1980 (5) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Computation of capital gains on the sale of bonus shares.
2. Determination of the cost of acquisition for bonus shares.
3. Applicability of Supreme Court decisions on the valuation of bonus shares.

Issue-wise Detailed Analysis:

1. Computation of Capital Gains on the Sale of Bonus Shares:
The primary issue was whether Rs. 41,200 should be allowed as the cost of 1,600 bonus shares sold by the assessee in the assessment year 1972-73. The assessee had received 2,000 bonus shares in 1951 and another 2,000 bonus shares in 1967. Out of the second set of bonus shares, the assessee sold 1,600 shares for Rs. 1,60,200. The Income Tax Officer (ITO) held that the cost of the bonus shares should be taken as nil since the entire cost of the original shares had been considered in the assessment year 1960-61. However, the Appellate Assistant Commissioner (AAC) directed the ITO to determine the cost of the bonus shares based on the principles laid down by the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567.

2. Determination of the Cost of Acquisition for Bonus Shares:
The assessee argued that the capital gain should be computed by averaging the cost of the original and bonus shares. The ITO's position was that since the cost of the original shares had been accounted for in the 1960-61 assessment, the cost of the bonus shares should be nil. The Tribunal upheld the AAC's decision, agreeing 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.

3. Applicability of Supreme Court Decisions on the Valuation of Bonus Shares:
The Tribunal and the High Court relied heavily on the Supreme Court's decision in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, which held that the cost of bonus shares should be calculated by spreading the cost of the original shares over both the original and the bonus shares. The High Court also referred to other relevant Supreme Court decisions, including CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 and Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651, to reinforce that the principles of commercial prudence should be applied in such computations.

Conclusion:
The High Court concluded that the Tribunal was correct in its decision to allow Rs. 41,200 as the cost of the 1,600 bonus shares. The Court emphasized that the principles laid down by the Supreme Court in CIT v. Dalmia Investment Co. Ltd. were applicable and that the cost of acquisition should be spread over both the original and bonus shares. The question referred to the Court was answered in the affirmative and in favor of the assessee, with no order as to costs.