The cost of acquisition of original shares, when bonus shares have been issued subsequently, is to be determined by spreading the original cost over both the original and the bonus shares.

( 1 ) THESE two income-tax references at the instance of the assessee pertain -to assessment years 1967-68 and 1968-69, the relevant previous years having ended on 30th June, 1966 and 30th June, 1967 respectively.

( 2 ) M/s. Escorts Farms (Ramgarh) Ltd. , New Delhi, the assessee, is a private limited company. It derives income from investments, agriculture and brick kiln business.

( 3 ) ON 1st August, 1965 the assessee sold 15,000 shares of Escorts Ltd. and declared a capital gain of Rs. 2,418 for the assessment year 1967-68. During the next assessment year the assessee sold 5000 shares on 31st January. 1967 and another 10,000 shares on 1st March, 1967 of the same company and declared a capital gain for that year of Rs. 11,700. The assessee worked out the capital gain by deducting the actual price paid at the time of purchase from the sale price. The assessee ignored the fact that it had also received bonus shares issued by Escorts Ltd.

( 4 ) WITH regard to the shares sold the Income-tax Officer observed that the assessee could not pin point which of these shares had been actually purchased and for what value. He averaged the cost of the shares by spreading out the purchase price of the original shares on both the original and the bonus shares. As on 1st August. 1965 the assessee had 1,03,012 shares in Escorts Ltd. The total amount paid for these shares was Rs. 9. 87,668. As such the average cost worked out to Rs. 9. 59 per share. Since the assessee sold 15,000 shares on 1st August, 1965 at the rate of Rs. 11. 73 per share the capital gain per share was held to be Rs. 2. 14: the total capital gain working out to Rs. 32. 100. Similarly. for the assessment year 1968-69, the average cost of the shares worked out at Rs. 9. 32 per share. As the shares were sold at Rs. 10. 15 there was a capital gain per share of Re. O. 83. The total capital gain being Rs. 12,450.

( 5 ) ON appeal by the assessee, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On further appeal to the Tribunal it found on facts in favour of the assessee and opined that it had "been able to correlate the sale of shares with the original shares in both the years of account and no bonus shares were sold in either year". But. applying the principle of averaging out as enunciated in Commissioner of Income-tax, Bihar v. Dalmia Investment Co. Ltd. (1964) 52 I. T. R. 567 (1), it upheld the order of the Income-tax Officer and dismissed the appeal.

( 6 ) THEREAFTER, at the instance of the assessee, the Tribunal referred the following two common questions of law for our opinion for both the assessment years : "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. I 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?

( 7 ) THE point in issue is : how is the cost of the acquisition of the original shares to be determined, when bonus shares have been issued subsequently ?

( 8 ) SECTION 45 provides for capital gains on the transfer of a capital asset to be chargeable to income tax. Section 48 deals with the mode of computation and deductions applicable to capital gains. The "capital gains" are to be arrived at after deducting from the consideration received for the transfer : (i) the expenditure incurred wholly and exclusively in connection with the transfer ; and (ii) the cost of acquisition of the capital asset and the cost of improvement thereto.

( 9 ) SECTION 55 (2) gives the meaning to be attached to the cost of acquisition in certain circumstances. Section 55 (2) (i) sa