TMI Blog1982 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that it had also received bonus shares issued by Escorts Ltd. With regard to the shares sold, the ITO observed that the assessee could not pinpoint which of these shares had been actually purchased and for what value. He averaged the cost of the shares by spreading out the purchase price of the original shares on both the original and the bonus shares. As on 1st August, 1965, the assessee had 1,03,012 shares in Escorts Ltd. The total amount paid for these shares was Rs. 9,87,668. As such the average cost worked out to Rs. 9.59 per share. Since the assessee sold 15,000 shares on 1st August, 1965, at the rate of Rs. 11.73 per share the capital gain per share was held to be Rs. 2.14, the total capital gain working out to Rs. 32,100. Similarly, for the assessment year 1968-69, the average cost of the shares worked out to Rs. 9.32 per share. As the shares were sold at Rs. 10.15, there was a capital gain per share of Rs. 0.83, the total capital gain being Rs. 12,450. On appeal by the assessee, the AAC confirmed the order of the ITO. On further appeal to the Tribunal, it found on facts in favour of the assessee and opened that it had " been able to correlate the sale of shares wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own. In such a case it would appear, normally, that the cost of acquisition of the original shares should be the actual price paid, and the capital gains should be arrived at after deducting this price from the sale price. But what happens when bonus shares have been issued after acquisition and before, sale ? Is not the actual cost of acquisition affected by the subsequent event, e.g., the issue of bonus shares ? The issue of bonus shares certainly affects the market value of the existing shares, which diminishes as a result. How then is the cost of the bonus shares and the original shares to be determined ? The cost of acquisition of an asset is normally the actual cost. However, if an assessee receives an asset " for free " a question arises as to the cost to be estimated. The nature of the asset, and the reason why the assessee has received it without any payment, has to be examined, A share in a company is bundle of rights permitting the holder to participate in the capital and management of the company. Bonus shares are issued to the holder of the original shares. Once bonus shares have been issued they are treated exactly as other shares, if they rank pari passu with the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old the 300 shares for total sum of Rs. 1,20,550. At the end of the accounting year the bonus shares remained with the assessee. The assessee claimed a loss of Rs. 35,801 for that year by valuing the bonus shares at their face value, whereas the ITO arrived at a loss of Rs. 27,766 by the method of averaging the price of the shares. The Appellate Tribunal adopted a third method by which the 50 bonus shares were completely ignored and the loss was arrived at by considering solely the purchase value of the 300 shares and the proceeds realised by their sale. On a reference, the High Court held that the method adopted by the Appellate Tribunal was erroneous and upheld the method of valuation adopted by the ITO. The Supreme Court held that the method of valuation adopted by the Appellate Tribunal was correct and in accordance with law. Hidayatullah J. (as he then was), speaking for the court, opined that for the purpose of assessing the loss for the accounting year the question of the proper method of valuing the bonus shares was not relevant as they were not sold and were still retained by the assessee. If matters had rested there, then on the basis of this decision, it would be app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaining to capital gains. The Revenue contended before the Supreme Court that in view of the decision in Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), after the issue of bonus shares the cost of the original shares had to be spread over all the shares inclusive of the bonus or right shares acquired on the original holding. The Supreme Court dealing with the case of Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), observed at p. 793: " We have set out the facts of this case in detail in order to demonstrate that 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 provision 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to acquire bonus shares is a right embedded in the original shares, and they are a legal accretion thereto. The method of spreading over on both the bonus and the original shares the cost of acquisition of the original shares would appear to be the proper method of determining the value of the asset. For, there is no doubt that on the issuance of the bonus shares, the value of the original shares is proportionately diminished. In simple language it is "split up". As such, the cost of acquisition of the original shares and their value is closely interlinked and interdependent on the issue of bonus shares. Therefore, once the bonus shares are issued, the averaging out formula has to be followed with regard to all the shares. But in view of the specific, language of s. 55(2)(i) regarding the substituted market value of 1st January, 1954, this cannot be done where the assessee has elected to exercise an option as decided in Shekhawati General Traders Ltd.'s case [1971] 82 ITR 788 (SC). For the reasons outlined above and harmonising the principles enunciated in the various decisions of the Supreme Court, it would appear to us that question No. 1 has to be answered in the affirma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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