Appeal partly allowed: Cost of bonus shares NIL; CIT(A) to adjudicate additional ground (A)

The appeal was partly allowed. The first ground concerning the cost of acquisition of bonus shares was dismissed, upholding the application of the amended law considering the cost of acquisition of bonus shares as NIL. The second ground regarding the non-adjudication of an additional ground by the CIT(A) was allowed, directing the CIT(A) to admit and adjudicate upon the additional ground.

---

---

Issues Involved:
1. Cost of Acquisition of Bonus Shares for Computing the Capital Gains.
2. Non-adjudication of Additional Ground by CIT(A).

Issue-wise Detailed Analysis:

1. Cost of Acquisition of Bonus Shares for Computing the Capital Gains:

The appellant-assessee contested the addition of Rs. 2,89,560 as Long Term Capital Gain from the sale of 1200 ITC shares, arguing that the bonus shares received should merge with the value of the original shares, necessitating an average cost calculation. The CIT(A) upheld the assessment, applying the amended law effective from the assessment year 1996-97, which considers the cost of acquisition of bonus shares as NIL.

The facts reveal that the assessee purchased 1200 shares of ITC Ltd. in 1992 and received 1200 bonus shares in 1994 without any payment. The total cost of 2400 shares was Rs. 3,76,800. The assessee sold the original 1200 shares in 1994 and computed the capital gain by averaging the cost over 2400 shares. The remaining cost of Rs. 1,88,400 was attributed to the bonus shares, which were sold in the relevant assessment year for Rs. 2,89,560, resulting in a claimed capital gain of Rs. 85,157.

The Assessing Officer, however, treated the entire sale value of Rs. 2,89,560 as long-term capital gain, applying sub-clause (iiia) of clause (aa) of sub-section (2) of section 55 of the Income-tax Act, 1961, which mandates that the cost of acquisition of bonus shares allotted without payment shall be taken as NIL effective from the assessment year 1996-97.

The Tribunal considered whether sub-clause (iiia) applied to bonus shares allotted before 1-4-1995 and whether it impaired any vested rights. It was noted that prior to sub-clause (iiia), the cost of acquisition of bonus shares was determined by averaging the cost of original shares over the total number of shares, as per the Supreme Court's decision in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567. However, sub-clause (iiia) introduced a statutory mode requiring the cost of acquisition of bonus shares to be NIL from the assessment year 1996-97.

The Tribunal held that sub-clause (iiia) applies to the transfer of bonus shares during the previous year relevant to the assessment year 1996-97 onwards, irrespective of when the bonus shares were allotted. The crucial factor is the date of transfer of the shares, not the date of allotment. The Tribunal found that the law to be applied is that in force in the assessment year unless otherwise provided. Consequently, the computation of capital gains by the Assessing Officer and upheld by the CIT(A) was deemed correct, and the first ground of appeal was dismissed.

2. Non-adjudication of Additional Ground by CIT(A):

The assessee claimed that the Assessing Officer incorrectly took the sale price of 1400 shares of ITC Classic Finance at Rs. 3,19,754 instead of Rs. 2,41,606, resulting in an unintended addition of Rs. 78,148. The CIT(A) did not admit this additional ground, suggesting the assessee approach the Assessing Officer for rectification.

The Tribunal noted that the CIT(A) should have admitted and adjudicated upon the additional ground instead of prolonging the litigation, especially since the application for rectification filed by the assessee in 2000 had not been disposed of by the Assessing Officer even by 2002. The Tribunal directed the CIT(A) to admit the additional ground and dispose of it in accordance with the law after giving an opportunity of hearing to both the assessee and the Assessing Officer. Consequently, the second ground of appeal was allowed to the extent that the matter was restored to the CIT(A).

Conclusion:
The appeal was partly allowed, with the first ground regarding the cost of acquisition of bonus shares dismissed and the second ground regarding the non-adjudication of the additional ground by the CIT(A) allowed, directing the CIT(A) to admit and adjudicate the additional ground.

---