JUDGMENT
Thanikkachalam, J.
1, At the instance of the Department, the Tribunal referred the following two questions for the opinion of this Court under s. 256(1) of the IT Act, 1961, hereinafter referred to as the ‘Act’ :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in setting aside the order under s. 263 of the IT Act, 1961 passed by the CIT for the asst. yr. 1978-79?
2. Whether, having regard to the provisions of s. 55(2) r/w s. 50(2) of the IT Act, 1961 the Tribunal was right in law in holding that the cost of acquisition of the bonus shares, which shares were issued subsequent to 1st Jan., 1964 i.e., on 9th Feb., 1975, should be taken at half of the cost of the fair market value of the original shares as on 1st Jan., 1964, i.e. half of Rs. 258.50?”
2. The assessee held 382 shares in the Coimbatore Pioneer Mills Ltd. He had been holding these shares even prior to 1st Jan., 1964. On 9th Feb., 1975 he received bonus shares in the ratio of 1:1 in respect of those 382 shares. Thus, as on 9th Feb., 1975 he was holding 764 shares. During the accounting year, relevant to the asst. yr. 1978-79, the assessee sold 167 original shares and 382 bonus shares for a total consideration of Rs. 60,340 (original shares were sold for Rs. 20,113 and bonus shares were sold for Rs. 40,227. In the return of income filed, the assessee showed a loss of Rs. 32,204. This loss has resulted by reason of adoption of the actual cost of the original shares at Rs. 258.50 per share being the fair market value as on 1st Jan., 1964 and the adoption of the actual cost of the bonus shares at half the value of the original shares, viz., at Rs. 129.25 per share. The ITO accepted the loss returned and completed the assessment accordingly. Later the order of the ITO came to be scrutinised by the CIT. The CIT found that the ITO had wrongly adopted the cost of acquisition of the bonus shares at Rs. 129.25. Accordingly, the CIT initiated proceedings under s. 263 of the IT Act, 1961, since the order passed by the ITO was erroneous and prejudicial to the interest of the Revenue. According to the CIT the correct cost of acquisition of the bonus shares should be as under :
"Total number of equity shares 382 held (original cost being face value : Rs. 100 per share) Bonus shares received 382 Total number of shares after 764 issue of bonus shares Value of each share : 38,200 divided by 764 per share. Therefore cost of 382 bonus shares at the rate of Rs. 50 19,100"
According to the CIT there was allowance of excess loss when the ITO adopted the cost of acquisition of the bonus shares at Rs. 129.50 per share. Accordingly, the CIT set aside the order of the ITO and directed him to recompute the total income adopting the short-term capital gains on sale of 382 bonus shares at Rs. 21,127. Aggrieved by the order of the CIT, the assessee preferred an appeal to the Tribunal and contended that he was entitled to opt for the fair market value as on 1st Jan., 1964 as the cost of acquisition of the original shares and on that basis he was entitled to take the cost of acquisition of the bonus shares at half the value of the original shares. The Tribunal accepted the contention put forward by the assessee and concluded that the adoption by the assessee of the cost of acquisition of the bonus shares at Rs. 129.25 per share was perfectly justified and in order. Accordingly the Tribunal came to the conclusion that the CIT was not correct in exercising his jurisdiction under s. 263 of the Act. It is against this order, the Department has filed this tax case before this Court.
3. Before us the learned standing counsel appearing for the Department, submitted that there is no dispute with regard to the value of the shares adopted for original shares at the rate of Rs. 258.50 per share, since these shares were acquired prior to 1st Jan., 1964. According to the provisions of s. 55(2)(b)(ii) of the Act, the assessee is entitled to exercise his option to adopt the fair market value as on 1st Jan., 1964 when the shares were purchased prior to 1st Jan., 1964. But according to the learned standing counsel the value adopted for the bonus shares is not in order. The learned standing counsel submitted that the bonus shares were acquired after 1st Jan., 1964, and therefore the value of original shares pegged as on 1st Jan., 1964 cannot be adopted for the purpose of valuing the bonus shares. Therefore, according to the learned standing counsel, the original cost of acquisition of the original shares., viz., Rs. 100 per share alone should be adopted for valuing the bonus shares. Inasmuch as both the original shares and the bonus shares were clubbed together for the purpose of ascertaining the value of bonus shares, half of Rs. 100 viz., Rs. 50 should be adopted for valuing each of the bonus share.
4. On the other hand, the learned counsel appearing for the assessee submitted that the original shares were acquired at the rate of Rs. 100 per share prior to 1st Jan., 1964. While valuing the original shares the assessee adopted the option and valued the original shares at the rate of Rs. 258.50 per share. The bonus shares were acquired at a later stage after 1st Jan., 1964. In order to ascertain the value of the bonus shares, the original shares and the bonus shares should be put together and the value of original shares adopted on 1st Jan., 1964 should be divided into two parts and the value of each bonus share should be taken at Rs. 129.25. It is not open to the Department to withdraw the privilege given to the assessee to adopt the value of the original shares at the rate of 258.50 as on 1st Jan., 1964 by exercising option under s. 55(2)(b)(ii) of the Act. Therefore, the learned counsel appearing for the assessee submitted that when the shares were valued as per the abovesaid method, which is in accordance with the decisions of various High Courts and the Supreme Court, it cannot be said that the order passed by the ITO is either erroneous or prejudicial to the interest of the Revenue. Hence, according to the learned counsel, the CIT has no jurisdiction to interfere with the order passed by the ITO under s. 263 of the Act.
5. We have heard the rival submissions. The fact remains that the assessee held 382 shares in the Coimbatore Pioneer Mills Ltd. These shares were acquired even prior to 1st Jan., 1964. On 9th Feb., 1975 the assessee acquired bonus share in the ratio of 1:1 in respect of these 382 shares. Thus as on 9th Feb., 1975 he was holding 764 shares. In the asst. yr. 1978-79 the assessee sold 167 original shares for Rs. 20,113 and 382 bonus shares for Rs. 40,227, totalling to Rs. 60,340. The assessee adopted the fair market value as on 1st Jan., 1964 in valuing the original shares at the rate of Rs. 258.50 by exercising his option as conferred on him under s. 55(2)(b)(ii) of the Act. According to the assessee in order to value the bonus shares as well as the original shares, the value as adopted on 1st Jan., 1964 at the rate of Rs. 258.50 should be taken and half of the same should be adopted for valuing each of the original shares, that means each original share should be valued at Rs. 129.25. But, according to the learned standing counsel appearing for the Department, bonus shares were acquired after 1st Jan., 1964. Therefore the value as on 1st Jan., 1964 cannot be adopted for valuing the bonus shares. The learned standing counsel submitted that the value of the bonus share should be taken at half of the original cost incurred for acquiring the original share, viz., Rs. 50 for each bonus share. If this method is adopted, the assessee would be liable to pay more capital gain tax.
6. In a matter like this, what is the correct method to be adopted is pointed out by the Supreme Court in CIT vs. Dalmia Investment Co. Ltd. , that. :
“What was previously owned by the shareholder by virtue of the original certificates is after the issue of bonus shares, held by them on the basis of more certificates. In point of fact, however, what the shareholder gets is not cash, but property from which incomes in the shape of money may be derived in future. In this, sense, there is no payment to him, but an increase of issued capital and the right of the shareholder to it is evidenced not by the original number of certificates held by him, but by more certificates. There is thus no payment of dividend. A dividend in the strict sense means a share in the profits and a share in the profits can only be said to be paid to the shareholder when a part of the profits is released to him in cash and the company pays that amount and the shareholder takes it away. The conversion of the reserves into capital does not involve the release of the profits to the shareholder, the money remains where it was, that is to say, employed in the business. Thereafter the company employs that money not as reserves of profits, but as its proper capital issued and contributed by the shareholder. If the shareholder were to sell his bonus shares as shareholders often do, the shareholder parts with the right to participation in the capital of the company and the cash he receives is not dividend, but the price of that right. The bonus shares when sold may fetch more or may fetch less than the face value and this shows that the certificate is not a voucher to receive the amount mentioned on its face. To regard the certificate as cash or as representing cash paid by the shareholder is to overlook the internal process by which that certificate comes into being”.
In the matter of valuation of the bonus share, the Supreme Court further held as under :
“This leaves for consideration the other two methods. Here we may point out that the new shares may rank pari passu with old shares or may be different. The method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares. This market price must be the middle price and not as represented by any unusual fluctuation. The other method is to take the amount spent by the shareholder in acquiring his original shares and to spread it over the old and new shares treating the new as accretions to the old and to treat the cost of old price of the original shares as the cost price of the old shares and bonus shares taken together. The method is suggested by the Department in this case. Since the bonus shares in this case rank pari passu with the old shares there is no difficulty in spreading the original cost over the old and the new shares and the contention of the Department in this case is right. But this is not the end of the present discussion. This simple method may present difficulties when the shares do not rank pari passu or are of a different kind. In such cases, it may be necessary to compare the resultant price of the two kinds of shares in the market to arrive that a proper cost valuation. In other words, if the shares do not rank pari passu, assistance may have to be taken of other evidence to fix the cost price of the bonus shares. It may then be necessary to examine the result as reflected in the market to determine the equitable cost.”
7. While considering a similar issue, the Supreme Court in Shekhawati General Traders Ltd. vs. ITO , held as under :
“We have set out the facts of this case in detail in order to demonstrate that decision was not at all apposite for the purpose of deciding the point which has arisen in the present case. No question arose there of the calculation of the capital gain or loss in accordance with the statutory provisions in, pari materia with ss. 48 and 55(2) of the Act. In the present case we are confined to the express provisions of s. 55(2) relating to the manner in which the cost of acquisition of a capital asset has to be determined for the purpose of s. 48. Where the capital asset becomes the property of the assessee before 1st Jan., 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 s. 48 or the fair market value of the asset on 1st Jan., 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 of the shares in question had been duly determined and accepted as correct by the ITO. Under no principle or authority can anything more be read into the provisions of s. 55(2) in the manner suggested by the Revenue based on the view expressed in the (i) Dalmia Investment Co.’s case .”
8. There is a decision of this Court rendered in CIT vs. Prema Ramanujam (1992) 192 ITR 692 (Mad), wherein this Court, following the decisions of the Supreme Court in (supra) and (supra), held that while valuing the original shares obtained prior to 1st Jan., 1954, the value as taken by the assessee as on 1st Jan., 1954 by exercising his option under s. 55(2)(ii) of the Act should be adopted for the purpose of valuing the original shares.
9. A combined reading of the decisions cited supra would go to show that in a case where the assessee acquired original shares before 1st Jan., 1964 and bonus shares after 1st Jan., 1964, while ascertaining the value of bonus shares, we have to take into account the value of the shares as opted by the assessee as on 1st Jan., 1964 as per the provisions of s. 55(2)(b)(i) of the Act, and both the original shares and the bonus shares should be clubbed together and find out the average value of each share by dividing the total number of shares by the original cost opted as on 1st Jan., 1964.
10. By adopting this method, in the present case, the assessee valued each of the bonus shares at the rate of Rs. 129.25 by taking into account the value of the original share opted on 1st Jan., 1964. The assessee divided the total number of both original shares and the bonus shares by the cost of each share as opted on 1st Jan., 1964. Thus the loss has resulted by reason of adoption of the actual cost of the original shares at Rs. 258.50 per share being the fair market value as on 1st Jan., 1964 and the adoption of the cost of the bonus shares at half the value of the original shares, viz., Rs. 129.25 per share. The learned standing counsel for the Department submitted that the value of the original shares should be taken as the cost price, viz., Rs. 100 per share in respect of fair market value opted by the assessee as on 1st Jan., 1964. This contention cannot be accepted since the assessee has been given the privilege of adopting the fair market value as on 1st Jan., 1964 when the shares were obtained earlier to that date. This privilege given by the statute cannot be taken away, simply because the Department has got to value the bonus shares, which were acquired subsequent to 1st Jan., 1964. This was also the view expressed by the Supreme Court cited supra. In view of those reasons, it cannot be said that the order passed by the ITO in allowing the loss is neither erroneous or prejudicial to the interest of the Revenue, warranting jurisdiction of the CIT under s. 263 of the Act. In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs.