1981 (4) TMI 34 - HC - Income Tax

Summary

Issues Involved:
1. Determination of the cost of bonus shares for computing profit or loss from their sale.
2. Applicability of the Supreme Court's decision in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567.
3. Consistency in the method of accounting and valuation of shares.

Detailed Analysis:

1. Determination of the Cost of Bonus Shares for Computing Profit or Loss from Their Sale:
The primary issue in this case was whether the Tribunal was correct in holding that the cost of 160 bonus shares should be deducted from the sale proceeds to compute the profit or loss. The assessee, a dealer in shares, had originally acquired 200 shares of M/s. Kamarhati Co. Ltd. at Rs. 1,92,000 and received 160 bonus shares. The assessee sold all its original shares by the end of the accounting year relevant to the assessment year 1952-53. In the assessment year 1972-73, the assessee sold the 160 bonus shares and credited the profit by valuing the cost at nil. However, the assessee later claimed that the cost of these shares should be Rs. 87,516, by spreading the cost of the original shares over the original and bonus shares. The ITO rejected this contention, but the AAC reversed the decision, directing the ITO to determine the cost of the bonus shares based on the Supreme Court's principles in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567.

2. Applicability of the Supreme Court's Decision in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567:
The Tribunal upheld the AAC's decision, agreeing that the method of accounting or valuation adopted by the assessee was not conclusive. The Tribunal emphasized that the cost of bonus shares should be determined by spreading the cost of the original shares over the original and bonus shares if they ranked pari passu. This principle was established by the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 and reiterated in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62. The Tribunal noted that the original shares' sale in earlier years and the profit calculation based on their entire cost did not affect the applicability of this principle for determining the cost of the bonus shares.

3. Consistency in the Method of Accounting and Valuation of Shares:
The Revenue argued that the valuation method is a part of accounting and should remain consistent year-to-year. They cited previous cases, including Chouthmal Golapchand [1938] 6 ITR 733, Ramswarup Bengalimal v. CIT [1954] 25 ITR 17, and others, to support their contention. However, the Tribunal and the High Court found these cases not directly relevant to the issue of determining the cost of bonus shares upon sale. The High Court referred to the Supreme Court's decision in Dalmia Investment Co. Ltd., emphasizing that the cost of acquisition of bonus shares must be determined by spreading the cost of the original shares over the original and bonus shares. This method is independent of the valuation method used for unsold stock in previous years.

Conclusion:
The High Court concluded that the Tribunal was correct in its decision, affirming that the cost of the bonus shares should be determined by spreading the cost of the original shares over both the original and bonus shares, as laid down by the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567. The question was answered in the affirmative and in favor of the assessee. The parties were directed to bear their own costs.