2003 (7) TMI 280 - AT - Income Tax

Summary

Issues Involved:
1. Determination of capital gains on the sale of bonus shares.
2. Applicability of Supreme Court decisions on capital gains for bonus shares.
3. Interpretation of cost of acquisition for bonus shares.
4. Retrospective application of amendments to Section 55(2) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Determination of capital gains on the sale of bonus shares:
The core issue was whether capital gains tax is applicable on the sale of bonus shares, acquired without any cost. The assessee argued that since no cost was incurred for acquiring the bonus shares, the amount realized from their sale should not be taxable. The Assessing Officer, however, included the sale proceeds within the tax net. The Commissioner (Appeals) supported the assessee's view, citing the Supreme Court's decision in CIT v. B.C. Srinivasa Setty, which held that assets with no determinable cost of acquisition are not subject to capital gains tax.

2. Applicability of Supreme Court decisions on capital gains for bonus shares:
The revenue argued that the Commissioner (Appeals) erred by relying on B.C. Srinivasa Setty's case, which pertains to goodwill, not bonus shares. They referenced Supreme Court rulings in CIT v. Dalmia Investment Co. Ltd. and Shekhavati Gen. Traders Ltd. v. ITO, which established principles for determining the cost of bonus shares. The Tribunal found that the Supreme Court in Dalmia Investment Co. Ltd. had laid down a method for averaging the cost of original and bonus shares, thus making the cost of bonus shares determinable and taxable.

3. Interpretation of cost of acquisition for bonus shares:
The assessee's counsel argued that the cost of acquisition for bonus shares should be nil, and thus, the sale proceeds should not be taxable. The Tribunal, however, noted that the Supreme Court in Dalmia Investment Co. Ltd. and subsequent cases had established that the cost of original shares must be averaged with the bonus shares. The Tribunal also referenced judgments from the Calcutta and Delhi High Courts, which had conflicting views but were ultimately resolved by the Supreme Court in Escorts Farms (Ramgarh) Ltd., confirming the averaging method.

4. Retrospective application of amendments to Section 55(2) of the Income-tax Act:
The assessee contended that the amendment to Section 55(2)(iiia), which mandates the cost of acquisition of bonus shares to be nil, should apply retrospectively. The Tribunal rejected this argument, stating that the amendment, effective from 1-4-1996, is not retrospective. The Tribunal emphasized that courts cannot legislate and must adhere to the effective dates of amendments as specified by the Legislature.

Conclusion:
The Tribunal concluded:
(i) The cost of bonus shares prior to 1-4-1996 should be determined by averaging the cost of original shares.
(ii) The Supreme Court's decision in B.C. Srinivasa Setty does not apply to bonus shares.
(iii) The amendment to Section 55(2) by incorporating clause (iiia) is substantive and not retrospective.

Final Judgment:
The appeal of the revenue was allowed, overturning the Commissioner (Appeals)'s order and holding that the sale proceeds of bonus shares are subject to capital gains tax.