R. Naresh and Others vs Commissioner of Income Tax

Thanikkachalam, J.—As directed by this Court in TC Petn. Nos. 166 to 177, 190, 194, 215, 216, 241 and 256 to 261 of 1978, etc.,

cases, dt. 14th November, 1978, the Tribunal referred the following question for the opinion of this Court under s. 256(2) of the IT Act, 1961 (for

short ''IT Act'').

Whether, on the facts and in the circumstances of the case, the method adopted by the Tribunal for valuing the cost of the shares in the hands of

the respective assessees for the purpose of arriving at the taxable capital gains is correct in law ?

All these Tax Case References relate to the asst. yr. 1973-74. Since the facts arising in all the above said Tax Cases are common, the facts

relating to the case of Sri R. Naresh (in TC No. 239 of 1980) were taken into consideration by the Tribunal in order to elucidate the issue arising

in all these Tax Cases.

The assessee in TC No. 239 of 1980 in all held 696 shares in Madras Motor & General Insurance Co. Ltd., out of which 433 shares were

acquired between 1963 and 1966 by actual payment of Rs. 100 per share, the total cost being Rs. 43,300. The assessee received in March,

1967, 147 bonus shares and again in September, 1969, 116 bonus shares. Thus, the aggregate shares held together with the shares originally

purchased came to 696 shares. Likewise, all other assessees were also having shares-both original and bonus. These were the shares, which were

acquired by the Government, consequent to the nationalisation of the General Insurance. The acquisition price paid per share was Rs. 197.44,

which for 696 shares came to Rs. 1,37,418. There was no dispute that this figure constituted the full value of the consideration for the transfer.

In computing the capital gain under s. 48 of the IT Act, 1961, the assessee claimed deduction of Rs. 63,321 under s. 48(ii), that is, ''the cost of

acquisition of the capital asset and the cost of any improvement thereto''. This figure was arrived at by taking the actual cost paid for 433 shares of

Rs. 43,300 and adding thereto the cost of bonus shares for which no actual payment was made, but which cost was arrived at by the method of

averaging and spreading over the cost between the original shares and the bonus shares. The assessee thus deducted the amount of Rs. 63,321, as

the cost of acquisition from the consideration of Rs. 1,87,418 and returned Rs. 74,097 as capital gains.

The ITO, in his order of assessment, stated that since the original shares had been taken at the full value, the bonus shares should not have been

valued again by averaging the original cost. According to him, by this process of averaging the value of bonus shares was included twice. The ITO

hence restricted the cost of acquisition to Rs. 43,300 itself, relying on the decisions of the Supreme Court in the case of Commissioner of Income

Tax, Bihar Vs. Dalmia Investment Co. Ltd., and in the case of Commissioner of Income Tax, Central Calcutta Vs. Gold Mohore Investment

Company Ltd., , and distinguishing the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. etc. Vs. Income Tax

Officer, Company Circle-1, Jaipur, . The ITO thus computed the capital gains at Rs. 94,188, that is, Rs. 1,37,418 which was the full value of the

consideration less Rs. 43,000.

Aggrieved, the assessee filed an appeal before the AAC, who held that the assessee was not justified in contending that the value of the old

shares should be left undisturbed and the averaging should be done only as far as the bonus shares were concerned and accordingly, dismissed the

assessee''s appeal.

Not satisfied with the order passed by the AAC, the assessee filed a second appeal before the Tribunal. The assessee contended before the

Tribunal that the real cost to the assessee of the bonus shares should not be taken to be ''nil''; but, they had to be valued by spreading the cost of

the old shares over the old shares and the new issue, that is, the bonus shares taken together where they ranked pari passu and otherwise, on a

proportionate basis, referring, inter alia, to the Gujarat High Court judgment in the case of Commissioner of Income Tax, Gujarat-I Vs. Chunilal

Khushaldas, . The assessee contended that the cost of the bonus shares determined in the aforesaid manner had to be added to the actual cost

paid for the original shares to arrive at the cost of acquisition of 696 shares, which were sold.

In reply, the Department relied on the Bombay High Court Judgment in Commissioner of Income Tax, Bombay City I Vs. K.A. Patch, , and

supported the order passed by the ITO.

Considering the decisions cited by the assessee as well as the Department, the Tribunal ultimately came to the conclusion that in determining the

cost of acquisition, we have to apply principles, which are part of commercial practice or which an ordinary man of business will resort to when

making computation for his business purposes. This would be so even if the surplus is to be computed on account of transactions of a capital

nature and is not merely confined to computation of trading profit. There can be dispute that when bonus shares are issued, the value of the original

shares gets depreciated. It may be that the bonus shares are not carved out of the original shares, but nevertheless the right to receive bonus

shares, which were embedded in the original shares has got liquidated and the liquidated right has given rise to the acquisition of the bonus share,

which is a new capital asset. The cost of acquisition, has, looking into the aforesaid pronouncements, to be computed, with reference to the value

of the bonus shares, as determined in accordance with the judgment of the Supreme Court in the case of CIT vs. Dalmia Investment Co. Ltd.

(supra), and other cases, which followed the aforesaid ratio and the value of the original shares have also to be computed, taking into consideration

the pronouncements of the Supreme Court in the aforesaid cases that the value thereof gets diminished. The only realistic principle that can be

applied in the view of the Tribunal, is in determining the cost of acquisition of the capital asset, which, in the present case, including the original

shares, as well as the bonus shares is to compute and determine the cost of the original shares, the first issue bonus shares and the second issue

bonus shares separately, having regard to each of the separate stages and applying the principles enunciated by the Supreme Court in the case of

CIT vs. Dalmia Investment Co. Ltd. (supra), the case of CIT vs. Gold Mohar Investment Co. Ltd. (supra) in the case of (1970) 78 ITR 16 (SC)

and in the case of Miss Dhun Dadabhoy Kapadia Vs. Commissioner of Income Tax, Bombay, . By applying the principles enunciated by the

abovesaid decisions, the Tribunal also worked out the cost of acquisition of 696 shares, which were acquired by the Government.

In the case of the remaining assessees also the identical point arose for the Tribunal''s consideration regarding the computation of cost of

acquisition of the shares held by the respective assessees in computing their respective capital gains. The Tribunal directed the ITO to recompute

the value of the cost of acquisition of the shares in terms of its directions given in the above case.

Before this Court, both the learned counsel appearing for the assessees as well as the learned standing counsel appearing for the Department

reiterated the arguments, as were focussed before the Tribunal.

A similar question came up for consideration before this Court in the case of Mala Ramesh Vs. Commissioner of Income Tax, , wherein this

Court held that the value of the bonus shares does not have to be separately ascertained, particularly when the entire block of shares including

bonus shares held by the shareholder has been sold or transferred. The whole cost of the shares, including the bonus shares, being a known figure,

it would be unnecessary to ascertain the individual cost of each share, because by getting at the average cost of the bonus shares, the average cost

of original shares must inevitably get reduced pro tanto. Inasmuch as the value of the cost of acquisition and the value of the shares worked out by

the Tribunal, in the present case, are in accordance with the decision of this Court cited supra, we consider that there is no infirmity in the order

passed by the Tribunal in each of the assessee''s cases in the matter of ascertaining the value of the original shares as well as the bonus shares.

Accordingly, we answer the references in the affirmative and against the assessees. No costs.