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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 ..... refore, 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 Indian Rup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Rs. 93,68,348 Average cost of 2,95,531 bonus shares -- 93,68,348 x 2,95,531 Rs. 31,22,779 ---------------------------------- ------------------------ 8,86,594 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ects to this part of the decision of the CIT (Appeals) in ground No. 3 of the appeal. 13. The learned Departmental Representative relied on the reasoning given in the assessment order and submitted that full effect had been given to the provisions of section 55(2)(b)(i) of the Income-tax Act, 1961, according to which, the assessee had an option to substitute the fair market value of the asset as on 1-4-1974 in place of the cost of acquisition for the purpose of the capital gains. According to him, full effect had been given in this manner to the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. and, there was no further justification to add the cost of bonus share once more to the total arrived at. 14. The learned counsel for the assessee, on the other hand, submitted before us that the Supreme Court was considering only the valuation of original shares in the case of Shekhawati General Traders Ltd. and it had been held that for the purpose of ascertainment of the fair market value of the shares in question on 1-1-1954, any issue of bonus shares subsequent to that date was wholly extraneous and irrelevant and could not be taken into consideration. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option under section 55(2) of the Income-tax Act, 1961 to take the fair market value prevailing on 1-1-1954 in place of the cost price of certain shares issued to the assessee prior to 1-1-1954. There was no controversy between the revenue and the assessee upto this point. However, thereafter, according to the revenue, a position was advanced that while determining the fair market value on 1-1-1954, the issuance of bonus or right shares after that date on the basis of the holding of the assessee prior to 1-1-1954 should have been taken into account. In other words, the cost had to be worked out by averaging the cost of the original shares and the cost of the original shares and the bonus shares taken together. According to the revenue, after the issue of bonus shares, the cost of the original holding had to be spread over the shares inclusive of the bonus or the right shares acquired on the original holding, relying on the decision of the Supreme Court in Dalmia Investment Co. Ltd. This contention was negatived by the Supreme Court by observing that in that case, no question arose of the calculation of the capital gains in accordance with the statutory provisions in pari materia wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in D.M. Dahanukar v. CIT [1973] 88 ITR 454 that a case of an investor in shares is not different in this regard. 18. It was observed by the Supreme Court in the above case that there were four possible methods for determining the cost of bonus shares. The first method is to take the cost as the equivalent of the face value of the bonus shares. The second method was to take the cost at nil. The third method was to take the cost of the original shares and to spread it over the original shares and the bonus shares taken collectively. The fourth method was to find out the fall in the price of the original shares on the Stock Exchange and to attribute this to the bonus shares. The Supreme Court held that it could not be said that the bonus shares were a gift and were acquired for nothing (pages 578 and 579 of the report). There was an immediate detriment to the shareholder in respect of his original holding by the issue of bonus shares pro rata which ranked pari passu with the existing shares, the market price was exactly halved and divided between the old and the bonus shares. It was further observed that the result may be stated by saying that what the shareholder held as a whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as on 1-4-1954 which was the prescribed date for the assessment year 1980-81 as against the original cost under section 55(2) of the Income-tax Act, 1961. The Tribunal, in para 4 of its order, noted that the meaning of the term 'cost of acquisition for the bonus shares' was to be found in the case of Dalmia Investment Co. Ltd. where the four possible methods for determination of the cost of bonus shares were examined. The four methods were mentioned and they have already been described by us above. Thereafter, it was noted that it was held by the Supreme Court that if the bonus shares ranked pari passu with the old shares, they should be valued by spreading the original cost over the old and new shares. It was further observed by the Tribunal that the cost of acquisition is defined in section 55(2) of the Act for the purpose of computing the capital gains in relation to a capital asset. Admittedly, the bonus shares did not become the property of the assessee before 1-1-1964 and, therefore, the market value of the bonus shares as on 1-1-1964 cannot be opted by the assessee. However, the average cost of acquisition should be worked out in the light of the above decision of the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et value of the original shares. We direct accordingly. In the circumstances, ground No. 3 of the department's appeal is partly allowed. 22. The cross objection filed by the assessee will now be taken up. The ground is reproduced below: "If the Department's claim of reducing the cost of original shares on determining the cost of bonus shares is accepted, your appellant submit the following cross objections. The said proceeds in respect of bonus shares sold are not eligible to tax as capital gains as no cost can be envisaged for bonus shares and the date of the real emergence of bonus shares is not predictable and, therefore, the computational machinery of capital gain under section 48 of the Act fails. The respondent derives support from the decision of the Supreme Court in the case of B.C. Srinivasa Shetty (128 ITR 294)." 23. We have heard the rival submissions. The learned counsel for the assessee has, very fairly, invited our attention to the decision of the Special Bench of the Tribunal in the case of Rohiniben Trust v. ITO [1985] 13 ITD 830 (Bom.). In that case, the assessees sold certain equity shares giving rise to a surplus. The ITO included the surplus as long-term c ..... 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