ORDER
Per Shri M. A. Ajinkya Account Member. – These are four appeals relating to the assessment years 1981-82 and 1982-83 filed by the assessee-appellant They were heard together and are disposed of by this consolidated order We will first deal with I. T. A. No. 1234 (Bom.) /85 relating to the assessment year 1981-82.
2. The appellant is a non-resident company having its registered office in East Africa. We are concerned with it assessment for the assessment year 1981-82, for which the accounting year ended on 31-3-1981. The appellant had purchased 4,000 equity shares of Rs. 100 each of AEGIS Chemical Industries Ltd. (formerly knows as Atul Drug Co. Ltd.) on 6-10-1960 for Rs. 4,00,000 It got 8,000 bonus shares of Rs. 100 each on 26-8-1966 and another 8,000 bonus shares of Rs. 100 each on 4-1-1967. Thus, the appellant company had total 20,000 equity shares of Rs. 100 each. There was a conversion of equity shares of the face value of Rs. 100 into that of the fact value of Rs. 10 and consequently the appellant received 2,00,000 equity shares of Rs. 10 on such conversion on 22-12-1976. It sold the whole lot of 2,00,000 shares for Rs. 20,00,000. The Income-tax Office determined the capital gains on sale of shares at Rs. 16,68,000 by adjusting against the sale price the fair market value of 40,000 equity shares @ Rs. 14.25 at Rs. 2,90,000 and by taking the cost of 1,60,000 bonus shares at nil and the expenses in connection with the transfer of shares of Rs. 42,000. Thus he deducted from the sale price of Rs. 20,00,000 cost plus expenses amounting in all to Rs. 3,32,000 and worked out the capital gains at Rs. 16,68,000. The ITO had worked out the fair market value of the shares as on 1-1-1964 by adopting break-up method and one of the ground taken by the appellants Representative before the CIT (Appeal) was that since AEGIS Chemical Industries Ltd., which was the company of which the shares were sold was a going concern the valuation of shares should have been done on yield basis. This contention was accepted by the CIT (Appeal) and has been confirmed by the Tribunal in a departmental appeal vide ITA No. 7495 (Bom.) /85 dated 4-4-1988.
3. The second issue raised before the CIT (Appeals) was the manner of working out the yield method. While disposing of this point the CIT (Appeals) observed/directed as under :
“For computing the value of the shares on the basis of the yield method the balance sheets of M/s. AEGIS Chemical Industries Ltd. for at least three years prior to 1-1-1964 will have to be examined in order to ascertain the profit-earning capacity of the company. Further it will be necessary to determine a fair market rate of capitalisation having regard to the normal expectation of yield from investment in shares and other securities. In order to enable the ITO to make necessary enquiries in this regard I set aside the relevant portion of the assessment order the restore the matter to him with a direction that he should determine the fair market value of the shares as on 1-1-1964 on the basis of the yield method.”
Effect to these direction was given by the IAC in his order dated 8-11-1985 and this order was confirmed the CIT (Appeals) by his order dated 19-2-1987 against which there is another appeal filed by the appellant market ITA No. 2277-A (Bom.) /87 with which we will deal after disposing of the other grounds raised in the present appeal at a later stage in the order.
4. The next point raised by the appellants Representative before the CIT (Appeals) was that the ITO ought to have taken the value of bonus shares by spreading the cost of the original 4,000 shares over the aggregate holdings consisting both of original shares and bonus shares. Reliance was placed on a decision of the Supreme Court in the case of Sekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788. Alternatively it was argued that if the cost of bonus shares is held to be nil no chargeable capital gains could be said to have arisen on the sale of shares in accordance with the principles laid down by the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294. The CIT (A) held that the decision in Sekhawati General Traders Ltds case (supra) would not apply to the facts of the present case because he found that in the case before the Supreme Court the question of computation of capital gains in a situation where both bonus shares and original shares are sold had not come up for consideration. He also rejected the alternative argument that since the bonus shares do not have any cost the entire sale proceeds in respect of such bonus shares were not taxable in view of the decision of the Supreme Court in B. C. Srinivasa Settys case (supra). He observed that in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 the Supreme Court had laid down the method of determining the cost of acquisition of the shares but since in the present case both the original shares and the bonus shares were sold together the cost of the bonus shares had not been determined separately on the basis of the Madras High Court decision in the case of CIT v. T. V. S. & Sons Ltd. [1983] 143 ITR 644. He therefore observed that by allowing deduction of the fair market value of shares as on 1-1-1964 the ITO had considered the whole cost of shares including the bonus shares. It is against this order of the CIT (A) that the present appeal is filed.
5. Substantially the first ground taken in this appeal is that the CIT (Appeals) failed to appreciate that the sale of bonus shares does not give rise to capital gains since the cost of acquisition of such shares is nil and therefore erred in directing the ITO to exclude the sale proceeds of 1,60,000 equity shares amounting to Rs. 16,00,000 in working out the capital gains. The second ground is that alternatively and without prejudice the CIT (A) erred in upholding the action of the ITO in taking into consideration the entire sale proceeds of 1,60,000 shares of the face value of Rs. 10 as long-term capital gains for the purpose of section 45 without deducting any cost of acquisition in respect of the said shares.
6. An additional ground has been taken in this appeal on 8-2-86 which is that the CIT (A) having accepted that yield method should be accepted for determining the fair market value of the shares of AEGIS Chemical & Industries Ltd. as on 1-1-1964 erred in directing the ITO that for computing the value of the shares on the basis of yield method the balance- sheets of the company of at least three years prior to 1-1-1964 should be considered. We will deal with this additional ground a little later.
7. Shri Dilip Dwarkadas firstly argued that the entire amount of Rs. 16,00,000 representing sale of bonus shares was not taxable because such shares had not cost an the decision of Supreme Court in B. C. Srinivasa Settys case (supra) would apply. We cannot accept this argument Shri Dwarkadas for two reasons. Firstly in the case decided by the Supreme Court the issue was about sale of an asset which is self-generating asset and of which cost cannot be determined the Supreme Court held that what is contemplated by section 48(2) is an asset in the acquisition of which it is possible to envisage a cost It must be an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire. Bonus shares in our opinion cannot be considered as an asset where it is not possible to envisage a cost or which is like goodwill a self-generating asset. The Supreme Court itself in several other decisions has held that the cost of bonus shares can be worked out where such shares rank pari passu with other shares. Reference in this connection may only be made to the decision of the Supreme Court in Dalmia Investment Co, Ltds case (supra) and CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213. Therefore, we cannot accept the contention of the appellants counsel that the bonus shares when sold do not yield any profit the bonus shares are issued only to those who are in possession of the original shares In Dalmia investment Co. Ltd. case (supra) the ITO took the same argument that is now being canvassed by Shri Dilip Dwarkadas. He held that the bonus shares had no cost as nothing had been paid and therefore they had to be valued at nil Justice Hidayatullah in his judgment in the aforementioned case at pages 574 of 52 ITR observed as under :
“It will be seen from the above that there are four possible methods for determining the cost of bonus shares. The first method is to take the cost as the equivalent of the face value of the bonus shares this method was followed by the assessee company in making entries in its books. The second method adopted by the department is that as the shareholder pays nothing in cash for the shares cost should be taken at nil. The third method is to take the cost of the original shares and to spread it over the original shares and bonus shares taken collectively. The fourth method is to find out the fall in the price of the original shares on the stock exchange and to attribute this to the bonus shares.”
and further observed at pages 575 and 576 as under :
“A limited liability company must state in its memorandum of association the amount of capital with which the company desires to do business and the number of shares into which that capital is to be divided The company need not issue all its capital at the same time It may issue only a part of its capital initially and issue more of the unissued capital on a later date. After the company does business and profits result it may distribute the profits or keep them in reserve. When it does the latter it does not kept the money in its coffers the money is used in the business and really represents an increase in the capital employed When the reserves increase to a considerable extent the issued capital of the issued capital of the company ceases to bear a true relation to the capital employed. The company may then decide to increase its issued capital and declare a bonus to the shareholders in lieu of bonus, certificates entitling them to an additional share in the increased capital. As a matter of accounting the original shares in a winding up before the increase issued capital would have yielded to the shareholder the same return as the old shares and the new shares taken together. 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 income in the shape of money may be derived in future. In this sense there is no payments to him but an increase of issued capital and the right of the shareholder to it is evidence not by original number of certificates held by him but by more certificates. There is thus no payments 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 taken 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 it to say employed in the business. Thereafter the company employees that money not as reserves of profits but as its proper capital issued to and contributed by the shareholder.”
This would only mean that it is fallacious to suggest that bonus shares are self-generating assets having no cost.
8. The next point for consideration is whether on the facts of the present case what should be the mode of computation of profits Here it is necessary to emphasize that the whole lot of shares was sold at a time. The original shares and the bonus shares were inextricably mixed. Further we are not required to independently determine the cost of bonus shares for the simple reason that only bonus shares were not sold in the present case. Next we have on the one hand the sale price of the entire lot of shares sold and the cost of the same lot to the assessee. Thus 2,00,000 equity shares of Rs. 10 each were sold for Rs. 20,00,000 and these comprised of 40,000 equity shares of Rs. 10 each (or 4,000 equity shares of Rs. 100 each) which were purchased by the appellant for Rs. 4,00,000 and 80,000 bonus shares in two lots of Rs. 10 each (8,000 bonus shares in two lots of Rs. 100 each) which were acquired by the appellant without having in incur any monetary cost on 26-8-1966 and 4-1-1967. As stated earlier since these bonus shares were acquired after 1-1-1964 the question of adopting the fair market value of the bonus shares were as on 1-1-1964 does not arise. Therefore we have the position where the sale price of 2,00,000 equity shares is known which is Rs. 20,00,000 and the cost of these shares to the appellant is known which is Rs. 4,00,000. Therefore following the decision of the Madras High Court in T. V. S. & Sons Ltds case (supra), we have to hold that when the entire shareholding including the original shares and the bonus shares are compulsorily acquired the question of determining the cost of acquisition of the bonus shares separately would not arise. The theory of average is a principle of costing resorted to determine the cost of the bonus shares alone with a view to reckoning the result of any transaction in respect of bonus shares alone. But when the entire block of shares held by a shareholder is sold and in that sale all the bonus shares held by the shareholder also figure there can be no occasion or necessity for determining the cost of the bonus shares separately. The whole cost of the shares including the bonus shares is already a known figure and it would be an unnecessary refinement to ascertain the individual cost of each share because by getting at the average cost of bonus shares the average cost of the original shares must inevitably get reduce pro tanto.
9.1 However on the facts of the present case there is on further refinement to this theory which is not wholly unnecessary and which we will have to presently consider and that is how to determine the cost of the 40,000 equity shares which were purchased by the appellant on 6-10-1960 in the form of 4,000 equity shares of Rs. Rs. 100 each. The manner of determining the cost of such shares as on 1-1-1964 has also been a subject matter of some debate before us to which we will presently advert. There are certain minor clarifications necessary to be made in this context. The first point taken before the CIT (A) by the appellant was that the shares sold were that of the AEGIS Chemical Industries Ltd. which was a going concern and yield method should be adopted for valuation of such shares. The ITO had adopted the break up method for valuation of the fair market value. While accepting the appellants counsels stand that yield method should be followed, the CIT (A) in his order dated 17-12-1964 gave following finding in para 7 :
“For computing the value of the shares on the basis of the yield method, the Balance sheets of M/s. AEGIS Chemical Industries Ltd. for a least three years prior to 1-1-1964 will have to be examined an order to ascertain the profit earning capacity of the company Further it will be necessary to determine a fair market rate of capitalisation having regard to the normal expectation of yield from investment in shares and other securities. In order to enable the ITO to make necessary enquiries in this regard I set aside the relevant portion of the assessment order and restore the matter to him with a direction that he should determine the fair market value of the share as on 1-1-1964 on the basis of the yield method.”
Against this finding the department went in appeal and the D-Bench of the Tribunal in their order in ITA No. 749 (Bom) /85 for the assessment year 1981-82 upheld the finding of the CIT (A) and dismissed the departmental appeal. It may be pointed out that on this issue the appellant did not file an appeal nor did it file any cross objection when the department filed its appeal. In consequence of the order of the CIT (A) as above dated 17-12-1984 the IAC passed another order on 8-11-85, in which in para-3 he state thus :
“3. Shri N. J. Damania C. A. from C. C. Chokshi & Co. attended and was heard He furnished the necessary details for the purpose of valuation of shares of M/s. Aegis Chemical Industries Ltd. for the periods ending 30-6-62, 31-12-62 and 31-12-63. The average profit earned by the assessee after deduction of income-tax works out to Rs. 3,55,510 capitalising this income at 9 per cent estimated return the value per share would work out to Rs. 658.35.”
The appellant filed an application of rectification on 20-1-1986. n This application was rejected by the IAC Range III (D), on 10-2-86. Against both these orders i.e. order under section 143(3) dated 8-11-85 and order refusing to rectify date 10-2-86 the appellant filed appeals which were rejected by the CIT (A) by his consolidated orders dated 19-2-1987. Before the CIT (A) the appellants contention was that the first accounting year ending 30-6-62 should have been left out of reckoning because commercial production had started only towards the end of that year. The CIT (A) held that the IAC was justified in working out the average of the last three years i.e., three accounting years but in fact a period of 2 1/2 years, and therefore the further held that it could not be said that the value of shares as worked out by the IAC on yield method was not in consonance with the direction of the CIT (A) So far as the appeal against the order or rectification was concerned the CIT (A) held is para-3 that the IAC was fully justified in rejected the appellants application under section 154.
9.2 Against these orders off the CIT (A), the appellant has filed two appeals which are marked ITA Nos. 2277 (Bom.) /87 and 2277-A (Bom.) /87 both for the assessment year 1981-82. Before dealing with the various arguments advanced in respect of these appeals it is necessary to state that an additional ground has been raised in the original appeal marked ITA No. 1234 (Bom.) /85. This ground was raised as late as on 8-2-1986 and reads as under :
“The learned Commissioner of Income-tax (Appeals) having accepted the contention of the Appellant that the yield method should be adopted for determining the fair market value of the shares of Messrs. Aegis Chemical & Industries Ltd., (formerly known as Atul Drug House) as on 1-1-64, erred in directing the Income-tax Officer that for computing the value of the shares on the basis of the yield prior to 1-1-1964 should be examined in order to ascertain the profit earning capacity of the company.
2. The learned Commissioner ought to have held that for computing the value of the shares of the aforesaid company on yield method the Balance Sheets of the Company for the periods ended on 31-12-1962 and 31-12-1963 only ought to be taken into consideration in view of the fact that the manufacturing activities of the Company had commenced at the fag end of the year ended on 30-06-1962.”
9.3. We have first to decide whether an additional ground of this type can at this stage be entertained in the original appeal for the assessment year 1981-82. Firstly, it may be stated that the grounds raised are not pure question of law and cannot be allowed to be raised at a later date. Secondly if we see the circumstances under which these grounds have been raised it would appear that the appellant has tried to revive an issue concluded by a decision of the CIT (Appeals) in his first order out of desperation when it found that it was likely to lose its appeals against the order given effect to the CIT (Appeals)s order on a technical ground. We may clarify this position by pointing out that the finding given by the CIT (A) about the manner of computing the value of the shares on yield method contained in para-7 of the CIT (A) order dated 17-12-1984 and reproduced in para-7.1 hereinabove was not challenged by the appellant company in its first appeal against that order although the appellant did raise several other grounds in the appeals so filed. This means that the appellant at the time of filing appeal against the CIT (A)s order had accepted the manner of computing the value of shares on yield method laid down by the CIT (A) in his original order dated 17-12-1984. The CIT (A) had specifically directed that for computing the value of shares on yield basis balance sheet of Aegis Chemical Industries Ltd., at least for three years prior to 1-1-1964 will have to be examined. This finding apparently was not challenged when the appellant filed appeal against the CIT (A)s order on 14-2-1985. The IAC proceeded to give effect to this finding by his order dated 8-11-1985. The relevant portion of the IACs order has also been reproduced in para-7.1 above. Thus it will be seen that the IAC was only carrying out the directions of the CIT (A) contained in his order dated 17-12-1984 which directions had not been challenged by the appellant. Therefore when the appellant filed and appeal against this order of the IAC the CIT (A) rightly held that this order was correct and the IAC was justified in working out the average of the last three years which he was directed to do by the CIT (A). When faced with this finding of the CIT (A), which was contained in his order dated 19-2-1987, the Appellant has now tried to revive the issue of the manner of computation of the value of shares as per yield method by filing an additional ground as late as on 8-11-1986, which is a date consequent too the date of the IACs order dated 8-11-1985. We cannot permit the appellant to agitate this issue at this late stage against the original order of the CIT (A) particularly when no question of law is involved and to issue in any case would come for adjudication in the appeal filed by the company against the order on an appeal against the order passed by the IAC too give effect to the first appellate order of to CIT (A). This brings us to the merits of the earlier years.
9.4 Shri Dwarkadas in this regard has filed copies of balance-sheets of Atul Drug House Ltd. (now known as Aegis Chemical & Industries Ltd.) for the periods 1-7-1961 to 3-6-1962, 1-7-1962 to 31-12-1962 and 1-1-1963 to 31-12-1963. It was Shri Dwarkadass case that the first commercial production commenced in March 1962 and, therefore, the accounts for the period 1-7-1962 to 30-6-1962 should be totally ignored as there was no commercial production during this period. According to Shri Dwarkadas, the results for the period 1-7-1961 to 31-12-1962 and for the period 1-1-1963 to 31-12-1963 should have been taken into account. Shri Dwarkadas has relied on the observations of the author, M. S. Adamson, on the question of valuation of the Company shares and Businesses and, in particular, on the observations on selection of past earnings. The observations on which Shri Dwarkadas has relied are as under :
“The base of past earnings to be used as a guide too earning capacity is often obtained by adopting the average results of a certain number of years. The main question for decision is how many, and which years would give the most reliable indication.
The earlier conventional method was to adopt the average of the last three, five or ten years, according to circumstance, but it has been established by practice, and recognised by later writers and judicial authorities, that modification is necessary. H. E. Seed referred the need to ignore exceptional periods where results may have been affected by strike, financial crisis and the like, and also too the greater claims of the last year as a nearer approximation to present and future Conditions quotes a method of using a weighted average by giving more effect to the later than to the earlier years in the calculation.”
9.5 We have considered these arguments and have given our very anxious consideration to the issue before us. On perusal of the directors report for the year ended 30-6-1962 of the company called Atul Drug House Ltd., we find that the report for the year ended 30-6-1962 was the sixth annual report. Thus, the company was already six years old by 30-6-1962. The directors have recorded that the sales of Methanol which started from March 6 during the year were satisfactory. They have also recorded that the company had completed the construction of Formaldehyde plant and other civil structures and that towards the end of June 1962 the Plant had started operating. The construction and installation of plants were made in record timing and certain equipments were expected to be received from abroad for the production of Hexamino. They have also recorded that the construction of plants had resulted in a very heavy capital expenditure on various accounts. For the year ended 30-6-1962, there were sales of Rs. 3,97,894 and substantial purchases of raw materials of nearly Rs. 15,49,971. On these facts, this year can by no manner or means be described as an exceptional period where results of the company have been affected by events like strikes, financial crisis and the like. Merely because the production had commenced in the course of the year and there was a loss in this first year, we cannot completely ignore the results of this year for the purpose of calculating the value of the shares as on 1-1-1964 on yield basis. The three years which the IAC has adopted for such calculations happen to cover a period of when there was a loss on account of late commencement of production and substantial investment on capital goods. That is no argument for excluding the year in which these events happened particularly when we find that the company was in existence even in 1962 for a period of six years prior to that date. In our opinion, therefore, the IAC, was perfectly justified in adopting the three balance-sheets prior to 1-1-1964 for calculating the fair market value of the shares as on 1-1-1964 and to CIT (A) was equally justified in confirming such calculation. We are not persuaded by the arguments advanced by Shri Dwarkadas too make any variation in the order of the CIT (A), which is confirmed, and the appeals of the assessee dismissed.
9.6 That leaves us with the appeal of the assessee (ITA No. 5812/Bom//85) for the assessment year 1982-83. The issue raised in this appeal is similar to the issue raised in the original appeal (ITA No. 1234/Bom. /85) for the assessment year also, the ground taken is that the sale of bonus shares does not give rise too capital gains. In the year relevant to the assessment year 1982-83, to assessee sold 4,36,000 shares of Aegis Chemical Industries Ltd., at Rs. 65,40,000, on which, after adjusting expenses on stamp duty and professional charges amounting in all to Rs. 1,15,460, the IAC worked out capital gains of Rs. 64,24,540. When the matter went before the CIT (A), the CIT (A) held that the matter was covered by the appellate decision of the CIT (A) for the assessment year 1981-82 for which year the CIT (A) had discussed this matter at great length. The shares sold during the year are bonus shares. These shares were issued after 1-1-1964. The CIT (A) for the assessment year 1981-82 had held that while allowing the deduction of to fair market value as on 1-1-1964, the whole cost of shares including the bonus shares had been considered. This decision of the CIT (A) for the assessment year 1981-82 and the consequential decision of the CIT (A) for the same year against the order have been discussed in the preceding paragraphs, and the assessees appeals against booth these appellate orders have been dismissed by us for the reasons stated in the preceding paragraphs. Since the CIT (Appeals) will be confirmed and the assessees appeal for the assessment year 1982-83 dismissed.