Dipak Kumar Sen, J.
1. The dispute in the reference arises out of computation of capital gains on the sale of 20,000 shares of Gwalior Rayon & Silk Mfg. Co. Ltd., by Sutlej Cotton Mills Ltd., the assessee, in the assessment year 1970-71, the relevant previous year having ended on the 31st March, 1970.
2. The facts found and/or admitted are as follows I The assessee acquired the said shares in the year 1955 at a price of Rs. 10 per share. Subsequently, the assessee received 20,000 bonus shares in respect of the said original shares. The assessee sold 20,000 of the said original shares during the relevant period. The ITO computed the capital gains accruing in the hands of the assessee by working out the cost of acquisition of the original shares by spreading out the initial cost between the original shares as also the bonus shares.
3. On an appeal preferred by the assessee, the AAC upheld the order of the ITO.
4. There was a further appeal by the assessee to the Income-tax Appellate Tribunal. It was contended before the Tribunal on behalf of the assessee that the actual cost of acquisition of a capital asset was to be determined with reference to the state of events on the date of acquisition and not with reference to subsequent events like issue of bonus shares. In this connection, a decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO : 82ITR788(SC) was relied on. It was contended on behalf of the revenue that the matter was covered by the decision of the Supreme Court in CIT v. Dalmia Investment Co. Ltd. : 52ITR567(SC) . Another decision of the Supreme Court in CIT v. Gold Mohore Investment Co. Ltd. : 74ITR62(SC) was also relied on by the revenue. It was submitted that the process of spreading out of the initial cost as approved by the Supreme Court was applicable to investors as also to dealers and should be extended to determine the cost of acquisition of the original shares also. It was submitted further that the decision of the Supreme Court in Shekhawati General Traders Ltd. : 82ITR788(SC) was distinguishable on facts. The Tribunal considered another decision of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT : 63ITR651(SC) .
5. The Tribunal held that the mere fact that the assessee was a share-dealer would not preclude the application of the principle of averaging in the computation of capital gains and upheld the decision of the revenue authorities and dismissed the assessee's appeal on this point.
6. On an application by the assessee under Section 256(2) of the I.T. Act, 1961, this court directed the Tribunal to draw up a statement of case and referthe following question as a question of law arising out of the order of the Tribunal :
' Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of Sections 48 and 55(2) of the Income-tax Act, 1961, the Tribunal was justified in holding that the 'cost of acquisition' of 20,000 (twenty thousand) shares (original shares) in Gwalior Rayon & Silk Mfg. Co. Ltd., during the previous year relevant to the assessment year 1970-71, should be determined on the basis of averaging the cost of original shares on the original shares and the bonus shares received thereon '
7. To appreciate the scope of the controversy in the present proceedings it is necessary to consider the relevant statutory provisions.
8. Section 45 of the I.T. Act, 1961, provides as follows :
'45. Capital gains.--(1) 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, 54, 54B, 54C 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.'
9. Section 48 of the Act is as follows :
' 48. Mode of computation and deductions.--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.'
10. Section 55(2) of the Act provides 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 as on the 1st day of January, 1954, at the option of the assessee;.........'.
11. Various decisions on this point including those cited before the authorities below were cited at the Bar at the hearing. It may be convenient to consider the said decisions in their chronological order.
(a) CIT v. Dalmia Investment Co. Ltd. : 52ITR567(SC) : The facts in this case were that the assessee held ordinary shares in a certain company both as investment as also as stock-in-trade in its business as a share-dealer. In 1944, the assessee had acquired 31,909 6f such shares and continued to hold them till January, 1945, when the said company distri-buted bonus shares at the rate of one ordinary bonus share for each original share. As a result, the assessee obtained 31,909 bonus shares. Between January, 1945, and the 31st December, 1947, the assessee sold 14,650 of the said original shares held by it. The assessee also acquired a number of newly issued shares in the said company between 1945 and 1947. By the 1st January, 1948, the total holding of the assessee in respect of shares in the said company amounted to 1,10,747 shares valued in its books at Rs. 15,57,902. The assessee had arrived at the said figure by valuing the bonus shares at their face value of Rs. 10 each and the other shares at the actual cost. On the 29th January, 1948, the assessee sold all the said shares for a total amount of Rs. 15,50,458 and in its return of income for the year 1949-50 claimed a loss of Rs. 7,444 on the sale. The return was not accepted by the ITO and in his assessment order the ITO computed the value of the shares in a different manner and came to the conclusion that there was a profit of Rs. 7-8-0 per bonus share aggregating in a profit of Rs. 2,39,317 which was held to be a capital gain. On appeal, the AAC held that as the bonus shares had cost nothing to the assessee, there was a profit of Rs. 3,11,646. On a further appeal, the Tribunal held that the original shares and the bonus shares could not be clubbed together. The Tribunal upheld the decision of the AAC. On a reference, the High Court of Patna held that the issue of bonus shares was nothing but a capitalisation of the company's reserve account or profit and the bonus shares could not be considered to have been issued free. According to them, the face value of the bonus shares represented a detriment to the assessee in respect of undistributed reserves and should be held to be the value of the cost of acquisition of the said bonus shares.
There was a further appeal to the Supreme Court. The Supreme Court noted that there were four possible methods for determining the cost of bonus shares. The first method was to take the cost as the equivalent of the face value of the bonus shares. The second method was to take the cost of the bonus shares as nil inasmuch as the shareholder had paid nothing in cash. The third method was to take the cost of the original shares and to spread it over the original shares and bonus shares taken collectively. The fourth method was to find out the fall in the price of the original shares on, the stock exchange as a result of the issue of these bonus shares and which amount should be held to be the cost of the said bonus shares.
The Supreme Court considered several decisions, inter alia, of the Privy Council, the House of Lords, the English Appeal Court as also a decision of the Supreme Court of the United States and held that the two feasible methods were either to ascertain the exact fall in the market price of the shares' already held and attribute that fall to the price of thebonus shares or to spread over the amount spent by the shareholder in acquiring the original shares on the old and new shares treating the new as accretions to the old and to treat the cost price of the original shares as the cost price of the old shares and bonus shares taken together. The last method was approved by the Supreme Court as in the case before it the bonus shares had been ranked pari passu with the original shares. The Supreme Court observed that when the bonus shares were not ranked pari passu with the original shares, their price would have to be adjusted either in the proportion of the face value they would bear in the absence of any other differentiating circumstances or on the equitable considerations based on the market price before and after the issue. Applying the second method the Supreme Court held that the accounting would be as follows (p. 582) :
Rs.1.Old issue of 17,259 shares brought forward from 1945, at (proportionate) cost
1,58,0352.Bonus shares 31,909 received in 1945, at (proportionate spread out) cost
2,92,1413.New issue 59,079 shares brought forward from 1945
8,88,5614.New purchases 2,500 shares brought forward from 1947
Total 1,10,747 shares13,78,037
Sales of all the above shares in 194815,50,458
Profit 1,72,421 Add loss returned 7,444
Profit to be added to the income returned 1,79,865
(b) Miss Dhun Dadabhoy Kapadia v. CIT : 63ITR651(SC) . The facts in this case were that the assessee at the relevant time was holding some ordinary shares in a certain company by way of investment. By a resolution of the said company, the assessee became entitled to purchase new ordinary shares issued by the company in the ratio of one new ordinary share for one existing ordinary share it held on a certain date. Pursuant thereto, an offer was made to the assessee by the company that she was entitled to apply for the same number of new ordinary shares as that already held by her to be paid for at the rale of Rs. 105 per new share. The assessee was given the option of either taking the shares wholly or partlyor renouncing them either wholly or partly in favour of any other person or persons. The assessee chose to renounce her rights over the said shares and sold her right to obtain the new shares in the open market in the relevant accounting year and obtained a sum of Rs. 45,268.50. It was not disputed that a capital gain had accrued to the assessee which was liable to be taxed. The assessee contended that on the issue of the new shares the value of her old shares depreciated because the assets of the company remained stationary while the number of shares increased and as a result of depreciation in the price of her old shares, she had suffered a loss to a certain extent, which she was entitled to set off against the capital gains realised by selling her right to take the new shares. The assessee contended alternatively that her right to receive the new shares was a right embedded in her old shares and, therefore, when she realised an amount by selling such right, the capital gains should be computed after deducting from this amount the value of the embedded right which was liquidated. The value of such embedded right had to be calculated in accordance with the principles of accountancy. The Supreme Court held that the claim of the assessee was justified as the net capital gain to her in the transaction could only be properly computed taking into account the depreciated value of the old shares which remained in her hands after the issue of the new shares and that the capital gains of the assessee was the difference between the money realised on the transfer of her right to the new shares and the amount lost by the assessee in the form of depreciation in the value of her old shares in order to acquire that right.
(c) CIT v. Gold Mohore Investment Co. Ltd. : 74ITR62(SC) . The assessee in this case, a dealer, had valued its shares in the assessment year 1949-50 at cost both at the opening and at the closing of the accounting period. The assessee held 2,500 shares of the face value of Rs. 10 each in a certain company purchased at Rs. 85 per share. In June, 1948, bonus shares ranking pari passu with the original shares were issued by the company in the proportion of three new shares for every two original shares, and the assessee obtained 3,750 new shares of the face value of Rs. 10 each. On the 2nd August, 1948, the assessee sold the original shares at Rs. 29 per share and on the 18th March, 1949, the bonus shares at the rate of Rs. 25 per share. On such transactions, the assessee-company computed a loss by valuing the bonus shares at their face value. The ITO did not accept this calculation and valued the bonus shares in a different way. The valuation of the ITO was accepted by the Tribunal. The High Court on a reference accepted the valuation of the assessee and the matter finally came up before the Supreme Court. The Supreme Court considering its earlier decisions in Dalmia Investment Co. Ltd. : 52ITR567(SC) as also Emerald & Co. Ltd. v. CIT : 36ITR257(SC) held that the third methodfollowed in Dalmia's case was the correct method and followed the same. The Tribunal was directed to calculate the profit and loss by spreading the initial cost over the original and bonus shares and finding out the average cost per share.
(d) CIT v. Gold Co. Ltd. : 78ITR16(SC) . The assessee in this case was a dealer in shares and used to value its opening and closing stock at cost. In the accounting year ending on the 3Ist March, 1949, it held 100 shares of a company at Rs. 612 per share. On the 30th April, 1948, 100 bonus shares of the face value of Rs. 100 each and ranking pari passu with the old shares were issued by the said company. On the 10th January, 1949, the assessee sold the original shares at a price of Rs. 196 per share and calculated a loss, valuing the bonus share at their face value. The ITO did not accept the computation, nor did the AAC. The Tribunal spread the cost of the original shares over the shares new and old, computed the value of original shares at Rs. 306 each and calculated the loss accordingly. On a reference, this court held in favour of the assessee. The Supreme Court following its earlier decision in the case of Gold Mohore Investment Co. Ltd. : 74ITR62(SC) upheld the computation of the Tribunal and held that the correct method was to spread the price of the old shares over the old and the new shares.
(e) Shekhawati General Traders Ltd. v. ITO : 82ITR788(SC) . The facts in this case were that the assessee had initially acquired 12,000 of certain ordinary shares of the face value of Rs. 10 each. On or about the 28th April, 1951, the assessee received 12,000 bonus shares against the said ordinary shares. It also received a further 60,000 bonus shares at the beginning of June, 1954, and finally it acquired 25,200 right shares on the 26th June, 1961. During the assessment year 1962-63, the assessee sold 22,000 of the said shares. It was found that the said 22,000 shares were sold out of 24,000 shares which the assessee held prior to the 1st January, 1954. The price realised on account of the sale of the said 22,000 shares during the said assessment year was Rs. 8,45,100. The assessee calculated the cost price of 22,000 shares sold by it at the market rate prevailing on the 1st January, 1954, which came to Rs. 8,63,500.
12. The assessee had also initially acquired 15,000 ordinary shares of another company before the 1st January, 1954. It obtained 41,250 bonus shares on its original holding after the 1st January, 1954. It further acquired 22,500 right shares in the said company for the nominal value of Rs. 3,60,000. The assessee, during the assessment year 1962-63, sold 15,000 of the said shares and realised a sum of Rs. 4,54,130. The assessee calculated the cost price of the said 15,000 shares at the market value prevailing on the 1st January, 1954, which came to Rs. 6,45,000.
13. According to the calculation of the assessee, the cost of acquisition of the said shares in the said two companies came to Rs. 14,19,400 and they were sold for a sum of Rs. 12,09,240. The assessee claimed to have suffered a capital loss of Rs. 2,10,160.
14. In the original assessment order, the ITO accepted the computation of the assessee and held that the assessee bad suffered a capital loss as claimed. The said loss was directed to be carried forward. A notice was subsequently issued under Section 147 of the I.T. Act, 1961, stating that the ITO had reasons to believe that the income chargeable to tax for the said assessment year had escaped assessment and, therefore, it was proposed to reopen the said assessment. It was alleged further in the said notice that in working out the cost, the assessee had taken into account the prevalent market price as on the 1st January, 1954, disregarding the fact that subsequent to the 1st January, 1954, bonus shares had been issued by the companies concerned and that in working out the capital gains the cost of acquisition of the said shares had to be worked out by averaging the initial cost of acquisition of the shares between the original shares and the bonus shares.
15. The said notice was sought to be impugned in an application under Article 226 of the Constitution before the Rajasthan High Court. The High Court upheld the notice by stating that inasmuch as the acquisition of bonus and right shares acquired by the assessee on the original holding had not been shown in its income-tax return, it can be said that the ITO had reason to believe that the income chargeable to tax had escaped assessment. The assessee preferred an appeal to the Supreme Court. The Supreme Court noted that the shares which had been sold by the assessee had indisputably become the property of the assessee before the 1st January, 1954, and all that had to be determined was the fair market value of the shares on the 1st January, 1954. The revenue contended before the Supreme Court that after the issue of the bonus shares the cost of the original holding had to be spread over all the shares inclusive of the bonus or right shares, acquired on the original holding. In support of such contention, the earlier decision of the Supreme Court in Dalmia Investment Co. Ltd. : 52ITR567(SC) was cited. The Supreme Court considered in detail its decision in Dalmia Investment Co. Ltd. and held, inter alia, as follows (p. 793) :
' We have set out the facts of this case in detail in order to demonstrate that that decision was not at all apposite for the purpose of deciding the point which has arisen in the present case. No question arose there of the calculation of the capital gain or loss in accordance with the statutory provisions in pari materia with Sections 48 and 55(2) of the Act. In the present case we are confined to the express provisions of Section 55(2)relating to the manner in which the cost of acquisition of a capital asset has to be determined for the purpose of Section 48. Where the capital asset became the property of the assessee before the first day of January, 1954, the assessee has two options. It can decide whether it wishes to take the cost of the acquisition of the asset to it as the cost of acquisition for the purpose of Section 48 or the fair market value of the asset on the first day of January, 1954. The word 'fair' appears to have been used to indicate that any artificially inflated value is not to be taken into account. In the present case it is common ground that when the original assessment order was made the fair market value of the shares in question had been duly determined and accepted as correct by the Income-tax Officer. Under no principle or authority can anything more be read into the provisions of Section 55(2)(i) in the manner suggested by the revenue based on the view expressed in the Dalmia Investment Co.'s case : 52ITR567(SC) . The High Court completely overlooked the fact that for the ascertainment of the fair market value of the shares in question on January 1, 1954, any event prior or subsequent to the said date was wholly extraneous and irrelevant and could not be taken into consideration. If the contention of the revenue were to be accepted the acquisition of bonus shares subsequent to January 1, 1954, will have to be taken into account which on the language of the statute it is not possible to do.'
16. The Supreme Court held that the information regarding the acquisition of bonus shares by the assessee could possibly furnish no reason to the ITO to form the belief that income chargeable to tax had escaped assessment for the assessment year in question.
(e) Madura Mills Co. Ltd. v. CIT : 86ITR467(Mad) . The question before the Madras High Court in this case was whether the bonus share issued should be valued at nil or at par. Following the decision of the Supreme Court in Dalmia Investment Co. Ltd. : 52ITR567(SC) , the High Court held that irrespective of the fact whether the holder of the shares was a dealer or an investor, the principles laid down in the said case would apply and for the purpose of computing capital gains the bonus shares should be valued by spreading the cost of original shares over the old shares and new shares taken together.
(f) D. M. Dahanukar v. CIT : 88ITR454(Bom) . The question before the Bombay High Court in this case was whether for the purpose of computing capital gains the assessee was entitled to deduct the face value of the bonus shares from the sale value. The Bombay High Court, following the decision of the Supreme Court in Dalmia Investment Co. Ltd. : 52ITR567(SC) and Gold Mohore Investment Co. Ltd. : 74ITR62(SC) , held that the correct method would be to take the cost of the original sharesand to spread it over to the original shares and bonus shares collectively and find an average.
(g) CIT v. Chunilal Kushaldas : 93ITR369(Guj) . The controversy in this case before the Gujarat High Court arose by reason of sale of certain bonus shares by the assessee and it had to be determined whether they were short-term capital assets or long-term capital assets. It was contended by the assessee that the bonus shares did not represent acquisition of any new assets, and that they were part of the original shares being carved out of them and must, therefore, be held to have acquired when the original shares were purchased, viz., prior to the 1st January, 1954, and, therefore, long-term capital assets. The contention of the assessee was rejected by the revenue authorities, but accepted by the Tribunal. On a reference, the Gujarat High Court held that bonus shares acquired by the shareholder must be taken to be held by the shareholder from the date of their issue and not from the date of the acquisition of the original shares.
17. On the authorities of Dalmia Investment Co. Ltd. : 52ITR567(SC) and Gold Mohore Investment Co. Ltd. : 74ITR62(SC) , Mr. Suhas Sen, learned counsel for the revenue, contended at the bearing that shares in a limited company constituted a bundle of rights which were acquired by the shareholder when it acquired the shares. He submitted that the right to get bonus shares in future on the strength of the prior holding was a right embedded in the original acquisition. Bonus shares were legal accretion to the original acquisition. No transfer was involved when the bonus shares were obtained in the sense that the cost of the original acquisition covered both the original shares as also the accretion, namely, the bonus shares. He invited us to follow the method of computation of value of such shares as was done by the Supreme Court in Dalmia Investment Co. Ltd. : 52ITR567(SC) and to hold that in valuing bonus shares the cost of acquisition of the original shares must necessarily be diluted every time bonus shares would be issued.
18. Mr. R. N. Bajoria, learned counsel for the assessee, contended, on the other hand, on the authority of Shekhawati General Traders Ltd. : 82ITR788(SC) that the cost of acquisition of the original shares was immutable. It can be either the actual cost of acquisition or at the choice cf the assessee the market value thereof on the 1st January, 1954, The latter value would only be substituted as permitted by the statute and would be deemed to be the cost of acquisition. Once this election was made, subsequent issue of bonus shares would have no effect on the cost of acquisition of the original shares and the capital gains on the transfer of such original shares had to be calculated on such cost. He submitted that the decision of the Supreme Court in Dalmia Investment Co. Ltd.  52 ITR 367 was applicable to the valuation of bonus shares only and not for com-putation of capital gains when original shares are transferred. He submitted further that in the said decision the computation of the Supreme Court was not for the purpose of calculation of capital gains but for the calculation of profits earned or loss suffered.
19. It appears to us that if we trace the principles laid down by the Supreme Court from Emerald & Co. Ltd. v. CIT : 36ITR257(SC) up to Shekhawati General Traders Ltd. : 82ITR788(SC) , the controversy in the instant case can be resolved. In Emerald & Co. Ltd. v. CIT : 36ITR257(SC) , the Supreme Court was considering the profit earned or loss suffered by a company by sale of shares which included both original shares as also bonus shares. For the purposes of such calculation the Supreme Court kept the question of cost of bonus shares in an entirely different compartment, from the cost of the original shares, and observed as follows (p. 261):
' 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 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 shown, 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.'
20. Dalmia Investment Co. Ltd. : 52ITR567(SC) , in our view, supplements the decision in Emerald & Co. Ltd. : 36ITR257(SC) . There the Supreme Court calculated the profit and loss arising out of sale of shares, both original and bonus shares. In the later decisions in Shekhawati General Traders Ltd. : 82ITR788(SC) and Dalmia Invsetment Co. Ltd. : 52ITR567(SC) , the Supreme Court treated the question of the cost of original shares also in a category separately from that of bonus shares. The distinction between the two cases, namely, Emerald & Co. Ltd, : 36ITR257(SC) and Dalmia Investment Co. Ltd. : 52ITR567(SC) is clearly drawn by the Supreme Court in Shekhawati General Traders Ltd. : 82ITR788(SC) , where in computing the value of the shares where the cost of acquisition was opted for by the assessee, at the market value ofthe same as on the 1st January, 1954, the Supreme Court refused to take any notice of the subsequent issue of bonus shares and dilute the amount of such cost accordingly,
21. A distinction has been sought to be drawn by Mr. Sen for the revenue, to the effect that the original cost of acquisition will ordinarily be diluted by subsequent issue of bonus shares, but if the assessee exercises its option and elects to treat the cost of acquisition of its original shares at the market value as on the 1st January, 1954, then such subsequent issue of bonus shares will not affect the said opted cost. This apparent distinction does not appeal to us. When an assessee elects 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 is in effect substituting the original cost of acquisition of such shares by another amount as allowed by the statute. If subsequent issue of bonus shares affects, alters or dilutes the original cost of acquisition there can be no reason why such subsequent issue should not affect, alter or dilute the substituted amount, that is, the market value of the original shares on the 1st January, 1954.
22. For the above reasons and applying the principles laid down by the Supreme Court in Shekhawati General Traders Ltd. : 82ITR788(SC) , we uphold the contentions of the assessee. The question is answered in the negative. There will be no order as to costs.
Bimal Chandra Basak, J.
23. I agree.