1996 (11) TMI 473 - HC - Income Tax

Summary

Issues:
1. Valuation method for cost of shares for calculating taxable capital gains under the IT Act, 1961.

Detailed Analysis:

Issue 1: Valuation method for cost of shares
The High Court of Madras was directed by the Tribunal to provide an opinion on the correct method for valuing the cost of shares in the hands of the assessees for determining taxable capital gains under the IT Act, 1961. The case involved multiple Tax Case References for the assessment year 1973-74, with a common issue arising in all cases. The facts of one particular case were considered to elucidate the matter for all cases. The assessee held shares in a company, including bonus shares acquired through a combination of actual payment and bonus issuances. The dispute arose over the deduction claimed by the assessee under section 48(ii) of the IT Act, based on the method used to calculate the cost of acquisition for the shares. The assessee's approach involved averaging the cost between original and bonus shares, while the Income Tax Officer (ITO) contended that the bonus shares should not be valued again through averaging, as it would result in double inclusion of their value. The ITO relied on Supreme Court decisions to support his position and computed the capital gains accordingly.

The assessee appealed the ITO's decision to the Appellate Assistant Commissioner (AAC) and later to the Tribunal, arguing that the cost of bonus shares should be determined by spreading the cost of original and bonus shares proportionately. The Department, on the other hand, supported the ITO's position and cited a Bombay High Court judgment. The Tribunal, after considering the arguments and relevant decisions, concluded that the cost of acquisition should be determined based on commercial principles and the impact of bonus shares on the value of original shares. It emphasized the need to compute the cost of original shares, first and second issue bonus shares separately, following the principles established by the Supreme Court in various cases.

The Tribunal directed the ITO to recompute the cost of acquisition for all assessees in line with its directions. The matter was then brought before the High Court, where both parties reiterated their arguments presented before the Tribunal. The High Court referred to a previous judgment in a similar case and held that the value of bonus shares did not need separate ascertainment when the entire block of shares, including bonus shares, was sold. The Court found the Tribunal's computation of the cost of acquisition to be in line with the previous judgment and upheld the Tribunal's decision in each assessee's case regarding the valuation of original and bonus shares for determining capital gains.

In conclusion, the High Court answered the references in the affirmative, ruling against the assessees and finding no infirmity in the Tribunal's order regarding the valuation of shares for calculating capital gains under the IT Act, 1961.