S RAM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN pursuance of the direction given by this court, the Tribunal referred the following question, for the opinion of this court under section 256(2) of the INcome-tax Act, 1961 (hereinafter referred to as "the Act") "Whether, on the facts and in the circumstances of the case, the method adopted by the Tribunal for valuing the cost of the shares in the hands of the respective assessees for the purpose of arriving at the taxable capital gains is correct in law ?" The assessee is an investor in shares. The assessee acquired on various dates prior to July 4, 1966, 87 original shares of Southern Roadways Private Ltd. On July 4, 1966, bonus shares were issued by the company. The bonus shares rank pari passu with the old shares. As a result of this bonus issue, the assessee received 174 shares. There was a further bonus issue when the assessee received 94 shares. The total shareholding of the assessee as on December 31, 1972, was 355 shares. On March 28, 1973, the assessee sold all the 355 shares for Rs. 56, 900. The question of assessment of capital gains from the sale of these shares arose. As per the calculation submitted by the assessee, the capital gain was Rs. 22, 109. The capital gain, according to the INcome-tax Officer, was Rs. 40, 892. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner gave a direction to the Assessing Officer in the matter of ascertaining the cost of bonus shares. According to the Appellate Assistant Commissioner, the cost of the bonus shares should be fixed by finding out the average price of all the shares in accordance with the ratio of the judgment of the Supreme Court in CIT v. Dalmia INvestment Co. Ltd. On receipt of this order, the INcome-tax Officer reworked the capital gains. He arrived at the same figure of Rs. 40, 892. What he did was to start with the cost of 87 shares, i.e., 58 shares on partition and 29 by way of gift at Rs. 16, 008 and thereafter he worked out the average cost of all the shares, i.e., original shares and the various bonus shares with the result that arithmetically the aggregate figure remained at Rs. 16, 008As against this order of the INcome-tax Officer, dated June 17, 1974, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner by his order, dated June 28, 1975, held that there was no appealable order before him and if the order of the predecessor Appellate Assistant Commissioner was not given effect to correctly, the assessee, it was stated, could have approached the Appellate Assistant Commissioner for amending the same. The assessee contested this finding of the Appellate Assistant Commissioner before the Tribunal. It seems that as against the order passed by the Appellate Assistant Commissioner, the Department also went in appeal before the Appellate Tribunal. The Appellate Tribunal took into consideration the appeal filed by the Department, which involved the question of valuation of shares consequent to the issue of bonus shares. The Tribunal proceeded to value the bonus shares. While determining the value of bonus shares, it is necessary to determine the cost of acquisition of the bonus shares. According to the Tribunal, the shares received on partition on June 25, 1957, would have to be taken at a particular book value in the assessee's books. So also regarding the shares received by way of gift, a particular cost would have been recorded in the assessee's books as on the date of gift. These values would have to be taken as the cost of the aforesaid 87 original shares. If no value has been recorded in the books in respect of the gifted shares, then the market price as on the date of gift should be taken as the cost of 29 gifted shares. Thus, the Tribunal directed to aggregate the cost of 87 original sharesSubsequently, there was an issue of bonus shares. For ascertaining the cost of value of the bonus shares issued subsequently as well as the revised value of the partitioned and gifted shares, the INcome-tax Officer was directed to adopt the method of working as detailed by the Tribunal in their order in I.T.A. No. 25 (Mad) of 1974-75, dated March 17, 1977As far as the bonus shares are concerned, the Tribunal held that the figures so obtained will be substituted as the cost of acquisition. The revised figures obtained for the shares got on partition (58 shares) and the shares got by way of gift (29 shares) will be ignored as far as the cost of acquisition is concerned, because the pegged value as on January 1, 1954, of Rs. 184 per share shall have to be adopted in lieu thereof as already directed. The INcome-tax Officer was directed to rework the cost of acquisition in terms of the order passed by the Tribunal. Subject to the above observations, the appeal filed by the Department in I.T.A. No. 857 (Mds.) of 1974-75 was treated as allowed. IN view of the order passed in the Departmental appeal, the appeal filed by the assessee in I.T.A. No. 1130 (Mds.) of 1975-76 was dismissedBefore us, learned counsel appearing for the assessee submitted that in so far as the original shares are concerned, which were acquired prior to January 1, 1954, they should be valued as per the provisions of section 55(2) of the INcome-tax Act, 1961, by taking into consideration the fair market value as was prevalent on January 1, 1954. Learned counsel further submitted that in order to ascertain the cost of acquisition of the bonus shares obtained subsequent to January 1, 1954, the market value as obtaining on January 1, 1954, with regard to the original shares should be spread over both the original shares and the bonus shares. According to learned counsel, the actual cost price of the original shares should not be spread over the original shares and the bonus shares in order to find out the cost of acquisition of the bonus shares. It is also the submission of learned counsel appearing for the assessee that while valuing the bonus shares, which were issued periodically, the value as it stood on the date of each issue should be taken into consideration and not the fair market value as it was prevalent on January 1, 1954, in the case of valuing the original shares. IN order to support these submissions, learned counsel appearing for the assessee relied upon the decision of this court in CIT v. Prema Ramanujam and another decision of the Supreme Court in Escorts Farms (Ramgarh) Ltd. v. CIT. Reliance was also placed upon another decision of the Supreme Court in Shekhawati General Traders Ltd. v. ITO. Lastly, learned counsel appearing for the assessee relied upon yet another decision of the Supreme Court in CIT v. Dalmia INvestment Co. Ltd. On the other hand, both learned senior and junior standing counsel appearing for the Department, submitted that inasmuch as the bonus shares were obtained after January 1, 1954, it is not possible to value the bonus shares on the basis of the value of the original shares, which were deter mined as per section 55(2) of the INcome-tax Act, 1961IN short, learned standing counsel appearing for the Department, made the following three submissions1. IN the present case, the assessee sold the entire shares, both the original and bonus. Hence, the question of valuing the bonus shares separately does not arise. Reliance was placed upon the decision of this court in CIT v. T. V. S. and Sons Ltd. and a decision of the Calcutta High Court in Goodricke Group Ltd. (No. 2) v. CIT.

(2.) SO far as the original shares are concerned, the assessee exercised his option to value the original shares as per the fair market value prevalent on January 1, 1954. The bonus shares were obtained after January 1, 1954. Hence, the option given under section 55(2) of the Act will not be applicable to the assessee in so far as the bonus shares are concerned