Commissioner of Income Tax vs Shashikalaben Navnitlal

M.S. Shah, J.—In all these references at the instance of the Revenue, the following common question is referred to us in respect of the assessment year 1983-84 :

"Whether, the Appellate Tribunal is right in law and on facts in directing the Income Tax Officer to take the average price of bonus shares for computation of capital gains in respect of sale of equity shares of Sarangpur Cotton Mfg. Co. Ltd. without reducing the cost of original shares on averaging the cost price on receipt of bonus shares ?"

It may be stated that in each reference, in the question referred, the number of equity shares of Sarangpur Cotton Mfg. Co. Ltd. is mentioned, but for the sake of convenience and brevity the common question set out above does not include the number of equity shares of the above company.

It is an agreed factual position that all the assessees had purchased equity shares of Sarangpur Cotton Mfg. Co. Ltd. ("the company" for short) prior to June 1, 1964. The company had issued bonus shares to the holders of equity shares including the present assessees. When the assessees sold the bonus shares, the question of determining the capital gains on the sale of such bonus shares arose. The assessees adopted the method of average costing for bonus shares relying upon the principles laid down by the Supreme Court in Commissioner of Income Tax, Bihar Vs. Dalmia Investment Co. Ltd., and Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, and certain other decisions. The Income Tax Officer did not accept the above method of determining the value of the bonus shares and took the actual cost for the shares purchased, i.e., for the original shares and "nil" cost for the bonus shares and computed the tax on long-term capital gain accordingly. The Commissioner of Income Tax (Appeals) decided the issue in favour of the assessees following the principles laid down by the apex court in the aforesaid two decisions. Hence, the Revenue went in appeal before the Tribunal.

The Tribunal confirmed the order of the Commissioner of Income Tax (Appeals) and held that the cost of the bonus shares is to be determined by the method of average costing along with the original shares if the bonus shares ranked pari pasu and there was no other circumstance to differentiate them. The Tribunal followed its decision in Income Tax Appeals Nos. 678 and 679 of 1987, in respect of the same assessment year.

At the hearing of the references, Mr. Akil Qureshi, learned counsel for the Revenue, and Mr. R.K. Patel, learned counsel for the assessees, stated that the controversy raised in these references is now concluded by the decision of the apex court in Escorts Farms (Ramgarh) Ltd. Vs. Commissioner of Income Tax, New Delhi, , wherein it has been held that where bonus shares are issued and some of the original shares are sold subsequently, their actual cost has to be reckoned only on the basis of "average value" except in rare cases, where "actual cost" is notionally adopted or determined as it existed on the relevant statutory date, which may be January 1, 1954, or January 1, 1964, as the case may be. The apex court held that the subsequent issue of the bonus shares had the effect of altering the original cost of acquisition of the shares. The apex court further clarified that in a case like Commissioner of Income Tax, Bihar Vs. Dalmia Investment Co. Ltd., where bonus shares arc issued and some of the original shares are sold subsequently, their actual cost has to be reckoned only on the basis of "average value" but there could be rare cases Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, where "actual cost" is notionally adopted or determined as it existed on the relevant statutory date because the shares were purchased prior to such statutory date.

Mr. Patel for the assessees states that in all the present cases the original shares were purchased before the relevant statutory date and, therefore, the Tribunal was justified in following the principle laid down in Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, .

We, accordingly, hold that the determination of capital gain in respect of sale of the equity shares in question of Sarangpur Cotton Mfg. Co. Ltd. by the assessees shall be made in accordance with the principles laid down by the Supreme Court in Escorts Farms (Ramgarh) Ltd. Vs. Commissioner of Income Tax, New Delhi, .

Mr. Patel for the assessees submits that the principles laid down in the aforesaid decision of the apex court will have to be reed along with the principles laid down in Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, .

We are of the view that since the decision in Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, has not been overruled or modified by the Supreme Court in Escorts Farms (Ramgarh) Ltd. Vs. Commissioner of Income Tax, New Delhi, , it will be for the assessees to point out the relevant facts to show that the cases at hand will be governed by the principles laid down in Shekhawati General Traders Ltd. etc. Vs. Income Tax Officer, Company Circle-1, Jaipur, which are still applicable to exceptional cases as pointed out in Escorts Farms (Ramgarh) Ltd. Vs. Commissioner of Income Tax, New Delhi, .

The references stand disposed of with no orders as to costs.