D.M. Dahanukar vs Commissioner of Income Tax, Bombay City-I

Kantawala, J.—The question in this reference relates to computation of capital gains when an assessee has sold the bonus shares allotted to him. The question of law referred to us for our decision is as under :

"Whether, for the purposes of computation of capital gains, was the assessee entitled to deduct the face value of the bonus shares from their sale value as the ''actual cost'' of those shares to the assessee within the meaning of section 12B(2) ?"

The assessee is the investor with reference to shares of Maharashtra Sugar Mills Ltd. held by him (hereinafter referred to as "sugar mills"). The assessee received certain bonus shares from the sugar mills. These bonus shares were acquired by him without paying any amount by him. The assessment relates to the assessment year 1960-61. During the relevant previous year, the assessee sold 600 bonus shares.

During the course of assessment, a question arose as regards the quantum of capital gains made by the assessee u/s 12B(1) by sale of these bonus shares. Before the Income Tax Officer, the assessee claimed a deduction of the face value of these shares from the sale proceeds received by him as the actual cost of shares to him. The Income Tax Officer rejected this contention and held that the entire surplus of the sale proceeds of the bonus shares as capital gains made by the assessee by the sale. In view of this finding, the brought to tax the sum of Rs. 1,14,000 under the head "Capital gains". On appeal by the assessee, the Appellate Assistant Commissioner upheld the decision of the Income Tax Officer. That decision was confirmed by the Income Tax Appellate Tribunal in the appeal preferred by the assessee. The Tribunal held that in computing the capital gains the actual cost to the assessee of the capital asset has to be deducted and that the phrase "actual cost" could not be interpreted as notional or something which the assessee was supposed to have suffered and which could be valued in terms of money. Before the Tribunal, it was urged on behalf of the assessee that the cost of the bonus shares to the shareholder need not necessarily be the amount actually paid by the shareholder and by the issue of bonus shares, the value of the original shares would be reduced and there was sufferance on the part of the shareholder and that could be taken as the face value of the shares. This contention did not find favour with the Tribunal. The phrase "actual cost" was interpreted to mean what is, in fact, expended by the assessee in acquiring the capital asset and not what the assessee was supposed to have suffered. On this finding, the Tribunal took the view that the actual cost of the bonus shares was nil.

Mr. Vakil, on behalf of the assessee, has contended that the question involved in this reference is concluded by the decision of the Supreme Court in the case of Commissioner of Income Tax v. Gold Mohore Investment Co. Ltd., wherein the earlier decision of the Supreme Court in Commissioner of Income Tax v. Dalmia Investment Co. Ltd. was approved. There is no controversy on behalf of the revenue that the method of the valuing the capital gains in a case like this is settled in view of the above decision of the Supreme Court.

In Gold Mohore Investment Co. Ltd.''s case, the Supreme Court took the view that in the case of a dealer in shares who values his stock at cost, where bonus shares issued in respect of ordinary shares held by him rank pari passu with the original shares, the correct method of valuing the cost to the dealer of the 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.

It is not disputed on behalf of the revenue that instead of being a dealer in shares, the same principle will apply if the assessee is an investor in shares. Even in case of an assessee, who was an investor in shares, the capital gain of bonus shares has to be calculated in accordance with the method of valuation laid down by the Supreme Court in Gold Mohore Investment Co. Ltd.''s case.

That being the view of the matter, our answer to the question referred to us is as under : The computation of capital gains made by the assessee upon the sale of 600 bonus shares of the Maharashtra Sugar Mills Ltd. has to be calculated in accordance with the method of valuation laid down by the Supreme Court in the case of Commissioner of Income Tax v. Gold Mohore Investment Co. Ltd. No order as to costs.