9911796707
TMI Blog1979 (2) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to the decisions in the cases of CIT vs. Gold Mohore Investment Co Ltd. and Gold Co. Ltd. 3. The assessee appealed to the AAC. The AAC accepted the working of the assessee regarding the computation of capital gains. In doing so, he relied on the decision in the case of CIT vs. Dalmia Investment Co. Ltd(2). 4. The Revenue has come on appeal. The Departmental Representative submitted that the AAC was in error in his determination of the capital gains whereby he deleted the sum of Rs. 6,58,250. The AAC failed to note that where the original shares and the bonus were sold in entirety the actual cost to the assessee cannot exceed the original cost. Reliance was placed on the decision in the case of Madura Mills Co. Ltd(4). The Departmental Representative also placed on a decision in 74-ITR-62(SC). Apart from this, reliance was also placed on a decision of the Tribunal in ITA No. 213/76-77, B. Bench dt. 30th Nov., 1997. 5. The learned counsel on the other hand submitted that the cost of bonus shares has been correctly worked out by the AAC by following the decision in Dalmia's(3) case. In that case 'Nil' value was given to the bonus shares by the ITO but that was not acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the face value of the bonus shares should be taken into consideration in determining the profit or loss. That decision also cannot be taken to authorise the reduction in the cost of acquisition of the original share-holding. Referring to the decision in 76-ITR-16 (Gold Co.'s case), he submitted that this case also dealt with the valuation of bonus. In this case also the question before the Court was whether the face value of the bonus shares should be taken into consideration or not. Moreover, these cases were cases of dealers in shares and there was no question of the computation of capital gains. He accordingly submitted that none of these cases have decided what should be the cost of acquisition of the original holding and at any rate those questions were not before the Court. By virtue of that decision of the Tribunal, it cannot be said that the cost of the original shareholdings had to be reduced by the amount of value assigned to the bonus shares. He then submitted that in the case of Emerald Co. Ltd(5)., it was decided that where the old shares were sold the bonus shares being kept back the profit on the sale of old shares had to be ascertained by taking the difference bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has now to be reduced. He submitted that though capital gains was the subject matter of computation it has to be seen what were the components on which capital gains arose. The capital gains arose on the acquisition of old shares as well as bonus shares. The ITO has accepted the position regarding the old shares and went on to hold that the bonus shares had no value. That at any rate was the dispute before the AAC. The dispute in bonus shares cannot now be enlarged. For this purpose he relied on the case of CIT vs. Steel Cast Corporation(11) and he referred to the various passages at 684, 685, 688, 690,691 to 696 and 700 in particular. He also referred to the decision in the case of Pathikonda Balasubba Setty(12). He submitted that the AAC himself could not have enhanced the assessment in the circumstances of this case. The Department should not be permitted to take this stand which was not its case when the Officer originally completed the assessment. 7. The Departmental Representative submitted that the learned counsel cannot now take the plea about the Department's case for the revaluation of the old shares. What the ITO did in fact was to take the cost actually paid as the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4525 Received as bonus shares 7-2-1967 1488 1,85,800 Purchased for cash 23-10-1969 3584 do . 21,507 . . The ITO held that the bonus shares have to be taken at 'nil' value as the shares were acquired by the assessee at no cost. He took the cost of original shares as the cost of the original shares plus the bonus shares and computed the capital gains. The AAC, however, ascertained the cost of bonus shares by averaging the cost of the original shares and the bonus shares and in this manner he valued the bonus shares received on 9th Dec., 1966 at Rs. 3,57,498 and that on 23rd Oct., 1969 at Rs. 3,00,752. The case of the Revenue is that the total value of all the shares including the bonus shares cannot exceed the cost of acquisition which amounted to Rs. 14,47,254. It was contended that the value given to the bonus shares should be deducted from the cost of the original holding. The net result will be that in effect the bonus share would not cost the assessee anything. The Tribunal's decisions in ITA No. 25 (Mad)/74-75 dt. 17th March, 1977 as well as ITA No.213 (Mad)/76-77d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educe the cost of acquisition of the shares purchased earlier than the issue of bonus shares. The original shares have to be dealt with under s. 48 which speaks of cost of acquisition and that is known. Accordingly, there will be no case for recalculating the cost of acquisition of the shares purchased for cash on 29th Sept., 1954, 19th March, 1956, 25th March, 1959 as on 19th Dec., 1966 when some bonus shares were issued and in relation to these shares and those purchased on 7th Feb., 1967 again as on 23rd Oct., 1969 when further bonus shares were issued. 11. The mode of computation of capital gains is governed by s. 48 which talks of "the cost of acquisition of the capital assets and the cost of any improvement thereto". The cost of any improvement thereto". The cost of acquisition of the shares paid for in cash is known and therefore there is no necessity to ascertain the cost of acquisition of such shares on any later dates. The bonus shares are issued in December 1966 and October 1969. On those two days there was no necessity to re-ascertain the cost of acquisition of the shares purchased for cash on days prior to that. There is no special method of ascertaining the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to the computation of capital gains which are governed by s. 48. As already noticed, the Supreme Court in 82-ITR-788 have stated the decision in 52-ITR-567 cannot be applied to the calculation of capital gains. 13. The other cases relied on are 74-ITR-62 and 78-ITR-16. Those cases also related to the valuation of bonus shares of share dealers and cannot be applied to the computation of capital gains. The questions referred to the Court also related to the valuation of bonus shares and these cases cannot be said to have decided the issue that after having allocated a value for the bonus shares on the basis of the principles laid down in 52-ITR-567, that the cost of acquisition of the old shares should be correspondingly reduced. 14. The learned counsel on the other hand referred to the decision in Emerald Company's case reported in 36-ITR-257. That case also dealt with a case of a dealer in shares. In that case the original shares were sold leaving the bonus shares intact. The question was how to compute the profit on the sale of the old shares. In that case, the assessee had 150 shares purchased for cash in 1951-52 when 50 bonus shares were issued. He sold 50 shares, pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original holdings accordingly. All the cases which have been referred to show that the assessee invariably adopt the face value of the bonus shares when they bring it into the accounts wherever they have been dealers in shares. This practice, however, has not been approved by the Supreme Court. No commercial practice has been brought to our notice which goes to reduce the value of the cost of acquisition of old shares consequent on the issue of bonus shares. 16. The other decisions on capital gains are Madura Mills Co. Ltd(4). The case also states that there was no controversy about the valuation of the shares purchased by the assessee, but related to the valuation of bonus shares. According to the assessee, the bonus shares had to be valued at face value and according to the Department its value should be taken as nil. The Court applied the decision is 52-ITR-567 and held that the bonus shares should be valued by spreading the cost of the ordinary shares over the old shares and the new shares. The Court also rejected the contention of the assessee that the decision in 52-ITR-547 though related to a trader should not be applied in the case of capital gains as well. This decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res cost nil has not been accepted by the Supreme Court in 52-ITR-567. 18. The true nature and effect of the issue of a bonus share is considered in 93-ITR-369 (Chunilal Kushaldas's case). The decision refers to Regulation 96 in Table A to the Companies Act, 1956. A reading of that decision would clearly show that a shareholder who would otherwise be interested in the undistributed profits kept back as reserves in a final liquidation gets that right transformed into a capital when bonus shares are issued. It is therefore incorrect to say that it did not cost the assessee anything at all. In fact it had costed something to the assessee which appears to be the face value but in view of the decision in 52-ITR-567 that face value has to be substituted. The assessee in 93-ITR-369 also relied on the decision in Dalmia Investment Co(3). At page 383 the Court held that the bonus shares are clearly a new capital asset acquired by a share-holder though after the acquisition the monetary value of the interest of the share-holder represented by the original shares and the bonus shares remains the same as it was prior to the acquisition. 19. There is another decision which also thrown some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew shares. The shareholders receiving bonus shares credited as fully paid up are given credit for the capital sums which they would otherwise have had to contribute in respect of the bonus shares allotted to them if those shares had not been issued credited as fully paid up and this credit is given by application of the capitalised accumulated profits in payment of such capital sums..........If this be the correct legal analysis of what happens when bonus shares are issued by a company, it is clear that at that stage there is a distribution of capitalised accumulated profits, though that distribution does not take the form of payment of accumulated profits in cash to the shareholders and does not, therefore, entail release of any assets of the company.......This view which we are taking is amply supported by authorities, but, more than the authorities, there is a statutory enactment which clearly shows that when bonus shares are issued credited as fully paid up out of capitalised accumulated profits, there is distribution of capitalised accumulated profits, though such distribution does not entail release of assets of the company. We are referring to regulation 96 in Table A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly halved...It follows that the bonus shares cannot be said to have cost nothing to the shareholder because in the issue of the bonus shares there is an instant loss to him in the value of his original holding". This passage clearly shows that the Court was comparing the old shares before and after the issue of bonus shares and did not say that the issue of bonus shares would reduce its cost of acquisition. In the light of this categorical pronouncement the acceptance of the Revenue's case in dealing with capital gains as in this case would in effect place a nil value on the bonus shares. This decision cannot therefore be applied to hold that the cost of old shares has to be reduced. It is clear that bonus shares have some value independent of the cost of acquisition of the original shares. Therefore, there is nothing incongruous by taking the cost of the acquisition of the old shares as such without any reductions and assigning a value to the bonus shares in accordance with the decision in 52-ITR-567. 21. It now only remains to consider the two decisions of the Tribunal relied on by the Departmental Representative. The first one is the decision in ITA No. 25 (Mad)/74/75 dt. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares purchased by the assessee in 1966. In arriving at the cost of acquisition of these shares, the total number of shareholdings the assessee received including the bonus shares for which he made only an original payment has to be taken into account and the cost of acquisition of the shares sold has to be worked out by spreading over the cost of the entire holding of shares. Though the decision in Dalima Investment Co. Ltd. was relevant in the finding of the cost of acquisition of the bonus shares, for the reason stated above the same principle would apply in the case of working out the cost of acquisition of shares sold subsequent to the declaration of bonus shares. Though we do not, therefore, in terms agree with the decision in ITA 25/74-75 the method of arriving at the cost acquisition of the present shares sold would be on the same principles". We have already discussed as to whether the value assigned to the bonus shares should be reduced or not from the cost of acquisition of the old shares and accordingly that part of the discussion need not be repeated. The other point made out in this decision is that on the issue of a bonus share a new asset consisting not only the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of bonus shares for which a shareholder does not apparently pay any cash, but on the basis of the case decided in 52 ITR 567 some cost is being attributed to that. In our opinion, therefore, the cost attributed to the bonus shares cannot be reduced from the cost of acquisition of the old shares. In the result, we uphold the order of the AAC on this point. 22. The second contention relates to the disallowance under s. 40A(5). The ITO disallowed a sum of Rs. 87,703 under the above section in respect of five persons. Out of this, the excess over Rs. 72,000 was disallowed in the cases of S/Shri T.S. Santhanam, R. Ramachandran, and K. Ramesh. In respect of the others the excess over 1/5th of the salary was disallowed. 23. On appeal, the AAC reworked the amount and held that only a sum of Rs. 15,238 can be allowed. 24. It is against this that the Revenue has come on appeal. The Departmental Representative submitted that in any of all these cases the ITO had taken note of rates and insurance, building and furniture maintenance and depreciation thereon as part of perquisites, whereas the AAC had deleted these items and took into consideration the other two items considered ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
