TMI Blog1978 (12) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... es. On an appeal preferred by the assessee, the AAC upheld the order of the ITO. There was a further appeal by the assessee to the Income-tax Appellate Tribunal. It was contended before the Tribunal on behalf of the assessee that the actual cost of acquisition of a capital asset was to be determined with reference to the state of events on the date of acquisition and not with reference to subsequent events like issue of bonus shares. In this connection, a decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 was relied on. It was contended on behalf of the revenue that the matter was covered by the decision of the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC). Another decision of the Supreme Court in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 was also relied on by the revenue. It was submitted that the process of spreading out of the initial cost as approved by the Supreme Court was applicable to investors as also to dealers and should be extended to determine the cost of acquisition of the original shares also. It was submitted further that the decision of the Supreme Court in Shekhawati General Trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 as on the 1st day of January, 1954, at the option of the assessee ; ............" Various decisions on this point including those cited before the authorities below were cited at the Bar at the hearing. It may be convenient to consider the said decisions in their chronological order. (a) CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC) : The facts in this case were that the assessee held ordinary shares in a certain company both as investment as also as stock-in-trade in its business as a share-dealer. In 1944, the assessee had acquired 31,909 of such shares and continued to hold them till January, 1945, when the said company distributed bonus shares at the rate of one, ordinary bonus share for each original share. As a result, the assessee obtained 31,909 bonus shares. Between January, 1945, and the 31st December, 1947, the assessee sold 14,650 of the said original shares held by it. The assessee also acquired a number of newly issued shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal Court as also a decision of the Supreme Court of the United States and held that the two feasible methods were either to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares or to spread over the amount spent by the shareholder in acquiring the original shares on the old and new shares treating the new as accretions to the old and to treat the cost price of the original shares as the cost price of the old shares and bonus shares taken together. The last method was approved by the Supreme Court as in the case before it the bonus shares had been ranked pari passu with the original shares. The Supreme Court observed that when the bonus shares were not ranked pari passu with the original shares, their price would have to be adjusted either in the proportion of the face value they would bear in the absence of any other differentiating circumstances or on the equitable considerations based on the market price before and after the issue. Applying the second method the Supreme Court held that the accounting would be as follows : Rs. " 1. Old issue of 17,259 shares brought forward from 1945, at (proporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culated in accordance with the principles of accountancy. The Supreme Court held that the claim of the assessee was justified as the net capital gain to her in the transaction could only be properly computed taking into account the depreciated value of the old shares which remained in her hands after the issue of the new shares and that the capital gains of the assessee was the difference between the money realised on the transfer of her right to the new shares and the amount lost by the assessee in the form of depreciation in the value of her old shares in order to acquire that right. (c) CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC). The assessee in this case, a dealer, had valued its shares in the assessment year 1949-50 at cost both at the opening and at the closing of the accounting period. The assessee held 2,500 shares of the face value of Rs. 10 each in a certain company purchased at Rs. 85 per share. In June, 1948, bonus shares ranking pari passu with the original shares were issued by the company in the proportion of three new shares for every two original shares, and the assessee obtained 3,750 new shares of the face value of Rs. 10 each. On the 2nd Augu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It also received a further 60,000 bonus shares at the beginning of June, 1954, and finally it acquired 25,200 right shares on the 26th June, 1961. During the assessment year 1962-63, the assessee sold 22,000 of the said shares. It was found that the said 22,000 shares were sold out of 24,000 shares which the assessee held prior to the 1st January, 1954. The price realised on account of the sale of the said 22,000 shares during the said assessment year was Rs. 8,45,100. The assessee calculated the cost price of 22,000 shares sold by it at the market rate prevailing on the 1st January, 1954, which came to Rs. 8,63,500. The assessee had also initially acquired 15,000 ordinary shares of another company before the 1st January, 1954. It obtained 41,250 bonus shares on its original holding after, the, 1st January, 1954. It further acquired 22,500 right shares in the said company for the nominal value of Rs. 3,60,000. The assessee, during the assessment year 1962-63, sold 15,000 of the said shares and realised a sum of Rs. 4,54,130. The assessee calculated the cost price of the said 15,000 shares at the market value prevailing on the 1st January, 1954, which came to Rs. 6,45,000. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Co. Ltd. and held, inter alia, as follows : " 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 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 assessment order was made the fair market valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt arose by reason of sale of certain bonus shares by the assessee and it had to be determined whether they were short-term capital assets or long-term capital assets. It was contended by the assessee that the bonus shares did not represent acquisition of any new assets, and that they were part of the original shares being carved out of them and must, therefore, be held to have acquired when the original shares were purchased, viz., prior to the 1st January, 1954, and, therefore, long-term capital assets. The contention of the assessee was rejected by the revenue authorities, but accepted by the Tribunal. On a reference, the Gujarat High Court held that bonus shares acquired by the shareholder must be taken to be held by the shareholder from the date of their issue and not from the date of the acquisition of the original shares. On the authorities of Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC) and Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC), Mr. Suhas Sen, learned counsel for the revenue, contended at the hearing that shares in a limited company constituted a bundle of rights which were acquired by the shareholder when it acquired the shares. He submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in an entirely different compartment, from the cost of the original shares, and 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 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 no departure from this system. All the ordinary shares which were bought were sold. Their purchase price is shown, as also their sale price. The first assessment is closed, so far as the assessee-company is concerned. The trading loss in the second assessment year is calculated on the purchase price of the 300 shares bought and sold, and it is Rs. 27,748. The loss, therefore, was calculated according to law, leaving out of consideration the price of 50 bonus s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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