1. G. M. MEHTA, J.-These two writ petitions under Article 226 of the Constitution by Shekhawati General Traders Ltd. (hereinafter called the assessee) are a sequel to the notice in each case under section 148 of the Income-tax Act, 1961 (hereinafter called the Act), by the Income-tax Officer, Company Circle No. 1 Jaipur praying for quashing the notices and for restraining the Income-tax Officer from taking proceedings in pursuance thereof. The points involved in both the writ petitions are common. They are, therefore, being decided by this judgment.
2. We would first state the facts of Writ Petition No. 105/67. The assessee is a company within the meaning of the Companies Act, 1956, having its registered office at Jaipur. For the assessment year 1962-63 relevant to the previous year ending 31st March 1962, the assessee filed its income-tax return before the Income-tax Officer, Company Circle No. 1, Jaipur, respon--dent, in accordance with the provisions of the Act. On or about March 29, 1949, the assessee acquired 12,000 ordinary shares of the Orient Paper Mills Ltd. Of Rs. 10 each and on this original holding received 12,000 bonus shares on or about April 28, 1951, i.e., long before January 1, 1954. The assessee again received 60,000 bonus shares on or about June 4, 1954? And further acquired 25,200 right shares on June 26, 1961. Thus, in the assessm ent year 1962-63, there was an opening balance of 84,000 ordinary shares and 25,200 right shares of the Orient Paper Mills Ltd. With the assessee, out of which it sold 22,000 shares during the assessm ent year 1962-63 and the sale price realised was Rs. 8,45,110. The assessee calculated the cost price of 22,000 shares sold by it at the market rate as prevailing on January 1, 1954, which came to Rs. 8,63,500.
3. The assessee had also acquired 15,000 ordinary shares of the Birla Jute Manufacturing Company Ltd. Before January 1, 1954, and got 41,250 bonus shares on the original holding after January 1, 1954.
4. Besides, the assessee got 22,500 right shares for the nominal value of Rs. 3,60,000. The assessee sold 15,000 shares during the assessment year 1962-63 and the sale price realised was Rs. 4,54,130.
5. The assessee calculated the cost price of 15,000 shares sold by it on the market value as prevailing on January 1, 1954, which came to Rs. 6,45,000. Thus, according to the assessee, the cost of acquisition of the said shares in the two companies came to Rs. 15,09,400 while they were sold for Rs. 12,09,240 and thereby the assessee suffered a capital loss of Rs. 2,10,160. The statement showing capital loss suffered by the assessee has been annexed to the petition and is Exh. A.
6. The respondent, vide assessm ent order dated 20th July 1964 (Exh. B) accepted the capital loss of Rs. 2,10,160 shown by the assessee and directed the same to be carried forward. The assessee has stated that, in spite of the aforesaid position, the respondent issued notice No. 2/S/Co./62-63 dated 4th January 1967, which was served on the 5th January 1967. By the said notice, the respondent informed the assessee that he had reason to believe that the income of the assessee chargeable to tax for the assessm ent year 1962-63 had escaped assessment within the meaning of section 147 of the Act. He, therefore, asked the assessee to deliver to him within 30 days from the date of service of the notice a return in the prescribed form of the income, on which it was assessable for the said assessm ent year. Thereafter, the Income-tax Officer, by his letter dated 7th January 1967 (Exh. D), gave the grounds on the basis of which the said notice under section 148 of the Act had been issued. The reasons given by the respondent read as follows: "During the assessm ent years 1962-63 and 1964-65 you sold shares of Messrs Birla Jute Manufacturing Co. And Orient Paper and Birla Cotton Spinning and Weaving Mills Ltd. While working out of cost you claimed the prevalent market price as on January 1, 1954, in complete disregard of the fact that the same shares had been given bonus shares in the subsequent year after January 1, 1954. The Supreme Court had laid down in the case of Commissioner of Income-tax v. Dalmia Investment Co. Ltd. (1964) 52 I T R 567 (SC) that while working out the capital gains the cost has to be worked out by averaging the cost of the original shares amongst the original shares and the bonus shares taken together. Your claim of the cost, therefore, was incorrect. By following an erroneous method you claimed and were allowed loss of Rs. 2,10,160 in assessment year 1964-65.
7. Against this the cost in assessm ent year 1962-63 would become much less and instead of capital losses a figure of capital gain will get computed. I have issued a notice under section 148 to withdraw the losses claimed and allowed and to reassess at profit."
8. The petitioner has submitted that the aforesaid reasons given by the respondent are against the provisions of the Act. The cost of acquisition for purposes of computing the capital gain has to be taken at the fair market value as on 1st January 1954, at the option of the assessee, which in this case was exercised by it. The petitioner has further submitted that the method of compu--ting the cost of the shares suggested by the respondent can only be applied in a case where the option is not exercised by an assessee. According to the assessee, the notice under section 148 of the Act had been issued by the respondent erroneously and in complete disregard of the provisions of the law. The assessee has, therefore, requested that the said notice be quashed and the Income-tax Officer restrained from taking proceedings in pursuance thereof.
9. In his reply, the respondent has contended that the assessee calculated the cost price of the shares sold by it incorrectly. The assessee had acquired 12,000 ordinary shares of the Orient Paper Mills Ltd. of Rs. 10 each and got 12,000 bonus shares of the original holding before January 1, 1954.
10. After January 1, 1954, the assessee further acquired 60,000 ordinary shares of the Orient Paper Mills.
11. Thus, in the assessm ent year 1962-63 there was an opening balance of 84,000 shares of the Orient Paper Mills Ltd., out of which the assessee sold 22,000 during the year 1962-63 and the sale price realised was Rs. 8,45,110. The assessee calculated the cost price of 22,000 shares sold by it on the market price prevailing on January 1, 1954. According to the respondent, the assessee should have worked out the market price of 24,000 shares (the holding of the assessee as on January 1, 1954) in accordance with the market rate prevailing on January 1, 1954, and should have spread that price over 84,000 shares, which were inclusive of the bonus shares. The cost price of 22,000 shares should then have been taken at the average rate. In this way, the cost price of 22,000 shares would come to Rs. 2,46,714 instead of Rs. 8,63,500 shown by the assessee.
12. In the same way, in respect of the shares of the Birla Jute Manufacturing Co. Ltd. owned by the assessee, it should have taken the total cost of shares inclusive of the bonus shares as under: <p.m> <p.m> </p.m></p.m> Rs.
(1) Cost of 15,000 shares applying the market rate as on 1-1-54 @ Rs. 43.06 6,45,900
(2) 41,250 bonus shares issued subsequently, the cost thereof nil
(3) 22,500 right shares issued in A. Y. 1962-63 before the sale of the shares in question : the cost thereof @ Rs. 16 per share3,60,000 Total cost of 78,750 shares 10,05,900 The cost of 15,000 shares of the Birla Jute Manufacturing Co. Ltd. Claimed by the assessee in Exh. A is Rs. 6,45,900 against the actual worked out cost of Rs. 1,91,600 by applying the method of calculating the cost price of shares as laid down by their Lordships in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. ((1964) 52 I T R 567 (SC)). The respondent's stand is that after the issue of bonus shares, the cost of the original holding has to be spread over all the shares inclusive of the bonus shares acquired on the original holding. The not result of calculating the cost of shares would be a capital gain of Rs. 8,60,926 as against a capital loss of Rs. 2,10,160 as shown by the assessee.
13. The respondent has stated that the assessee did not disclose in this return for the assessment year 1962-63 fully and truly all material facts necessary for the assessment. In the income-tax return filed by it, the assessee did not give out the details of the bonus and right shares acquired by it on the original holding, nor did it work out the cost price of the shares according to law as laid down by the Supreme Court in Dalmia Investment Company's case with the result that there was an escapement of income, which ought to have been brought to tax. It was not brought to the notice of the respondent that the assessee had acquired bonus and right shares on the original holding Consequently, the assessm ent order, which was passed on 20th July 1904, was based on insufficient data on account of the failure on the part of the assessee to supply full and complete particulars, The respondent has further stated that the assessee had no doubt an option under section 55(2) of the Act to take cost of acquisition or market value as on 1st January 1954. But after exercising his option, the assessee should have spread the cost price as on January 1, 1954, over the original as well as the bonus and right shares holding. The notice dated 4th January 1967, under section 148 of the Act has been claimed as having been rightly issued. It was not necessary to disclose in the notice the reasons on which the respondent's belief was based. However, the respondent intimated the reasons, which led him to issue the impugned notice by letter dated the 7th of January 1967. The respondent has prayed that the writ petition be dismissed.
14. The respondent, vide assessm ent order dated 14th of January 1965, accepted the capital loss of Rs.
15. 45,176 for the assessm ent year 1964-65 and directed the same to be carried forward. On January 4, 1967, the assessee received notice under section 1425 of the Act similar to the one issued in respect of the assessm ent year 1962-63 followed by reasons, as contained in the respondent's letter dated January 7, 1967. Tile assessee has requested that the said notice be quashed on the same grounds as have been taken in the other case.
16. The respondent has contended that the assessee should have averaged the cost price of 2,200 shares. If so done, the cost price of 2,200 shares would come to Rs. 44,785 instead of Rs. 1,04,500 shown by the assessee. Thus, the assessee followed a wholly erroneous method of calculating the cost of the shares. The cost claimed by the assessee is Rs. 1,04,500 against the actual worked out cost of Rs. 44, 785 by applying the method of calculating the cost of shares as laid down by the Supreme Court in Dalmia Investment Company's case. After the issue of bonus shares the cost of the original holding has to be spread over all the shares inclusive of the bonus snares acquired on the original hold--ing.., The not result of calculating the cost of shares according to the method laid down in that case would be a capital gain of Rs. 14,539 as against a loss of Rs. 45,176 as shown by the assessee. The respondent has requested that the writ petition be dismissed.
17. Under section 45 of the Act, any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54 be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place. Under section 55(2) of the Act "cost of acquisition" in relation to a capital asset, where the capital asset became the property of the assessee before the 1st day of January 1954, means the cost of the acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January 1954, at the option of the assessee. The assessee has exercised its option to take the fair market value of the assets on January 1, 1954, as its cost of acquisition in computing the loss on the sale of the aforesaid scrips. The grievance of the respondent is that the assessee in its returns for both the years, did not show that it had acquired bonus and right shares on the original holding. This vital information was withheld by the assessee from the respondent. Further, the assessee followed a wholly erroneous method of calculating the cost of the shares. In both the cases, bonus shares were admittedly issued and where bonus shares are issued in respect of ordinary shares, their real cost to the assessee cannot be taken to be nil. The cost of the original shares, according to the respondent, should have been spread over to the original shares and bonus shares collectively. Since this has not been done, there was an escapement of assessm ent of income in these two years necessitating notice under section 148 of the Act.
18. The Income-tax Officer could reopen the assessment in both the cases under section 147 of the Act which reads as follows; "147. Income escaping assessm ent.--If-
(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)."
19. Under section 147(a), reason to believe that income chargeable to tax has escaped assessment by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessm ent year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessm ent for that year is a condition precedent to the exercise of his jurisdiction to assess or reassess income of the assessee. Similarly, under section 147(b), reason to believe that income chargeable to tax has escaped assessment in consequence of the information in the possession of the Income-tax Officer is a condition precedent to the exercise of his jurisdiction to assess or reassess the income of the assessee. If these conditions do not exist, steps taken by the Income-tax Officer to assess or reassess the income will be without jurisdiction.
20. Before considering whether the conditions precedent to the exercise of jurisdiction by the Income- tax Officer under section 147 of the Act existed or not, it might be stated that the High Court has power to issue a writ in a fit case prohibiting the Income-tax-Officer from proceeding with reassessm ent when it appears that the Income-tax Officer had no jurisdiction to commence the proceeding. In this connection we may refer to the two decisions of the Supreme Court.
21. Coming to the question of the application of section 147 to the two cases before us, it is an admitted position that the assessee, in the income-tax returns filed by it for the two years, did not give out the details of the bonus and right shares acquired by it on the original holding. The conditions which invest the Income-tax Officer with jurisdiction under section 147(a) are two-fold.
22. Firstly, the Income-tax Officer should have reason to believe that the income chargeable to income-tax has escaped assessm ent and, secondly, that the escapement is by reason of the omission or failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment for that year. Since it is an accepted position that the acquisition of bonus and right shares acquired by the assessee on the original holding had not been shown in the Income-tax returns in both the cases, it can be said that the Income-tax Officer had reason to believe that the income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessm ent. On the material before him, the Income-tax Officer could have reasonably taken the view that it was a case of escapement, of assessment, for which notice under section 148 was necessary. Finding it to be a case of escapement during the years 1962-63 and 1964-65 he, therefore, gave notice to the assessee under section 148 in both the cases. In the circumstances of the cases, it cannot be said that the respondent had no reason to believe that there was an escapement of income-tax by the assessee on account of the omission or failure on its part to disclose fully and truly the material facts necessary for its assessment for that year.
23. Learned counsel for the assessee has submitted that it was not necessary for the assessee to have shown the acquisition of bonus shares in the returns filed by him for determination of the acquisition cost of the ordinary and bonus shares held by it, and, for this proposition, he has relied on Emerald & Co. Ltd. v. Commissioner of Income-tax ((1959) 36 I T R 257). The implications of the Emerald & Company's case have been considered by the Supreme Court in Commissioner of Income-tax v. Dalmia Investment Co. And it would be useful to restate here what has been decided in Emerald & Company's case on the basis of that authority. In that case, the assessee had, at the beginning of the year, 350 shares of which 50 shares were bonus shares and all were of the face value of Rs. 250 each. The assessee sold 300 shares and claimed a loss of Rs. 35,801 by valuing the bonus shares at face value. The Department arrived at a loss of Rs. 27,760 by the method of averaging the cost, following the earlier case of the Bombay High Court in Commissioner of Income-tax v. Manaklal Chunnilal & Sons Ltd. (Income-tax Reference No. 16 of 1948). The Tribunal suggested a third method. It ignored the 50 shares and the loss was calculated by considering the cost of 200 shares and their sale price. The loss worked out to Rs. 27,748, but the Tribunal did not disturb the order of the Appellate Assistant Commissioner in view of the small difference. The High Court held that the method adopted by the Department was proper, but the Supreme Court, on appeal, held in that case that the method adopted by the Tribunal was correct. The reason was that the assessee originally held 50 shares in 1950 ; in 1951 it received 50 bonus shares. It sold its original holding three days later and then purchased another 100 shares after two months. In the financial year 1950-51 (assessm ent year 1951-52) the Income-tax Officer averaged the price of 150 shares and found a profit of Rs. 1,060 on the sale of 50 shares instead of loss of Rs. 1,365, which was claimed. The assessee did not appeal.
24. We may next refer to Commissioner of Income-tax v. Dalmia Investment Co. Which, according to the petitioner, does not apply to its case, whereas, according to the Income-tax Officer, it aptly applies. It would not be proper for us to express our views at this stage whether it applies to the present case or not. It would suffice if we may state what has been decided in that case. In that case, it his been decided that where bonus shares are issued in respect of the ordinary shares held in a company by an assessee, who is a dealer in shares, their real cost to the assessee cannot be taken to be nil or their face value. They have to be valued by spreading the cost of the old shares over the old shares and the new issue (viz., the bonus shares) taken together if they rank pari passu, and if they do not, the price may have to be adjusted either in proportion of the face value they bear (if there is no other circumstance to differentiate them) or on equitable considerations based on the market price before and after issue.
25. The assessee has stated that it was not necessary for it to have shown the bonus shares issued in respect of the ordinary shares held by it whereas the Department's stand is that it was necessary for the assessee to have shown the bonus shares for determination of the acquisition cost of the ordinary shares and bonus shares held by it. Prima facie, it cannot be said that the Income-tax Officer had no reason to believe that there was an escapement of assessment on account of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessm ent for the years 1962-63 and 1964-65 requiring notice under section 148 of the Income-tax Act.
26. For the aforesaid reasons, we find no substance in the assessee's prayer that the notice under section 148 of the Act given by the Department in both the cases merits to be quashed. Both the writ petitions fail and are accordingly dismissed with costs.
27. BHANDARI, J.-I agree with my learned brother.
28. The only question to be determined in these writ petitions is whether the Income-tax Officer, Company Circle No. 1, Jaipur (hereinafter called the Income-tax Officer), could have, in the circumstances of the cases, issued the notices under section 148 of the Indian Income-tax Act. For issuing notices, the conditions laid down under section 147 should be fulfilled.
29. As pointed out by their Lordships of the Supreme Court in Calcutta Discount Company v. Income- tax Officer while interpreting section 34 of the Indian Income-tax Act, 1922 "To confer jurisdiction under this section to issue notice . . . . . . Two conditions have . . . To be satisfied. The first is that the Income-tax Officer must have reason to believe that income, profits or gains chargeable to income-tax have been under-assessed. The second is that he must have also reason to believe that such `under-assessment' has occurred by reason of either (i) omission or failure on the part of an assessee to make a return of his income under section 22, or (ii) omission or failure on the part of an assessee to disclose fully and truly all material facts necessary for his assessm ent for that year."
30. The same two conditions must be fulfilled under section 147(c) of the Act. It is contended by the petitioner that both these conditions are not satisfied. It is urged that the Income-tax officer had no reason to believe that the income chargeable to tax had been under-assessed as the assessee calculated the cost of acquisition of the various ordinary shares at the fair market value of these shares on January 1, 1954, which he was entitled to do under section 55(2) of the Act, and, after deducting the sale price which he realised from the sale of these ordinary shares, calculated the loss and all this was in conformity with the decision of their Lordships; of the Supreme Court in Emerald & Co. Ltd. v. Commissioner of Income-tax. I do not think that this case lays down anything in favour of the assessee as in that case against the ordinary shares which had been sold, no bonus shares had been issued. It was a simple case in which the ordinary shares which had been purchased were sold, there being no issue of bonus shares between the period of purchase and sale. The shares in respect of which the bonus shares were issued had already been averaged with the bonus shares. This distinction has been pointed out by the Supreme Court in Commissioner of Income-tax v. Dalmia Investment Co. Thus, in the instant case, if the method laid down by their Lordships of the Supreme Court in Dalmia Investment Company's case is adopted, the Income-tax Officer had reason to believe that the assessee had escaped assessment.
31. The second condition is that such under-assessment must have occurred by reason of omission or failure on the part of the assessee to disclose fully and truly material facts necessary for his assessm ent. On this point, it is contended by the petitioner that the letter dated January 7, 1967, sent by the Income-tax Officer did not give the reason that the petitioner had omitted to disclose fully and truly all material facts necessary for his assessment. The Income-tax Officer has said in that letter "while working out the cost you claimed the prevalent market price as on January 1, 1954, in complete disregard of the fact that the same shares had been given bonus shares in the subsequent years after January 1, 1954". On a proper interpretation of this passage in the letter I am left in no manner of doubt in the circumstances of the case that the Income-tax Officer meant to say and did say that, the petitioner had omitted to disclose the material fact that bonus shares had been obtained on the ordinary shares held by the assessee. It is not denied that in the return filed by the petitioner, it was not mentioned that, on the basis of ordinary shares sold, bonus shares had been obtained by the petitioner. It is contended that it was no part of his duty to disclose this fact. In my opinion, as laid down by the Supreme Court, the words "omission or failure to disclose fully and truly all material f4icts necessary for the assessment for that year" postulate a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. I am further of the opinion that non-disclosure of the bonus shares obtained on the basis of the ordinary shares sold by the assessee was non-disclosure of a primary fact and this is what the Income-tax Officer meant to convey to the assessee in his letter that the assessee had completely disregarded the fact that the shares sold by him had been given bonus shares in the subsequent years after January 1, 1954. In this view of the matter, the second condition for the application of section 147(x) is also fulfilled.
32. The Income-tax Officer has not said that in consequence of an information he had received he had reason to believe that the income chargeable to tax had escaped assessment and for that reason clause (b) of section 147 is not applicable to the circum--stances of these case.
33. However, the case of the petitioner is covered by section 147(a). The notices issued under section 148 are not bad in law. The writ petitions, therefore, deserve to be dismissed.
34. BY THE COURT The writ petitions are dismissed with costs.