Court affirms averaging method for share cost acquisition. Assessee's original cost claim rejected. Revenue prevails.

The court upheld the method of averaging out the cost of acquisition of original shares over both the original and bonus shares, as enunciated in previous Supreme Court decisions. Consequently, the assessee was not justified in taking the value of the shares at their original cost under section 45 of the Income-tax Act, 1961. The court ruled in favor of the Revenue, affirming the Tribunal's decision on determining the cost of acquisition. The Revenue was awarded costs, including counsel's fee of Rs. 350.

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Issues Involved:
1. Determination of the cost of acquisition of original shares when bonus shares have been issued subsequently.
2. Whether the assessee was justified in taking the value of the shares at their original cost u/s 45 of the Income-tax Act, 1961.

Summary:

Issue 1: Determination of the cost of acquisition of original shares when bonus shares have been issued subsequently.

The primary issue was how to determine the cost of acquisition of original shares when bonus shares have been issued subsequently. The assessee, M/s. Escorts Farms (Ramgarh) Ltd., sold shares and declared capital gains by deducting the actual purchase price from the sale price, ignoring the bonus shares received. The Income Tax Officer (ITO) averaged the cost of the shares by spreading the purchase price of the original shares over both the original and bonus shares. This method was upheld by the Appellate Assistant Commissioner (AAC) and the Tribunal, which applied the principle of averaging out as enunciated in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC).

The court examined the relevant sections of the Income-tax Act, 1961, including sections 45, 48, and 55(2), which deal with capital gains and the cost of acquisition. The court noted that the cost of acquisition of an asset is normally the actual cost, but when bonus shares are issued, the cost of acquisition of the original shares is affected. The Supreme Court in Dalmia Investment Co. Ltd. had considered various methods and concluded that the cost of the original shares should be spread over both the original and bonus shares.

The court also referred to other Supreme Court decisions, including Emerald & Co. Ltd. v. CIT [1959] 36 ITR 257 and CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62, which supported the principle of averaging out the cost of acquisition. The court concluded that the issue of bonus shares affects the value of the original shares, and the cost of acquisition should be spread over both the original and bonus shares.

Issue 2: Whether the assessee was justified in taking the value of the shares at their original cost u/s 45 of the Income-tax Act, 1961.

Given the affirmative answer to the first issue, the court found that the assessee was not justified in taking the value of the shares at their original cost u/s 45 of the Income-tax Act, 1961. The court emphasized that the principle of averaging out must be applied to determine the cost of acquisition when bonus shares are issued.

Conclusion:

The court answered question No. 1 in the affirmative and in favor of the Revenue, stating that the Tribunal was justified in determining the cost of acquisition by spreading the original cost over the original and bonus shares. Consequently, question No. 2 did not arise. The Revenue was entitled to costs, with counsel's fee set at Rs. 350.

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