1990 (2) TMI 96 - AT - Income Tax

Bonus Shares, Computation Of Capital, Orders Prejudicial To Interests, Original Assessment, Previous Year, S. 10

Summary

Issues:
1. Computation of capital gains by spreading cost over original plus bonus shares.
2. Justification of CIT's direction to recompute capital gain based on average cost.
3. Application of Supreme Court decisions in determining cost of shares for capital gain computation.
4. Interpretation of Section 48 of the Income-tax Act regarding cost of acquisition.
5. Relevance of bonus shares issuance on the cost of original shares.
6. Comparison of various High Court decisions on the impact of bonus shares on original shares' cost for capital gain computation.

Analysis:
The case involved an appeal by an individual assessee against the CIT's order for the assessment year 1983-84, challenging the inclusion of capital gains in the total income. The CIT directed the ITO to recompute the capital gain by spreading the cost over original plus bonus shares, contrary to the assessee's computation method.

The CIT relied on Supreme Court decisions like CIT v. Dalmia Investment Co. Ltd. and CIT v. Gold Mohore Investment Co. Ltd. to support the direction. However, the ITAT found these decisions irrelevant as they mainly dealt with the valuation of bonus shares, not the computation of capital gain from the sale of original shares.

The ITAT referred to Section 48 of the Income-tax Act, emphasizing that the cost of acquisition of original shares should not be affected by subsequent issuance of bonus shares. Citing the Supreme Court's decision in Shekhawati General Traders Ltd. v. ITO and subsequent High Court judgments, the ITAT concluded that the cost of acquisition remains unchanged by bonus shares issuance for capital gain computation.

The ITAT highlighted that the original shares were sold by the assessee, and there was no error in the initial capital gain computation accepted by the ITO. Therefore, the ITAT set aside the CIT's direction under Section 263 of the Act, partially allowing the appeal.

In summary, the ITAT's analysis focused on the correct method of computing capital gains, emphasizing that the cost of original shares should not be diluted by subsequent bonus shares issuance. The judgment clarified the application of relevant legal provisions and distinguished various court decisions to support its conclusion in favor of the assessee.