Back
1996 Supreme(SC) 1555
1996(8) Supreme 239
SUPREME COURT OF INDIA
B.P. Jeevan Reddy and K.S. Paripoornan, JJ.
M/s. Escorts Farms (Ramgarh) Ltd. -Appellant
versus
Commissioner of Income Tax, New Delhi -Respondent
Civil Appeal Nos. 1124-25 (NT) of 1987
Decided on 26-9-1996
Counsel for the Parties :
For the Appearing Parties : B.B. Ahuja, Dr. V. Gaurishankar, Dr. R.R. Mishra, Sr. Advocates, Ms. Geetanjali Mohan, S. Rajappa, C. Ramesh, P. Parmeshwaran, M.S. Syali, M.N. Shroff, and Ms. Reema Bhandari, Advocates.
IMPORTANT POINT
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.
Headnote:TAXATION-Income-tax Act-Capital gains tax-Determination of cost of original shares for purposes of-How the cost of acquisition of original shares is to be determined when bonus shares are issued subsequently-Held, where bonus shares are issued and some of original shares are sold subsequently, their actual cost has to be determined only on basis of average value except in rare cases, where actual cost is notionally adopted or determined as it existed on relevant statutory date-Dalmia Investment Co. Ltd. case, (1964) 52 ITR 567; Shekhawati General Traders case, 82 ITR 788 : Relied on.
Held that the principle of averaging by spreading the cost over the old shares and the new bonus shares as enunciated by this Court in Dalmia Investment Co. s case, (1964) 52 ITR 567 and other cases, will apply as a general rule in cases where the assessee claims to deduct the actual cost of acquisition, instead of the statutory cost of acquisition. It also stands to reason since the fair the market value as per the "statutory cost of acquisition will be a notional or fictional figure-mostly inflated-having no connection with the original or actual cost. We should bear in mind that it is after discussing the effect or impact of the issue of the bonus shares, on the value of the original shares generally and also the various possible methods for determining the cost of the bonus shares, this Court in Dalmia Investment Co. s case (1964) 52 ITR 567 stated that the real cost to the assessee of the bonus shares cannot be taken to be nil or their face value and they have to be valued by spreading the cost of the old shares over the old shares and the new issue (bonus shares), taken together etc. The principle so laid down is one of the general application. We should also state that the character of the owner of the shares as an "investor" or as a "dealer" is of no consequence. (Para 10)
In view of the larger Bench decisions of this Court, it is fairly clear 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" (as held in Dalmia Investment & other cases) except in rare cases, where "actual cost" is notionally adopted or determined as it existed on the relevant statutory date, (Shekhawati General Traders Ltd. v. I.T.O.). In the instant case, the High Court was justified in law in holding so and in further holding that the subsequent issue of the bonus shares has the effect of altering the original cost of acquisition of the shares as held by this Court in Commissioner of Income-Tax v. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 and other cases. (Para 11)
JUDGMENT
Paripoornan, J.-The appellant, a private limited company, is an Assessee to income tax. It derives income from investment, agriculture and brick kiln business. It is an investor in shares. In the assessment years 1967-68 and 1968-69, the relevant previous years ending on 30th June 1966 and 30th June 1967, the assessee sold shares of Escorts Limited and declared the capital gains that accrued therefrom. The Income Tax Officer did not accept the cost of acquisition of the shares, as returned by the assessee and worked out the capital gains in a different manner. The computation made by the Income Tax Officer regarding the original shares was confirmed by the Appellate Assistant Commissioner and the Appellate Tribunal. In so doing, the Appellate Tribunal relied upon the decision of this Court in Commissioner of Income-tax, Bihar v. Dalmia Investment Co. Ltd.1. At the instance of the appellant-assessee, the Income Tax Appellate Tribunal referred the following two questions of law for both the Assessment Years under Section 256(1) of the Income-tax Act for the decision of the High Court of Delhi.
"1. Whether on the facts and in the circumstances of the case the Tribunal was justified in determining the cost of acquisition of the original shares, by spreading the original cost over the original and the bonus shares and then averaging the same and on that basis working out the capital gain at Rs. 32,100/- and Rs. 12, 450/- for the assessment years 1967-68 and 1968-69 respectively ?
2. If the answer to question No. 1 is in the negative, whether the assessee was justified in taking the value of the shares at their original cost under Section 45 of the Income-tax Act, 1961?"
2. The question that arose for decision, was, how the cost of the acquisition of the original shares should be determined for the purposes of capital gains tax. After referring to the relevant decision, the High Court held that the valuation made by the revenue regarding the cost of the original shares is proper and valid in the facts and circumstances of the case. Question No. 1 was answered in the affirmative and in favour of the revenue. The High Court declined to answer question No. 2. It is the aforesaid decision of the High Court dated 23.4.1982, which the assessee has assailed in these appeals. The decision of the High Court is reported in (1983) 143 ITR 749.
3. We heard counsel. At our request, Dr. Gaurishanker, Senior Advocate also addressed us and brought to our notice certain decisions and passages from various text-books. The short question that arises for consideration is, how the cost of acquisition of the original shares is to be determined when bonus shares are issued subsequently? It is common ground that the appellant admittedly purchased the original shares after 1954. Such shares were sold subsequently. Since the acquisition was after 1954, the option of taking the fair market value as on 1.1.1954 does not arise. According to the appellant, for determining the capital gains that accrued when the original shares were sold, the cost of acquisition should be taken at "actual cost". The subsequent issue of bonus shares is of no consequence and will not have the effect of altering the original cost of acquisition of the shares. The High Court declined to accept this plea. It was held that once the bonus shares are issued, it has impact on the original shares; it has the effect of altering the cost of original shares. It was so held by placing reliance on the decisions of this Court reported in C.I.T. v. Dalmia Investment Co. Ltd. (supra), C.I.T. v. Gold Mohare, Investment Co. Ltd.2, C.I.T. v. Gold Company Ltd.3 and distinguishing the cases of this Court reported in Emerald & Co. Ltd. v. C.I.T.4 and Shekhawati General Traders Ltd. v. I.T.O.5.
4. Before us, counsel for the appellant-assessee, vehemently argued that the High Court was in error in holding that the subsequent issue of bonus shares has the effect of altering the cost of acquisition
