Judgement

HIDAYATULLAH, C.J.I. : These are two appeals by the Commissioner of Income-tax, Central, Calcutta against Messrs. Gold Mohore Investment Co. Ltd. and arise out of Income-tax Reference 65/54 decided by the Calcutta High Court on August 27, 1963. The point involved in the appeals is the valuation of bonus shares in the assessment years ending March 31, 1950 and 1951, respectively. The previous years corresponding to the assessment years were the financial years ending 31st March, 1949 and 1950, respectively.

2. The Assessee Company is a dealer in shares. Its method of valuation at the opening and closing of the stocks is to value shares at the cost in the Assessment Year 1949-50. The Company held 2,500 shares of the face value of Rs. 10 each in the Howrah Mills Co. Ltd. They had been purchased at Rs. 85 per share and the total cost to the Assessee Company was Rs. 2,12,500. In June 1948 bonus shares were issued by the Howrah Mills Co. Ltd. in proportion of three shares for every two original shares. The bonus shares were to rank pari passu with the old shares. As a result, the Assessee Company obtained 3750 shares of the face value of Rs. 10 each. On August 2, 1948, the Assessee Company sold the original shares for Rs. 72,087/8/-, i.e. at about Rs. 29 per share. On March 18, 1949 the Assessee Company sold 3,750 shares for Rs. 95,250, that is to say, at Rs. 25 per share. The Assessee Company computed a loss of Rs. 84,041/12/-. It calculated the loss in the following manner .

"Dr. Sold Cr.

O. S. 2500 Shares (old) 2,12,500-0-0 2-8-48 (2500) (old) Sh. 72,087-0-0

21-6-48 Cost of transfer of Shares 1,379-4-0 18-3-49 (2750) (bonus) sh. 70,125-0-0

" (1000) (bonus) sh. 25,125-0-0

2-7-48 By crediting Capital Reserve to a/c with the face value of bonus shares received free of cost Loss to P & L a/c 6250 sh. 84,041-12-0

(3750) 37,500-0-0

2,51,379-4-0 2,51,379-4-0"

The bonus shares when they were issued were included in the trading account. According to the Assessee Company the bonus shares had fetched as profit Rs. 95,250 less the face value of the shares, Rs. 37,500. This profit was set off against the loss on the origial shares Rs. 2,12,500 less Rs. 72,087/8/-, giving the overall loss of Rs. 84,041/12/-, as stated above.

3. The Income-tax Officer did not accept this mode of calculation. According to him the loss was Rs. 46,541-12.0 as follows :

"Dr. Sold Cr.

Rs. n.p. Rs. n.p.

O.S. 2500 sh. (sold) 2,12,500-0-0 2-4-48 (2500) sh. old 72,087-8-0

21-6-48 Cost of transfer of shares 1,379-4-0 18-3-49 (2750) (bonus) 70,125-0-0

2-7-48 (3700) sh. Bonus (sc) Nil " (1000) bonus 25,125-0-0

Loss to P & L a/c 46,541-12-0

2,13,879-4-0 2,13,879-4-0

On appeal to the Tribunal as to which method was correct, the Tribunal accepted the method of valuation of the Income-tax Officer.

4. In the Assessment year 1950-51, the account year being 1949-50, the Assessee Company held 122 first preference shares of Fort Gloster Jute Company Ltd. which had cost to the assessee Company Rs. 22,893/12/-. In the year of account there was an issue of bonus shares (second preference) and the Assessee Company received 137 shares of the face value of Rs. 100 each. The Assessee Company sold 125 shares (second preference) for Rs. 14,500. It was, therefore, left with 122 shares (first preference) and 12 shares (second preference). The Assessee Company returned a profit of Rs. 1,997 as follows :

"Dr. Rs. n. p. Cr. Rs. n. p.

O. S. (122) lst Pref. 23,883-12-0 18-3-49 (125) 2nd Pref 14,500-0-0

(137) 2nd Pref. 13,703-0-0 C. S. (122) lst

Profit P & L a/c 1,997-0-0 lst Pref.

(12) 2nd 23,883-12-0

Pref. 1,200-0-0

(259) 39,583-12-0 (259) 39,583-12-0".

It will be seen that the cost of bonus shares was shown at the face value of the shares plus a minor charge of Rs. 3.Rupees 13,703 were credited to capital reserve. The Income-tax Officer spread out the cost of 122 1st preference shares (Rs. 23,883/12/-) over the 122 shares (first preference) and 137 shares (second preference). He worked out t