TMI Blog1980 (5) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee received 2,000 bonus shares in the ratio of one bonus share for each ordinary share. In respect of the sale made on February 7, 1959, the assessee claimed capital loss of Rs. 42,000 in the assessment for the assessment year 1960-61 by substituting the market price as on January 1, 1954, which was Rs. 125 per share for the cost price at Rs. 103 per share. The assessee's claim was allowed in the assessment for the assessment year 1960-61. This was in respect of the original shares held by the assessee which were purchased in 1948, as mentioned hereinbefore. The total cost of the shares had been considered in the assessment for the assessment year 1960-61. As mentioned hereinbefore, in 1951, the company, M/s. Hastings Mills Ltd., issued bonus shares in the proportion of one bonus share for each ordinary share. As result, the assessee had received 2,000 bonus shares in the year 1951. In the year 1967, M/s. Hastings Mills Ltd. again issued bonus shares in the ratio of 1 : 1 with the result the assessee got another 2,000 bonus shares in respect of 2,000 ordinary shares which the assessee was then holding which had been received in 1951, as mentioned hereinbefore. It was ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had computed the value of the bonus shares sold in the year under reference was at Rs. 103 which depreciated by the issue of bonus share to roundabout Rs. 52 per share. This again was further diluted by the issue of 2,000 bonus shares on the bonus shares held by the assessee. Therefore, the value of the bonus shares got depreciated to half, and half of that value was worked out at Rs. 25.75. The revenue being aggrieved by the decision of the AAC preferred an appeal before the Tribunal. Before the Tribunal, on behalf of the revenue, it was urged that the ratio of the decision of the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC) had no application to the facts of the present case inasmuch as the entire holding of the original shares was sold by the assessee long before the bonus shares in question were sold and, therefore, the entire cost of the original shares was considered in the assessment for the assessment year 1960-61. According to the assessee, in assessing the capital loss arising out of the sale of the entire holding of the original shares, the question of spreading that cost over the original shares and the bonus shares according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 55 of the Act provides for the meaning and definition of certain terms and sub-s. (2) of s. 55 deals with the expression " cost of acquisition " in ss. 48 and 49 in relation to a capital asset and the relevant provisions with which we are concerned in sub-s. (2) of s. 55 are as follows : " (2) For the purposes of sections 48 and 49, 'cost of acquisition', in relation to a capital asset, (i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee; (ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1954, means the cost of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation had to be made for the purpose of taxation. The Supreme Court was unequivocal in observing that they were unable to accept this proposition. The Supreme Court reiterated that in working out the capital gain or loss, the principles that have to be applied were those which were part of the commercial practice or which an ordinary man of business would resort to when making computation for its business purposes. The Supreme Court referred, with approval, to the principles enunciated in the decision in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC). Learned advocate for the revenue, however, tried to urge that the Supreme Court while reiterating the principles enunciated in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), had not taken note of the fact that the Dalmia Investment case was not a case which dealt with valuation of bonus shares for the purpose of computation of capital gains but it was dealing with the question of valuation in respect of a dealer in shares. We are, however, unable to appreciate the significance of the difference highlighted by the learned advocate for the revenue. The question is computation of capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue of the new ones ...... In short, the corporation is no poorer and the stock-holder is no richer than they were before...... If the plaintiff gained any small advantage by the change, it certainly was not an advantage of pound 417,450, the sum upon which he was taxed...... What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new. ...... If a shareholder sells dividend stock, he necessarily disposes of a part of his capital interest, just as if he should sell a part of his old stock, either before or after the dividend. What he retains no longer entitles him to the same proportion of future dividends as before the sale. His part in the control of the company likewise is diminished'." In the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), a question arose as to how the bonus shares issued in respect of ordinary shares held in a company by an assessee who was a dealer in shares, would be valued and whether the real cost to the assessee could be taken to be nil or their face value. The majority view was that these should be valued by spreading the cost of the old ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nificance of difference of bonus shareholding as such disappears because the shares rank pari passu and after the issue of the bonus share the holder becomes a holder of share though the character of the share may originally have been the bonus share. Therefore, the moment some new shares are issued or there is new additional bonus shares, there is diminution in the value of the shares that have been held by the shareholders. In that case, the Supreme Court was dealing with, as we have mentioned hereinbefore, with the question how the bonus shares should be valued of an assessee who carried on business in shares. The assessee was a public limited company and the bonus shares were issued in the calendar year by another company in the year 1945 by Rohtas Industries Ltd., in the proportion of one bonus share for one ordinary share already held by the shareholders. In this way, the assesseecompany received 31,909 bonus shares of the face value of Rs. 10 per share which showed that its previous holding was 31,909 existing ordinary shares. The existing ordinary shares were purchased by the assesseecompany for Rs. 5,85,283 for the assessment year 1949-50, which corresponded to the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the method adopted by the Appellate Tribunal was erroneous and upheld the method of valuation adopted by the ITO. On a further appeal to the Supreme Court, it was held 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 these were not sold and were still retained in the hands of the assessee at the relevant time. In those circumstances, the Supreme Court held that the method of valuation adopted by the Appellate Tribunal was the correct method and the loss as calculated by the Tribunal was correct and according to law. The Supreme Court, at pages 261-262 of the report observed as follows: " In our opinion, the Tribunal's calculation is according to law and correct. What the bonus shares cost is not the question at the present moment. They may have cost Rs. 12,500 as the assessee-company claims, or nothing as stated by the Income-tax Officer or even something else according to some other principle. The bonus shares are still there, and have not been sold. When they are sold, the question will arise as to what they cost. The books of the assessee-company, as stated in the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1964] 52 ITR 567 (SC) and the decision in the case of Emerald Co. Ltd. v. CIT [1959] 36 ITR 257 (SC). The Supreme Court negatived that contention at p. 66 of the report in the following words: " These, cases would normally have been decided on the strength of the ruling of this court but a doubt arose because in an earlier decision in Emerald Co. Ltd. v. Commissioner of Income-tax [1959] 36 ITR 257 (SC) this court seemed to have approved of another method. In that case the bonus shares were not sold. In applying different methods, the difference was only Rs. 18 and the court did not, therefore, express a final view on the matter and accepted the calculation of the Tribunal which was to ignore the bonus shares which were not sold and to calculate the profit and loss on the basis of the original shares, their cost and sale prices. The court observed as follows: 'The bonus shares are still there, and have not been sold. When they are sold, the question will arise as to what they cost. The books of the assessee-company, as stated in the statement of the case, include the closing stock at cost price. In calculating profit and loss in the manner done by the Tribunal, there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and capital loss was computed. Thereafter, the ITO issued a notice of reassessment under s. 147 of the I.T. Act, 1961, proposing to reopen the assessment on the ground that subsequent to January 1, 1954, further bonus shares were issued to the assessee in respect of the shares held by it. It was held by the Supreme Court that for the ascertainment of the fair market value of the shares in question on January 1, 1954, any issue of bonus shares subsequent to that date was wholly extraneous and irrelevant and could not be taken into consideration. The assessee-was bound to disclose under clause (a) of s. 147 of the I.T. Act, 1961, only such material facts which were necessary for assessment for the relevant assessment year and not those facts which were wholly extraneous or irrelevant for the purpose of assessment. Under clause (b) of s. 147 the information had to be such as would lead to the ITO to believe that income chargeable to tax had escaped assessment. The information in this case relating to the acquisition of bonus shares subsequent to January 1, 1954, could not possibly furnish any reason to the ITO to form the belief that income chargeable to tax had escaped assessment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired had to be spread over and the value determined accordingly and that is the value which the Tribunal has adopted and followed and we think in principle that is the correct value because by issue of the additional bonus shares the value of bonus shares originally being issued to the assessee when these additional bonus shares were being issued which were the subject-matter of the transaction in the present case-there was diminution in the value of the original shares. We have indicated the actual break-up of the value. Reliance was also placed on the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 119 ITR 666 (Cal). There the question was whether in determining the cost of acquisition of the original shares on which bonus shares had been issued, it could not either be the actual cost of acquisition or at the choice of the assessee to a market value on January 1, 1954. When an assessee had elected to adopt a market value as on January 1, 1954, for the purpose of computation of capital gain or loss for the transfer of its originally acquired shares he was in effect substituting the original cost of acquisition of such shares by another amount as allowed by the statute and the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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