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

Citation: [1972] 1 S.C.R. 927 · Decided: 04-10-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Appeal(s) allowed

Judgment (excerpt)

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927 
SHEKHAWATI GENERAL TRADERS LTD. 
v. 
INCOME TAX OFFICER, COMPANY CIRCLE I, JAIPUR 
October 4, 1971 
[K. S. IIEGDE AND A. N. GROVER, JJ.] 
Income-tax Act, 1961-Sections 147 and 55 and its scope. 
Jn 1949, the assessee company had acquired ·some ordinary shares of 
a company of the face value of Rs. 10/. each. On this holding the 
assessee had received certain bonus shares. The assessee further acquired 
a certain number of right shares of the same company in 1961. 
During the assessment year 1962-63 it sold a certain number of shares 
which it held prior to January 1, 1954 and calculated the cost price of 
the shares sold, at tho market rate prevailing on January 1, 1954. 
Similarly, the assessee acquired certain ordinary shares of another 
company before January 1, 1954 and received certain bonus shares lifter 
that date. During the assessment year 1962-63 it again sold some of these 
shares and calculated the cost of acquisition of the said shares at the 
market value prevailing on January 1, 1954. 
Thus, according to the 
assessee, by selling the shares of the ~o companies, it had suflj,,red a 
capital loss and the Income-tax Officer allowed the loss to be carried 
forward by the assessee. 
After nearly 2l years, the Income-tax Officer notified the assessee that 
income chargeable to tax for the assessment year 1962-63 had escaped 
assessment within s. 147 of the Income Tax Act, 1961 and wrote that 
while wctking out the cost, the assessee wrongly claimed the prevalent 
market price as on January I, 1954 ignoring the fact that the same shares 
\\'ere given as bonus shares in later years after January l, 1954. Accord-
ing to the Income-tax Officer, the cost has to be worked at by averaging 
the cost of the original shares, amongst the original shares and the bonus 
shares taken together. 
The assessee maintained that it had exercised its 
option under s. 55(2) of the Act. Therefore, the cost of acquisition of 
the ordinary shares of the two companies which had been acquired long 
before January I, 1954 was taken at the fair market value as on that 
date and the capital lpss was computed accordingly. The assessee, there-
after filed a writ petition before the High Cou'rt challenging the validity 
of the notice issued under s. 14 7 of the Act. 
The High Court dismissed the writ petition on the ground that since 
the assessee had not shown the acquisition of bonus and right shares in 
the Income-tax return, the Income-tax Officer had reason to believe that 
the income chargeable to tax had escaped assessment and therefore, the 
notice was valid. 
Allowing the appeal, 
HELD: (!) That the cost of acquisition under s. 55(2) of the Act, 
is the cost of the asset to the assessee or the fair market value of the 
asset on the 1st day of January, 1954 at the option of the assessee. 
Therefore, in the present case, the assessee rightly applied its option and 
the fair market value is duly determi....t. It is wrong to hold-that while 
working out the capital gains, the cost had to be worked out by averag-
ing the cost of the original shares among the original shares and the bdnus 
928 
SUPREME COURT REPORTS 
[l 9 72] l S.C.R. 
shares taken together. ignoring the statutory provisions of ss. 48 and 55(2) 
of the Act. For the ascertainment of the fair market value of the shares 
in question, on Janua:ry 11 1954, any event prior to or subsequent to that 
date is wholly extraneous and irrelevant. [932 FJ 
(2) The assessee is bound to disclose under cl. (a) of s. 147 only 
such material facts which are necessary for its assessment for the assess~ 
ment ye .. .:- :tnd not those facts which are irrelevant and extraneous fer 
the putpose of assessment. 
As regards cl. (b) of s. 147 from the infor-
mation furnished by the asses~ee, there is no reason for the LT.0. to 
believe that income chargeable to tax has escaped as11cssment for the 
assessment year in question. [933 B-CJ 
Conunissioner of Income.tax, Bihar v .. Da!n1ia lnvestlnent Co., 52 
l.T.R. 567, referred to and distinguished. 
C1v1L APPELLATE Ju&1so1cTION : Civil Appeals Nos. 2039 
and 2040 of 1968. 
Appeals from the judgment and order dated April 20, 1968 
of the Rajasthan High Court in D. B. Civil Writ Nos. 104 and 105 
of 1967 
S. Mitra, 0. P. Khaitan, N. R. Khaitan, B. P. Mahesh1vari and 
R. K. Maheshwari, for the appellant (in both the appeals). 
V. S. Desai, P. L. Juneja, R. N. Sachthey and B. D. Sharma; 
for the respondent (in both the appeal

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