Seth Rasesh Family Trust No. 1 vs Commissioner of Income Tax

Dr. B.P. Saraf J.

By this reference u/s 256(1) of the Income Tax Act, 1961, made at the instance of the assessee, the Income Tax Appellate Tribunal, Bombay Bench ''E'', Bombay, has referred the following question of law to us for opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the gains arising out of the sale of bonus equity shares of the Standard Mills Co. Ltd. held by the assessee, were liable to be included in the income of the assessee as capital gains ?"

The assessee is a trust. The assessment year is 1980-81. The accounting year ended on December 31, 1979. The assessee held equity shares of Standard Mills Co. Ltd. During the relevant accounting year, the assessee sold 968 equity shares of the said company. The shares that were sold included 161 shares which had been received by the assessee-trust as bonus shares on October 19, 1978. The assessee included the capital gains arising out of these shares in its returned income for the relevant assessment year. The Income Tax Officer accepted the computation of capital gains as shown by the assessee.

The assessee filed an appeal before the Appellate Assistant Commissioner of Income Tax. It was contended by the assessee before the Appellate Assistant Commissioner that the capital gains arising out of the sale of bonus shares should not have been included in the total income of the assessee. The Appellate Assistant Commissioner, however, rejected this contention and dismissed the appeal.

The assessee filed further appeal before the Tribunal. It was contended by the assessee before the Tribunal that transfer of bonus shares did not give rise to a capital gain for the purposes of Income Tax as no price had been paid for acquisition of bonus shares and it could not be said as to on what particular date the bonus shares came into existence. Reliance was placed in support of this contention on the decision of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, .

The Tribunal rejected the contention of the assessee and held that the principle laid down in the decision of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, was not applicable to the gains arising out of the sale of bonus shares. In arriving at the above conclusion, the Tribunal relied upon the decisions of the Supreme Court in Commissioner of Income Tax, Bihar Vs. Dalmia Investment Co. Ltd., and Commissioner of Income Tax, Central Calcutta Vs. Gold Mohore Investment Company Ltd., and of the Bombay High Court in Commissioner of Income Tax, Bombay City-I Vs. Alcock Ashdown and Co. Ltd., . Hence, this reference at the instance of the assessee.

We have carefully considered the contention of the assessee and the order of the Tribunal. We have also perused the decision of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, on which reliance is placed by the assessee. We are, however, of the clear opinion that the ratio of the said decision has no application to gains arising from sale of bonus shares because of the well-settled legal position that the cost of the bonus shares cannot be taken to be nil. Such shares have to be valued by spreading the cost of the old shares over the old shares and the bonus shares taken together treating the bonus shares as accretions to the old, if they rank pari passu. If they do not, the price may have to be adjusted either in proportion to the face blue they bear or on equitable considerations based on the market price before and the after issue. (See Commissioner of Income Tax, Bihar Vs. Dalmia Investment Co. Ltd., ) and Commissioner of Income Tax, Central Calcutta Vs. Gold Mohore Investment Company Ltd., . It is settled by the decision of this court in D.M. Dahanukar Vs. Commissioner of Income Tax, Bombay City-I, that the above method of valuation of bonus share would apply irrespective of the fact whether the assessee is a dealer in shares or an investor.

The above legal position was reiterated by this court in W.H. Brady and Company Ltd. Vs. Commissioner of Income Tax, Bombay, . In the above case, the assessee had treated the cost of acquisition of bonus share as nil. The Income Tax Officer spread the cost of the original shares over the whole of 2,680 shares which included 670 original shares and 2,010 bonus shares. In appeal, the Appellate Assistant Commissioner agreed with the assessee, but on further appeal, the Tribunal restored the order of the Income Tax Officer. On a reference, the High Court held that the Income Tax Officer rightly followed the method of valuation laid down by the Supreme Court in Commissioner of Income Tax, Bihar Vs. Dalmia Investment Co. Ltd., . It was further held that in view of the decision of this court in D.M. Dahanukar Vs. Commissioner of Income Tax, Bombay City-I, , it was not permissible to contend that the case of an investor in shares was different from that of a dealer in shares.

In view of the above legal position, we are of the clear opinion that the Tribunal was right in law in holding that the gains arising out of the sale of bonus equity shares held by the assessee were liable to be included in the income of the assessee as capital gains for the purpose of Income Tax.

In the premises, we answer the question referred to us in the affirmative and in favour of the Revenue.

In the facts and circumstances of the case, there shall be no order as to costs.