TMI Blog1983 (1) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... of the general insurance companies. The Government took over, instead, all the shares held by the entire body of shareholders in all these general insurance companies at a valuation. This value was set out in a schedule appended to that Act. The valuation was fairly liberal such that capital gains resulted practically to everyone of the shareholders. The assessee held 21,507 shares in a general insurance company called the Madras Motor and General Insurance Company Ltd. Under the Schedule to the Act, a sum of Rs. 1,77,69,600 was the amount payable to all the shareholders of this company in the aggregate. So far as the assessee was concerned, for its entire shareholdings in this company numbering 21,507 shares, the assessee was paid Rs. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l shares plus bonus shares. Following this method, the assessee derived the figure of Rs. 6,58,250 as the cost of the 8,109 bonus shares. The assessee claimed that this amount of Rs. 6,58,250 must be added to the sum of Rs. 14,47,254, which was the actual cost of the original shares, and that the resultant figure of Rs. 21,05,504, must properly be regarded as the total cost of the entire holding of 21,507 shares. According to the assessee, it is this amount of Rs. 21,05,504, which must be deducted from the total value of the consideration paid by the Central Govt. in the sum of Rs. 42,46,342 and the capital gains must be arrived at in the sum of Rs. 21,40,838 as against the figure of Rs. 27,99,088 proposed to be assessed to capital gains ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n away, by compulsory transfer, by the Central Govt. The compensation paid for by the Central Govt. was thus payable and actually paid for all the 21,507 shares en bloc. The compensation was not paid at so much for the bonus shares. There might be some meaning in people sitting at a table and working out the cost of bonus shares, where bonus shares alone are the subject of transfer, either voluntary or compulsory, at a gain. But, in the present case, there was no distinction made between the two kinds of shares and all the assessee's shares, whether they were original shares or bonus shares, were acquired compulsorily by the Central Govt. The question is what in such an event, is precisely the cost of all the assessee's 21,507 shares en blo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration in a case where the totality of the shareholder's holdings are sold as one block or otherwise acquired in a single transaction. It must be clear, as a principle of elementary arithmetic, that by getting at the average cost of bonus shares which are included in the total holdings consisting of original shares and bonus shares, the average cost of original shares must inevitably get reduced pro tanto. To take a very simple illustration, if a shareholder holds a single share which he has purchased at Rs.100 and subsequently a bonus share is issued to him, then, the theory of averaging and of obtaining the notional cost of the bonus shares, the purchase cost of Rs. 100 for the single original share must be divided by two, one for the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bonus share which is arrived at in the sum of Rs. 50 to the actual cost of Rs. 100, the result will be Rs. 150, which will raise the average cost of the bonus share to Rs. 75. This is scarcely a result which is consistent even with the very principle of averaging adopted by the assessee in order to arrive at the cost of bonus shares. We must, therefore, hold that to add to the actual cost the notional cost of bonus shares would result in an absurdity because by that process you not only raise the actual cost fictionally but also raise the notional or average fictional cost of bonus shares itself by another fiction. We earlier observed that the average cost of bonus share comes to be calculated, and is meant, for certain limited purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said that the Dalmia case [1964] 52 ITR 567 (SC), only laid down the principle of averaging as a method of attributing to the bonus shares some cost which may be justified on principle. The Tribunal also said that the Dalmia case did not deal with any other situation. The Tribunal further noticed that in the Dalmia case, the Supreme Court was aware that this method of averaging resulted in not only attributing to the bonus shares a cost which they did not actually incur but also have the effect of reducing the cost of the original shares. Nevertheless, the Tribunal observed that for the purpose of capital gains, the notional cost of bonus shares must be added to the actual cost of the original shares. They dismissed the Dalmia case [1964] ..... X X X X Extracts X X X X X X X X Extracts X X X X
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