RATNAM J.

The assessee is an individual. During the previous year ending on March 31, 1975, relevant to the assessment year 1975-76, the assessee sold 675 shares held by her in a private limited company for Rs. 89, 661. In computing the capital gains, the Income-tax Officer, after noticing the total shareholding of the assessee, included the original holding and also all the bonus shares issued subsequently, worked out the average cost per share at Rs. 47.17, which was adopted as the cost of acquisition of the shares sold by the assessee and computed the long-term capital gain at Rs. 57, 820 and subjected it to tax. In so doing, the Income-tax Officer purported to follow the decision in CIT v. Dalmia Investment Co. Ltd. 1964 AIR(SC) 1464, 1964 (52) ITR 567, 1964 (2) SCJ 546, 1964 (7) SCR 210 (SC), as, in his view, the decision in Shekhawati General Traders Ltd. v. ITO 1971 AIR(SC) 2389, 1971 (82) ITR 788, 1971 (2) SCC 754, 1972 (1) SCR 927, 1972 (1) CTR 120, 1972 CTR(SC) 120 (SC), was inapplicable in that, on the issue of bonus shares, the original shares were split up, totally losing their identity. On appeal by the assessee before the Appellate Assistant Commissioner, she, after adverting to the history of the shareholding of the assessee and referring to the decisions of CIT v. Dalmia Investment Co. Ltd. (supra) (SC) and Shekhawati General Traders Ltd. v. ITO (supra) (SC), took the view that the method adopted by the Income-tax Officer in spreading over the cost of the original shares, whose fair market value on January 1, 1954, had been fixed at the option of the assessee, after taking into account the whole of the subsequently issued bonus shares, to arrive at the cost of acquisition of the shares sold by the assessee was erroneous and upheld the stand of the assessee that the capital gains exigible to tax would only be Rs. 2, 261. On further appeal to the Tribunal by the Revenue, it found that the assessee had elected to opt for the fixation of the fair market value in respect of the shares originally held by her, which was unalterable in view of the decision in Shekhawati General Traders Ltd. v. ITO (supra) (SC) and that, out of the 675 shares sold by the assessee, 375 shares formed part of the original holding and 300 shares were comprised in the bonus shares issued subsequently. In that view, the Tribunal proceeded to compute the cost of acquisition in respect of the 375 shares at the fair market value opted by the assessee as on January 1, 1954. Regarding the sale of 300 bonus shares, the Tribunal found that the shares so sold formed part of the bonus shares issued during the year ended March 31, 1967, and applied the method of spreading over the cost in respect of the shares originally held by the assessee and also the bonus shares issued up to March 31, 1967, and not the subsequent issue of bonus shares, to arrive at the cost of acquisition of 300 bonus shares sold by the assessee. So computing the cost of acquisition of shares sold by the assessee, the Tribunal affirmed the order of the Appellate Assistant Commissioner and dismissed the appeal. That has given rise to this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Revenue, on the following question of law

"Whether, on the facts and in the circumstances of the case, the method adopted by the Tribunal for valuing the cost of shares for purposes of arriving at the taxable capital gains is correct in law ?" *

A brief reference may now be made to the mode of acquisition of shares by the assessee. The assessee had received from her father a gift of 3, 000 shares. Later, she sold 125 shares leaving a balance of 2, 875 shares. Since the shares became the property of the assessee by way of gift, the cost to the previous owner had to be taken or the value as on January 1, 1954, and, in this case, there is no dispute that the assessee chose to have the value as on January 1, 1954 at Rs.