1988 (1) TMI 69 - AT - Income Tax

Summary

Issues:
Determining the cost of acquisition of bonus shares acquired after 1-1-1964.

Analysis:
The appeal involved the assessment year 1980-81 and centered on the cost of acquisition of bonus shares acquired post 1-1-1964. The assessee had initially purchased 160 shares in November 1959 and later received 38,240 bonus shares in July 1979. The dispute arose regarding the method to calculate the cost of acquisition for these bonus shares. The assessing officer contended that the cost should be determined based on the price paid for the original shares divided by the total number of shares, as per the decisions in the cases of CIT v. Dalmia Investment Co. Ltd. and CIT v. Gold Mohore Investment Co. Ltd. The Commissioner of Income-tax (Appeals) upheld this view, denying the assessee's claim to substitute the fair market value as on 1-1-1964 under section 55(2)(i) of the Income-tax Act.

The assessee argued that the focus should be on determining the average cost of acquisition of the bonus shares by considering the market value of the original shares as on 1-1-1964. Referring to the Supreme Court decisions, the assessee contended that the cost of acquisition should be spread over the original and bonus shares. The Tribunal analyzed the various methods for determining the cost of bonus shares, as discussed in the Dalmia Investment Co. Ltd. case. It was established that if bonus shares rank pari passu with the old shares, the cost should be spread over both types of shares.

The Tribunal delved into the definition of the cost of acquisition under section 55(2), emphasizing that the market value as on 1-1-1964 could be deemed as the cost of acquisition for the original shares. Therefore, this substituted cost should be utilized for all computations related to capital gains, including determining the average cost of acquisition of bonus shares. The Tribunal concluded that once the market value as on 1-1-1964 is adopted as the cost of acquisition for the original shares, it should be spread over to calculate the cost of acquisition for bonus shares. Consequently, the Tribunal allowed the appeal, directing the authorities to adjust the cost of acquisition accordingly.

In summary, the judgment revolved around interpreting the provisions of section 55(2) and applying the principles established in previous Supreme Court decisions to determine the cost of acquisition of bonus shares acquired after 1-1-1964. The Tribunal clarified that the market value as on 1-1-1964 should be considered for all purposes, including calculating the average cost of acquisition, leading to the allowance of the appeal in favor of the assessee.