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TMI Blog2007 (3) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... as erred in directing the Assessing Officer to compute long-term capital gain on the indexed cost of the market value of shares as against the "average cost" taken by the Assessing Officer for computation of long-term capital gain on sale of shares of Premier Automobiles Ltd." 3. The relevant facts may be stated briefly. During the previous year relevant to the assessment year under appeal, the assessee-company sold the shares, including bonus shares, held by it in the following three companies : (1)Premier Automobiles Ltd. (PAL) (2)Walchandnagar Industries Ltd. (WIL) (3)Bombay Cycle and Motor Agencies Ltd. (BCMA) The assessee declared long-term capital gain on sale of these shares at Rs. 918.93 lakhs. As against this, the Assessing Officer determined the capital gain at Rs. 1,113.34 lakhs. Some of the shares were acquired by the assessee prior to 1-4-1981 whereas some shares were acquired by the assessee after the above date. Bonus shares were issued to the assessee after the statutory date of 1-4-1981. There is no dispute between the assessee and the revenue on the point that for determining the cost of acquisition, the original cost is to be averaged out between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the index factor 140 in the financial year 1986-87. The cost of acquisition of the shares acquired by the assessee in the financial years 1981-82, 1982-83 and 1983-84 was also increased in similar manner. Such increased cost was adopted for the purpose of deriving the average cost per share. Such average cost of acquisition was further indexed by the assessee to the level of the financial year relevant to the assessment year under appeal. Capital gain was worked out on the above cases. 4. The Assessing Officer rejected the aforesaid method adopted by the assessee for determining the cost of acquisition. He held that for averaging the actual cost of pre 1-4-1981 shares should be adopted instead of FMV as on 1-4-1981. He also held that the assessee cannot get the benefit of double indexation of the cost of acquisition i.e., first up to the financial year 1986-87 when the bonus shares were allotted, and again up to the level of the financial year 1993-94 when the shares were sold. Assessing Officer, therefore, re-determined the cost of acquisition and worked out capital gain chargable to tax as per annexure to the assessment order. 5. When the matter came up before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. of shares including both, bonus shares and cash-paid shares acquired prior to the issue of bonus shares. The principle of averaging the cost is as laid down by the Apex Court in following cases: ( a ) CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567; ( b ) CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 /[1969] 74 ITR 62; ( c ) CIT v Gold Co. Ltd. [1970] 78 ITR 16 . 3.For the purpose of determining the average cost, the original cost of cash paid shares [in the case of pre-1-4-1981 shares, the cost is taken either at the actual cost or fair market value as on 1-4-1981 whichever is higher - as per section 55(2)( b )( i )] is indexed so as to bring it to the level of index of the year of issue of bonus shares. Such indexed cost is spread over the total No. of shares to arrive at the average cost, which I then applied to all the shares except pre 1-4-1981 shares where the fair market value as on 1-4-1981 is substituted in the place of cost of acquisition as provided under section 55(2)( b )( i ). The aggregate of the average indexed cost as of the bonus year is then brought to the indexed level of the year of sale by taking the cost inflation index ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true benefit of indexation. Therefore, in order to reflect the true indexed cost under the averaging principle, it was necessary to upgrade the original cost to the level of index of bonus year and then average it out. This method is intended to promote the object of the new scheme of indexation in its true spirit to keep off the inflationary profits from taxation. 4.In respect of other post-bonus shares, the actual cost of acquisition is suitably indexed having regard to the cost inflation index of the year of sale and that of the year of acquisition. 5.As explained earlier, the cost of acquisition of pre 1-4-1981 shares is taken at the fair market value as on 1-4-1981 or the original cost whichever is beneficial to the company since the company has option to do so under section 55(2)( b )( i ). In this case even though by the averaging method, the original cost of pre 1-4-1981 shares gets reduced, since the fair market value as on 1-4-1981 being more than such reduced cost, the fair market value is substituted in the place of the average cost. This is in accordance with the provisions of section 55(2)( b )( i ) and same is supported by the Supreme Court decision in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained at page 15 of the Assessing Officer s order and the annexure to the assessment order where the cost of acquisition has been determined. It was argued that the Assessing Officer s order is in conformity with the provisions of law. 9. We have given our careful consideration to the rival submissions vis-a-vis the relevant facts and the legal position as emerging from the cases cited before us. First of all, we would like to refer to the ITAT Pune Bench (TM) decision in the case of Kalyani Exports Investments (P.) Ltd. ( supra ). On a difference of opinion between the learned Judicial Member and the learned Accountant Member, the relevant issues were placed before the Third Member. The issues, therefore, stand decided by the majority. One of the questions dealt with by the Tribunal pertained to as to whether statutory cost of acquisition can be affected by issue of bonus shares subsequent to statutory date. The Tribunal observed that this issue came for consideration before the Supreme Court in the case of Shekhawati General Traders Ltd. ( supra ), where it was held that any event prior or subsequent to the statutory date is irrelevant and, therefore, statutory c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quisition for the shares acquired by the assessee between 1-4-1981 and the date of issue of bonus shares should be inflated in the same ratio as the cost inflation factor for the financial year 1986-87 bears to the cost inflation factor of the relevant financial year in which the shares were acquired by the assessee, in our view, this submission cannot be accepted. There is no warrant for adopting this methodology under the provisions of Income-tax Act and no authority has been cited by the learned counsel for the assessee in support of this argument. The various judicial pronouncements including the Supreme Court s decision available on this point, lay down the principle that either the FMV as on the statutory date or the actual cost of acquisition of the shares has to be spread over the original shares and the bonus shares. The benefit of cost inflation index will be available to the assessee as the base year has to be taken to be financial year wherein the statutory date falls or the relevant financial years in which further shares were acquired, as the case may be. Such statutory cost and the cost of acquisition will be inflated on the basis of the index factor of the base year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the value of the bonus shares is not to be separately ascertained when an entire block of shares including bonus shares held by the assessee were sold or transferred, and in such a situation, it is not necessary to ascertain the individual cost of each share. The position was reiterated by this court in S. Ram v. CIT [1988] 230 ITR 353, wherein this court held that in case where the original shares were obtained before 1-1-1954, and the bonus shares were obtained after 1-1-1954, and where the assessee has exercised his option adopting the fair market value as prevalent as on 1-1-1954, it is not possible to adopt one value for the original shares, namely the value as on 1-1-1954, and another value for the bonus shares which was prevalent after 1-1-1954. This court held that once the value of the original shares was determined in accordance with the statutory provisions, then the said value remains an unalterable figure and the said value should be adopted for the purpose of dividing the same by bonus shares as well as the original shares and any alteration to the above method would be hit by the provisions of section 55(2) of the Act. This court held that once the value h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple of costing. It is resorted to whenever it I found necessary to get to know the average cost of bonus shares with a view to reckoning the results of any separate transaction in which the bonus shares alone figured to the entire exclusion of the original shares. But where the entire block of shares held by a shareholder is sold or otherwise disposed of and in that sale also figure all the bonus shares held by that shareholder, there can be no occasion for entering into the exercise of costing of bonus shares. That is because the whole cost of shares including bonus shares is already a known figure, and it would be an unnecessary refinement to get to know the individual cost of each share. It is enough that we know the actual cost of all the original shares held by the assessee and since the whole block is sold, the actual cost of acquisition of the original shares alone will have to be taken. If, however, you follow a fastidious or an over sophisticated method of calculation taking note of only the average cost of the bonus shares, then you must also take into account the average cost of the original shares, in which even also there cannot be a separate addition to the actual co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case may be, and in accordance with the relevant statutory provisions. In Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC), the court laid stress on the fact that the assessee had opted to take the cost of acquisition as provided by the relevant statute, i.e., the statutory cost of acquisition and thus substituting the market value as on 1-1-1954, in place of the actual cost of acquisition, and only in such a case, the subsequent issue of bonus shares cannot affect the issue. It is implicit from the above decision that the principle of averaging by spreading the cost over the old shares and the new bonus shares as enunciated by the Supreme Court in Dalmia Investment Co. s case [1964] 52 ITR 567, and other cases, will apply as a general rule in cases where the assessee claims to deduct the actual cost of acquisition, instead of the statutory cost of acquisition. It also stands to reason since the fair market value as per the "statutory cost of acquisition" will be a notional or fictional figure - mostly inflated - having no connection with the original or actual cost. It is after discussing the effect or impact of the issue of the bonus shares, on the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value of 2,775 bonus shares at Rs. 167.50, being the market value as on 1-4-1954 4,64,813 Expenditure incurred for sale 51,843 18,29,176 5,99,899 In effect, the assessee treated the cost of acquisition of the bonus shares as nil and sought to exercise the option of substituting the market value of the asset as on January 1, 1954, under section 48 and section 55(2)( i ) of the Income-tax Act, 1961, in respect of these shares in place of their cost of acquisition. The ITO spread the cost of the original shares over the whole lot of 2,680 shares which included 670 original shares and 2,010 bonus shares. Since the average cost according to this formula was much less than the market price of the shares as prevailing on 1-1-1954, he gave the assessee the benefit of the option of the market price as on 1-1-1954, in respect of this lot of 2,680 shares. In regard to the second lot of 765 shares bought between 1942 and 1946 and 765 bonus shares issued to the assessee in April, 1946, the average cost came to Rs. 210 per share. It was much higher than the market price of the shares as on 1-1-1954. The ITO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of the following principles : ( a )The cost of acquisition of pre-1-4-1981 shares has to be adopted as FMV as on that date or the original cost of acquisition, as opted by the assessee. ( b )The FMV adopted as on 1-4-1981 is unalterable and cannot be changed. ( c )The cost of the bonus shares is to be worked out on the basis of the statutory cost as adopted on 1-4-1981 and the actual cost of acquisition of shares acquired by the assessee post 1-4-1981. ( d )The base year in respect of bonus shares shall be the financial year in which bonus shares are allotted. ( e )The base year in respect of pre 1-4-1981 shares shall be the financial year 1981-82. ( f )The base year in respect of shares acquired post 1-4-1981 shall be the relevant financial year. ( g )On the above basis, the indexed cost of acquisition shall be adopted by the Assessing Officer and the income under the head capital gains shall be determined accordingly. 19. We direct the Assessing Officer to recompute the income under the head Capital gains on the basis of the discussion given above. 20. Ground No. 2 of the assessee s appeal as also of the Department s appeal pertains to the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 36(2) are not fulfilled. In our view, even if it is assumed that, strictly speaking, the assessee was not carrying on money lending business, there is no dispute that the debt has arisen in the normal course of carrying on the business activity and, therefore, if such debt cannot be recovered by the assessee and has written off in the books of account, it would constitute a legitimate business loss deductible under section 37. We have considered the Madras High Court decision in the case of South India Surgical Co. Ltd. ( supra ). The Madras High Court was concerned with debts recoverable from Government hospitals and institutions and the High Court observed that such debts cannot be said to have become irrecoverable or bad. The ITAT Mumbai Special Bench in the case of Oman International Bank, SAOG ( supra ) has held that writing off a bad debt in the books of account constitutes evidence of its having become bad and irrecoverable. The only condition is that such writing off should be bona fide and not fraudulent. It may be mentioned that the Gujarat High Court in the case of CIT v. Girish Bhagwat Prasad [2002] 256 ITR 772 has taken the view that after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant as bad debts." 27. Both the sides agreed that this issue is covered by the Tribunal s order dated 15-12-2006 in ITA No. 7095/Mum./98 and 3497/Mum./01. We find that this issue has been considered and decided at paras 4 and 5 of the above order which are reproduced below: "4. The next issue which is also common for the two assessment years under appeal pertains to confirmation of additions made by the Assessing Officer for lease rentals and hire charges on accrual basis. Similar issue has been dealt with by the Tribunal for the assessment years 1989-90 and 1991-92 in the order referred to above. The Tribunal considered this issue at paras 14 and 15 of the order and the matter was restored to the Assessing Officer for re-adjudication with the following observations at para 15 of the order: We have gone through the aforesaid order of the Tribunal and find that the Tribunal, vide order dated 17-10-2006, has deleted similar addition in respect of 1992-93 and 1993-94 on the ground that addition has been offered on cash basis. Impliedly, the Tribunal has accepted the mixed system of accounting followed by the assessee. This issue had also arisen in assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue is also covered by the Tribunal s order for the assessment years 1995-96 and 1997-98 referred to above. The issue was restored to the Assessing Officer with the following observations at para 3 of the order : "3. The first issue which is common for both the assessment years pertains to disallowance of depreciation in respect of computers leased by the assessee to PCL. Similar issue has been dealt with by the Tribunal in the order referred to above at paras 6 and 7. At para 7 the Tribunal observed that similar issue arose in the assessment year 1992-93 and vide order dated 17-10-2006 it was restored to the Assessing Officer for fresh adjudication. Therefore, for the assessment years 1989-90 and 1991-92 also this issue was restored to the Assessing Officer for re-consideration in accordance with the order of the Tribunal for the assessment year 1992-93. The facts and circumstances are admitted to be similar in the two assessment years which are under appeal and, therefore, respectfully following the precedents, we restore this issue for both the years to the Assessing Officer for re-adjudication in consonance with the Tribunal s order for the assessment year 1992-93 referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaining to assessment years 1989-90 to 1991-92 and the Tribunal had noted that income was offered on receipt basis. Since amount of interest was offered in the year of receipts, the Tribunal accepted the stand of the assessee vide order dated 30-6-2005. It appears that the Tribunal accepted the appeal of the assessee in order to avoid the double taxation. Therefore, following the same, the addition confirmed by the learned CIT(A) is hereby deleted. The Assessing Officer is directed to assessee the interest income on receipt basis in the years in which it is received." 35. Respectfully following the precedent, we confirm the order of the learned CIT(A) on this issue. 36. Ground No. 4, which is the last ground of appeal raised by the Department, is as under: "On the facts and circumstances of the case and in law, the learned CIT(A) has erred, in deleting the disallowance of finance charges of Rs. 15,15,000 paid to M/s. Infrastructure Leasing and Finance Ltd." 37. This issue is admitted to be covered by the Tribunal s order dated 17-10-2006 for the assessment year 1992-93 in ITA No. 6467/Mum./96. We find that on similar issue the Revenue was in Appeal and the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X
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