1978 (6) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Determination of capital gains on the sale of shares.
2. Calculation method for the cost of acquisition of bonus shares.
3. Applicability of Supreme Court decisions to the case of an investor versus a dealer in shares.

Summary:

1. Determination of Capital Gains on Sale of Shares:
The primary issue was the calculation of capital gains realized by the assessee, Messrs. W.H. Brady & Company Ltd., on the sale of 8,833 shares of New City of Bombay Manufacturing Company Ltd. The assessee claimed capital gains of Rs. 5,99,899, while the Income Tax Officer (ITO) determined it to be Rs. 7,50,958. The difference arose due to the method of calculating the cost of acquisition of bonus shares.

2. Calculation Method for the Cost of Acquisition of Bonus Shares:
The assessee segregated the bonus shares, treated their cost of acquisition as nil, and opted to substitute the market value of the shares as on January 1, 1954, for their cost of acquisition. The ITO, however, spread the cost of the original shares over the original and bonus shares collectively, following the principle laid down by the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567. The Tribunal upheld the ITO's method, stating that the cost of 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 to the Case of an Investor Versus a Dealer in Shares:
The assessee argued that the Supreme Court's decision in Dalmia Investment Co. Ltd.'s case applied only to dealers in shares, not investors. However, the Tribunal and the High Court rejected this argument, citing the Bombay High Court's decision in D. M. Dahanukar v. CIT [1973] 88 ITR 454, which held that the method of valuing the cost of bonus shares is the same for both dealers and investors. The High Court reiterated that the principle laid down by the Supreme Court in Dalmia Investment Co. Ltd.'s case is applicable irrespective of whether the assessee is a dealer or an investor.

Conclusion:
The High Court affirmed the Tribunal's decision that the capital gains realized by the assessee on the sale of shares of New City of Bombay Manufacturing Company Ltd. was Rs. 7,50,958, as determined by the ITO. The assessee's method of calculation was not accepted, and the principle of spreading the cost of original shares over the original and bonus shares collectively was upheld. The assessee was ordered to pay the costs of the revenue.