Court rules on valuation of bonus shares for capital gains computation.

The High Court upheld the Income Tax Officer's decision in a case involving the valuation of bonus shares for computing capital gains. The Court ruled that in the case of compulsory acquisition of all shares, including bonus shares, the total cost should be based solely on the actual cost of the original shares, rejecting the inclusion of notional cost of bonus shares in the computation. The Court emphasized the principle of averaging for specific purposes like closing stock valuation and deemed individual costing of bonus shares unnecessary in the sale of the entire block of shares.

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Issues involved: Valuation of bonus shares for computing capital gains.

Summary:
The judgment concerns the valuation of bonus shares for computing capital gains. The assessee, a shareholder in a nationalized general insurance company, received compensation for the compulsory transfer of shares to the Central Govt. The dispute arose over the computation of net capital gains, specifically regarding the cost of 8,109 bonus shares in addition to the original shares. The assessee argued for averaging the cost of original and bonus shares to determine the total cost. The Income Tax Officer (ITO) initially calculated the taxable capital gain at Rs. 27,99,088. The Appellate Authority Commissioner (AAC) and the Tribunal, however, allowed the assessee's claim to include the cost of bonus shares in the computation. The High Court, in its judgment, disagreed with the Tribunal's approach and upheld the ITO's decision. The Court emphasized that in the case of compulsory acquisition of all shares, including bonus shares, the total cost should be based on the actual cost of the original shares alone. The Court rejected the notion of adding the notional cost of bonus shares to the actual cost, as it would distort the total outlay on shares. The judgment highlighted the principle of averaging for specific purposes like closing stock valuation, emphasizing that in the sale of the entire block of shares, individual costing of bonus shares is unnecessary. The Court concluded that the Tribunal's decision to add the notional cost of bonus shares to the actual cost of original shares lacked legal basis and upheld the ITO's method of computation.

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