LexM/S ESCORTS FARMS (RAMGARH) LTD. versus THE COMMISSIONER OF INCOME TAX, NEW DELHI
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A
MIS ESCORTS FARMS {RAMGARH) LTD.
v.
THE COMMISSIONER OF INCOME TAX, NEW DELHI
SEPTEMBER 26, 1996
B
[B.P. JEEVAN REDDY AND K.S. PARIPOORNAN, JJ.]
Income Tax Ac~ 1961-Sections: 2(14),45 (1), 48 and 55 (2}-Capital
gain~omputation of-Capital assets-Shares-Shares purchased after
1954--Subsequently, bonus shares issued in respect of the original
C shares-Declaration of capltal gains by treating the actual cost of the original
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shares as its cost of acquisitio~on-acceptance of the declaration by the
Reve11ue Authoritie~on~putation of the original shares by ITO co11finned
by the Appellate Tribu11a~n refere11ce, High Court answered inf avour of
Reve11ue--Decision of the High Court assailed-Held, the principles of averag-
D i11g by spreadi11g the cost over the old shares and the new bonus shares as
enunciated in Dalmia Investment Co.'s case will apply as general rule-The
subsequent issue of the bonus shares has the effect of altering the original cost
of acquisition of the shares-171e character of owner of the shares as an
'investor' or as a 'dealer' is of no consequence.
E
'lbe appellant purc:hased the original shares after 1954. Bonus
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shares were also issued in respect of the original shares. Subsequently the
appellant sold its shares aiad declared the capital gains accrued therefrom,
by treating the actual cost of the original shares as its cost of acquisition.
The Income Tax Officer did not accept the declaration of the appellant and
worked out the capital gains on its own.
The Computation made by the Income Tax Officer regarding the
original shares was confirmed by the Appellate Assistant Commissioner
and the Appellate Tribunal. At the instance of the appellant, the Appellate
Tribunal referred two questions of law for the decision of the High Court.
G The questions are as under:
"l. Whether on the facts and in the circumstances of the case the
tribunal was justified in determining the cost of acquisition of the original
shares, by spreading the original cost over the original and the bonus
shares and then averaging the same and on that basis working out the
H capital gain at Rs.32,100 and Rs.12,450 for the assessment years 1967-68
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- ,.
)-
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..
ESCORTS FARMS (RAMGARH) LID. v. C.I.T.
and 1968-69 respectively ?
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2. If the answer to question No.1 is in the negative, whether the
assessee was justified in taking the value of the shares at their original
cost under Section 45 of the Income Tax Act, 1961 ?"
A
The High Court answered the Question No.1 in favour of the B
Revenue holding that the valuation made by the Revenue regarding the
cost of the original shares is proper and valid in the facts and circumstan-
ces of the case. The High Court declined to answer Question No.2. Hence
this appeal.
Dismissing the appeal, this Court
c
HELD: 1. When bonus shares were issued by a company, it has its
impact on the original shares. The market value of the company's shares
may get reduced to a figure nearer their normal value. The value of the
original shares acquired get automatically reduced, notwithstanding the D
fact that the total holding of the shareholder may be larger. (29-B-C]
Robert R. Pennington's "Company Law'~ 5th Edition (1985); Dr. A.N.
Agarwala's "171e Higher Science of Accountancy" (1972 Edition); British
Master Tax Guide, (1988-89); William Pickles's ''Accountancy" and M.C.
Shukla and T.S. Grewal's ''Advanced Accounts" (1989), referred to.
E
C.I. T. v. Dalmia Investment Co. Ltd., 52 ITR 567 and C./. T v. Gold
Company Ltd., 78 ITR 16, referred to.
2. The principle of averaging by spreading the cost over the old
shares and the new bonus shares as enunciated by this court in Dalmia F
Investment Co. 's case (supra) and other cases, will apply as general rule in
cases where the assessee claims to deduct the actual cost of acquisition,
instead of the statutory cost of acquisition. It also stands to reason since
the fair market value as per the 'statutory cost of acquisition' will be a
notional or fictional figure-mostly inflated-having no connection with the G
original or actual cost. The real cost to the assessee of the bonus shares
cannot be taken to be nil or their face value and they have to be valued by
spreading the cost to the old shares over the old shares and the new issue
(bonus shares), taken together etc. The principle so laid down is one of the
general application and the character of the owner of the shares as an
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