1993 (8) TMI 146 - AT - Income Tax

Summary

Issues: Valuation of shares for computation of capital gains based on original and bonus shares, application of the principle of averaging, statutory option to substitute fair market value, dichotomy in the method of computation of capital gains.

In this case, the assessee, a HUF deriving income from business and other sources, appealed against the order of the CIT (A) confirming the valuation of shares based on averaging the cost of original and bonus shares for computing capital gains. The assessee argued that the capital gains returned should have been accepted without applying the principle of averaging. The Assessing Officer determined the capital gains by averaging the cost of acquisition among original and bonus shares, following the Supreme Court decision in CIT v. Dalmia Investment Co. Ltd. The CIT (A) upheld this decision, relying on the Supreme Court and Madras High Court judgments. The assessee contended that the statutory option to substitute fair market value should prevail over averaging, citing the Supreme Court judgment in Shekhawati General Traders Ltd. v. ITO. The ITAT observed that both original and bonus shares were acquired before 1-4-1974, allowing the assessee to substitute fair market value. The ITAT distinguished the cases cited by the lower authorities, emphasizing that the valuation of bonus shares alone was not the issue in this appeal. The ITAT set aside the CIT (A) order, directing the Assessing Officer to re-calculate capital gains based on the fair market value or cost of acquisition as per the assessee's option, requiring written confirmation of the option and providing the assessee an opportunity to be heard.

The ITAT noted the statutory option available to the assessee to substitute fair market value for the cost of acquisition for shares acquired before 1-4-1974. The ITAT emphasized that the assessee's method of valuation, using original cost for some shares and averaging for others, was not acceptable as both original and bonus shares were acquired before the specified date, allowing only one option for valuation. The ITAT distinguished previous judgments, highlighting that the specific circumstances of this case warranted the application of the fair market value substitution option. As a result, the ITAT allowed the appeal for statistical purposes, directing a re-calculation of capital gains based on the correct valuation method chosen by the assessee, ensuring procedural fairness in the process.