Case Note & Summary
The case pertains to a reference under Section 256(1) of the Income Tax Act, 1961, at the instance of the assessee, M/s. Madhura Coats Ltd., arising from the order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 1978-79. The assessee-company, incorporated in England, was associated with three Indian companies: Madhura Mills Co. Ltd., A & F Harvey Ltd., and J & P Coats (India) Ltd. The assessee held substantial shareholdings in these companies. Subsequently, J & P Coats (India) Ltd. and A & F Harvey Ltd. amalgamated with Madhura Coats Ltd., and the assessee received shares of Madhura Coats Ltd. in exchange for its shares in the amalgamating companies. Later, the assessee sold some of these shares of Madhura Coats Ltd. and claimed a capital loss. In computing the capital gain/loss, the assessee sought to substitute the fair market value as on 1st January 1964 of the shares of the amalgamating companies as the cost of acquisition of the shares sold, under Section 55 of the Act. The Assessing Officer rejected this claim, and the Tribunal upheld the rejection. The two questions referred to the High Court were: (1) whether the Tribunal was right in holding that the assessee was not entitled to exercise the option to substitute the fair market value as on 1-1-1964 of the shares of the amalgamating companies as cost of acquisition under Section 55; and (2) if the answer to the first question is negative, whether the Tribunal was right in holding that for computing capital gains, the shares should be valued on cost basis and not on yield method. The High Court answered both questions in the affirmative, i.e., in favor of the Revenue and against the assessee. The Court held that since the shares were acquired in an amalgamation which is not regarded as a transfer under Section 47, the cost of acquisition is determined under Section 49 as the cost to the amalgamating company. Consequently, the option under Section 55(2) to substitute fair market value as on 1-1-1964 is not available. The Court also upheld the Tribunal's view that the yield method is not applicable for determining cost of acquisition.
Headnote
A) Income Tax - Capital Gains - Cost of Acquisition in Amalgamation - Sections 47, 49, 55 of Income Tax Act, 1961 - The assessee-company, having acquired shares of Madura Coats Ltd. through amalgamation of J & P Coats (India) Ltd. and A & F Harvey Ltd., sold those shares. The assessee sought to substitute the fair market value as on 1-1-1964 of the shares of the amalgamating companies as cost of acquisition under section 55. The Tribunal held that the assessee was not entitled to such substitution because the shares were acquired in a transaction not regarded as a transfer under section 47, and the cost of acquisition under section 49 is the cost to the amalgamating company. The High Court upheld the Tribunal's view, holding that the option under section 55(2) to substitute fair market value is not available when the asset was acquired under a transaction referred to in section 47, as the cost of acquisition is deemed under section 49. (Paras 1-5) B) Income Tax - Valuation of Shares - Cost Basis vs. Yield Method - The Tribunal held that for computing capital gains, the shares sold by the assessee should be valued on the basis of cost and not on the basis of yield method. The High Court affirmed this, noting that the yield method is not applicable for determining cost of acquisition under the Act. (Paras 2-5)
Issue of Consideration
Whether the assessee-company was entitled to substitute the fair market value as on 1st January 1964 of shares of amalgamating companies as cost of acquisition of shares sold, under section 55 of the Income Tax Act, 1961, and whether the Tribunal was right in holding that the shares should be valued on cost basis and not yield method.
Final Decision
The High Court answered both questions in the affirmative, i.e., in favor of the Revenue and against the assessee. The Court held that the Tribunal was right in holding that the assessee was not entitled to substitute the fair market value as on 1-1-1964, and that the shares should be valued on cost basis.
Law Points
- Capital gains computation
- cost of acquisition in amalgamation
- substitution of fair market value under section 55
- sections 47 and 49 of Income Tax Act
- 1961
