ORDER
S. Kannan, Accountant Member
1. These three appeals, which give rise to a single common issue, were heard together, on being referred to this Special Bench of the Income-tax Appellate Tribunal, Madras Bench “D”, see pro forma dated June 27, 1990, for making reference by a Bench to the President, Income-tax Appellate Tribunal, under Section 255(3) of
the Income-tax Act, 1961, for constitution of a Special Bench, and the President’s orders thereon.
2. The assessee first mentioned in the cause title is assessed to tax in the status of an individual. The second assessee is a specified Hindu undivided family, of which the said R. Jagadish Chandran is the karta. The assessee mentioned last in the cause title is assessed to tax in the status of an individual.
3. The assessment year involved is common, namely, assessment year 1982-83. The relevant previous year is also identical, namely, the year of accounting ending on June 30, 1981.
4. Smt. R. Vijayalakshmi, the mother of Jagadish Chandran (individual), had acquired prior to January 1, 1964, 1,000 equity shares (of the face value of Rs. 100 each) in Premier Mills Ltd. During 1965 and 1966, she purchased 160 equity shares of the same company. In 1967, she received bonus shares in the ratio of 1:1, which augmented her holdings to 2,320 shares. In 1967, she purchased 30 shares, thus increasing the entire holdings to 2,350 shares. There were further issues of bonus shares in 1975 and 1977.
5. On August 3, 1978, she gifted a major portion of her holdings to her son, Jagadish Chandran (individual), which comprised the bonus shares
issued in 1967, 1975 and 1977.
6. On his part, the assessee-individual sold during the previous year relevant to the assessment year 1982-83, which is now before us, 2,000 shares at the rate of Rs. 202 per share. The said 2,000 shares comprised :
(a) 1,160 shares, being the entirety of the 1967 bonus issue ; and
(b) 840 shares being a part of the 1975 bonus issue.
7. The Hindu undivided family of which Jagadish Chandran is the karta had acquired prior to January 1, 1964, 1,000 equity shares of the said Premier Mills Ltd. The assessee-Hindu undivided family had purchased certain shares of the said company in 1969, 1970 and 1971. And bonus shares came to be allotted in 1967, 1975 and 1977.
8. In the 1977 bonus issue, the assessee-Hindu undivided family had
been allotted 1,323 bonus shares. Out of the said 1,323 bonus shares, the
assessee-Hindu undivided family had sold during the previous year relevant
to the assessment year 1982-83, which is now before us 1,023 shares at
the rate of Rs. 202 per share.
9. Smt. Sabitha Chandran, it would appear, had in 1957, applied for certain shares of the said company. She was allotted 75 shares at par. She too was allotted bonus shares by the company in 1967, 1975 and 1977. And during the previous year relevant to the assessment year 1982-85, which is now before us, she sold 100 shares (from out of the 150 bonus shares issued to her by the company in 1977) to one Vijayalakshmi Investments P. Ltd. at Rs. 202 per share.
10. The common case of the assessees before the Assessing Officer was that the cost of acquisition of bonus shares being nil, the question of computing capital gains arising from the sale of the shares in question did not arise. This argument was obviously based on the decision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294.
11. The assessees herein had advanced an alternative argument also before the Assessing Officer. The said argument ran as follows : The shares sold by them came out of the bonus issues. The original holdings (in relation to which the said bonus issues were made from time to time by the company) had been acquired prior to January 1, 1964, Ergo, the fair market value of the original holdings as on January 1, 1964, should be taken into reckoning for the purposes of ascertaining the cost to the assessees of the bonus shares sold by them. In other words, their case before the Assessing Officer was that the fair market value of the original holdings as on January 1, 1964, must be ascertained first and that thereafter the said value must be spread over both the original holdings and the bonus shares taken together.
12. In the case of Jagadish Chandran (individual) (who, as pointed out earlier, had received the shares in question as a gift from his mother), the said contention was advanced, inter alia, on the basis of the provisions of Section 49(1)(ii) read with Section 55(2)(ii) of the Act.
13. The said arguments did not find favour with the Assessing Officer. As for the contention that the cost to the assessees of the bonus shares being nil the capital gains arising on the sale of the bonus shares could not be computed, the Assessing Officer took the line that in the case of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, the Supreme Court has clearly held that bonus shares did have a value which should be ascertained by applying the appropriate method. Accordingly, he rejected the main contention of the assessees herein.
14. The Assessing Officer rejected the alternative contention too.
15. Going on the footing that in the case of Dalmia Investment Co. Ltd. [1964] 52 ITR 567, the Supreme Court has held that the value of bonus shares must be ascertained by adopting the principle of averaging, he computed the cost of acquisition of the bonus shares at Rs. 30.64 per share. For this purpose he took into reckoning the actual cost to the assessees of the original holdings and not the substituted cost as on January 1, 1964.
16. The assessees were unsuccessful before the Commissioner of Income-tax (Appeals).
17. Thereupon, the assessees moved the Income-tax Appellate Tribunal. When the matter came up before the Income-tax Appellate Tribunal, Madras Bench ‘D’, the Members of that Bench were of the opinion that the decision of the Income-tax Appellate Tribunal, Bombay Bench “D”, in the case of F. Hoffman-La Roche and Co. Ltd. v. IAC [1988] 27 ITD 17, which was referred to and relied upon by the assessee’s counsel, required further examination and consideration. In that regard, the following considerations weighed with the Members ;
(i) In all the decisions of the Supreme Court on this issue, it is clearly laid down that the cost of bonus shares is to be arrived at by distributing the price paid for the acquisition of the original shares between those shares and the bonus shares received later.
(ii) There is no authority for the proposition that the substituted value as on January 1, 1964, of the original shares and not the original cost that has to be distributed over the bonus shares also in arriving at the cost of the bonus shares.
(iii) On the contrary, the ratio of the decision of the Gujarat High Court in the case of CIT v. Chunilal Khushaldas [1974] 93 ITR 369 appears to be against the proposition at serial No. (ii) above, In that case, rejecting the assessee’s contention that the bonus shares came to be held by the assessee from the date when the original shares were purchased by the assessee, the High Court held that the bonus shares could be said to be held by the assessee only from the date of their issue.
It may not, therefore, be correct to say that the bonus shares which are acquired after January 1, 1964, should be valued on the basis of the substituted value on January 1, 1964, of the original shares.
(iv) If the substituted value as on January 1, 1964, of the original shares has to be distributed between the original and bonus shares, the
value of the original shares will also go down. The decision of the Supreme Court in the case of Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 to the effect that the substituted value as on January 1, 1964, of the original shares will not be affected by earlier and subsequent events, like the issue of bonus shares, is based on the principle that the potential value which we are asked to adopt on the basis of the express provisions of Section 55(2) cannot be affected by the issue of bonus shares. On the same logic, the said potential value cannot also determine the value of the bonus shares issued either earlier or later. This aspect was not considered by the Income-tax Appellate Tribunal, Bombay Bench ‘D’, when it decided the case of F. Hoffman-La Roche and Co. Ltd. [1988] 27 ITD 17 (Bom).
(v) While deciding the said case, the Bombay Bench relied upon the doctrine that a fiction created has to be taken to its logical consequence. Perhaps, this is a case where the other doctrine, namely, that a fiction should be limited for the purpose for which it is created and should not be allowed to operate beyond its legitimate field has to be applied.
18. It was for the said reasons that the Members of the Income-tax Appellate Tribunal, Madras Bench ‘D’, opined that this was a fit and proper case that should be referred to a Special Bench for a detailed consideration of the issue involved. And it was in these circumstances that the matter is now before the Special Bench.
19. Shri K. R. Ramamani, learned counsel for the assessee, took us through the facts and circumstances of the case and contended that the case of F. Hoffman-La Roche and Co. Ltd. [1988] 27 ITD 17 (Bom) was rightly decided by the Bombay Bench of the Tribunal. Under the scheme of the Act, capital gains arising on the transfer of a capital asset will have to be computed with reference to, inter alia, the provisions of Sections 48, 49 and 55. Section 48 stipulates that capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer ; and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.
20. Section 49 deals with cost of acquisition with reference to certain modes of acquisition. It stipulates, inter alia, that where the capital asset became the property of the assessee under a gift, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement
of the assets incurred or borne by the previous owner or the assessee, as the case may be.
21. Section 55(2)(i) stipulates, inter alia, that where the capital asset became the property of the assessee before January 1, 1964, the cost of acquisition for the purposes of Sections 48 and 49 means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the first day of January, 1964, at the option of the assessee.
22. Section 55(2)(ii) stipulates that where the capital asset became the property of the assessee by any of the modes specified in Section 49(1), and the capital asset became the property of the previous owner before the first day of January, 1964, the cost of acquisition for the purposes of Sections 48 and 49 means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1964, at the option of the assessee.
23. True, in the cases before us the shares sold by the assessees herein during the relevant previous year represented the bonus shares issued by the company. True, again, the bonus shares were issued after January 1, 1964. But the question here is : how to determine the “cost of acquisition” of the shares in question ? In the context of the valuation of the shares sold by the assessee, emphasised Shri Ramamani, the assessees are not asking for the adoption of the January 1, 1964, value of the bonus shares. What the assessees are claiming is that the substituted value as on January 1, 1964, of the original shares must be taken into reckoning for the purposes of applying the principle of averaging.
24. At this stage of the hearing, the Bench elicited the response of Shri Ramamani for the following query :
Proposition No. (1) :
25. Section 55(2) prescribes what may be called the statutory procedure for determining the cost of acquisition of an asset which was acquired prior to January 1, 1964, and which was sold after the said date. Under that Section, it is only” in cases where the capital asset became the property of the assessee before the cut-off date that the assessee has an option of having either the actual cost of acquisition of the asset or fair market value of the asset on the cut-off date. Therefore, in cases where the capital asset becomes property of the assessee after the said cut-off date, the question of allowing the assessee the option of taking the fair market value of the asset on the relevant cut-off date does not arise. Here,
in relation to the option available to the assessee, the context is clearly the sale after January 1, 1964, of a capital asset acquired prior to that date.
Proposition No. (2) :
26. The principle of averaging laid down by the Supreme Court in the case of Dalmia Investment Co. Ltd. [1964] 52 ITR 567 is a judge-made procedure designed to find out the cost of acquisition of bonus shares. Although in one sense bonus shares are acquired without the shareholders’ having to pay for them, yet on the principle of costing it would not only be possible but legitimate to arrive at the average cost of the bonus shares. The need to ascertain the average cost of bonus shares arises, inter alia, when the bonus shares are sold, or transferred, giving rise to profit in the case of a dealer in shares or, as the case may be, capital gain in the case of an investor in shares. Here the context is sale of bonus shares. It was in that context that the Supreme Court applied the principle of averaging to arrive at the average cost of bonus shares sold, the average cost being worked out with reference to the actual cost to the assessee of the original shares.
Proposition No. (3) :
27. The said two procedures, one statutory and the other judge-made, are designed to operate in different contexts.
Query :
28. In such a legal milieu, could the two procedures at all meet and cross ? In other words, could the judge-made procedure be matched and married to the statutory procedure ?
29. Responding to the said query, Shri Ramamani vehemently contended that there is nothing in the judge-made procedure to exclude the statutory procedure. In other words, the principle of averaging, which is applied to find out the value of the bonus shares, docs not contain anything alien to the statutory procedure prescribed by and under Section 55(2) of the Act, even in cases where the original holdings came to be acquired prior to January 1, 1964, and the bonus shares issued in relation thereto came to be issued after January 1, 1964.
30. Shri Ramamani also sought to draw support (for the aforesaid thesis of his) from the Special Bench decision in the case of H. F. Craig Harvey v. ITO (Third) [1988] 25 ITD 1 (Mad). According to Shri Ramamani, though the said decision came to be rendered in the context of the amalgamation
of two companies, the very basis of the decision supports his thesis that, even while valuing the bonus shares issued after April 1, 1964, by applying the method of averaging, the substituted value as on January 1, 1964, of the original holdings should be taken into account.
31. Finally, Shri Ramamani contended that the recent decision of the Madras High Court in the case of CIT v. Prema Ramanujam [1991] 192 ITR 692, which is directly to the point at issue here, is in favour of the assessees herein.
32. In the said case, the assessee had received 3,000 shares as and by way of gift from her father. Later, she sold 125 shares, leaving a balance of 2,875 shares. During the financial years 1966-67, 1967-68 and 1969-70, the assessee had received bonus shares and in the previous year relevant to the assessment year 1975-76 she had sold 675 shares, 375 of which came from the block of shares gifted to her and the rest from the 1966-67 bonus issue. The sale transaction gave rise to capital gain. Since the shares became the property of the assessee by way of gift, the cost to the previous owner, or the value as on January 1, 1954, had to be taken and it was common ground that the assessee had chosen the value as on January 1, 1954, namely, Rs. 184 per share. On this basis the assessee contended that she had earned capital gain of Rs. 2,261 only.
33. On his part, the Assessing Officer, even while applying the principle of averaging, took into reckoning not only the original shares but also all the bonus shares issued subsequently, and worked out the average cost per share at Rs. 47.17, On this basis, the Assessing Officer computed the long-term capital gain at Rs. 57,820 and brought it to charge.
34. The first appellate authority allowed the assessee’s claim, relying on the Supreme Court cases of : (i) Shekhawati General Traders Ltd. [1971] 82 ITR 788, and (ii) Dalmia Investment Co. Ltd. [1964] 52 ITR 567.
35. The Tribunal affirmed the order of the first appellate authority and dismissed the Departmental appeal.
36. Thereupon, the matter reached the Madras High Court as and by way of reference at the instance of the Department. With reference to the ascertainment of the cost of acquisition of 375 shares (out of 675) shares sold by the assessee, the High Court held that the cost of acquisition had to be worked out on the basis of the unalterable fair market value fixed at the option of the assessee as on January 1, 1954. This procedure is clearly established by the decision of the Supreme Court in Shekhawati General Traders Ltd. [1971] 82 ITR 788.
37. As for the determination of the cost of acquisition of 300 bonus shares sold by the as’sessee, following the decision of the Supreme Court in the case of Dalmia Investment Co. [1964] 52 ITR 567, the High Court held that the cost of 2,875 shares must be ascertained at the rate of Rs. 184 per share as opted by the assessee, and that cost spread over the original holding of the assessee, namely, 2,875 shares as well as 5,750 bonus shares issued during the financial year 1966-67.
38. In the process, the Madras High Court upheld the assessee’s claim.
39. According to Shri Ramamani, therefore, the matter thus stands con-eluded in favour of the assessees herein by the said decision of the jurisdic-tional High Court.
40. On his part, Shri T. V. Unnikrishnan, learned Departmental Representative, strongly supported the impugned orders of the Commissioner of Income-tax (Appeals) on this issue. He first contended that the scheme of the Act relating to the computation of capital gains is clear and unambiguous. Before the assessee can have the benefit of the substituted value as on January 1, 1964, the assessee must clearly show that he had held the asset even before January 1, 1964. In the cases before us there is no dispute that the bonus shares, which ultimately came to be sold by the assessees herein, were issued after January 1, 1964. Therefore, the question of taking into account the January 1, 1964, value of the shares does not arise.
41. Secondly, when the Income-tax Appellate Tribunal, Bombay Bench, decided the case of F. Hoffman-La Roche and Co. Ltd. [1988] 27 ITD 17, the Calcutta case of CIT v. General Investment Co. Ltd. [1981] 131 ITR 366 was very much there and the Bombay Bench failed to take note of the said decision. In that case, the Calcutta High Court has clearly held that the benefit of the substitution contemplated by Section 55(2)(i) (as it stood at the relevant point of time) was not available to the assessee where the capital asset was acquired after January 1, 1954.
42. The Gujarat case of Navnitlal Sakarlal v. CIT [1994] 208 ITR 194 was also to the same effect.
43. Relying upon the Gauhati case of CIT v. Jhabarmal Agarwalla [1992] 195 ITR 351, the learned Departmental Representative contended that it is the settled principle of interpretation that where the language is plain and admits of but one meaning, there is no room for an intendment.
44. In view of the foregoing, therefore, contended Shri Unnikrishnan, the appeals are fit to be dismissed.
45. In his reply, Shri Ramamani contended that the two cases, one of the Calcutta High Court and the other of the Gauhati High Court, referred to and relied upon by the Departmental Representative, are not applicable to the facts of the cases before us. The Gauhati case was a case of straight substitution. There the question was not whether the value as on January 1, 1964, of the original holdings could be taken into reckoning for the purposes of applying the principle of averaging.
46. The Calcutta case is also distinguishable on the same lines. There the assessee claimed that the capital gains arising out of the sale of bonus shares should be computed by taking the average price of the original shares and bonus shares by spreading the cost of the original shares over both the original and bonus shares. The Income-tax Officer, however, held that the cost of bonus shares should be taken as nil, since the entire cost of the original shares had already been considered in computing the assessee’s capital loss arising out of the sale of original shares in an earlier assessment, namely, the assessment for the assessment year 1960-61. The Appellate Assistant Commissioner, relying on the Supreme Court case of Dalmia Investment Co. Ltd. [1964] 52 ITR 567 directed the Income-tax Officer to determine the cost of bonus shares received in 1967 on the basis of the principles laid down by the Supreme Court in the above decision and recompute the capital gains out of sale of bonus shares. The appeal filed by the Department was dismissed by the Income-tax Appellate Tribunal. Thereafter, the matter reached the High Court. The court held that as the bonus shares sold had been acquired after January 1, 1954, the option of taking their cost at their fair market value as on January 1, 1954, did not arise. The court further held, relying on the Supreme Court case of Dalmia Investment Co. Ltd. [1964] 52 ITR 567, that the value of the original shares held by the assessee had to be spread over both the original holdings and the bonus shares issued in 1967 and the average price arrived at.
47. According to Shri Ramamani, thus, in the Calcutta case, the question whether the substituted value of the original holdings could be taken into reckoning for the purpose of applying the averaging principle was not canvassed before the High Court. Hence, the said Calcutta case cannot avail the Department.
48. Summing up the arguments, Shri Ramamani reiterated his thesis that for the purpose of valuing the bonus shares in question, the January 1, 1964, value of the original holdings must be taken into account.
49. We have looked into the facts of the case, We have considered the rival submissions.
50. The arguments advanced by the learned Departmental representative, not only during the initial hearing before the Division Bench, but also during the hearing before the Special Bench are attractive and much could be said in favour of them. Even so; the thesis canvassed by Shri Ramamani is not at variance with the decision of the jurisdictional High Court, in the case of Prema Ramanujam [1991] 192 ITR 692 (Mad). Respectfully following the said binding decision of the jurisdictional High Court, we allow the assessees’ appeals on this common issue. We also direct the Assessing Officer to recompute the capital gains in question accordingly.
51. In the case of Jagadish Chandran (individual), another issue, particular to his case, has been taken. And that relates to the standard deduction available to the assessee-individual under Section 16 of the Act. Since no arguments were advanced on this issue, we reject the related grounds.
52. In the result, the appeal filed by Jagadish Chandran (individual) is partly allowed and those filed by Jagadish Chandran (Hindu undivided family) and Smt. Sabitha Chandran are allowed.