TaxTMI 
TaxTMI 
1996 (9) TMI 4
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....vestment Co. Ltd. [1964] 52 ITR 567. At the instance of the appellant-assessee, the Income-tax Appellate Tribunal referred the following two questions of law for both the assessment years under section 256(1) of the Income-tax Act for the decision of the High Court of Delhi (see [1983] 143 ITR 749) : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in determining the cost of acquisition of the original shares by spreading the original cost over the original and the bonus shares and then averaging the same and on that basis working out the capital gain at Rs. 32,100 and Rs. 12,450 for the assessment years 1967-68 and 1968-69, respectively ? 2. If the answer to question No. 1 is in the negative, whether the assessee was justified in taking the value of the shares at their original cost under section 45 of the Income-tax Act, 1961 ? " The question that arose for decision was, how the cost of the acquisition of the original shares should be determined for the purposes of capital gains tax. After referring to the relevant decisions, the High Court held that the valuation made by the Revenue regarding the cost of the original shares is ....
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....her argued that the question in those cases, was not the computation of capital gains, as a result of the sale of the shares (whether original or bonus shares) but the computation of " the profits and gains " in the business. The said vital difference was omitted to be noticed by the High Court. On the other hand, counsel for the Revenue submitted that the High Court was justified in its reasoning and conclusion in holding that the subsequent issue of bonus shares has the effect of altering the original cost of acquisition of the shares, irrespective of the fact whether the assessee is an investor or dealer in shares and the shares sold are original shares or bonus shares. In order to resolve the controversy in this case, it will be useful to bear in mind the relevant statutory provisions, as they stood at the relevant time : Section 2(14) of the Income-tax Act : " 2. (14) 'capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include --- (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ; " Section 45(1) of the Income-tax Act :....
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.... accounts which are not available for distribution (i.e., capital reserves and unrealised profits) and to apply the amount so capitalised in paying in full the nominal value of new shares to be issued to members in the same manner and proportions as a cash dividend of the same amount would have been distributed. Under such provisions in the articles it is possible for a company to capitalise the net amount of its realised and unrealised profits or the amount of reserves representing them in order to issue bonus shares, but only the company's accumulated balance of realised profits may be used to issue bonus debentures or to pay up any unpaid part of the issue price of shares which have already been issued. New shares or debentures issued in this way on a capitalisation of profits or reserves are known as bonus shares or debentures, but the name is misleading in that it implies that they are a gift from the company. If they were a gift, they would not be paid-up at all, and in the case of bonus shares, the company could call on their holders to pay for them in cash. In fact, they are not a gift, for their nominal value is paid in full or in part by the capitalised profits or reserve....
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....ce the same amount of profit will now have to be distributed over a larger number of shares. . . ." (emphasis supplied). In the book " British Master Tax Guide " (1988-89) under the head " Bonus and rights issues " at page 598, bonus issues are dealt with as hereunder : --- " Bonus issues ; Bonus issues are free distributions of shares (e.g., two new shares for each share already held). Example : In 1970, A purchased 300 ordinary shares in S Ltd. at pound 3 per share, total cost pound 900 (ignoring expenses for the purposes of the example). In 1980, A received a bonus issue of 300 shares. He, then, held 600 shares at pound 1.50 per share. They are all as purchased in 1970." (emphasis supplied). William Pickles in his book Accountancy dealing with bonus shares at pages 23245-23246, states thus : " Advantages and disadvantages. The advantages and disadvantages of an issue of bonus shares are briefly summarised (a) as regards the company and (b) as regards the shareholders.... (b) The shareholder's viewpoint. (i) Surtax and capital gains tax may be payable on a bonus share distribution. (ii) Unless the company makes increased profits, the fall in rate ....
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....reholders by the additions of the relevant amount of reserves...." (emphasis supplied). M. C. Shukla and T. S. Grewal in their book Advanced Accounts (1989), at page 823, have dealt with the impact of the bonus shares on the original shares, thus : " It should be remembered that when bonus shares are distributed, the shareholders may not gain at all. This is because of the fact that the market value of the shares depends upon the dividend received. If the company issues bonus shares, the profits (which do not increase) will have to be distributed over a larger number of shares, thus reducing the dividend per share. This will result in a fall in the value of the shares in the market. Thus, the shareholder will have a larger number of shares but the total value of his holding will not increase because each share now is of a smaller value. Hence, the shareholder makes no entry in his books on receipt of bonus shares. However, the shareholder will benefit in the form of capital appreciation if there is a net increase in the amount of dividend received by him. " (emphasis supplied). On a reference to the above standard text books, it is evident that when bonus shares are issued....
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....stant case are identical with the facts in the aforesaid decision of the Supreme Court, where the original shares were sold by an investor, in a case where bonus shares were issued subsequently and the matter came up for consideration. The court held that the capital gains or loss should be calculated in accordance with the statutory provisions of sections 48 and 55(2) of the Income-tax Act and the subsequent issue of bonus shares was completely irrelevant and extraneous which should not be taken into consideration. It is necessary to understand the scope and impact of the decision in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC). In the said case, the main issue posed was with regard to the validity of the proceedings initiated under section 147 of the Income-tax Act. The assessee therein acquired 12,000 ordinary shares of Orient Paper Mills on March 29, 1949. It received 12,000 bonus shares on April 28, 1951. Subsequently, on June 4, 1954, and June 26, 1961, it received bonus shares. The assessee sold 22,000 shares, which were out of the 24,000 shares which it acquired prior to January 1, 1954. It calculated the cost price of the 22,000 shares sold by it (out o....
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....ss in accordance with the statutory provisions in pari materia with sections 48 and 55(2) of the Act. In the present case, we are confined to the express provisions of section 55(2) relating to the manner in which the cost of acquisition of a capital asset has to be determined for the purpose of section 48. Where the capital asset became the property of the assessee before the first day of January, 1954, the assessee has two options. It can decide whether it wishes to take the cost of the acquisition of the asset to it as the cost of acquisition for the purpose of section 48 or the fair market value of the asset on the first day of January, 1954. The word 'fair' appears to have been used to indicate that any artificially inflated value is not to be taken into account. In the present case, it is common ground that when the original assessment order was made the fair market value a the shares in question had been duly determined and accepted as correct by the Income-tax Officer. Under no principle or authority can anything more be read into the provisions of section 55(2)(i) in the manner suggested by the Revenue based on the view expressed in the Dalmia Investment Co.'s case [1964] ....
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....whether the shares are held by an " investor " or " dealer " in shares. In both the cases, it is the surplus receipt that is brought to tax, either as " capital gains " or " profit or loss ", as the case may be, and in accordance with the relevant statutory provisions. The decisions reported in Madura Mills Co. Ltd. v. CIT [1972] 86 ITR 467 (Mad) ; D. M. Dahanukar v. CIT [1973] 88 ITR 454 (Bom) ; W. H. Brady and Co. Ltd. v. CIT [1979] 119 ITR 359 (Bom) and Alembic Chemical Works Ltd. (No. 1) v. CIT [1992] 194 ITR 497 (Guj) are in accord with the above view and they represent the correct law. The decisions (in Sutlej Cotton Mills Ltd v. CIT [1979] 119 ITR 666 (Cal) ; CIT v. Steel Group Ltd. [1981] 131 ITR 234 (Cal) and Smt. Protima Roy v. CIT [1982] 138 ITR 536 (Cal), etc.,) cited before us, misapplied the rule enunciated in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC) and failed to bear in mind the proper principles to be applied in the matter and do not lay down the correct law. In this case, the High Court has found that the original shares sold were admittedly purchased after 1954 and, therefore, the option of taking the fair market value as on January 1, 195....