1993 (7) TMI 246 - HC - Income Tax

Capital gains - Computation of - Whether principle of averaging out cost of acquisition will apply only where shares which are subject matter of sale have been followed by issuance of bonus shares, on shares so purchased from market - Held, yes

Summary

Issues:
Computation of capital gains from the sale of shares - Method of computation of the cost price for capital gains.

Detailed Analysis:

The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the computation of capital gains arising from the sale of shares. The specific question referred for decision was whether the cost of acquisition of shares sold should be determined based on the actual cost or by averaging the cost of original shares and bonus shares received. The assessee sold 300 shares of Alembic Chemicals Industries and 200 shares of Alembic Glass Industries during the relevant year, leading to the question of how to compute the capital gains from these sales based on the cost price. The assessee argued for considering only the actual cost incurred for the purchase of shares, while the revenue contended that the cost should be averaged out, including bonus shares received on the purchased shares.

The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) applied the principle of averaging out the cost and computed the capital gains accordingly. However, the Tribunal, in the second appeal by the assessee, reversed the decision of the AAC and the ITO. The Tribunal held that the specific shares sold were purchased from the market, and the cost of acquisition was indicated by the assessee, thus not applying the principle of averaging out. The Tribunal distinguished the case from a previous Supreme Court decision involving rights shares, emphasizing that in the present case, the situation was different as bonus shares were acquired after purchasing the original shares.

The High Court referred to a previous decision involving Alembic Chemical Works Ltd, where the cost of original and bonus shares was averaged out for computing capital gains. The court noted that when bonus shares are issued on shares purchased from the market, the cost of acquisition should be averaged out. Therefore, in the present case, the cost of acquisition for the shares sold by the assessee should be computed by averaging out the cost of shares purchased from the market and the bonus shares received.

The court clarified that the principle of averaging out the cost of acquisition applies only when bonus shares are issued on the shares sold. Consequently, the court answered the referred question by stating that the cost of acquisition of the shares should be computed by averaging out the cost of the original shares and the bonus shares received. The reference was disposed of accordingly, with no order as to costs.