1994 (12) TMI 140 - AT - Income Tax

Summary

Issues Involved:

1. Determination of the cost of acquisition of bonus shares for computing capital gains.
2. Application of the principle of averaging for bonus shares.
3. Relevance of the substituted value of original shares as on 1-1-1964.
4. Standard deduction under section 16 of the Income-tax Act for Jagadish Chandran (Ind.).

Issue-wise Detailed Analysis:

1. Determination of the cost of acquisition of bonus shares for computing capital gains:

The common case of the assessees before the Assessing Officer was that the cost of acquisition of bonus shares being nil, the question of computing capital gains arising from the sale of the shares in question did not arise. This argument was based on the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. The Assessing Officer rejected this argument, referencing CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, where the Supreme Court held that bonus shares have value ascertainable by an appropriate method. Consequently, the Assessing Officer computed the cost of acquisition of the bonus shares at Rs. 30.64 per share using the averaging principle.

2. Application of the principle of averaging for bonus shares:

The principle of averaging was discussed in the context of determining the cost of acquisition of bonus shares. The Members of the ITAT Madras Bench-D opined that the principle of averaging, as laid down by the Supreme Court in Dalmia Investment Co. Ltd., should be applied to determine the cost of bonus shares. However, they noted that the substituted value as on 1-1-1964 of the original shares should not be used for averaging. This was based on the Gujarat High Court's decision in CIT v. Chunilal Khushaldas [1974] 93 ITR 369, which held that bonus shares are held from the date of their issue, not from the date of the original shares' acquisition.

3. Relevance of the substituted value of original shares as on 1-1-1964:

The assessees argued that the fair market value of the original holdings as on 1-1-1964 should be considered for determining the cost of bonus shares. This was based on the provisions of sections 49(1)(ii) and 55(2)(ii) of the Income-tax Act. The ITAT Madras Bench-D considered whether the statutory procedure under section 55(2) and the judge-made principle of averaging could be reconciled. The Special Bench ultimately supported the assessee's view, referencing the Madras High Court decision in CIT v. Prema Ramanujam [1991] 192 ITR 692, which upheld the use of the 1-1-1964 value of original shares for averaging.

4. Standard deduction under section 16 of the Income-tax Act for Jagadish Chandran (Ind.):

In the case of Jagadish Chandran (Ind.), an additional issue was raised regarding the standard deduction available under section 16 of the Income-tax Act. However, since no arguments were advanced on this issue, the related grounds were rejected.

Judgment:

The appeals filed by the assessees were allowed based on the jurisdictional High Court's decision in Prema Ramanujam, directing the Assessing Officer to recompute the capital gains accordingly. The appeal by Jagadish Chandran (Ind.) was partly allowed, and those by Jagadish Chandran (HUF) and Smt. Sabitha Chandran were fully allowed.