Court rules on averaging method for share acquisition cost calculation, emphasizing impact of bonus shares

The High Court of Gujarat ruled that the cost of acquisition for shares sold should be determined by averaging the cost of original shares with bonus shares received. The court rejected the assessee's argument for using only the actual purchase price and upheld the Revenue's position on the averaging method. Emphasizing the need to consider both types of shares in the cost calculation, the court clarified that bonus shares do impact the cost of acquisition. The decision aligned with precedent and required spreading the cost over both original and bonus shares for accurate capital gains computation.

---

---

Issues:
Computation of capital gains for shares sold based on cost of acquisition - actual cost vs. averaging method.

Analysis:
The High Court of Gujarat addressed the issue of computing capital gains for shares sold by an assessee, focusing on the method of determining the cost of acquisition. The question revolved around whether the cost should be based on the actual purchase price or by averaging the cost of original shares with bonus shares received. The assessee sold 300 shares of Alembic Chemicals Industries and 200 shares of Alembic Glass Industries, prompting the need to ascertain the appropriate method for calculating capital gains.

The assessee argued that the cost of acquisition should be based solely on the actual purchase price of the shares. In contrast, the Revenue contended that bonus shares received should be factored into the cost price calculation, advocating for an averaging method. The Income-tax Officer and the Appellate Assistant Commissioner supported the averaging method, leading to a second appeal by the assessee before the Tribunal.

The Tribunal, however, diverged from the previous decisions and rejected the averaging method. It emphasized that the specific shares sold were those purchased from the market, with their acquisition cost clearly indicated by the assessee. The Tribunal distinguished the case from precedent involving rights shares, asserting that bonus shares did not alter the cost of acquisition significantly. Nonetheless, it was acknowledged that the assessee acquired additional shares through a bonus issue, altering the context of the situation.

The High Court referenced a prior decision involving Alembic Chemical Works Ltd., highlighting the importance of considering both original and bonus shares in the cost calculation. Drawing from the Supreme Court's approach in a related case, the court emphasized the necessity of spreading the cost of original shares over both original and bonus shares for computing capital gains accurately. Consequently, the court concluded that the cost of acquisition for the shares sold by the assessee should be determined by averaging the cost of shares purchased from the market with the bonus shares received.

In conclusion, the High Court clarified that the averaging method applies specifically when bonus shares are issued on shares bought from the market and sold subsequently. The court answered the reference question by affirming that the cost of acquisition for the shares in question should be computed by averaging the cost of original shares and the bonus shares received. The judgment disposed of the reference accordingly, with no order regarding costs.

---