TMI Blog1996 (9) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Officer did not accept the cost of acquisition of the shares, as returned by the assessee and worked out the capital gains in a different manner. The computation made by the Income-tax Officer regarding the original shares was confirmed by the Appellate Assistant Commissioner and the Appellate Tribunal. In so doing, the Appellate Tribunal relied upon the decision of this court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567. At the instance of the appellant-assessee, the Income-tax Appellate Tribunal referred the following two questions of law for both the assessment years under section 256(1) of the Income-tax Act for the decision of the High Court of Delhi (see [1983] 143 ITR 749) : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in determining the cost of acquisition of the original shares by spreading the original cost over the original and the bonus shares and then averaging the same and on that basis working out the capital gain at Rs. 32,100 and Rs. 12,450 for the assessment years 1967-68 and 1968-69, respectively ? 2. If the answer to question No. 1 is in the negative, whether the assessee was justified in taking th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent issue of bonus shares has the effect of altering the cost of acquisition of the original shares. Stress was laid on the fact that in the instant case, the shares sold were original shares and by an " investor ", whereas in the decisions of this court dealt with by the High Court, the shares sold were " bonus shares " and the assessees in those case ; were " dealers in shares ". It was further argued that the question in those cases, was not the computation of capital gains, as a result of the sale of the shares (whether original or bonus shares) but the computation of " the profits and gains " in the business. The said vital difference was omitted to be noticed by the High Court. On the other hand, counsel for the Revenue submitted that the High Court was justified in its reasoning and conclusion in holding that the subsequent issue of bonus shares has the effect of altering the original cost of acquisition of the shares, irrespective of the fact whether the assessee is an investor or dealer in shares and the shares sold are original shares or bonus shares. In order to resolve the controversy in this case, it will be useful to bear in mind the relevant statutory provisions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in whole or part the issue price of partly paid shares held by members, or in paying in full the nominal value of new shares or debentures to be issued to members in the same manner and proportions as a cash dividend of the same amount would have been distributed ; and (b) to capitalise any part of the amounts standing to the credit of the company's profit and loss account or to reserve accounts which are not available for distribution (i.e., capital reserves and unrealised profits) and to apply the amount so capitalised in paying in full the nominal value of new shares to be issued to members in the same manner and proportions as a cash dividend of the same amount would have been distributed. Under such provisions in the articles it is possible for a company to capitalise the net amount of its realised and unrealised profits or the amount of reserves representing them in order to issue bonus shares, but only the company's accumulated balance of realised profits may be used to issue bonus debentures or to pay up any unpaid part of the issue price of shares which have already been issued. New shares or debentures issued in this way on a capitalisation of profits or reserves are know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dends in the shape of shares. The advantage of this procedure is that shareholders get back undistributed profits which were hitherto withheld from them. So far as the company is concerned, it pays the shareholders not in cash but in the form of bonus shares so that its financial position is in no way impaired. It will mean that the future rate of dividend will come down since the same amount of profit will now have to be distributed over a larger number of shares. . . ." (emphasis supplied). In the book " British Master Tax Guide " (1988-89) under the head " Bonus and rights issues " at page 598, bonus issues are dealt with as hereunder : --- " Bonus issues ; Bonus issues are free distributions of shares (e.g., two new shares for each share already held). Example : In 1970, A purchased 300 ordinary shares in S Ltd. at pound 3 per share, total cost pound 900 (ignoring expenses for the purposes of the example). In 1980, A received a bonus issue of 300 shares. He, then, held 600 shares at pound 1.50 per share. They are all as purchased in 1970." (emphasis supplied). William Pickles in his book Accountancy dealing with bonus shares at pages 23245-23246, states thus : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vantage to such holders where there are preference shares which carry a right in a winding-up to share pari passu in a surplus, as the bonus issue, by absorbing such part of the reserves of the company as is necessary for such purpose, diminishes the 'surplus'. In other words, such 'surplus' has been utilised solely to increase the claims of the ordinary shareholders by the additions of the relevant amount of reserves...." (emphasis supplied). M. C. Shukla and T. S. Grewal in their book Advanced Accounts (1989), at page 823, have dealt with the impact of the bonus shares on the original shares, thus : " It should be remembered that when bonus shares are distributed, the shareholders may not gain at all. This is because of the fact that the market value of the shares depends upon the dividend received. If the company issues bonus shares, the profits (which do not increase) will have to be distributed over a larger number of shares, thus reducing the dividend per share. This will result in a fall in the value of the shares in the market. Thus, the shareholder will have a larger number of shares but the total value of his holding will not increase because each share now is of a sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee is only an investor and in such a case what is to be determined is the capital gains and not the computation of business income, as in the case of a dealer in shares. Much stress was laid on the decision of this court in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788. Counsel for the appellants argued that the facts of the instant case are identical with the facts in the aforesaid decision of the Supreme Court, where the original shares were sold by an investor, in a case where bonus shares were issued subsequently and the matter came up for consideration. The court held that the capital gains or loss should be calculated in accordance with the statutory provisions of sections 48 and 55(2) of the Income-tax Act and the subsequent issue of bonus shares was completely irrelevant and extraneous which should not be taken into consideration. It is necessary to understand the scope and impact of the decision in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC). In the said case, the main issue posed was with regard to the validity of the proceedings initiated under section 147 of the Income-tax Act. The assessee therein acquired 12,000 ordinary sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act and distinguishing the earlier Constitution Bench decision of this court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, held thus : " .... that decision was not at all apposite for the purpose of deciding the point which has arisen in the present case. No question arose there of the calculation of the capital gain or loss in accordance with the statutory provisions in pari materia with sections 48 and 55(2) of the Act. In the present case, we are confined to the express provisions of section 55(2) relating to the manner in which the cost of acquisition of a capital asset has to be determined for the purpose of section 48. Where the capital asset became the property of the assessee before the first day of January, 1954, the assessee has two options. It can decide whether it wishes to take the cost of the acquisition of the asset to it as the cost of acquisition for the purpose of section 48 or the fair market value of the asset on the first day of January, 1954. The word 'fair' appears to have been used to indicate that any artificially inflated value is not to be taken into account. In the present case, it is common ground that when the original assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be valued by spreading the cost of the old shares over the old shares and the new issue (bonus shares), taken together, etc. The principle so laid down is one of the general application. We should also state that the character of the owner of the shares as an " investor " or as a " dealer " is of no consequence. There is no " dichotomy ", as to whether the shares are held by an " investor " or " dealer " in shares. In both the cases, it is the surplus receipt that is brought to tax, either as " capital gains " or " profit or loss ", as the case may be, and in accordance with the relevant statutory provisions. The decisions reported in Madura Mills Co. Ltd. v. CIT [1972] 86 ITR 467 (Mad) ; D. M. Dahanukar v. CIT [1973] 88 ITR 454 (Bom) ; W. H. Brady and Co. Ltd. v. CIT [1979] 119 ITR 359 (Bom) and Alembic Chemical Works Ltd. (No. 1) v. CIT [1992] 194 ITR 497 (Guj) are in accord with the above view and they represent the correct law. The decisions (in Sutlej Cotton Mills Ltd v. CIT [1979] 119 ITR 666 (Cal) ; CIT v. Steel Group Ltd. [1981] 131 ITR 234 (Cal) and Smt. Protima Roy v. CIT [1982] 138 ITR 536 (Cal), etc.,) cited before us, misapplied the rule enunciated in Shekhawati Gene ..... X X X X Extracts X X X X X X X X Extracts X X X X
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