1996 (12) TMI 16 - HC - Income Tax

Bonus Shares, Capital Gains, Computation Of Capital, Cost Of Acquisition, Fair Market Value, Shares And Securities

Issues Involved:

1. Method of valuing the cost of shares for determining taxable capital gains.
2. Determination of the cost of acquisition for original shares acquired before January 1, 1954.
3. Determination of the cost of acquisition for bonus shares issued after January 1, 1954.
4. Application of Section 55(2) of the Income-tax Act, 1961.
5. Applicability of the fair market value as of January 1, 1954, for original shares and its impact on bonus shares.
6. Consideration of judicial precedents in valuing shares and bonus shares.

Detailed Analysis:

1. Method of Valuing the Cost of Shares for Determining Taxable Capital Gains:

The primary issue was whether the method adopted by the Tribunal for valuing the cost of shares in the hands of the respective assessees for the purpose of arriving at taxable capital gains is correct in law. The Tribunal had directed the aggregation of the cost of original shares and the subsequent bonus shares to determine the taxable capital gains.

2. Determination of the Cost of Acquisition for Original Shares Acquired Before January 1, 1954:

The court observed that there is no dispute regarding the valuation of original shares acquired before January 1, 1954. These shares should be valued as per the fair market value prevalent on January 1, 1954, as per the option exercised by the assessee under Section 55(2) of the Income-tax Act, 1961.

3. Determination of the Cost of Acquisition for Bonus Shares Issued After January 1, 1954:

The critical question was whether the cost of acquisition of the bonus shares should be determined based on the fair market value of the original shares as of January 1, 1954, or the actual cost price of the original shares. The Tribunal had initially directed that the book value of the original shares should be taken into consideration for valuing the bonus shares, which was contested by the assessee.

4. Application of Section 55(2) of the Income-tax Act, 1961:

Section 55(2) allows the assessee to opt for the fair market value as of January 1, 1954, for shares acquired before that date. The court had to decide whether this provision also applies to the bonus shares issued after January 1, 1954. The Department argued that the bonus shares should be valued based on the cost price of the original shares, while the assessee contended that the fair market value as of January 1, 1954, should be spread over both the original and bonus shares.

5. Applicability of the Fair Market Value as of January 1, 1954, for Original Shares and Its Impact on Bonus Shares:

The court referred to several judicial precedents, including CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788, and CIT v. Prema Ramanujam [1991] 192 ITR 692. These cases established that the cost of acquisition for bonus shares should be determined by spreading the cost of the original shares over both the original and bonus shares. The court noted that adopting different values for original and bonus shares would contravene the provisions of Section 55(2) and the established judicial principles.

6. Consideration of Judicial Precedents in Valuing Shares and Bonus Shares:

The court concluded that the Tribunal's method of valuing the bonus shares based on the book value of the original shares was incorrect. Instead, the fair market value as of January 1, 1954, should be used for both the original and bonus shares. The court emphasized that any deviation from this method would violate Section 55(2) and the judicial precedents cited.

Conclusion:

The court answered the referred question in the negative and in favor of the assessee. It directed the Tribunal to redetermine the cost of acquisition and value of the bonus shares while ascertaining the capital gains tax to be levied on the assessee. The court held that the fair market value as of January 1, 1954, should be used for both the original and bonus shares, in line with the judicial precedents and statutory provisions.

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