The cost of acquisition of the original shares is immutable and is not affected by the subsequent issue of bonus shares.

( 1 ) THE dispute in the reference arises out of computation of capital gains on the sale of 20,000 shares of Gwalior Rayon and Silk Mfg. Co. Ltd. , by Sutlej Cotton Mills Ltd. , the assessee, in the assessment year 1970-71, the relevant previous year having ended on the 31st March, 1970.

( 2 ) THE facts found and/or admitted are as follows I The assessee acquired the said shares in the year 1955 at a price of Rs. 10 per share. Subsequently, the assessee received 20,000 bonus shares in respect of the said original shares. The assessee sold 20,000 of the said original shares during the relevant period. The ITO computed the capital gains accruing in the hands of the assessee by working out the cost of acquisition of the original shares by spreading out the initial cost between the original shares as also the bonus shares.

( 3 ) ON an appeal preferred by the assessee, the AAC upheld the order of the ITO.

( 4 ) THERE was a further appeal by the assessee to the Income-tax Appellate Tribunal. It was contended before the Tribunal on behalf of the assessee that the actual cost of acquisition of a capital asset was to be determined with reference to the state of events on the date of acquisition and not with reference to subsequent events like issue of bonus shares. In this connection, a decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 was relied on. It was contended on behalf of the revenue that the matter was covered by the decision of the Supreme Court in CIT v. Dalmia Investment Co. Ltd. Another decision of the Supreme Court in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 was also relied on by the revenue. It was submitted that the process of spreading out of the initial cost as approved by the Supreme Court was applicable to investors as also to dealers and should be extended to determine the cost of acquisition of the original shares also. It was submitted further that the decision of the Supreme Court in Shekhawati General Traders Ltd. [1971] 82 ITR 788 was distinguishable on facts. The Tribunal considered another decision of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651.

( 5 ) THE Tribunal held that the mere fact that the assessee was a share-dealer would not preclude the application of the principle of averaging in the computation of capital gains and upheld the decision of the revenue authorities and dismissed the assessee's appeal on this point.

( 6 ) ON an application by the assessee under Section 256 (2) of the I. T. Act, 1961, this court directed the Tribunal to draw up a statement of case and refer the following question as a question of law arising out of the order of the Tribunal :" Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of Sections 48 and 55 (2) of the Income-tax Act, 1961, the Tribunal was justified in holding that the 'cost of acquisition' of 20,000 (twenty thousand) shares (original shares) in Gwalior Rayon and Silk Mfg. Co. Ltd. , during the previous year relevant to the assessment year 1970-71, should be determined on the basis of averaging the cost of original shares on the original shares and the bonus shares received thereon ? "

( 7 ) TO appreciate the scope of the controversy in the present proceedings it is necessary to consider the relevant statutory provisions.

( 8 ) SECTION 45 of the I. T. Act, 1961, provides as follows :"45. Capital gains.-- (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54b, 54c and 54d be chargeable to income-tax under the head ' Capital gains' , and shall be deemed to be the income of the previous year in which the transfer took place. "

( 9 ) SECTION 48 of the Act is as follows :" 48. Mode of computation and deductions.--The income chargeable under the head ' Capital gains' shall be computed by