G.M.MEHTA, J. - (1.)THESE two writ petitions under Art. 226 of the Constitution by Shekhawati General Traders Ltd. (hereinafter called the assessee) are a sequel to the notice in each case under S. 148 of the IT Act, 1961 (hereinafter called the Act), by the ITO, Company Circle No. 1, Jaipur, praying for quashing the notices and for restraining the ITO 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 asst. year 1962 - 63 relevant to the previous year ending 31st March, 1962, the assessee filed its IT return before the ITO, Company Circle No. 1, Jaipur, respondent, 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 asst. 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 asst. yr. 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. 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. 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 asst. year 1962 -63 and the sale price realised was Rs. 4,54,130. 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 exhibit A. The respondent, vide assessment order dated 20th July, 1964 (exhibit 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 asst. year 1962 -63 had escaped assessment within the meaning of S. 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 assessment year. Thereafter, the ITO, by his letter dated 7th January, 1967 (exhibit D), gave the grounds on the basis of which the said notice under S. 148 of the Act had been issued. The reasons given by the respondent read as follows :
"During the asst. yrs. 1962 -63 and 1964 -65 you sold shares of M/s Birla Jute Manufacturing Co. and Orient Paper and Birla Cotton Spinning and Weaving Mills Ltd. 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 year after January 1, 1954. The Supreme Court had laid down in the case of CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 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 asst. year 1964 - 65. Against this the cost in asst. 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 S. 148 to withdraw the losses claimed and allowed and to reassess at profit."

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 computing 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 S. 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 ITO restrained from taking proceedings in pursuance thereof. 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. After January 1, 1954, the assessee further acquired 60,000 ordinary shares of the Orient Paper Mills. Thus, in the asst. 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. 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 : The cost of 15,000 shares of the Birla Jute Manufacturing Co. Ltd. claimed by the assessee in exhibit 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 CIT vs. Dalmia Investment Co. Ltd. (supra), 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 net 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. The respondent has stated that the assessee did not disclose in his return for the asst. 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 (supra) 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 assessment order, which was passed on 20th July, 1964, 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 s. 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 . . 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 asst. year 1962 -63 before the sale of the shares in question : the cost thereof @ Rs. 16 per share 3,60,000 . Total cost of 78,750 shares 10,05,900 . Cost price of 15,000 shares sold by the assessee on average rate, i.e., 10,05,900 X 15,000 . 1,91,600 78,750 . the original as well as the bonus and right shares holding. The notice dated 4th January, 1967, under S. 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.

(3.)IN Writ Petition No. 104/1967, the assessee had acquired before January 1, 1954, 25,500 ordinary shares of the Birla Cotton Spinning and Weaving Mills. After January 1, 1954, the assessee acquired 34,000 bonus shares. In the asst. year 1962 -63 the assessee had gifted 34,000 shares to Hindustan Charity Trust. Thus, in the asst. year 1964 -65 relevant to the previous year ending 31st March, 1964, there was an opening balance of 25,500 shares of Birla Cotton Spinning and Weaving Mills, out of which the assessee sold 2,200 shares during the asst. year 1964 -65 and the sale price realised was Rs. 59,324. The assessee calculated the cost price of 2,200 shares sold by it on the market rate prevailing on January 1, 1954. The cost of acquisition of these shares came to Rs. 1,04,500. The sale price was Rs. 59,324. There was thus a capital loss of Rs. 45,176 on the sale of the said 2,200 shares, which would appear from statement, exhibit A, filed along with the petition. The respondent, vide assessment order dated 14th of January, 1965, accepted the capital loss of Rs. 45,176 for the asst. year 1964 -65 and directed the same to be carried forward. On January 4, 1967, the assessee received notice under S. 148 of the Act similar to the one issued in respect of the asst. year 1962 -63 followed by reasons, as contained in the respondent's letter dated January 7, 1967. The assessee has requested that the said notice be quashed on the same grounds as have been taken in the other case. 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 (supra). 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 net 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. Under S. 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 Ss. 53 and 54 be chargeable to income -tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place. Under S. 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 assessment of income in these two years necessitating notice under S. 148 of the Act.
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