ORDER
Balasubramanyam, Judicial Member
1. The question that this appeal raises is about the method of computing the capital gains resulting on sale of both original and bonus shares of a company.
2. The assessee is a company now in liquidation. This company held 3,500 shares of face value of Rs. 100 of M/s. Senapathy Whiteley Ltd. They had been acquired on 21-7-1962 and the cost was Rs. 3.5 lakhs. The assessee was allotted 16,100 bonus shares on three occasions : 1,400 shares on 10-3-1967; 4,900 shares on 6-2-1975; and 9,800 shares on 30-7-1977. The face value of the bonus shares was also Rs. 100.
3. The assessment year is 1984-85 and the year of account ended on 31-3-1984.
4. The assessee sold 7,833 shares on 16-7-1983 and again 6,300 shares on 23-7-1983. On 26-10-1983, the remaining 5,467 shares were sold. The original and bonus shares had together fetched a sale price of Rs. 9,80,000.
5. In the return filed on 15-5-1984 an income of Rs. 6,30,000 was shown as capital gains. A second return was filed on 18-10-1985 revising the capital gains to Rs. 3,92,454.
6. There was a change in the computation of cost of the shares between the first and the second returns. The ITO did not accept the change. He held that capital gain was Rs. 6,30,000.
7. The CIT(A) substantially agreed with the ITO in the matter of computation. He, however, accepted a suggestion on behalf of the assessee that the cost of the original shares should be taken at the market value as on 1-1-1964 in terms of Section 55(2) as the company was entitled to opt for the same. The ITO was directed to substitute the cost by market value and to accordingly complete the assessment.
8. In this further appeal to the Tribunal the assessee’s points are like this :
(a) The cost of 3,500 original shares was Rs. 3,50,000. This was the actual cost. The sale had been at the rate of Rs. 50 per share. The sale consideration attributable to 3,500 original shares was Rs. 1,75,000. Thus, there was a capital loss of Rs. 1,75,000 on account of sale of the original shares.
(b) The cost of the bonus shares was worked out in a different manner. The assessee averaged the cost of bonus shares and the original shares. In that way, the cost of 16,100 bonus shares worked out to Rs. 2,87,546. The sale consideration received by sale of 16,100 bonus shares was Rs. 8,55,000. This resulted in capital gain of Rs. 5,67,434.
(c) In the manner adopted by the assessee there was a capital loss by the sale of original shares and capital gain by the sale of bonus shares. Capital loss was set off against capital gain and the resultant was a capital gain of Rs. 3,92,454.
9. The authorities below did not treat this method of computation as proper. Precedents of the highest court ranging from Emerald & Co. Ltd v. CIT[1959] 36 ITR 257 (SC) down to Shekhawati General Traders Ltd v. ITO [1971] 82 ITR 788 (SC) were cited. The governing principle is clear and past all disputes. The method of valuation of shares, original and bonus, either for the purpose of capital gain or for the sake of making entry in accounts to show the closing or opening stock value, is the same. It is a case of original shares purchased for a price and bonus shares allotted by the company for which no cost had in fact been incurred. The Supreme Court has, on more than one occasion, ruled that the correct method to be applied in such cases is to take up the cost of the original shares and to spread it over to the original as well as bonus shares if the shares rank paripassu. This view taken in Emerald & Co. Ltd’s case (supra) was approved in the case of CIT v. Dalmia lnvestment Co. Ltd [1964] 52ITR 567 (SC) and two subsequent decisions in the cases of CIT v. GoldMohore Investment Co. Ltd [1968] 68 ITR 213 (SC) and CIT v. Gold Mohore Investment Co. Ltd [1969] 74 ITR 62 (SC) and finally in the case of Shekhawati General Traders Ltd’s case (supra).
10. During the course of argument the learned counsel for the assessee made reference to the cases of Dalmia Investment Co. Ltd (supra) and Shekhawati General Traders Ltd (supra) but, we find, the principle stated in the cases of Emerald& Co. Ltd (supra)and the Gold Mohore Investment Co. Ltd(supra) is reiterated. In the case of Shekhawati General Traders Ltd (supra) the fair market value of the shares as on 1-1-1954 was necessary. For that purpose, their Lordships ruled that any issue of bonus shares prior to subsequent to the said date was extraneous and irrelevant. But their Lordships have affirmed the view expressed in Dalmia Investment Co. ‘s case (supra) on the point of averaging the price.
11. The decisions of the Calcutta High Court in Smt. Protima Roy v. CIT [1982] 138 ITR 536; CIT v. Steel Group Ltd [1981] 131 ITR 234 and Sutlej Cotton Mills Ltd v. CIT[1979] 119 ITR 666 were mentioned at the Bar on behalf of the assessee. These decisions only hold that bonus shares issued subsequent to the material date are irrelevant. Such a situation does not obtain in the appeal before us.
12. The ITO relied upon the decision of the Madras High Court in the case of CIT v. T.V.S. & Sons Ltd [1983] 143 ITR 644. In this case, both original shares and bonus shares had been sold and there was a question of determining the cost of those shares for the capital gains. Their Lordships held that when the entire block of shares had been sold the question of determining the cost of acquisition of bonus shares separately would not arise.
13. We may also refer to the subsequent decision of the Madras High Court in the case of CIT v. Prema Ramanujam [1991] 192 ITR 692. In this case, the assessee had received shares as gift prior to 1-1-1954. Bonus shares had been issued in July 1966, March 1968 and March 1970. During the year ending March 31, 1975, the assessee had sold 375 shares out of the gifted shares and 300 shares out of bonus shares issued in July 1966. Their Lordships held that cost of acquisition of bonus shares is to be calculated by spreading the cost of the original shares acquired originally and bonus shares issued in July 1966, and bonus shares issued subsequently in 1968 and 1970 were not to be taken into account. The facts of the case before us are not comparable with this since there was bonus shares issued after the sale.
14. As held by the Madras High Court in the case of T.V.S. & Sons Ltd (supra) when both original shares and bonus shares figure in the sale there could be no question or necessity of determining the cost of bonus shares separately.
15. The assessee has valued the cost of the bonus shares on the method of averaging which we should accept. On the basis of the principle explained by the Supreme Court which is followed in T. V.S. & Sons Ltd’s case (supra), where the fact$ approximate, we should have directed that the cost of the original shares also should be taken on averaging. But then there is case for splitting. As shown in Shekhawati General Traders Ltd’s case (supra) where an assessee had opted for adopting market value in terms of Section 55(2), it is unalterable and the cost of original shares cannot be worked by averaging their cost among the original shares and bonus shares taken together ignoring the statutory provisions of Section 55(2). This position in law is also made clear in Prema Ramanujam’s case (supra). The CIT(A) has held that the assessee was entitled to opt for market value in terms of Section 55(2) as they had been purchased on 21-7-1962. In view of this option exercised by the assessee and the CIT(A)’s approval to substitute the market value for the cost, we have to deal with a different situation. We have to, therefore, direct the ITO to take the market value of 3,500 original shares as on 1-1-1964 as the substituted cost.
16. The bonus shares had been acquired subsequent to 1-1-1964. Therefore, the market value of 3,500 shares alone will be the substituted cost. In the result, we compute the capital gains as hereunder:
A. Cost of bonus shares on averaging Rs. 2,87,546
B. Fair market value of 3,500
original shares as on 1-1-1964
(to be fixed by the ITO) say Rs. X
Rs. 2,87,546
Rs. X
Total cost for the purpose
of capital gains Rs. 2,87,546
plus Rs. X
say Rs. Y
C. Sale price Rs. 9,80,000
Deduct the cost as worked out minus Rs. Y
Capital gains say Rs. Z
The ITO shall ascertain the market value of 3,500 original shares as on 1-1-1964 and recompute the income by way of capital gains on the lines shown above. The assessee shall be heard in the matter.
17. The appeal by the assessee stands allowed as mentioned above.