Pre-1954 share valuation option cannot be defeated by later bonus shares; averaging rejected for capital gains computation.

Where shares or the asset from which they are derived were acquired before 1 January 1954, the assessee may opt under the capital gains computation rules to substitute fair market value on that date for actual cost. The sub-division of shares did not defeat that option because the cost of the subdivided shares was traceable to the original pre-1954 shares. The later issue of bonus shares was irrelevant to the valuation date and did not justify averaging the fair market value or cost of acquisition. The valuation question was therefore decided in favour of the assessee, and averaging was rejected.

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Issues: (i) whether, on the sub-division of shares, the assessee could exercise the option under section 55(2)(i) to substitute the fair market value as on 1 January 1954 for the cost of acquisition; (ii) whether the principle of averaging could be applied in determining the fair market value or cost of acquisition in view of the subsequent issue of bonus shares.

Issue (i): whether, on the sub-division of shares, the assessee could exercise the option under section 55(2)(i) to substitute the fair market value as on 1 January 1954 for the cost of acquisition.

Analysis: The computation provisions for capital gains in sections 45, 48 and 55 showed that where a capital asset had become the property of the assessee before 1 January 1954, the assessee could opt for fair market value on that date in place of actual cost. Even if the sub-divided shares were treated as derived from the original shares, section 55(2)(v)(d) required the cost of the sub-divided shares to be traced to the original shares from which they were derived, and the original shares were accepted as having been acquired before 1 January 1954. The option under section 55(2)(i) was therefore available.

Conclusion: The issue was answered in the affirmative and in favour of the assessee.

Issue (ii): whether the principle of averaging could be applied in determining the fair market value or cost of acquisition in view of the subsequent issue of bonus shares.

Analysis: Once the assessee was entitled to substitute the fair market value as on 1 January 1954, the later issue of bonus shares was irrelevant to that valuation. The subsequent allotment did not affect the fair market value of the original shares on the critical date, and the averaging approach based on the bonus issue had no role in determining that value. Accordingly, the question of averaging did not arise for the fair market value issue, and it was not applicable to that determination.

Conclusion: The issue was answered in the negative and against the Revenue.

Final Conclusion: The assessee was entitled to adopt the fair market value of the pre-1954 shares as on 1 January 1954, and the later bonus issue did not justify averaging for valuation purposes.

Ratio Decidendi: Where a capital asset or the asset from which it is derived became the property of the assessee before the critical date, the statutory option to substitute fair market value on that date cannot be defeated by a later issue of bonus shares, and such later issue is irrelevant to that valuation.

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