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TMI Blog1984 (8) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of one bonus share for every five shares held by the shareholders. Thus 1,120,925 and 1,104 bonus shares were allotted by the company to Shrimati Raj Kumari in respect of three lots of shares held by her including the right shares. Out of the aforesaid shares, the assessee sold 1,500 and 500 shares in the accounting years relevant to the assessment years 1962-63 and 1966-67, respectively, and she sold the remaining 16,894 shares in the accounting year corresponding to the assessment year 1967-68. The other assessee, Shrimati Chandri Devi, purchased 4,000 shares of Indian Iron and Steel Co. Ltd. at Rs. 40.69 per share. On April 9, 1967, the assessee was offered 4,000 right shares by the company at the concessional rate of Rs. 13.50 per share, which she acquired thereafter in the year 1969. The company allotted 1,600 bonus shares to the assessee, Smt. Chandri Devi, on the basis of one bonus share for every five shares held by the assessee. Out of the aforesaid shares, the assessee gifted 1,800 and 500 shares in the years relatable to the assessment years 1962-63 and 1963-64, respectively. Thus, in all, 2,300 shares were gifted away by Smt. Chandri Devi. Of the remaining shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id assessment year. The ITO did not accept the computation of the cost of acquisition of bonus shares as calculated by both the assessees and held that in working out the income or the capital gain, the net cost incurred in acquiring the original and right shares by the assessees was to be adjusted against or deducted from the sale price, and it was erroneous to adjust the cost price of the bonus shares worked out on an average basis. The ITO held that nothing more than the actual cost price of the original and right shares could be allowed to be deducted from the sale price in working out the income or, for that matter, the capital gain of the assessee in relation to the assessment year in question. The ITO totalled up the cost price of all the shares purchased by each assessee from time to time and allotted to the assessee and deducted it from the sale price received by the assessee, in order to work out the income or capital gain of the assessee. Both the assessees filed appeals before the AAC of Income-tax who discarded the computation of profit and loss made by the ITO and did not also accept the method for such computation adopted by the two assessees. The AAC computed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jaipur, by a common order dated May 9, 1972. The Addl. CIT, Rajasthan, Jaipur, required the Appellate Tribunal to draw up a statement of the case and refer to this court questions of law arising out of its order dated May 9, 1972, in the case of both the assessees. The Tribunal held that the following questions of law arise out of its order dated May 9, 1972, and referred them to this court for its opinion? "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the price of the right shares are not to be averaged with the price of the original shares purchased from the open market for the purpose of determining the cost of acquisition of the shares in computing the capital gain under section 48 of the Income-tax Act, 1961 ? 2. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of acquisition of bonus shares has to be determined in terms of section 48(ii) of the Income-tax Act, 1961, by averaging the cost of the original shares and the bonus shares received with reference to them, in one lot, and by averaging the cost of the right shares and the bonus shares, received with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or may fetch less value, as the value thereof varies according to the market price of the shares of that company. In this view of the matter, the share certificates in respect of the bonus shares cannot be regarded either as cash or as a voucher to receive the face value thereof nor can it represent the amount paid by the shareholder for obtaining the same, because as a matter of fact no amount at all is actually paid by the shareholder even when bonus shares are allotted to him on the basis of his equity shareholding. The question of computation of the value of bonus shares arose before their Lordships of the Supreme Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567. It was held in that case that where bonus shares were issued in respect of ordinary shares held in a company by an assessee, who is a dealer in shares, their real cost to the assessee cannot be taken to be nil or their face value. Hidayatullah J., as he then was, speaking for the majority of the judges constituting the Bench of the Supreme Court, observed as under in Dalmia Investment Co. Ltd.'s case [1964] 52 ITR 567 at p. 578: " The Indian Income-tax Act defines 'dividend' and also extends it in some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u, as for example when the company has issued preference shares as well as ordinary shares, in that event, assistance may have to be taken of other evidence to fix the cost price of the bonus shares. The principle laid down by their Lordships of the Supreme Court in Dalmia Investment Co.'s case [1964] 52 ITR 567 was reiterated by the Bombay High Court in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC). In that case, it was held that in the case of a dealer in shares, who values his stock at cost, where bonus shares issued in respect of ordinary shares held by him ranked pari passu with the original shares, the correct method of valuing the cost of the bonus shares to the assessee is to take the cost of the original shares and spread it over the original shares and the bonus shares collectively and find out the average price of all the shares. The same view was also taken by their Lordships of the Supreme Court in CIT v. Gold Co. Ltd. [1970] 78 ITR 16 (SC). The question of determination of the value of right shares arose before their Lordships of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC). In that case, the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." Thus, in order to arrive at the capital gains, the cost of acquiring the capital asset has to be deducted from the full value of the consideration received. Sub-section (2) of s. 55 provides that for the purpose of s. 48, " cost of acquisition" in relation to a capital asset, shall be the cost of acquisition of the asset to the assessee or the fair market value of the assets. The question as to the method of valuation to be adopted to determine the value of bonus shares, when both original shares as well as bonus shares were sold, was also considered by their Lordships of the Bombay High Court in W. H. Brady Company Ltd. v. CIT [1979] 119 ITR 359. In that case, the assessee bought 670 shares of a company and on account of the possession of those shares, he acquired further 670 shares as bonus shares. Thereafter, the assessee bought further 765 shares of the company and thus he had a total holding of 2,105 shares of the company. Thereafter, the assessee received another lot of 2,105 shares as bonus shares. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the cost of bonus shares over the original shares and the bonus shares taken together. The decision in Kapadia's case [1967] 63 ITR 651 (SC), to, our mind has no bearing on the question of averaging the price of different lots of shares actually purchased by the assessee nor are we prepared to accept the argument of the learned counsel for the assessees that each lot of shares should be considered as distinct and different identifiable units for the purpose of arriving at the average purchase price. It may be pointed out that the right shares as well as the bonus shares were purchased by the assessees directly from the company in consideration of the assessees already holding equity shares of the company. In our view, the price of the bonus shares received by the assessees on the basis of the original shares purchased by them from the open market, has to be determined by spreading over the cost of the original shares over the original or equity shares and bonus shares taken together. Similarly, the price of bonus shares issued to the assessees on the basis of their holding right shares has to be computed by averaging the cost of the right shares and spreading the same over th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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