Back
1996 Supreme(Mad) 1235
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE K. A. THANIKKACHALAM & THE HONOURABLE MR. JUSTICE N. V. BALASUBRAMANIAN
S. Ram - Appellant
Versus
Commissioner of Income Tax - Respondents
TC No. 249 of 1980, REF No. 160 of 1980
Decided On : 12 December 1996
The cost of acquisition of bonus shares should be determined by spreading the cost of the original shares over both the original shares and the bonus shares.
Headnote:
CAPITAL GAINS - BONUS SHARES - COST OF ACQUISITION - METHOD OF VALUATION - INCOME-TAX ACT, 1961, SECTION 55(2).
Fact of the Case:
The assessee, an investor in shares, acquired 87 original shares of Southern Roadways Private Ltd. prior to July 4, 1966. Bonus shares were issued on July 4, 1966, and the assessee received 174 shares. There was a further bonus issue when the assessee received 94 shares. The assessee sold all 355 shares on March 28, 1973, for Rs. 56, 900. The dispute arose in determining the capital gains from the sale of these shares.
Finding of the Court:
The Tribunal held that the cost of acquisition of the bonus shares should be determined by spreading the cost of the original shares over both the original shares and the bonus shares. The Tribunal directed the Income-tax Officer to adopt this method for valuing the bonus shares.
Issues: 1. Whether, in valuing the bonus shares, the value of the original shares as determined on January 1, 1964, should be taken into consideration or the cost price of the original shares should be considered? 2. Whether the assessee is entitled to ask for valuing the bonus shares on the basis of the fair market value, prevalent on January 1, 1954, of the original shares?
Ratio Decidendi: 1. The court held that while ascertaining the value of bonus shares, the value of the shares as opted by the assessee as on January 1, 1964, as per the provisions of section 55(2)(b)(i) of the Act, should be taken into account. Both the original shares and the bonus shares should be clubbed together and the average value of each share found out by dividing the total number of shares by the original cost opted as on January 1, 1964. 2. The court held that the assessee is not entitled to ask for valuing the bonus shares on the basis of the fair market value, prevalent on January 1, 1954, of the original shares.
Final Decision: The court answered the question referred to it in the negative and in favor of the assessee. The Tribunal was directed to redetermine the cost of acquisition and value of the bonus shares while ascertaining the capital gains tax to be levied in the case of the assessee.
K.A. THANIKKACHALAM J.
In pursuance of the direction given by this court, the Tribunal referred the following question, for the opinion of this court under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the 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 ?"
The assessee is an investor in shares. The assessee acquired on various dates prior to July 4, 1966, 87 original shares of Southern Roadways Private Ltd. On July 4, 1966, bonus shares were issued by the company. The bonus shares rank pari passu with the old shares. As a result of this bonus issue, the assessee received 174 shares. There was a further bonus issue when the assessee received 94 shares. The total shareholding of the assessee as on December 31, 1972, was 355 shares. On March 28, 1973, the assessee sold all the 355 shares for Rs. 56, 900. The question of assessment of capital gains from the sale of these shares arose. As per the calculation submitted by the assessee, the capital gain was Rs. 22, 109. The capital gain, according to the Income-tax Officer, was Rs. 40, 892. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner gave a direction to the Assessing Officer in the matter of ascertaining the cost of bonus shares. According to the Appellate Assistant Commissioner, the cost of the bonus shares should be fixed by finding out the average price of all the shares in accordance with the ratio of the judgment of the Supreme Court in CIT v. Dalmia Investment Co. Ltd. On receipt of this order, the Income-tax Officer reworked the capital gains. He arrived at the same figure of Rs. 40, 892. What he did was to start with the cost of 87 shares, i.e., 58 shares on partition and 29 by way of gift at Rs. 16, 008 and thereafter he worked out the average cost of all the shares, i.e., original shares and the various bonus shares with the result that arithmetically the aggregate figure remained at Rs. 16, 008As against this order of the Income-tax Officer, dated June 17, 1974, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner by his order, dated June 28, 1975, held that there was no appealable order before him and if the order of the predecessor Appellate Assistant Commissioner was not given effect to correctly, the assessee, it was stated, could have approached the Appellate Assistant Commissioner for amending the same. The assessee contested this finding of the Appellate Assistant Commissioner before the Tribunal. It seems that as against the order passed by the Appellate Assistant Commissioner, the Department also went in appeal before the Appellate Tribunal. The Appellate Tribunal took into consideration the appeal filed by the Department, which involved the question of valuation of shares consequent to the issue of bonus shares. The Tribunal proceeded to value the bonus shares. While determining the value of bonus shares, it is necessary to determine the cost of acquisition of the bonus shares. According to the Tribunal, the shares received on partition on June 25, 1957, would have to be taken at a particular book value in the assessee's books. So also regarding the shares received by way of gift, a particular cost would have been recorded in the assessee's books as on the date of gift. These values would have to be taken as the cost of the aforesaid 87 original shares. If no value has been recorded in the books in respect of the gifted shares, then the market price as on the date of gift should be taken as the cost of 29 gifted shares. Thus, the Tribunal directed to aggregate the cost of 87 original shares
Subsequently, there was an issue of bonus shares. For ascertaining the cost of value of the bonus shares issued subsequently as well as t
