1972 (10) TMI 7 - HC - Income Tax

Computation of capital gains when an assessee has sold the bonus shares allotted to him - Whether, for the purposes of computation of capital gains, was the assessee entitled to deduct the face value of the bonus shares from their sale value as the actual cost of those shares to the assessee within the meaning of section 12B(2) - correct method of valuing the cost to a person of the bonus shares is to take the cost of the original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares - instead of being a dealer in shares, the same principle will apply if the assessee is an investor in shares. Even in case of an assessee, who was an investor in shares, the capital gain of bonus shares has to be calculated in accordance with the method of valuation laid down by the Supreme Court in Gold Mohore Investment Co. Ltd. s case

Summary

Issues:
Computation of capital gains on sale of bonus shares - Deduction of face value as actual cost under section 12B(2).

Detailed Analysis:
The judgment delivered by the Bombay High Court addressed the issue of computation of capital gains when an assessee sells bonus shares allotted to them. The specific question referred to the court was whether the assessee could deduct the face value of the bonus shares from their sale value as the 'actual cost' within the meaning of section 12B(2). The case involved an investor holding shares of a company and receiving bonus shares without any payment. The assessment year in question was 1960-61, during which the assessee sold 600 bonus shares.

Initially, the Income-tax Officer rejected the assessee's claim to deduct the face value of the bonus shares from the sale proceeds as the actual cost, treating the entire surplus of the sale proceeds as capital gains. This decision was upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal interpreted 'actual cost' as the amount expended by the assessee in acquiring the capital asset, not what the assessee was supposed to have suffered.

The assessee relied on a Supreme Court decision in the case of Commissioner of Income-tax v. Gold Mohore Investment Co. Ltd., which established the method of valuing capital gains in cases involving bonus shares. The Supreme Court held that the cost of bonus shares for a dealer or investor should be calculated by spreading the cost of the original shares over both the original and bonus shares to find the average price of all shares. The Bombay High Court agreed that this method of valuation applied to investors as well, not just dealers in shares.

Therefore, the High Court concluded that the computation of capital gains on the sale of the bonus shares must be calculated in accordance with the method established by the Supreme Court in the Gold Mohore Investment Co. Ltd.'s case. The court ruled in favor of the assessee, allowing the deduction of the face value of the bonus shares from the sale value as the actual cost. No costs were awarded in this judgment.