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TMI Blog1993 (11) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... me were, therefore, receipt of technical know-how fees from the Indian Company and also dividend from the same company. In addition to the above, the assessee disclosed income from capital gains on sale of shares of the Indian Company and the dispute relates to the computation of capital gains. 4. The assessee sold 8,86,594 shares of the face value of Rs. 10 each of the Indian Company at a price of Rs. 51 per share. The rate for transfer was fixed by the Reserve Bank of India. According to the assessee, for the purpose of working out the capital gains, the sale-price of Rs. 51 per share should be converted into US Dollars at the prevailing rate of exchange on the date of transfer of shares. Similarly, the cost of acquisition of shares should also be converted into US Dollars after applying the conversion rate as on 1-4-1974 with respect to the original shares, which were purchased before 1-4-1974. After working out the capital gains in foreign currency in the above manner, the assessee has sought to apply the provisions of rule 115 of the Income-tax Rules, 1962 which deals with the rate of exchange which has to be applied for conversion of income expressed in foreign currency into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1982. These dates are significant. The original as well as the bonus shares were transferred during the year under consideration. The sale price @ Rs. 51 per share is no more in dispute. However, the difference has arisen in the computation of cost of acquisition. 9. The assessee worked out the cost of acquisition of 5,91,063 shares @ Rs. 15.85 per share, which was the fair market value on 1-4-1974. This amounted to Rs. 93,68,348. Thereafter, the assessee worked out the average cost of 2,95,531 bonus shares by spreading the above fair market value on 1-4-1974 of Rs. 93,68,348 over the total number of shares of 8,86,594 and multiplying the same by 2,95,531. This gave a value of Rs. 31,22,779. This computation is reproduced below: "Fair market value as on 1-4-1974 of 5,91,063 shares @ Rs. 15.85 per share. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in dispute here that the bonus shares ranked pari passu with the original shares. With these observations, the Assessing Officer adopted the cost of the original shares as the fair market value on 1-4-1974, i.e., Rs. 15.85 per share and arrived at the cost of 5,91,063 original shares as well as 2,95,531 bonus shares together at Rs. 93,68,348 (5,93,063 original shares x Rs. 15.85). 11. The CIT (Appeals), however, accepted the contention of the assessee. He relied on the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 for coming to the conclusion that the cost of original shares cannot be reduced by a process of spread over of the cost over the original shares and the bonus shares. The department has objected to this finding in ground No. 2 of the appeal. 12. The CIT (Appeals) further held that the bonus shares must be deemed to have been obtained at some cost and not free and relied on the decisions of the Supreme Court in the cases of Dalmia Investment Co. Ltd. and Gold Mohore Investment Co. Ltd. besides the decisions of the Calcutta High Court in the case of CIT v. Kishore Trading Co. Ltd. [1982] 138 ITR 527 (Cal.) and Smt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riginal shares on the prescribed date as against the original cost should be spread over to arrive at the cost of acquisition of the bonus shares. This decision had been followed subsequently by the Ahmedabad Bench of the Tribunal in the case of ITO v. N. Kishore Settlement & N.K. Settlement [IT Appeal Nos. 678 and 679 (Ahd.) of 1987, dated 2-4-1990] a copy of which was placed before us. Reliance was also placed on a decision in Smt. Krishnabai A. Khatau v. Fourth ITO [1989] 35 TTJ (Bom.) 531 but a copy of the same was not placed before us. 15. We have considered the rival submissions carefully. In order to appreciate the issue before us, it will be appropriate to consider the computation of cost of acquisition separately for the original shares numbering 5,91,063 and the bonus shares numbering 2,95,531. As far as the original shares are concerned, we have noted that they were purchased before 1-4-1974, i.e., the prescribed date in section 55(2)(b)(i) of the Income-tax Act, 1961, the relevant extract from which is reproduced below: "55(2) For the purposes of sections 48 and 49, 'cost of acquisition',-- (b) in relation to any other capital asset,-- (i) where the capital asset be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order of the CIT (Appeals) on the point holding that the cost of original shares, opting for the fair market value on 1-4-1974 cannot be reduced on account of subsequent issue of bonus shares. Thus, ground No. 2 of the department's appeal is also rejected. 17. Ground No. 3 of the appeal requires a clarification. Inasmuch as in case the cost of acquisition of the original shares numbering 5,91,063 has been rightly taken at Rs. 93,68,348, as we have held above and if the cost of acquisition of the original shares as well as 2,95,531 bonus shares is also taken at Rs. 93,68.348, as held in the assessment order, then it must follow that the cost of acquisition of 2,95,531 bonus shares in the assessment order has been taken at 'nil'. With this clarification, we will now proceed to understand the impact of the issue of bonus shares, as explained by the Supreme Court in the case of Dalmia Investment Co. Ltd. It was held in that case that where bonus shares are 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. The court further held that they have to be value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old Mohore Investment Co. Ltd., the same principle was reiterated. 19. Thus, it will be seen that although the above judgment is the prevailing authority on valuation of bonus shares in normal cases where the question of option of adopting the fair market value under section 55(2)(b)(i) of the Income-tax Act, 1961 is not involved, the impact of such an option remains to be examined. It is clear that the value of bonus shares cannot be taken at nil as has been done in the assessment order. However. there are still two methods possible for the computation of the cost. The first method would be to spread the cost of the original shares over the original shares and the bonus shares taken together and, the second would be to spread the fair market value of the original shares over the original shares and the bonus shares taken together. The assessee has adopted the second method. 20. This very question was considered by the Tribunal in the case of F. Hoffman-La-Roche & Co. Ltd.'s case and we will now proceed to analyse the same. It may be mentioned that this decision was followed by the Ahmedabad Bench of the Tribunal in the case of N. Kishore Settlement & N.K. Settlement and, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary to the analysis in the judgment of the Supreme Court about the impact of the issue of the bonus shares, in the case of Dalmia Investment Co. Ltd. (at pages 578 and 579 of the report). On the issue of bonus shares, there was an immediate detriment to the shareholder in respect of his original holdings and there is a beautiful illustration given in the judgment saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two fifty paise coins. Thus, it is at the stage of issue of bonus shares itself that there is a detriment to the shareholder in respect of his original holding and the bonus shares acquire a cost. The question of invoking the provisions of section 55(2)(b)(i) of the Income-tax Act, 1961 does not arise at that stage at all since section 55(2) starts with the words "for the purposes of sections 48 and 49" and, these sections deal with the "mode of computation and deductions of income chargeable under the head 'Capital gains" and "cost with reference to certain modes of acquisition" with which we are not concerned here. Income chargeable under the head "Capital gains" can arise only when there is a transfer of a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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