Capital loss and house property valuation: original share cost stays unchanged by bonus issue, while sham rent arrangements yield expected annual value.

For capital loss computation on share sales, the original cost of acquisition remains the assessee's actual cost, subject only to the statutory adjustment in section 55(2), and a later bonus issue does not reduce that cost; the point was answered for the assessee. A lease of house properties to a partnership firm composed of close relatives was treated as collusive and not genuine on the surrounding facts; the finding was upheld against the assessee. For house property income, annual value must be determined by the rent reasonably expected to be received under sections 22 and 23, not by a sham or understated rent arrangement; this issue was decided for the Revenue.

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Issues: (i) Whether, in computing capital loss on sale of shares, the cost of the original shares could be reduced by the subsequent issue of bonus shares; (ii) Whether the lease of the assessee's house properties to the partnership firm was a genuine transaction or only a facade for diversion of income; (iii) Whether the annual value of the house properties was to be determined on the basis of the rent actually received or the rent reasonably expected to be received under the Act.

Issue (i): Whether, in computing capital loss on sale of shares, the cost of the original shares could be reduced by the subsequent issue of bonus shares.

Analysis: The computation of capital gains and capital loss under Sections 45 and 48 of the Income-tax Act, 1961 turns on the cost of acquisition of the capital asset. The issue before the Court was not the valuation of bonus shares, but the cost of the original shares transferred by the assessee. The Court held that the original cost of acquisition is the actual cost to the assessee, subject only to the statutory modification in Section 55(2), and that a subsequent issue of bonus shares does not alter that original cost. The earlier Supreme Court decisions dealing with the valuation of bonus shares were distinguished as not deciding the present question.

Conclusion: The loss on sale of shares had to be computed without reducing the original cost by reason of the bonus issue, and this issue was answered in favour of the assessee.

Issue (ii): Whether the lease of the assessee's house properties to the partnership firm was a genuine transaction or only a facade for diversion of income.

Analysis: The Court accepted the Tribunal's appreciation of the surrounding circumstances, including the constitution of the firm from close relatives and the immediate leasing of the properties to that firm. The finding that the arrangement was collusive and not genuine was based on material facts on record and did not suffer from perversity. The Court treated the finding as one of fact and found no basis to interfere.

Conclusion: The lease was held to be a facade and the issue was decided against the assessee and in favour of the Revenue.

Issue (iii): Whether the annual value of the house properties was to be determined on the basis of the rent actually received or the rent reasonably expected to be received under the Act.

Analysis: For assessment of house property income under Sections 22 and 23 of the Income-tax Act, 1961, the relevant standard is the bona fide annual value, namely the sum for which the property might reasonably be expected to let from year to year. The Court held that the rent actually received under the impugned arrangement could not displace the statutory annual value, especially when the lease itself was found to be not genuine.

Conclusion: The annual value was to be determined on the basis of reasonable expected rent, not the alleged actual rent, and this issue was decided in favour of the Revenue.

Final Conclusion: The reference was answered partly in favour of the assessee on the capital loss computation question and partly in favour of the Revenue on the house property questions.

Ratio Decidendi: For capital gains purposes, the cost of acquisition of original shares remains the assessee's original cost, subject only to the statute's express adjustments, and is not altered by a later issue of bonus shares; in house property cases, the statutory annual value is governed by the rent reasonably expected to be received, not by a sham or collusive rent arrangement.

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