Skip to content


Addl. Commissioner of Income-tax Vs. Raj Kumari Bangur and Chandri Devi Bangur - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference Nos. 12 and 14 of 1974
Judge
Reported in[1985]154ITR868(Raj)
ActsIncome Tax Act, 1961 - Sections 45 and 48
AppellantAddl. Commissioner of Income-tax
RespondentRaj Kumari Bangur and Chandri Devi Bangur
Appellant Advocate J.P. Joshi, Adv.
Respondent Advocate C.R. Mehta, Adv.
Excerpt:
.....as ordinary shares, in that event, assistance may have to be taken of other evidence to fix the cost price of the bonus shares. 18. the question as to the method of valuation to be adopted to determine the value of bonus shares, when both original shares as well as bonus shares were sold, was also considered by their lordships of the bombay high court in w. as the original shares as well as the bonus shares ranked pari passu in the present case, the cost of bonus shares could be arrived at by spreading the cost of bonus shares over the original shares and the bonus shares taken together. it may be pointed out that the right shares as well as the bonus shares were purchased by the assessees directly from the company in consideration of the assessees already holding equity shares of the..........respect thereof in order to arrive at the average cost per share, for the purpose of computing the cost price of bonus shares. similarly, the price of bonus shares acquired by the assessee against the right shares was also arrived at by her by averaging the total price paid by the assessee for acquiring the right shares by spreading the said price equally over the right shares and bonus shares acquired on the basis thereof.5. the other assessee, smt. chandri devi bangur, also worked out the cost price of 800 bonus shares sold by her during the accounting period corresponding to the assessment year 1966-67 along with 1,200 original shares by the method of averaging the cost of equity shares and bonus shares allotted in respect thereof, as was done in the case of smt. raj kumari bangur,.....
Judgment:

Dwarka Prasad, J.

1. These two references have been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, and as identical questions of law have been referred by the Tribunal to this court for its opinion, it would be proper for us to dispose of both the references by a common order.

2. The assessees in both the cases, Smt. Raj Kumari Bangur and Smt. Chandri Devi Bangur, are investors in shares and derived their income from interest on securities and dividends. Smt. Raj Kumari purchased 5,600 shares of Indian Iron & Steel Co. Ltd. prior to 1953 @ Rs. 32.66 per share. On November 13, 1953, she purchased another lot of 4,625 shares @ Rs. 24.75 per share. In April, 1957, the aforesaid company allotted her 5,520 right shares at the concessional rate of Rs. 13.50 per share. In the year 1959, the company issued bonus shares to its shareholders at the rate of one bonus share for every five shares held by the shareholders. Thus 1,120, 925 and 1,104 bonus shares were allotted by the company to Shrimati Raj Kumari in respect of three lots of shares held by her including the right shares. Out of the aforesaid shares, the assessee sold 1,500 and 500 shares in the accounting years relevant to the assessment years 1962-63 and 1966-67, respectively, and she sold the remaining 16,894 shares in the accounting year corresponding to the assessment year 1967-68.

3. The other assessee, Shrimati Chandri Devi, purchased 4,000 shares of Indian Iron and Steel Co. Ltd. at Rs. 40.69 per share. On April 9, 1967, the assessee was offered 4,000 right shares by the company at the concessional rate of Rs. 13.50 per share, which she acquired thereafter in the year 1969. The company allotted 1,600 bonus shares to the assessee, Smt. Chandri Devi, on the basis of one bonus share for every five shares held by the assessee. Out of the aforesaid shares, the assessee gifted 1,800 and 500 shares in the years relatable to the assessment years 1962-63 and 1963-64, respectively. Thus, in all, 2,300 shares were gifted away by Smt. Chandri Devi. Of the remaining shares, she sold away 2,800 shares and 2,000 shares in the accounting years corresponding to the assessment years 1962-63 and 1966-67, respectively. The remaining 2,500 shares remained with the assessee.

4. Thus, both the assessees were in possession of three types of shares, namely, (i) original or equity shares acquired after payment of full market price of such shares ; (ii) right shares allotted by the company to the assessees at the concessional rate of Rs. 13.50 per share ; and (iii) bonus shares acquired without incurring any expenditure, at the rate of one bonus share for every five shares held by the assessees. The equity shares and right shares ranked pari passu. As mentioned, Smt. Raj Kumari Bangur disposed of the remaining 16, 894 shares held by her by sale in the accounting year corresponding to the assessment year 1967-68. The last-mentioned lot of shares included original or equity shares, right shares as well as bonus shares. The assessee claimed the value of the aforesaid shares sold by her, for the purposes of computing the capital gain under Section 48 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), by working out the cost of bonus shares by averaging the cost of acquisition of original shares in each lot separately over the shares initially acquired and the bonus shares received in relation thereto. Thus, the cost incurred by the assessee in purchasing the original shares of each lot was divided between the original shares of that lot and bonus shares allotted in respect thereof in order to arrive at the average cost per share, for the purpose of computing the cost price of bonus shares. Similarly, the price of bonus shares acquired by the assessee against the right shares was also arrived at by her by averaging the total price paid by the assessee for acquiring the right shares by spreading the said price equally over the right shares and bonus shares acquired on the basis thereof.

5. The other assessee, Smt. Chandri Devi Bangur, also worked out the cost price of 800 bonus shares sold by her during the accounting period corresponding to the assessment year 1966-67 along with 1,200 original shares by the method of averaging the cost of equity shares and bonus shares allotted in respect thereof, as was done in the case of Smt. Raj Kumari Bangur, and claimed that she suffered a loss in the transaction of 2,000 shares sold in the aforesaid assessment year. The ITO did not accept the computation of the cost of acquisition of bonus shares as calculated by both the assessees and held that in working out the income or the capital gain, the net cost incurred in acquiring the original and right shares by the assessees was to be adjusted against or deducted from the sale price, and it was erroneous to adjust the cost price of the bonus shares worked out on an average basis. The ITO held that nothing more than the actual cost price of the original and right shares could be allowed to be deducted from the sale price in working out the income or, for that matter, the capital gain of the assessee in relation to the assessment year in question. The ITO totalled up the cost price of all the shares purchased by each assessee from time to time and allotted to the assessee and deducted it from the sale price received by the assessee, in order to work out the income or capital gain of the assessee.

6. Both the assessees filed appeals before the AAC of Income-tax who discarded the computation of profit and loss made by the ITO and did not also accept the method for such computation adopted by the two assessees. The AAC computed the cost of shares and the capital gain by working out the average cost of shares sold by aggregating the original shares and bonus shares lot-wise and dividing, such cost equally between the originally purchased shares and the bonus shares. The Department felt dissatisfied with the mode of calculation adopted by the AAC of Income-tax and filed appeals before the Income-tax Appellate Tribunal in respect of assessment year 1966-67 in the case of Smt. Chandri Devi and in respect of assessment year 1967-68 in the case of Smt. Raj Kumari Bangur.

7. The contention of the Department before the Tribunal was that the price of the right shares should have been averaged with the price of the shares purchased from the open market as the market value of shares would have fallen on the issue of right shares. The Tribunal, however, did not accept the above proposition of law advanced on behalf of the Department. On the other hand, the contention advanced by the two assessees before the Tribunal was that when different lots of shares were acquired by the assessee at different rates and the shares in each lot were distinct and clearly identifiable and shares were sold with distinct and identifiable numbers, there was no justification for mixing up the shares purchased in different lots at different prices, in order to arrive at an average purchase price of the right shares and the shares purchased from the open market. The Tribunal accepted the contention advanced on behalf of the assessees and held that each lot of shares purchased by the assessees including the bonus shares was definite and ascertainable and when sales were made out of that lot, the average price of shares only in that lot including the bonus shares therein should be taken into account. Thus, according to the Tribunal, the right shares acquired by each one of the assessees along with the bonus shares allotted on the basis thereof comprised a separate lot, while the shares purchased by each one of the assessees from the open market and the bonus shares allotted on the basis thereof represented entirely a different lot of shares and there could be no averaging of the cost price of the aforesaid two lots of shares. The appeals preferred by the ITO before the Tribunal in the case of both the assessees and some other similarly situated assessees were disposed of by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by a common order dated May 9, 1972.

8. The Addl. CIT, Rajasthan, Jaipur, required the Appellate Tribunal to draw up a statement of the case and refer to this court questions of law arising out of its order dated May 9, 1972, in the case of both the assessees. The Tribunal held that the following questions of law arise out of its order dated May 9, 1972, and referred them to this court for its opinion :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the price of the right shares are not to be averaged with the price of the original shares purchased from the open market for the purpose of determining the cost of acquisition of the shares in computing the capital gain under Section 48 of the Income-tax Act, 1961 ?

2. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of acquisition of bonus shares has to be determined in terms of Section 48(ii) of the Income-tax Act, 1961, by averaging the cost of the original shares and the bonus shares received with reference to them, in one lot, and by averaging the cost of the right shares and the bonus shares, received with reference to them, in another lot '

9. A limited liability company has to state in its memorandum of association the amount of capital with which the company desires to do business and the number of shares into which the capital is to be divided. The company may not issue all its capital at one time. It may issue only a part of its capital initially and the remaining part or a portion of the unissued capital may be issued by the company on a later date. After the company does business which may result in profits, the same may be distributed amongst the shareholders by the company or may be kept in reserve. When a part of the profits is kept in reserve, the company does not keep the money in its coffers but the same is utilised in the business of the company and as a matter of fact, it represents an increase in the capital employed by the company in doing its business. When the amount of profits thus kept in reserve increases to a considerable extent, the issued capital of the company ceases to bear a true relation to the capital employed by it. Then the company may decide to increase its issued capital and declare a bonus and issue to the shareholders new certificates entitling them to an additional share in the increased capital in lieu of bonus. As a matter of accounting, the original shares and the new bonus shares taken together would yield to the shareholder the same return. However, in point of fact, what the shareholder gets is not cash by way of bonus but shares in lieu thereof, from which income in the shape of money may be derived in future. In this sense, the company does not make any payment to the shareholder in the shape of bonus but there is an increase of issued capital and the right of the shareholder to it is evidenced not by the original number of share certificates held by him but by more certificates issued to him in lieu of bonus. Thus, the conversion of the reserves of profits into capital does not involve the release of the profits to the shareholders, because the money remains with the company where it was and is continued to be employed by the company in its business ; but thereafter the company employs that money not in the shape of reserves of profits, but as a part of its capital issued to and continued (sic) by the shareholders. The bonus shares, when sold by the shareholders, may fetch more price than the face value of such shares or may fetch less value, as the value thereof varies according to the market price of the shares of that company. In this view of the matter, the share certificates in respect of the bonus shares cannot be regarded either as cash or as a voucher to receive the face value thereof nor can it represent the amount paid by the shareholder for obtaining the same, because as a matter of fact no amount at all is actually paid by the shareholder even when bonus shares are allotted to him on the basis of his equity shareholding.

10. The question of computation of the value of bonus shares arose before their Lordships of the Supreme Court in CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . It was held in that case that where bonus shares were 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 benil or their face value. Hidayatullah J., as he then was, speaking for the majority of the judges constituting the Bench of the Supreme Court, observed as under in Dalmia Investment Co. Ltd.'s case : [1964]52ITR567(SC)

'The Indian Income-tax Act defines 'dividend' and also extends it in some directions but not so as to make the issue of bonus shares a release of reserves as profits so that they could be included in the term. The face value of the shares cannot, therefore, be taken to be dividend by reason of anything in the definition. The share certificate, which is issued as bonus, entitles the holder to a share in the assets of the company and to participate in future profits. As pointed out above, if sold, it may fetch either more or less. The market price is affected by many inponderables, one such being the yield or the expected yield. The detriment to the shareholder, if any, must therefore be calculated on some principle, but the method of computing the cost of bonus shares at their face value does not accord either with fact or business accountancy.

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 fata, 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.'

12. Thus, it is clear that when bonus shares rank pari passu with the original or equity shares, the value of the bonus shares can be arrived at by spreading the amount initially spent by the shareholder in acquiring the equity shares over the original shares and the bonus shares, treating the new shares as accretions to the old shares and treating the cost price of the original shares as the cost price of the equity shares and the bonus shares taken together. However, if the shares do not rank pari passu, as for example when the company has issued preference shares as well as ordinary shares, in that event, assistance may have to be taken of other evidence to fix the cost price of the bonus shares.

13. The principle laid down by their Lordships of the Supreme Court in Dalmia Investment Co.'s case : [1964]52ITR567(SC) was reiterated by the Bombay High Court in CIT v. Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) . In that case, it was held that in the case of a dealer in shares, who values his stock at cost, where bonus shares issued in respect of ordinary shares held by him ranked pari passu with the original shares, the correct method of valuing the cost of the bonus shares to the assessee is to take the cost of the original shares and spread it over the original shares and the bonus shares collectively and find out the average price of all the shares.

14. The same view was also taken by their Lordships of the Supreme Court in CIT v. Gold Co. Ltd. : [1970]78ITR16(SC) .

15. The question of determination of the value of right shares arose before their Lordships of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1961] 63 ITR 651 In that case, the assessee, who was not a dealer in shares, held by way of investment 710 ordinary shares in Tata Iron and Steel Co. Ltd. The company issued new shares and offered the shareholders equal number of ordinary shares at a premium, with an option of either actually purchasing those shares at the prescribed rate or renouncing them wholly or partially in favour of another person and obtaining monetary gain in that transaction. The assessee thus held 710 old shares together with the right to take 710 new shares but the assessee renounced her right to the new shares and realised a monetary gain. When the amount so realised by the assessee while renouncing her right to obtain the new shares was sought to be taxed as a capital gain, the assessee claimed that on the issue of the new shares, the value of her old shares depreciated and that she was entitled to deduct from the monetary gain received by her on renouncing her right to the new shares, the loss suffered by her on account of depreciation in the market value of the old shares. The Supreme Court accepted the contention advanced on behalf of the assessee and held that the claim made by the assessee was justified because the net capital gain in the transaction, which consisted of issue of new shares together with her renouncing the right to receive new shares and receive monetary gain thereby, could only be properly computed by deducting the loss in the value of the old shares from the capital gain obtained by the renouncement of her right to receive the new shares. Their Lordships held that in working out the capital gain or loss, the principles which are part of the commercial practice or which an ordinary man of business would resort to when making computation of profit or loss for his business purposes have to be applied. However, the aforesaid decision has no bearing on the question of averaging the prices of different lots of shares actually purchased by the assessee inasmuch as the assessee did not purchase the right shares in the aforesaid case.

16. The mode of computation of income chargeable under the head 'Capital gains' has been provided in Section 48 of the Act, which runs as under :

'48. The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :--

(i) expenditure incurred wholly and exclusively in connection with such transfer ;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.'

17. Thus, in order to arrive at the capital gains, the cost of acquiring the capital asset has to be deducted from the full value of the consideration received. Sub-section (2) of Section 55 provides that for the purpose of Section 48, 'cost of acquisition' in relation to a capital asset, shall be the cost of acquisition of the asset to the assessee or the fair market value of the assets.

18. The question as to the method of valuation to be adopted to determine the value of bonus shares, when both original shares as well as bonus shares were sold, was also considered by their Lordships of the Bombay High Court in W.H. Brady & Company Ltd. v. CIT : [1979]119ITR359(Bom) . In that case, the assessee bought 670 shares of a company and on account of the possession of those shares, he acquired further 670 shares as bonus shares. Thereafter, the assessee bought further 765 shares of the company and thus he had a total holding of 2,105 shares of the company. Thereafter, the assessee received another lot of 2,105 shares as bonus shares. The assessee further acquired 4,623 shares. Thereafter, the assessee sold all the shares. The Bombay High Court, following the decision of their Lordships of the Supreme Court in Dalmia Investment Co.'s case : [1964]52ITR567(SC) held that where the existing shares and the bonus shares ranked pari passu, the proper method of valuation of the bonus shares 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 shares as accretions to the original shares and treating the cost of the original shares as the cost price of the old shares and bonus shares taken together. It was thus held that the cost incurred by the shareholder in obtaining the original shares should be spread over that lot of shares possessed by the assessee, including the original shares and the bonus shares and to work out the average cost of all those shares taken together.

19. The question of the method to be adopted for valuing bonus shares, in computing the loss or profit arising from the sale of bonus shares, arose before their Lordships of the Calcutta High Court in CIT v. Kishore Trading Co. Ltd. : [1982]138ITR527(Cal) . Sabyasachi Mukharji J., as he then was, held that where bonus shares were issued in respect of ordinary shares held in a company by an assessee, who was a dealer in shares, the real cost to the assessee could neither be taken to be nil nor could it be taken according to their face value. Their Lordships held that those shares have to be valued by spreading over the cost of the original shares over the original shares and bonus shares taken together, if they ranked pari passu and if they did not, then the price might have to be adjusted either in proportion to the face value of such bonus shares or on equitable considerations based on the market price before and after the issue of the bonus shares. It was further held in the aforesaid case that the subsequent issue of bonus shares did not affect, alter or dilute the cost of acquisition of the original shares.

20. In our view, the decision of their Lordships of the Supreme Court in Dalmia Investment Co. Ltd.'s case : [1964]52ITR567(SC) has concluded the question relating to the valuation of bonus shares. As the original shares as well as the bonus shares ranked pari passu in the present case, the cost of bonus shares could be arrived at by spreading the cost of bonus shares over the original shares and the bonus shares taken together.

21. The decision in Kapadia's case : [1967]63ITR651(SC) to our mind has no bearing on the question of averaging the price of different lots of shares actually purchased by the assessee nor are we prepared to accept the argument of the learned counsel for the assessees that each lot of shares should be considered as distinct and different identifiable units for the purpose of arriving at the average purchase price. It may be pointed out that the right shares as well as the bonus shares were purchased by the assessees directly from the company in consideration of the assessees already holding equity shares of the company. In our view, the price of the bonus shares received by the assessees on the basis of the original shares purchased by them from the open market, has to be determined by spreading over the cost of the original shares over the original or equity shares and bonus shares taken together. Similarly, the price of bonus shares issued to the assessees on the basis of their holding right shares has to be computed by averaging the cost of the right shares and spreading the same over the right shares and bonus shares issued in respect thereof, taken together. In this view of the matter, the Tribunal appears to be justified in holding that the price of the right shares was not required to be averaged with the price of the original shares purchased by the assessees from the open market, for the purpose of determining the cost of acquisition of shares, while computing the profit or loss or, for that matter, the capital gain of the assessees under Section 48 of the Act. We may point out that the original shares and the right shares do not stand on the same footing inasmuch as the original shares were purchased by the assessees from the open market, while the right shares were allotted by the company on the basis of the original shares held by the assessees. Moreover, the original shares were purchased after payment of full market price thereof while the right shares were allotted by the company at the concessional rate of Rs. 13*50 per share. Therefore, there could be no question of averaging the price of right shares and original shares for the purpose of determining the cost of acquisition of those shares. At the same time, it may be observed that the right shares do not stand on the same footing as the bonus shares as the right shares are allotted to the shareholders by the company on payment of concessional price but bonus shares are given to the existing shareholders without payment of any price for them. It may also be pointed out that the right shares are not identical in nature to bonus shares because whereas the bonus shares are allotted out of accumulated undistributed profits and do not affect the value of the original shares, the right shares are issued out of undistributed capital which is offered for sale in the first instance to the existing shareholders. If, however, the holders of equity shares fail to buy the right shares, the company would be free to offer them to the general public. As such, it would not be proper to aggregate the cost of acquiring original shares with the price paid for right shares, in order to arrive at the cost of acquisition of the shares for the purpose of computing the capital gain under Section 48 of the Act. Therefore, the price of the right shares could not be averaged with the price of the original shares purchased from the open market. The first question referred to us is thus answered in the affirmative.

22. As already observed above, the principles enunciated by their Lordships of the Supreme Court in Dalmia Investment Co.'s case : [1964]52ITR567(SC) have been rightly applied by the AAC and the Appellate Tribunal for the purpose of determining the cost of acquisition of bonus shares, by averaging the cost of original shares and spreading over the same to the original shares and bonus shares received by the assessee in respect thereof, taken together. Similarly, the cost of the bonus shares issued in relation to the right shares was also properly arrived at by averaging the cost of right shares and spreading over the same to the right shares and bonus shares allotted to the assessees with reference to them, taken together in another lot. In this view of the matter, we are of the opinion that the method of accounting adopted by the Appellate Tribunal in arriving at the cost of acquisition of bonus shares, received by both the assessees, in respect of the original shares as well as the right shares, was legally justified.

23. In the result, the second question is also answered in the affirmative.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //