1985 (6) TMI 46 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of surplus on the sale of bonus shares.
2. Cost of acquisition of bonus shares.
3. Applicability of the Supreme Court decision in B.C. Srinivasa Setty's case.
4. Conceptual and practical differences between bonus shares and other assets like goodwill.
5. Method of valuation and computation of capital gains on bonus shares.

Detailed Analysis:

1. Taxability of Surplus on the Sale of Bonus Shares:
The primary issue was whether the surplus arising from the sale of bonus shares should be taxed as capital gains. The Income Tax Officer (ITO) included the surplus as long-term capital gain in the total income, which was upheld by the Commissioner (Appeals). The assessee argued that the bonus shares had no cost of acquisition, and thus no capital gains should be assessed. The Tribunal, referencing the Supreme Court decision in B.C. Srinivasa Setty's case, examined whether the cost of acquisition for bonus shares could be determined.

2. Cost of Acquisition of Bonus Shares:
The Tribunal discussed various methods for determining the cost of acquisition of bonus shares. It was argued that the cost of acquisition should be considered nil since no money was paid for acquiring the bonus shares. The department, however, relied on earlier decisions such as Dalmia Investment Co. Ltd.'s case, which suggested spreading the cost of the original shares over the old and bonus shares collectively. The Tribunal concluded that the cost of acquisition of bonus shares is embedded in the original shares' cost and should be determined by averaging the cost of the original and bonus shares.

3. Applicability of the Supreme Court Decision in B.C. Srinivasa Setty's Case:
The assessee relied heavily on the Supreme Court decision in B.C. Srinivasa Setty's case, which held that assets with no ascertainable cost of acquisition could not be subjected to capital gains tax. The Tribunal examined whether this principle applied to bonus shares. It was noted that the Supreme Court's decision in B.C. Srinivasa Setty's case focused on goodwill, an asset with an indeterminate cost of acquisition. The Tribunal distinguished bonus shares from goodwill, stating that bonus shares do have a determinable cost of acquisition when the cost of the original shares is averaged over the total shares held, including bonus shares.

4. Conceptual and Practical Differences Between Bonus Shares and Other Assets Like Goodwill:
The Tribunal discussed the inherent differences between bonus shares and assets like goodwill. Goodwill is self-generated and does not have a specific cost of acquisition, whereas bonus shares are issued based on the reserves of the company and are linked to the original shares' cost. The Tribunal emphasized that bonus shares, unlike goodwill, can be valued by averaging the cost of the original shares over the total number of shares held.

5. Method of Valuation and Computation of Capital Gains on Bonus Shares:
The Tribunal reviewed various methods for computing the cost of acquisition and capital gains on the sale of bonus shares. The department's method of averaging the cost of the original and bonus shares was upheld. The Tribunal concluded that the earlier decisions of the Supreme Court, which adopted the averaging method for determining the cost of bonus shares, were still applicable. The Tribunal also noted that the decision in B.C. Srinivasa Setty's case did not override these earlier decisions regarding the computation of capital gains on bonus shares.

Conclusion:
The Tribunal concluded that the surplus on the sale of bonus shares is liable to be taxed under the head 'Capital gains'. The cost of acquisition of bonus shares should be determined by averaging the cost of the original shares over the total number of shares held. The decision in B.C. Srinivasa Setty's case did not apply to bonus shares as it dealt with the unique nature of goodwill. The appeals were dismissed, and the orders of the Commissioner (Appeals) were upheld.