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Commissioner of Income-tax (Central-ii) Vs. General Investment Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 276 of 1977
Judge
Reported in(1981)20CTR(Cal)282,[1981]131ITR366(Cal)
ActsIncome Tax Act, 1961 - Sections 45, 46, 48, 49, 53, 54B, 54D, 55, 55(2), 147 and 256(1)
AppellantCommissioner of Income-tax (Central-ii)
RespondentGeneral Investment Co. Ltd.
Appellant AdvocateB.K. Bagchi and ;A.N. Bhatacharjee, Advs.
Respondent AdvocateDebi Pal, ;R. Murarka and ;A.K. Dey, Advs.
Cases ReferredCo. Ltd. v. Commissioner of Income
Excerpt:
- sabyasachi mukharji, j.1. in this reference under section 256(1) of the i.t. act, 1961, the following question has been referred to this court for the assessment year 1972-73 :'whether, on the facts and in the circumstances of the case, the tribunal was right in holding that in computing the capital gains arising from the sale by the assessee of 1,600 bonus shares of hastings mills ltd., rs. 41,200 should be allowed as the cost of the said shares '2. the assessment year involved, as we have mentioned before, is the assessment year 1972-73. the assessee purchased 2,000 shares of m/s. hastings mills ltd. in the year 1948 at the rate of rs. 103 per share. the entire holding of 2,000 original shares were sold by the assessee on february 7, 1959, at the rate of rs. 104 per share. before this.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court for the assessment year 1972-73 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the capital gains arising from the sale by the assessee of 1,600 bonus shares of Hastings Mills Ltd., Rs. 41,200 should be allowed as the cost of the said shares '

2. The assessment year involved, as we have mentioned before, is the assessment year 1972-73. The assessee purchased 2,000 shares of M/s. Hastings Mills Ltd. in the year 1948 at the rate of Rs. 103 per share. The entire holding of 2,000 original shares were sold by the assessee on February 7, 1959, at the rate of Rs. 104 per share. Before this transaction, it has to be mentioned that in the year 1951, the assessee received 2,000 bonus shares in the ratio of one bonus share for each ordinary share. In respect of the sale made on February 7, 1959, the assessee claimed capital loss of Rs. 42,000 in the assessment for the assessment year 1960-61 by substituting the market price as on January 1, 1954, which was Rs. 125 per share for the cost price at Rs. 103 per share. The assessee's claim was allowed in the assessment for the assessment year 1960-61. This was in respect of the original shares held by the assessee which were purchased in 1948, as mentioned hereinbefore. The total cost of the shares had been considered in the assessment for the assessment year 1960-61. As mentioned hereinbefore, in 1951, the company, M/s. Hastings Mills Ltd., issued bonus shares in the proportion of one bonus share for each ordinary share. As a result, the assessee had received 2,000 bonus shares in the year 1951. In the year 1967, M/s. Hastings Mills Ltd. again issued bonus shares in the ratio of 1: 1 with the result the assessee got another 2,000 bonus shares in respect of 2,000 ordinary shares which the assessee was then holding which had been received in 1951, as mentioned hereinbefore. It was out of the second set of 2,000 bonus shares that the assessee sold 1,600 bonus shares for Rs. 1,60,200 during the previous year relevant to the assessment year 1972-73. The assessee claimed that the capital gain arising out of this sale should be computed by taking the average price of the original shares and bonus shares by, spreading the cost of the original shares over the original shares and the bonus shares together with the cost per share of 1,600 bonus shares sold. The assessee, accordingly, claimed deduction of Rs. 41,200 as the cost of 1,600 bonus shares from the sale price of Rs. 1,60,200 in computing capital gains. The ITO, however, held that the cost of the bonus shares sold should be taken as nil since the entire cost of the original shares had also been considered in computing the assessee's capital loss arising out of the sale of 2,000 original shares in the assessment for the assessment year 1960-61. The ITO, therefore, did not allow the deduction claimed by the assessee and added Rs. 41,200 to the capital gains of Rs. 1,19,000 disclosed by the assessee as arising out of sale of 1,600 bonus shares. The assessee preferred an appeal before the AAC. The AAC, after discussing the facts mentioned hereinbefore, noted the respective contentions and relying on the decision of the Supreme Court in the case of CIT v. Dalmia Investment. Co. Ltd. : [1964]52ITR567(SC) directed the ITO to determine the cost of the bonus shares received in the year 1967 on the basis of the principles laid down by the Supreme Court in the said decision and to recompute on that basis the capital gains arising out of the sale of 1,600 bonus shares.

3. In this connection, it may be instructive to set out the basis of the argument of the assessee made before the AAC. The assessee had shown long-term capital gains of Rs. 1,20,015 and long-term capital loss of Rs. 53,607, thus arriving at a net capital gain of Rs. 66,408, which was shown in the return. In arriving at the long-term capital gains, the assessee had taken the average cost of 1,600 bonus shares of M/s. Hastings Mills Ltd. at Rs. 25.75. The ITO had found that the assessee had purchased 2,000 shares of the above company at Rs. 103 per share in 1948. The entire 2,000 original shares of M/s. Hastings Mills Ltd. were sold on February 7, 1959, at Rs. 104 per share, as mentioned hereinbefore. Therefore, the basis on which the assessee had computed the value of the bonus shares sold in the year under reference was at Rs. 103 which depreciated by the issue of bonus share to roundabout Rs. 52 per share. This again was further diluted by the issue of 2,000 bonus shares on the bonus shares held by the assessee. Therefore, the value of the bonus shares got depreciated to half, and half of that value was worked out at Rs. 25.75.

4. The revenue being aggrieved by the decision of the AAC preferred an appeal before the Tribunal. Before the Tribunal, on behalf of the revenue, it was urged that the ratio of the decision of the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) had no application to the facts of the present case inasmuch as the entire holding of the original shares was sold by the assessee long before the bonus shares in question were sold and, therefore, the entire cost of the original shares was considered in the assessment for the assessment year 1960-61. According to the assessee, in assessing the capital loss arising out of the sale of the entire holding of the original shares, the question of spreading that cost over the original shares and the bonus shares according to the decision of the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) did not arise. In this situation, it was urged that the ITO was justified in taking the cost of 1,600 bonus shares sold during the relevant previous year to be nil. On behalf of the assessee, it was on the other hand contended that the mere fact that the entire cost of the original shares had already been considered in the assessment year could not have the effect of reducing the cost of the bonus shares to nil. It was submitted that the ratio of the decision in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) and in the case, CIT v. Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) would apply to the present case and the AAC was justified in accepting the said contention of the assessee and deleting the above. After referring to the relevant decisions, the Tribunal came to the conclusion that the direction given by the AAC was justified in law and in accordance with the principles enunciated by the Supreme Court in the decision in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) .

5. Upon this, the question as indicated above has been referred to this court under Section 256(1) of the I.T. Act, 1961. The basic fact that has to be borne in mind in the instant case is that we are concerned about the sale of 1,600 shares out of the second lot of bonus shares issued to the assessee. This second lot of bonus shares was issued to the assessee in 1967 by virtue of the assessee's holding of 2,000 shares issued in 1951. On that account, the assessee had acquired that right by virtue of its holding of shares on that date which were 2,000 shares purchased in 1948. Before we consider this question it would be appropriate to bear in mind the relevant provisions of the Act. Section 45 of the I.T. Act, 1961, enjoins that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54B and 54D, be chargeable to income-tax under the head ' Capital gains ' and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 of the Act provides for mode of computation and deductions which enjoins that 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.

6. Section 55 of the Act provides for the meaning and definition of certain terms and Sub-section (2) of Section 55 deals with the expression 'cost of acquisition' in Sections 48 and 49 in relation to a capital asset and the relevant provisions with which we are concerned in Sub-section (2) of Section 55 are as follows:

'(2) For the purposes of sections 48 and 49, 'cost of acquisition ', in relation to a capital asset,--

(i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee ;

(ii) where the capital asset became the property of the assessee by any of the modes specified in Sub-section (1) of Section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1954, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee ;

(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head 'Capital gains ' in respect of that asset under section 46, means the fair market value of the asset on the date of distribution. '

7. Therefore, under Clause (i) of Sub-section (2) of Section 55 it is only where the capital asset became the property of the assessee before the 1st day of January, 1954, that the assessee has an option of having either the cost of acquisition of the asset or the fair market value of the asset on the 1st day of January, 1954. That option, however, is not available to the assessee where the capital asset is acquired after the 1st of January, 1954, as the Act stood at the relevant time. Therefore, in order to merit deduction under Section 48 from the computation of the capital gains the cost of acquisition of the asset to the assessee will have to be deducted. It is, therefore, necessary in this case as the bonus shares with which we are concerned had been acquired after the 1st of January, 1954, because the bonus shares sold were acquired in the year 1967, as mentioned hereinbefore, to determine what was the cost of acquisition of such asset to the assessee.

8. Before we proceed to decide the principles which, from time to time, have been enunciated by different courts as to how to value the cost of acquisition of bonus shares, it is perhaps desirable to remember one salutary principle that in these matters one should proceed as a prudent commercial man. In the case of Miss Dhun Dadabhoy Kapadia v. CIT : [1967]63ITR651(SC) , the Supreme Court was dealing with the question of capital gains in respect of new shares offered to a holder of shares in the company with a right to renew. The question was as to how the new shares should be valued. At p. 655 of the report, the Supreme Court referred to the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , a decision to which we shall have to refer presently, to the view of the High Court which had expressed the view that the principles of accountancy applicable to valuation of such right who received new shares issued by the company were not applicable when computation had to be made for the purpose of taxation. The Supreme Court was unequivocal in observing that they were unable to accept this proposition. The Supreme Court reiterated that in working out the capital gain or loss, the principles that have to be applied were those which were part of the commercial practice or which an ordinary man of business would resort to when making computation for its business purposes. The Supreme Court referred, with approval, to the principles enunciated in the decision in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . Learned advocate for the revenue, however, tried to urge that the Supreme Court while reiterating the principles enunciated in the case of, CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , had not taken note of the fact that the Dalmia Investment case was not a case which dealt with valuation of bonus shares for the purpose of computation of capital gains but it was dealing with the question of valuation in respect of a dealer in shares. We are, however, unable to appreciate the significance of the difference highlighted by the learned advocate for the revenue. 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 principle. 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. It is perhaps in this background that the Supreme Court of the United States of America observed, quoting from an earlier decision, in the case of Eisner v. Macomber [1920] 252 U.S. Report 189 ; 64 LE 521, a decision which has been referred to withapproval by the Supreme Court (of India) in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , inter alia, as follows (p. 579):

' ' 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....... Theproportional 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 thechange, it certainly was not an advantage of 417,450, the sum upon which he was taxed......What has happened is that the plaintiff's old certificateshave 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 apart of his capital interest, just as if 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 '.'

9. In the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , a question arose as to how the bonus shares issued in respect of ordinary shares held in a company by an assessee who was a dealer in shares, would be valued and whether the real cost to the assessee could be taken to be nil or their face value. The majority view was that these should be valued by spreading the cost of the old shares over the old shares and the new issue, that is to say, the bonus shares taken together if they ranked pari passu, as they did in the present case before us, and if they did not, the price might have to be adjusted either in proportion to the face value they bear, if there was no other circumstances to differentiate them or on equitable considerations based on the market price before and after issue. Mr. Justice Sarkar, in a dissenting judgment, however, held that in such cases the bonus shares should be valued on the date when they were so acquired. The valuation of the cost of the bonus share, if we have understood correctly the principle that was being highlighted by the Supreme Court in the aforesaid decision, is the diminution or the deprivation of the value of the shares at that time being held by an assessee. Learned advocate for the revenue tried to emphasise that that was a decision dealing with shares not in connection with the valuation or computation of cost of acquisition for the purpose of capital gains. We are, however, unable to appreciate the significance of this difference. The cost ofacquisition would be the same in the case of a dealer of shares and in the case who is not a dealer of shares.

10. Another point which the learned advocate for the revenue tried to urge was that in the case of cost the question arose in the background of the fact that at the time the assessee was holding both the original shares as well as the new bonus shares, therefore, the cost of new bonus shares could be valued by spreading over the cost of the original shares taken together, the cost of the new shares. But in case, learned advocate for the revenue emphasised, the original shares had been sold off or disposed of before the bonus shares were issued, then this principle would not be applicable. We are also unable to appreciate this argument. A bonus share is always issued and can only be issued to the holder of a share. But that holder of a share may be of either the original share or a bonus share subsequently issued to an original shareholder by virtue of holding the original share. The bonus shares are issued or subsequently additional bonus shares are issued to the holders of bonus shares (sic), the shareholder be he the original shareholder or the bonus shareholder. Incidentally, it may be emphasised that after the issue of the bonus share the significance of difference of bonus shareholding as such disappears because the shares rank pari passu and after the issue of the bonus share the holder becomes a holder of share though the character of the share may originally have been the bonus share. Therefore, the moment some new shares are issued or there is new additional bonus shares, there is diminution in the value of the shares that have been held by the shareholders. In that case, the Supreme Court was dealing with, as we have mentioned hereinbefore, with the question how the bonus shares should be valued of an assessee who carried on business in shares. The assessee was a public limited company and the bonus shares were issued in the calendar year by another company in the year 1945 by Rohtas Industries Ltd., in the proportion of one bonus share for one ordinary share already held by the shareholders. In this way, the assessee-company received 31,909 bonus shares of the face value of Rs. 10 per share which showed that its previous holding was 31,909 existing ordinary shares. The existing ordinary shares were purchased by the assessee-company for Rs. 5,85,283 for the assessment year 1949-50, which corresponded to the accounting period of the assessee-company, being the calendar year 1948. The assessee-company was holding shares as investment and was also dealing in shares. The shares in the trading account, being the stock-in-trade, were valued at the beginning of the year and also at the end of the year and the book value was based on cost. Between December 31, 1945, and January 1, 1948, the assessee-company sold some shares of Rohtas Industries Ltd. and bought others. Its holding on the first day of January, 1948, was 1,10,747 shares, which were valued in its books atRs. 15,57,902. The assessee-company sold these shares on January 29, 1941, to Dalmia Cement and Paper Marketing Co. for Rs. 15,50,458. This date fell within the period in which capital gains were taxable. The question was, how the shares should be valued. The revenue contended that this should be nil. The Supreme Court considered whether this bonus shares could be considered as gift or were acquired for nothing. The Supreme Court, however, examined four different methods of valuing bonus shares and was of the view that the bonus shares in such cases should be valued by spreading the cost of old shares over the old shares and the new shares. The principle, as we have mentioned before, must be that by the issue of the bonus shares, there is diminution in value of the ordinary shares. Prior to this, in another decision, in a different context, the Supreme Court had to consider this aspect in the case of Emerald & Co. Ltd. v. CIT : [1959]36ITR257(SC) . In that case, at the beginning of the accounting year, the assessee held 100 shares in a company which it had purchased for the sum of Rs. 48,359 and 50 bonus shares of the face value of Rs. 250 each. During that year, the assessee purchased 200 more shares of the company for Rs. 99,939 and later sold the 300 shares for a total sum of Rs. 1,20,550. At the end of the accounting year, the bonus shares remained with the assessee. The assessee claimed a loss of Rs. 35,801 for that year by valuing the bonus shares at their face value, while the ITO arrived at a loss of Rs. 27,766 by the method of averaging the price of shares. The Appellate Tribunal adopted a third method by which 50 bonus shares were completely ignored and the loss was arrived at by considering solely the purchase price of 300 shares and the proceeds realised by their sale. On a reference, the High Court held that the method adopted by the Appellate Tribunal was erroneous and upheld the method of valuation adopted by the ITO. On a further appeal to the Supreme Court, it was held that for the purpose of assessing the loss for the accounting year the question of the proper method of valuing the bonus shares was not relevant as these were not sold and were still retained in the hands of the assessee at the relevant time. In those circumstances, the Supreme Court held that the method of valuation adopted by the Appellate Tribunal was the correct method and the loss as calculated by the Tribunal was correct and according to law. The Supreme Court, at pages 261-262 of the report observed as follows:

' In our opinion, the Tribunal's calculation is according to law and correct. What the bonus shares cost is not the question at the present moment. They may have cost Rs. 12,500 as the assessee-company claims, or nothing as stated by the Income-tax Officer or even something else according to some other principle. The bonus shares are still there, and have not been sold. When they are sold, the question will arise as towhat they cost. The books of the assessee-company, as stated in the statement of the case, include the closing stock at cost price. In calculating profit and loss in the manner done by the Tribunal, there is no departure from this system. All the ordinary shares which were bought were sold. Their purchase price is known, as also their sale price. The first assessment is closed, so far as the assessee-company is concerned. The trading loss in the second assessment year is calculated on the purchase price of the 300 shares bought and sold, and it is Rs. 27,748. The loss, therefore, was calculated according to law, leaving out of consideration the price of 50 bonus shares, what it is and if any. These questions are left open.'

11. Referring to this judgment, learned advocate for the revenue drew our attention to certain observations in Kanga and Palkhivala's The Law and Practice of Income Tax, 7th Edn. Vol. I, page 876, where the learned editors have observed as follows :

' In Emerald & Co. Ltd. v. CIT : [1959]36ITR257(SC) , the Supreme Court, reversing the Bombay High Court, upheld the Tribunal's order which proceeded on the basis that when an assessee sells the original shares which had been purchased by him and retains the bonus shares allotted subsequently, the profit or loss should be computed by deducting the full purchase price of the original shares from their sale price, ignoring the bonus shares altogether. It is difficult to reconcile this case with the ratio of Dalmia Investment according to which the Supreme Court should have upheld the ITO's computation and affirmed the High Court's decision : [1956]29ITR814(Bom) .'

12. The Supreme Court itself, we find, had an occasion to explain this position that there was no apparent conflict between these two decisions in the case of CIT v. Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) . There, the Supreme Court held in the case of a dealer in shares, who valued his stock at cost, where bonus shares issued in respect of ordinary shares held by him rank pari passu with the original shares, the correct method of valuing the cost to the dealer of the bonus shares was to take the cost of the original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares. It was argued before the Supreme Court that there was an apparent conflict between the decision of the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) and the decision in the case of Emerald & Co. Ltd. v. CIT : [1959]36ITR257(SC) . The Supreme Court negatived that contention at p. 66 of the report in the following words:

' These cases would normally have been decided on the strength of the ruling of this court but a doubt arose because in an earlier decision inEmerald 6 Co. Ltd. v. Commissioner of Income-tax : [1959]36ITR257(SC) this court seemed to have approved of another method. In that case the bonus shares were not sold. In applying different methods, the difference was only Rs. 18 and the court did not, therefore, express a final view on the matter and accepted the calculation of the Tribunal which was to ignore the bonus shares which were not sold and to calculate the profit and loss on the basis of the original shares, their cost and sale prices. The court observed as follows :

' The bonus shares are still there, and have not been sold. When they are sold, the question will arise as to what they cost. The books of the assessee-company, as stated in the statement of the case, include the closing stock at cost price. In calculating profit and loss in the manner done by the Tribunal, there is no departure from this system. All the ordinary shares which were bought were sold, their purchase price is known, as also their sale price. The first assessment is closed, so far as the assessee-company is concerned.' 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 Dalmia's case and every method of calculation was considered there. We were invited to depart from the decision in Dalmia's case : [1964]52ITR567(SC) and to take the view which appeared to have been taken in Emerald's case : [1959]36ITR257(SC) . We have considered the matter once again and are of opinion that the method followed in 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.'

13. The Supreme Court reiterated, in other words, the principle enunciated by the Supreme Court in its decision in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . Learned advocate for the revenue again stressed before us that that was a decision dealing with the cost of valuation of shares in the context of dealer in shares as to how he should value the shares at the closing stock and not the computation of cost of acquisition of asset in the case of capital gains. But this, as we have mentioned before, is of no significance.

14. Our attention was also drawn to a decision of the Supreme Court in the case of Shekhawati General Traders Ltd. v. ITO : [1971]82ITR788(SC) . There, the Supreme Court reiterated that for the purpose of computing the capital gains in the sale of certain bonus shares issued to the assessee prior to January 1, 1954, the assessee had exercised its option under Sections 55(2) of the I.T. Act, 1961, to take their fair market value prevailing on January 1, 1954, in place of the cost price of the shares and the assessment was made accordingly and capital loss was computed. Thereafter, the ITO issued a notice of reassessment under Section 147 of the I.T. Act, 1961, proposing to reopen the assessment on the ground that subsequent to January 1, 1954, further bonus shares were issued to the assessee in respect of the shares held by it. It was held by the Supreme Court that for the ascertainment of the fair market value of the shares in question on January 1, 1954, any issue of bonus shares subsequent to that date was wholly extraneous and irrelevant and could not be taken into consideration. The assessee was bound to disclose under Clause (a) of Section 147 of the I.T. Act, 1961, only such material facts which were necessary for assessment for the relevant assessment year and not those facts which were wholly extraneous or irrelevant for the purpose of assessment. Under Clause (b) of Section 147 the information had to be such as would lead to the ITO to believe that income chargeable to tax had escaped assessment. The information in this case relating to the acquisition of bonus shares subsequent to January 1, 1954, could not possibly furnish any reason to the ITO to form the belief that income chargeable to tax had escaped assessment for the relevant assessment year. The ITO had, therefore, no jurisdiction, the Supreme Court held, to initiate reassessment proceedings under Section 147. At page 792 of the report, the Supreme Court held that the facts of that case were distinctly different from the facts in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . But in the case of Shekhawati General Traders Ltd. v. ITO : [1971]82ITR788(SC) , the Supreme Court had to confine itself to the express provisions of Section 55(2) relating to the manner in which the cost of acquisition of capital asset had to be determined for the purpose of s. 48. Where the capital asset became the property of the assessee before January 1, 1954, the assessee had two options. It could decide whether it wished to take the cost of acquisition of asset to it as the cost of acquisition for the purpose of Section 48 or the fair market value of the asset on January 1, 1954. The word ' fair ' market value, reiterated by the Supreme Court, appeared to have been used to indicate that any artificially inflated value was not to be taken into consideration. In the last-mentioned case, it was common ground that when the original assessment was made, the fair market value of the shares in question had been duly determined and accepted as correct by the ITO.Under no principle or authority could anything more be read into the provisions of Section 55(2)(i) in the manner suggested by the revenue in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . But this observation, in our opinion, has no relevance or significance in the context and in the facts of the present case. Here, the bonus shares that were the subject-matter of computation of capital gains were subsequently issued and were issued in respect of the bonus shares in respect of the original shares. The original shares, when they were issued, were issued prior to January 1, 1954. The assessee had the option to take it at their cost or at the fair market value. The assessee chose to value them at fair market value because they had been acquired before January 1, 1954, in respect of the original shares. At that time no question of valuation of the bonus shares arose. Now, the question is the additional shares which are being sold and what would be the cost of acquisition. These bonus shares which had been sold and the shares which the assessee held were all acquired had to be spread over and the value determined accordingly and that is the value which the Tribunal has adopted and followed and we think in principle that is the correct value because by issue of the additional bonus shares--the value of bonus shares originally being issued to the assessee when these additional bonus shares were being issued which were the subject-matter of the transaction in the present case--there was diminution in the value of the original shares. We have indicated the actual break-up of the value.

15. Reliance was also placed on the case of Sutlej Cotton Mills Ltd. v. CIT : [1979]119ITR666(Cal) . There the question was whether in determining the cost of acquisition of the original shares on which bonus shares had been issued, it could not either be the actual cost of acquisition or at the choice of the assessee to a market value on January 1, 1954. When an assessee had elected to adopt a market value as on January 1, 1954, for the purpose of computation of capital gain or loss for the transfer of its originally acquired shares he was in effect substituting the original cost of acquisition of such shares by another amount as allowed by the statute and the capital gains on the transfer had to be calculated at such cost. Subsequent issue of bonus shares did not affect, alter or dilute the cost of acquisition of the original shares. It was held on the facts of that case that the Tribunal was not justified in holding that the cost of acquisition of the original shares should be determined on the basis of averaging the cost of original shares and the bonus shares received thereon. The facts of that case, as we have mentioned before, were distinctly similar to the facts of the instant case. Here, we are not concerned with the cost of the original shares. Here, we are concerned with the cost or the value of the subsequently acquired bonus shares, subsequently in the sense that bonus shares acquired by virtue of the holding of the original bonus shares to the share-holder in question. Secondly, at the time when the valuation was made, which was taken at the option of the assessee as fair market value, which the assessee elected was only in respect of the original shares. Therefore, this principle would not be applicable, in view of the facts and circumstances of this case, to the instant case.

16. Having regard to the principle enunciated by the Supreme Court in the case referred to hereinbefore and in view of the facts and circumstances of the instant case, we are of the opinion that the Tribunal was right in its conclusion and the question referred to us must be answered in the affirmative and in favour of the assessee.

17. In the facts and circumstances of the case, there will, however, be no order as to costs.

Sudhindra Mohan Guha, J.

18. I agree.


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