Court allows deduction of face value of bonus shares in capital gains computation.

The Bombay High Court ruled in favor of the assessee in a case concerning the computation of capital gains on the sale of bonus shares. The court allowed the deduction of the face value of the bonus shares from the sale value as the 'actual cost,' following the method established by the Supreme Court in a previous case. The decision overturned the Income-tax Officer's initial rejection and the subsequent decisions by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal.

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Issues:
Computation of capital gains on sale of bonus shares - Deduction of face value as actual cost under section 12B(2).

Detailed Analysis:
The judgment delivered by the Bombay High Court addressed the issue of computation of capital gains when an assessee sells bonus shares allotted to them. The specific question referred to the court was whether the assessee could deduct the face value of the bonus shares from their sale value as the 'actual cost' within the meaning of section 12B(2). The case involved an investor holding shares of a company and receiving bonus shares without any payment. The assessment year in question was 1960-61, during which the assessee sold 600 bonus shares.

Initially, the Income-tax Officer rejected the assessee's claim to deduct the face value of the bonus shares from the sale proceeds as the actual cost, treating the entire surplus of the sale proceeds as capital gains. This decision was upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal interpreted 'actual cost' as the amount expended by the assessee in acquiring the capital asset, not what the assessee was supposed to have suffered.

The assessee relied on a Supreme Court decision in the case of Commissioner of Income-tax v. Gold Mohore Investment Co. Ltd., which established the method of valuing capital gains in cases involving bonus shares. The Supreme Court held that the cost of bonus shares for a dealer or investor should be calculated by spreading the cost of the original shares over both the original and bonus shares to find the average price of all shares. The Bombay High Court agreed that this method of valuation applied to investors as well, not just dealers in shares.

Therefore, the High Court concluded that the computation of capital gains on the sale of the bonus shares must be calculated in accordance with the method established by the Supreme Court in the Gold Mohore Investment Co. Ltd.'s case. The court ruled in favor of the assessee, allowing the deduction of the face value of the bonus shares from the sale value as the actual cost. No costs were awarded in this judgment.

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