SMT. SUBHADRA RAJKUMAR vs SEVENTH ADDITIONAL Income Tax OFFICER.

Per Shri M. A. Ajinkya, Accountant Member - This is an appeal filed by an assessee for the assessment year 1983-84 against the order of the CIT, Bombay City-VIII, Bombay u/s. 263 of the Act passed on 17-1-1988.

The assessee is an individual. In the assessment year 1983-84, she declared income of Rs. 1,02,570. In computing the total income, the ITO included income from capital gains of Rs. 40,241. Although the manner in which the computation of such capital gains was done is not available in the order of the ITO. The Commissioner of Income Tax, who took action u/s. 263 on the ground that the assessment made on 16-5-1984 was erroneous in so far as it was prejudicial to the interest of the revenue, has given the relevant facts which are as follows :

The assessee originally held 19,520 shares of Piem Hotels Ltd. During the accounting year relevant to the assessment year 1982-83, she received certain bonus shares in the ratio of 1 : 1. The assessee sold 11,025 shares during the assessment year 1983-84 and disclosed capital gains of Rs. 40,241. According to the CIT, the assessee had deducted cost at Rs. 10 per share, while computing such capital gain instead of spreading over cost of original shares on original plus bonus shares as laid down by several Supreme Court decisions, which have been mentioned by the CIT in the body of his order. The CIT observed that the deduction allowed by the ITO (in the computation of capital gain) with reference to original cost and not average cost was incorrect. He directed the ITO to redetermine the capital gain by taking the cost at Rs. 5 per share (original cost spread over between original shares and bonus shares) and recompute the total income accordingly. It is against this finding of the CIT that the present appeal is filed.

At the time of the appeal hearing before us, Shri Raheja, who appeared on behalf of the appellant pointed out that during the accounting period relevant to the assessment year 1983-84, the appellant had sold 11,025 shares, all of which were original shares held by the assessee and they did not constitute or form part of the bonus shares. In her latter dated 12-8-1985, addressed to the ITO, the assessee has given details of distinctive numbers of these shares and has made a statement that the shares sold did not constitute any portion of the bonus shares. It would appear that during the same period, the assessee had received 19,520 bonus shares. The capital gain on sale of these 11,025 shares was calculated as under :

Sale price of these 11,025 shares '' Rs. 13.65 per share

1,50,491

Less : Cost of the shares '' Rs. 10 per share

1,10,250

40,241

This cost of original shares, according to Shri Raheja, was rightly adopted by the ITO and the fact the bonus shares were issued during the year, did not necessarily mean that the cost to the assessee of the original shares god diluted ipso facto. On these facts, we have to decide whether the CIT is justified in giving direction that the capital gain should be recomputed by taking the cost of the shares at Rs. 5 per share on the basis of the average cost of the original shares and the bonus shares. The CIT has relied on the following decisions, in support of the finding that he has given in his order.

Commissioner of Income Tax, Bihar Vs. Dalmia Investment Co. Ltd., , Commissioner of Income Tax, Central, Calcutta Vs. Gold Mohore Investment Co. Ltd., , W.H. Brady and Company Ltd. Vs. Commissioner of Income Tax, Bombay, and (1970) 78 ITR 16 (SC) .

We will presently see how far these decisions are relevant for resolving the controversy before us. In the case of Dalmia Investment Co. Ltd. (supra), the Supreme Court was concerned mainly with the question of the manner of valuation of bonus shares, in the case of an assessee engaged in business of share dealing. The Supreme Court held that where bonus shares are issued in respect of ordinary shares held in a company by an assessee who is dealer in shares, their real cost to the assessee 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 new shares. In present case, we are not concerned with determining the cost of bonus shares, particularly when it is not disposed that what is sold are the original holdings of the assessee. Therefore, the decision of the Supreme Court in the case of Dalmia Investment Co. Ltd. (supra), quoted by the CIT is not relevant and in any case, does not support the case of the department.

In the case of Gold Mohore Investment Co. Ltd. (supra), the issue again was the manner of valuation of bonus shares. The Supreme Court, following their earlier decision in the case of Dalmia Investment Co. Ltd. (supra) held than when bonus shares were issued in respect of ordinary shares held in a company by an assessee, their real cost to the assessee could not be taken to be nil or their face value but the proper method of valuation was to spread the cost of the old shares over the old shares and the new shares. It may be stated that in both these decisions, the issue about the valuation of bonus shares was considered and decided in a different context and the question of determining the cost of the shares sold for the purpose of capital gain did not come up before the Supreme Court. In both these decisions. In that sense also, the reliance of the CIT on these two decisions is misplaced and does not advance the case of the department.

In the case of W. H. Brady & Co. Ltd. (supra), the Bombay High Court considered the question of acquisition of the assets for the purpose of computation of capital gain, for the first time, in that case, the assessee had bought 670 shares between 1922 and 1941. It acquired further 670 shares as bonus shares in May, 1942. Then between April, 1942 and April, 1946, the assessee bought further 765 shares and had a total holdings of 2,105 shares. In April, 1946, the assessee received another lot of 2,105 bonus shares. Then again the assessee purchased still 4,623 shares in April, 1946 and in the accounting year ending 31st December, 1961, the assessee sold all the shares at the rate of Rs. 275 per share and realised certain profit. Since then entire lot of shares was sold and such lot of shares included both bonus shares as well as shares purchased, the Bombay High Court, following the decision of the Supreme Court in the case of Dalmia Investment Co. Ltd. (supra) held that where the existing shares and the bonus shares rank pari passu, the proper method of valuation of the bonus shares is to take the amount spent by the shareholder in acquiring his original shares. Here again, effectively, the finding of the Bombay High Court is on the valuation of bonus shares for determining their cost of computation of capital gain, when it is not possible to identify the type of shares sold. In that sense, the facts of the case decided by Bombay High Court are distinguishable in as much as, in the present case, it is only the original shares acquired by the assessee that were sold and the shares so sold could be identified with reference to their distinctive numbers.

In the case of Gold Mohore Investment Co. Ltd. (supra), the Supreme Court was again concerned with the valuation of the bonus shares in the case of an assessee dealing in shares and it followed the principle laid down by the same Court in the case of Gold Mohore Investment Co. Ltd. (supra) and Dalmia Investment Co. Ltd. (supra). The common thread running through all these decisions, the manner of computing the valuation of bonus shares either for the purpose of working out business profit when such shares were sold along with other shares or for the purpose of computing capital gain.

In the present case, what are sold are the original shares held by the assessee. This fact has been disputed either by the ITO or by the CIT in his order or at the time of hearing before us. The cost of the shares which were sold during the year has to be determined, in accordance with the provisions of section 48 of the Income Tax Act, which prescribes the mode of computation of capital gains. Section 48(1) (ii) specifically speaks of cost of acquisition of the asset and the cost of any improvement there to which has to be deducted from the value of the consideration received, on the transfer of the capital asset. Here, the cost of the original shares is known. The question is whether such cost gets depleted by the mere fact that the recipient of such shares receives bonus shares on a later date In out opinion, this is not an acceptable proposition. When we consider the question as to how the cost of the original shares is to be computed. In case bonus shares are issued, we can do no better than refer to the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, where the Supreme Court has observed at page 792 as under :

"The assessee has exercised the option of the fair market value of the assets. The shares which had been sold by it of both the companies had indisputably become its property before the first day of January, 1954. Therefore, all that had to be determined was the fair market value on the first day of January, 1954, of those shares. This was duly determined and it was not disputed that the determination was made according to the rates prevailing in the market on the aforesaid date by the Income Tax Officer when he made his assessment order on July 20, 1964. Once the market value of the shares was ascertained or determined on the date given in the clause (i) of section 55(2) that would be the cost of acquisition in relation to capital assets. Up to this point there is no controversy between the revenue and the assessee, but, on the behalf of the revenue, an almost startling position has been advance that while determining the fair market value on January 1, 1954, the issuance of bonus or right shares after that date on the basis of the holding of the assessee prior to January 1, 1954, should have been taken into account. In other words, as was explained in the letter of the Income Tax Officer dated January 4, 1967, while working out the capital gains, the cost had to be worked out by averaging the cost of the original shares amongst the original shares and the bonus shares the cost of the original holding had to be spread over all the shares inclusive of the bonus shares acquired on the original holding. Support for this view appears to have been found in the decision of this Court in Commissioner of Income Tax v. Dalmia Investment Co. Ltd."

Thereafter, the Supreme Court stated the relevant facts and proceeded to lay down the following principle :

"We have set out the facts of this casein detail in order to demonstrate that that decision was not at all apposite for the purpose of deciding the point which had arisen in the present case. No question arose thereof the calculation of the capital gain or loss in accordance with 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 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 value of the shares in question assessment order was made the fair market value of the shares in question had been duly determined and accepted as correct by the Income Tax Officer. Under "no principle or authority can anything more be read into the provisions of section 55(2) (i) in the manner suggested by the revenue based on the view expressed in the Dalmia Investment Co.s case. The High Court completely overlooked the fact that for the ascertainment of the fair market value of the shares in question on January 1, 1954 any event prior or subsequent to the said date was wholly extraneous and irrelevant and could not be taken into consideration. If the contention of the revenue were to be accepted the acquisition of bonus shares subsequent to January 1, 1954 will have to be taken into account which on the language of the state it is not possible to do."

This decision was followed by the Calcutta High Court in the case of Smt. Protima Roy Vs. Commissioner of Income Tax, , wherein the High Court held that the cost of acquisition of the original shares is not affected by subsequent issue of bonus shares. The Calcutta High Court considered the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. (supra), as well as all other decisions cited above to come to the above conclusion. Even the Bombay High Court in the case of Harish Mahindra and another Vs. Commissioner of Income Tax, Bombay City-II, held that for the purpose of ascertainment of fair market value of the shares on January 1, 1954, any issue of bonus shares subsequent to that date is wholly extraneous and irrelevant and cannot be taken into consideration.

In this case, the issue was how to determine the cost of acquisition of capital assets namely shares for the purpose of computing the capital gain. The facts in both Calcutta High Court and Bombay High Court decisions are pari materia with the facts of the present case. We are, therefore, satisfied that if what was sold by the assessee was the original lot of shares, there is no mistake in the computation of the capital gain, as shown by the assessee and accepted by the ITO at the time of the original assessment and that, therefore, the CIT was not justified in directing the ITO to revise such computation by taking recourse to action u/s. 263 of the Act. The order of the CIT is set aside.

In the result, the appeal is partly allowed.