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TMI Blog2003 (9) TMI 296X X X X Extracts X X X X X X X X Extracts X X X X ..... hile the profit and loss account of the assessee reflects profit on sale of shares at Rs. 75,200, in the computation of income the same has been excluded for being considered separately, and that the computation of capital gains, in turn, reflects a loss of Rs. 5,532 which has been claimed as eligible for carry forward as long term capital loss. It was further noticed that the aforesaid capital loss pertained to sale of shares of three different companies, out of which two companies had received bonus shares but, as the assessee himself stated by way of note on computation to capital gains, shares were valued at cost and bonus shares were ignored. In response to Assessing Officer's requisition for further details, the assessee clarified that since the bonus shares were not sold during the relevant previous year, and in view of amendments in section 55 of the Act which provides that the cost of acquisition of bonus shares is required to be taken at nil, "it is mandatory for the assessee to keep lot wise details of shares for the purpose of computing capital gains". It was thus urged that facts and circumstances of the case did not warrant or justify the cost of acquisition of the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich bonus shares are issued. On these facts, I do not find any infirmity in the computation adopted by the Assessing Officer and the same is, therefore, confirmed. Aggrieved by the order of the Commissioner (Appeals) as well, the assessee is in second appeal before us. 4. Shri P.J. Pardiwala and Shri P.P. Bhandari appeared for the assessee, and revenue was represented by Shri K.K. Sharma. Rival contentions are conscientiously heard, orders of the authorities below carefully perused, and applicable legal position duly deliberated upon. 5. In order to adjudicate on the issue in this appeal, it is necessary to take a careful look at the paradigm shift in the scheme of computation of capital gains on sale of shares, brought by the virtue of insertion of clause (iiia) in section 55(2). Let us, therefore, first take a look at this amendment itself. It may be recalled that clause (iiia), which provides that for the purpose of computing capital gains, cost of acquisition of bonus shares is required to be taken as nil, was added to section 55(2) vide Finance Act, 1995, and with effect from 1st April 1996. It may be useful to reproduce section 55(2)(iiia) which provides as follows: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of allotment of such asset. These amendments will take effect from 1st April 1996, and will, accordingly, apply to the securities transferred on or after 1st April, 1995. 7. In the backdrop of this legislative amendment, let us take a look at the undisputed factual position of the case before us. It is an undisputed position that the assessee had purchased shares of certain companies, and consequent to such purchases the assessee also received some bonus shares. It is also not in dispute that, in the relevant previous year, the assessee sold a part of the shares originally purchased, while he continued to hold the bonus shares received. On these facts, in case the cost of acquisition of the shares sold is to be taken by averaging the purchase price over the entire share holding of that company (i.e., aggregate of original shares purchased plus the bonus shares received) and the cost of bonus shares which assessee may sell in post 1st April, 1995 period, in view of the insertion of clause (iiia) in section 55(2), is to be taken as nil, an incongruity may arise that the capital gains computation will not show the true picture inasmuch as the cost of acquisition in that computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onus shares could be taken as nil as was done by the revenue in that case. The answer to this question, as observed in the judgment itself, depended 'on the cost of acquisition, if any, to be properly attributable to bonus shares'. It was in this context that Their Lordships of had held that "the bonus shares can be valued by spreading the cost of the old shares over the old shares and the new issue (i.e. bonus shares) taken together". 11. In the case of Escort Farms (Ramgarh) Ltd. v. CIT [1996] 222 ITR 509, Hon'ble Supreme Court reiterated the same principle and observed that "...it is fairly clear that where bonus shares are issued and some of the original shares are sold subsequently, their actual cost has to be determined only on the basis of 'average value' (as held in Dalmia Investments and other cases)...." In coming to this conclusion, Their Lordships also observed that "We should bear in mind that it is after discussing the effect or impact of the issue of the bonus shares, on the value of the original shares generally and also the various possible methods for determining the cost of the bonus shares, this Court in Dalmia Investment Co.'s case stated that the real cost t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, divorced from the context of question under consideration and treat it to be the complete law declared by the Supreme Court. A decision of Supreme Court takes its colours from the question involved in the case in which it is rendered and, while applying it to a later case, the Courts must carefully try to ascertain the true principles laid down by the decision. It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing full exposition of law on a question when the question did not even fall to be answered in that judgment." 12. It was not even the case of the revenue, in the matter of Escort Farms (Ramgarh) Ltd., that even where cost of acquisition for the purpose of bonus shares is statutorily required to be taken as nil, yet the cost of acquisition for the purpose of original holding is required to be taken on the basis of averaging the purchase price over the original shares as well as the bonus shares. In fact, the question of cost of acquisition of original shares being averaged arises as a consequence to assigning a notional cost of acquisition, on the basis of averaging, to the bonus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s material facts of the case before Their Lordships in which those observations have been made. For these reasons also, Hon'ble Supreme Court's observations in the case of Dalmia Investment Co. Ltd. and Escort Farms (Ramgarh) Ltd. have no application in the matter. 15. In the light of the above discussions, we are of the considered view that in a situation in which the cost of acquisition of bonus shares, in terms of the provisions of section 55(2)(iiia), is required to be taken as nil, those bonus shares are required to be excluded for ascertaining the 'average price' of shares for the purpose of computation of capital gains and in terms of the judgment of Hon'ble Supreme Court in the cases of Dalmia Investment Co. Ltd. and Escort Farms (Ramgarh) Ltd. As a corollary to this exclusion, however, it cannot be open to the assessee to claim that the bonus shares allotted prior to 1st April, 1995 will not be hit by the provisions of section 55(2)(iiia). Accordingly, in our considered view, cost of acquisition for such bonus shares also will have to be, for the purpose of computation of capital gains, taken as nil. 16. We now come to learned Departmental Representative's plea that in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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