TMI Blog1978 (6) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... that day, it received another lot of 2,105 shares as bonus shares. Subsequently between April, 1946, and February, 1960, the assessee acquired further, 4,623 shares for the aggregate of Rs. 8,55,122. The ruling rate of these shares on January 1, 1954, was Rs. 167.50 per share, while between April, 1946, and December, 1953, the rates at which the assessee had from time to time purchased the shares were higher than that rate. In the year of account, i.e., the calendar year ending December 31, 1961, the assessee sold all the shares of the company at the rate of Rs. 275 per share, and the aggregate price realised by it came to Rs. 24,29,075. The assessee incurred expenditure of Rs. 51,843 in connection with the sale of these shares. For the assessment year 1962-63, while assessing the assessee under the I.T. Act, a question arose as regards calculation of capital gains payable by it by reason of these shares. Before the taxing authorities the assessee claimed that the capital gains were only Rs. 5,99,899 calculated as under : Rs. Rs. Sale proceeds of 8,833 shares 24,29,075 Less: Actual cost of 6,058 shares 13,12,520 Value of 2,775 bonus shares at Rs. 167.50, being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l preferred by the assessee, the AAC accepted the contention of the assessee that in respect of the bonus shares their cost would be nil and the assessee would be entitled to substitute the market price as on January 1, 1954. This conclusion was arrived at by him relying upon the decision of the Bombay High Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1963] 48 ITR 882. In an appeal preferred by the revenue before the Tribunal, it was contended on its behalf that the decision of Bombay High Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1963] 48 ITR 882, on which reliance was placed by the AAC, was overruled by the Supreme Court, and the judgment of the Supreme Court was reported in [1967] 63 ITR 651. It was urged before the Tribunal that the decision of the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 was directly applicable to this case and according to that decision the cost of bonus shares had to be determined by spreading the cost of the original shares over the original and bonus shares and taking the average thereof. On behalf of the assessee, it was sought to be urged before the Tribunal that the said decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal for the assessment year 1962-63, the following question has been referred to us for our determination : " Whether, on the facts and in the circumstances of the case, the correct capital gains realised by the assessee on sale of shares of the New City of Bombay Manufacturing Company Ltd. was Rs. 5,99,899 as returned, by the assessee, or Rs. 7,50,958 as determined by the Income-tax Officer ? " Mr. Dastoor, on behalf of the assessee, urged that each share of a limited company is a separate capital asset and for computation of capital gains the assessee has the option in respect of such of the shares as it may desire to retain the amount of actual cost of acquisition, while in respect of such of the shares as it may desire to sell to calculate on the basis of the price prevailing on January 1, 1954. The option to determine the cost of acquisition is with the assessee and in case where the cost of acquisition of shares is to be determined, where the shares are partly purchased and partly received by the assessee as free bonus shares, it is open to the assessee so far as the shares purchased by him are concerned, to consider the cost of acquisition as the price paid by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of capital gains, how the bonus shares are to be valued has been considered by the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567. It was held by the Supreme Court in this case that where bonus shares are issued in respect of ordinary shares held in a company by an assessee who is a dealer in shares, their real cost to the assessee cannot be taken to be nil or their face value. Hidayatullah and Shah JJ., who constituted the majority of the Bench, took the view that such bonus shares have to be valued by spreading the cost of the old shares over the old shares and the new issue (viz., the bonus shares) taken together if they rank pari passu and if they do not, the price may have to be adjusted either in proportion to the face value they bear (if there is no other circumstance to differentiate them) or on equitable considerations based on the market price before and after issue. Hidayatullah J. in his judgment pointed out that there are four possible methods for determining the cost of bonus shares. The first method is to take the cost as the equivalent of the face value of the bonus shares. The second method is that, as the shareholder pays ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot as represented by any unusual fluctuation. The other method is to take the amount spent by the shareholder in acquiring his original shares and to spread it over the old and new shares treating the new as accretions to the old and to treat the cost, old price of the original shares, as the cost price of the old shares and bonus shares taken together. It is this last method that was suggested for acceptance on behalf of the revenue before the learned judge, and the learned judge pointed out that since the bonus shares rank pari passu with the old shares there is no difficulty in spreading the original cost over the old and the new shares and the contention of the department in this case was right. He further proceeds to point out that this simple method may present difficulties when the shares do not rank pari passu or are of a different kind. In such cases, it may be necessary to compare the resultant price of the two kinds of shares in the market to arrive at a proper cost valuation. In other words, if the shares do not rank pari passu assistance may have to be taken of other evidence to fix the cost price of the bonus shares. It may then be necessary to examine the result as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealer in shares ought not to be applied to the case of an investor. So far as this court is concerned, such a question is concluded by the decision of this court in the case of D. M. Dahanukar v. CIT [1973] 88 ITR 454 (Bom) to which I was a party. In this case, the view taken is that the correct method of valuing the cost to a person of bonus shares is to take the cost of the original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares. The method would be the same whether the assessee is a dealer in shares or an investor. Thus, it is not permissible, so far as this court is concerned, for Mr. Dastoor to contend that the case of an investor in shares is different from that of a dealer in shares. It is quite apparent that if the principle laid down by the Supreme Court in Dalmia Investment Co. Ltd.'s case [1964] 52 ITR 567 is borne in mind, then the method of calculation of capital gains canvassed on behalf of the assessee cannot be accepted. The method that has been adopted by the ITO, which has been approved by the Tribunal is on the average basis and having regard to the facts and circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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