1969 (4) TMI 27 - SC - Income Tax

Whether the method adopted by the Income-tax Officer in relation to the Fort Gloster jute shares is the method approved of by this court, namely, that where the shares are pari passu and the valuation is to be made at cost, the price of the original shares must be spread over the old and the new shares and they must be held to have been purchased at the average cost and that the profit or loss is to be calculated accordingly? Held that - This court held that the correct method to apply in cases where bonus shares rank pari passu is to follow the third method, namely, to take the cost of the original shares and to spread it over all the original as well as the bonus shares and to find out the average price of all the shares. The cases will be disposed of in the light of our observations by the Income-tax Appellate Tribunal by calculating the profit and loss by spreading the cost over the original and the bonus shares and finding out the average cost per share. The appeals are allowed.

Summary

Issues:
1. Valuation of bonus shares in assessment years ending March 31, 1950, and 1951.
2. Correct method of calculating profit or loss on shares involving bonus shares.

Analysis:
In the judgment delivered by the Supreme Court, the appeals by the Commissioner of Income-tax, Central, Calcutta, against Messrs. Gold Mohore Investment Co. Ltd. revolved around the valuation of bonus shares in the assessment years ending March 31, 1950, and 1951. The first issue involved the method of valuation of bonus shares by the assessee-company, which was disputed by the Income-tax Officer. The second issue pertained to the correct calculation method of profit or loss on shares involving bonus shares, as determined by the Income-tax Officer and upheld by the Tribunal.

The first case involved the Howrah Mills Co. Ltd. shares, where the assessee-company had received bonus shares in June 1948. The company sold the original shares and calculated a loss based on its method of valuation, which was not accepted by the Income-tax Officer. The Tribunal sided with the Income-tax Officer's method of calculation, leading to the appeal to the Supreme Court.

In the second case concerning Fort Gloster Jute Company Ltd. shares, the assessee-company received bonus shares in the year of account and sold a portion of these shares. The Income-tax Officer spread out the cost of original shares over both the old and new shares to calculate the profit, a method confirmed by the Tribunal and the Appellate Assistant Commissioner.

The Supreme Court analyzed various methods of calculating profit or loss on shares involving bonus shares, referencing past judgments and conflicting decisions. The court ultimately endorsed the method of spreading the cost of original shares over all shares, old and new, to find the average price per share. This method was deemed correct when bonus shares rank pari passu, as established in previous court rulings.

The High Court's judgment in favor of the assessee-company was overturned by the Supreme Court, which discharged the answers recorded by the High Court and directed the cases to be disposed of by the Income-tax Appellate Tribunal using the approved method of calculating profit and loss on shares involving bonus shares. The appeals were allowed with costs, settling the dispute over the valuation of bonus shares in the assessment years in question.