2003 (9) TMI 296 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the cost of acquisition for shares when computing capital gains, specifically whether to use the average cost method or the actual cost method.
2. Applicability of statutory amendments to Section 55(2) of the Income-tax Act, 1961, regarding the cost of acquisition of bonus shares.
3. Interpretation and application of Supreme Court judgments in similar cases concerning the cost of acquisition of shares.

Detailed Analysis:

1. Determination of Cost of Acquisition for Shares:
The primary issue in this appeal concerns the method for computing the cost of acquisition of shares for the purpose of calculating capital gains. The CIT(A) upheld the use of the average cost method, which involves spreading the actual purchase cost over both the original and bonus shares. The assessee, however, argued that the cost should be based on the actual purchase price of the original shares, excluding the bonus shares since they were not sold in the relevant year. The Assessing Officer rejected the assessee's claim, stating that the statutory amendment effective from 1st April 1996 mandated the use of the average cost method for transactions occurring before this date.

2. Applicability of Statutory Amendments to Section 55(2):
The amendment to Section 55(2) introduced by the Finance Act, 1995, effective from 1st April 1996, specifies that the cost of acquisition for bonus shares should be taken as nil. This amendment aimed to simplify the computation of capital gains on the transfer of bonus shares. The CBDT Circular No. 717 dated 14th August 1995 elaborated that the cost of bonus shares should be nil while the cost of original shares should be the amount paid to acquire them. The Tribunal noted that applying the average cost method in light of this amendment could lead to an incongruity, as the cost of acquisition might be less than the actual cost.

3. Interpretation and Application of Supreme Court Judgments:
The CIT(A) relied on the Supreme Court's decision in Escort Farms (Ramgarh) Ltd. v. CIT [1996] 222 ITR 509, which held that the cost of acquisition of shares should be determined based on the average value when bonus shares are issued. However, the Tribunal observed that this principle applies only when the cost of acquisition of bonus shares is not statutorily required to be nil. The Tribunal emphasized that the legislative amendment to Section 55(2) necessitates excluding bonus shares from the computation of the average cost for determining the cost of acquisition of original shares. The Tribunal also referred to the Supreme Court's judgment in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, which supported the averaging method but did not account for the statutory requirement to take the cost of bonus shares as nil.

Conclusion:
The Tribunal concluded that in cases where the cost of acquisition of bonus shares is statutorily required to be nil, these shares should be excluded from the computation of the average cost for the purpose of determining the cost of acquisition of original shares. The Tribunal restored the matter to the Assessing Officer to verify whether the assessee continued to hold the relevant bonus shares as of 1st April 1995. If the assessee held the shares on this date, the bonus shares should be excluded from the computation of the average cost.

Final Order:
The appeal was allowed with the direction to the Assessing Officer to verify the holding of bonus shares as of 1st April 1995 and to exclude these shares from the computation of the average cost for determining the cost of acquisition of the shares sold during the relevant previous years.