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Issues Involved:
1. Justification of the Appellate Tribunal in setting aside the order under section 263 of the Income-tax Act, 1961. 2. Correctness of the Appellate Tribunal's decision on the cost of acquisition of bonus shares issued after January 1, 1964. Issue-wise Detailed Analysis: 1. Justification of the Appellate Tribunal in setting aside the order under section 263 of the Income-tax Act, 1961: The Tribunal was tasked with determining whether the Commissioner of Income-tax (CIT) was justified in invoking section 263 of the Income-tax Act, 1961, to revise the assessment order passed by the Income-tax Officer (ITO). The CIT had argued that the ITO erroneously adopted the cost of acquisition of the bonus shares at Rs. 129.25 per share, which was prejudicial to the interests of the Revenue. The CIT recalculated the cost of acquisition of the bonus shares at Rs. 50 per share and directed the ITO to recompute the total income, resulting in a higher short-term capital gains tax. The Tribunal, however, accepted the assessee's contention that the cost of acquisition of the original shares should be taken at the fair market value as on January 1, 1964, and the cost of the bonus shares should be half of that value, i.e., Rs. 129.25 per share. The Tribunal concluded that the ITO's original order was neither erroneous nor prejudicial to the interests of the Revenue. Consequently, the Tribunal set aside the CIT's order under section 263. 2. Correctness of the Appellate Tribunal's decision on the cost of acquisition of bonus shares issued after January 1, 1964: The primary legal question was whether the cost of acquisition of the bonus shares, issued after January 1, 1964, should be calculated based on the fair market value of the original shares as on January 1, 1964, or the original cost of acquisition of the original shares. The Department argued that since the bonus shares were acquired after January 1, 1964, their value should be based on the original cost of acquisition of the original shares, i.e., Rs. 100 per share, resulting in a cost of Rs. 50 per bonus share. This method would yield a higher capital gains tax. The assessee contended that the original shares were acquired before January 1, 1964, and thus, under section 55(2)(ii) of the Act, the fair market value as on January 1, 1964, should be adopted. The assessee argued that the cost of the bonus shares should be half of this fair market value, i.e., Rs. 129.25 per share. The court referred to the Supreme Court's decisions in CIT v. Dalmia Investment Co. Ltd. and Shekhawati General Traders Ltd. v. ITO, which established that the cost of acquisition of bonus shares should be determined by spreading the original cost over the old and new shares, treating the new shares as accretions to the old shares. The Supreme Court had also held that the fair market value as on January 1, 1964, could be adopted for shares acquired before that date, and this value should be used to determine the cost of bonus shares. Applying these principles, the court concluded that the assessee was correct in adopting the fair market value of Rs. 258.50 per share as on January 1, 1964, and valuing the bonus shares at half this value, i.e., Rs. 129.25 per share. The court held that this method was in accordance with the statutory provisions and judicial precedents, and the CIT was not justified in revising the ITO's order. Conclusion: The court answered both questions in the affirmative and against the Department, upholding the Tribunal's decision to set aside the CIT's order under section 263 of the Income-tax Act, 1961. The court ruled that the assessee's method of valuing the bonus shares was correct, and the ITO's original assessment was neither erroneous nor prejudicial to the interests of the Revenue.
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