Lodha, C.J. - (1.) THESE are three similar writ petitions whereby the petitioners have challenged the validity of the notices issued by the ITO, under Section 147(b) of the I.T. Act, 1961 (hereinafter referred to as " the Act "). One set of arguments has been made with respect to all these petitions as the points involved in them are identical. Consequently, we propose to dispose of them by a common order.
(2.) FIRST, we shall take the facts of Writ Petition No. 1177 of 1974. This petition is by Purushottam Das Bangur and pertains to the assessment year 1969-70 (financial year ending on March 31, 1969). During the said accounting year, the petitioner derived income from dividends on shares, share of profit from M/s. Ranganath Purshottam Das Bangur, director's fee and commission, interest on debentures and bank deposits. The assessee-petitioner alleged that he had suffered long-term capital loss on sale of certain bonus shares. The ITO, 'C' Ward, Jodhpur, by his order dated December 15, 1970 (annex. A), assessed the petitioner for the said assessment year on a total income of Rs. 1,98,381. He held, inter alia, that the petitioner had made no fresh purchase of shares during the year but had sold certain shares of Maharaja Shree Umaid Mills Ltd., between the period March 5, 1969, and March 30, 1969, at the price quoted in the official report and quotations of the Calcutta Stock Exchange Association Ltd., and had thereby incurred a loss of capital gains (long-term nature) of Rs. 1,57,792, which would be carried forward. Aggrieved by the assessment order on certain other points with which we are not concerned, the assessee-petitioner filed an appeal before the AAC of Income-tax, Range A, Jaipur, who by his order dated June 14, 1971 (annex. B), dismissed the appeal. Thereafter, by his order dated October 14, 1971, the ITO rectified his order dated December 15, 1970, under Section 154 of the Act. However, on March 28, 1974, the petitioner received a notice dated March 27, 1974, under Section 147 of the Act (annex. C) from the ITO, C-Ward, Jodhpur, whereby the petitioner was informed that the ITO had reason to believe that the assessee's income chargeable to tax for the assessment year 1969-70 had escaped assessment and, therefore, the assessing authority proposed to reassess the income for the said assessment year and, therefore, he required the assessee to deliver to him a return in the prescribed form of his income for the said year. The assessee, by his letter dated April 6, 1974 (annex. D), addressed to the ITO, objected to the issuance of the said notice on the ground that the proposed reassessment proceedings were wholly without jurisdiction and, therefore, the notice may be withdrawn and, thereafter, filed the present writ petition in this court on April 22, 1974, challenging the validity of the notice. Writ Petition No. 1182 of 1974 is filed by Rang Lal Bangur and also pertains to the assessment year 1969-70, The material facts in this case are also the same and so also the impugned notice dated March 27, 1974 (annex. C). The petitioner in Writ Petition No. 57 of 1975 is also Rang Lal Bangur, but the assessment year is 1971-72 (financial year ending March 31, 1971). The material facts of this petition are also the same except, that the impugned notice in this case is dated October 22, 1944 (annex. E). All the writ petitions have been opposed by the assessing authority, who has filed identical counters, but for the sake of convenience, we shall refer to the documents contained in Writ Petition No. 1177 of 1974 only. In the counter-affidavit filed by Shri D. R, Gupta, ITO, B-Ward, Jodhpur, who was the assessing authority and who had also issued the impugned notice, it is averred that during the assessment proceedings, it was brought to his notice on behalf of the assessee that between March 5, 1969, and March 31, 1969, he had sold 1,800 shares of Maharaja Shree Umaid Mills Ltd., Pali, out of which 200 shares were shown as having been sold to M/s. Magni Ram Bangur & Company at the rate of Rs. 84 per share and the remaining 1,600 shares were shown as having been sold to Kamla & Company Ltd., Deedwana, out of which 300 shares were sold at Rs. 85 per share and the remaining 1,300 shares at the rate of Rs. 84 per share. As the purchase price of these 1,800 shares was higher than the sale price, the assessee claimed long-term capital loss of Rs. 1,59,360 on the sale of these 1,800 shares. He goes on to state that it was represented to him on behalf of the assessee that the shares of Maharaja Shree Umaid Mills Ltd, were regularly quoted in the stock exchange and that the sale was effected by the assessee at the prevalent market rate. A share quotation list was also shown to him and, in these circumstances, he accepted the version given by the assessee without making any further inquiry regarding the market rates of the shares, as, at that time, there was no material before him to suspect that the fair market value of the shares was higher than the sale price given out by the assessee. He has further stated that on March 26, 1974, he received a letter through Shri C. S. Jain, IAC, Jodhpur Range, Jodhpur, from Shri S. M. Bagai, Deputy Director, Directorate of Inspection (Investigation), Special Cell, New Delhi, dated March 21, 1974, along with some annexures and also a telegram by Shri Bagai from Calcutta giving certain information regarding the shares of Maharaja Shree Umaid Mills Ltd., Pali, which had been collected by the said director, Shri S. M. Bagai. The telegram by Shri Bagai from Calcutta indicated that on inquiries he had found that the shares of the said company were not regularly quoted in the stock exchange. Copies of the letter dated March 21, 1974, along with the annexures and the telegrams have been submitted by the opposite party and marked Ex. A-1 to Ex. A-7. Shri Gupta goes; on to state that he applied his mind to the aforesaid information and it appeared to him that the quotation of the shares of the mills at the Calcutta Stock Exchange was a result of certain manipulated trans- actions within the Bangur group itself. He, therefore, calculated the fair market value of the shares at Rs. 250 per share on the relevant dates as against Rs. 84 and Rs. 85 per share. His case is that it was in consequence of the aforesaid information received by him on March 26, 1974, that he formed the reasonable belief that the fair market value of the shares was far more than the sale price and the so-called market quotations shown by the assessee at the time of the original assessment were manipulated ones as a result of which the income chargeable to tax had escaped assessment. It is, however, clear from the affidavit of Shri Gupta that he decided to take action under Section 147(b) of the Act, and after recording the reasons, as required by Section 148(2) of the Act, he issued the impugned notice. Thus, even though the notice is silent on the point whether it was under Clause (a) or Clause (b) of Section 147, it is now the admitted case of the assessing authority that the impugned notice was issued under Section 147(b) of the Act. Therefore, the short point that we are called upon to decide is whether the impugned notice issued by the assessing authority under Section 147(b) is legal and valid ? Section 147(b) reas as under : " 147. Income escaping assessment.--If--...... (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)......" Dr. Pal, learned counsel for the petitioner, has urged that the ITO had no information in his possession so as to lead him to believe that the income chargeable to tax had escaped assessment. It is only the opinion of Shri Bagai contained in the letter, Ex. A-1, but based on no material, that has led to the issuance of the impugned notice. In this connection, he has submitted that the impugned notice has been issued on account of a vague feeling and suspicion entertained by Shri Bagai as well as the ITO, that the quoted value of the shares was not the prevalent market value. Such a vague feeling and suspicion, it is urged, cannot give rise to a belief based on reasonable ground. It is submitted that there was no error in the original assessment proceedings and that the ITO had not committed any error of law in making the quoted value of the shares as the basis for determining the prevailing market value. He has argued that the ITO did not apply his mind to the facts of the case but issued the notice merely on the basis of Shri Bagai's letter dated March 21, 1974. It is submitted by him that the notice for reopening the assessment has been given only on the ground that the alternative method of valuing the shares on the basis of break-up value should have been adopted instead of quoted value. It is argued that the break-up value of the shares, was before the ITO even in the course of assessment proceedings and, therefore, there was no new information subsequent to the assessment which could have given rise to a reasonable belief in the mind of the ITO that the income had escaped assessment. It is also the contention of Dr. Pal that information must be as to the facts and not to the conclusion arrived at by any authority. In the course of arguments, learned counsel for the revenue submitted that the capital gains from the sale of shares in question is taxable under Section 52(2) of the Act. Consequently, according to the revenue, there has been under-assessment and this is what led to the issuance of a notice under Section 148 of the Act.
(3.) SECTION 45(1) of the Act deals with capital gains. It provides that 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, 54, 54B and 54D, 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. SECTION 48 provides the mode of computation and deductions under the head " Capital gains ". It reads as under : " 48. The income chargeable under the head ' Capital gains ' 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 following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." Section 52, the heading of which is " Consideration for transfer in cases of understatement ", reads thus : "52. (1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax Officer has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer. (2) Without prejudice to the provisions of Sub-section (1), if in the opinion of the Income-tax Officer, the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent. of the value so declared, the full value of the consideration for such capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer : Provided that this sub-section shall not apply in any case- (a) where the capital asset is transferred to the Government, or (b) where the full value of the consideration for the transfer of the capital asset is determined or approved by the Central Government or the Reserve Bank of India and the adequacy of the full value of the consideration so determined or approved is not questioned by the assessee," As stated above, the case of the revenue is that the fair market value of the shares transferred by the assessee as on the date of the transfer exceeded the full market value of the consideration declared by the assessee in respect of the transfer of the shares by an amount of not less than fifteen per cent. of the value so declared and, therefore, the full value of the consideration for such capital asset shall, with the previous approval of the IAC, be taken to be its fair market value on the date of its transfer. The ITO has assessed the fair market value of the share at Rs. 250. Dr. Pal's contention is that for ascertaining the fair market value of a capital asset, the ITO should have resorted to the provisions of Section 55A, under which the ITO may refer the valuation of the capital asset to a Valuation Officer. It is submitted that, in the present case, no reference has been made to the Valuation Officer for ascertaining the fair market value of the shares. The question regarding the method of calculation of the value of the shares came up before the Supreme Court in CWT v. Mahadeo Jalan [1972] 86 ITR 621, in which, after discussing a number of authorities on the point, their Lordships summed up as follows (p. 633) : " An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusions : (1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares, (2) Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company the value is determined by reference to the dividends, if any, reflecting the profit-earning capacity on a reasonable commercial basis. But, where they do not, then the amount of yield on that basis will determine the value of the shares. In other words, the profits which the company has been making and should be making will ordinarily determine the value. The dividend and earning method or yield method are not mutually exclusive ; both should help in ascertaining the profit-earning capacity as indicated above. If the results of the two methods differ, an intermediate figure may have to be computed by adjustment of unreasonable expenses and adopting a reasonable proportion of profits. (3) In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation. (4) Where the dividend yield and earning method break down by reason of the company's inability to earn profits and declare dividends, if the set-back is temporary, then it is perhaps possible to take the estimate of the value of the shares before set-back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses. (5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process. (6) As in Attorney-General of Ceylon v. Mackie [1952] 2 All ER 775 (PC), a valuation by reference to the assets would be justified where as in that case the fluctuations of profits and uncertainty of the conditions at the date of the valuation prevented any reasonable estimation of prospective profits and dividends. In setting out the above principles, we have not tried to lay down any hard and fast rule because ultimately the facts and circumstances of each case, the nature of the business, the prospects of profitability and such other considerations will have to be taken into account as will be applicable to the facts of each case. But, one thing is clear : the market value, unless in exceptional circumstances to which we have referred, cannot be determined on the hypothesis that because in a private limited company one holder can bring it into liquidation, it should be valued as on liquidation by the break-up method. The yield method is the generally applicable method while the break-up method is the one resorted to in exceptional circumstances or where the company is ripe for liquidation but none the less is one of the methods." ;