1984 (8) TMI 67 - HC - Income Tax

Summary

Issues Involved:
1. Whether the price of the right shares should be averaged with the price of the original shares purchased from the open market for determining the cost of acquisition of shares in computing capital gain under section 48 of the Income-tax Act, 1961.
2. Whether the cost of acquisition of bonus shares has to be determined by averaging the cost of the original shares and the bonus shares received with reference to them, and by averaging the cost of the right shares and the bonus shares received with reference to them.

Detailed Analysis:

Issue 1: Averaging the Price of Right Shares with Original Shares
The Tribunal was tasked with determining if the price of the right shares should be averaged with the price of the original shares purchased from the open market for the purpose of computing capital gains under section 48 of the Income-tax Act, 1961. The Department argued that the price of the right shares should be averaged with the price of market-purchased shares as the market value of shares would fall upon the issue of right shares. However, the Tribunal rejected this argument, holding that each lot of shares, including bonus shares, should be treated as distinct and identifiable. The Tribunal concluded that the right shares and bonus shares should be considered separate lots, and there should be no averaging of the cost price of different lots of shares. The High Court agreed, noting that original shares and right shares do not stand on the same footing, as original shares were purchased at full market price, while right shares were acquired at a concessional rate. Therefore, the price of right shares could not be averaged with the price of original shares for determining the cost of acquisition. The first question was answered in the affirmative.

Issue 2: Determining Cost of Acquisition of Bonus Shares
The second issue was whether the cost of acquisition of bonus shares should be determined by averaging the cost of original shares and the bonus shares received with reference to them, and similarly for right shares and their corresponding bonus shares. The Tribunal had accepted the method of averaging the cost of original shares over both original and bonus shares, treating them as accretions to the original shares. This method was consistent with the principles laid down by the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, which held that the real cost to the assessee of bonus shares cannot be taken to be nil or their face value. The High Court reiterated that when bonus shares rank pari passu with the original shares, the cost of bonus shares should be arrived at by spreading the cost of original shares over both original and bonus shares. The same principle applied to right shares and their corresponding bonus shares. Thus, the Tribunal's method of accounting for the cost of acquisition of bonus shares was legally justified. The second question was also answered in the affirmative.

Conclusion:
The High Court upheld the Tribunal's decisions on both issues, affirming that the price of right shares should not be averaged with the price of original shares and that the cost of acquisition of bonus shares should be determined by averaging the cost of original shares and right shares with their corresponding bonus shares.