COMPANY AND IN CONSIDERATION OF THAT THE AMALGAMATED COMPANY WAS T O ISSUE TO SHAREHOLDERS OF THE AMALGAMATING COMPANY 14 EQUITY SHARES OF RS. 100/- EACH CREDITED AS FULLY PAID-UP IN THE AMALGAMATED COMPANY FOR EACH S HARE HELD IN THE AMALGAMATING COMPANY. DURING THE RELEVANT YEAR ASS ESSEE SOLD THE SHARES OF AMALGAMATED COMPANY AND THE GAIN ARISING ON THE SAM E WAS CHARGED BY THE ITO AS CAPITAL GAIN. THE ASSESSEE CONTENDED THAT SA ME COULD NOT BE CHARGED BECAUSE THE COST OF SHARES OBTAINED BY AMALGAMATION COULD NOT BE DETERMINED AS THERE WAS NO TRANSFER INVOLVED DURING THE AMALGAMATION. THE ASSESSEE HAD NOT FURNISHED THE DETAILS OF COST OF T HE SHARES OF THE AMALGAMATED COMPANY. HOWEVER THE ITO NOTED THAT UN DER THE SCHEME I.T.A.NO.3013/M/07 (S.B) 26 ASSESSEES HAD RECEIVED 14 SHARES OF THE FACE VALUE OF RS.100/- EACH IN THE AMALGAMATED COMPANY FOR ONE SHARE OF THE FACE VALUE OF A SHARE IN THE AMALGAMATING COMPANY. HE MULTIPLIED THE NUMBER OF S HARES OF THE AMALGAMATED COMPANY THAT ASSESSEE HAD SOLD BY THEIR FACE VALUE OF RS.100/- EACH AND DIVIDED BY 14 TO ARRIVE AT THEIR COST. AFT ER REDUCING THIS COST FROM THE SALE PRICE THE BALANCE WAS SUBJECTED TO CAPITAL GAINS TAX. THE ITO REJECTED THE CONTENTION OF THE ASSESSEE THAT SECTIO NS 49(2) AND 47(III) WERE NOT ATTRACTED AS THE ASSESSEE HAD NOT BECOME THE OW NER OF THE SHARES OF THE AMALGAMATED COMPANY IN CONSIDERATION OF THE TRANSFE R OF THEIR SHARE IN THE AMALGAMATED COMPANY. BEFORE THE HON'BLE APEX COURT ANOTHER DECISION IN THE CASE VANIA SILK MILLS PVT. LTD. VS. CIT [SUPRA] WAS RELIED. THE HON'BLE COURT AFTER DETAILED DISCUSSION IN CIT VS. GRACE COLLIS & ORS. [SUPRA] HELD AS UNDER: WE HAVE GIVEN CAREFUL THOUGHT TO THE DEFINITION OF 'TRANSFER' IN SECTION 2(47) AND TO THE DECISION OF THIS COURT IN VANIA SILK MIL LS PVT. LTD.'S CASE [1991] 191 ITR 647. IN OUR VIEW THE DEFINITION CLEARLY CONTEM PLATES THE EXTINGUISHMENT OF RIGHTS IN A CAPITAL ASSET DISTINCT AND INDEPENDE NT OF SUCH EXTINGUISHMENT CONSEQUENT UPON THE TRANSFER THEREOF. WE DO NOT APP ROVE RESPECTFULLY OF THE LIMITATION OF THE EXPRESSION 'EXTINGUISHMENT OF ANY RIGHTS THEREIN' TO SUCH EXTINGUISHMENT ON ACCOUNT OF TRANSFERS OR TO THE VI EW THAT THE EXPRESSION 'EXTINGUISHMENT OF ANY RIGHTS THEREIN' CANNOT BE EX TENDED TO MEAN THE EXTINGUISHMENT OF RIGHTS INDEPENDENT OF OR OTHERWIS E THAN ON ACCOUNT OF TRANSFER. TO SO READ THE EXPRESSION IS TO RENDER IT INEFFECTIVE AND ITS USE MEANINGLESS. AS WE READ IT THEREFORE THE EXPRESSION DOES INCLUDE THE EXTINGUISHMENT OF RIGHTS IN A CAPITAL ASSET INDEPEN DENT OF AND OTHERWISE THAN ON ACCOUNT OF TRANSFER. THUS FROM THE ABOVE IT IS CLEAR THAT EVEN EXTINGUI SHMENT OF RIGHTS IN A PARTICULAR ASSET WOULD AMOUNT TO TRANSFER. THE CHAR GEABILITY OF THE CAPITAL GAIN WAS UPHELD BECAUSE ON EXTINGUISHMENT OF SHARES IN THE AMALGAMATING COMPANY THE ASSESSEE GOT THE NEW SHARES AND THERE FORE THE QUESTION WHETHER ANY COST OF ACQUISITION COULD BE ASCERTAINE D WAS ANSWERED IN FAVOUR OF THE REVENUE. IN THE CASE BEFORE US AS POINTED OUT BY THE LD. DR I.T.A.NO.3013/M/07 (S.B) 27 THE ASSESSEES RIGHTS HAVE NOT BEEN EXTINGUISHED . WE HAD ASKED DURING THE HEARING THAT HOW MUCH PERCENTAGE ASSESSEE WAS H OLDING IN TGL AND IT WAS SUBMITTED THAT IT WAS MORE THAN 51%. ON VERIFIC ATION OF THE DETAILS IT IS SEEN THAT AFTER REDUCTION TGL IS HAVING 89 93 149 EQUITY SHARES OF RS.10/- EACH [AFTER REDUCTION AND CONSOLIDATION] AND ASSESS EE IS HOLDING 67 37 399 SHARES WHICH COMES TO ABOUT 74.9% I.E 75% FOR EASY CALCULATION. LET US EXAMINE WHETHER ASSESSEES RIGHTS HAVE BEEN EXTINGU ISHED OR NOT. 23. AS POINTED OUT BY LD. DR ASSESSEES PERCENTAGE OF SHARE HOLDING IMMEDIATELY BEFORE REDUCTION OF SHARE CAPITAL AND I MMEDIATELY AFTER SUCH REDUCTION REMAINED THE SAME. THEREFORE ASSESSEE WAS HOLDING 74.9% SHARES OF TGL IMMEDIATELY BEFORE THE REDUCTION OF C APITAL AND ALSO IMMEDIATELY AFTER THE REDUCTION OF CAPITAL. SUCH CAPITAL HAS BEEN REDUCED NOT ONLY IN THE CASE OF ASSESSEE BY TGL BUT THE SAME HAS BEEN REDUCED FOR ALL THE SHAREHOLDERS OF THE TGL. THOUGH UNDER THE CONCEPT OF JOINT STOCK COMPANY THE JOINT STOCK COMPANY IS HAV ING INDEPENDENT LEGAL ENTITY BUT FOR ALL PRACTICAL PURPOSES THE COMPANY I S ALWAYS OWNED BY THE SHAREHOLDERS. THEREFORE SUM TOTAL OF 100% SHAREHOL DERS WOULD OWN THE NET ASSETS OF THE COMPANY. NOW LET US SAY A COMPANY STA RTED WITH A CAPITAL OF RS.100/- AND HAD ASSETS OF RS.100/- THEN 75% SHARE HOLDERS WOULD OWN 75% OF SUCH ASSETS I.E. RS.75. IF AFTER FEW YEARS THIS COMPANY SUFFERS A LOSS AND THE ASSETS ARE REDUCED TO RS.50 THEN SHARE OF THE ASSESSEE IN THE ASSETS OF THE COMPANY WOULD BE ONLY RS.37.50. IF THE CAPITAL OF THE COMPANY IS REDUCED BY 50% EVEN THEN THE SHARE OF THE ASSESSEE WOULD B E 75% AND IT WOULD REMAIN SAME AT RS.37.50. THEREFORE THE EFFECTIVE S HARE OF ASSESSEE IN THE ASSETS OF THE COMPANY WOULD REMAIN THE SAME IMMEDI ATELY BEFORE AND AFTER I.T.A.NO.3013/M/07 (S.B) 28 REDUCTION OF SUCH CAPITAL. IN OTHER WORDS THE LOSS SUFFERED BY THE COMPANY WOULD BELONG TO THE COMPANY AND THAT CANNOT BE ALLO WED TO BE SET OFF IN THE HANDS OF THE ASSESSEE. THIS POSITION IS FURTHER SUP PORTED BY ANOTHER EXAMPLE. IF IN THE ABOVE ILLUSTRATION AFTER FEW YEARS INS TEAD OF ASSETS BECOMING RS.50/- IT INCREASES TO RS.200/- BECAUSE OF PROF IT AND IN TURN THIS COMPANY ISSUED BONUS SHARES EVEN THEN THE PROFIT WOULD REM AIN IN THE BOOKS OF THE COMPANY AND MERE ALLOTMENT OF SUCH BONUS SHARES CAN NOT BE SUBJECTED TO TAX. THIS POSITION WAS ACCEPTED EVEN BY THE LD. COU NSEL OF THE ASSESSEE. THEREFORE WHEN THE PROFITS OF THE COMPANY WHICH HA VE BEEN DISTRIBUTED TO THE SHAREHOLDERS BY WAY OF BONUS SHARES CANNOT BE A SSESSED ON THE SAME PRINCIPLE LOSSES OF THE COMPANY WHICH HAVE BEEN ADJ USTED BY REDUCING THE CAPITAL CANNOT BE ALLOWED. 24. NOW LET US EXAMINE THE ISSUE FROM ANOTHER ANGLE . LET US ASSUME THAT MR. A HOLDS 100% SHARES OF A COMPANY AND THE COM PANY IN TURN HAS INVESTED ITS ENTIRE FUNDS IN A PROPERTY. IF THE VAL UE OF THIS PROPERTY FALLS AND THE COMPANY DECIDES TO REDUCE ITS CAPITAL AND IF TH E CAPITAL IS REDUCED BY 50% AND MR. A 'S HOLDING IS REDUCED TO 50 SHARES IT WILL NOT MAKE ANY DIFFERENCE BECAUSE HE IS STILL HOLDING 100% SHARES AND THE FAL L IN THE VALUE OF THE PROPERTY IN THE HANDS OF THE COMPANY IS ONLY A NOTI ONAL FALL OR NOTIONAL LOSS WHICH WOULD NOT EFFECT THE SHAREHOLDING. LET US TA KE ANOTHER ILLUSTRATION. A COMPANY KNOWN AS Z STARTED WITH AN EQUITY CAPITAL OF RS.1 000/- DIVIDED INTO 100 SHARES OF RS.10 EACH. THE COMPANY BORROWED ANOT HER RS.4 000/- AND AFTER 10 YEARS THE VALUE OF ASSETS AND LIABILITIES OF THE COMPANY CHANGES. SUCH CHANGES WOULD OCCUR DIFFERENTLY IN THE CASE OF A PROFITABLE COMPANY AND IN CASE OF A LOSS MAKING COMPANY. LET US ASSUME THA T THE COMPANY INCURS A I.T.A.NO.3013/M/07 (S.B) 29 LOSS OF RS.10 000/- OR ALTERNATIVELY EARNS THE PROF IT OF RS.10 000/- THEN THE BALANCE-SHEET OF THE COMPANY AFTER 10 YEARS WOULD R EAD AS UNDER: IN CASE OF THE LOSS COMPANY BALANCE SHEET AS ON 31-3-XXXX RS. RS. SHARE CAPITAL 1000 ASSETS 5000 LOAN LIABILITIES 14000 DEBIT BALANCES IN P&L A/C. 10 000 --------- --- --------- 15000 15 000 ====== ======= IN CASE OF THE PROFITABLE COMPANY BALANCE SHEET AS ON 31-3-XXXX RS. RS. SHARE CAPITAL 1000 ASSETS 15 000 LOAN LIABILITIES 4000 5000 CREDIT BALANCE IN P&L A/C PROFIT CARRIED FORWARD 10000 -------- ----------- 15000 15 000 ===== ====== LET US FURTHER ASSUME THAT NO DIVIDEND WAS PAID BY THE PROFIT MAKING COMPANY. NOW IT CAN BE SAID THAT IN CASE OF LOSS M AKING COMPANY THE VALUE OF SHARES HAS GONE DOWN BECAUSE OF THE LOSS BUT TH E SHAREHOLDERS RIGHTS WOULD NOT BE AFFECTED BECAUSE SUCH LOSS BELONGS TO THE COMPANY AND IS ASSESSABLE IN THE HANDS OF THE COMPANY. IF SUCH LOS S MAKING COMPANY REDUCES THE CAPITAL SUCH PROPORTIONATE SHAREHOLDIN G WOULD STILL REMAIN AND ENTITLED TO THE SAME PROPORTION OF ASSET AND ASSESS EES INTEREST IS NOT EFFECTED. SAME SITUATION WOULD PREVAIL IN CASE OF P ROFIT MAKING COMPANY AND IF SUCH PROFIT MAKING COMPANY ISSUES BONUS SHARES T HEY CANNOT BE TAXED IN THE HANDS OF SUCH SHAREHOLDERS AND THEY CAN BE TAXE D ONLY WHEN SUCH SHARES I.T.A.NO.3013/M/07 (S.B) 30 ARE SOLD BY THE SHAREHOLDERS. THEREFORE WHETHER TH E COMPANY SUFFERS LOSS OR EARNS PROFIT THE PROPORTIONATE INTEREST OF THE SHA REHOLDER IS NOT AFFECTED. 25. NOW LET US FURTHER UNDERSTAND THE EXACT EFFECT OF THE REDUCTION OF SHARE CAPITAL WITH THE FOLLOWING ILLUSTRATION: POSITION PRIOR TO REDUCTION IN CAPITAL LIABILITIES RS. ASSETS RS. SHARE CAPITAL 1000 ASSETS 2500 LOANS 2000 P&L A/C. BAL (LOSS) 500 3000 3000 ------ ------- NET WORTH OF THE COMPANY (2500 2000) R S.500 NOW LET US ASSUME FURTHER THAT SHARE CAPITAL IS RE DUCED BY 50% AND THE SAME IS ADJUSTED AGAINST LOSS THEN FOLLOWING POSIT ION WOULD EMERGE: POSITION AFTER TO REDUCTION IN CAPITAL RS. RS. SHARE CAPITAL 500 ASSETS 2500 LOANS 2000 ------ ------- 2500 2500 ------- ------- NET WORTH OF THE COMPANY (2500 2000) = RS.500 AS CAN BE SEEN FROM THE ABOVE EXAMPLE EVEN AFTER R EDUCTION OF CAPITAL FROM RS.1000/- TO RS.500/- THE NET WORTH OF THE COMPANY REMAINS THE SAME AND THE SHARE OF EVERY SHAREHOLDER ALSO REMAINS THE SA ME. FOR EXAMPLE SUPPOSE X WAS HOLDING 50 SHARES OUT OF TOTAL 100 SHARES P RIOR TO REDUCTION HE WILL HOLD 25 SHARES OUT OF TOTAL 50 SHARES AFTER REDUCTI ON OF 50% BUT HIS SHARE IN THE TOTAL SHARE CAPITAL OF THE COMPANY AS WELL AS I N THE NET WORTH OF THE COMPANY WOULD REMAIN THE SAME I.E. AT 50%. THUS I N THIS ILLUSTRATION SHARE OF X IN THE NET WORTH REMAINS AT RS.250/- I.E. 50 % OF RS.500/- BEFORE AND I.T.A.NO.3013/M/07 (S.B) 31 AFTER REDUCTION OF THE NUMBER OF SHARES. THERE IS T HUS NO CHANGE IN THE INTRINSIC VALUE OF HIS SHARES AND EVEN HIS RIGHTS V IS--VIS OTHER SHAREHOLDERS AS WELL AS VIS--VIS COMPANY WOULD REMAIN THE SAME. TH ERE IS THUS NO LOSS THAT CAN BE SAID TO HAVE ACTUALLY ACCRUED TO THE SHAREHO LDER AS A RESULT OF REDUCTION IN THE SHARE CAPITAL. THERE WOULD BE NO C HANGE EVEN IN THE COST OF ACQUISITION OF SHARES WHICH THE SHAREHOLDER WOULD B E ENTITLED TO CLAIM AS DEDUCTION IN COMPUTING THE GAIN OR LOSS AS AND WHEN THE SAID SHARES ARE TRANSFERRED OR SOLD IN FUTURE AS PER SEC.55(V). SIM ILARLY IN THE CASE BEFORE US THE PERCENTAGE OF HOLDING OF THE ASSESSEE REMAINS A T 74.9 EVEN AFTER THE REDUCTION OF ITS CAPITAL AND ASSESSEE HAS THE RIGHT TO SHARE 74.9% NET WORTH OF TGL AND NO LOSS HAS BEEN CAUSED TO THE ASSESSEE. 26. THE LD. COUNSEL OF THE ASSESSEE HAD ALSO RELIED ON THE FOLLOWING DECISIONS OF THE TRIBUNAL- A) ZYMA LABORATORIES LTD. VS. ADDL. CIT 7 SOT 164 [MUM ] B) DCIT VS. M/S POLYCHEM LTD. ITA NO.4212/M/07 [MUM] A ND C) GINNERS & PRESSER LTD. VS. ITO ITA NO.398/M/07 & 41 93/M/07 BUT IN ALL THESE CASES THE PRINCIPLE LAID DOWN BY T HE HON'BLE SUPREME COURT IN THE CASE OF B. C. SRINIVASA SETTY [SUPRA] WAS NEITH ER CITED NOR CONSIDERED AND THEREFORE THESE DECISIONS ARE DISTINGUISHABLE AND IN ANY CASE NOT BINDING ON THE SPECIAL BENCH. IN FACT SUCH PROFIT O R LOSS ARISING OUT OF ISSUE OF BONUS SHARES OR REDUCTION OF CAPITAL IS ONLY A NOTI ONAL PROFIT OR NOTIONAL LOSS AND THIS CONCEPT HAS BEEN APPROVED BY THE HON'BLE S UPREME COURT IN THE CASE OF MISS DHUN DADANBHOY KAPADIA VS. CIT [SUPRA] AND FURTHER CONFIRMED BY THE HON'BLE SUPREME COURT IN THE CASE OF SUNIL S IDDHARTHBHAI VS. CIT I.T.A.NO.3013/M/07 (S.B) 32 [SUPRA]. IN THE CASE OF DHUN DADANBHOY KAPADIA VS. CIT [SUPRA] THE FACTS NOTED BY THE HON'BLE APEX COURT ARE AS UNDER: THE APPELLANT WAS HOLDING 710 ORDINARY SHARES OF TH E TATA IRON AND STEEL COMPANY LTD. (HEREINAFTER REFERRED TO AS ' THE COMP ANY ') WHICH SHE HAD INHERITED SOME TINE PRIOR TO 1ST JANUARY 1954 AS AN INVESTMENT. IT WAS ADMITTED THAT SHE WAS NOT A DEALER IN SHARES. UNDE R A SPECIAL RESOLUTION PASSED AT AN EXTRAORDINARY GENERAL MEETING OF THE C OMPANY OIL 12TH MARCH 1956 THE APPELLANT AS HOLDER OF 710 ORDINARY SHAR ES BECAME ENTITLED TO PURCHASE NEW ORDINARY SHARES ISSUED IN THE RATIO OF ONE NEW ORDINARY SHARE FOR ONE EXISTING ORDINARY SHARE AS HELD ON 26TH APR IL 1956. IN PURSUANCE OF THIS RESOLUTION AN OFFER WAS MADE TO THE APPELLANT BY THE COMPANY BY ITS CIRCULAR LETTER DATED 15TH MAY 1956 THAT SHE WAS IN TERMS OF THE RESOLUTION ENTITLED TO APPLY FOR 710 NEW ORDINARY SHARES TO BE PAID FOR AT THE RATE OF RS. 105 PER NEW ORDINARY SHARE. THIS PAYMENT WAS TO RE PRESENT RS. 75 AS THE FACE VALUE OF THE SHARE AND RS. 30 AS PREMIUM. SHE WAS ALSO GIVEN THE OPTION OF EITHER TAKING THE SHARES WHOLLY OR PARTLY OR RENOUNCING THEM EITHER WHOLLY OR PARTLY IN FAVOUR OF ANY OTHER PERSON OR PERSONS. THE APPELLANT CHOSE TO RENOUNCE HER RIGHT TO ALL THE 710 ORDINARY SHARES INSTEAD OF TAKING THE SHARES HERSELF AND WHEN RENOUNCING THE SHARES SHE SOLD THEM IN THE OPEN MARKET ON 12TH JUNE 1956 AS A RESULT OF WHIC H SHE ACTUALLY REALISED A SUM OF RS. 45 262 50P. IT WAS COMMON GROUND BEFORE THE INCOME-TAX AUTHORITIES AS WELL AS THE TRIBUNAL THAT THIS AMOUN T RECEIVED BY HER WAS A CAPITAL GAIN AND THE WHOLE OF THIS AMOUNT WAS SOUGH T TO BE TAXED AS CAPITAL GAIN RECEIVED BY THE APPELLANT. ON BEHALF OF THE A PPELLANT THE PLEA WAS THAT ON THE ISSUE OF THE NEW ORDINARY SHARES THE VALUE OF HER OLD ORDINARY SHARES DEPRECIATED BECAUSE THE ASSETS OF THE COMPANY REMAINED STATIONARY WHILE THE NUMBER OF SHARES INCREASED. IT WAS IN CO NSIDERATION OF THIS DEPRECIATION IN HER ORIGINAL HOLDINGS THAT SHE WAS GIVEN THE RIGHT TO PURCHASE THESE NEW ORDINARY SHARES OR TO RENOUNCE THEM IN F AVOUR OF SOME OTHER PERSON AND MAKE UP THE LOSS WHICH SHE WOULD SUFFER ON HER ORIGINAL SHARES. THE BOARD OF DIRECTORS OF THE NATIVE STOCK AND SHA RES ASSOCIATION LTD. HAD PASSED A RESOLUTION THAT THE TRANSACTIONS IN THESE SHARES WERE TO BE CUM- RIGHT UP TO AND INCLUDING 1ST JUNE 1956 AND WERE TO BE EX-RIGHTS FROM 4TH JUNE 1956 ONWARDS. THE INTERVENING DAYS 2ND AND 3RD JUNE BEING OFFICIAL HOLIDAYS THERE WERE TO BE NO TRANSACTIONS ON THOSE DAYS. THE MARKET QUOTATION OF THE OLD TATA ORDINARY SHARES WAS RS. 2 53 PER SHARE ON 1ST JUNE 1956 AND FELL TO RS. 198.75NP. ON 4TH JUNE 1956. THERE WAS THUS A FALL IN THE MARKET QUOTATION OF OLD SHARES OF RS. 54.26P. P ER SHARE. IT WAS CLAIMED BY THE APPELLANT THAT AS A RESULT OF THIS DEPRECIA TION IN THE PRICE OF HER OLD ORDINARY SHARES SHE SUFFERED A CAPITAL LOSS IN THO SE SHARES TO THE EXTENT OF RS. 37 630 AND SHE WAS ENTITLED TO SET OFF THIS LO SS AGAINST THE CAPITAL GAIN OF RS. 45 262.50P. WHICH SHE REALISED ON SELLING HER R IGHT TO TAKE THE NEW ORDINARY SHARES. IN THE ALTERNATIVE THE CASE WAS PUT FORWARD ON THE BASIS THAT THE RIGHT TO RECEIVE THESE NEW ORDINARY SHARES WAS A RIGHT WHICH WAS EMBEDDED IN HER OLD ORDINARY SHARES AND CONSEQUEN TLY WHEN SHE REALISED THE SUM OF RS. 45 262 50P BY SELLING HER RIGHT THE CAPITAL GAIN SHOULD BE COMPUTED AFTER DEDUCTING FROM THIS AMOUNT REALISED THE VALUE OF THE EMBEDDED RIGHT WHICH BECAME LIQUIDATED. THE VALUE OF THAT RIGHT ACCORDING TO THE APPELLANT SHOULD BE CALCULATED IN ACCORDANC E WITH THE PRINCIPLES OF ACCOUNTANCY AS LAID DOWN BY VARIOUS AUTHORS ON THE SUBJECT TO BE APPLIED IN SUCH SITUATIONS. EVEN IF THIS PRINCIPLE BE ACCEPTE D THE AMOUNT TAXABLE AS I.T.A.NO.3013/M/07 (S.B) 33 CAPITAL GAIN IN HER HANDS WOULD HAVE TO BE REDUCED BY AT LEAST A SUM OF RS. 37 630 IF NOT MORE . THE CONTENTION OF THE ASSESSEE WAS REJECTED BY THE INCOME TAX AUTHORITIES AS WELL AS BY THE TRIBUNAL AND THE HIGH COURT CONFIRME D THE DECISION OF THE TRIBUNAL. WHEN THE MATTER TRAVELLED TO HON'BLE SUPR EME COURT THE APEX COURT OBSERVED AS UNDER: IN ORDER TO ANSWER THE QUESTION REFERRED TO THE HI GH COURT IT APPEARS TO US THAT THE NATURE OF THE TRANSACTION WHICH RESULTED IN THIS RECEIPT OF RS. 45 262.50P. BY THE APPELLANT MUST BE ANALYSED AND PROPERLY UNDERSTOOD. THE AMOUNT IT IS THE AGREED CASE OF THE PARTIES W AS A CAPITAL GAIN. THE CAPITAL ASSET WHICH THE APPELLANT ORIGINALLY POSSES SED CONSISTED OF 710 ORDINARY SHARES OF THE COMPANY. THERE WAS ALREADY A PROVISION THAT IF THE COMPANY ISSUED ANY NEW SHARES EVERY HOLDER OF OLD SHARES WOULD BE ENTITLED TO SUCH NUMBER OF ORDINARY SHARES AS THE B OARD MAY BY RESOLUTION DECIDE. THIS RIGHT WAS POSSESSED BY THE APPELLANT B ECAUSE OF HER OWNERSHIP OF THE OLD 710 ORDINARY SHARES AND WHEN THE BOARD OF DIRECTORS OF THE COMPANY PASSED A RESOLUTION FOR ISSUE OF NEW SHARES THIS RIGHT OF THE APPELLANT MATURED TO THE EXTENT THAT SHE BECAME ENT ITLED TO RECEIVE 710 NEW SHARES. THIS RIGHT COULD BE EXERCISED BY HER BY ACT UALLY PURCHASING THOSE SHARES AT THE SHARES PLUS THIS RIGHT TO TAKE 710 NE W SHARES. AT THE TIME OF HER TRANSACTION HER OLD SHARES WERE VALUED AT RS. 253 PER SHARE SO THAT THE CAPITAL ASSET IN HER POSSESSION CAN BE TREATED TO B E THE CASH VALUE OF 710 MULTIPLIED BY RS. 253 OF THE OLD SHARES PLUS THIS R IGHT TO OBTAIN NEW SHARES. AFTER SHE HAD TRANSFERRED THIS RIGHT TO OBTAIN NEW SHARES THE CAPITAL ASSETS THAT CAME INTO HER HANDS WERE THE 710 OLD SHARES W HICH BECAME VALUED AT RS. 198.75P. PER SHARE TOGETHER WITH THE SUM OF RS . 45 262.50P. THE NET CAPITAL GAIN OR LOSS TO THE APPELLANT OBVIOUSLY WOU LD BE THE DIFFER ENCE BETWEEN THE VALUE OF THE CAPITAL ASSET AND THE CASH IN HER HANDS AFTER SHE HAD RENOUNCED HER RIGHT AND REALISED THE CASH VALUE IN RESPECT OF IT AND THE VALUE OF THE CAPITAL ASSET INCLUDING THE RIGHT WHIC H SHE POSSESSED JUST BEFORE THESE NEW SHARES WERE ISSUED AND BEFORE SHE REALISE D ANY CASH IN RES PECT OF THE RIGHT BY RENOUNCING IT IN FAVOUR OF SOME OTHER PERSON. AS WE HAVE INDICATED ABOVE THE VALUE OF THE CAPITAL ASSET AF TER RENOUNCEMENT WOULD BE 710 MULTIPLIED BY RS. 198.75P. PLUS THE SUM OF R S. 45 262.50P WHILE THE VALUE OF THE ASSET IMMEDIATELY BEFORE THE RENOUNCE MENT WOULD BE 710 MULTIPLIED BY RS. 253 THERE BEING NO CASH VALUE AT THAT TIME OF THE RIGHT TO BE TAKEN INTO ACCOUNT. THUS THE CAPITAL GAIN OR LO SS WOULD BE WORKED OUT AT RS. 45 262.50P. AFTER DEDUCTING FROM IT THE SUM WOR KED OUT AT 710 MULTIPLIED BY THE DIFFERENCE BETWEEN RS. 253 AND RS. 198.75P. THIS LAST AMOUNT COMES TO A LITTLE MORE THAN THE SUM OF RS. 37 630 WHICH T HE APPELLANT CLAIMED SHOULD BE DEDUCTED FROM RS. 45 262.50P. IN COMPUTIN G HER CAPITAL GAIN. THE CLAIM MADE BY THE APPELLANT WAS THUS CLEARLY JUSTIF IED BECAUSE THE NET CAPITAL GAIN BY HER IN THE TRANSACTION WHICH CONSISTED OF ISSUE OF NEW SHARES TOGETHER WITH HER RENOUNCEMENT OF THE RIGHT TO RECE IVE NEW SHARES AND MAKE SOME MONEY THEREBY COULD ONLY BE PROPERLY COMPUTED IN THE MANNER INDICATED BY US ABOVE. IN THE ALTERNATIVE THE USE CAN BE EXAMINED IN ANOT HER ASPECT. AT THE TIME OF THE ISSUE OF NEW SHARES THE APPELLANT POSSESSED 71 0 OLD SHARES AND SHE ALSO I.T.A.NO.3013/M/07 (S.B) 34 GOT THE RIGHT TO OBTAIN 710 NEW SHARES. WHEN SHE SO LD THIS RIGHT TO OBTAIN 710 NEW SHARES AND REALISED THE SUM OF RS. 45 262.5 0P. SHE CAPITALISED THAT RIGHT AND CONVERTED IT INTO MONEY. THE VALUE OF THE RIGHT MAY BE MEASURED BY SETTING OFF AGAINST THE APPRECIATION IN THE FACE VALUE OF THE NEW SHARES THE DEPRECIATION IN THE OLD SHARES AND CONSEQUENTLY T O THE EXTENT OF THE DEPRECIATION IN THE VALUE OF HER ORIGINAL SHARES S HE MUST BE DEEMED TO HAVE INVESTED MONEY IN ACQUISITION OF THIS NEW RIGHT. A CONCOMITANT OF THE ACQUISITION OF THE NEW RIGHT WAS THE DEPRECIATION I N THE VALUE OF THE OLD SHARES AND THE DEPRECIATION MAY IN A COMMERCIAL S ENSE BE DEEMED TO BE THE VALUE OF THE RIGHT WHICH SHE SUBSEQUENTLY TRANS FERRED. THE CAPITAL GAIN MADE BY HER WOULD THEREFORE BE REPRESENTED ONLY B Y THE DIFFERENCE BETWEEN THE MONEY REALISED ON TRANSFER OF THE RIGHT AND TH E AMOUNT WHICH SHE LOST IN THE FORM OF DEPRECIATION OF HER ORIGINAL SHARES IN ORDER TO ACQUIRE THAT RIGHT. LOOKED AT IN THIS MANNER ALSO IT IS CLEAR THAT THE NET CAPITAL GAIN BY HER WOULD BE REPRESENTED BY THE AMOUNT REALISED BY HER ON TRANSFERRING THE RIGHT TO RECEIVE NEW SHARES AFTER DEDUCTING THEREFROM TH E AMOUNT OF DEPRECIATION IN THE VALUE OF HER ORIGINAL SHARES BEING THE LOSS INCURRED BY HER IN HER CAPITAL ASSET IN THE TRANSACTION IN WHICH SHE ACQUI RED THE RIGHT FOR WHICH SHE REALISED THE CASH. THIS METHOD OF LOOKING AT THE TR ANSACTION ALSO LEADS TO THE SAME CONCLUSION WHICH WE HAVE INDICATED IN THE PREC EDING PARAGRAPH. IN THE ABOVE CASE HON'BLE COURT HAS MADE IT CLEAR THAT CAPITAL GAIN ON ACCOUNT OF SALE OF RIGHTS SHARES HAS TO BE UNDERSTO OD SIMILARLY AS UNDERSTOOD IN THE COMMERCIAL WORLD. IT HAS TO BE NOTED THAT WH ILE STATING THE FACTS THE HON'BLE SUPREME COURT NOTED AND STRESSED THAT ASSET S OF THE COMPANY REMAINED STATIONARY AND THAT IS WHY DEPRECIATION HA S ACCRUED IN THE VALUE OF OLD ORDINARY SHARES BECAUSE SAME ASSETS WOULD BE R EPRESENTED BY OLD ORDINARY SHARES PLUS THE NEW RIGHTS SHARES. THUS W HEN THERE WAS NO CHANGE IN THE VALUE OF ASSETS OF THE COMPANY ON THE DATE O F ISSUANCE OF RIGHTS SHARES THEN SUCH REDUCTION IN THE VALUE OF NEW SHA RES HAS TO BE RECKONED BECAUSE ASSETS REMAINED THE SAME. SIMILARLY IN THE CASE BEFORE US THE VALUE OF ASSET OF A COMPANY IMMEDIATELY BEFORE AND AFTER REDUCTION OF SHARE CAPITAL REMAINED THE SAME AND THEREFORE BY REDUCING THE AMO UNT AND NUMBER OF SHARES THE ASSESSEES PROPORTIONATE SHARE IN SUCH A SSETS REMAINED THE SAME. IN THE CASE BEFORE US ALSO THE VALUE OF ASSETS EVEN AFTER REDUCTION OF CAPITAL REMAINED THE SAME AND THEREFORE LOSS IF ANY AT BEST CAN BE CALLED NOTIONAL I.T.A.NO.3013/M/07 (S.B) 35 LOSS WHICH CANNOT BE ALLOWED AS OBSERVED BY THE HON 'BLE SUPREME COURT IN THE CASE OF SUNIL SIDDHARTHBHAI VS. CIT [SUPRA] AT PAGES 521 & 522 WHICH WE HAVE REPRODUCED EARLIER. .. IT WAS NOTICED THAT PERHAPS DURING THE EARLIER H EARING OF THIS CASE RELIANCE HAS BEEN PLACED BY THE DEPARTMENT ON THE DECISION O F THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF AJAY C. MEHTA VS. DC IT 305 ITR (AT) 155. IN THAT CASE ALSO ASSESSEE HAD CLAIMED SHORT TERM CAPI TAL LOSS. THE ASSESSEE HAD APPLIED FOR 2 00 000 WARRANTS AND PAID RS.2.70 PER WARRANT AS UPFRONT PAYMENT. LATER ON ASSESSEE EXERCISED THE OPTION ON LY IN RESPECT OF 40 000 WARRANTS AND THE RIGHT WITH RESPECT TO 1 50 000 WAR RANTS WAS EXTINGUISHED WHICH WAS CLAIMED AS SHORT TERM CAPITAL LOSS. THIS CLAIM OF LOSS WAS REJECTED BY THE TRIBUNAL BECAUSE NO CONSIDERATION WAS RECEIV ED BY FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F B. C. SRINIVASA SETTY [SUPRA]. IN ANY CASE IN ADDITION TO THE ABOVE DETA ILED DISCUSSION THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HON'BLE BOM BAY HIGH COURT IN THE CASE OF THE BOMBAY BURMAH TRADING CORPORATION LTD. VS. CIT [SUPRA] WHEREIN IT IS CLEARLY HELD THAT IF NO COMPENSATION IS RECEIVED THEN CAPITAL LOSS CANNOT BE ALLOWED. IT WAS ARGUED BY THE LD. COUNSEL OF THE ASSESSEE THAT DETAILED FACTS ARE NOT AVAILABLE BUT WE FIND THAT THE HON'BLE MADHYA PRADESH HIGH COURT IN THE CASE OF NATIONAL TEXTILE CORPORAT ION VS. CIT [171 TAXMAN 339] HAS CLEARLY HELD THAT A DECISION OF JURISDICTI ONAL HIGH COURT CANNOT BE IGNORED BY THE TRIBUNAL SIMPLY BECAUSE IT IS ASSUME D THAT CERTAIN ASPECTS OF THE ISSUE MIGHT NOT HAVE BEEN CONSIDERED BY THE JUR ISDICTIONAL HIGH COURT. IN THE CASE OF NATIONAL TEXTILES CORPORATION IT WAS O BSERVED AS UNDER: I.T.A.NO.3013/M/07 (S.B) 36 IT IS NEITHER PERMISSIBLE NOR LEGAL FOR ANY COURT A ND TRIBUNAL TO COMMENT UPON THE DECISION OF SUPREME COURT/HIGH COU RT . SIMILARLY IT IS ALSO NOT PERMISSIBLE FOR THE TRIBUNAL TO COMMENT UPON THE MANNER IN WHICH A PARTICULAR DECISION WAS RENDERED BY SUPREME COURT /HIGH COURT. IT IS ALSO NOT PERMISSIBLE FOR TRIBUNAL TO SIDETRACK OR/AND IG NORE THE DECISION OF HIGH COURT ON THE GROUND THAT IT DID NOT TAKE INTO CONSI DERATION A PARTICULAR PROVISION OF LAW. IF SUCH APPROACH IS RESORTED TO B Y SUBORDINATE COURTS/TRIBUNALS THEN IT IS HELD TO BE NOT IN CONFO RMITY WITH THE LAW LAID DOWN BY SUPREME COURT. IT WAS DEPRECATED BY SUPREME COUR T AS BEING IMPROPER. WHEN THE HIGH COURT HAS NO JURISDICTION TO COMMENT UPON ANY DECISION OF SUPREME COURT NOR HIGH COURT HAS A POWER TO IGNORE SUCH DECISION BY VIRTUE OF MANDATE CONTAINED IN ARTICLE 141 OF CONSTITUTION THEN ON THE SAME REASONING THE TRIBUNAL BEING SUBORDINATE TO HIGH C OURT HAS TO FOLLOW THE DECISION OF JURISDICTIONAL HIGH COURT WITHOUT MAKIN G ANY COMMENT UPON THE SAID DECISION OR/AND WITHOUT IGNORING IT ON ANY GRO UND EXCEPT THOSE WHICH ARE WELL RECOGNIZED AS INDICATED HEREINBELOW. IN OTHER WORDS WHEN LAW LAID DOWN BY SUPREME COURT IS BINDING ON ALL COURTS/TRIB UNALS IN THE COUNTRY BY VIRTUE OF ARTICLE 141 OF CONSTITUTION OF INDIA THEN LAW LAID DOWN BY HIGH COURT IS EQUALLY BINDING ON COURTS/TRIBUNALS THEY BEING S UBORDINATE TO HIGH COURT BY VIRTUE OF POWERS CONFERRED BY ARTICLES 215 226 AND 227 OF CONSTITUTION OF INDIA AND BY JUDICIAL PRECEDENTS. THEREFORE IN OUR VIEW THE DECISION OF HON'BLE BOM BAY HIGH COURT IS BINDING AND HAS TO BE APPLIED. 27. FURTHER RECENTLY THE AUTHORITY FOR ADVANCING R ULINGS (INCOME-TAX) NEW DELHI PRESIDED OVER BY HON'BLE JUSTICE P.K.BA LASUBRAMANYAN CHAIRMAN IN THE CASE OF GOODYEAR TIRE & RUBBER COMPANY IN R E* (2011) 199 TAXMAN 121 ALSO TOOK THE SAME VIEW IN ALMOST IDENTICAL CI RCUMSTANCES. IN THIS CASE THE APPLICANT GOODYEAR TIRE & RUBBER CO. USA WHICH IS INCORPORATED IN USA WAS HOLDING SHARES IN GOODYEAR INDIA LIMITED. AS PA RT OF THE GLOBAL STRATEGY IT WAS CONTEMPLATING RE-ORGANISING ALL ITS INVESTME NTS AND THEREFORE PROPOSED TO ENTER INTO SHARE CONTRIBUTION DEED TO C ONTRIBUTE VOLUNTARILY ENTIRE 74% OF ITS HOLDINGS IN GOODYEAR INDIA LTD. TO GOODYEAR ORIENT. (P) LTD. SINGAPORE WITHOUT CONSIDERATION AND VOLUNTARI LY. THE FOLLOWING QUESTION WAS REFERRED FOR CONSIDERATION OF THE HON'BLE AUTHO RITY- WHETHER THE APPLICANT IS LIABLE TO TAX IN INDIA UN DER THE PROVISIONS OF SECTION 45 READ WITH SECTION 48 OR UNDER A.Y OTHER PROVISIO NS OF THE INCOME-TAX ACT 1961 (ACT) IN RELATION TO THE PROPOSED CONTRIBUTI ON OF ITS SHARES IN GOODYEAR I.T.A.NO.3013/M/07 (S.B) 37 INDIA LIMITED (GIL) TO GOODYEAR ORIENT COMPANY (P RIVATE) LIMITED (GOCPL) WITHOUT CONSIDERATION? THE AUTHORITY AFTER DETAILED DISCUSSION OBSERVED AT PARA-8 AS UNDER: 8. IT IS SETTLED LAW THAT SECTION 45 MUST BE READ WITH SECTION 48 AND IF THE COMPUTATION PROVISION CANNOT BE GIVEN EFFECT TO FOR ANY REASON THE CHARGE UNDER SECTION 45 FAILS. THE HON'BLE SUPREME COURT HAS EXPLAINED THE INTERPLAY AND RELATIVE SCOPE OF THE TWO SECTIONS IN THE CASES OF B. C. SRINIVASA SETTY [1981] 128 ITR 294 AND SUNIL SIDDHARTHBHAI VS . CIT [1985] 156 ITR 509 (S.C). AND FURTHER OBSERVED AT PARA-10 AS UNDER: 10. AS NO CONSIDERATION WILL PASS ON TRANSFER OF S HARES OF GIL BY GTRC NO INCOME WILL ARISE. THE PROVISION OF SECTIONS 92 TO 92F OF THE ACT WILL NOT BE APPLICABLE IN THE ABSENCE OF LIABILITY TO PAY TAX. 28. WE ALSO FIND FORCE IN THE SUBMISSIONS OF THE LD . DR THAT AS PER SEC.55(V) THE COST THE COST OF ACQUISITION OF SHARE S EVEN AFTER CONVERSION ETC. HAS TO BE TAKEN WITH REFERENCE TO THE COST OF ORIGI NAL SHARES. THEREFORE AFTER REDUCTION OF SHARE CAPITAL THE COST OF ACQUISITION OF THE REMAINING SHARES WOULD BE RECKONED WITH REFERENCES TO THE ORIGINAL C OST. THOUGH AT THIS STAGE ASSESSEE HAS NOT OBTAINED ANY BENEFIT BECAUSE LOSS HAS BEEN COMPUTED WITH REFERENCE TO THE ACTUAL COST BUT IN FUTURE IF ASS ESSEE DECIDES TO SELL ITS SHAREHOLDING IN TGL THEN ASSESSEE HAS THE RIGHT U/S 55[V] TO SUBSTITUTE THE COST OF ACQUISITION WITH REFERENCE TO THE ORIGINAL SHAREHOLDING AND IN THAT CASE IT MAY AMOUNT TO DOUBLE BENEFIT LATER ON WHICH IS N OT PERMISSIBLE UNDER THE LAW. 29. THEREFORE IN THE LIGHT OF THE ABOVE DISCUSSION WE ARE OF THE OPINION THAT THE LOSS ARISING ON ACCOUNT OF REDUCTION IN SH ARE CAPITAL CANNOT BE SUBJECTED TO PROVISIONS OF SEC.45 R.W.S. 48 AND AC CORDINGLY SUCH LOSS IS NOT ALLOWABLE AS CAPITAL LOSS. AT BEST SUCH LOSS CAN BE DESCRIBED AS NOTIONAL LOSS I.T.A.NO.3013/M/07 (S.B) 38 AND IT IS SETTLED PRINCIPLE THAT NO NOTIONAL LOSS O R INCOME CAN BE SUBJECTED TO THE PROVISIONS OF THE I.T.ACT.WE HOLD ACCORDINGLY. 30. THE OTHER GROUNDS OF APPEAL RAISED ARE AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOW ANCE OF RS.48 60 835/- TOWARDS OBSOLETE/NON MOVING MATERIAL WRITTEN OFF. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED CIT(A) ERRED IN NOT ALLOWING DEDUCTION U/S. 80IB OF RS.1 68 11 086/- IN RESPECT OF CHENNAI INDUSTRIES U NDERTAKING. 31. THE LD. COUNSEL SHRI VENKATRAMAN SUBMITTED THA T THE ISSUES RAISED IN BOTH THESE APPEALS ARE COVERED BY THE EARLIER ORDER OF THE TRIBUNAL IN I.T.A.NOS.5741 & 5665/M/2007 COPY OF WHICH HAS BEE N FILED ON RECORD. 32. ON THE OTHER HAND LD. DR RELIED ON THE ORDER O F THE AO. 33. THE ISSUE RAISED IN GROUND NO.1 CAME UP FOR CON SIDERATION OF THE TRIBUNAL IN A.Y 2003-04 IN I.T.A.NOS.5741 & 5665/M/ 2007 AND THE SAME HAD BEEN ADJUDICATED VIDE PARAS 4 AND 5. IN PARA 4 THE CONTENTIONS OF BOTH THE PARTIES HAVE BEEN CONSIDERED AND ULTIMATELY THE ISS UE HAD BEEN ADJUDICATED VIDE PARA-5 WHICH IS AS UNDER: 5. WE HAVE ALSO HEARD THE LEARNED D.R. ON THIS ISS UE. AS SUBMITTED BY THE LEARNED COUNSEL THE IDENTICAL ISSUE HAS BEEN C ONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y 2000-01 AND THE OPERATIVE PART OF THE FINDINGS IS IN PARA NO.4 WHICH READS AS UNDER: 4. THE GROUND OF APPEAL NO.6 OF THE ASSESSEE IS A S UNDER: 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.3 1 33 240/- BEING OBSOLETE/NON-MOVING MATERIAL WRITTEN OFF. THIS GROUND OF APPEAL CONSISTS OF TWO PARTS I.E. WI TH REGARD TO THE ADDITION OF RS.17 11 240/- ON ACCOUNT OF TIMES MUSI C POP ALBUMS AND THE OTHER ADDITION OF RS.14 22 000/- ON PLANET M . LEARNED COUNSEL FOR THE ASSESSEE HAS NOT PRESSED THE GROUND OF APPE AL WITH REGARD TO THE ADDITION OF RS.14 22 000/- OF PLANET M AND TH E GROUND OF APPEAL OF THE ASSESSEE WITH REGARD TO THIS ADDITION OF RS. 14 22 000/- IS DISMISSED. WITH REGARD TO THE OTHER ADDITION OF RS. 17 11 240/- OF TIMES MUSIC THE LD. COUNSEL FOR THE ASSESSEE SUBMI TTED THAT THE ASSESSEE HAS THE METHOD OF ACCOUNTING BY WHICH ONE YEAR IT VALUES THE OBSOLETE MUSIC CASSETTES OF OVER THREE YEARS AN D OVER ONE YEAR AT I.T.A.NO.3013/M/07 (S.B) 39 RS.1/- PER CASETTE WHICH HAS RESULTED IN THE LOSS OF RS.17 11 240/- DURING THE RELEVANT PERIOD AND IS ALLOWABLE NATURE. THE LD. D.R. HAS RELIED ON THE ORDERS OF THE ASSESSING OFFICER AND C IT(A). WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THE CASSETTES BECOMES OBSOLETE AFTER EXPIRY OF CONSIDERABLE TIME AND THER E IS NOTHING WRONG IN THE METHOD OF ACCOUNTING OF THE ASSESSEE IN VALU ING THE OBSOLETE CASSETTES AT RS.1/- PER CASSETTE RESULTING IN LOSS TO THE ASSESSEE DURING THE RELEVANT PERIOD. THE LOSS BEING GENUINE AND VERY MUCH INCIDENTAL TO THE BUSINESS IS OF ALLOWABLE NATURE A ND IS ACCORDINGLY ALLOWED AND THE GROUND OF APPEAL NO.6 WITH REGARD T O THE AMOUNT OF RS.17 11 240/- OF TIME MUSIC IS ALLOWED. THE ORDER OF THE TRIBUNAL FOR THE A.Y 2000-01 IS AL SO FOLLOWED IN THE SUBSEQUENT A.Y 2002-02. AS THE FACTS ARE IDENTICLA IN THIS YEAR THEREFORE FOLLOWING THE ORDER OF THE TRIBUNAL IN AS SESSEES OWN CASE CITED [SUPRA] WE DELETE THE ADDITION CONFIRMED BY THE LD. CIT(A). ACCORDINGLY GROUND NO.1 IS ALLOWED. FOLLOWING THE ABOVE ORDER THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 34. THE ISSUE RAISED IN GROUND NO.2 HAS BEEN ADJUDI CATED VIDE PARAS 15 16 & 17 AND PARA 17 READS AS UNDER: 17. WE HAVE HEARD THE LEARNED D.R. ON THIS ISSUE . IT IS SEEN THAT THE ISSUE FOR ALLOWABILITY OF THE DEDUCTION U/S.80I B IN RESPECT OF CHENNAI UNIT HAS BEEN DEALT WITH BY THE TRIBUNAL WHILE DECIDING THE ORDER PASSED BY THE CIT U/S.263 FOR THE A.Y 1986-87 BEING I.T.NO.3125/M /2001 ORDER DATED 30- 11-2004 AND IT IS HELD THAT CHENNAI UNIT IS AN IND USTRIAL UNDERTAKING WITHIN THE MEANING OF SECTION 80IA. THE OPERATIVE PART OF THE ORDER READS AS UNDER: REGARDING CHENNAI UNIT WE FIND THAT THE BOARD CIRC ULAR NO.347 AS REPORTED IN 37 (STAT.) 14 HAS APPROVED THE VIEW OF THE HONBLE MADRAS & CALCUTTA HIGH COURTS IN 107 ITR 822 117 ITR 718 RESPECTIVELY. AS PER THESE JUDGMENTS AND AS PER THIS CIRCULAR BOOK PUBLISHING COMPANY EVEN IF NOT PRINTING OR BINDING OF BOOKS TH EMSELVES ARE TO BE TREATED AS INDUSTRIAL COMPANY. IN THE PRESENT CASE ALSO THE OBJECTION OF THE CIT IS BASED ON THIS FACT THAT THE ASSESSEE IS NOT PRINTING THE PAPER AND HENCE IS NOT AN INDUSTRIAL UNIT. WE ARE O F THE CONSIDERED OPINION THAT THE ASSESSEE HAS TO BE TREATED AS AN I NDUSTRIAL UNIT FOR CHENNAI ALSO IN VIEW OF THIS CIRCULAR OTHERWISE AL SO AS PER SECTION 80IA[12] INDUSTRIAL UNDERTAKING SHALL HAVE THE SAM E MEANING ASSIGN. SUCH EXPLANATION TO SECTION 33B IS REPRODUCED BELOW : EXPLANATION: IN THIS SECTION INDUSTRIAL UNDERTAKI NG MEANS ANY UNDERTAKING WHICH IS MAINLY ENGAGED IN THE BUSINESS OF GENERATION OR DISTRIBUTION OF ELECTRICITY OR ANY OTHER FORM OF PO WER OR IN THE CONSTRUCTION OF SHIPS OR IN THE MANUFACTURE OR PROC ESSING OF GOODS OR IN MINING. FROM THE ABOVE WE FIND THAT ANY UNDERTAKING WHICH IS MAINLY ENGAGED IN PROCESSING OF GOODS IS ALSO AN INDUSTRIAL UNDERTAKI NG AND IN THE PRESENT CASE THE CHENNAI UNIT IS MAINLY ENGAGED IN GATHERING THE NEWS AND PROCUREMENT OF ADVERTISEMENTS AND THEN PROCESSING THE SAME TO R ESULT IN A NEWS PAPER. I.T.A.NO.3013/M/07 (S.B) 40 THESE ACTIVITIES FULFIL THE CONDITION OF PROCESSING OF GOODS AND HENCE HAS TO BE TREATED AS AN INDUSTRIAL UNDERTAKING THE SAID ORDER HAS BEEN FOLLOWED BY THE TRIBUNAL IN THE OTHER ASSESSMENT YEARS. AS THE FACTS ARE IDENTICAL WE CONFIRM THE O RDER OF THE LD.CIT[A] IN THIS YEAR ALSO AND DISMISS GROUND NO.4 TAKEN BY THE REVE NUE . FOLLOWING THE ABOVE ORDER WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND DIRECT THE AO TO ALLOW DEDUCTION U/S.80IB IN RESPEC T OF PROFITS OF CHENNAI INDUSTRIAL UNDERTAKING. 35. IN THE RESULT APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 30/09/2011. SD/- SD/- (D.MANMOHAN) ( R.S.SYAL ) ( T .R.SOOD) VICE PRESIDENT ACCOUNTANT MEMBER ACCOUNTANT ME MBER MUMBAI: 30/9/2011. P/-* PER R.S.SYAL AM : 36. I HAVE GONE THROUGH THE ORDER PROPOSED BY L D. COLLEAGUES ON THE SPECIAL BENCH. I FULLY AGREE WITH AND ENDORSE THE V IEW TAKEN ON GROUND NOS. 1 AND 2 IN SUCH ORDER. 37. DESPITE MY BEST PERSUASION I COULD NO T CONVINCE MYSELF TO CONCUR WITH THE CONCLUSION AND ALSO THE REASONING I N THE PROPOSED ORDER QUA THE OTHER GROUNDS INVOLVING ONE ISSUE FOR WHICH T HIS SPECIAL BENCH HAS BEEN CONSTITUTED. AS SUCH I AM CONSTRAINED TO W RITE MY SEPARATE ORDER AS FOLLOWS. I.T.A.NO.3013/M/07 (S.B) 41 38. THE HONBLE PRESIDENT OF THE INCOME TAX APP ELLATE TRIBUNAL HAS CONSTITUTED THIS SPECIAL BENCH TO HEAR THE APPEAL A ND TO GIVE OPINION ON THE FOLLOWING QUESTION:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE THE CIT(A) WAS JUSTIFIED IN DECLINING (SIC - DECLAR ING) LONG TERM CAPITAL LOSS OF RS.22 21 85 693 ON ACCOUNT OF REDUCTION IN PAID UP EQUITY SHARE CAPITAL? 39. THE FACTS APROPOS THIS ISSUE AS PER THE AS SESSMENT ORDER ARE THAT THE ASSESSEE DECLARED CAPITAL LOSS OF RS.18 59 18 6 68 VIDE NOTE NO.10 OF ANNEXURE-F TO THE COMPUTATION OF TOTAL INCOME REA DING AS UNDER:- THE AMOUNT OF NET CAPITAL LOSS MADE DURING THE YEA R IS RS.18 59 18 668. THE WORKING OF SHORT TERM AND LONG TERM CAPITAL GAINS / LOSS IS ATTACHED IN ANNEXURE F. PURSUANT TO THE REDUCTION OF 50% OF SHARE CAPITAL OF TIMES GUARANTY LIMITED (TGL) AS APPROVED BY THE COURT TH E COMPANYS INVESTMENT THEREIN OF RS.2484.02 LACS HAS BEEN REDUCED BY 50% TO 1242.01 LACS. THE AMOUNT OF 1242. 01 LACS HAS BEEN SHOWN AS INVESTMENTS WRITTEN OFF IN THE ACCOUNTS. THE SAME HAS BEEN TREATED AS LONG TERM C APITAL LOSS. COPY OF THE COURT ORDER IS ENCLOSED ALONG WIT H ANNEXURE F. 40. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSE E HAD AN INVESTMENT OF RS.2484.02 LAKH IN EQUITY SHARES OF A GROUP COMPANY VIZ. TIMES GUARANTY LIMITED (HEREINAFTER CALLED TGL). ALL THE SHARES WERE OF THE FACE VALUE OF RS.10 EACH. UNDER SECTION 100 OF THE COMPANIES ACT 1956 (HEREINAFTER CALLED THE COMPANIES ACT) TGL APPLIED FOR REDUCTION OF ITS EQUITY SHARE CAPITAL AND APPROACHE D THE HONBLE BOMBAY HIGH COURT FOR THE APPROVAL OF THE SAME. THE COURT APPROVED THE PETITION OF TGL AND ALLOWED REDUCTION IN ITS SHARE CAPITAL B Y 50% THEREBY REDUCING FACE VALUE OF EACH EQUITY SHARE OF RS.10 E ACH TO RS.5 EACH. I.T.A.NO.3013/M/07 (S.B) 42 CONSEQUENTLY THE ASSESSEE COMPANYS INVESTMENT IN T GL WHICH ORIGINALLY STOOD AT RS.2484.02 LAKH WAS REDUCED TO RS.1242 LAKH POST CAPITAL REDUCTION OF TGL. BY APPLYING THE COST INFL ATION INDEX THE ASSESSEE WORKED OUT THE LOSS DUE TO REDUCTION OF SH ARE CAPITAL OF TGL AT RS.22.21 CRORE. ON BEING CALLED UPON TO JUSTIFY THE LOSS UNDER THE HEAD `CAPITAL GAINS THE ASSESSEE RELIED ON THE JUDGME NT OF THE HONBLE SUPREME COURT IN THE CASE OF KARTIKEYA V.SARABHAI VS. CIT [(1997) 228 ITR 163 (SC)] TO CONTEND THAT THE REDUCTION IN THE SHARE CAPITAL WOULD AMOUNT TO `TRANSFER WITHIN THE MEANING OF SECTION 2(47) OF THE INCOME- TAX ACT 1961 (HEREINAFTER CALLED `THE ACT). TO ST RENGTHEN ITS POINT THE ASSESSEE ALSO RELIED ON THE JUDGMENTS OF THE HONBL E SUPREME COURT IN CIT VS. G.NARASIMHAN (DIED) [(1999) 236 ITR 327 (SC )] AND ANARKALI SARABHAI VS. CIT [(1997) 224 ITR 422 (SC)] . 41. THE ASSESSING OFFICER DID NOT AGREE WIT H THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE AND GAVE THE FOL LOWING REASONS FOR NOT APPLYING THE RATIO IN THE CASE OF KARTIKEYA V.SARABHAI (SUPRA) :- I) THERE HAS BEEN REDUCTION OF CAPITAL BY REDUCING THE FACE VALUE OF EQUITY SHARES FROM RS.10/- EACH TO RS .5/- EACH BUT IN THE CASE OF KARTIKEYA SARABHAI (SUPRA) THE ISSUE OF PREFERENCE SHARES WAS INVOLVED. II) THIS DISTINCTION IS MATERIAL BETWEEN PREFERENC E SHARES AND EQUITY SHARES AS IN THE CASE OF PREFERENCE SHAR ES THE RIGHT TO VOTE TO THE SHARE HOLDER IS LIMITED ONLY T O THE EXTENT OF RESOLUTION PLACED BEFORE THE COMPANY WHICH DIREC TLY AFFECT THE RIGHTS ATTACHED TO HIS PREFERENCE SHARES . I.T.A.NO.3013/M/07 (S.B) 43 III) IN ASSESSEES CASE EVEN THOUGH REDUCTION IN THE ENTIRE SHARE CAPITAL HAS TAKEN PLACE THE RIGHT OF VOTING OF THE ASSESSEE IS NOT AFFECTED IN ANY WAY WHICH REMAINS T HE SAME. IV) IN THE PRESENT CASE THE ASSESSEE HAS NOT RECE IVED ANY CONSIDERATION FOR REDUCTION IN THE VALUE OF SHARES. THE ASSESSEE HAS NOT GIVEN AWAY OR PASSED ON ITS RIGHT IN THE SHARES TO ANYONE AS THERE HAS BEEN NO CHANGE IN THE RIGHTS OF THE ASSESSEE VIS--VIS OTHER SHAREHOLDERS. 42. IT WAS THEREFORE HELD THAT THERE WAS NO TRAN SFER OF THE CAPITAL ASSET WITHIN THE MEANING OF SECTION 45 SO AS TO RES ULT INTO ANY LOSS UNDER THE HEAD `CAPITAL GAINS. THE AO FURTHER OPINED TH AT IF AT ALL ANY CAPITAL LOSS IS THERE THAT SHALL ARISE TO THE ASSESSEE ON T HIS ACCOUNT ONLY WHEN IT SELLS THE REMAINING SHARES. 43. THE ASSESSEE REMAINED UNSUCCESSFUL AT THE FI RST APPELLATE STAGE ALSO AS IT COULD NOT CONVINCE THE LD. CIT(A) TO ITS LIN E OF REASONING. RESULTANTLY NO RELIEF WAS ALLOWED IN THE FIRST APPE AL ON THIS COUNT. 44. THE QUESTION FOR CONSIDERATION IS TO DECIDE AS TO WHETHER THE ASSESSEE INCURRED ANY LOSS WITHIN THE MEANING OF SE CTION 45 ON ACCOUNT OF REDUCTION IN THE PAID UP EQUITY SHARE CAPITAL IN TG L. IT IS OBSERVED FROM THE ASSESSMENT ORDER THAT THE A.O. CANVASSED THE OP INION THAT THERE WAS NO TRANSFER OF THE CAPITAL ASSET ON THE GROUND TH AT THERE WAS ONLY REDUCTION IN THE FACE VALUE OF THE EQUITY SHARES FR OM RS.10 EACH TO RS.5 EACH AND THE ASSESSEES RIGHTS IN THE COMPANY WERE NOT AFFECTED IN ANY MANNER WITH THE REDUCTION IN THE SHARE CAPITAL. 45. BEFORE I PROCEED FURTHER IT IS IMPERATIVE TO NO TE THAT THERE IS NO REDUCTION IN THE `FACE VALUE OF EQUITY SHARES FROM RS.10 EACH TO RS.5 I.T.A.NO.3013/M/07 (S.B) 44 EACH AS HAS BEEN MADE OUT BY THE ASSESSING OFFICER. AT THIS JUNCTURE IT WOULD BE RELEVANT TO CONSIDER THE RESOLUTION PASSED BY TGL IN ITS ANNUAL GENERAL MEETING HELD ON 1 ST OF JUNE 2000. NOTICE DATED 27 TH APRIL 2000 WAS ISSUED BY TGL FOR THE ANNUAL GENERAL MEETING R EQUIRING THE PASSING OF FOLLOWING RESOLUTION WITH OR WITHOUT MOD IFICATION :- RESOLVED THAT: 1) SUBJECT TO APPROVAL OF THE HONBLE HIGH COURT O F BOMBAY UNDER SECTION 100 OF THE COMPANIES ACT 1956 AND ANY OTHER APPLICABLE PROVISIONS OF THE ACT IF ANY AND PURSUANT TO ARTICLE 47 OF THE ARTICLES OF THE ASSOC IATION OF THE COMPANY THE SUBSCRIBED EQUITY SHARE CAPITAL OF THE COMPANY BE REDUCED FROM RS.17 98 62 990/- (RUPEES SEVENTEEN CRORES NINETY EIGHT LAKHS SIXTY TWO THOUS AND NINE HUNDRED AND NINETY ONLY) DIVIDED INTO 1 79 86 299 (ONE CRORE SEVENTY NINE LAKHS EIGHTY SIX THOUSAND T WO HUNDRED AND NINETY NINE) EQUITY SHARES OF RS.10/- ( RUPEES TEN ONLY) EACH TO RS.8 99 31 495/- (RUPEES EIGHT CR ORES NINETY NINE LAKHS THIRTY ONE THOUSAND FOUR HUNDRED AND NINETY FIVE ONLY) DIVIDED INTO 1 79 86 299 (ONE CRO RE SEVENTY NINE LAKHS EIGHT SIX THOUSAND TWO HUNDRED A ND NINETY NINE ONLY) EQUITY SHARES OF RS.10/- (RUPEES TEN ONLY) EACH RS.5/- (RUPEES FIVE ONLY) EACH PAID UP BY CANCELLING THE CAPITAL TO THE EXTENT OF RS.5/- (RUP EES FIVE ONLY) PER EQUITY SHARE. 2) FORTHWITH UPON REDUCTION OF CAPITAL TAKING EFF ECT 2 (TWO) EQUITY SHARES OF RS.10/- (RUPEES TEN ONLY) EA CH RS.5/- (RUPEES FIVE ONLY) EACH PAID-UP BE CONSOLIDA TED INTO 1 (ONE) EQUITY SHARE OF RS.10/- (RUPEES TEN ONLY) E ACH FULLY PAID-UP SO THAT THE TOTAL NUMBER OF EQUITY SHARES D OES NOT EXCEED 89 93 149 (EIGHTY NINE LAKHS NINETY THREE THOUSAND ONE HUNDRED FORTY NINE ONLY) EQUITY SHARES OF RS.10/- (RUPEES TEN ONLY) EACH FULLY PAID UP. CORRESPONDINGLY THE PAID UP CAPITAL SHALL ALSO STAN D REDUCED AND CONSOLIDATED. 3) NO FRACTIONAL CERTIFICATE SHALL BE ISSUED PURSU ANT TO SUCH REDUCTION AND CONSOLIDATION OF SHARE CAPITAL O F THE COMPANY IN FAVOUR OF ANY MEMBER ALL SUCH FRACTIONS SHALL I.T.A.NO.3013/M/07 (S.B) 45 BE CONSOLIDATED INTO EQUITY SHARES OF RS.10/- (RUPE ES TEN ONLY) EACH FULLY PAID UP. 4) THE EXISTING CERTIFICATE OF SHARES BE CALLED BA CK AND CANCELLED AND IN PLACE THEREOF NEW CERTIFICATES OF SHARES BE ISSUED IN TERMS OF COMPANIES (ISSUE OF SHARE CERTIF ICATES) RULES 1960. 5) THE CARRIED FORWARD LOSS OF RS.42 96 53 000/- ( RUPEES FORTY TWO CRORES NINETY SIX LAKHS FIFTY THREE THOUS AND ONLY) BE WRITTEN OFF BY REDUCING THE PAID UP SHARE CAPITAL TO THE EXTENT OF RS.8 99 31 495/- (RUPEES EIGHT CRORES NINETY NINE LAKHS THIRTY ONE THOUSAND FOUR HUNDRED AND NIN ETY FIVE ONLY) AS MENTIONED HEREINABOVE AND THE BALANCE SUM OF RS.33 97 21 505/- (RUPEES THIRTY THREE CRORES NI NETY SEVEN LAKHS TWENTY ONE THOUSAND FIVE HUNDRED AND FI VE ONLY) BE WRITTEN OFF BY UTILIZING THE SHARE PREMIUM ACCOUNT OF THE COMPANY. 46. SUCH PROPOSED REDUCTION BY TGL RECEIVED THE AS SENT OF ITS SHAREHOLDERS BY WAY OF SPECIAL RESOLUTION IN THE AN NUAL GENERAL MEETING AND THE HONBLE BOMBAY HIGH COURT APPROVED THIS REDUCTION WHICH IS IN CONFORMITY WITH SECTION 100 OF THE COMP ANIES ACT. A COPY OF HIGH COURT ORDER IS PLACED ON PAGES 62 TO 71 OF THE PAPER BOOK FROM WHERE IT IS APPARENT THAT RESOLUTION EXTRACTED ABOV E HAS BEEN APPROVED BY THE HONBLE HIGH COURT. COMING BACK TO THE RESOLUTI ON IT IS SEEN THAT THE SUBSCRIBED EQUITY SHARE CAPITAL OF THE COMPANY HAS BEEN REDUCED FROM RS.17.98 CRORE DIVIDED INTO 1 79 86 299 EQUITY SHARES OF RS.10 EACH TO RS.8.99 CRORE DIVIDED INTO 1 79 86 299 EQUITY SH ARES OF RS.10 EACH RS.5 EACH PAID UP. IT IS FURTHER BORNE OUT FROM RES OLUTION-1 THAT THE SUBSCRIBED EQUITY SHARE CAPITAL TO THE EXTENT OF RS .5 PER EQUITY SHARE HAS BEEN CANCELLED. THUS THERE IS REDUCTION IN THE `SUB SCRIBED/PAID UP CAPITAL AND NOT THE `FACE VALUE OF EQUITY SHARES. ON EXAMI NATION OF RESOLUTION NO. 2 IT CAN BE SEEN THAT FORTHWITH UPON REDUCTION OF CAPITAL TAKING EFFECT 2 EQUITY SHARES OF RS.10 EACH (RS.5 EACH PAID UP) H AVE BEEN CONSOLIDATED INTO 1 EQUITY SHARE OF RS.10 EACH FULLY PAID UP SO THAT TOTAL NUMBER OF I.T.A.NO.3013/M/07 (S.B) 46 SHARES HAS COME DOWN TO 89 93 149 EQUITY SHARES OF RS.10 EACH FULLY PAID. 47. FROM THE ABOVE TWO RESOLUTIONS IT IS MANIF EST THAT THERE WERE TWO STEPS IN THE OVERALL EXERCISE VIZ. FIRST STEP BE ING THE REDUCTION OF SUBSCRIBED / PAID UP VALUE OF SHARE BY RS.5 KEEPIN G THE FACE VALUE OF EACH EQUITY SHARES AT RS.10 EACH AND SECOND STEP B EING THE CONSOLIDATION OF 2 EQUITY SHARES OF RS.10 EACH (RS.5 PAID UP ON E ACH SHARE) INTO 1 EQUITY SHARE OF RS.10 EACH FULLY PAID UP. WHEREAS T HE FIRST STEP DEALT WITH THE REDUCTION IN CAPITAL (RESOLUTION NO. 1) THE SE COND STEP WITH THE CONSOLIDATION (RESOLUTION NO. 2). REDUCTION HAS TA KEN PLACE ONLY IN THE SUBSCRIBED / PAID UP VALUE OF EQUITY SHARE AND NOT ITS FACE VALUE. AFTER KEEPING THE FACTS STRAIGHT I SHALL NOW DEAL WITH V ARIOUS ASPECTS OF THE ISSUE. I. WHETHER REDUCTION OF CAPITAL IS `TRANSFER U/ S 2(47) ? 48.1. SECTION 100 OF THE COMPANIES ACT DEALING WITH THE REDUCTION OF SHARE CAPITAL IS AS UNDER:- 100. SPECIAL RESOLUTION FOR REDUCTION OF SHARE CAP ITAL (1) SUBJECT TO CONFIRMATION BY THE TRIBUNAL A COMP ANY LIMITED BY SHARES OR A COMPANY LIMITED BY GUARANTEE AND HAVING A SHARE CAPITAL MAY IF SO AUTHORISED BY IT S ARTICLES BY SPECIAL RESOLUTION REDUCE ITS SHARE CAPITAL IN ANY WAY; AND IN PARTICULAR AND WITHOUT PREJUDICE TO THE GENE RALITY OF THE FOREGOING POWER MAY- (A) EXTINGUISH OR REDUCE THE LIABILITY ON ANY OF IT S SHARES IN RESPECT OF SHARE CAPITAL NOT PAID-UP; (B) EITHER WITH OR WITHOUT EXTINGUISHING OR REDUCIN G LIABILITY ON ANY OF ITS SHARES CANCEL ANY PAID-UP SHARE CAPI TAL WHICH IS LOST OR IS UNREPRESENTED BY AVAILABLE ASSETS; O R (C) EITHER WITH OR WITHOUT EXTINGUISHING OR REDUCIN G LIABILITY I.T.A.NO.3013/M/07 (S.B) 47 ON ANY OF ITS SHARES PAY OFF ANY PAID-UP SHARE CAP ITAL WHICH IS IN EXCESS OF THE WANTS OF THE COMPANY; AND MAY IF AND SO FAR AS IS NECESSARY ALTER ITS M EMORANDUM BY REDUCING THE AMOUNT OF ITS SHARE CAPITAL AND OF ITS SHARES ACCORDINGLY. . 48.2. A CURSORY LOOK AT THIS PROVISION DIVULG ES THAT A COMPANY LIMITED BY SHARES SUBJECT TO OTHER CONDITION MAY REDUCE ITS SHARE CAPITAL IN ANY WAY. THE POWER OF REDUCTION OF THE SHARE CAP ITAL IS GENERAL AND APPLIES TO EVERY POSSIBLE MODE BY WHICH CAPITAL RED UCTION CAN BE EFFECTED. IT IS NOT RESTRICTED TO THREE MODES SPEC IFIED IN THE SECTION. THE FIRST MODE AS ENSHRINED IN CLAUSE (A) OF SECTION 100(1) OF THE COMPANIES ACT REFERS TO REDUCING THE LIABILITY ON ANY OF ITS SHARES IN RESPECT OF SHARE CAPITAL NOT PAID UP . THIS TOUCHES UPON REDUCING THE SHARE CAPITAL WHIC H HAS NOT BEEN PAID UP SO FAR. THE SECOND MODE SPECIFIED IN THE SECTION IS CANCELLING ANY SHARE CAPITAL WHICH IS LOST OR IS UNREPRESENTED BY AVAILABLE ASSETS AND THE THIRD MODE IS TO PAY OFF ANY PAID UP SHARE CAPITAL WHICH IS IN EXCESS OF THE WANTS OF THE COMPANY. 48.3. A NEED TO REDUCE CAPITAL MAY ARISE DUE TO V ARIETY OF POSITIVE OR NEGATIVE REASONS. THE NEGATIVE REASONS MAY INCLUDE INCURRING OF HEAVY REVENUE OR CAPITAL LOSSES NECESSITATING THE RATION ALIZATION OF CAPITAL STRUCTURE SO AS TO EXCLUDE THE EFFECT OF SUCH LOSSE S BY ERADICATING THE AMOUNT OF LOSSES FROM THE ASSET SIDE OF THE BALANCE SHEET WITH THE SIMULTANEOUS OBLITERATION OF THE CAPITAL OR SHARE P REMIUM ACCOUNT ETC. FROM THE LIABILITY SIDE. THE POSITIVE REASONS MAY INCLUDE A COMPANY FINDING ITSELF IN EXCESS OF RESOURCES THAN IT CAN P ROFITABLY EMPLOY. IN SUCH A SITUATION THE COMPANY MAY CONTEMPLATE DISCHARGING OF ITS LIABILITY FULLY OR PARTLY TOWARDS THE SHAREHOLDERS BY PAYI NG BACK THE PAID UP AMOUNT ON SHARES. I.T.A.NO.3013/M/07 (S.B) 48 48.4. THUS IT IS APPARENT THAT THE REDUCTION OF CAPITAL BY ANY MODE EITHER BY WAY OF PAYING BACK TO THE SHAREHOLDERS OR WRITING OFF LOSSES ETC. HAS THE EFFECT OF REDUCING THE LIABILITY OF THE COM PANY TO ITS SHAREHOLDERS. REDUCTION RELIEVES THE COMPANY FROM ITS LIABILITY TO PAY TO THE SHAREHOLDERS IN FUTURE TO THE EXTENT OF THE CAPITAL REDUCED IN THE EVENT OF THE WINDING UP OF THE COMPANY; AND ALSO TO PAY DIVI DEND ON SUCH AMOUNT OF SHARE CAPITAL DURING THE SUBSISTENCE OF THE COMP ANY. COMING TO THE OTHER SIDE THE SHAREHOLDER WHOSE CAPITAL HAS BEEN REDUCED IS DEPRIVED OF HIS RIGHT TO RECEIVE THAT PART OF THE SHARE CAPITAL WHICH HAS BEEN SO REDUCED IN THE EVENT OF WINDING UP OF THE COMPANY; AND ALSO THE AMOUNT OF DIVIDEND ON SUCH SHARE CAPITAL DURING THE CONTI NUANCE OF THE COMPANY. THE ABOVE CONSEQUENCES FOLLOW IRRESPECTIVE OF THE F ACT WHETHER THE REDUCTION OF CAPITAL TAKES PLACE BY PAYING OFF ANY PAID-UP SHARE CAPITAL WHICH IS IN EXCESS OF THE WANTS OF THE COMPANY OR B Y CANCELLING ANY PAID-UP SHARE CAPITAL WHICH IS LOST OR IS UNREPRESE NTED BY AVAILABLE ASSETS. IN BOTH THE SITUATIONS THERE IS REDUCTION IN THE R IGHTS OF THE SHAREHOLDERS ON ONE HAND AND THE LIABILITY OF THE COMPANY ON THE OTHER. 48.5. IN THE FIRST SITUATION REDUCTION TAKE S PLACE PURSUANT TO REPAYMENT BY THE COMPANY TO THE SHAREHOLDERS OF A D EFINITE AMOUNT WHICH RESULTS IN TRANSFERRING BACK THE SHARES FUL LY OR PARTLY DEPENDING UPON THE SCHEME OF REDUCTION BY THE SHAREHOLDERS T O THE COMPANY BY WAY OF SALE RELINQUISHMENT OR EXTINGUISHMENT OF R IGHTS IN THE SHARES. IN THE CASE OF ANARKALI SARABHAI (SUPRA) THE ASSESSEE HELD 297 REDEEMABLE PREFERENCE SHARE OF UNIVERSAL CORPORATION PRIVATE L IMITED WITH FACE VALUE OF RS.1000 EACH. THESE SHARES WERE PURCHASED BY THE ASSESSEE FOR RS.2 66 550. THE COMPANY DECIDED TO REDEEM THE PREF ERENCE SHARE AND THE ASSESSEE RECEIVED A SUM OF RS.2 97 000 BEING TH E FACE VALUE OF THE SHARES HELD BY HER. THE VALUE OF SHARES RECEIVED BY THE ASSESSEE EXCEEDED I.T.A.NO.3013/M/07 (S.B) 49 THE VALUE BY WHICH SHE HAD PURCHASED BY RS.30 450. THE ITO HELD THE DIFFERENTIAL AMOUNT AS CHARGEABLE TO TAX U/S 45 OF THE ACT. THE ASSESSEE OPPOSED THE MOVE OF THE ASSESSING OFFICER BY CONTEN DING THAT THERE WAS NO `TRANSFER WITHIN THE MEANING OF SECTION 2(47) A ND HENCE ON THE REDEMPTION OF THE PREFERENCE SHARES THE PROFIT OF RS.30 450 COULD NOT BE SAID TO HAVE ARISEN FROM THE TRANSFER OF THE CAPITA L ASSET. THE FIRST AND SECOND APPELLATE AUTHORITIES ACCEPTED THE ASSESSING OFFICERS VIEW. THE HONBLE HIGH COURT ALSO UPHELD THE VIEW POINT OF TH E ASSESSING OFFICER. WHEN THE MATTER CAME UP BEFORE THE HONBLE SUPREME COURT IT WAS CONTENDED FOR THE ASSESSEE THAT THERE WAS NO QUEST ION OF APPLICABILITY OF SECTION 45 AS NO TRANSFER OF THE PREFERENCE SHARE S HAD TAKEN PLACE BECAUSE OF THE REDEMPTION OF THE SHARES. REPELLING THIS CONTENTION THE HONBLE APEX COURT HELD THAT THE DEFINITION OF TRA NSFER U/S 2(47) IS NOT EXHAUSTIVE BUT INCLUSIVE AND FURTHER IT DOES NOT RE FER ONLY TO `SALE. CONSIDERING THE OTHER INGREDIENTS OF CLAUSE (I) OF SECTION 2(47) BEING `EXCHANGE OR RELINQUISHMENT OF THE ASSETS ALSO TH E HONBLE SUPREME COURT HELD THAT THE REDEMPTION OF PREFERENCE SHARES BY THE COMPANY RESULTED INTO `TRANSFER OF SUCH SHARES FROM THE AS SESSEE TO COMPANY BY `RELINQUISHMENT. IT WAS HELD THAT THE TRANSACTION ALSO RESULTED IN SALE. RESULTANTLY THE DIFFERENCE BETWEEN THE PURCHASE PRI CE PAID BY THE ASSESSEE AND THE PRICE AT WHICH THE SHARES WERE RED EEMED BY THE COMPANY WAS HELD TO BE TAXABLE AS CAPITAL GAIN. 48.6. IN THE CASE OF KARTIKEYA V.SARABHAI (SUPRA) THE ASSESSEE PURCHASED 90 NON-CUMULATIVE PREFERENCE SHARES EACH OF THE FACE VALUE OF RS.1 000 AT A PRICE OF RS.420 PER SHARE OF A COMPAN Y CALLED SARABHAI LIMITED. IN 1965 A SUM OF RS.500 PER PREFERENCE SH ARE WAS PAID OFF TO THE ASSESSEE UPON REDUCTION OF THE SHARE CAPITAL OF THE COMPANY. THIS WAS DONE BY REDUCING THE FACE VALUE OF EACH SHARE FROM RS.1000 TO RS.500 BY PAYING OFF RS.500 IN CASH. FURTHER REDUCTION IN THE FACE VALUE OF THE I.T.A.NO.3013/M/07 (S.B) 50 SHARES TOOK PLACE IN THE YEAR IN QUESTION. THE COMP ANY PAID OFF RS.450 PER SHARE WHICH REDUCED ITS LIABILITY ON THE PREFER ENCE SHARE FROM RS.500 TO RS.50 PER SHARE. THE ITO FORMED THE VIEW THAT TH E SUM OF RS.450 PER SHARE RECEIVED BY THE ASSESSEE IN THE YEAR WAS LIAB LE TO CAPITAL GAIN TAX. THE ASSESSEES CONTENTION THAT THERE WAS NO `TRANSF ER WITHIN THE MEANING OF SECTION 2(47) DID NOT FIND FAVOUR WITH HIM. THE HONBLE HIGH COURT HELD THAT THE ASSESSEE MADE CAPITAL GAIN ON REDUCTI ON OF PREFERENCE SHARE CAPITAL AND THE SAME WAS EXIGIBLE TO CAPITAL GAIN T AX. IT WAS CONTENDED ON BEHALF OF THE ASSESSEE BEFORE THE HONBLE SUPREME C OURT THAT THERE WAS NO `TRANSFER WITHIN THE MEANING OF SECTION 2(47) A S THE ASSESSEE CONTINUED TO BE SHAREHOLDER OF THE COMPANY EVEN AFT ER RECEIPT OF THE AMOUNT. REJECTING THIS CONTENTION THE HONBLE SUMM IT COURT OBSERVED THAT THE REDUCTION IN THE FACE VALUE OF SHARES AMOU NTED TO `EXTINGUISHMENT WITHIN THE MEANING OF SECTION 2(47 ) AND HENCE THE AMOUNT RECEIVED ON SUCH REDUCTION WAS TAXABLE AS CA PITAL GAIN. 48.7. IN THE CASE OF G.NARASIMHAN (DECD.) AND OTHERS (SUPRA) THE ASSESSEE WAS A SHAREHOLDER IN A PRIVATE COMPANY HOL DING 70 SHARES WITH THE FACE VALUE OF RS.1 000 EACH. THE COMPANY PASSED RESOLUTION TO REDUCE ITS CAPITAL. WITH THAT THE FACE VALUE OF SHARES IN THE COMPANY WAS REDUCED FROM RS.1 000 EACH TO RS.210 EACH. THERE WAS PRO-RA TA DISTRIBUTION OF SOME PROPERTIES OF THE COMPANY AND PAYMENT OF MONEY TO THE SHAREHOLDERS. WHEN THE MATTER FINALLY REACHED THE H ONBLE SUPREME COURT THE QUESTION WAS RAISED AS TO WHETHER THE T RIBUNAL WAS RIGHT IN HOLDING THAT NO CAPITAL GAIN WAS ASSESSABLE IN THE HANDS OF THE ASSESSEE AS THERE WAS NO EXTINGUISHMENT OF ANY RIGHT OF THE ASS ESSEE AND CONSEQUENTLY THERE WAS NO TRANSFER WITHIN THE MEANI NG OF SECTION 2(47) OF THE ACT BY THE ASSESSEE OF ANY CAPITAL ASSET. THE H ONBLE SUPREME COURT CONSIDERED THE PROVISIONS OF SECTION 45(1) R.W.S. 2 (47) AND ALSO SECTION 2(22)(D) OF THE ACT. IT WAS OBSERVED THAT ON THE RE DUCTION IN THE FACE VALUE OF THE SHARE THE SHARE CAPITAL STOOD REDUCED ; THE RIGHT OF THE I.T.A.NO.3013/M/07 (S.B) 51 SHAREHOLDER TO THE DIVIDENDS AND HIS RIGHT TO SHARE IN THE DISTRIBUTION OF THE NET ASSETS UPON LIQUIDATION WAS EXTINGUISHED PR OPORTIONATELY TO THE EXTENT OF REDUCTION IN THE CAPITAL. IN THE FACTS OF THAT CASE AND IN THE LIGHT OF QUESTION BEFORE THE HONBLE SUPREME COURT IT WA S NOTICED THAT THERE WERE TWO FACTORS IN THE AMOUNT DISTRIBUTED TO THE ASSESSEE ON REDUCTION OF THE SHARE CAPITAL VIZ. DISTRIBUTION ATTRIBUTABLE TO ACCUMULATED PROFITS AND DISTRIBUTION ATTRIBUTABLE TO CAPITAL (EXCEPT CAPITA LIZED PROFIT). IT WAS FINALLY HELD THAT TO THE EXTENT OF THE ACCUMULATED PROFITS IN THE HANDS OF THE COMPANY THE RETURN TO THE ASSESSEE ON REDUCTIO N OF HIS CAPITAL WAS TAXABLE AS DIVIDEND U/S 2(22)(D) AND THE BALANCE AS CAPITAL GAIN. 48.8. IT CAN BE EASILY NOTICED THAT IN THE CASES OF ANARKALI SARABHAI (SUPRA) AND KARTIKEYA V.SARABHAI (SUPRA) THERE WAS REDUCTION IN THE FACE VALUE OF `PREFERENCE SHARES FROM RS.1 000 TO NIL A ND RS.1 000 TO RS.50 RESPECTIVELY. IN G.NARASIMHAN (DECD.) AND OTHERS (SUPRA) THERE WAS REDUCTION IN THE FACE VALUE OF `EQUITY SHARES AND NOT THE PREFERENCE SHARES AS WAS THE CASE IN OTHER TWO CASES. THE FACT THAT THE CASE OF G.NARASIMHAN (DECD.) IS BASED ON `EQUITY SHARES BECOMES AMPLY CLEAR WHEN THE JUDGMENT OF THE HONBLE SUPREME COURT IS P ERUSED WHICH DOES NOT USE ANY PREFIX TO THE SHARES. THE WORD SHARE NOT PRECEDED BY THE WORD PREFERENCE MAKES IT EQUITY. HOWEVER THE FA CT THAT THE SHARES IN THE CASE OF G.NARASIMHAN WHERE `EQUITY SHARES HAS BEEN ABLY DEMONSTRATED ON BEHALF OF THE ASSESSEE BY PLACING O N RECORD A COPY OF THE ASSESSMENT ORDER PASSED BY THE ITO DATED 23.01.1968 IN THAT CASE AND ALSO THE TRIBUNAL ORDER WHICH IN UNEQUIVOCAL TERM S DESCRIBES THE SHARES AS `EQUITY SHARES. THUS IT IS MANIFEST THAT THE CA SE OF G.NARASIMHAN IS BASED ON THE REDUCTION IN THE FACE VALUE OF EQUITY SHARES WHICH HAS BEEN HELD AS TRANSFER RESULTING INTO CHARGEABILITY OF TAX U/S 45 OF THE ACT. I.T.A.NO.3013/M/07 (S.B) 52 48.9. COMING BACK TO SECTION 100 OF THE COMPANIE S ACT IT HAS BEEN NOTICED ABOVE THAT CLAUSE (C) OF SECTION 100(1) DEA LS WITH THE REDUCTION OF CAPITAL BY WAY OF EXTINGUISHING OR REDUCING LIABILI TY ON ANY OF ITS SHARES BY PAYING OFF ANY PAID UP SHARE CAPITAL. ALL THE T HREE SUPREME COURT CASES IN ANARKALI SARABHAI (SUPRA) KARTIKEYA V.SARABHAI (SU PRA) AND G.NARASIMHAN (DECD.) (SUPRA) FALL IN CLAUSE (C) OF SECTION 100 IN AS MUCH AS THE REDUCTION IN THE SHARE CAPITAL TOOK PLACE BY WAY OF PAYING OFF THE PAID UP CAPITAL. 48.10. SECTION 100(1)(B) OF THE COMPANIES ACT DEALS WITH REDUCTION IN CAPITAL BY CANCELLING ANY PAID UP CAPITAL WHICH IS LOST OR UNREPRESENTED BY THE AVAILABLE ASSETS. IT REFERS TO A SITUATION IN W HICH THE COMPANY HAS ACCUMULATED LOSSES OVER THE PERIOD WHICH HAS LED TO THE ERADICATION OF THE CAPITAL BASE. IT IS AXIOMATIC THAT THE PROFITS INCR EASE THE CAPITAL BASE AND LOSSES REDUCE IT. THOUGH THE EROSION IN CAPITAL ACT UALLY TAKES PLACE AS A RESULT OF LOSSES BUT THE SAME GETS REFLECTED IN TH E ACCOUNTS BY SHOWING SUCH LOSSES AS `FICTITIOUS ASSET ON THE ASSET SIDE OF THE BALANCE SHEET THEREBY KEEPING THE FIGURE OF `CAPITAL INTACT ON T HE LIABILITY SIDE. THE AMOUNT OF SUCH LOSS CAN BE REMOVED FROM THE ASSET S IDE ONLY WHEN EQUAL AMOUNT IS WITHDRAWN FROM THE SHAREHOLDERS FUNDS ON THE LIABILITY SIDE. THIS REDUCTION IN THE LIABILITY SIDE MAY TAKE PLACE BY CANCELLING THE SHARE CAPITAL AND/OR ADJUSTING SHARE PREMIUM ACCOUNT ETC. SO AS TO SHOW THE TRUE AND FAIR VIEW. 48.11. ADVERTING TO THE FACTS OF THE INSTANT CA SE IT IS NOTICED THAT THE REDUCTION IN THE CAPITAL OF TGL TOOK PLACE AS PER CLAUSE (B) OF SECTION 100 OF THE COMPANIES ACT. SPECIAL RESOLUTION NO.5 I NDICATES THAT TGL WAS RUNNING INTO LOSSES AND HAD CARRIED FORWARD LOS S OF RS.42.96 CRORE. THIS LOSS WAS SOUGHT TO BE WRITTEN OFF BY REDUCING THE PAID UP SHARE CAPITAL TO THE EXTENT OF RS.8.99 CRORE AS PER FIRST RESOLUTION AND THE I.T.A.NO.3013/M/07 (S.B) 53 BALANCE SUM OF RS.33.97 CRORE BY UTILIZING THE SHA RE PREMIUM ACCOUNT OF THE COMPANY. AFTER THE HIGH COURT APPROVING THE RES OLUTION PASSED BY TGL IN ITS ANNUAL GENERAL MEETING THE BROUGHT FOR WARD LOSS OF RS.42.96 CRORE WAS WRITTEN OFF WITH THE SHARE CAPI TAL SO REDUCED AND THE AMOUNT LYING IN THE SHARE PREMIUM ACCOUNT WRITTEN O FF. THUS IT CAN BE SEEN THAT THE REDUCTION IN THE SHARE CAPITAL IN THE INSTANT CASE IS COVERED U/S 100(1)(B) OF THE COMPANIES ACT BY WHICH TGL CAN CELLED ITS PAID UP SHARE CAPITAL TO THE EXTENT IT WAS LOST AND WAS UNR EPRESENTED BY AVAILABLE ASSETS. 48.12. AS PER THE MANDATE OF SECTION 45(1) OF T HE ACT ANY PROFITS OR GAINS ARISING FROM THE `TRANSFER OF A CAPITAL ASSE T EFFECTED IN THE PREVIOUS YEAR SHALL SAVE AS OTHERWISE PROVIDED IN CERTAIN S ECTIONS BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD `CAPITAL GAINS AND SH ALL BE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSF ER TAKES PLACE. THE CHARGE UNDER THIS SECTION IS ATTRACTED WHEN THERE I S A TRANSFER OF A CAPITAL ASSET. THE WORD TRANSFER IN RELATION TO T HE CAPITAL ASSET HAS BEEN DEFINED U/S 2(47). THIS SECTION HAS CLAUSES (I) TO (VI) AND DEFINES THE WORD TRANSFER IN AN INCLUSIVE MANNER. CLAUSE (I) OF SE CTION 2(47) EXPLAINS TRANSFER TO MEAN THE SALE EXCHANGE OR RELINQUISHM ENT OF THE ASSET AND CLAUSE (II) REFERS TO THE EXTINGUISHMENT OF ANY RI GHTS THEREIN. OTHER CLAUSES OF SECTION 2(47) ARE NOT RELEVANT IN THE FA CTS AND CIRCUMSTANCES OF THE PRESENT CASE. A RAPID LOOK AT THE DEFINITION OF WORD TRANSFER U/S 2(47) MAKES IT PALPABLE THAT THE CHARGE U/S 45 IS A TTRACTED NOT ONLY ON THE `SALE OF A CAPITAL ASSET BUT ALSO INTER ALIA ON `EXCHANGE OR RELINQUISHMENT OF THE ASSET OR `EXTINGUISHMENT OF ANY RIGHTS IN THE CAPITAL ASSET. ORDINARILY THE WORD SALE IMPLIES THAT THERE IS A TRANSFER OF PROPERTY WITH CONSIDERATION WHICH IS NORMALLY MONEY OR ITS WORTH . THE SECOND INGREDIENT OF CLAUSE (I) OF SECTION 2(47) IS EXCHA NGE WHICH TAKES PLACE ON THE TRANSFER OF ONE PROPERTY FOR ANOTHER. THE LA ST ELEMENT IS I.T.A.NO.3013/M/07 (S.B) 54 RELINQUISHMENT WHICH TAKES PLACE WHEN THE OWNER OF THE PROPERTY PULLS AWAY FROM OF THE PROPERTY IN TERMS OF OWNERSH IP BUT SUCH PROPERTY CONTINUES TO EXIST EVEN AFTER SUCH PULLING OUT. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RASIKLAL MANEKLAL (HUF) [(1989) 177 ITR 198 (SC)] HAS HELD THAT : RELINQUISHMENT TAKES PLACE WHEN TH E OWNER WITHDRAWS HIMSELF FROM THE PROPERTY AND ABANDONS HI S RIGHT THERETO. THUS IT CAN BE SEEN THAT CLAUSE (I) OF SECTION 2(47 ) COVERING SALE EXCHANGE OR RELINQUISHMENT OF CAPITAL ASSET CONTEMP LATES THE CONTINUATION OF PROPERTY EVEN AFTER TRANSFER AND IT IS ONLY A MA TTER OF CHANGING HANDS. THUS `TRANSFER AS PER CLAUSE (I) PRE-SUPPOSES THE EXISTENCE OF PROPERTY EVEN AFTER TRANSFER. 48.13. CLAUSE (II) OF SECTION 2(47) REFERS TO TRA NSFER BY EXTINGUISHMENT OF ANY RIGHTS THEREIN. THE HONBLE SUPREME COURT I N THE CASE OF VANIA SILK MILLS (P.) LTD. VS. CIT [(1999) 191 ITR 647 (S C)] CONSIDERED THE MEANING OF THE PHRASE EXTINGUISHMENT OF ANY RIGHTS THEREIN IN THE CONTEXT OF SECTION 2(47) AND HELD THAT THIS EXPRESS ION WOULD TAKE THE COLOUR FROM ASSOCIATED WORDS AND WILL HAVE TO BE RE STRICTED TO THE SENSE ANALOGUES TO THEM. IT WAS HELD THAT THE EXPRESSION EXTINGUISHMENT OF ANY RIGHTS THEREIN WILL HAVE TO BE CONFINED TO THE EXT INGUISHMENT OF A RIGHT ON ACCOUNT OF TRANSFER AND CANNOT BE EXTENDED TO ME AN ANY EXTINGUISHMENT OF RIGHTS INDEPENDENT OF OR OTHERWI SE THAN ON ACCOUNT OF TRANSFER. THIS JUDGMENT RENDERED BY TWO HONBLE JUD GES CAME UP FOR CONSIDERATION BEFORE A LARGER BENCH (OF THREE HONB LE JUDGES) OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MRS.GRACE COLLIS AND OTHERS [(2001) 248 ITR 323 (SC)] . IN THE LATER CASE OF MRS.GRACE COLLIS AND OTHERS THE HONBLE SUPREME COURT DISAPPROVED THE JUDGMENT IN VANIA SILK MILLS P. LTD. BY HOLDING THAT THE EXPRESSION EXTINGUISHMENT OF ANY RIGHTS THEREIN CANNOT BE LIMITED TO SUCH EXTIN GUISHMENT ON ACCOUNT OF TRANSFERS. IT WAS HELD THAT THIS EXPRESSION WOUL D ALSO EXTEND TO I.T.A.NO.3013/M/07 (S.B) 55 EXTINGUISHMENT OF RIGHTS INDEPENDENT OF OR OTHERWIS E THAN ON ACCOUNT OF TRANSFER. IN THIS CASE IT HAS BEEN HELD THAT THE RI GHTS OF THE ASSESSEE IN THE CAPITAL ASSET BEING THE SHARES IN THE AMALGAMATIN G COMPANY STOOD EXTINGUISHED UPON THE AMALGAMATION OF THE AMALGAMAT ING COMPANY WITH THE AMALGAMATED COMPANY AND THERE WAS A TRANSFER OF SHARES IN THE AMALGAMATING COMPANY WITHIN THE MEANING OF SECTION 2(47) OF THE ACT. 48.14. REVERTING TO THE FACTS OF THE INSTANT CA SE IT IS SEEN THAT BY WAY OF STEP-1 OF THE OVERALL EXERCISE THE REDUCTION IN TH E SHARE CAPITAL OF TGL TOOK PLACE IN TERMS OF SECTION 100(1)(B) OF THE COM PANIES ACT BY WHICH THE PAID UP VALUE OF EQUITY SHARES OF RS.10 WAS RED UCED TO PAID UP VALUE OF RS.5. THERE WAS EXTINGUISHMENT OF THE RIGHTS OF THE ASSESSEE IN THE SHARES AT THAT STAGE. GOING BY THE JUDGMENT IN THE CASE OF MRS.GRACE COLLIS AND OTHERS (SUPRA) THE TRANSACTION OF REDUCTION OF CAPITAL FELL WITHIN THE DOMAIN OF `EXTINGUISHMENT OF ANY RIGHTS THEREIN AS PER SECTION 2(47)(II) AS SUCH EXTINGUISHMENT OF RIGHTS IS OTHERWISE THAN ON ACCOUNT OF TRANSFER OF SHARES. THE SAME VIEW FOLLOW S WHEN I EXAMINE THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F G.NARASIMHAN (DECD.) (SUPRA) IN WHICH CASE ALSO THERE WAS A REDUCTION IN THE FA CE VALUE OF EQUITY SHARES AND THE HONBLE SUPREME COURT HELD IT TO BE TRANSFER U/S 2(47) ATTRACTING CAPITAL GAIN. I THEREFORE HOLD THAT `TRANSFER OF EQUITY SHARES TOOK PLACE ON THE REDUCTION OF THE SHARE CAP ITAL BY TGL. II. CONSEQUENCES OF NIL FULL VALUE OF CONSIDERATION 49.1. THE LEARNED DEPARTMENTAL REPRESENTATIVE CO NTENDED THAT IN THIS CASE THE ASSESSEE DID NOT RECEIVE ANY CONSIDERATION FROM TGL ON THE REDUCTION OF CAPITAL. HE SUBMITTED THAT IN THE ABSE NCE OF ANY CONSIDERATION THE COMPUTATION PROVISION HAS FAILE D. HE RELIED ON THE I.T.A.NO.3013/M/07 (S.B) 56 JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F B.C.SRINIVASA SETTY [(1981) 128 ITR 294 (SC)] IN WHICH CASE IT WAS HELD THAT WHERE COMPUTATION PROVISION CANNOT APPLY AT ALL THE CAS E CANNOT FALL WITHIN THE CHARGING SECTION. THE LEARNED DEPARTMENTAL REPRESEN TATIVE STATED THAT SINCE THERE WAS NO CONSIDERATION RECEIVED BY THE AS SESSEE AGAINST THE REDUCTION OF SHARE CAPITAL THE COMPUTATION OF CAPI TAL GAIN BECAME IMPOSSIBLE AND RESULTANTLY THERE COULD NOT HAVE BE EN ANY GAIN OR LOSS FROM THE REDUCTION OF CAPITAL. IN THE OPPOSITION T HE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE JUDGMENT IN THE CAS E OF B.C.SRINIVASA SETTY (SUPRA) IS NOT APPLICABLE BECAUSE IN THAT CASE THE COST OF ACQUISITION WAS NOT CAPABLE OF ASCERTAINMENT. 49.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD IT IS NOTED THAT THE EXPRESSION PROFITS OR GAINS AS EMPLOYED IN SECTION 45(1) GETS ITS MEANING FROM SEC TION 48 WHICH IN TURN PROVIDES THE MODE OF COMPUTATION OF INCOME CHA RGEABLE UNDER THE HEAD `CAPITAL GAINS. AS PER THIS SECTION INCOME CH ARGEABLE UNDER THIS HEAD SHALL BE COMPUTED BY DEDUCTING - THE EXPENDIT URE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER OF A CAPITAL ASSET THE COST OF ACQUISITION OF THE ASSET AND THE COST OF AN Y IMPROVEMENT THERETO - FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED O R ACCRUING AS A RESULT OF SUCH TRANSFER. IN NUTSHELL THE VALUE OF FOLLOWING FOUR INGREDIENTS IS NEEDED FOR COMPUTING CAPITAL GAINS U/S 45 :- (I) FULL VALUE OF CONSIDERATION (II) COST OF ACQUISITION (III) COST OF IMPROVEMENT (IV) EXPENDITURE INCURRED IN CONNECTION WITH TRANSFER I.T.A.NO.3013/M/07 (S.B) 57 49.3. IN THE INSTANT CASE THE COST OF IMPROVEMENT AND EXPENDITURE IN CONNECTION WITH TRANSFER IS NIL AND AS SUCH THESE T WO COMPONENTS ARE IRRELEVANT LEAVING WITH COST OF ACQUISITION AND FU LL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER OF THE SHARES. THERE IS NO DISPUTE ON THE ASPECT OF COST OF ACQUISITION OF 67 37399 EQUITY SHARES. THE TOTAL INVESTMENT MADE BY THE ASSESSEE IN 1.34 CRORE EQUITY SHARES OF TGL WAS RS.24.84 CRORE AND HALF OF THE SHARES AT 67.37 LAKHS WHICH HAVE BEEN TRANSFERRED AS A RESULT OF CAPITAL REDUCTION HAVE B EEN ASSIGNED PURCHASE COST OF RS.12.42 CRORE BEING HALF OF THE TOTAL PU RCHASE COST. IT HAS BEEN INDEXED AT RS.22.21 CRORE. THUS THE INDEXED COST OF ACQUISITION OF THE SHARES TRANSFERRED BY WAY OF REDUCTION OF CAPITAL C OMES TO RS.22.21 CRORE. THE MANNER OF COMPUTING SUCH INDEXED COST HAS BEEN GIVEN ON PAGE 77 OF THE PAPER BOOK. NEITHER THE AO NOR THE LEARNED C IT HAS DISPUTED THIS FIGURE. THE FULL VALUE OF CONSIDERATION HAS BEEN SH OWN AS NIL BECAUSE NO AMOUNT WAS RECEIVED BY THE ASSESSEE FROM TGL ON RED UCTION OF CAPITAL. RESULTANTLY LOSS UNDER THE HEAD `CAPITAL GAINS W AS WORKED OUT AT RS.22.21 CRORE. THE VIEW POINT OF THE LEARNED DEPAR TMENTAL REPRESENTATIVE IS THAT SINCE THE FULL VALUE OF CONS IDERATION IS ZERO SECTION 48 CANNOT APPLY. THE SUM AND SUBSTANCE OF HIS SUBMI SSION IS THAT AS COMPUTATION U/S 48 HAS BECOME IMPOSSIBLE BECAUSE OF NIL VALUE OF FULL VALUE OF CONSIDERATION THERE CANNOT BE ANY INCOME U/S 45 OF THE ACT. THE MAIN RELIANCE OF THE LEARNED DEPARTMENTAL REPRESENT ATIVE IN SUPPORT OF THIS PROPOSITION IS ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN B.C.SRINIVASA SETTY (SUPRA) . I SHALL EXAMINE THE FACTS OF THIS CASE. THE ASSESSEE IN THAT CASE DID NOT DISCLOSE GOODWILL OF THE FIRM IN ITS ACCOUNTS. SUBSEQUENTLY THE FIRM WAS DISSOLVED AND AT THAT TIM E THE GOODWILL OF THE FIRM WAS VALUED AT RS.1 50 000. A NEW PARTNERSHIP B Y THE SAME NAME WAS FORMED WHICH TOOK OVER ALL ASSETS INCLUDING THE GO ODWILL AND LIABILITIES OF THE DISSOLVED FIRM. THE ITO MADE AN ASSESSMENT O N THE DISSOLVED FIRM WITHOUT INCLUDING ANY AMOUNT ON ACCOUNT OF THE GAIN ARISING ON THE I.T.A.NO.3013/M/07 (S.B) 58 TRANSFER OF THE GOODWILL. THE CIT EXERCISING HIS P OWER U/S 263 DIRECTED THE ITO TO MAKE A FRESH ASSESSMENT AFTER TAKING INT O ACCOUNT THE CAPITAL GAIN ARISING ON THE SALE OF GOODWILL. IT WAS ARGUED BEFORE THE TRIBUNAL THAT THIS TRANSACTION DID NOT ATTRACT TAX ON CAPIT AL GAIN U/S 45 WHICH FOUND FAVOUR WITH THE TRIBUNAL. THE HONBLE HIGH CO URT ALSO UPHELD THE VIEW TAKEN BY THE TRIBUNAL. THE REVENUE PREFERRED A PPEAL BEFORE THE HONBLE SUPREME COURT CONTENDING THAT SECTION 45 WA S APPLICABLE. THE HONBLE SUPREME COURT NOTED THAT SECTION 45 IS A CH ARGING SECTION AND ALL TRANSACTIONS ENCOMPASSED BY SECTION 45 MUST FALL UN DER THE GOVERNANCE OF ITS COMPUTATION PROVISIONS. A TRANSACTION TO WHICH THOSE PROVISIONS CANNOT BE APPLIED MUST BE REGARDED AS NEVER INTENDE D BY SECTION 45 TO BE THE SUBJECT OF THE CHARGE. IF THERE IS A CASE TO WH ICH THE COMPUTATION PROVISIONS CANNOT APPLY AT ALL THE HONBLE SUPREME COURT HELD THAT SUCH CASE COULD NEVER BE CONSIDERED AS INTENDED TO FALL WITHIN THE CHARGING SECTION. THEREAFTER IT LOOKED INTO THE PROVISIONS O F SECTION 48 DEALING WITH THE MODE OF COMPUTATION. IT WAS OBSERVED THAT THE I NCOME CHARGEABLE UNDER THE HEAD SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF CONSIDERATION RECEIVED INTER ALIA THE COST OF ACQUISITION OF THE CAPITAL ASSET. THE HONBLE APEX COURT FOUND THAT WHAT IS CO NTEMPLATED IS AN ASSET IN THE ACQUISITION OF WHICH IT IS POSSIBLE TO ENVISAGE A COST AND IT SHOULD BE AN ASSET WHICH POSSESSES THE INHERENT QUA LITY OF BEING AVAILABLE TO A PERSON SEEKING TO ACQUIRE IT. REJECTING THE CO NTENTION RAISED ON BEHALF OF THE REVENUE THE HONBLE SUPREME COURT HELD THA T : NONE OF THE PROVISIONS PERTAINING TO THE HEAD `CAPITAL GAINS S UGGESTS THAT THEY INCLUDE AN ASSET IN THE ACQUISITION OF WHICH NO COST AT ALL CAN BE CONCEIVED . YET THERE ARE ASSETS WHICH ARE ACQUIRED BY WAY OF PRODUCTION IN WHICH NO COST ELEMENT CAN BE INDENTIFIED OR ENVISAGED. IT WAS FURTHER OBSERVED THAT GOODWILL DENOTES THE BENEFIT ARISING FROM CONNECTION AND REPUTATION. A VARIETY OF ELEMENTS GO INTO ITS MAKIN G AND ITS COMPOSITION VARIES IN DIFFERENT TRADES AND IN DIFFERENT BUSINES SES IN THE SAME TRADE. ITS I.T.A.NO.3013/M/07 (S.B) 59 VALUE MAY FLUCTUATE FROM ONE MOMENT TO ANOTHER DEPE NDING ON CHANGES IN THE REPUTATION OF THE BUSINESS. IT IS AFFECTED B Y EVERYTHING RELATING TO THE BUSINESS THE PERSONALITY AND BUSINESS RECTITUD E OF THE OWNERS THE NATURE AND CHARACTER OF THE BUSINESS ITS NAME AND REPUTATION ITS LOCATION ETC. ETC. SINCE GOODWILL IS GENERATED AS THE BUSINE SS IS CARRIED ON AND MAY BE AUGMENTED WITH THE PASSAGE OF TIME IT IS IMPOSS IBLE TO PREDICATE THE MOMENT OF ITS BIRTH. IT WAS THEREFORE FINALLY HEL D THAT SECTION 45 CANNOT APPLY BECAUSE OF THE INAPPLICABILITY OF SECTION 48( II) BEING THE IMPOSSIBILITY TO ENVISAGE ITS COST OF ACQUISITION O F GOODWILL. 49.4. THE VIEW POINT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS THAT THE COMPUTATION PROVISION U/S 48 SHALL FAIL TO APPL Y IN THE PRESENT CASE ALSO FOR THE REASON THAT THERE IS NO FULL VALUE OF CONSIDERATION AS IT WAS IN THE CASE OF B.C.SRINIVASA SETTY (SUPRA) WHERE THERE WAS NO COST OF ACQUISITION. ONCE COMPUTATION PROVISION U/S 48 CEAS ES TO BE WORKABLE THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THERE CANNOT BE ANY QUESTION OF PROFIT OR LOSS ARISING FROM THE TRANSFE R OF SHARES U/S 45(1). 49.5. THERE CANNOT BE ANY DOUBT THAT IF A COMPUTA TION PROVISION CANNOT BE APPLIED CHARGING SECTION SHALL ALSO NOT BE ATTR ACTED. I HAVE TO TEST THE APPLICABILITY OR INAPPLICABILITY OF SECTION 48 IN T HE PRESENT CASE. IN THE CASE OF B.C. SRINIVASA SETTY (SUPRA) IT HAS BEEN HELD THAT THERE CANNOT BE ANY CHARGE U/S 45 BECAUSE SECTION 48(II) CANNOT BE APPLIED ON ACCOUNT OF COST OF ACQUISITION OF GOODWILL BECOMING IMPOSSIBLE TO CONCEIVE OR ENVISAGE. GOODWILL IS MADE OVER A PERIOD OF TIME A ND IT IS NOT POSSIBLE TO ASCERTAIN WITH EXACTITUDE ANY PARTICULAR SUM LEADIN G TO THE GENERATION OF GOODWILL. VARIOUS FACTORS OVER THE TIME CONTRIBUTE TO THE MAKING OR SPOILING OF GOODWILL OF A CONCERN AND ONE CANNOT AT TRIBUTE A SPECIFIC AMOUNT GOING INTO THE GENERATION OF GOODWILL. THE P RINCIPLE THEREFORE IS THAT THE COST OF ACQUISITION OF GOODWILL IS NOT CAPABLE OF ASCERTAINMENT I.T.A.NO.3013/M/07 (S.B) 60 AND SINCE SUCH COST CANNOT BE CONCEIVED THE PRESC RIPTION OF SECTION 48 FAILS. A LINE OF DISTINCTION NEEDS TO BE DRAWN BET WEEN THE CASES IN WHICH THE COST OF ACQUISITION OR FOR THAT MATTER ANY OTHE R COMPONENT OF SEC. 48 IS INCAPABLE OF ASCERTAINMENT AND THE CASES IN WHICH I T IS ASCERTAINED AS ZERO. THE JUDGMENT OF THE HONBLE SUPREME COURT IN B.C. SRINIVASA SETTY (SUPRA) APPLIES WITH FULL FORCE TO THE CASES WERE EITHER T HE COST OF ACQUISITION OR ANY OTHER COMPONENT SUCH AS THE FULL VALUE OF CONSIDERATION CANNOT BE ASCERTAINED. BUT WHERE THE VALUE OF EACH OF THE COMPONENTS IS ASCERTAINABLE BUT IS NIL THE RATIO DECIDENDI OF THE DECISION BECOMES INAPPLICABLE. IF THIS GENERAL PRESUMPTION THAT IN CASE THE COST OF ACQUISITION OR THE VALUE OF ANY OTHER VARIABLE IS N IL SECTION 48 CAN NEVER APPLY IS ACCEPTED THEN THE PROVISIONS OF SEC. 55(2 )(A) SHALL BECOME REDUNDANT. THIS PROVISION PROVIDES THAT FOR THE PU RPOSES OF SECTIONS 48 AND 49 COST OF ACQUISITION IN RELATION TO CAPITAL ASSET BEING GOODWILL OF A BUSINESS OR A TRADEMARK OR BRAND NAME ASSOCIATED WI TH THEIR BUSINESS OR A RIGHT TO MANUFACTURE PRODUCE OR PROCESS ANY ARTICL E OR THINGS ETC. SHALL MEAN THE AMOUNT OF PURCHASE PRICE AND WHERE NO PURC HASE PRICE HAS BEEN PAID IT SHOULD BE TAKEN AS NIL. ON A LOOK AT THE NA TURE OF CAPITAL ASSETS REFERRED TO IN SECTION 55(2)(A) SUCH AS GOODWILL O F BUSINESS OR TRADEMARK OR BRAND NAME ETC. IT COMES TO NOTICE THAT THESE ARE THE CAPITAL ASSETS WHICH COME INTO EXISTENCE OVER A PERIOD AND NO PART ICULAR COST CAN BE DIRECTLY IDENTIFIED WITH SUCH CAPITAL ASSETS UNLES S PURCHASED. DESPITE THE FACT THAT IT IS NOT POSSIBLE TO ENVISAGE COST OF SU CH CAPITAL ASSETS THE LEGISLATURE HAS MADE IT CLEAR THAT ON TRANSFER OF S UCH CAPITAL ASSETS WHICH WERE NOT PURCHASED BY THE ASSESSEE FROM A PREVIOUS OWNER THE COST OF ACQUISITION SHALL BE TAKEN AS NIL AND FULL VALUE OF CONSIDERATION RECEIVED ON THEIR TRANSFER SHALL BE CONSIDERED FOR COMPUTING CAPITAL GAINS. THUS IT CAN BE SEEN THAT IF A CAPITAL ASSET WHOSE COST CAN NOT BE IDENTIFIED OR CONCEIVED DUE TO THE NATURE OF SUCH CAPITAL ASSET ITS TRANSFER SHALL NOT LEAD TO ANY PROFITS OR GAIN ARISING U/S 45(1) EXCEPT WHE RE SUCH CAPITAL ASSET IS I.T.A.NO.3013/M/07 (S.B) 61 COVERED U/S 55(2). IN THIS WAY TWO CATEGORIES OF THE CAPITAL ASSETS BECOME GLARING. THE FIRST CATEGORY IN WHICH THE COS T OF ACQUISITION CANNOT BE CONCEIVED OR ENVISAGED AND THE SECOND CATEGORY IN WHICH THE COST OF ACQUISITION IS NIL. WHEREAS THE TRANSFER OF THE FIR ST CATEGORY OF THE CAPITAL ASSETS WOULD ESCAPE CHARGE U/S 45(1) UNLESS SUCH A SSET IS SPECIFICALLY COVERED U/S 55(2) THE TRANSFER OF THE SECOND CATEG ORY OF THE CAPITAL ASSETS WOULD ATTRACT THE APPLICABILITY OF SECTION 45. WHEN THE JUDGMENT OF THE HONBLE SUPREME COURT IN B.C.SRINIVASA SETTY (SUPRA) IS CONSIDERED IN JUXTAPOSITION TO SECTION 55(2) THE PICTURE WHICH CLEARLY EMERGES IS THAT SECTION 45 IS NOT ATTRACTED WHEN IT IS NOT POSSIBLE TO CONCEIVE OR ENVISAGE THE COST OF ACQUISITION OR FULL VALUE OF CONSIDERAT ION ETC. SUBJECT TO THE OTHER PROVISIONS OF THIS CHAPTER. THE RATIO OF THIS JUDGMENT SHALL HAVE NO ROLE TO PLAY OR IN OTHER WORDS CHARGE U/S 45 SHALL BE ATTRACTED IN ALL OTHER CASES IN WHICH THE COST OF ACQUISITION OR FULL VALU E OF CONSIDERATION ETC. IS CONCEIVABLE OR ASCERTAINABLE BUT IS NIL. 49.6. ADVERTING TO THE FACTS OF THE INSTANT CAS E IT IS NOTED THAT ON THE REDUCTION OF CAPITAL TGL DID NOT PAY ANYTHING TO T HE ASSESSEE. THUS THE ASSESSEE RECEIVED NIL CONSIDERATION AND IT IS NOT A CASE IN WHICH THE FULL VALUE OF CONSIDERATION IS INCAPABLE OF ASCERTAINMEN T. THE FULL VALUE OF CONSIDERATION IS FULLY ASCERTAINED AND IDENTIFIED A S NIL. IN THAT VIEW OF THE MATTER I AM OF THE CONSIDERED OPINION THAT THE JUDG MENT OF THE HONBLE SUPREME COURT IN THE CASE OF B.C.SRINIVASA SETTY (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE. 49.7. THE OTHER CASE WHICH HAS BEEN HOTLY DISCUS SED DURING THE COURSE OF HEARING IS CIT VS. MOHANBHAI PAMABHAI [(1973) 91 ITR 393 (GUJ .)] . IN THIS CASE THE ASSESSEE AND SEVEN OTHER PERSONS C ARRIED ON THE BUSINESS IN PARTNERSHIP FIRM. THERE WERE DISPUTES BETWEEN PA RTNERS OF THE FIRM AND ACCORDINGLY THE ASSESSEE ALONG WITH SOME OTHER PART NERS RETIRED FROM THE I.T.A.NO.3013/M/07 (S.B) 62 FIRM LEAVING OTHER SEVEN AS CONTINUING PARTNERS OF THE FIRM. THE ASSESSEE RECEIVED CERTAIN AMOUNT WHICH INCLUDED AN AMOUNT RE PRESENTING THE PROPORTIONATE SHARE IN THE VALUE OF THE GOODWILL. T HE ITO TOOK THE VIEW THAT THE AMOUNT RECEIVED BY THE ASSESSEE TO THE EX TENT IT REPRESENTED PROPORTIONATE SHARE IN THE VALUE OF GOODWILL REPR ESENTED CAPITAL GAIN CHARGEABLE TO TAX U/S 45 OF THE ACT. THE TRIBUNAL D ECIDED THE ISSUE IN ASSESSEES FAVOUR. WHEN THE MATTER CAME UP BEFORE T HE HONBLE HIGH COURT TWO FOLD SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE IN SUPPORT OF ITS CASE WHICH HAVE BEEN DISCUSSED AND ADJUDICATED BY THE HONBLE HIGH COURT AS UNDER:- SO FAR AS THE SECOND QUESTION IS CONCERNED THERE WERE TWO CONTENTIONS URGED ON BEHALF OF THE ASSESSEES IN SUPPORT OF THE DECISION OF THE TRIBUNAL THAT THE AMOUNT REPRE SENTING THE PROPORTIONATE SHARE OF EACH ASSESSEE IN THE VA LUE OF THE GOODWILL OF THE FIRM WAS NOT LIABLE TO BE ASSESSED TO TAX AS CAPITAL GAIN. ONE CONTENTION WAS THAT THE PROPORTIONATE SHARE IN THE VALUE OF THE GOODWILL WAS RECEIVED BY EACH ASSESSEE AS PART OF THE AMOUNT REPRESENTING HIS SHA RE IN THE NET PARTNERSHIP ASSETS AFTER DEDUCTION OF LIABILITIES AND PRIOR CHARGES AND THIS LAST AMOUNT HAVING BEEN RECE IVED BY HIM IN SATISFACTION OF HIS SHARE IN THE PARTNERSHI P AND NOT BY WAY OF CONSIDERATION FOR TRANSFER OF HIS INTERE ST IN THE GOODWILL OR OTHER ASSETS OF THE FIRM THERE WAS NO TRANSFE R OF CAPITAL ASSET WHICH WOULD ATTRACT LIABILITY TO CAPI TAL GAINS TAX. THIS CONTENTION WAS AT NO TIME URGED BEFORE TH E REVENUE AUTHORITIES OR EVEN BEFORE THE TRIBUNAL AND IT WAS RAISED FOR THE FIRST TIME AT THE HEARING OF THE REFERENCES BE FORE US BUT SINCE IT DOES NOT INVOLVE A NEW QUESTION AND REPRE SENTED MERELY A DIFFERENT ASPECT OF THE SAME QUESTION WE ALLOWED THE ASSESSEES TO RAISE IT AND IT MUST BE SAID IN FA IRNESS TO THE COUNSEL FOR THE REVENUE THAT HE RIGHTLY DID NOT CON TEND THAT IT SHOULD NOT BE ALLOWED TO BE RAISED. THE OTHER CONTENTION URGED ON BEHALF OF THE ASSESSEES WAS THAT HAVING REGARD TO THE SCHEME OF THE PROVISIONS RELATING TO CAPITAL GAINS TAX AND PARTICULARLY SECTION 48 C LAUSE (II) THE CAPITAL ASSET CONTEMPLATED BY SECTION 45 IS A CAPITAL ASSET ACQUISITION OF WHICH HAS COST SOMETHING TO THE I.T.A.NO.3013/M/07 (S.B) 63 ASSESSEE IN TERMS OF MONEY AND SINCE GOODWILL OF THE FIRM IN THE PRESENT CASE ADMITTEDLY COST NOTHING TO THE FIRM AND ITS PARTNERS IN TERMS OF MONEY TRANSFER OF HIS IN TEREST IN THE GOODWILL BY EACH OF THE ASSESSEES DID NOT ATTR ACT THE CHARGE OF CAPITAL GAINS TAX. OF THESE TWO CONTENTIONS TH E FIRST IS IN OUR OPINION WELL-FOUNDED WHILE THE SE COND MUST BE REJECTED. OUR REASONS FOR SAYING SO ARE AS FOLLOWS : (EMPHASIS SUPPLIED BY US) 49.8. IT CAN BE SEEN FROM THE ABOVE PARA ON PAGE NO.398 OF THE REPORT THAT THE ASSESSEE MADE DUAL SUBMISSIONS. THE FIRST THAT THE VALUE OF GOODWILL RECEIVED BY THE ASSESSEE REPRESENTED THE P ART OF THE AMOUNT OF HIS SHARE IN THE NET PARTNERSHIP ASSETS AFTER DEDUC TION OF LIABILITIES ETC. AND IT WAS NOT BY WAY OF CONSIDERATION FOR TRANSFER OF HIS INTEREST IN THE GOODWILL OR OTHER ASSETS OF THE FIRM. THE SECOND TH AT SINCE THE GOODWILL OF THE FIRM DID NOT COST ANYTHING TO THE FIRM AND HENC E THE RECEIPT BY THE ASSESSEE DID NOT ATTRACT CHARGE TO THE CAPITAL GAIN TAX BECAUSE THERE WAS NO COST OF ACQUISITION. THE HONBLE HIGH COURT ACCEPTE D THE FIRST CONTENTION AND REJECTED THE SECOND. THE MAIN REASONING ON WHI CH THE HONBLE HIGH COURT RENDERED ITS JUDGMENT IN ASSESSEES FAVOUR WA S BY WAY OF ACCEPTING THE FIRST CONTENTION THAT THE VALUE OF GOODWILL REC EIVED WAS HIS SHARE IN THE VALUE OF THE ASSETS OF THE FIRM AND NOT BY WAY OF TRANSFER OF GOODWILL. IN ORDER TO SUPPORT ITS CONCLUSION BASED ON THE MAI N REASONING THE HONBLE HIGH COURT ALSO GAVE ANCILLARY REASONING BY PRESUMING THAT EVEN IF ITS MAIN REASONING HOLDING THAT THERE WAS NO TRA NSFER WAS WRONG AND IT WAS TO BE HELD THAT THE TRANSACTION INVOLVED `TRAN SFER STILL THE AMOUNT RECEIVED BY THE ASSESSEE IN RESPECT OF HIS SHARE IN THE VALUE OF GOODWILL MUST BE HELD TO BE OUTSIDE THE PALE OF CHARGEABILIT Y TO CAPITAL GAIN TAX. THE REASON GIVEN WAS THAT IN ORDER TO ATTRACT THE C APITAL GAIN TAX THERE MUST BE A TRANSFER AS A RESULT OF WHICH CONSIDERATI ON IS RECEIVED BY OR ACCRUES TO THE ASSESSEE AND IF THERE IS NO CONSIDER ATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER THE MACHINERY SEC TION ENACTED IN SECTION I.T.A.NO.3013/M/07 (S.B) 64 48 WOULD BE INAPPLICABLE AND IT WOULD NOT BE POSSIB LE TO COMPUTE PROFITS OR GAINS ARISING FROM THE TRANSFER OF CAPITAL ASSET . I AM CALLING SECOND REASONING AS ANCILLARY BECAUSE IN THAT CASE THERE W AS IN FACT SOME CONSIDERATION RECEIVED BY THE ASSESSEE FOR GOODWILL AND WAS NOT A CASE OF NIL CONSIDERATION. IT IS SETTLED LEGAL POSITION THA T THE REMARKS OF A COURT MUST BE VIEWED IN THE BACKDROP OF THE FACTS PRESENT BEFORE IT. THE OBSERVATIONS OF THE COURT DECIDING THE CONTROVERSY IN THE LIGHT OF THE PREVAILING FACTS CONSTITUTE RATIO DECIDENDI OF THE JUDGMENT WHEREAS THE OTHER OBSERVATIONS WHICH ARE DE HORS THE FACTS OR LEGAL POSITION UNDER CONSIDERATION CONSTITUTE ONLY THE PASSING REMARKS AND ARE CONSIDERED AS OBITER DICTA . THE CHARACTER OF BINDING PRECEDENT SUBJECT TO OT HER CONDITIONS IS ASSIGNED ONLY TO THE RATIO DECIDENDI AND NOT THE OBITER DICTA OF A DECISION. 49.9. AS THE SECOND CONTENTION RAISED ON BEHALF OF THE ASSESSEE WAS REJECTED BY THE HONBLE HIGH COURT AND THE DECISION WAS GIVEN IN FAVOUR OF THE ASSESSEE ON THE FIRST CONTENTION THE REVENU E PREFERRED APPEAL BEFORE THE HONBLE SUPREME COURT. IN ADDL.CIT VS. MOHANBHAI PAMABHAI [(1987) 165 ITR 166 (SC)] THE JUDGMENT OF THE HONBLE HIGH COURT HAS BEEN AFFIRMED BY A BRIEF JUDGMENT READING AS UNDER:- HAVING REGARD TO THE VIEW TAKEN BY THIS COURT IN S UNIL SIDDHARTHBHAI V. CIT AND KARTHIKEYA V.SARABHAI V. C IT [(1985) 156 ITR 509 (SC)] THESE APPEALS MUST BE DI SMISSED. ACCORDINGLY WE DISMISS THESE APPEALS. THERE IS NO ORDER AS TO COSTS. 49.10. FROM THE ABOVE JUDGMENT IT IS MANIFES T THAT THE HONBLE SUPREME COURT HAS UPHELD THE HIGH COURT JUDGMENT BY FOLLOWING ITS VIEW IN SUNIL SIDDHARTHBHAI (SUPRA) WITHOUT MAKING ANY DISCUSSION. I SHALL EXAMINE THE FACTUAL MATRIX IN THE CASE OF SUNIL SIDDHARTHBHAI. THE ASSESSEE IN THAT CASE WAS A PARTNER IN A FIRM. AS H IS CONTRIBUTION TO THE I.T.A.NO.3013/M/07 (S.B) 65 CAPITAL OF THE FIRM HE CONTRIBUTED CERTAIN SHARES OF LIMITED COMPANIES WHICH WERE HELD BY HIM AS HIS CAPITAL ASSETS. THE B OOK VALUE OF THOSE SHARES IN HIS ACCOUNT BOOKS WAS SHOWN AS RS. 1 49 8 19. HOWEVER ON THE DATE WHEN HE CONTRIBUTED THOSE SHARES TO THE PARTN ERSHIP FIRM HE REVALUED THE SHARES AT THE MARKET VALUE OF RS. 1 6 0 279 AND CREDITED THE RESULTING DIFFERENCE OF RS. 10 460 TO HIS CAPITAL ACCOUNT. THE INCOME-TAX OFFICER DID NOT INCLUDE SUCH DIFFERENCE IN THE AS SESSABLE INCOME. THE CIT VIDE HIS ORDER U/S 263 HELD THAT THE DIFFE RENCE BETWEEN THE MARKET VALUE OF THE SHARES AND THE COST OF ACQUISITION OF THE SHARES TO THE ASSESSEE SHOULD HAVE BEEN BROUGHT TO TAX AS CAPITA L GAINS IN VIEW OF SECTION 45 OF THE ACT. THE TRIBUNAL HELD THAT WHILE THE TRANSACTION DID AMOUNT TO A TRANSFER WITHIN THE MEANING OF CLAUSE ( 47) OF SECTION 2 OF THE ACT BUT IT DID NOT RESULT IN CAPITAL GAINS LIABLE TO TAX. WHEN THE MATTER CAME UP BEFORE THE HONBLE SUPREME COURT IT HELD T HAT THERE WAS A TRANSFER OF THE SHARES WHEN THE ASSESSEE MADE THEM OVER TO THE PARTNERSHIP FIRM AS HIS CAPITAL CONTRIBUTION. IT WA S NOTICED THAT POSITION AS SUBSISTING BEFORE IT WAS DIFFERENT FROM A SITUATIO N WHEN A PARTNER RECEIVES HIS SHARE ON THE DISSOLUTION OF THE FIRM. AS THAT L ATER SITUATION DID NOT RESULT INTO TRANSFER IT WAS HELD THAT NO CAPITAL G AIN COULD ARISE. IN RECORDING THIS FINDING THE HONBLE SUPREME COURT INTER ALIA CONSIDERED THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN CIT V. MOHANBHAI PAMABHAI (SUPRA) WHICH IS EVIDENT FROM THE FOLLOWI NG PARA OF THE JUDGMENT :- LEARNED COUNSEL FOR THE ASSESSEE HAS ATTEMPTED TO DRAW AN ANALOGY BETWEEN THE POSITION ARISING WHEN A PERSON AL ASSET IS BROUGHT BY A PARTNER INTO A PARTNERSHIP AS HIS CONTRIBUTION TO THE PARTNERSHIP CAPITAL AND THAT W HICH ARISES WHEN ON DISSOLUTION OF THE FIRM OR ON RETIR EMENT A SHARE IN THE PARTNERSHIP ASSETS PASSES TO THE ERST WHILE PARTNER. IT HAS BEEN HELD BY THIS COURT IN CIT V. DEWAS CINE CORPORATION [1968] 68 ITR 240 (SC) AND THE I.T.A.NO.3013/M/07 (S.B) 66 GUJARAT HIGH COURT IN CIT V. MOHANBHAI PAMABHAI [1973] 91 ITR 393 THAT WHEN A PARTNER RETIRES OR THE PARTNERSHIP IS DISSOLVED WHAT THE PARTNER RECEIVE S IS HIS SHARE IN THE PARTNERSHIP. WHAT IS CONTEMPLATED HER E IS A SHARE OF THE PARTNER QUA THE NET ASSETS OF THE PART NERSHIP FIRM. ON EVALUATION THAT SHARE IN A PARTICULAR CA SE MAY BE REALISED BY THE RECEIPT OF ONLY ONE OF ALL THE ASS ETS. WHAT HAPPENS HERE IS THAT A SHARED INTEREST IN ALL THE ASSETS OF THE FIRM IS REPLACED BY AN EXCLUSIVE INTEREST IN AN AS SET OF EQUAL VALUE. THAT IS WHY IT HAS BEEN HELD THAT THERE IS NO TRANSFER . IT IS THE REALISATION OF A PRE-EXISTING RIGHT. 49.11. EVENTUALLY IN SUNIL SIDDHARTHBHAI (SUPRA) IT WAS HELD THAT WHEN A PARTNER BRINGS HIS PERSONAL ASSET INTO THE PARTN ERSHIP FIRM AS HIS CONTRIBUTION TO ITS CAPITAL THERE IS TRANSFER. BUT AS THE ASSESSEE RECEIVED NO CONSIDERATION WITHIN THE MEANING OF SECTION 48 O F THE INCOME-TAX ACT 1961 IT WAS HELD THAT NO PROFIT OR GAIN ACCRUED T O HIM FOR THE PURPOSES OF SECTION 45. 49.12. FROM THE JUDGMENT OF SUNIL SIDDHARTHBHAI (SUPRA) IT IS ABUNDANTLY CLEAR THAT THE VIEW OF THE HONBLE GUJAR AT HIGH COURT IN MOHANBHAI PAMABHAI (SUPRA) THAT WHEN A PARTNER RECEIVES ANYTHING FROM THE FIRM EITHER ON ITS RETIREMENT OR ON THE DI SSOLUTION THERE IS NO TRANSFER AND THE AMOUNT RECEIVED CANNOT BE CHARGED TO TAX U/S 45 HAS BEEN APPROVED. NOW EVENTUALLY WHEN THE HONBLE SUPREME COURT IN TH E CASE OF MOHANBHAI PAMABHAI (SUPRA) DISMISSED THE DEPARTMENTAL APPEAL BY FOLLOWING ITS JUDGMENT IN SUNIL SIDDHARTHBHAI (SUPRA) WHICH HAD ALREADY CONSIDERED AND APPROVED THE GUJARAT HIGH CO URT JUDGMENT IN MOHANBHAI PAMABHAI (SUPRA) IT SIMPLY APPROVED THE VIEW OF THE HONBLE HIGH COURT ON THE POINT THAT THE AMOUNT REC EIVED BY THE ASSESSEE BY WAY OF HIS SHARE IN THE GOODWILL OF THE FIRM DID NOT INVOLVE TRANSFER AND HENCE NO CAPITAL GAIN WAS CHARGEABLE. IT IS ONL Y UP TO THIS EXTENT THAT THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN MOHANBHAI PAMABHAI I.T.A.NO.3013/M/07 (S.B) 67 (SUPRA) GOT APPROVAL FROM THE HONBLE SUPREME COURT. THERE IS NO DISCUSSION BY THE HONBLE SUPREME COURT EITHER IN SUNIL SIDDHARTHBHAI (SUPRA) OR MOHANBHAI PAMABHAI (SUPRA) ABOUT THE ANCILLARY REASONING GIVEN BY THE HONBLE HIGH COURT WHICH I HAVE CATE GORIZED ABOVE AS OBITER DICTA OF THE JUDGMENT. BY NO STRETCH OF IMAGINATION CAN IT B E SAID THAT THE ABOVE DISCUSSED OBITER DICTA OF THE HONBLE HIGH COURT ALSO GOT THE SEAL OF APPROVAL FROM THE HONBLE SUPREME COURT EITHER EXPRESSLY OR BY NECESSARY IMPLICATION. 49.13. THE SECOND CONTENTION FOR THE ASSESSEE B EFORE THE HONBLE HIGH COURT IN MOHANBHAI PAMABHAI (SUPRA) THAT SINCE GOODWILL DID NOT COST ANYTHING TO THE FIRM AND ITS PARTNERS IN TERMS OF MONEY TRANSFER OF INTEREST IN THE GOODWILL BY THE ASSESSEE DID NOT A TTRACT THE CHARGE OF CAPITAL GAINS TAX WAS REJECTED BY THE HONBLE GUJA RAT HIGH COURT. IT IS INTERESTING TO NOTE THAT SUBSEQUENTLY THIS VERY IS SUE CAME UP FOR CONSIDERATION BEFORE THE HONBLE SUPREME COURT IN B.C. SRINIVASA SETTY (SUPRA) WHEREIN THE DEPARTMENT PRESSED INTO SERVICE THE JU DGMENT OF THE HONBLE GUJARAT HIGH COURT IN MOHANBHAI PAMABHAI (SUPRA) IN SUPPORT OF ITS STAND. THE HONBLE SUPREME COURT IN B.C. SRINIVASA SETTY (SUPRA) HELD THAT AS THE COST OF ACQUISITION OF GOODWILL WA S NOT CAPABLE OF ASCERTAINMENT ITS TRANSFER WOULD NOT ATTRACT CHARG E U/S 45. THE VIEW TAKEN BY THE HONBLE GUJARAT HIGH COURT IN MOHANBHAI PAMABHAI (SUPRA) TO THE EXTENT OF REJECTING THE ASSESSEES CONTENTION HAS BEEN SPECIFICALLY OVERRULED BY THE HONBLE SUPREME COURT IN THE CASE OF B.C.SRINIVASA SETTY (SUPRA). 49.14. THUS IT CAN BE SEEN THAT THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF MOHANBHAI PAMABHAI (SUPRA) HAS BEEN PARTLY APPROVED IN SUNIL SIDDHARTHBHAI (SUPRA) AND MOHANBHAI PAMABHAI (SUPRA) AND PARTLY NOT APPROVED BY THE HONBLE SUPREME COUR T I.T.A.NO.3013/M/07 (S.B) 68 B.C.SRINIVASA SETTY (SUPRA) . THE ONLY PART OF THE JUDGMENT WHICH HAS BEEN APPROVED IS TO THE EFFECT THAT ON RETIREMENT O R DISSOLUTION WHAT A PARTNER RECEIVES IS HIS SHARE IN THE PARTNERSHIP AN D NOT ANY CONSIDERATION FOR TRANSFERRING HIS INTEREST IN THE FIRM TO CONTIN UING PARTNERS. NOTHING MORE AND NOTHING ELSE THAN IT CAN BE CONSTRUED AS H AVING BEEN APPROVED BY THE HONBLE SUPREME COURT. THE RELIANCE OF THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OBITER DICTA OF THE JUDGMENT OF THE HONBLE HIGH IN MOHANBHAI PAMABHAI (SUPRA) FOR THE PROPOSITION THAT THE ABSENCE OF ANY CONSIDERATION ON THE REDUCTION OF CAPITAL WOULD MAKE SECTION 48 AND RESULTANTLY SEC. 45 INAPPLICABLE IS THEREFORE NOT CAPABLE OF ACCEPTANCE. IT IS MORE SO FOR THE DETAILED DISCUSSION MADE BY ME I N PARA 49.5 OF THIS ORDER. 49.15. ANOTHER CASE WHICH HAS BEEN DEBATED DURING THE COURSE OF HEARING IS BOMBAY BURMA TRADING CORPORATION LTD. VS. CIT [(199 8) 147 TAXATION 570 (BOM.)] IN WHICH THE QUESTION WHETHER THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT WHERE IN A CASE OF COM PULSORY ACQUISITION BY GOVERNMENT WITHOUT COMPENSATION NO CAPITAL LOSS WIL L ARISE HAS BEEN HELD TO BE NOT A REFERABLE QUESTION OF LAW AS THE S AME BEING COVERED BY THE RATIO OF THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF CIT VS. B.C.SRINIVASA SETTY (SUPRA). AN ARGUMENT WAS PUT FORTH THAT SINCE IN THIS CASE ALSO NO COMPENSATION WAS ALLOWED BY THE G OVERNMENT ON THE COMPULSORY ACQUISITION AND THE CAPITAL LOSS WAS HEL D TO BE NOT ARISING IN THE PRESENT CASE ALSO SINCE THERE IS NO CONSIDERATI ON THE PROVISIONS OF SECTION 45 SHALL NOT APPLY BECAUSE OF THE INAPPLICA BILITY OF SECTION 48. 49.16. I AM NOT CONVINCED WITH THIS SUBMISSION FOR THE REASON THAT IN THE CASE BEFORE THE HONBLE BOMBAY HIGH COURT THE ASSESSEE SOUGHT A DIRECTION TO REFER INTER ALIA THIS QUESTION IN ADDITION TO THE QUESTIONS ALREADY REFERRED BY THE TRIBUNAL U/S 256(2) OF THE ACT. SUB-SECTION (2) OF I.T.A.NO.3013/M/07 (S.B) 69 SECTION 256 AT THE MATERIAL TIME EMPOWERED THE AG GRIEVED PARTY TO APPROACH THE HIGH COURT AGAINST THE REFUSAL BY THE TRIBUNAL TO MAKE A REFERENCE OF A QUESTION TO THE HONBLE HIGH COURT. SEEN IN THIS LIGHT OF THE FACT THAT THIS JUDGMENT IS SIMPLY AN ORDER U/S 256(2) REFUSING TO ALLOW THE ADDITIONAL REFERENCE IN THE GIVEN CIRCUMSTANCES CANNOT BE HELD AS LAYING DOWN A PROPOSITION OF LAW. BE THAT AS IT MAY THERE IS NO DISCUSSION WORTH THE NAME ABOUT THE FACTS OF THE CASE IN THIS CASE AND THE NOTICE OF MOTION MOVED BY THE ASSESSEE SEEKING DIRECTION TO R EFER THE SAID QUESTION WAS REJECTED. FROM THE QUESTION ONE CAN POSSIBLY IN FER EITHER OF THE TWO SITUATIONS VIZ. FIRST WHEN NO CONSIDERATION WAS R ECEIVED BY THE ASSESSEE DURING THE YEAR IN APPEAL AGAINST COMPULSORY ACQUIS ITION BUT WAS RECEIVED IN A LATE YEAR AND SECOND WHEN NO CONSIDERATION AT ALL WAS RECEIVED EITHER IN THE YEAR IN APPEAL OR THEREAFTER. GOING BY THE F IRST SITUATION WHEN THE ASSESSEE DID NOT RECEIVE ANY COMPENSATION ON THE CO MPULSORY ACQUISITION FROM THE GOVERNMENT IN THE YEAR UNDER APPEAL NATUR ALLY THE QUESTION OF EARNING ANY INCOME FROM TRANSFER OF SUCH PROPERTY C ANNOT ARISE IN SUCH YEAR. IT MAY BE A MATTER OF TIME WHEN THE AWARD IS MADE AND COMPENSATION IS AWARDED IN A LATER YEAR. IT IS IN T HIS LATER YEAR(S) THAT THE INCOME UNDER THE HEAD `CAPITAL GAINS SHALL ARISE. THE SECOND SITUATION DOES NOT APPEAR TO BE LIKELY FOR THE REASON THAT TH E POSSIBILITY OF THE GOVERNMENT ACQUIRING PROPERTY AND NOT SANCTIONING A NY COMPENSATION AT ALL IS NOT CAPABLE OF ACCEPTANCE. IN VIEW OF THESE FACTS I AM NOT PERSUADED TO TAKE THIS CASE AS THE AUTHORITY FOR THE PROPOSIT ION THAT IF FULL VALUE OF CONSIDERATION IS NIL THERE CANNOT BE ANY LOSS UND ER THE HEAD CAPITAL GAINS. 49.17. FROM THE ABOVE DISCUSSION IT CAN BE SEEN THAT THE JUDGMENT IN THE CASE OF B.C.SRINIVASA SETTY (SUPRA) HAS LAID DOWN A PRINCIPLE THAT IF COST OF ACQUISITION OF A CAPITAL ASSET CANNOT BE ENVISAG ED OR IS INCAPABLE OF DETERMINATION OR IS UNASCERTAINABLE THE PROVISIONS OF SECTION 45 SHALL NOT I.T.A.NO.3013/M/07 (S.B) 70 APPLY. WHAT IS TRUE FOR COST OF ACQUISITION SHALL A LSO BE TRUE FOR THE FULL VALUE OF CONSIDERATION AS CONTENDED BY THE LD. DR A ND ALSO FOR OTHER COMPONENTS GIVEN IN SECTION 48. THE TWO SITUATIONS CANNOT BE COMPARED VIZ. FIRST IN WHICH COST OF ACQUISITION OR FULL VA LUE OF CONSIDERATION ETC. IS INCAPABLE OF ASCERTAINMENT OR CANNOT BE ENVISAGED A ND SECOND IN WHICH THE COST OF ACQUISITION OR FULL VALUE OF CONSIDERAT ION ETC. IS NIL AND THERE IS NO DIFFICULTY IN FINDING OUT THE ZERO VALUE. WHEREA S THE FORMER SITUATION WILL NOT RESULT INTO ANY INCOME U/S 45 THE LATTER WILL LEAD TO DETERMINATION OF THE INCOME CHARGEABLE UNDER THIS HEAD. FURTHER I T IS BEYOND MY COMPREHENSION AS TO HOW ANYONE CAN ARGUE THAT IF TH E FULL VALUE OF CONSIDERATION IS A MINUSCULE PART OF THE COST OF AC QUISITION THERE WILL ARISE LOSS UNDER THE HEAD `CAPITAL GAINS BUT IF IT IS NIL THEN THERE CANNOT BE ANY LOSS. TO PUT IT SIMPLY THE CONTENTION IS THAT I F A CAPITAL ASSET WITH COST OF ACQUISITION OF RS.100 IS TRANSFERRED FOR A FULL VALUE OF CONSIDERATION OF SAY RE.1 THERE WILL BE CAPITAL LOSS U/S 45 OF RS. 99 BUT IF NOTHING IS REALIZABLE OR THE FULL VALUE OF CONSIDERATION IS NI L THE ENTIRE LOSS OF RS.100 WOULD GO OUT OF RECKONING. THIS PROPOSITION IS TOTALLY ABSURD. IT MAY HAPPEN THAT THE OUTSIDE LIABILITIES OF ANY COMP ANY EXCEED THE AVAILABLE ASSETS. IF SUCH COMPANY GOES INTO LIQUID ATION AND ONLY THE OUTSIDE LIABILITIES ARE DISCHARGED TO A PARTICULAR EXTENT LEAVING NOTHING FOR SHAREHOLDER CAN ANY ONE SAY THAT THE ASSESSEE WHO PURCHASED THE SHARES OF THE COMPANY HAS NOT INCURRED ANY LOSS U/S 45 SIM PLY FOR THE REASON THAT IT IS A CASE OF TOTAL LOSS OF THE INVESTMENT ? IN MY CONSIDERED OPINION THE ANSWER TO THIS QUESTION HAS TO BE GIVEN IN NEGATIVE ALONE. IF IN SUCH SITUATION THE COMPANY IN LIQUIDATION AFTER DISCHARG E OF THE OUTSIDE LIABILITIES MANAGES TO PAY SAY PAISA 10 AGAINST TH E FACE VALUE OF SHARE OF RS.100 THE SHAREHOLDER SUFFERS LOSS OF RS.99.90 PE R SHARE WHICH WILL BE COMPUTED U/S 45. IT CANNOT BE CONTEMPLATED THAT WHE RE THE COMPANY COULD NOT PAY EVEN PAISA 10 THE LOSS OF RS.100 AS AGAINST RS.99.90 IN THE EARLIER CASE WOULD ASSUME A DIFFERENT CHARACTER A ND LOSE THE RIGHT TO BE I.T.A.NO.3013/M/07 (S.B) 71 COMPUTED U/S 45. IN VIEW OF THE FOREGOING DISCUSSIO N I AM OF THE CONSIDERED OPINION THAT THE SALE CONSIDERATION OF N IL IN THIS CASE IS LIABLE TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSES OF COMPUTING LOSS U/S 45 AT RS.22.21 CRORE. 49.18. MY VIEW CAN BE SUPPORTED FROM ANOTHER A NGLE ALSO. THE CONTENTION OF THE LD. DR IS THAT SINCE `FULL VALUE OF CONSIDERATION WHICH IS AN ESSENTIAL COMPONENT OF SECTION 48 IS NIL TH E COMPUTATION SHALL BECOME IMPOSSIBLE. IF THIS INTERPRETATION IS TRUE FOR ONE COMPONENT OF SEC. 48 THEN IT SHALL ALSO BE TRUE FOR THE REMAINI NG THREE COMPONENTS AS DISCUSSED IN PARA 49.2 ABOVE. PROCEEDING WITH SUCH INTERPRETATION IT WOULD BECOME ESSENTIAL THAT ALL THE FOUR COMPONENT S MUST BE PRESENT IN ALL CIRCUMSTANCES IN ORDER TO ENABLE THE COMPUTATIO N OF INCOME UNDER THE HEAD `CAPITAL GAINS. IF THIS LOGIC IS UPHELD THE N ILLOGICAL RESULTS WILL FOLLOW. IN SEVERAL CASES ONE CAN FIND THAT EITHER T HERE IS NO COST OF IMPROVEMENT OF A CAPITAL ASSET OR NO EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH ITS TRANSFER. GOING BY THIS INTERPRETATION THEN IN ALL SUCH CASES THE COMPUTATION PROVISION U/S 48 SHALL FAIL BECAUSE OF THE LACK OF THE PRESENCE OF SUCH COMPONENT(S) AN D ALL THE TRANSFERS SHALL ESCAPE CHARGEABILITY U/S 45. IT IS SIMPLE AND PLAIN THAT IT IS NOT AND CAN NEVER BE THE INTENTION OF THE LEGISLATURE. THE INTERPRETATION GIVEN BY THE HONBLE SUPREME COURT TO SECTION 48 READ WITH S ECTION 45 IN B.C. SRINIVASA SETTY (SUPRA) SHOULD BE UNDERSTOOD TO THE EXTENT OF IMPOSSIBILITY TO ENVISAGE OR CONCEIVE THE VALUE OF ANY OF THE COMPONENTS OF SECTION 48 SO AS TO MAKE IT UNWORKABLE AND NOT W HERE IT IS ASCERTAINABLE BUT IS NIL. IT CANNOT BE UNDERSTOOD T O MEAN THAT IF THE VALUE OF ANY OF THESE FOUR FACTORS IS NIL THE COMPUTATI ON PROVISION SHALL FAIL AND AS SUCH SECTION 45 SHALL NOT APPLY. I.T.A.NO.3013/M/07 (S.B) 72 III. IS THERE ANY LOSS TO ASSESSEE ON REDUCTION OF CAPITAL? 50.1. THE LEARNED DEPARTMENTAL REPRESENTATIVE ST RONGLY ARGUED THAT THE CAPITAL REDUCTION IN THE INSTANT CASE SHOULD NOT BE TREATED AS CAUSING LOSS TO THE ASSESSEE FOR THE REASON THAT THERE IS NO CHA NGE OF ITS RIGHT IN THE NET ASSETS OF TGL PRE AND POST REDUCTION OF CAPITAL. IT WAS EXEMPLIFIED BY STATING THAT IF TGL HAS NET ASSETS OF RS.1 000 WIT H PRE-REDUCTION EQUITY SHARE CAPITAL OF 100 SHARES THE VALUE OF THE RIGHT OF EACH SHAREHOLDER IN THE PROPERTIES OF THE COMPANY SHALL REMAIN SAME EVE N IN THE POST- REDUCTION PERIOD AS THE ENTIRE EQUITY SHARE CAPITAL WOULD PROPORTIONATELY COME DOWN LEAVING RS.1000 UNTOUCHED. HE ARGUED THA T AN ORIGINAL SHAREHOLDER HOLDING 50 SHARES IN COMPANY HAVING RIG HT OVER RS.500 OF ITS NET ASSET WOULD HAVE THE SAME RIGHT EVEN WHEN TOTAL 100 EQUITY SHARES ARE REDUCED TO 50 AND THE SHAREHOLDER HOLDING 50 EQUIT Y SHARES BECOMES SHAREHOLDER OF 25 EQUITY SHARES. DRAWING STRENGTH F ROM THIS EXAMPLE IT WAS STATED THAT THERE WAS NO CHANGE IN THE NET WORT H OF THE ASSESSEES SHARE IN THE NET ASSETS OF TGL AFTER REDUCTION OF CAPITAL. TO BUTTRESS THIS VIEW HE RELIED ON THE JUDGMENT OF THE HONBLE SUPR EME COURT IN THE CASE OF CIT VS. DALMIA INVESTMENT CO. LTD. [(1964) 52 ITR 5 67 (SC)] IN WHICH THE ASSESSEE HOLDING SHARES AS STOCK-IN-TRADE WAS ALLOTTED BONUS SHARES IN PROPORTION TO THE ORIGINAL SHARE. IN THAT CASE IT WAS HELD THAT THE BONUS SHARES BE VALUED BY SPREADING COST OF OLD SH ARES OVER OLD SHARES AND NEW SHARES TAKEN TOGETHER AS SUCH SHARES WOULD RANK PARI PASSU. IT WAS EXPLAINED BY THE LD. DR THAT THE ISSUANCE OF BO NUS SHARES DOES NOT LEAD TO ANY INCOME TO THE SHAREHOLDER AS NET WORTH OF THE SHAREHOLDER IN THE COMPANY REMAINS THE SAME PRE AND POST ISSUANCE OF BONUS SHARES. APPLYING THE SAME IN THE REVERSE DIRECTION THE LEA RNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT IF THE ISSUANCE OF FU RTHER BONUS SHARES DOES NOT ATTRACT ANY CHARGE TO TAX ON THE GROUND THAT TH ERE WAS NO NET INCREASE I.T.A.NO.3013/M/07 (S.B) 73 IN THE NET WORTH OF THE SHAREHOLDER THE REDUCTION IN THE EQUITY SHARE ALSO NOT LEADING TO ANY DEPLETION OF THE NET WORTH SHOUL D MEET SAME FATE. ON THIS ANALOGY IT WAS ARGUED THAT THE REDUCTION OF CA PITAL SHOULD ALSO NOT BE CONSTRUED AS RESULTING INTO ANY LOSS TO THE ASSESSE E. 50.2. IN SO FAR AS THE QUESTION OF DETERMINING INCOME FROM ASSET IS CONCERNED IT DEPENDS UPON THE POINT AS TO WHETHER SUCH ASSET IS HELD AS `STOCK IN TRADE OR `INVESTMENT. WHEREAS INCOME RE SULTING FROM CAPITAL ASSETS HELD AS `INVESTMENTS IS TAXABLE UNDER THE H EAD `CAPITAL GAINS THE INCOME RESULTING FROM THE ASSETS HELD AS `STOCK IN TRADE IS TAXABLE UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSI ON. THIS IS THE REASON FOR WHICH THE DEFINITION OF `APITAL ASSETS GIVEN IN SECTION 2(14) EXCLUDES INTER ALIA STOCK IN TRADE AS PER CLAUSE (I). THE PARAMETERS FOR TAXING THE INCOME UNDER BOTH THE HEADS ARE DIFFEREN T. AS FAR AS STOCK IN TRADE IS CONCERNED THE INCOME MAY ARISE FROM ITS T RANSFER AND ALSO FROM ITS RETENTION IN TERMS OF INCREASE OR DECREASE IN I TS VALUE AS ON THE BALANCE SHEET DATE WHEN THE ASSESSEE VALUES ITS STOCK AT M ARKET PRICE WHICH IS ONE OF THE RECOGNIZED METHODS. BUT INCOME FROM `CAP ITAL ASSETS ARISES ONLY ON ITS TRANSFER AND NOT DURING ITS RETENTION. IT IS SO BECAUSE OF THE WORDING OF SECTION 45(1) WHICH CLEARLY PROVIDES IN THE OPENING PART THAT ANY PROFITS OR GAINS ARISING FROM THE `TRANSF ER OF A CAPITAL ASSET SHALL SUBJECT TO OTHER PROVISIONS BE CHARGEABLE TO TAX UN DER THIS HEAD. SAME MANDATE IS DISCERNIBLE FROM THE LATER PART OF THIS PROVISION WHICH STIPULATES THAT IT `SHALL BE DEEMED TO BE THE INC OME OF THE PREVIOUS YEAR IN WHICH TRANSFER TOOK PLACE. ON THE OTHER HAND I NCOME FROM THE STOCK IN TRADE ARISES WHEN IT IS TRANSFERRED OR THERE IS INCREASE OR REDUCTION IN THE VALUE OF CLOSING STOCK. WHEN STOCK IS VALUED AT `MA RKET PRICE METHOD ITS VALUE HAS TO BE REFLECTED ACCORDINGLY IRRESPECTIVE OF THE PURCHASE PRICE. IN SUCH A CASE THERE WILL ARISE BUSINESS INCOME IF THE VALUE OF STOCK IN HAND I.T.A.NO.3013/M/07 (S.B) 74 AT THE END OF THE YEAR MOVES NORTHWARDS AND ON THE OTHER HAND BUSINESS LOSS IF ITS VALUE MOVE SOUTHWARDS. 50.3. COMING TO THE INCOME (WHICH ALSO INCLUDES L OSS) IN RESPECT OF ASSETS IN THE FORM OF SHARES IT IS FOUND THAT THE SAME ARISES FROM THEIR TRANSFER IRRESPECTIVE OF THE FACT WHETHER SUCH SHAR ES ARE HELD AS `STOCK IN TRADE OR `INVESTMENT. BUT WHEN THE ASSESSEE IS FO LLOWING MARKET PRICE METHOD OF VALUING THE INVENTORY AND SUCH SHARES AR E HELD AS STOCK IN TRADE THERE CAN BE INCOME FROM THEIR RETENTION WH ICH WILL DEPEND UPON THE GOING UP OR COMING DOWN OF THE MARKET PRICE OF SUCH SHARES AS AT THE END OF THE YEAR VIS-A-VIS THE PURCHASE PRICE OR ITS VALUE IN THE OPENING STOCK IF THESE WERE PURCHASED IN AN EARLIER YEAR. HOWEVER THERE CANNOT BE ANY INCOME (NEITHER POSITIVE NOR NEGATIVE) FROM RETENTION OF SHARES HELD AS INVESTMENT BECAUSE OF SEC. 45 WHICH PROVI DES THAT INCOME SHALL ARISE ONLY ON THE `TRANSFER OF CAPITAL ASSET. IT THUS FOLLOWS THAT ANY INCREASE OR DECREASE IN THE MARKET VALUE OF SHARES HELD AS `INVESTMENT WILL NOT RESULT INTO COMPUTATION OF ANY CAPITAL GAI N ON MERE RETENTION. IN OTHER WORDS NEITHER INCREASE IN THE MARKET VALUE O F SHARES HELD AS INVESTMENT SHALL GENERATE CAPITAL GAIN NOR ITS REDU CTION SHALL RESULT INTO LOSS UNDER THIS HEAD. TO PUT IT SIMPLY THE MARKET VALUE OF SHARES HAS NO ROLE TO PLAY IN THE COMPUTATION OF CAPITAL GAINS S O LONG AS SUCH SHARES ARE IN HOLDING AND ARE NOT TRANSFERRED. ANY INCREASE OR DECREASE IN THE MARKET VALUE OF SUCH SHARES IS A TOTALLY IRRELEVANT CONSID ERATION. 50.4. RETURNING TO THE PRESENT CASE IT IS FOUND AS AN UNDISPUTED FACT THAT THE ASSESSEE HELD THE SHARES OF TGL AS INVESTMENT A ND NOT AS STOCK IN TRADE. THE CONTENTION OF THE LD. DR THAT AFTER THE REDUCTION OF CAPITAL THE NET WORTH PER SHARE SHALL PROPORTIONATELY GO UP AND THE ASSESSEES INTEREST IN TGL SHALL REMAIN UNAFFECTED ON OVERALL BASIS NOT RESULTING INTO LOSS AT THE TIME OF REDUCTION OF CAPITAL IS DEVOID OF MERI TS. IT IS OBVIOUS THAT THE I.T.A.NO.3013/M/07 (S.B) 75 REDUCTION OF CAPITAL HAS LEFT THE ASSESSEE WITH FIF TY PER CENT OF ITS HOLDING IN TERMS OF NUMBER OF SHARES. ON THE OTHER HAND TH E INCREASE IN THE BOOK VALUE OF THE REMAINING SHARES IN HOLDING HAS NO EFF ECT SINCE SUCH REMAINING SHARES HAVE NOT BEEN SOLD BY THE ASSESSEE SIMULTANEOUSLY SO AS TO ABSORB THE LOSS ON ACCOUNT OF REDUCTION OF CAPIT AL. IT HAS BEEN SEEN ABOVE THE INCREASE IN THE MARKET VALUE OF SHARES IS OF NO CONSEQUENCE WHEN THESE ARE HELD AS INVESTMENT UNLESS THESE ARE SOLD. EVEN IF THE MARKET VALUE OF THE SHARE SHOOTS UP OR CRASHES THER E CANNOT BE ANY QUESTION OF CAPITAL GAIN UNLESS THE SHARES HELD AS INVESTMENT ARE TRANSFERRED. 50.5 THE CONTENTION OF THE LD. DR IN SIMPLE WORDS IS THAT ALBEIT THERE IS A TRANSFER ON REDUCTION OF CAPITAL BUT NO LOSS CAN RESULT DUE TO SIMULTANEOUS EQUAL INCREASE IN THE BOOK VALUE OF TH E REMAINING SHARES. IF INCREASE IN THE BOOK VALUE OF THE REMAINING SHARES IS CONSIDERED AS A RELEVANT FACTOR TO NEGATE THE LOSS ON TRANSFER DUE TO REDUCTION OF CAPITAL THEN EVERY INCREASE OR DECREASE IN THE BOOK VALUE OF THE SHARES SHOULD ALSO BE CONSIDERED AS RESULTING INTO INCOME OR LOSS UNDER THE HEAD `CAPITAL GAINS. IT IS SEEN THAT THE ASSESSEES TOT AL INVESTMENT IN TGL BEFORE REDUCTION OF CAPITAL WAS RS.24.84 CRORES. TGL HAD SUFFERED LOSSES OVER THE PERIOD AND AS ON THE DATE OF REDUCT ION OF CAPITAL IT HAD ACCUMULATED LOSSES OF RS.42.96 CRORES WHICH WERE WR ITTEN OFF OUT OF CAPITAL REDUCTION AND SHARE PREMIUM ACCOUNT. IN T HAT VIEW OF THE MATTER THE ASSESSEE SHOULD HAVE BEEN ALLOWED TO COMPUTE LO SS UNDER THE HEAD `CAPITAL GAINS ON EVERY INCURRING OF LOSS BY TGL. THE FIGURES ARE APPARENT THAT ASSESSEE IS HOLDING AROUND 75% OF TGL S CAPITAL AND THE ACCUMULATED LOSS OF TGL IS ALMOST DOUBLE THE AMOUNT OF ASSESSEES INVESTMENT IN ITS SHARE CAPITAL. OBVIOUSLY THE CONT ENTION OF THE LD. DR HAS NO FORCE AS THE INCREASE OR DECREASE IN THE BOOK VA LUE OF SHARES HAS NOTHING TO DO WITH INCOME OR LOSS UNDER THE HEAD `C APITAL GAINS. THE I.T.A.NO.3013/M/07 (S.B) 76 RELEVANT CRITERIA TO PRODUCE INCOME OR LOSS UNDER THE HEAD `CAPITAL GAINS IS TRANSFER OF CAPITAL ASSET WHICH HAS TAKEN PLACE IN THE PRESENT CASE DUE TO REDUCTION OF TGLS CAPITAL. NEITHER ANY INCREASE IN THE MARKET PRICE OF SHARES WHILE IN HOLDING RESULTS INTO ANY INCOME N OR THE DECREASE IN THEIR MARKET PRICE RESULTS INTO LOSS. 50.6. HERE IS A CASE IN WHICH THE SHARE-HOLDING O F THE ASSESSEE HAS COME DOWN BY FIFTY PER CENT. IF IT HAD EARLIER 100 SHARE S AT ITS DISPOSAL FOR SALE AT ANY TIME NOW IT IS LEFT WITH ONLY 50 SHARES. IT S RIGHT OVER THE 50 SHARES WHICH HAVE BEEN CANCELLED BY THE COMPANY HAS COME TO A NAUGHT AND IT HAS RESULTED INTO TRANSFER. NOW AFTER THE REDUCTIO N IT CANNOT GO TO MARKET TO SELL 100 SHARES BUT HAS ONLY 50 SHARES AT ITS DI SPOSAL. THE CAPITAL ASSET TO THE EXTENT OF 50 EQUITY SHARES HAS DISAPPEARED F ROM HIS HOLDING. THE TRANSACTION OF REDUCTION INTO CAPITAL HAS COME TO A N END MAKING THE ASSESSEE POORER BY 50 SHARES WITHOUT ANY CORRESPOND ING INFLOW OF CONSIDERATION. THE INCREASE IN THE BOOK OR MARKET V ALUE OF THE REMAINING SHARES IN HAND IS NOT DETERMINATIVE OF THE CAPITAL LOSS RESULTING FROM THE TRANSACTION OF TRANSFER ON REDUCTION OF CAPITAL WH ICH GOT COMPLETED IN THE YEAR IN QUESTION. IT WOULD BE ALTOGETHER DIFFERENT TRANSACTION WHEN REMAINING SHARES BECOME SUBJECT MATTER OF TRANSFER. AT THAT POINT OF TIME THE QUESTION OF CAPITAL GAIN WOULD ARISE BY CONSIDE RING THE MARKET PRICE OF SUCH SHARES VIS--VIS THE COST OF ACQUISITION OF THE REMAINING SHARES. I F THE MARKET PRICE FURTHER GOES UP AT THE TIME OF TRA NSFER OF THE REMAINING SHARES THERE WILL RESULT STILL HIGHER INCOME. BUT IF UNFORTUNATELY SAY TGLS FUTURE HAS MORE ADVERSE TIME IN STORE AND THA T THE MARKET PRICE OF ITS SHARES FURTHER PLUNGES THE ASSESSEE WILL STAND TO LOSE AT THE TIME OF THE TRANSFER OF THE REMAINING SHARES AS WELL. IN THAT CASE THE FACT THAT ON REDUCTION OF CAPITAL THERE WAS SOME INCREASE IN THE BOOK VALUE OF THE REMAINING SHARES WILL NOT COME TO MITIGATE THE LOSS TO THE ASSESSEE SUBSEQUENTLY AT THE TIME OF SECOND TRANSACTION OF T RANSFERRING REMAINING I.T.A.NO.3013/M/07 (S.B) 77 SHARES. CONVERSELY IF THE MARKET PRICE OF THE REM AINING SHARES GOES UP AT THE TIME OF THEIR TRANSFER IT SHALL LEAD TO HIGHER AMOUNT OF CAPITAL GAIN. BUT THAT EVENT SHALL ARISE ONLY AT THE SECOND STAGE THAT IS WHEN THE REMAINING SHARES ARE TRANSFERRED. THE FAVOURABLE OR ADVERSE FACTORS HAVING BEARING ON THE POTENTIAL INCREASE OR REDUCTI ON IN THE PRICE OF THE REMAINING SHARES CANNOT REDUCE THE LOSS THAT HAS ACTUALLY RESULTED TO THE ASSESSEE BECAUSE OF THE FIRST TRANSACTION BEING T HE TRANSFER ON REDUCTION OF CAPITAL WITHOUT ANY CONSIDERATION. THE PROPOSITI ON PUT FORTH BY THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD HAVE HAD SOME FORCE IF SIMULTANEOUS WITH THE REDUCTION OF THE CAPITAL OR I MMEDIATELY THEREAFTER TGL HAD GONE INTO LIQUIDATION IN WHICH CASE THE AS SESSEE WOULD HAVE REALIZED THE AMOUNT AGAINST ITS TOTAL SHAREHOLDING FROM THE COMPANY. IN THAT CASE BOTH THE TRANSACTIONS NAMELY THE REDUCTI ON OF CAPITAL AND TRANSFER OF THE REMAINING SHARES WOULD HAVE TAKEN PLACE IN CLOSE PROXIMITY TO EACH OTHER. STILL IN THAT CASE THE CA PITAL GAIN IF ANY COULD HAVE BEEN CONSIDERED FROM THE SECOND TRANSACTION B EING THE TRANSFER OF REMAINING SHARES LEAVING THE LOSS FROM THE FIRST T RANSACTION INTACT ON CAPITAL REDUCTION. SINCE TGL HAS NOT GONE INTO LIQU IDATION AND IS AN EXISTING COMPANY AND THE ASSESSEE HAS NEITHER REALI ZED ITS PROPORTIONATE SHARE IN THE ASSETS OF TGL NOR THE REMAINING FIFTY PER CENT SHARES HAVE BEEN TRANSFERRED IN THE CURRENT YEAR THERE CANNOT BE ANY QUESTION OF CONSIDERING THE INCREASE IN BOOK VALUE OR THE PROBA BLE HIGHER MARKET PRICE OF THE REMAINING SHARES IN TGL CUTTING OUT THE LOSS ARISING AT THE TIME OF REDUCTION OF SHARE CAPITAL. 50.7. THE LD. DR HAS FOCUSED HIS ARGUMENT ON THE POINT THAT THE VALUE OF THE ASSESSEES SHARE IN THE NET WORTH OF TGL HAS R EMAINED SAME AND AS SUCH THERE IS NO LOSS. IT HAS BEEN NOTICED ABOVE TH AT IT IS THE MARKET PRICE OF THE SHARES WHICH MATTERS AT THE TIME OF TRANSFER . THE BOOK VALUE OR THE NET WORTH OF A COMPANY MAY NOT HAVE ANY DIRECT NEXU S WITH THE MARKET I.T.A.NO.3013/M/07 (S.B) 78 PRICE OF ITS SHARES. ONE CAN FIND INNUMERABLE CASES IN WHICH THE MARKET PRICE OF A SHARE MAY BE MUCH HIGHER THAN ITS BOOK V ALUE OR VICE VERSA AND AS SUCH BOTH THE BOOK VALUE AND MARKET VALUE NEED N OT NECESSARILY FOLLOW THE SAME COURSE. MARKET PRICE OF A SHARE DEPENDS U PON VARIETY OF FACTORS INCLUDING THE SENTIMENT OF MARKET. OTHER THINGS I NCLUDING THE BOOK VALUE REMAINING THE SAME THE MARKET PRICE OF A S HARE MAY ZOOM OR DWINDLE INTRA-DAY OR WITHIN THE SAME SETTLEMENT PE RIOD. GIVEN THE SAME BOOK VALUE THE MARKET PRICE OF THE SHARES OF TWO COMPANIES MAY BE QUITE DIFFERENT INTRA INDUSTRY OR INTER INDUSTRIES . IT IS THUS VIVID THAT THE INCREASED OR REDUCED OR STATIC BOOK VALUE OF THE SHARES OF A COMPANY HAS NO RELATION EITHER WITH ITS MARKET PRICE OR COMPUTA TION OF CAPITAL GAIN EITHER AT THE TIME OF TRANSFER ON REDUCTION OF CAP ITAL OR WHEN THE REMAINING SHARES IN POSSESSION ARE TRANSFERRED. THI S CONTENTION RAISED ON BEHALF OF THE REVENUE IS THUS REPELLED. 50.8. NOW I SHALL EXAMINE THE FACTS OF DALMIA INVESTMENT CO. LTD. (SUPRA) WHICH HAS BEEN PUT FORTH AS TRUMP CARD OF THE R EVENUE. IN THAT CASE THE ASSESSEE WAS HOLDING SHARES AS STOCK-IN-TR ADE. IT PURCHASED SOME SHARES AND WAS ALLOTTED EQUAL NUMBER OF BONUS SHARE S IN THE YEAR 1945. IN A.Y. 1949-50 IT LIQUIDATED BOTH THE ORIGINAL AS WEL L AS BONUS SHARES. ON THE QUESTION OF BUSINESS INCOME FROM THIS TRANSACTI ON THE HONBLE SUPREME COURT HELD THAT THE PURCHASE COST OF THE OR IGINAL SHARES WAS TO BE SPREAD OVER THE ORIGINAL AS WELL AS THE BONUS SHARE S AND THAT WAS HOW THE BUSINESS INCOME WAS TO BE DETERMINED. THUS IT CAN B E SEEN THAT THIS JUDGMENT IS NOT APPLICABLE PRIMARILY FOR THE REASON THAT IT WAS RENDERED IN THE CONTEXT OF SHARES WHICH WERE HELD AS STOCK-IN-T RADE. THE RECEIPT OF BONUS SHARES IMPROVES THE SHARE HOLDING AND IF THE MARKET PRICE METHOD OF VALUING STOCK IS FOLLOWED THERE MAY ARISE INCOM E ON ACCOUNT OF RECEIPT OF SUCH SHARES AT THE END OF THE YEAR BY VALUING SU CH SHARES SIMULTANEOUSLY WITH THE REDUCTION IN THE MARKET VAL UE OF ORIGINAL SHARES. I.T.A.NO.3013/M/07 (S.B) 79 PRESENTLY THE SITUATION UNDER CONSIDERATION IS THE ONE IN WHICH THE SHARES ARE INVESTMENT. IN SUCH A CASE NO INCOME CAN ARISE AT THE TIME OF RECEIPT OF BONUS SHARES AS THE EVENT RESULTING INTO CAPITAL GAINS CAN ARISE WHEN CAPITAL ASSET IS PARTED WITH AND NOT WHEN IT IS REC EIVED. SECONDLY THE QUESTION BEFORE THE HONBLE SUPREME COURT WAS TO FI ND OUT THE COST OF THE BONUS SHARES FOR ASCERTAINING THE AMOUNT OF BUSINES S PROFIT FROM THE SALE OF SUCH STOCK OF SHARES AT THE TIME OF THEIR SALE. ONE MOST IMPORTANT FACTOR TO BE NOTED IS THAT THIS JUDGMENT WAS RENDER ED UNDER THE INDIAN INCOME-TAX ACT 1922 AND NOW IT IS THE REGIME OF TH E INCOME-TAX ACT 1961 AND THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2002-03. POSITION UNDER THE 1961 ACT IS QUITE DIFFERENT INASMUCH AS S PECIFIC PROVISION HAS BEEN INCORPORATED TO DEAL WITH THE QUESTION OF COST OF ACQUISITION OF BONUS SHARES AND RIGHT SHARES IN SECTION 55(2) FOR THE PU RPOSES OF SEC. 45. CLAUSE (AA) OF SUB-SECTION (2) OF SECTION 55 CLEARLY PROVI DES THAT IN A CASE WHERE BY VIRTUE OF HOLDING A CAPITAL ASSET BEING A SHARE OR ANY OTHER SECURITY THE ASSESSEE BECOMES (A) ENTITLED TO SUBSCRIBE TO A NY ADDITIONAL FINANCIAL ASSET (I.E. RIGHT SHARES) OR (B) IS ALLOTTED ANY A DDITIONAL FINANCIAL ASSET WITHOUT ANY PAYMENT (I.E. BONUS SHARES) THEN THE C OST OF ACQUISITION FOR THE PURPOSES OF SECS. 48 AND 49 SHALL (I) IN RELATI ON TO THE ORIGINAL SHARES ON THE BASIS OF WHICH THE ASSESSEE BECOMES ENTITLED TO ANY ADDITIONAL FINANCIAL ASSET MEANS THE AMOUNT ACTUALLY PAID FOR ACQUIRING THE ORIGINAL FINANCIAL ASSET; (III) IN RELATION TO THE FINANCIAL ASSET TO WHICH THE ASSESSEE HAS SUBSCRIBED ON THE BASIS OF THE SAID ENTITLEMEN T (I.E. RIGHT SHARES) MEANS THE AMOUNT ACTUALLY PAID BY HIM FOR ACQUIRING SUCH ASSET ; (IIIA) IN RELATION TO THE FINANCIAL ASSET ALLOTTED TO THE ASS ESSEE WITHOUT ANY PAYMENT AND ON THE BASIS OF HOLDING OF ANY OTHER FINANCIAL ASSET (I.E. BONUS SHARES) SHALL BE TAKEN TO BE NIL. IT IS THEREFORE OBVIOU S THAT UNDER THE ACT THE COST OF ACQUISITION OF THE ORIGINAL SHARES REMAINS AT THE AMOUNT ACTUALLY PAID FOR ACQUIRING SUCH SHARES AND THE ISSUANCE OF BONUS SHARES DOES NOT RESULT INTO SPREADING OVER THE COST OF ORIGINAL SHA RES OVER THE ORIGINAL PLUS I.T.A.NO.3013/M/07 (S.B) 80 BONUS SHARES. IN SUCH A SITUATION THE COST OF BONU S SHARES BECOMES NIL. WHEN THE SHAREHOLDER GOES TO SELL THE ORIGINAL SHAR ES THE TOTAL COST SPENT AT THE TIME OF ACQUIRING SUCH SHARES SHALL BE CONSI DERED AS ITS COST OF ACQUISITION AND THERE WILL NOT BE ANY QUESTION OF S PREADING IT OVER THE BONUS SHARES AS WELL. SIMILARLY WHEN HE TRANSFERS THE BONUS SHARES EITHER WITH OR WITHOUT AS ALSO BEFORE OR AFTER THE ORIGINA L SHARES THE COST OF ACQUISITION OF BONUS SHARES SHALL BE NIL. IF THE RE CEIPT OF BONUS SHARES DOES NOT LEAD TO REDUCTION IN THE COST OF ORIGINAL SHARE S UNDER THE 1961 ACT RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION HOW THE REDUCTION IN THE CAPITAL WHICH IS A REVERSE PROPOSITION OF BONU S SHARES CAN GO TO INCREASE THE COST OF THE REMAINING SHARES. IF I A CCEPT THE CONTENTION OF THE LD. DR THAT ON THE ISSUANCE OF BONUS SHARES TH E ORIGINAL COST HAS TO BE SPREAD OVER THE ORIGINAL AND BONUS SHARES THEN UN INTENDED CONSEQUENCES WILL FOLLOW. AT THE TIME OF TRANSFER OF ORIGINAL SH ARES THEIR COST OF ACQUISITION SHALL GET REDUCED AS CONTENDED BY THE L D. DR BUT WHEN THE BONUS SHARES ARE TRANSFERRED THE COST OF ACQUISITI ON SHALL BECOME NIL AS PER SECTION 55(2). OBVIOUSLY IT CANNOT BE THE CASE . AS SUCH IT IS CLEAR THAT THE JUDGMENT IN THE CASE OF DALMIA INVESTMENT (SUPRA) IS NOT APPLICABLE TO THE PRESENT CASE. SIMILAR IS THE POSITION REGAR DING THE RELIANCE OF THE LD. DR ON ANOTHER JUDGMENT OF THE HONBLE SUPREME C OURT IN THE CASE OF MISS DHUN DADABHOY KAPADIA VS CIT [(1967) 63 ITR 65 1 (SC)] WHICH HAS ALSO BEEN RENDERED IN RELATION TO THE A.Y. 1957 -58. THIS JUDGMENT IS ALSO NOT APPLICABLE TO THE PRESENT CASE AS HAVING B EEN GIVEN UNDER THE OLD ACT. 50.9. ONCE A CAPITAL ASSET IS TRANSFERRED THE NATURAL CONSEQUENCE WHICH FOLLOWS IS THAT THERE IS EITHER GAIN OR LOSS UNLESS FULL VALUE OF CONSIDERATION EQUALS THE COST OF ACQUISITION. AS TH E REDUCTION OF CAPITAL HAS BEEN HELD TO RESULT INTO `TRANSFER THE EXCESS OF COST OF ACQUISITION OF SUCH SHARES OVER THE FULL VALUE OF CONSIDERATION WI LL LEAD TO LOSS. FOR THE I.T.A.NO.3013/M/07 (S.B) 81 FOREGOING REASONS I AM NOT INCLINED TO ACCEPT THIS CONTENTION RAISED ON BEHALF OF THE REVENUE. THUS IT IS HELD THAT THE RE DUCTION OF CAPITAL BY TGL HAS CAUSED LOSS TO THE ASSESSEE IN TERMS OF SE C. 45. IV. IS ASSESSEE DERIVING DOUBLE ADVANTAGE ? 51.1. THE LEARNED DEPARTMENTAL REPRESENTATIVE A LSO SUBMITTED THAT THE ASSESSEE WAS TRYING TO DRAW A DOUBLE ADVANTAGE FIR STLY BY SHOWING LOSS IN THE INSTANT YEAR WITH THE PURCHASE COST OF RS.12 .42 CRORE AS RELATABLE TO 50% OF THE PURCHASE COST OF ITS REDUCED SHAREHOLDI NG AND THEREAFTER AGAIN WHEN IT WOULD SELL THE REMAINING 50% IT WILL CONS IDER THE PURCHASE COST AT FULL VALUE OF RS.24.84 CRORE. IN ORDER TO STRENG THEN THIS VIEW HE RELIED ON SECTION 55(2)(IV). IN THE OPPOSITION THE LEARNE D COUNSEL FOR THE ASSESSEE CONTENDED THAT THE BALANCE SHEET OF THE AS SESSEE FOR THE YEAR IN QUESTION COPY PLACED AT PAGE 75 OF THE PAPER BOOK CLEARLY DEMONSTRATES THAT THE VALUE OF INVESTMENT TOGETHER WITH THE NUMB ER OF SHARES IN THE PRECEDING YEAR I.E. PRE-REDUCTION PERIOD HAS BEEN R EDUCED BY THE ASSESSEE- COMPANY IN THE CURRENT YEAR I.E. POST-REDUCTION PER IOD BOTH IN TERMS OF NUMBER OF SHARES AND VALUE. IT WAS ARGUED THAT SIMU LTANEOUS WITH THE CLAIMING OF LOSS THE ASSESSEE HAS ITSELF REDUCED ITS VALUE OF INVESTMENT AND NUMBER OF SHARES IN ITS BALANCE SHEET AND SUCH REDUCED VALUE SHALL CONSTITUTE THE PURCHASE COST OF THE REMAINING SHARE S. 51.2. A BARE PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE INDICATES THAT THE SHAREHOLDING OF THE COMPANY ALONG WITH THE PURC HASE COST HAS BEEN REDUCED BY THE ASSESSEE TO 50% POST-REDUCTION IN TH E SHARE CAPITAL OF TGL. WHEREAS ON 31.3.2001 THE ASSESSEE HAD SHOWN 1 34 74 799 SHARES IN TGL VALUED AT RS.24.48 CRORE IN THE YEAR ENDING AS ON 31.3.2002 THE I.T.A.NO.3013/M/07 (S.B) 82 NUMBER OF SHARES HAVE BEEN SHOWN AT 67 37 399 WITH THE FIGURE OF INVESTMENT AT RS.12.42 CRORE. HAVING REDUCED THE FI GURE OF INVESTMENTS IN THE REMAINING SHARES TO ONE HALF THERE SHOULD NOT BE ANY APPREHENSION OF THE ASSESSEE ADOPTING PURCHASE COST OF REMAINING 67 37 399 SHARES AT RS.24.84 CRORE IN THE SUBSEQUENT YEARS WHEN SUCH SH ARES UNDERGO TRANSFER. 51.3. FURTHER THE RELIANCE BY THE LEARNED DEPART MENTAL REPRESENTATIVE ON SECTION 55(2)(B)(V) IS NOT APPLICABLE IN THE INS TANT CASE. AS I HAVE NOTICED ABOVE THAT TGL NOT ONLY REDUCED THE SUBSCRI BED/PAID UP VALUE OF RS.10 EACH TO RS.5 EACH BY STEP-1 BUT ALSO FORTH WITH UPON SUCH REDUCTION TAKING EFFECT CONSOLIDATED 2 EQUITY SHA RES OF RS.10 EACH (RS.5 EACH PAID UP) INTO 1 EQUITY SHARES OF RS.10 EACH FULLY PAID UP UNDER STEP-2. IT IS ONLY STEP-1 WHICH HAS RESULTED INTO C APITAL REDUCTION THEREBY INVOLVING TRANSFER U/S 2(47) OF THE ACT. THE SECOND STEP INVOLVING CONSOLIDATION OF 2 EQUITY SHARES INTO ONE EQUITY SH ARE IS TAX NEUTRAL. THE CONSOLIDATION OF CAPITAL ASSET FROM ONE DENOMINATIO N TO OTHER DENOMINATION DOES NOT RESULT INTO ANY CAPITAL GAIN. I HAVE NOTICED ABOVE THAT REDUCTION OF CAPITAL IS COVERED U/S 100 OF THE COMPANIES ACT. CONSOLIDATION OF THE SHARE CAPITAL INTO SHARES OF L ARGER AMOUNT IS SUBJECT MATTER OF SECTION 94 OF THE COMPANIES ACT. FURTHER SUB-SECTION (3) OF SECTION 94 OF THE COMPANIES ACT SPECIFICALLY PROVID ES THAT A CANCELLATION OF SHARES IN PURSUANCE OF THIS SECTION SHALL NOT BE DEEMED TO BE A REDUCTION OF SHARE CAPITAL WITHIN THE MEANING OF TH IS ACT. IT IS THUS OBVIOUS THAT CONSOLIDATION OF SHARES DOES NOT AMOU NT TO REDUCTION OF CAPITAL. 51.4. NOW I SHALL TAKE UP THE CONTENTION OF THE LE ARNED DEPARTMENTAL REPRESENTATIVE ABOUT SECTION 55(2)(B)(V) WHICH REA DS AS UNDER:- I.T.A.NO.3013/M/07 (S.B) 83 SECTION 55 (2) FOR THE PURPOSES OF SECTIONS 48 AND 49 'COST O F ACQUISITION' -- .. (B) IN RELATION TO ANY OTHER CAPITAL ASSET - . (V) WHERE THE CAPITAL ASSET BEING A SHARE OR A ST OCK OF A COMPANY BECAME THE PROPERTY OF THE ASSESSEE ON-- (A) THE CONSOLIDATION AND DIVISION OF ALL OR ANY OF THE SHARE CAPITAL OF THE COMPANY INTO SHARES OF LARGER AMOUNT THAN ITS EXISTING SHARES MEANS THE COST OF ACQUISITION OF THE ASSET CALCULAT ED WITH REFERENCE TO THE COST OF ACQUISITION OF THE SHARES OR STOCK FROM WHICH SUCH ASSET IS DERIVED. 51.5. A PERFUNCTORY LOOK AT THIS PROVISION DIVUL GES THAT WHERE THE SHARES OF A COMPANY ARE CONSOLIDATED INTO SHARES OF LARGER AMOUNT THAN THE EXISTING SHARES THE COST OF ACQUISITION OF THE CON SOLIDATED SHARES SHALL MEAN THE COST OF ACQUISITION OF THE SHARES WHICH HA VE BEEN SO CONSOLIDATED. FROM THE ABOVE PROVISION IT IS ABUNDA NTLY CLEAR THAT THE ACT OF CONSOLIDATION IN ITSELF DOES NOT AMOUNT TO TRANS FER AND THAT IS WHY THE COST OF ACQUISITION OF THE CONSOLIDATED SHARES IS T AKEN WITH REFERENCE TO THE COST OF ACQUISITION OF THE SHARES WHICH HAVE BE EN CONSOLIDATED. THIS SECTION GETS ATTRACTED WHEN THE CONSOLIDATED SHARES BECOME SUBJECT MATTER OF TRANSFER AND AT THAT STAGE THE QUESTION OF COMPU TATION OF THE COST OF ACQUISITION OF SUCH CONSOLIDATED SHARES ARISES WHI CH HAS BEEN ADDRESSED TO BY PROVIDING THAT THE COST OF SUCH CONSOLIDATED SHARES SHALL BE THE COST OF ACQUISITION OF THE SHARES WHICH HAVE BEEN CONSOL IDATED. THIS SECTION NOWHERE PROVIDES THAT IF BEFORE CONSOLIDATION SOME SHARES HAVE BEEN TRANSFERRED THE COST OF SUCH TRANSFERRED SHARES SH ALL ALSO CONTINUE TO BE I.T.A.NO.3013/M/07 (S.B) 84 INCLUDED IN THE SHARES NOT TRANSFERRED. IT IS NATUR AL THAT WHEN ON THE TRANSFER OF SUCH SHARES THE PROPORTIONATE COST H AS BEEN TAKEN INTO CONSIDERATION FOR COMPUTING CAPITAL GAIN ON THEIR T RANSFER THAT COST SHALL CEASE TO BE AVAILABLE WITH THE ASSESSEE FOR THE REM AINING SHARES. REVERTING TO THE FACTS OF INSTANT CASE IT IS CLEAR THAT REDUCTION HAS TAKEN PLACE IN THE PAID UP VALUE OF EQUITY SHARES BEFORE CONSOLIDATION AND THIS REDUCTION HAS RESULTED INTO TRANSFER OF SHARE CAPIT AL. IT IS BUT NATURAL THAT ON SUCH TRANSFER OF THE SHARES THE PROPORTIONATE P ART FROM THE TOTAL COST WAS SLICED AWAY. IT IS ONLY THE REMAINING COST OF T HE SHARES IN THE HANDS OF THE ASSESSEE WHICH SHALL CONTINUE TO BE THE PURCHAS E PRICE OF THE CONSOLIDATED SHARES. GOING BY THE PRESCRIPTION OF S ECTION 55(2)(B)(V) THE COST OF ACQUISITION OF THE CONSOLIDATED 6737399 SHA RES SHALL BE RS.12.42 CRORE. 51.6. I THEREFORE HOLD THAT THE ASSESSEE CANNOT DERIVE DOUBLE ADVANTAGE BY FIRSTLY CLAIMING DEDUCTION OF RS.12.42 CRORE AT THE STAGE OF REDUCTION OF SHARE CAPITAL AND AGAIN ASSUMING THE COST OF ACQ UISITION OF THE REMAINING SHARES AT THE FULL VALUE OF RS.24.84 CROR E. THE COST OF ACQUISITION OF THE REMAINING CONSOLIDATED SHARES IN TGL SHALL STAND REDUCED U/S55(2)(B)(V) TO RS.12.42 CRORE. 52. COMING BACK TO SECTION 45(1) WHICH IS CHARGING SECTION FOR THE INCOME UNDER THE HEAD `CAPITAL GAINS IT CAN BE S EEN THAT THE CHARGE IS ATTRACTED WHEN ANY PROFIT OR GAIN ARISES FROM THE T RANSFER OF A CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR SUBJECT TO THE FULFIL LMENT OF OTHER CONDITIONS. IT IS PATENT THAT ALL THE RELEVANT CONDITIONS FOR T HE APPLICABILITY OF SECTION 45(1) ARE FULFILLED INASMUCH AS - THERE IS (A) TR ANSFER (ON REDUCTION OF CAPITAL BY TGL - AS PER DISCUSSION IN PARAS 48.1 TO 48.14); (B) OF CAPITAL ASSET ( EQUITY SHARES WHICH HAVE BEEN CANCELLED BY TGL) ; (C) RESULTING I.T.A.NO.3013/M/07 (S.B) 85 INTO PROFITS OR GAINS (THAT IS FULL VALUE OF CONSID ERATION AT NIL AS REDUCED BY THE INDEXED COST OF ACQUISITION AT RS.22.21 CROR E AS PER PARAS 50.1 TO 50.9). 53. IT CAN BE SEEN FROM THE ORDERS OF THE AU THORITIES BELOW THAT THE ONLY REASON ASSIGNED BY THEM FOR NOT ALLOWING THE CAPITAL LOSS OF RS.22.21 CRORE IN THIS CASE IS THAT THE REDUCTION O F SHARE CAPITAL OF TGL DID NOT AMOUNT TO TRANSFER OF THE CAPITAL ASSET. THERE IS NO FINDING GIVEN BY THE AUTHORITIES THAT SECTION 45 IS NOT APPLICABL E FOR THE REASON THAT THE FULL VALUE OF CONSIDERATION IN THIS CASE IS NIL. IN ORDER TO PROVIDE COMPLETENESS TO THE ISSUE APART FROM EXAMINING AS TO WHETHER OR NOT THERE IS ANY TRANSFER ON REDUCTION I HAVE DEALT W ITH ALL OTHER RELEVANT ASPECTS GERMANE TO THE ISSUE WHICH HAVE BEEN ARGUE D BEFORE THE BENCH. 54. I THEREFORE HOLD THAT THE LEARNED CIT( A) WAS NOT JUSTIFIED IN REFUSING TO DENY THE LONG TERM CAPITAL LOSS AMOUNTI NG TO RS.22.21 CRORE. THE QUESTION BEFORE THE SPECIAL BENCH IS THEREFORE ANSWERED IN NEGATIVE AND IN FAVOUR OF THE ASSESSEE. CONSEQUENTLY TWO GRO UNDS RAISED ON THIS ISSUE ARE ALLOWED. 55. IN THE RESULT THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER 2011 . SD/- (R.S.SYAL) ACCOUNTANT MEMBER I.T.A.NO.3013/M/07 (S.B) 86 MUMBAI : 30 TH SEPTEMBER 2011. DEVDAS*