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Rohiniben Trust Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)13ITD830(Mum.)
AppellantRohiniben Trust
Respondentincome-tax Officer
Excerpt:
1. the assessee, a trust, assessed as an aop, sold 2,400 equity shares of the standard mills co. ltd. and received a surplus computed at rs. 26,475. the ito included this surplus as long-term capital gain in the total income. before the commissioner (appeals), the assessee claimed that the shares of standard mills co. ltd. sold were bonus shares and so no capital gains should have been assessed on the surplus. a number of decisions were cited before the commissioner (appeals) to support the claim that no capital gain arose on the transfer of an asset for which no cost of acquisition can be ascribed. the commissioner (appeals) rejected the assessee's claim and confirmed the ito's order.it is, thus, that the matter is in appeal before the tribunal.2. when the matter came up for hearing.....
Judgment:
1. The assessee, a trust, assessed as an AOP, sold 2,400 equity shares of the Standard Mills Co. Ltd. and received a surplus computed at Rs. 26,475. The ITO included this surplus as long-term capital gain in the total income. Before the Commissioner (Appeals), the assessee claimed that the shares of Standard Mills Co. Ltd. sold were bonus shares and so no capital gains should have been assessed on the surplus. A number of decisions were cited before the Commissioner (Appeals) to support the claim that no capital gain arose on the transfer of an asset for which no cost of acquisition can be ascribed. The Commissioner (Appeals) rejected the assessee's claim and confirmed the ITO's order.

It is, thus, that the matter is in appeal before the Tribunal.

2. When the matter came up for hearing before the Tribunal, reliance was placed by the department on an earlier decision of the Tribunal in In re. Radhika Trust No. 1 [IT Appeal No. 654 (Bom.) of 1982 dated 28-7-1983], in rejecting the assessee's claim for relief on the basis of the Supreme Court's decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, the Bench in that case had held that the Supreme Court decision would not apply to the case. The Bench felt that in the case of bonus shares conceptually as well as practically it could not be stated that it was not a self-generated asset but had been brought into existence in some particular form of acquisition and it was also necessary to give a finding as to the nature of the origin of this asset. The Bench felt that the earlier decision in Radhika Trust No. Ps case (supra) could not be applied to the present case. It is, thus, that the matter has come up for hearing before a Special Bench. At the time of the hearing, Podar Organization (P.) Ltd. [IT Appeal No. 594 (Bom.) of 1983] also intervened, as a similar point was involved in its case.

3. The learned counsel for the assessee has pointed out that the bonus shares formed an asset peculiar in itself like goodwill. Earlier the question of origin of the shares was not considered at all in decisions relating to the assessment of profit on the sale of bonus shares whether treated as stock-in-trade or as a capital asset. With the decision in B.C. Srinivasa Setty's case (supra), the entire approach has to be changed. The earlier decisions dealing with the finding of profit on the sale of shares based on some method of valuation could not, therefore, apply. Several of the decisions referred to and relied on by the department were decisions prior to B.C. Srinivasa Setty's case (supra). In these cases, the Courts, especially the Supreme Court, were concerned with the limited question of the method of valuation of bonus shares whether for the purpose of computing business profit or capital gain. The Court was not concerned with the cost of acquisition.

Method of valuation is different from the cost of acquisition.

According to the learned counsel, the first is to be determined on equitable grounds for the determination of the profit realised. The latter was concerned with the question of the outlay. There are several cases such as decision in Evans Fraser & Co. Ltd. v. CIT [1982] 137 ITR 493 (Bom.), which also supported the assessee's case that no capital gains should be assessed on the sale of bonus shares. In the cases such as CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), CIT v.Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 (SC), Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC), the Court was concerned with the questions not covered by B.C. Srinivasa Setty's case (supra).

The question was what should be the cost in a trading account allocable to bonus shares while computing the profit. Dalmia Investment Co.

Ltd.'s case (supra) dealt with equitable considerations relevant for determining commercial profits, whereas Gold Mohore Investment Co.'s case (supra) dealt with the method of valuation especially as a dealer in shares. In Mm Dhun Dada-bhoy Kapadia's case (supra), according to the learned counsel, the case of an investor, two distinguishing facts were there, viz., the question of right share issue and the valuation of right shares. Right issue had a potential value unlike bonus shares.

It involved payment of a price. The question relating to the fall in prices of shares was also considered.

4. According to the learned counsel, what was relevant in the case under appeal was to find out how much the assessee spent on the acquisition of the bonus shares from his pocket. The cost of acquisition was a concept different from the method of valuation involved in the cost of bonus shares. It was a real value. The case of spreading the cost over (sic) was a notional concept. It is also pointed out that there was an element of fixity involved in the cost of acquisition which was incapable of varying with time. It depended on the actual time of acquisition. On this basis, the cost of acquisition of bonus shares was nil. It is also pointed out that when shares were issued, they constituted a distinct and separate capital asset. This has been brought out clearly in the decision in CIT v. Madan Gopal Radhey Lai [1969] 73 ITR 652 (SC). That was the case of a dealer in shares who received bonus shares in relation to the shares held by him as stock-in-trade. Cost of acquisition also involved a definite and positive expenditure of money. The provisions of Section 55(2)(v) of the Income-tax Act, 1961 ('the Act') supported the assessee's case.

According to the learned counsel, if the department's view was to be accepted, in the background of Sections 49 and 50 of the Act, there should have been specific provision in Section 49 attributing to bonus share a fictional cost. Reliance is placed on several decisions of the Courts, especially in Shekha-wati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC), B.C. Srinivasa Setty's case (supra) and Evans Fraser & Co. Ltd.'s case (supra) to support his case.

5. On behalf of the intervener, Podar Organization (P.) Ltd., it was pointed out that bonus shares are a separate and distinct asset forming part of the original shares. The decision of the Gujarat High Court in CIT v.Chunilal Khushaldas [1974] 93 ITR 369 is pressed into service in this context. When a shareholder receives bonus shares, he makes no payment. Bonus shares from their very nature are not available to any one prepared to expend money and seeking to acquire them but only to the persons specified under the rules of the particular company.

According to the learned counsel, bonus share is not an asset which falls within the contemplation of Section 45 of the Act. This is made clear by the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra). Referring to Section 55(2)(v), it is pointed out that there is no fiction of law also providing for the assumption of a cost of acquisition for bonus shares. Here was, therefore, an asset not available for money but having the specific characteristics referred to in B.C. Srinivasa Setty's case (supra). The comparison with right shares is not proper. The cases referred to for the department never considered the question of the cost of acquisition as such.

6. For the department, stress is laid on the orders of the authorities below. According to the learned counsel for the department, before a tax on capital gains can be levied, there must be the sale of an asset, and the asset must be a capital one as defined in the Act. Bonus shares are 'capital assets' as defined in Section 2(14) of the Act being property of any kind. The decision of the Supreme Court in B.C.Srinivasa Setty's case (supra) clearly brings out this concept especially at page 297. Under the provisions of the Act, only an asset coming under an exclusion clause can escape the tax on capital gain.

Bonus shares do not fall in this category.

7. Dealing with the question whether bonus shares constitute an asset in the acquisition of which it is possible to envisage a cost, the learned counsel has referred to the decision in Datmia Investment Co.

Ltd.'s case (supra). In computing the capital gains, one has first to address himself to the cost. Method of arriving at the cost is a subsequent event. Reference is made, in this connection, to the decisions in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC) and Escorts Farms (Ramgarh) Ltd. v. CIT [1983] 143 ITR 749 (Delhi). It is pointed out that in Miss Dhun Dadabhoy Kapadia's case (supra), the Supreme Court has not rejected the argument that the right to secure new shares was embedded in the rights of the original shareholder. Dalmia Investment Co. Ltd.'s case (supra) deals with the determination of the cost of acquisition. The decision in Chunilal Kushaldas's case (supra) of the Gujarat High Court specifically deals with the market rate on the date of acquisition. These decisions as well as the decision in H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (SC) dealing with the cost of improvement, according to the learned counsel, clearly support the department's case. The simple question is whether there has been a transfer of the capital asset. If the further question is asked, viz., whether it is possible to quantify the surplus on such a transfer, the answer will be a clear 'Yes'.

Concepts like 'capital asset', 'date of acquisition' and 'cost of acquisition' are all well-known concepts. Reference is also made in this context to the decisions dealing with the conversion of debentures into equity shares. Particular attention is invited to the decisions in Mrs. A. Ghosh v. CIT [1983] 141 ITR 45 (Cal.) and Escorts Farms (Ramgarh) Ltd.'s case (supra) also supports the department's case.

8. Dealing with the decision in Evans Fraser & Co. Ltd.'s case (supra), it is pointed out that whatever is said with reference to goodwill would not apply to the case of bonus shares. Cases have also shown that it does not matter whether the holder of shares is an investor or a dealer. The decisions in W.H. Brady & Co. Ltd. v. CIT [1979] 119 ITR 359 (Bom.) and Harish Mahindra v. CIT [1982] 135 ITR 191 (Bom.) are of relevance. Referring to the provisions of Section 55(2), it is pointed out that clause (v) deals with meanings with particular reference to certain situations. Both the Supreme Court decisions and the factual position of bonus shares clearly attribute to them a cost of acquisition. According to the learned counsel, therefore, the decision in B.C. Srinivasa Setty's case (supra), referring to a situation of no cost of acquisition, would not be relevant in the context of bonus shares.

9. The facts lie in a short compass. The assessee sold certain shares of Standard Mills Co. Ltd. They are stated to constitute bonus shares, having been received as such from the company under its regulations. It is not clarified as to why these shares were considered to be bonus shares. Perhaps this is based on the fact that the distinctive numbers carried by these shares relate them to the bunch of shares distributed by the company in connection with a bonus share distribution. The assessee's stand is that like goodwill and similar assets, bonus shares have no cost of acquisition. It is also slightly hinted that they do not surface at any time before the sale but like goodwill involved an uncertain origin. If the decision in B.C. Srinivasa Setty's case (supra) is directly applicable to the assessee's case, the surplus calculated--whatever be the method followed --on the sale of bonus shares would not be liable to capital gains.

10. In Dalmia Investment Co. Ltd.'s case (supra), the Supreme Court considered the question of valuation of bonus shares in the case of an assessee who was a dealer in shares and sold them. The majority judgment of M. Hidayatullah and J.C. Shah, JJ. held that their real cost to the assessee cannot be taken to be nil or their face value.

Bonus shares had to be valued by spreading the cost of the old shares over the old shares and the new issue, viz., the bonus shares taken together if they rank pari passu. The minority judgment of A.K. Sarkar, J. held that bonus shares have to be valued at the market value on the date when they were acquired. In that case, in 1944, the assessee acquired 31,909 ordinary shares of Rohtas Industries Ltd. at a cost of Rs. 5,84,283. In January 1945, Rohtas Industries Ltd. distributed bonus shares at the rate of one ordinary share for each original share. The assessee got 31,909 bonus shares. Between that time and December 1947, the assessee sold 14,650 of the original shares. On 1-1-1948, it held 17,259 original shares acquired in 1944 ; 31,909 bonus shares issued in January 1945 ; 59,079 newly issued shares acquired in the year 1945 after the issue of the bonus shares ; and 2,500 further shares acquired in 1947. The total holding of Rohtas Industries Ltd. shares of the assessee on 1-1-1948 came to 1,10,747 shares valued in the books at Rs. 15,57.902. In arriving at this figure the assessee had valued the bonus shares at their face value of Rs. 10 each and the other shares at actual cost. On 29-1-1948, the assessee sold all the shares for a total amount of Rs. 15,50,458, i.e., at Rs. 14 per share and in its return for the assessment year 1949-50 claimed a loss of Rs. 7,444. The ITO computed the cost of the bonus shares at Rs. 6-8-0 by following what he called the method of averaging and arrived at a profit of Rs. 2,39,317.

The AAC holding that the assessee paid nothing for the bonus shares, enhanced the profit to Rs. 3,11,646, which was confirmed on appeal by the Tribunal. The Tribunal did not, however, give a finding as to whether the profit was a trading profit or capital gain. The minority judgment of Sarkar J. relied on the decision in CIT v. Bai Shirlnbai K.Kooka [1962] 46 ITR 86 (SC) and held that bonus shares must be deemed to have been acquired at the market value on the date of their issue and worked out the profit on that basis.

11. The majority judgment delivered by M. Hidayatullah, J. found that there are four possible methods for determining the cost of bonus shares. This is pointed out : ... The first method is to take the cost as the equivalent of the face value of the bonus shares. This method was followed by the assessee-company in making entries in its books. The second method adopted by the department is that as the shareholder pays nothing in cash for the shares, cost should be taken at nil. The third method is to take the cost of the original shares and to spread it over the original shares and bonus shares taken collectively. The fourth method is to find out the fall in the price of the original shares on the stock exchange and to attribute this to the bonus shares.

Before us the assessee-company presented for our acceptance the first method and the department the third method....

They suggested a method of valuation by spreading the entire outlay over the original holding of shares and the bonus shares together and arriving at the average cost for the purpose of determining the profit.

Explaining the process of issue of bonus shares, their Lordships observed : ... The conversion of the reserves into capital does not involve the release of the profits to the shareholder ; the money remains where it was, that is to say, employed in the business. Thereafter the company employs that money not as reserves of profits, but as its proper capital issued to and contributed by the shareholder. If the shareholder were to sell his bonus shares, as shareholders often do, the shareholder parts with the right to participation in the capital of the company, and the cash he receives is not dividend but the price of that right. The bonus share when sold may fetch more or may fetch less than the face value and this shows that the certificate is not a voucher to receive the amount mentioned on its face. To regard the certificate as cash or as representing cash paid by the shareholder is to overlook the internal process by which that certificate comes into being.

... That the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding. The earning capacity of the capital employed remains the same, even after the reserve is converted into bonus shares....

12. A detailed reference to Dalmia Investment Co. Ltd.'s case (supra) has been made here because the major plank of the department's argument is based on this. In CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213, the Supreme Court followed its decision in Dalmia Investment Co. Ltd.'s case (supra). In D .M. Dahanukar v. CIT [1973] 88 ITR 454 and W.H. Brady & Co. Ltd. 's case (supra), the Bombay High Court followed Dalmia Investment Co. Ltd.'s case (supra) for the purpose of valuation of bonus shares. In D.M. Dahanukar's case (supra) the Bombay High Court also averred that it was not permissible to contend that the case of an investor in shares was different from that of a dealer in shares. In Miss Dhun Dadabhoy Kapadia's case (supra), the Supreme Court dealt with a case where the assessee--the holder of old shares in a company with a right to renounce new shares offered--renounced such right and claimed the loss in the value of the old shares as a result of the issue of new shares as deduction. The Supreme Court held that the assessee was entitled to deduct the loss suffered by way of depreciation in the old shares. The Court held : ... In working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes. The principles of accounting indicated by us above are clearly the principles that must be applied in order to find out the net capital gain or loss arising out of a transaction of the nature with which we are concerned....

13. In CIT v. General Investment Co. Ltd. [1981] 131 ITR 366, the Calcutta High Court applied the ratio of Dalmia Investment Co. Ltd's case (supra) and held that the correct method of valuing bonus shares is to take the cost of the original shares spreading it over the original shares and bonus shares collectively and finding out the average price of all the shares. It was claimed for the revenue in that case that Dalmia Investment Co. Ltd.'s case (supra) was a decision dealing with the cost of valuation of shares in the context of a dealer in shares as to how he should value the shares as the closing stock and not the computation of cost of acquisition of the asset in the case of capital gain. This their Lordships held is of no significance.

14. Three other decisions are of importance in the context. The first is the decision of the Supreme Court in Madan Gopal Radhey Lal's case (supra), where the assessee, who held shares and securities as part of his business as a dealer, received bonus shares in respect of the shares held as stock-in-trade. The Supreme Court held that the bonus shares did not become part of the stock-in-trade of the assessee but were received as capital and could be converted by the assessee into stock-in-trade or retained as capital asset. The Supreme Court decision in Shekhawati General Traders Ltd.'s case (supra) and the Gujarat High Court decision in Chunilal Khushaldas's case (supra) dealt with the question of the date from which bonus shares are held--the first in connection with the substitution of the fair market value as on 1-1-1954 in the place of the cost price and the second for the identification of capital gains as short or long-term. Both these decisions referred to Dalmia Investment Co. Ltd.'s case (supra).

15. The above decisions, we find, referred to different aspects of matters relating to bonus shares. Case like Dalmia Investment Co.

Ltd.'s case (supra) dealt with the position of a dealer in shares, whereas others like General Investment Co. Ltd.'s case (supra) and D.M.Dahanukar's case (supra) dealt with investors in shares. CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 (SC) dealt with the application of Section 23A of the Indian Income-tax Act, 1922 ('the 1922 Act') whereas Shekhawati General Traders Ltd.'s case (supra) dealt with the reopening of the assessment. These cases were decided prior to the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra), where for the first time the question of the cost of acquisition came up in an abstract form as distinct from its being considered for the purpose of computing the excess or surplus on the sale of the asset. There is no doubt about the fact that the actual nature of the acquisition of the asset itself was not considered in any of these cases. In the Gujarat High Court decision in Chunilal Khushaldas's case (supra) and the Supreme Court decision in Shekhawati General Traders Ltd.'s case (supra) the question of the date of acquisition was also considered. In D.M. Dahanukar's case (supra) as well as the Calcutta High Court decision in General Investment Co.

Ltd.'s case (supra), the Courts generally held that there was no particular difference between valuation for the purpose of computing business profits and for the purpose of working out capital gain. The point to be considered in the present appeal is whether decisions dealing with the working out of the profit--whether for business or for capital gain purposes--would apply to the more fundamental question of cost of acquisition referred to in Section 48 of the Act. The Act in dealing with capital gains had made special provision for the computation of the cost of acquisition in a fictional manner in specific cases such as inheritance, gift, etc., vide Section 55, but the case of bonus shares or goodwill have been left out in this enumeration.

16. The following observations in General Investment Co. Ltd.'s case (supra) deal with the nature of the issue of bonus shares : ... The question is computation of capital gains. That question again has to be determined in relation to the cost of acquisition of an asset. Now, the cost of acquisition of asset must not necessarily be bereft of the principle how an ordinary man estimates the cost of acquisition. There is evidence of actual payment of cost in a particular case or payment for addition of a particular asset, As we have mentioned before, in the case of an acquisition of an asset by payment, the cost of acquisition, unless the payment is unreal or inflated or not genuine, should normally be taken to be the cost.

But, whenever an assessee obtains something without payment, the question arises whether he obtains such an asset free, viz., without any cost to himself. Now, in such circumstances, naturally, if there is any cost that cost had to be estimated and the estimation of such a cost must be based on certain commonsense and commercial principles. In connection with the valuation of bonus shares, it is necessary to remember what nature of interest a share represents. A share in a company represents the right of participation in the capital as also other necessary rights in the management which a shareholder enjoys in a limited liability company. Therefore, whenever a bonus share is issued by a company to the holder of an ordinary share or additional bonus shares are issued to a holder of bonus shares, his total right of participation is not thereby increased but only it is the measure of his quantification which is expressed in a different form....

Their Lordships also referred to the Supreme Court of the United States of America decision in the case of Eisner v. Macomber [1920] 252 US 189, a decision referred to with approval by the Supreme Court in Dalmia Investment Co. Ltd.'s case (supra) as follows : A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders.

Its property is not diminished, and their interests are not increased.... The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. ... In short, the corporation is no poorer and the stock-holder is no richer than they were before. ... If the plaintiff gained any small advantage by the change, it certainly was not an advantage of 4,17,450, the sum upon which he was taxed... what has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new.

... If a shareholder sells dividend stock, he necessarily disposes of a part of his capital interest, just as he should sell a part of his old stock, either before or after the dividend. What he retains no longer entitles him to the same proportion of future dividends as before the sale. His part in the control of the company likewise is diminished.

17. In B.C. Srinivasa Setty's case (supra) the Supreme Court considered the taxability of copital gain on the transfer of goodwill. It is in this context they observed : ... Its [goodwill] value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition.

There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period. Imperceptible at birth it exists enwrapped in a concept, growing or fluctuating with the numerous imponderables pouring into, and affecting, the business. Undoubtedly, it is an asset of the business, but is it an asset contemplated by Section 45 Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings Section 45 into play.... All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge....

The point to consider then is whether if the expression 'asset' in Section 45 is construed as including the goodwill of a new ^business, it is possible to apply the computation Sections for quantifying the profits and gains on its transfer.

What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by Section 49 and its cost, for the purpose of Section 48, is determined in accordance with those provisions. There are other provisions which indicate that Section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision.

So also is Sub-section (2) of Section 55. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived....

In the case of goodwill generated in a new business there is the further circumstances that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the 'cost of acquisition' mentioned in Section 48 implies a date of acquisition, and that inference is strengthened by the provisions of Sections 49 and 50 as well as Sub-section (2) of Section 55.

For the above reasons, their Lordships came to the conclusion that goodwill generated in a newly commenced business cannot be described as an 'asset' within the meaning of Section 45 leading to capital gains on its transfer. Their Lordships relied on the twin facts : impossibility of determing the cost of acquisition and the date of acquisition either by the assessee or a previous owner, 18. In Evans Fraser & Co. Ltd.'s case (supra) the Bombay High Court considered the nature of goodwill and examined the Supreme Court's decision in B.C. Srinivasa Setty's case (supra) at length. Evans Fraser & Co. Ltd.'s case (supra) went further than B. C. Srinivasa Setty's case (supra) in holding that even if the moment of acquisition of goodwill and its cost of acquisition can be pin-pointed its cost of improvement cannot be ascertained in terms of--another factor which also leads to any capital gains arising on the sale of such goodwill being not taxable.

19. In the light of the above decisions, to which both the parties before us and the intervener have made profuse references, we have to decide the issue before us. The assessee's case is that the bonus shares have no cost of acquisition. On the ratio of B.C. Srinivasa Setty's case (supra), capital gains, therefore, arising from the sale of bonus shares cannot be computed or taxed. In the earlier decision of the Supreme Court such as Dalmia Investment Co. Ltd.'s case (supra) and the decisions of the High Courts which followed that decision, profit arising on the transfer of bonus shares were brought to tax. In working out this profit, apparently a trading account was cast wherein on the cost side the total financial outlay on the purchase of the original shares which gave rise to the bonus shares was regarded as constituting the outlay on all the shares including the bonus shares. The surplus was worked out as the difference between the sale price and such outlay. In effect, these decisions made out a trading account where the total outlay in the shares including the bonus shares was entered on the left hand side and the sales realisation including the value of the closing stock of shares was entered on the right hand side to arrive at the surplus. If one were to ascertain the excess on the holding of shares originally purchased for a price but which subsequently gave rise to bonus shares being sold as an entire lot or part by part thereof, certainly the Supreme Court decisions and the High Court decisions following them have laid down the guideline. The issue before us, however, is not the ascertainment of such surplus but the more fundamental question as to whether in respect of bonus shares in the light of the decision in B.C. Srinivasa Setty's case (supra) and Evans Fraser & Co. Ltd.'s case (supra), a computation of surplus leading to taxability is at all justified In our view, even though in casting trading account to arrive at a surplus shares were treated as having a value on the method of averaging, the question whether it has a 'cost of acquisition' as understood in Section 45 has to be answered on its own and in the light of B.C. Srinivasa Setty's case (supra), and other cases. These are two different issues.

20. When an assessee pays a certain amount of money to acquire a certain number of shares, the cost of acquisition of those shares is fixed. Even while holding those shares and without any further outlay of money on his part, the assessee is given bonus shares. In fact, the assessee does not invest any money or incur any expenditure in the acquisition of these bonus shares. It would, therefore, be correct to say that as a matter of fact he has not paid any money or incurred any cost of acquisition in getting these shares. The question whether he has spent any money for acquiring these shares factually and legally has only one answer, viz., a definite 'No'.

In the first place, if one looks for the amount of money invested in acquiring the bonus shares, it is clear that no such amount has been invested. Secondly, the cost of acquisition of an asset, whether for Section 45 or for any other purpose, would be a fixed figure. It cannot go on fluctuating from time to time or be a variable figure. 'Cost' means the financial outlay and whatever be the manner in which such outlay is made, there cannot be any doubt about the fixity of the amount invested. If the manner of determining the cost leads to an ambiguity or a variation from time to time, that would make the cost of acquisition unascertain-able. The application of decision like Dalmia Investment Co. Ltd.'s case (supra), as suggested by the departmental learned counsel to the determination of the cost of acquisition of bonus shares, definitely leads to a fluctuating figure of cost.

21. If an assessee purchased 1,000 shares at Rs. 100 each, paying Rs. 1 lakh and later on got 1,000 shares by way of bonus issue, his outlay of Rs. 1 lakh resulted in his acquisition of 2,000 shares. Following the Supreme Court's decision, the cost of the bonus shares would be Rs. 1,00,000/2,000, i.e, Rs. 50. If another assessee purchased 1,000 shares of the same company on some other date at Rs. 80 per share, thus, spending Rs. 80,000, that assessee also gets 1,000 shares by way of bonus issue. In the case of the second assessee, the average cost for purposes of determining the surplus would be Rs. 80,000/2,0000, i.e., Rs. 40. The issue of the bonus shares on the same day by the same company yields an average cost of Rs. 5 for the first assessee but an average cost of Rs. 40 for the second assessee. Even though, therefore, the same company issued the same bonus issue on the same date, the application of the average principle makes the 'cost of acquisition' vary from shareholder to shareholder even though it would be the same for the issuer company. If an assessee purchased 1,000 shares at Rs. 100 and another 1,000 shares at Rs. 80 and bonus shares were received on his holding of 2,000 shares, the average method puts the cost to be ascribed for the bonus shares at Rs. 1,80,000/4,000 , i.e., Rs. 45, where another assessee purchased some shares at same price, sold some shares, in between got some bonus shares issue and otherwise dealt with this conglomeration of shareholding, then on the average method, the alleged 'cost of acquisition' of the bonus shares would be an entirely different figure. In other words, the averaging method of ascribing a cost to bonus shares for the purpose of working out the surplus as envisaged in Dalmia Investment Co. Ltd.'s case (supra) and other cases definitely imparts a variable figure of cost for these shares varying with the differences of purchase, with the person who makes the purchases and also with other transactions in shareholding, which the recipient of bonus shares indulges in. The alleged 'cost of acquisition' is, thus, not only not a fixed figure but one subject to the widest fluctuations depending on the shareholder, his activities, his holdings and any number of other variable factors.

22. There is also another difficulty. Where an assessee holding purchased shares acquired bonus shares and sold the bonus shares, the Supreme Court decision (prior to B.C. Srinivasa Setty's case) (supra) on the concession that sale of bonus shares resulted in capital gains taxable under Section 45, took the value of the bonus shares sold as the average price of both the original shares and the bonus shares taken together. Thus, if 1,000 shares purchased for Rs. 1 lakh fetched 1,000 bonus shares with no further outlay and the bonus shares were sold for Rs. 2,50,000, the owner retaining the original shares, the cost of the bonus shares would be taken as Rs. 50,000, on the average basis and the profit on the sale would be Rs. 2 lakhs. Suppose instead of the bonus shares the original shares were sold. The original shares actually cost Rs. 1 lakh being the money laid out for the purchase. It is a fixed cost. If these original shares are sold for Rs. 2,50,000, the owner retaining the 1,000 bonus shares received free would it mean that the profit on the sale of the original shares would be IRs. 2,50,000 minus Rs. 1,00,000= Rs. 1,50,000 Or would it, when the average price for the original share and bonus shares is taken, be only Rs. 2 lakhs even though they really cost Rs. 1 lakh This would show that the averaging is purely a notional process intended to meet the particular issue before the Court. The fact that where the shares do not rank pari passu, the principle of averaging is to be modified even according to the Supreme Court it further strengthens this view.

23. Though, therefore, the decisions indicate a manner of working out the surplus received on the sale of shares including bonus shares, it would not be proper to regard these decisions as assigning a particular 'cost of acquisition' for these shares for the purpose of Section 45.

This is the effect of the decision of the Supreme Court in B.C.Srinivasa Setty's case (supra) or other decisions like Evans Fraser & Co. Ltd.'s case (supra). In our view, the manner of arriving at the surplus would not, therefore, be a complete and conclusive guide in deciding whether bonus shares as such have a cost of acquisition. On the contrary, as a matter of fact, a person who receives bonus shares on account of his holdings of some original shares does not have to pay any amount for getting the bonus shares. A person who does not hold shares in the company cannot get bonus shares either by making a payment of money or by any other method. The only source of receipt of bonus shares is the holding of shares in the company and not parting with any money or its equivalent. This aspect of purchase by payment of money is also stressed in the context of goodwill in B.C. Srinivasa Setty's case (supra) (vide passage extracted above).

24. The position, thus, is that a set of cases before the Supreme Court and the High Courts assumed that the bonus shares when sold would necessarily result in capital gains. Since the assessee did not challenge that position and in fact they conceded it, the department's attempt to compute the capital gains on the basis that no money was spent when the bonus shares were received led to the inequitable position that not the surplus on the sale of the bonus shares but the actual value of the bonus shares on sale was brought to tax. Faced with this incongruity, the Supreme Court adopted the device of notionally drawing up a trading account to ascertain the surplus. It was in this context that out of several methods proposed, the method of averaging between the bonus and original shares are recommended. This is clear from the passage from Miss Dhun Dadabhoy Kapadia's case (supra) quoted at paragraph No. 12 above. The basic question whether bonus shares could be subject to capital gains when no payment at all was made for acquiring it was never raised by the assessees or considered by the Supreme Court. Paragraph No. 25 in B.C. Srinivasa Setty's case (supra), on the other hand, a similar asset, namely, goodwill came up for consideration before the Supreme Court. As in the case of bonus shares, a surplus could be calculated and was received on the sale of goodwill.

The same inequity of treating the entire consideration received for the sale as the taxable surplus was, however, apparent. When the very question of goodwill having any cost of acquisition was disputed, the Court interpreted the provisions dealing with the taxability of capital gains holding that one essential condition was that the asset should have a positive cost of acquisition. In other words, the Court held that when there was no payment or parting with of money on its purchase an asset like goodwill even if it fetched money on its sale cannot be subjected to tax on capital gains. The calculation of the surplus was necessary only if capital gains were taxable. If the very concept of taxability is frustrated at one or other anterior stage by the non-fulfilment of any condition, there was no question of calculating the surplus. When B.C. Srinivasa Setty's case (supra) was decided, the decision of the Supreme Court and the High Courts dealing with capital gains, Section 45 and allied Sections were before and known to the Supreme Court. When their Lordships said : 'what is contemplated is an asset in the acquisition of which it is possible to envisage a cost', if they felt that the decisions in Dalmia Investment Co. Ltd.'s case (supra) and Gold Mohore Investment Co. Ltd.'s case (supra) and other cases governed the situation they would certainly have followed those decisions. The Supreme Court did not apparently do so because they were not called upon to compute a surplus on a concession being made that capital gains are to be taxed but had to decide the more fundamental question of whether the capital gains have arisen at all. This was a question to be decided even at threshold. The decision in B.C.Srinivasa Setty's case (supra) is, thus, a clear refinement and dealt with a more basic and fundamental issue than in the earlier decisions and should be regarded as modifying if not overruling them to this extent.

25. The important question is whether what applies to goodwill applies to bonus shares. The legal and factual position of these items treated as assets are the same. When goodwill comes into existence in a running business, the owner of the business makes no payment for its acquisition. It is an asset added on to the existing business without any payment being made. The case of bonus shares is also the same. They constitute an asset for which the receiver pays no price just as in the case of goodwill generated. Bonus shares are also an addition to the assets already held by the owner. Again, while no payment is made by the person who acquires the bonus shares or goodwill in the initial stage, when sold to a third party, they would get a price for the same.

Bonus shares even as goodwill, thus, do not have the inherent quality of being available on the expenditure of money to any person desiring to acquire them. Both these can, however, be acquired from a person who initially acquired them by payment of money. Referring to the date of acquisition, the Court noted that it is not possible to determine the date on which the goodwill generated in a business comes into existence. Bonus shares really represent available accumulated profits converted into capital of the company are thus self-generated like goodwill. Though the shares are actually declared and made available to the existing shareholders on a particular day, the accumulation of profit leading to the bonus shares was going on for a period and was generated in the business much earlier. It would, therefore, be equally impossible to determine the exact date when the profit converted into bonus shares came into existence. Because bonus shares are issued to the shareholder on a particular day, it is incorrect to say that its date of acquisition is known. In fact, on this line of reasoning, even in the case of goodwill, a day can be chosen at the date for its valuation or for its being identified. Both these assets can be sold for a price by a subsequent seller, who would get them only on the payment of the price. Thus, conceptually, both bonus shares and goodwill attached to a business are similar. Even as the goodwill goes with the business, bonus shares represent and go with the company doing business.

26. We have, therefore, no hesitation holding that looked at from the point of view of the application of Section 45 and the meaning of 'cost of acquisition' regarded as fundamental to the application of the section by decision like B.C. Srinivasa Setty's case (supra) of the Supreme Court, bonus shares received as such cannot be said to have a cost of acquisition. If a person purchases a cow by paying a certain amount of money and the cow subsequently gives birth to a calf, to hold that the calf has cost the owner of the cow any money or that the owner has to incur a cost of acquisition for the calf, would be a plain untruth. The case of bonus shares is in no way different. Both in law as well as a matter of fact, there is no outlay of money leading to a cost of acquisition when a person receives bonus shares issued by a company. It is, thus, worth noting that Section 49 and Section 55, which have made adequate provision for the computation of cost in certain specific instances have not made any provision for the artificial ascertainment of cost of bonus shares or similar assets issued or received free in certain contingencies. This aspect of the matter also finds stress in the Supreme Court decision in B.C.Srinivasa Setty's case (supra). Even though, therefore, the earlier decisions like Dalmia Investment Co. Ltd.'s case (supra) and Gold Mohore Investment Co. Ltd.'s case (supra), etc., of the Supreme Court and the decisions of the High Courts following them indicated a method of arriving at the surplus to be worked out and taxed on the transfer of bonus shares--whether on business account or on capital account--after the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra) regarding the cost of acquisition as a fundamental concept basic to the very application of Section 45, no capital gain can be said to arise on the sale of bonus shares. The decision in AC.Srinivasa Setty's case (supra) has completely altered the concept of taxability itself of assets which have no cost of acquisition.

27. There is, however, one difficulty. A share in a company has a distinct meaning. In a general way, it represents a conglomeration of the shareholders' rights in the company as a member thereof. The definition of a 'share' most widely quoted is that of Farwell J. in Barland's Trustee v. Steel Bros. [1901] 1 Ch. 279 : A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with (section 20 of the Companies Act, 1948). The contract contained in the articles of association is one of the original incidents of the share. A share is not a sum of money ...

but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.

The definition stresses to some extent the contractual nature of the shareholders' rights but emphasises the fact that he has an interest in the company. According to Gower's Principles of Modern Company Law, Fourth edn. : The theory seems to be that the contract constituted by the articles of association defines the nature of the rights, which, however, are not purely personal rights but instead confer some sort of proprietory interest in the company though not in its property.

In CIT v. Standard Vacuum Oil Co. AIR 1966 SC 1393, the Supreme Court held : By a share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holder by the articles of the company, which constitute a contract between him and the company.

The holder of shares in a company is granted a share certificate which is essentially an indication of the right and title to the bundle of advantages represented by the share. Palmer's Company Law, Vol. 1, twenty-third cdn., p. 385 sums up the position by stating "holding of a share in a company limited by shares generally carries the right to receive proportion of the profits of the company and of its assets in the winding up, and all other benefits of membership, combined with an obligation to coatribute to its liabilities, all measured by a certain sum of money which is the nominal value of the share, and all subject to the memorandum and articles of the company'. Section 82 of the Indian Companies Act, 1956" specifies that shares or other interests of a member in a company shall be movable property, transferable in the manner provided by the articles of the company. The definition of 'goods' in the Sale of Goods Act, 1930, specifically includes stocks and shares. The holder of shares is issued a certificate. This certificate or scrip is the prima facie evidence of the holder's title to the shares. Section 83 of the Indian Companies Act provides for a number for the shares stating that each share in a company having a share capital shall be distinguished by its appropriate number. When a person is registered as a holder of certain shares in a company, the distinctive numbers of the shares allotted to him are marked in the register and the certificates in his hands also carry the distinctive numbers.

28. The above nature and the legal position of the shares, however, do not make the scrip or the certificate representing the title to the membership of the company an asset by itself. The share certificate is only an indication and evidence of the holder's rights, etc., in the company. When, according to the methods prescribed for the transfer of shares, a shareholder transfers or sells his shares to another, the latter steps into the shoes of the former as regards all his rights as a member of the company. Where in a company, the capital is divided into a particular number of shares (ignoring for the moment the different types of shares for the purpose) each shareholder is entitled to his proportionate share of the assets, rights, etc., in the company.

The transfer of shares connotes the transfer of this proportionate share in the company. In this background of the legal nature of shares, the number given to the share certificate does not have any effect on the rights of the shareholder or his relation with the company. The distinctive numbers are useful only, firstly, to keep a count of the shares issued by the company from time to time and, secondly, to help the shareholder himself to identify his particular title deed (share certificate), if it were to get lost. Distinctive numbers put on the shares cannot be regarded as in any way referring to any particular or distinctive part of the assets of the company. The inevitable result is that the rights, etc., of all the shareholders are the same, whatever be the distinctive number on the share certificate, it has no particular meaning ; and more important, since the origin of the shares can be by way of first issue or a later issue or a right share or a bonus share, the distinctive numbers except in giving an identity mark or a sequence to the issue of shares cannot by themselves create any legal significance of their own. Thus, a person who holds shares in the company cannot by looking into the distinctive numbers in the share certificates held by him specify whether they are originally purchased shares, second or later issues or bonus shares. Even if at the time of the issue the distinctive number may refer to the above nature of the issue, after these shares have passed through one or more hands by sale, gift, etc., such significance gets completely lost. Thus, if a shareholder holding share Nos. 1 to 100 gets bonus shares 1,000 to 1,100 but after some time all the shares are sold successively to A, B, C, etc., but on a later occasion, share numbers 1,005 to 1,020 are again purchased by the original shareholder, could he say that these shares are bonus shares even though when he originally received them before sale to 'A', he received them as the bonus shares from the company If you ask a share broker to sell to you the bonus shares only of 'X', 'Y', 'Z' company, what would he reply. At any rate, will he give it without a gleeful twinkle in his eye.

29. We have considered the nature of the shareholdings and the function of the distinctive number at length to identify and understand a problem raised in these appeals, but the significance of which does not seem to have been fully appreciated. The assessee holder of some shares earlier and a recipient of bonus shares subsequently, is stated to have sold bonus shares. The above details would indicate that from the mere look at the share certificates or even from the rights subsumed by these certificates, one cannot say whether the shares held by a person came from a first issue, the bonus issue or any other issue. There is no difference either from the legal or the factual point of view between one share and another share whatever be the occasion for issuing the shares by the company. When a shareholder is, therefore, possessed of a bunch of shares, part of which is purchased and the other part obtained as bonus shares, he would not be in a position to distinguish between these two shares, From a purely historical point of vjew, he may be in a position to say that shares having such and such distinctive numbers were purchased and shares with other distinctive numbers were received as bonus. From this knowledge, if he claimed that he has sold bonus shares or original shares, in our view, from the purely legal or even factual point of view, it would not be a correct statement. What the shareholder sold is only a share of the company.

The added clarification that it is bonus share or originally received share having no basis in law or fact is a mere fiction of imagination.

We are, therefore, really surprised to see that where an assessee sells shares, he could say that he has sold bonus shares only or originally purchased shares. What we want to emphasize is that the very controversy raised in these appeals bristles with difficulties even at the threshold, since the identification or differentiation of shares sold as bonus or others itself involves factual inaccuracies. Our point is strengthened by the fact that even though our Companies Act still retains the provisions for numbering of shares, elsewhere law has dispensed with the requirement of distinctive numbers. Thus, while section 74 of the UK Companies Act, 1948 requires that shares must bear distinctive numbers, the proviso thereto specifies that the directors may dispense with the requirement of numbering when certain conditions are satisfied, such as that the shares are fully paid up, rank pari passu and are all issued shares of the company or issued shares of a particular class. Palmer (at p. 386) observes that in practice numbers are frequently dispensed with. As a matter of fact, therefore, the stand of an assessee that he has sold bonus shares or any other shares at a particular sale would be factually incomprehensible.

30. If the above be the position and an application of the Supreme Court decision in B.C. Srinivasa Selty's case (supra) leaves bonus shares with no cost of acquisition, the question would be as to how to deal with capital gains on the sale of shares. An assessee may possess 1,000 shares of a company purchased by him. He may acquire by bonus issue 500 shares. If he decides to sell 300 shares out of these, the question is : would it lead to capital gain If the original shares have been sold, B.C. Srinivasa Setty's case (supra) would not apply.

There would be a capital gain. If the shares acquired on bonus distribution are sold, B.C. Srinivasa Setty's case (supra) would apply and there would be no capital gain. Where 300 shares are sold as above, perhaps the assessee would claim in a suitable case that he sold the bonus shares. The department might claim that the original shares were sold ; or as in the present case, even in the case of bonus shares the excess would be computed by the department following Dalmia Investment Co. Ltd.'s case (supra). A decision on the question is not easy but in view of what is stated above, it is not very difficult either. In our view, the owner of any property has the right to choose what part of it he decides to sell and what part he wants to retain for himself.

Exercising this general right, if a holder of both bonus and other shares states that he sold the shares received on bonus distribution that should be accepted. If on the contrary, for reasons of his own, he prefers to have the other purchased shares treated as sold that should be allowed to him. In any case, the computation should be made on the basis of the stand taken and the declaration made by the assessee as the owner of the property.

31. There was a discussion about the reduction in the value of the shares of the company when the company issues bonus shares. In the case of Miss Dhun Dadabhoy Kapadia (supra), the Supreme Court permitted to deduct a certain amount from the excess received on the sale of shares on this account. Reference was made to this decision. In our opinion, the actual nature and significance of the deduction permitted in this case does not seem to have been fully appreciated in the arguments before us. In the first place here as in the earlier cases, their Lordships were considering the question of working out the surplus in what could be regarded as something like a trading account cast. In such a computation, the loss incidental to the sale transaction has to be taken into account, which was not done by the revenue. Secondly, bonus shares are issued against accumulated but undistributed profits.

Inevitably, therefore, these shares issued are backed up by sufficient fresh capital and assets in the company. Though each shareholder who receives a bonus share has now two shares instead of the one he originally held, both the shares are backed by sufficient assets and capital in the company. The issue of bonus shares by itself, in our opinion, does not reduce the value of the shares of the company since there is no reduction in the proportionate assets of the company. Nor does issue of bonus shares constitute a case of sub-division of stock or shares. In fact, their Lordships did not refer to any such reduction at all. On the contrary, the situation considered was when the shares were sold. At that time, more shares being put in the market the play of the demand and supply position depresses the value of the shares. It is in this context that the account cast for determining the surplus gave a factual reduction in the market value of the shares. According to us, there was no depression in the nominal value.of the shares, its cost of acquisition or any other aspect of its intrinsic value. This, in our opinion, does not, therefore, affect the question before us at all.

(i) The decisions of the Supreme Court in Dalmia Investment Co.

Ltd.'s case (supra) and Gold Mohore Investment Co. Ltd.'s case (supra) and of the High Courts following these decisions went on the assumption that on the sale of bonus shares taxable capital gains arose. In calculating the surplus to be taxed on the above concession, the cost of the bonus shares was notionally adopted by averaging the cost of the purchased shares amongst those shares as well as the bonus shares and not by considering the actual money outlay on the acquisition of bonus shares.

(ii) For the first time, B.C. Srinivasa Setty's case (supra) focussed attention on the origin, nature and cost of acquisition of such assets as a distinct concept in order to find out whether capital gains arise at all on the sale of such assets. To the extent that this decision is applicable to issues like the present, there is nothing inconsistent in this decision with the earlier decisions of the Supreme Court. The Dalmia Investment Co. Ltd.''s case (supra) method of computation of capital gains would not, therefore, be decisive of the altogether different question whether capital gains arise or not at all.

(iii) Shares represented by share certificate as to their title, form a peculiar and special type of property, whatever be the origin and the time of their distribution, whether original or subsequent or by way of bonus, all shares of the same type (i.e., which are pan passu) are identical, similar as to rights, etc., and cannot be distinguished from one another, like one currency note from another.

(iv) Basically, it would be inaccurate to say when one sells the share of a company that he has sold bonus shares or other shares.

The manner of acquiring shares by a shareholder, however, being fixed even though their identity cannot be established, a person who has received bonus shares can say that he owns these shares for which he has not rendered any money payment.

(v) As the owner of property, a shareholder who owns both shares purchased at a cost as well as bonus shares received without a money outlay would free to put on sale whichever of these category of shares that he likes. If, therefore, while selling shares, he declares that he has sold the bonus shares received by him rather than the shares he purchased by payment of money, he exercises a right exclusive to the owner of property. The computation of capital gain in that case should be made by accepting that declaration. If his claim is that he sold bonus shares, there would be no capital gains to be computed under Section 45. If he declares that he has sold the purchased shares, capital gains would have to be computed on that basis. After selling one type of shares, the other type of shares which remains should be dealt with on its own basis.

1. We have perused the order proposed by our learned brother, Dr. V.Balasubramanian. With great respect to him, we regret our inability to agree with the said order, for the following reasons.

2. The controversy in these two cases before the Special Bench is whether these two assessees are liable to tax on the surplus arising on the sale of certain bonus shares held by them, as capital gains chargeable to tax under Section 45. To appreciate the arguments that were urged before us in their proper and correct perspective, it is necessary to set out the relevant facts leading up to the present appeals.

3. The appellant, in the main appeal is Rohiniben Trust [IT Appeal No.5544 (Bom.) of 1983]. The assessment year is 1981-82, for which the previous year ended on 31-12-1980. During the year, the assessee-trust had sold 2,400 equity shares of the Standard Mills Co. Ltd., giving rise to a surplus of Rs, 26,475, While declaring this amount of Rs, 26,475, as long-term capital gains in its 'Statement of total income', the assessee-trust stated as follows in note No. 8, below the said statement : 8. Bonus Shares : Capital Gain shown above includes Capital Gain on sale of Bonus Shares. These gains are without prejudice to the claim that the sale of Bonus Shares give rise to no taxable capital gain as the actual cost of acquisition of bonus shares is nil. The assessee inter alia relies on the Supreme Court decision in 128 ITR The assessee-trust also funished full and complete details of cost of acquisition in respect of these 2,400 shares for the purpose of capital gain, as could be seen from the statements at pages 14 to 17 of the assessee's paper book.

4. After examining the said claim, the ITO held that the assessee-trust had made long-term capital gains of Rs. 26,475 as per the statement filed, on the sale of 2,400 equity shares of the Standard Mills Co.

Ltd. and that the same was assessable in the hands of the trust.

Apparently, the ITO did not accept the assessee's contention based on the decision of the Supreme Court in B.C. Srinivasa Betty's case (supra).

5. On appeal, the Commissioner (Appeals) negatived the assessee's contentions as not tenable in view of the principles laid down by the Supreme Court in the case of Dalmia Investment Co. Ltd. (supra). He pointed out that the principles of distributing the cost over the original and the bonus shares, applied where shares were held as stock-in-trade or as investment and that this view was supported by the decisions of the Gujarat High Court in Chunilal Khushaldas' case (supra) and of the Calcutta High Court in General Investment Co. Ltd.'s case (supra). The Commissioner (Appeals), therefore, confirmed the order of the ITO and dismissed the appeal. It is against this order of the Commissioner (Appeals), the assessee-trust has come up in appeal to the Tribunal raising the following ground : 1. The learned Commissioner (Appeals) erred in not accepting the appellant's claim that surplus on sale of bonus shares was not exigible to capital gains tax since the actual cost of the bonus shares was nil and, hence, the Supreme Court decision in B.C. Srinivasa Setty [1981] 128 ITR 294 applied to the appellant's case.

In the appellant's submission, the Commissioner (Appeals) ought to have held that surplus on sale of bonus shares was not exigible to capital gains.

6. In the case of the intervener, Podar Corporation (P.) Ltd., the facts are the following. The assessee is a private limited company. In the statements accompaying its return of income for the assessment year 1979-80, for which the previous year ended on 31-12-1978, the assessee had shown a sum of Rs. 1,44,407 as short-term capital gains arising on the sale of 376 bonus shares of Bajaj Auto Ltd. and a sum of Rs. 1,63,408 as long-term capital gains arising on the sale of 424 equity shares of Bajaj Auto Ltd., out of which 245 were bonus shares received by the assessee in 1971 and 1973. In the course of the assessment proceedings, the assessee filed a statement showing a revised calculation of capital gains. In this revised statement, the assessee-company claimed as follows :Relating to short-term capital assets (other than land and Rs.building)Sale proceeds of 376 equity shares of Bajaj Auto Ltd. sold toKailashnarain Parasrampuria, Bombay.

1,60,428Note : As whole of these shares are out of the bonus shares received in 1976, no capital gain is chargeable in view of decision of the Bombay High Court in CIT v. Home Industries & Co. [1977] 107 ITR 609.Relating to long-term capital assets (other than land and buil-ding)(i) Sale proceeds of 179 equity shares of Bajaj Auto Ltd. at the rate of Rs. 428 per share 76,612Less : Cost of the same 196 34,217 _________Note : No capital gain is chargeable on sale proceeds of 245 equity shares of Bajaj Auto Ltd. amounting to Rs. 1,04,860 since these shares were the shares received as bonus shares during 1971 and 1973 in view of the decision of the Bombay High Court in Home Industries & Co.'s case (supra).

7. The ITO and the Commissioner (Appeals) did not accept the assessee's contentions. It would be useful to quote paragraph No. 4 of the Commissioner (Appeals)'s order as he has discussed the issue raised by the asses-see in some detail : 4. After a careful consideration of the submissions advanced on behalf of the appellant-company, I am unable to agree that capital gains on the sale of bonus shares does not attract tax. The cases relied upon by the learned representative are both in respect of an asset in the form of goodwill, which is a self-created or self-generated asset. In an asset of that type; it is surely not possible to comprehend any cost in terms of money and such an asset was, therefore, held to be not contemplated by Section 48(?7), so that profit arising on the transfer thereof was, therefore, held not liable to tax under Section 45. As far as bonus share is concerned, such an asset is available on the expenditure of money to a person, who seeks to acquire it. It cannot be said to be an asset in the acquisition of which no cost at all can be conceived. In fact, the very proposition, which was canvassed before the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, viz., that the cost to the assessee of such shares was to be taken to be nil, was not accepted by the Court, which held that the cost of such shares has to be determined by the process of averaging, that is by spreading the cost of the old shares over those shares and the new issue (viz., the bonus shares) taken together if they rank pari passu. In fact, in one of the later judgment of the Supreme Court affirming the decision in Dalmia Investment Co. Ltd.'s case (supra), the Court had, at one place, compared the issue of two bonus shares vis-avis the original share to be by way of two eight-annas coins, in place of a single rupee. It is, therefore, wholly incorrect to say that no cost in terms of money can be envisaged when bonus shares are issued. As lightly pointed out by the Income-tax Officer, the cost of such shares has to be determined by the process of averaging, as approved by the Supreme Court in Dalmia Investment Co. Ltd.'s case (supra), reaffirmed in subsequent decisions such as CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 and CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62.

In fact, the Bombay High Court, in the case of W.H. Brady & Co. Ltd. v. CIT [1979] 119 ITR 359 has, following the said decisions of the Supreme Court, approved the average cost to be the correct 'cost of acquisition' of bonus shares for the purpose of computation of capital gains under Section 48. No doubt, the proposition that all transactions encompassed must fall within the governance of computation provisions, in the manner it was canvassed in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC), was not advanced at the time of the said rulings, as urged by the representative. However, that proposition would not take the appellant's case out of the purview of Section 45, because in respect of the bonus shares, it is surely possible to envisage a cost. The contentions to the effect that the profit earned on the sale of bonus shares is outside the purview of Section 45 are, therefore, not acceptable. The Income-tax Officer's action in adopting the computations of capital gains as per the original statement accompanying the return is, therefore, quite valid in law and is upheld.8. Against this decision of the Commissioner (Appeals), the intervener-company has raised the following two grounds as ground Nos.

1 and 2 in IT Appeal No. 594 (Bom.) of 1983 : 1. The learned Income-tax Officer and the learned Commissioner (Appeals) have erred in computing short-term capital gains at Rs. 1,44,409 as against the correct figure of Rs. nil.

The appellant respectfully submits that no part of sale proceeds of 376 equity shares of Bajaj Auto Ltd., amounting to Rs. 1,60,428 is liable to capital gains since whole of these shares were out of the bonus shares received in 1976.

2. The learned Income-tax Officer and the learned Commissioner (Appeals) have further erred in computing the long-term capital loss at Rs. 2,228 as against the correct amount of Rs. 1,23,341. The appellant respectfully submits that no part of the sale proceeds of 245 equity shares of Bajaj Auto Ltd. amounting to Rs. 1,04,860 is liable to capital gains since whole of these shares were out of the bonus shares received during the years 1971 and 1973.

9. Since the arguments of the learned counsels on both sides have been fully set out in paragraph Nos. 3 to 8 of the order of the learned Vice-President, we do not propose to burden this order by repeating the same. Suffice it to say that the main thrust of the arguments of the learned counsel for the two appellants is totally based on the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra) and of the Bombay High Court in Evans Fraser & Co. Ltd.'s case (supra).

10. At the outset, we would like to emphasise that the entire case of the two appellants is based on the undisputed factual position that the shares sold by them and giving rise to surpluses in their hands, were 'bonus shares'. There is also no dispute about the dates or years of acquisition of these bonus shares by the two appellants. This would be clear from the statements filed at pages 14, 16 and 17 of the assessee's paper book, in the case of Rohiniben Trust (supra). In the case of the intervener, Podar Organisation (P.) Ltd., it would be clear from the revised calculation of capital gains quoted above and also from 'Annexure D--Capital gains' at page (1) of the appellant's papers.

Thus, it is clear that the two appellants accept the true nature of these shares sold by them as 'bonus shares' as well as the dates of acquisition of these bonus shares by them.

11. The dispute in these appeals, therefore, narrows down to the only issue whether there was any cost of acquisition to the two appellants in respect of these bonus shares sold. According to the assessees, the cost of acquisition of these bonus shares to them was nil, as indisputably they had not paid anything for acquiring them and, consequently, they go out of the charging provision of Section 45, in respect of capital gains as held in B.C. Srinivasa Setty's case (supra) and Evans Fraser & Co. Ltd.'s case (supra). The revenue seeks to meet these contentions by relying on a catena of cases starting from Dalmia Investment Co. Ltd.'s case (supra) and ending with Escorts Farms (Ramgarh) Ltd.'s case (supra).

12. In B.C. Srinivasa Setty's case (supra), the Supreme Court held that goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 of the 1961 Act (or section 12B of the 1922 Act) and that the transfer of such goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. While reaching the above conclusion, the Supreme Court laid down the law in this regard as under : The charging Section 45 and the computation provisions (i.e., Section 48, etc.) together constitute an integrated code, and in a case to which the computation provisions cannot apply at all, such a case is not intended to fall within the charging section. The Supreme Court held as follows while dealing with the provisions relating to computation of income liable to be taxed as capital gain : What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by Section 49 and its cost, for the purpose of Section 48, is determined in accordance with those provisions. There are other provisions which indicate that Section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision.

So also is Sub-section (2) of Section 55. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived.

Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.

In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the 'cost of acquisition' mentioned in Section 48 implies a date of acquisition, and that inference is strengthened by the provisions of Sections 49 and 50 as well as Sub-section (2) of Section 55.

It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in Sub-section (1) of Section 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can Sub-section (3) of Section 55 be invoked, because the date of acquisition by the previous owner will remain unknown.

We are of opinion that the goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 and, therefore, its transfer is not subject to income-tax under the head 'Capital gains'.

13. The pertinent questions that have to be considered are the following : (i) Is 'Bonus share' an asset in the acquisition of which it is possible to envisage or conceive a cost (ii) Is 'Bonus share' an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it? (iii) Whether 'Bonus share' is an asset for which it is possible to pin-point the date of its acquisition 14. According to us, the answer to the third question does not present any difficulty. In the case of Rohiniben Trust (supra), the dates of acquisition are clearly specified in the statemezit at page 14 of the appellant's paper book under the head 'Date and mode of acquisition'.

It is seen from this statement that the dates of acquisition of these bonus shares in that case were 31-7-1958, 14-12-1961, 23-2-1972, 10-2-1976 and 12-10-1966 as specified in the said statement. Similarly, in the case of the intervener, the years of acquisition of the bonus shares are indicated as 1971 and 1973 as could be seen from the particulars set out in paragraph No. 6 supra. Thus, it is clear that the date of issue of bonus shares by a company to its shareholders is easily and undisputably the date of their acquisition.

15. The answer to the first question is provided in the various decisions of the Supreme Court starting from Dalmia Investment Co.

Ltd.'s case (supra). In this case, the Supreme Court held that where bonus shares are issued in respect of ordinary shares held in a company by an assessee, who is a dealer in shares, their real cost to the assessee cannot be taken to be nil or their face value. According to the majority judgment of the Supreme Court, they have to be valued by spreading the cost of the old shares over the old shares and the new issue (viz., the bonus shares) taken together if they rank pari passu, and if they do not, the price may have to be adjusted either in proportion to the face value they bear if (there is no other circumstances to differentiate them) or on equitable considerations based on the market price before and after the issue. A careful study of the entire judgments in this case, would establish that the Supreme Court was unanimous in rejecting the contention that the cost of acquisition of the bonus shares is nil. His Lordship Justice Sarkar (as his Lordship then was) held as follows : How then is the cost of the bonus shares to be determined We start with this that nothing in fact was paid for them. But if the cost of acquisition is nil, the whole of the sale proceeds of the shares would be taxable profits. In CIT v. Bai Shirinbai K. Kooka [1962] 3 SCR (Suppl.) 391, this Court has approved of the Bombay High Court's view that 'Obviously, the whole of the sale proceeds or receipts could not be treated as profits and made liable to tax, for that would make no sense.' So the profits cannot be ascertained on the basis that the bonus shares had been acquired for nothing. The view taken by the Appellate [Assistant] Commissioner and the Tribunal cannot be supported.

Delivering the majority judgment, his Lordship Justice Hidayatullah (as his Lordship then was) held as follows : Can we then say that the bonus shares are a gift and are acquired for nothing At first sight, it looks as if they are so, but the impact of the issue of bonus shares has to be seen to realise that there is an immediate detriment to the shareholder in respect of his original holding. The Income-tax Officer, in this case, has shown that in 1945 when the price of shares became stable it was Rs. 9 per share, while the value of the shares before the issue of bonus shares was Rs. 18 per share. In other words, by the issue of bonus shares pro rata which ranked pari passu with the existing shares, the market price was exactly halved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 nP. coins.

The total value remains the same, but the evidence of that value is not in one certificate but in two....

After quoting from the decision of the Supreme Court of the United States of America in Eisner's case (supra), his Lordship rejected the method of calculation which places the value of bonus shares at nil as incorrect in the following words : ... It follows that the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding. The earning capacity of the capital employed remains the same, even after the reserve is converted into bonus shares. By the issue of the bonus shares there is a corresponding fall in the dividends actual or expected and the market price moves accordingly.

The method of calculation which places the value of bonus shares at nil cannot be correct.

Thereafter, the Supreme Court examined the other two methods for ascertaining the cost of acquisition of the bonus shares and held as follows: This leaves for consideration the other two methods. Here we may point out that the new shares may rank pari passu with old shares or may be different. The method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares. This market price must be the middle price and not as represented by any unusual fluctuation. The other method is to take the amount spent by the shareholder in acquiring his original shares and to spread it over the old and new shares treating the new as accretions to the old and to treat the cost old price of the original shares as the cost price of the old shares and bonus shares taken together. This method is suggested by the department in this case. Since the bonus shares in this case rank pari passu with the old shares there is no difficulty in spreading the original cost over the old and the new shares and the contention of the department in this case is right. But this is not the end of the present discussion. This simple method may present difficulties when the shares do not rank pari passu or are of a different kind. In such cases, it may be necessary to compare the resultant price of the two kinds of shares in the market to arrive at a proper cost valuation. In other words, if the shares do not rank pari passu, assistance may have to be taken of the other evidence to fix the cost price of the bonus shares. It may then be necessary to examine the result as reflected in the market to determine the equitable cost. ...

16. This decision was followed by the Supreme Court in CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213. In CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 the Supreme Court approved their earlier view in Dalmia Investment Co. Ltd.'s case (supra). The Supreme Court held as follows : ... In the decision of this Court in Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), four methods of calculation were considered.

The first method is to take the cost as equivalent to the face value of the bonus shares. This method was followed by the assessee-company. The second method is to take the cost of the bonus shares at nil, a method adopted by the Income-tax Officer in relation to the Howrah Mills Co. Ltd. A third method is to take the cost of the original shares and to spread it over the original shares and the bonus shares taken collectively, and a fourth method is to find out the fall in the price of the original shares at the stock exchange and to attribute this to the bonus shares. After considering all the four methods, this Court held that the correct method to apply in cases where bonus shares rank pari passu is to follow the third method, namely, to take the cost of the original shares and to spread it over all the original as well as the bonus shares and to find out the average price of all the shares.

After referring to the doubt raised by the counsel on the basis of an earlier decision of the Court in the case of Emerald & Co. Ltd. v. CIT [1959] 36 ITR 257, their Lordships of the Supreme Court held as follows : In other words, this Court did not go into the question of the valuation of the bonus shares at all but decided the case on the basis of the original holding, its cost price and its sale price.

The matter was gone into more closely in the Dalmia's case [1964] 52 ITR 567 (SC.) and every method of calculation was considered there.

We were invited to depart from the decision in the Dalmia's case and to take the view which appeared to have been taken in the Emerald's case [1959] 36 ITR 257, 262 (SC). We have considered the matter once again and are of the opinion that the method followed in the Dalmia's case is the correct method and there seems to be some error in stating that the method of the Tribunal in Emerald's case was finally accepted. Perhaps the Court intended saying that the method of the Income-tax Officer was preferable but by error put down the name of the Income-tax Appellate Tribunal. In any case that case did not decide the matter fully because, as the Court itself observed, the difference in the two methods only resulted in Rs. 18 being either added to or deducted from the ultimate result.

We accordingly accept the third method. The answers recorded by the High Court are discharged and we answer the question in the negative. The cases will be disposed of in the right of our observations by the Income-tax Appellate Tribunal by calculating the profit and loss by spreading the cost over the original and the bonus shares and finding out the average cost per share. The appeals are allowed with costs.

Their Lordships reiterated this position again in the case of CIT v.Gold Co. Ltd. [1970] 78 ITR 16 (SC), decided by them on the same day by following their decision in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC).

17. We would refer to two decisions, one of the Bombay High Court and the other of the Delhi High Court, where the ratio of these decisions of the Supreme Court has been followed and applied. In W.H. Brady & Co.

Ltd.'s case (supra), the question before the Bombay High Court was regarding the cost of acquisition of the bonus shares sold by the assessee for the purpose of computing the capital gains. Their Lordships of the Bombay High Court followed the decision of the Supreme Court in Dalmia Investment Co. Ltd.'s case (supra) and distinguished the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. (supra). The High Court has held as follows : Reference was made by Mr. Dastoor to the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. v. TTO [1971] 82 ITR 788. This was a case where the Court was concerned with an issue of bonus shares after January 1, 1954. We are not concerned with a case of that type. Actually in this case the questions with which we are concerned did not arise for consideration and any attempt to pick up an isolated sentence shorn from the context is of no assistance to the Court in view of the clear pronouncements of the Supreme Court in Dalmia Investment Co. Ltd.'s case [1964] 52 ITR 567 where the principles are fully crystallised.

In fact, in this judgment, their Lordships also referred to the later decision of the Supreme Court in CIT v. Gold Mohore Investment Co, Ltd. [1969] 74 ITR 62. Their Lordships also rejected the assessee's contention that in Dalmia Investment Co. Ltd.'s case (supra), the Supreme Court was concerned with a dealer in shares, whereas in the case before them the assessee was an investor in shares. The Bombay High Court at pp.368 and 369 of the reports pointed out that there was no distinction between a dealer in shares and an investor in shares by relying on their earlier decision in D.M. Dahanukar's case (supra).

18. In Escorts Farms (Ramgarh) Ltd.'s case (supra), the Delhi High Court had considered the cost of acquisition of original shares in respect of which bonus shares were issued for purposes of finding out the capital gains on sale of the original shares. The first question, which was referred to the High Court, was as follows : 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 The Delhi High Court discussed the effect of the issue of bonus shares on the original shares in the following words : We are here concerned with the 'cost of acquisition' of the original shares and not the cost of acquisition of the bonus shares. It is the original shares that have been sold. They were admittedly purchased after 1954. Therefore, the option of taking the fair market value as on 1st January 1, 1954, is not available to the assessee. The cost and date of acquisition of these shares is known.

The sale price is known. In such a case it would appear, normally, that the cost of acquisition of the original shares should be the actual price paid, and the capital gains should be arrived at after deducting this price from the sale price. But what happens when bonus shares have been issued after acquisition and before sale Is not the actual cost of acquisition affected by the subsequent event, e.g., the issue of bonus shares The issue of bonus shares certainly affects the market value of the existing shares, which diminishes as a result. How then is the cost of the bonus shares and the original shares to be determined The cost of acquisition of an asset is normally the actual cost.

However, if an assessee receives an asset 'for free' a question arises as to the cost to be estimated. The nature of the asset, and the reason why the assessee has received it without any payment, has to be examined. A share in company is bundle of rights permitting the holder to participate in the capital and management of the company. Bonus shares are issued to the holder of the original shares. Once bonus shares have been issued they are treated exactly as other shares, if they rank part passu with the other shares.

Thereafter, bonus shares can be issued also in relation to these earlier bonus shares which are now ranking pari passu. Therefore, on the issue of bonus shares what happens is, that though the participation of the holder is not increased, the number of shares is, all holders of original shares being entitled to the bonus. As such, the shares are split up. In the words of Justice Holmes in Henry R. Towne v. Mark Eismer, Collector of United States Internal Revenue for the Third District of the State of New York [1977] 245 US 418 at 426 ; 62 L. Ed. 372 at 376, 'what has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value (o the extent of the value of the new'.

After referring to the various decisions of the Supreme Court referred to above as well as the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case (supra), the Delhi High Court answered the first question referred to them in the affirmative and in favour of the revenue in the following words : From a layman's point of view, the cost of the original shares is the price paid for them ; and the cost of the bonus shares is nil.

But once the principle of averaging is accepted, as it certainly has to be in respect of bonus shares at least, it necessarily implies that for the original cost the assessee must be taken to have acquired both the bonus and the original shares. In ether words, the issue of bonus shares, though subsequent, has the effect of altering the original cost of acquisition of the shares. There is nothing illegal in this, as the price by the assessee originally was not only for the shares themselves but also for such shares that it may yield subsequently, if any.

The right to acquire bonus shares is a right embedded in the original shares, and they are a legal accretion thereto. The method of spreading over on both the bonus and the original shares the cost of acquisition of the original shares would appear to be the proper method of determining the value of the asset. For, there is no doubt that on the issuance of the bonus shares, the value of the original shares is proportionately diminished. In simple language it is 'split up'. As such, the cost of acquisition of the original shares and their value is closely interlinked and interdependent on the issue of bonus shares. Therefore, once the bonus shares are issued, the averaging out formula has to bs followed with regard to all the shares. But in view of the specific language of Section 55(2)(7) regarding the substituted market value of January 1, 1954, this cannot be done where the assessee has elected to exercise an option as decided in Shekhawati General Traders Ltd.'s case [1971] 82 ITR 788 (SC).

For the reasons outlined above and harmonising the principles enunciated in the various decisions of the Supreme Court, it would appear to us that question No. 1 has to be answered in the affirmative and in favour of the revenue.

19. From the above discussion, it would be clear that 'bonus share' is an 'asset', in the acquisition of which it is possible to envisage or conceive a cost and that it is too late in the day to contend that the cost of acquisition of bonus shares to an assessee is nil. In fact, this was the stand taken by the assessee in W.H. Brady & Co. Ltd.'s case (supra) before the Bombay High Court. But this stand of the assessee has been negatived by following the decisions of the Supreme Court referred to above. As pointed out by the Delhi High Court in the case of Escorts Farms (Ram-garh) Ltd. (supra), the right to acquire bonus shares is a right embedded in the original shares and they were the legal accretions thereto. It, therefore, follows that the cost of acquisition of bonus shares is also embedded in the cost of acquisition of the original shares and that the said cost of acquisition of the bonus shares has to be ascertained according to the third method approved by the Supreme Court in the case of Dalmia Investment Co. Ltd. (supra). We, therefore, hold, respectfully following the decisions of the Supreme Court and the Bombay and the Delhi High Courts referred to above, that 'bonus share' is an 'asset' in the acquisition of which it is possible to envisage or conceive a cost.

20. The process of issue of bonus shares has been discussed by the Supreme Court in the case of Dalmia Investment Co. Ltd. (supra) at pp.

575 and 576 and the same has been quoted by our learned brother in paragraph 11 of his order. From the said passage, it would be clear that on the conversion of the reserves into capital by the issue of bonus shares, the company employs the said money not as a reserve of profits, but as its proper capital issued to and contributed by the shareholders. It is for this reason that their Lordships of the Supreme Court unanimously rejected the method of calculation, which places the value of bonus shares at nil as incorrect. Their Lordships have also described the result of the issue of the bonus shares when the shares rank pan passu by saying that what the shareholder held as a whole rupee coin, is held by him after the issue of bonus shares in two 50 nP. coins and that the total value remains the same, but the evidence of that holding is not in one certificate but in two. It, therefore, follows that the answer to the second question is that the 'bonus share' is an 'asset' which possesses the inherent quality of being available to a shareholder on the capitalisation of the reserves of profits by a company. After it is issued, a bonus share is as good as or as bad as any other equity share, whether acquired originally for a price or whether issued later by way of bonus. But the question of ascertaining the cost of bonus shares is closely interlinked and interdependent with the cost of acquisition of the original shares, as the cost of the bonus shares is also embedded in the cost of the original shares, just as the right to acquire bonus share is embedded in the original shares.

21. There is another way of looking at the problem. Bonus shares, as such, are not a separate species of shares. Shares which are issued by way of bonus are popularly known as 'bonus shares' in common parlance.

Therefore, the pertinent question is not whether bonus share is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is whether shares issued by way of bonus, which are as good as any equity shares, are available on the expenditure of money to any person seeking to acquire them. Considered in this manner, the answer to the second question whether equity share is available at a price cannot but be in the affirmative. Looked at from any point of view, it has, therefore, to be held that the shares issued by way of bonus are equity shares and which are capable of being purchased for a price by any person seeking to acquire them.

22. In view of the above discussion, it is clear that the decision of the Supreme Court in B.C. Srinivasa Setty's case (supra) is inapplicable to the facts of the present case. For the very same reason, the decision of the Bombay High Court in Evans Fraser & Co.

Ltd.'s case (supra) relied on by the appellants is also inapplicable to the facts of the present case. That was also a case of goodwill only and not of bonus shares. In fact, in this case, their Lordships of the Bombay High Court have brought out the distinction between goodwill and other tangible assets, wherein they have stated as follows : ... Goodwill differs from a tangible asset such as an immovable property or a share in a joint stock company which retains its shape and form but of which the market value fluctuates. The market value of goodwill also fluctuates, but it fluctuates because of the fluid nature of goodwill. Just as it is impossible to pin-point when goodwill came into existence, so it is equally impossible to pinpoint the moment at which goodwill waxed or increased or it waned or decreased, for, the process is imperceptible ; and just as in the case of a newly started business it is not possible to ascertain in terms of money the cost of acquisition of goodwill; it is equally impossible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill which led to the increase in its value.... Such increase is really due to the fact that by further self-generation the goodwill has increased....

Thus, it would be seen that this decision of the Bombay High Court entirely dealt with a case of capital gains arising on the sale of goodwill only which was acquired by a company and not a case of bonus shares with which we are presently concerned. Therefore, this decision is of no help to the appellants in the present case.

23. For the reasons discussed above, we are unable to accept the contentions of the learned counsel for the appellants that no capital gains can arise on the sale of bonus shares by the two appellants.

There is no dispute before us about the correctness of the amount of capital gains computed by the ITO, who has accepted the computation made by the appellants as correct. We, therefore, confirm the orders of the Commissioner (Appeals) on this point in both the appeals.

24. In the result, IT Appeal No. 5544 (Bom.) of 1983 filed by Rohiniben Trust is dismissed. Ground Nos. 1 and 2 in IT Appeal No. 594 (Bom.) of 1983 filed by Podar Organisation (P.) Ltd. are rejected.

1. The order of the Special Bench by majority, thus, is that the shares in question are capital assets, the surplus on the sale of which is liable to be taxed under the head 'Capital gains'.

2. In the result, the appeal in IT Appeal (No. 5544 (Bom.) of 1983 stands dismissed.


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