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Commissioner of Income-tax, Central-ii Vs. Kishore Trading Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 272 of 1977
Judge
Reported in(1981)23CTR(Cal)218,[1982]138ITR527(Cal)
ActsIncome Tax Act, 1961 - Section 256(1)
AppellantCommissioner of Income-tax, Central-ii
RespondentKishore Trading Co. Ltd.
Appellant AdvocateB.K. Bagchi and ;B.K. Naha, Advs.
Respondent AdvocateDebi Pal and ;R. Murarka, Advs.
Cases ReferredEisner v. Macomber
Excerpt:
- .....is to say, at the rate of rs. 960 per share. by virtue of its shareholding, the assessee got 160 bonus shares in the said company allotted to it on 31st december, 1948. the assessee sold all its original shares by the end of the accounting year relevant to the assessment year 1952-53. the assessee sold 76 shares, 25 shares and 100 shares (original shares) of the aforesaid company in the accounting years relevant to the assessment years 1950-51, 1951-52 and 1952-53. in the assessment for these assessment years, the profit and loss resulting from the sales of the aforesaid shares was determined on the basis of the cost of these shares at rs. 960 per share. but in those years as well as in the subsequent years, the assessee was valuing the closing stock of its bonus shares at the end of.....
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:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the profit or loss arising from the sale of 160 bonus shares of M/s. Kamarhati Co. Ltd., a sum of Rs. 85,233 should be deducted as the cost of the said shares from the sale proceeds ?'

2. The question arises in respect of the assessment for the assessment year 1972-73. The assessee is a dealer in shares and was holding 200 ordinary shares of M/s. Kamarhati Co. Ltd. as stock-in-trade. These shares were acquired by it at Rs. 1,92,000, that is to say, at the rate of Rs. 960 per share. By virtue of its shareholding, the assessee got 160 bonus shares in the said company allotted to it on 31st December, 1948. The assessee sold all its original shares by the end of the accounting year relevant to the assessment year 1952-53. The assessee sold 76 shares, 25 shares and 100 shares (original shares) of the aforesaid company in the accounting years relevant to the assessment years 1950-51, 1951-52 and 1952-53. In the assessment for these assessment years, the profit and loss resulting from the sales of the aforesaid shares was determined on the basis of the cost of these shares at Rs. 960 per share. But in those years as well as in the subsequent years, the assessee was valuing the closing stock of its bonus shares at the end of each year at nil. In the previous year, relevant to the assessment year under reference 1972-73, the assessee sold all the 160 bonus shares of M/s. Kamarhati Co. Ltd. In the profit and loss account of the year, the assessee credited the profit resulting from the sale of these shares by valuing the cost at nil, just as it was valuing the closing stock of these shares at nil at the end of each year. The profit and loss account of that year disclosed a loss of Rs. 3,17,484. But, in the return filed for the assessment year, the assessee claimed that the loss disclosed in the profit and loss account should further be enhanced by Rs. 87,516, on the ground that by mistake the profit resulting from the sale of 160 bonus shares of M/s. Kamarhati Co. Ltd. was credited in the profit and loss account by taking the cost of these shares as nil whereas the cost of these shares should be taken at Rs. 87,516. The assessee claimed that the cost of 200 original shares should be spread over these shares and also the 160 bonus shares in order to determine the cost of 160 bonus shares and that if it was so spread the cost of 160 bonus shares would be Rs. 87,516 and not nil as accounted for by the assessee in the accounts. The ITO rejected the assessee's contention.

3. There was an appeal before the AAC. The AAC reversed the decision of the ITO and directed the ITO to determine the cost of the bonus shares sold in the light of the principles laid down by the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , and determine afresh the profit and loss account arising out of the sale of shares on that basis.

4. Being aggrieved by the said decision of the AAC, the Revenue preferred an appeal before the Tribunal. The Tribunal, after noting the rival contentions, observed in its order as follows :

'We have given due consideration to these rival submissions. We are in agreement with the view of the Appellate Assistant Commissionerthat the method of accounting or the manner of valuation adopted by the assessee was not conclusive and that the Income-tax Officer should determine the profit or loss accruing from any transaction according to law irrespective of the method of accounting or mode of valuation adopted by the assessee. Nothing would, therefore, turn upon the fact that the assessee was valuing his closing stock of the bonus shares at nil in his accounts, if under the law the bonus shares had some value and that value should be computed in a particular manner in arriving at the profit resulting from the sale thereof. In CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , we have the authoritative pronouncement of the Supreme Court to the effect that the value of bonus shares could neither be taken as nil nor at their face value and that their cost could be determined at the average price arrived at by spreading the cost of the original shares, in a case where the bonus shares ranked pari passu with the original shares. This principle was reiterated by their Lordships of the Supreme Court in their subsequent ruling in CIT v. Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) . The fact that all the original shares were already sold out and that in determining the profit from the sale of the original shares in the earlier years the assessee was given the benefit of deduction of their entire cost from the sale proceeds would not make any difference, in our opinion, to the applicability of the principle laid down by their Lordships of the Supreme Court in the aforementioned cases : [1964]52ITR567(SC) and : [1969]74ITR62(SC) , so far as determination of the cost of the bonus shares is concerned. A careful reading of these rulings would go to show that the bonus shares must be deemed to have been obtained at some cost and not free, since, as a consequence of the issue of the bonus shares the original shares suffered some detriment in the sense of depreciation of their value in the market and that the cost of the bonus shares could be determined at the average price arrived at by spreading the cost of the original shares over the original snares and bonus shares if the bonus shares ranked pari passu with the original shares. But the spreading of the cost of the original shares over the original shares and the bonus shares is only for the purpose of determining the cost of the bonus shares and it does not in any way affect the cost of the original shares. Whatever was the price at which the original shares were acquired must be taken as their cost even after the issue of the bonus shares. There is nothing in the ruling of the Supreme Court (supra) to suggest that the determination of the cost of the bonus shares by the method of spreading the cost of the original shares over the original shares and the bonus shares is subject to the cost of the original shares being reduced pro rata or the original shares remaining unsold by the time of sale of the bonus shares. We are, therefore, of the opinion that the fact that all the original shares were alreadysold out in the earlier years and the profit from the sale of the original shares was worked out in the earlier years by taking as their cost the entire price at which these shares were purchased would not have the effect of reducing the cost of the bonus shares at nil. That is because, as stated already, law attaches cost to bonus shares because of the depreciation in the market value suffered by the original shares as a consequence of the issue of the bonus shares but law does not enjoin any reduction of the cost of the original shares for the purpose of determining the profit arising from the sale of those shares. In our judgment, the AAC was justified in applying the ratio of the decision of the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , to the instant case. We, therefore, see no reason to interfere with the decision of the AAC on the issue agitated before us.'

5. Out of the aforesaid order, the aforesaid question, as indicated before, has been referred to this court. On behalf of the Revenue, it was contended that the valuation is a method of accounting and whatever was valued as the closing stock of the previous year must be the value of the opening stock of the next year and there might be a change made during the year for any good reason and the decision of the Supreme Court might be a good reason, but in this case no such change, according to the Revenue, had been made. Learned advocate for the Revenue further submitted that the Tribunal was wrong in following the principles enunciated by the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , in this case, where the assessee was following the particular method and the assessee had not changed that method during the year of accounting. In support of this contention reliance was placed on the decision of this court in the matter of Chouthmal Golapchand : [1938]6ITR733(Cal) . There the Division Bench of this court reiterated the principle, as the stock was at all previous times valued at cost price and was brought into the balance-sheet at the beginning of the year at its cost price and when it was taken out of the assets of the company, it also should be valued in the same way at the cost price. Mr. Justice Costello, who delivered the concurring judgment, observed that it was clear law that a trader puts into his accounts one value at the end of any accounting year, he should start his next year's accounts with precisely the same value. We must, however, bear in mind that in that case the question involved was not the question of profit arising out of sale of shares or any stock. For the same proposition, reliance was also placed on the judgment of the Allahabad High Court in the case of Ramswarup Bengalimal v. CIT : [1954]25ITR17(All) as also the decision of the Allahabad High Court in the case of Ram Luxman Sugar Mills v. CIT : [1967]63ITR51(All) . The Madras High Court also reiterated more or less the same principle in the case of Indo-Commercial Bank Ltd v. CIT : [1962]44ITR22(Mad) . There, it was reiterated that the valuation of stock was also the method of accounting. In the case of British Paints India Ltd. v. CIT : [1978]111ITR53(Cal) , this court was concerned with the question of valuing raw materials and stock-in-trade and also the unfinished goods and we reiterated the principles that should normally be followed in valuing the stock-in-trade and unsold stock. In the case of Reform Flour Mills P. Ltd. v. CIT : [1981]132ITR184(Cal) , we were concerned with the assessee who maintained its accounts on the mercantile system. During the accounting years 1968-69 and 1969-70, there was a departure from the system followed and the assessee disclosed the interest receivable on cash basis on the ground that there was no chance of realisation of either the principal or the interest. The income-tax authorities as well as the Tribunal did not allow such departure and taxed the interest amount on an accrual basis. It was held by us that the treatment of a particular transaction differently or separately from the method followed by the assessee was not permissible and, therefore, the authorities below were justified in holding that the interest on loan was liable to be included in the respective assessment years. Here again we were not concerned with the cost of acquisition of bonus shares in case of sale of shares.

6. This question, in our opinion, as the Tribunal had rightly pointed out, was concluded by the decision of the Supreme Court in Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . Before we refer to that decision, we mustreferto the previous decision of the Supreme Court in the case of Emerald & Co. Ltd. v. CIT : [1959]36ITR257(SC) . There, 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 on 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 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 share at their face value whereas the ITO arrived at the loss of Rs. 27,766 by the method of averaging the price of the shares. The Appellate Tribunal had adopted a third method by which the 50 bonus shares were completely ignored and the loss was arrived at by considering solely the purchase value of the 300 shares and the proceeds realised by their sale. On a reference, the High Court had held that the method adopted by the Tribunal was in error and upheld the method of valuation adopted by the ITO. On 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 they were not sold and ware still retained in the hands of the assessee.

7. The Supreme Court further reiterated that the method of valuation adopted by the Tribunal was the correct method and the loss as calculated by the Tribunal was correct and according to law. For our present purpose it has to be reiterated that the question of the value of bonus shares was kept open and was not decided by the Supreme Court as the bonus shares in question were not sold in the year and that was not in issue before the Supreme Court.

8. But this question did come up before the Supreme Court in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . Now, it may be instructive to set out the relevant facts which were as follows (p. 568):

'The assessee held shares by way of investments and also as stock-in-trade of its business as a share dealer. We are concerned in this case only with its holdings of ordinary shares in Rohtas Industries Ltd. In 1944 the assessee acquired 31,909 of these shares at a cost of Rs. 5,84,283 and was holding them in January, 1945. In that month the Rohtas Industries Ltd. distributed bonus shares at the rate of one ordinary bonus share for each original share and so the assessee got 31,909 bonus shares. Between that time and December 31, 1947, the assessee sold 14,650 of the original shares with the result that on January 1, 1948, it held the following shares : (a) 17,259 original shares acquired in 1944, (b) 31,909 bonus shares issued in January, 1945, (c) 59,079 newly issued shares acquired in the year 1945 after the issue of the bonus shares, and (d) 2,500 further shares acquired in 1947. The total holding of the assessee on January 1, 1948, thus came to 1,10,747 shares which in its books had been valued at Rs. 15,57,902. In arriving at this figure the assessee had valued the bonus shares at the face value of Rs. 10 each and the other shares at actual cost. On January 29, 1948, the assessee sold all these shares for the total sum of Rs. 15,50,458, that is, at Rs. 14 per share and in its return for the year 1949-50 claimed a loss of Rs. 7,444 on the sale.'

9. Dealing with the question as to how the bonus shares are to be valued, the majority judgment of the Supreme Court which was delivered by Hidayatullah J., as the learned Chief Justice then was, referred to the decision of the Supreme Court of the United States in the case of Eisner v. Macomber [1920] 252 US 189. There, the Supreme Court of the United States observed as follows (p. 579 of 52 ITR):

'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 thatthe 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 417,450 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 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.'

10. The Supreme Court, in this context, 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, their real cost to the assessee could not be taken to be nil or their face value. Those 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 ranked pari passu, and if they did not, the price might have to be adjusted either in proportion to the face value they bore (if there was no other circumstance to differentiate them) or on equitable considerations based on the market price before and after issue. Now we are here concerned with, firstly, the bonus shares which ranked Pari Passu, secondly, we are not concerned with the value of the old shares. Some of the original shares were sold before the year in question. We are also concerned with the profit resulting from the sale of bonus shares. This is important because it is not a question of considering what is the profit embedded in the unsold stock either of shares or of stock-in-trade. It is a case of sale of an asset of a particular year. Therefore, it is not, in our opinion, very relevant to consider in what manner these stocks had been valued year by year, but, as the Supreme Court noted, what is the cost of acquisition of the particular asset which is sold and whose profit is due to be considered. Now, the cost of the acquisition of the bonus shares, in our opinion, is clearly laid down by the Supreme Court in the principle enunciated, as we have mentioned before. Our attention was drawn to the computation that was made by the Supreme Court of the bonus shares at p. 582 of the report. Leaving aside part of the original shares before it was sold before the year in question, i.e., 14,650, in our opinion, the Supreme Court in the computation at p. 582 of the report had spread over the cost of the original shares and the bonus shares and thereby determined the cost of the bonus shares. In this connection, the method normally followed by the assessee is not the relevant question. Because, in the narration of the facts which we have setout hereinbefore, in that case also the assessee was not valuing these shares in the way the Supreme Court had indicated. The assessee was valuing and was assessing the shares in a different way. But that did not bind the assessee or did not deflect from the need to value the shares on the basis of cost of acquisition as indicated by the Supreme Court in the aforesaid decision.

11. In the case of W. H. Brady & Co. Ltd. v. C1T : [1979]119ITR359(Bom) , the Bombay High Court reiterated that the Supreme Court had held that where the existing shares and the bonus shares ranked pari passu, the proper method of valuation of the bonus shares was 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 of the original shares as the cost price of the old shares and bonus shares taken together.

12. Our attention was also drawn to a Bench decision of this court in the case of Sutlej Cotton Mills Ltd. v. CIT : [1979]119ITR666(Cal) . There, the court held that in determining the cost of acquisition of the original shares on which bonus shares had been issued, it could either be the actual cost of acquisition or, at the choice of the assessee, the market value thereof on the 1st January, 1954. When an assessee elected to adopt the market value as on the 1st January, 1954, for the purpose of computation of capital gain or loss in 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 on such cost. Subsequent issue of bonus shares did not affect, alter or dilute the cost of acquisition of the original shares. It was held that, on the facts of the case, 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, on the original shares and the bonus shares received thereon. Here, in the instant reference before us, we are not concerned with the cost of acquisition of the original shares. We are concerned with the cost of acquisition of the bonus shares and that cost, in our opinion, would be in accordance with the principles laid down by the Supreme Court in the case of Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) , by spreading over the cost of original shares and bonus shares, irrespective of the fact that some of the original shares had been sold and irrespective of the fact that the assessee was valuing its unsold stock at a particular method different from the method indicated before year after year. It is not a question of changing the method of valuation of unsold stock or shares. It is a question of profit arising out of the sale of an asset of an assessee and in determiningthat the cost of acquisition will have to be determined in accordance with the principles as enunciated by the Supreme Court.

13. In that view of the matter, we are of the opinion that the Tribunal was right in its conclusion and the question must be answered in the affirmative and in favour of the assessee.

14. In the facts and circumstances of the case, as the Tribunal has referred the case, we direct that the parties will pay and bear their own costs.

Sudhindra Mohan Guha, J.

15. I agree.


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