1991 (1) TMI 18 - HC - Income Tax

Court clarifies share valuation rules under Income-tax Act, upholding cost allocation method.

The High Court upheld the Tribunal's decision that the cost of shares should be determined by spreading the original cost over the total shares, including ... Bonus Shares, Business, Shares And Securities Issues:Interpretation of Income-tax Act, 1961 regarding valuation of shares and computation of profit or loss in share dealings.Analysis:The case involved a reference under section 256(2) of the Income-tax Act, 1961, for the assessment year 1981-82, concerning the method of valuing shares and calculating profit or loss in share dealings. The primary question was whether the cost of original shares should be reduced by spreading it over bonus shares received. The assessee had purchased 19,900 shares and received 4,950 bonus shares, selling the original shares at a loss. The Income-tax Officer calculated the cost of shares by spreading it over the total holding of original and bonus shares, resulting in a profit instead of a loss. The Commissioner of Income-tax (Appeals) initially accepted the assessee's computation but later reversed the decision based on relevant case law.The Tribunal held that the cost of shares should be determined by spreading the original cost over the total shares, including bonus shares, and applied the decision in the case of Gold Mohore Investment Co. Ltd. The Tribunal disagreed with the applicability of the decision in the case of Smt. Protima Roy to the present case and restored the Income-tax Officer's order. The High Court, after considering the arguments and relevant case law, concluded that the method of valuing shares as laid down in the Gold Mohore case was applicable in this scenario. The court emphasized that the cost of acquisition of original shares should not be affected by subsequent events like the issuance of bonus shares.In a detailed analysis, the court referred to previous judgments, including the decision in CIT v. General Investment Co. Ltd., to support the application of the principles laid down in the Gold Mohore case. The court reiterated that the cost of acquisition of original shares should not fluctuate with subsequent events like bonus share issuances. The case law cited, such as Shekhawati General Traders Ltd. v. ITO, was relied upon to establish that the issuance of bonus shares does not decrease the cost of acquisition of original shares for computing capital gains. Ultimately, the court answered the reference question in the affirmative, favoring the Revenue, and upheld the Tribunal's decision, emphasizing the correct application of relevant legal principles.Therefore, the judgment clarified the method of valuing shares and computing profit or loss in share dealings under the Income-tax Act, emphasizing the principles established in relevant case law and ensuring consistency in the treatment of original and bonus shares in such transactions.