TaxTMI 
TaxTMI 
2007 (3) TMI 413
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....as erred in directing the Assessing Officer to compute long-term capital gain on the indexed cost of the market value of shares as against the "average cost" taken by the Assessing Officer for computation of long-term capital gain on sale of shares of Premier Automobiles Ltd." 3. The relevant facts may be stated briefly. During the previous year relevant to the assessment year under appeal, the assessee-company sold the shares, including bonus shares, held by it in the following three companies : (1)Premier Automobiles Ltd. (PAL) (2)Walchandnagar Industries Ltd. (WIL) (3)Bombay Cycle and Motor Agencies Ltd. (BCMA) The assessee declared long-term capital gain on sale of these shares at Rs. 918.93 lakhs. As against this, the Assessing Officer determined the capital gain at Rs. 1,113.34 lakhs. Some of the shares were acquired by the assessee prior to 1-4-1981 whereas some shares were acquired by the assessee after the above date. Bonus shares were issued to the assessee after the statutory date of 1-4-1981. There is no dispute between the assessee and the revenue on the point that for determining the cost of acquisition, the original cost is to be averaged out between the origina....
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....e index factor 140 in the financial year 1986-87. The cost of acquisition of the shares acquired by the assessee in the financial years 1981-82, 1982-83 and 1983-84 was also increased in similar manner. Such increased cost was adopted for the purpose of deriving the average cost per share. Such average cost of acquisition was further indexed by the assessee to the level of the financial year relevant to the assessment year under appeal. Capital gain was worked out on the above cases. 4. The Assessing Officer rejected the aforesaid method adopted by the assessee for determining the cost of acquisition. He held that for averaging the actual cost of pre 1-4-1981 shares should be adopted instead of FMV as on 1-4-1981. He also held that the assessee cannot get the benefit of double indexation of the cost of acquisition i.e., first up to the financial year 1986-87 when the bonus shares were allotted, and again up to the level of the financial year 1993-94 when the shares were sold. Assessing Officer, therefore, re-determined the cost of acquisition and worked out capital gain chargable to tax as per annexure to the assessment order. 5. When the matter came up before the learned CIT(A),....
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....oth, bonus shares and cash-paid shares acquired prior to the issue of bonus shares. The principle of averaging the cost is as laid down by the Apex Court in following cases: (a )CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567; (b) CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 /[1969] 74 ITR 62; (c )CIT v Gold Co. Ltd. [1970] 78 ITR 16 . 3.For the purpose of determining the average cost, the original cost of cash paid shares [in the case of pre-1-4-1981 shares, the cost is taken either at the actual cost or fair market value as on 1-4-1981 whichever is higher - as per section 55(2)(b)( i)] is indexed so as to bring it to the level of index of the year of issue of bonus shares. Such indexed cost is spread over the total No. of shares to arrive at the average cost, which I then applied to all the shares except pre 1-4-1981 shares where the fair market value as on 1-4-1981 is substituted in the place of cost of acquisition as provided under section 55(2)(b)(i ). The aggregate of the average indexed cost as of the bonus year is then brought to the indexed level of the year of sale by taking the cost inflation index of the year of sale and that of the bonus year. The o....
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....t the true indexed cost under the averaging principle, it was necessary to upgrade the original cost to the level of index of bonus year and then average it out. This method is intended to promote the object of the new scheme of indexation in its true spirit to keep off the inflationary profits from taxation. 4.In respect of other post-bonus shares, the actual cost of acquisition is suitably indexed having regard to the cost inflation index of the year of sale and that of the year of acquisition. 5.As explained earlier, the cost of acquisition of pre 1-4-1981 shares is taken at the fair market value as on 1-4-1981 or the original cost whichever is beneficial to the company since the company has option to do so under section 55(2)(b)( i). In this case even though by the averaging method, the original cost of pre 1-4-1981 shares gets reduced, since the fair market value as on 1-4-1981 being more than such reduced cost, the fair market value is substituted in the place of the average cost. This is in accordance with the provisions of section 55(2)(b)( i) and same is supported by the Supreme Court decision in the case of Shekhawati General Traders Ltd. v ITO [1971] 82 ITR 788. Even t....
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....the cost of acquisition has been determined. It was argued that the Assessing Officer's order is in conformity with the provisions of law. 9. We have given our careful consideration to the rival submissions vis-a-vis the relevant facts and the legal position as emerging from the cases cited before us. First of all, we would like to refer to the ITAT Pune Bench (TM) decision in the case of Kalyani Exports & Investments (P.) Ltd. (supra). On a difference of opinion between the learned Judicial Member and the learned Accountant Member, the relevant issues were placed before the Third Member. The issues, therefore, stand decided by the majority. One of the questions dealt with by the Tribunal pertained to as to whether statutory cost of acquisition can be affected by issue of bonus shares subsequent to statutory date. The Tribunal observed that this issue came for consideration before the Supreme Court in the case of Shekhawati General Traders Ltd. (supra), where it was held that any event prior or subsequent to the statutory date is irrelevant and, therefore, statutory cost of acquisition remains unchanged. 10. The Tribunal also referred to the Supreme Court decision in the case of ....
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....s the cost inflation factor for the financial year 1986-87 bears to the cost inflation factor of the relevant financial year in which the shares were acquired by the assessee, in our view, this submission cannot be accepted. There is no warrant for adopting this methodology under the provisions of Income-tax Act and no authority has been cited by the learned counsel for the assessee in support of this argument. The various judicial pronouncements including the Supreme Court's decision available on this point, lay down the principle that either the FMV as on the statutory date or the actual cost of acquisition of the shares has to be spread over the original shares and the bonus shares. The benefit of cost inflation index will be available to the assessee as the base year has to be taken to be financial year wherein the statutory date falls or the relevant financial years in which further shares were acquired, as the case may be. Such statutory cost and the cost of acquisition will be inflated on the basis of the index factor of the base year and the index factor of the year in which the shares have been sold. Accordingly, we reject this argument raised before us on behalf of the as....
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.... in such a situation, it is not necessary to ascertain the individual cost of each share. The position was reiterated by this court in S. Ram v. CIT [1988] 230 ITR 353, wherein this court held that in case where the original shares were obtained before 1-1-1954, and the bonus shares were obtained after 1-1-1954, and where the assessee has exercised his option adopting the fair market value as prevalent as on 1-1-1954, it is not possible to adopt one value for the original shares, namely the value as on 1-1-1954, and another value for the bonus shares which was prevalent after 1-1-1954. This court held that once the value of the original shares was determined in accordance with the statutory provisions, then the said value remains an unalterable figure and the said value should be adopted for the purpose of dividing the same by bonus shares as well as the original shares and any alteration to the above method would be hit by the provisions of section 55(2) of the Act. This court held that once the value has been determined under section 55(2) of the Act, that value should be taken into account and both the original shares and bonus shares should be clubbed together and the average v....
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....he entire exclusion of the original shares. But where the entire block of shares held by a shareholder is sold or otherwise disposed of and in that sale also figure all the bonus shares held by that shareholder, there can be no occasion for entering into the exercise of costing of bonus shares. That is because the whole cost of shares including bonus shares is already a known figure, and it would be an unnecessary refinement to get to know the individual cost of each share. It is enough that we know the actual cost of all the original shares held by the assessee and since the whole block is sold, the actual cost of acquisition of the original shares alone will have to be taken. If, however, you follow a fastidious or an over sophisticated method of calculation taking note of only the average cost of the bonus shares, then you must also take into account the average cost of the original shares, in which even also there cannot be a separate addition to the actual cost, the average or notional cost of bonus shares." 16. It is notable that no question arose before the Madras High Court in the above two cases with regard to indexing the FMV on statutory date or the cost of acquisition ....
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....as provided by the relevant statute, i.e., the statutory cost of acquisition and thus substituting the market value as on 1-1-1954, in place of the actual cost of acquisition, and only in such a case, the subsequent issue of bonus shares cannot affect the issue. It is implicit from the above decision that the principle of averaging by spreading the cost over the old shares and the new bonus shares as enunciated by the Supreme Court in Dalmia Investment Co.'s case [1964] 52 ITR 567, and other cases, will apply as a general rule in cases where the assessee claims to deduct the actual cost of acquisition, instead of the statutory cost of acquisition. It also stands to reason since the fair market value as per the "statutory cost of acquisition" will be a notional or fictional figure - mostly inflated - having no connection with the original or actual cost. It is after discussing the effect or impact of the issue of the bonus shares, on the value of the original shares generally and also the various possible methods for determining the cost of the bonus shares, that the Supreme Court in Dalmia Investment Co.'s case [1964] 52 ITR 567 stated that the real cost to the assessee of the bonu....
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....tituting the market value of the asset as on January 1, 1954, under section 48 and section 55(2)(i) of the Income-tax Act, 1961, in respect of these shares in place of their cost of acquisition. The ITO spread the cost of the original shares over the whole lot of 2,680 shares which included 670 original shares and 2,010 bonus shares. Since the average cost according to this formula was much less than the market price of the shares as prevailing on 1-1-1954, he gave the assessee the benefit of the option of the market price as on 1-1-1954, in respect of this lot of 2,680 shares. In regard to the second lot of 765 shares bought between 1942 and 1946 and 765 bonus shares issued to the assessee in April, 1946, the average cost came to Rs. 210 per share. It was much higher than the market price of the shares as on 1-1-1954. The ITO, therefore, did not substitute the market price as on 1-1-1954, in place of the original cost in respect of the second lot. In respect of the third lot also the position was the same as in the case of the second lot, except that in the third lot there were no bonus shares. No substitution was, therefore, necessary in the case of the third lot. The ITO thus d....
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....ase year in respect of bonus shares shall be the financial year in which bonus shares are allotted. (e)The base year in respect of pre 1-4-1981 shares shall be the financial year 1981-82. (f)The base year in respect of shares acquired post 1-4-1981 shall be the relevant financial year. (g)On the above basis, the indexed cost of acquisition shall be adopted by the Assessing Officer and the income under the head capital gains shall be determined accordingly. 19. We direct the Assessing Officer to recompute the income under the head 'Capital gains' on the basis of the discussion given above. 20. Ground No. 2 of the assessee's appeal as also of the Department's appeal pertains to the additions made by the Assessing Officer by disallow-ing the assessee's claim for bad debts, in respect of which part relief has been allowed by the learned CIT(A). Both the parties are aggrieved on account of the order of the learned CIT(A) on this issue. The assessee is disputing the confirmation of addition to the extent of Rs. 11,45,000. The Department is in appeal against the relief allowed by the learned CIT(A) of Rs. 18,59,000. We have heard both the sides. The learned counsel for the assessee h....
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....h India Surgical Co. Ltd. (supra). The Madras High Court was concerned with debts recoverable from Government hospitals and institutions and the High Court observed that such debts cannot be said to have become irrecoverable or bad. The ITAT Mumbai Special Bench in the case of Oman International Bank, SAOG ( supra) has held that writing off a bad debt in the books of account constitutes evidence of its having become bad and irrecoverable. The only condition is that such writing off should be bona fide and not fraudulent. It may be mentioned that the Gujarat High Court in the case of CIT v. Girish Bhagwat Prasad [2002] 256 ITR 772 has taken the view that after the amendment the onus is not on the assessee to establish that the debt written off, has become irrecoverable during the relevant year. Similar view has been adopted by the Delhi High Court in the following recent judgments : (1) CIT v. Morgan Securities Credits, order dated 7-12-2006 in ITA No. 1442 of 2006. (2)CIT v. DCM Ltd., dated 10-1-2007 in ITA No. 1307 of 2006. 22. Considering the entire facts and circumstances and the legal position as enunciated above, we delete the addition of Rs. 11,45,000 sustained by the lear....
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....of the order and the matter was restored to the Assessing Officer for re-adjudication with the following observations at para 15 of the order: 'We have gone through the aforesaid order of the Tribunal and find that the Tribunal, vide order dated 17-10-2006, has deleted similar addition in respect of 1992-93 and 1993-94 on the ground that addition has been offered on cash basis. Impliedly, the Tribunal has accepted the mixed system of accounting followed by the assessee. This issue had also arisen in assessment year 1985-86, which has been quoted extensively in the order dated 30-6-2005 pertaining to assessment years 1989-90 to 1991-92 and 1995-96. Considering the fact that the Tribunal has accepted the cash system of accounting in respect of interest, we also hold that lease rent and interest income should be assessed on receipt basis. The additional ground raised by the assessee is admitted and the matter is restored to the file of Assessing Officer for fresh adjudication after verifying the fact whether income has been assessed in subsequent years on cash basis or not.' 5. The learned counsel appearing for the assessee was fair enough to point out that insofar as the assessment....
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.... years 1989-90 and 1991-92 also this issue was restored to the Assessing Officer for re-consideration in accordance with the order of the Tribunal for the assessment year 1992-93. The facts and circumstances are admitted to be similar in the two assessment years which are under appeal and, therefore, respectfully following the precedents, we restore this issue for both the years to the Assessing Officer for re-adjudication in consonance with the Tribunal's order for the assessment year 1992-93 referred to above." 31. Accordingly for the present assessment year also we restore this issue to the Assessing Officer for revenue expenditure - adjudication in consonance with the Tribunal's order for the assessment year 1992-93. 32. The last ground of appeal pertains to rental income and service charges assessed by the revenue authorities as income from house property or income from other sources as against the assessee's claim that the same should be assessed as business income. Similar issue arose before the Tribunal for the assessment years 1989-90 and 1991-92 as also assessment years 1995-96 and 1997-98 and was dealt with in the orders referred to supra. It was observed by the Tribun....