Kalyani Exports and Investments Vs. Deputy Commissioner of - Court Judgment

Excerpt:

.....to the property as capital asset and not property as stock-in-trade.hence, we do not agree with the learned counsel that the properly (in this case shares) were acquired by the assessee as capital asset. we do agree with the learned d.r. that the learned judges while delivering the aforesaid two judgments were aware that they were dealing with agricultural land and not shares. they were also aware that the problems posed by the shares are entirely different than the problems posed by agricultural land. that is why on page 742 keshavji karsondas' case (supra), the hon'ble judges have observed that the decision of the supreme court in bai shirinbai k. kooka 's case (supra) and miss dhun dadabhoy kapadia's case (supra) are not applicable. it will be useful to quote the following extract from the said judgment: "learned counsel for the assessee referred to the decisions of the supreme court in cit v. bai shirinbai k. kooka [1962] 46 itr 86 and miss dhun dadabhoy kapadia v. cit [ 1967] 63 itr 651 in support of his contention that commercial principles should be followed by the courts in determining the capital gains for the purpose of taxation. we do not think that the above.....

Judgment:

Kalyani Exports & Investments (P.) Ltd.'s case Per Chhibber, Accountant Member 1. This appeal by the assessee is directed against the order of the CIT (Appeals)-I, Pune.

2. The assessee is an Investment Company floated by Kalyani group.

During the year under appeal, it has shown property income, income from business and capital gain on the sale of shares of Bharat Forge Ltd. and also income on account of dealing in the shares of other companies.

3. The first grievance of the assessee is with regard to the computation of capital gains on the sale of shares and bonus shares.

The assessee had acquired 68740 shares of M/s. Bharat Forge Ltd. in 1977 on the dissolution of the firm M/s. Kalyani Brothers, wherein it was a partner. On 20-6-1981, it got bonus shares in the ratio of 1:1, i.e., 68740. Again it got 1780 Bonus shares in 1989. It retained these shares as stock-in-trade in its Balance sheet till 30-6-1988 and on 1-7-1988, these shares were converted into capital asset at the rate of Rs. 17 per share. Out of these shares, during this year, the assessee sold 68740 shares on which capital gains were shown. While working out the capital gains, the assessee adopted the fair market value as on 1-4-1981 as per the provisions of section 55(2)(b). The Assessing Officer held that the assessee was not entitled to exercise this option because as on that date, these shares were held by the assessee as stock-in-trade and not as capital assets. According to the Assessing Officer, capital asset does not include stock-in-trade as per section 2(14). Since the shares were treated as stock-in-trade by the assessee upto 30-6-1988, it cannot be said that there was any capital asset in existence prior to this date. Therefore, for the purpose of computing long term capital gain, the first year of acquisition of capital asset has to be taken as financial year 1988-89. Since the capital asset has come into existence only on 1-7-1988, the market value of these shares as on 1-4-1981 cannot be adopted as provided under section 55(2)(3) of the Income-tax Act, 1961. Secondly, while computing the cost of acquisition of bonus shares, the assessee had computed the same by spreading over the indexed cost of acquisition upto the date of issue of bonus shares and not cost of acquisition. According to the Assessing Officer, this was not correct and the indexed cost of acquisition is to be computed from the cost of acquisition. The cost of acquisition of bonus shares has to be computed by spreading over the cost of acquisition of original assets over the original assets and bonus shares issued, as decided by the Hon'ble Supreme Court in the case of Escorts Farms (Ramgarh) Ltd v. CIT[1996] 222 ITR 509. The indexed cost of acquisition is, therefore, to be computed from the cost of acquisition and not by spreading the indexed cost of acquisition of original holding. The Assessing Officer accordingly computed the capital gains as per Annexure to the assessment order, which was challenged before the CIT (Appeals).

4. The CIT (Appeals) went into various provisions of the Income-tax Act, 1961 relating to capital gains and held that the action of the Assessing Officer was as per the provisions of law. The CIT (Appeals) noted that the assessee had itself taken the cost of the shares at the time of conversion at Rs. 17 in its books of account for which entries were passed. According to the CIT (Appeals), this was the cost of share for the purposes of determining the cost of acquisition of the capital asset. The CIT (Appeals) further observes, "In fact, the cost of acquisition of the shares on the dale of conversion was around Rs. 50 per share in the market. If the conversion were to be at market price, the difference of Rs. 33 (Rs. 50--17) would have been taxable as business income, being appreciation in the value of stocks. However, the appellant has chosen to convert the shares into capital asset at the cost of Rs. 17. This, obviously is the cost of acquisition per share to the appellant for computing capital gains under section 45." The CIT (Appeals) relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86.

Regarding the determination of cost of bonus shares, the CIT (Appeals) held that the ratio laid down by the Hon'ble Supreme Court in the case of Escorts Farms (Ramgarh) Ltd (supra) will apply. He further remarked, "The actual cost of bonus shares has to be reckoned only on the basis of 'average value'. As the original shares of 68740 and bonus shares of 68740 on conversion became capital asset on 1-7-1988 and later on further bonus shares were acquired in the year 1989, the average cost of original and bonus shares will be taken as per Annexure 2 attached to the assessment order." The CIT (Appeals) concluded that the indexed cost of acquisition will be worked out as under ; (i) In respect of shares converted into investments on 1-7-1988, indexation will be allowed from the year 1988-89 to the year of transfer on the average cost as stated above.

(ii) In respect of bonus shares acquired in 1989, indexation will be allowed from 1989-90 to the year of transfer on the average cost as stated above.

5. Aggrieved by the orders of the authorities below, the assessee is in appeal before this Tribunal. Dr. Sunil Pathak, the learned counsel for the assessee, submitted that as per the provisions of section 48(ii) what is deductible from the consideration received as a result of the transfer of the capital asset is the cost of acquisition thereof. This word implies the cost which the assessee is required to pay to acquire the asset. The word "the asset" as used in this clause is identifying the capital asset as referred to in section 45. He further submitted that an assessee can acquire an asset only once. It cannot acquire an asset as a non-capital asset at one time and later on acquire the same as a capital asset. As per the provisions of section 55(2)(b), the option for adopting the capital asset in question became the property of the assessee before 1-4-1981. In this case, the assessee held the shares as stock-in-trade and thus, they did constitute the "property" for the assessee before 1-4-1981 and there is no reason as to why this option can be denied to the assessee. According to the learned counsel, even as per the provisions of sections 49, 50 etc., it is revealed that the legislature wanted to treat the cost of acquisition for the purposes of section 48 as the cost originally incurred to acquire the properly. In citing an example, the learned counsel submitted that as per the provisions of section 49, when the capital asset becomes the property of the assessee through any of the modes stated thereunder like gift, will, inheritance, etc. the cost of acquisition of the asset is deemed to be the cost for which the previous owner of the property acquired it. Thus, an assessee may receive certain plots on death of his father who was a land dealer and in whose hands such plots constituted the stock-in-trade. The assessee is not dealing in this business and hence the plots which he receives are treated as investments by him. As per this provision of section 49, the cost of acquisition in his hands will be the cost of acquisition which his father was required to incur. In support of his contentions, the learned counsel relied on the decision of the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel v. CIT [1971] 81 ITR 446 and of the Bombay High Court in the case of Keshavji Karsondas v. CIT [1994] 207 ITR 737. He elaborately read through these two judgments and submitted that the ratio laid down in these two judgments clearly applied to the case of the assessee. He further submitted that the benefit of indexation is to account for the inflation over a period of years. If that is so, there is no reason as to why the assessee should be denied this benefit from 1-4-1981 because whether he held it as stock-in-trade or capital asset, the rise in price because of inflation was the same. He, therefore, submitted that the indexation be allowed from 1-4-1981 onwards and not from 1-7-1988 as done by the CIT (Appeals).

6. As regards the capital gains on Bonus shares, the learned counsel submitted that as regards the original shares which were held from the date prior to 1-4-1981 the fair market value as on 1-4-1981 should be adopted as the cost of acquisition and that cost is to be spread over the original and the Bonus shares for the purposes of computing the cost of acquisition of the Bonus shares. So far as the original shares are concerned, the fair market value as on 1-4-1981 which is adopted as the cost of acquisition as per provisions of section 55(2)(b) does not undergo any change because of the Bonus shares issued after 1-4-1981.

For this proposition, he relied upon the following decisions : 7. Shri Naresh Kumar, the learned senior D.R. strongly supported the orders of the authorities below. He submitted that as per section 1(14) of the Income-tax Act, stock-in-trade is not included in the definition of 'capital asset'. Mode of computation of capital gain has been provided under section 48, wherein from the full value of consideration received, the 'indexed cost of acquisition' has to be deducted. He drew our attention to Explanation (iii) to section 48 which defines 'indexed cost of acquisition' and submitted that the relevant phrases in the above-mentioned definitions are 'for the first year in which the asset was held by the assessee'. According to him, the word 'asset' used here means the 'capital asset'. Therefore, the relevant word is 'first year in which the capital asset was held by the assessee'. According to him, there is a material difference in the language of section 48(ii), which was applicable up to the assessment year 1993-94. As per section 48(ii), the authorities were concerned with the cost of acquisition of the capital asset, whereas the indexed cost of acquisition talks of the first year in which the capital asset was held. According to the learned senior D.R., while interpreting the Act, the principles laid down by the Hon'ble Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43 have to be kept in mind. It has been observed by the Hon'ble Supreme Court that, "there is a fundamental though unwritten axiom, that no legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed." In other words, in the absence of clear statutory provisions to the contrary, the statute should not be read so as to permit the assessee double deductions.

8. Shri Naresh Kumar further submitted that the assessee had itself taken the cost of shares at the time of conversion at Rs. 17 in its books of account for which entries were passed. This was the cost of share for determining the cost of shares of acquisition of the capital asset. In fact, the cost of acquisition of shares on the date of conversion was about Rs. 50 per share, which was the market value, if the conversions were to be at market price, the difference of Rs. 33 would have been taxable as business income, being appreciation in the value of stocks. However, the assessee chose to covert the stock-in-trade into capital asset at the cost of Rs. 17. He emphasised that this is the cost of acquisition to the assessee within the definition of capital gain under section 45, as per the decision of the Hon'ble Supreme Court in Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506, This is also true by applying the ratio in reverse of the decision of the Hon'ble Supreme Court in the case of Bat Shirinbai K. Kooka (supra). Therefore, since the assessee itself has chosen to adopt Rs. 17 as the cost of acquisition of the shares at the time of conversion into capital asset, there is no requirement of substituting any other cost for computing the capital gain. He, therefore, further emphasised that the date of acquisition for the purpose of computing the capital gain of such share will, therefore, be 1-7-1988, i.e., the dale, when the stocks were converted into investment.

9. Shri Naresh Kumar further submitted that the reliance placed by Dr.

Pathak on the Gujarat High Court decision in Ranchhodbhai Bhaijibhai Patel's case (supra) and of the Bombay High Court in Keshavji Karsondas' case (supra) is not correct for the following reasons : (1) These judgments were delivered when old provision of section 48(ii) were on the statute when there was nothing in the statute to allow indexed cost of acquisition.

(2) The issue before the Hon'ble High Courts was about the cost of acquisition of the agricultural land which became non-agricultural asset subsequently. The nature of the assets in this case was entirely different than the nature of the assets in the present case. In these cases no entries in the books of account were required to be made but in the assessee's case, entries were made to convert stock-in-trade into investment.

(3) The agricultural lands were not held as stock-in-trade. If the ratio of these decisions is applied to stock-in-trade, it would result into unintended double benefit or double jeopardy to the assessee, depending upon the value of the market price and the cost of acquisition. This is against the decision of the Supreme Court in Escorts Ltd.'s case (supra).

(4) What heavily weighed with the Hon'ble Judges while deciding this issue, was that they were dealing with agricultural land. It has been observed by the Hon'ble Judges in Keshavji Karsondas' case (supra) on page 741 that, "The property which is transferred could become the property of the assessee only at one point of time. It would not become the property of the assessee as non-capital asset at one point of time and as a capital asset at another point of time". It was under this principle that the Hon'ble High Court decided the issue. However, this observation of the Hon'ble High Court is no longer true in view of the decision of the Rajasthan High Court in CIT v. Dr. A.K. Sharma [1993] 204 ITR 62 and CIT v. Gemini Pictures Circuit (P.) Ltd. [1996] 220 ITR 43 (SC). In these two cases, the Supreme Court upheld that the agricultural land which was a non-capital asset became a capital asset subsequently.

Therefore, at one point of time the agricultural land was a non-capital asset, whereas it became a capital asset at another point of time. Therefore, the ratio of the decision of the Hon'ble High Court is no longer true.

(5) Also, the learned Judges were aware that they were dealing with agricultural land and not shares. They were also aware that the problems posed by the shares are entirely different than the problems posed by agricultural land. That is why on page 742 in Keshavji Karsondas' case (supra), the Hon'ble Judges have observed that the decision of the Supreme Court in Bai Shirinbai K. Kooka's case (supra) and Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651, are not applicable. However, there is no dispute that these two cases are land mark judgments, so far as shares are concerned.

Therefore, in view of the above, the decisions relied upon by the assessee do not apply to the facts of the case.

10. Regarding the determination of the cost of Bonus shares, the learned senior D.R. submitted that the reliance placed by the counsel of the assessee on the decision of the Supreme Court in Shekhawati General Traders Ltd's case (supra) and of the Madras High Court in G.N.Venkatapathy's case (supra), is misplaced. According to the learned senior D.R., the correct decision to be applied will be the decision of the Supreme Court in the case of Escorts Farms (Ramgarh) Ltd. (supra).

11. According to the learned senior D.R. in the case of Bonus shares acquired in 1989, the indexation will have to be allowed from financial year 1989-90 only, since as per the decision of the Gujarat High Court in CIT v. Chunilal Khuskaldas [1974] 93 ITR 369, these shares came into existence in 1989 and are deemed to be held only from that year.

12. As a rejoinder, Dr. Pathak submitted that the interpretation given by the learned senior D.R. to Explanation (iii) to section 48 is incorrect. According to Dr. Pathak, the Explanation clearly states that the indexation is allowable from the first year in which the asset was held by the assessee. Had the learned D.R.'s contention be correct, the Explanation should have been the first year in which it was held as a capital asset by the assessee. He drew our attention to Ranchhodbhai Bhaijibhai Patel's case (supra) in which it was held that the intention of the legislature must be gathered from the words used. He submitted that it is well-settled that what is unexpressed by the legislature must be taken as unintended. As the assessee had held the shares as on 1-4-1981, it satisfied the condition of this Explanation and there was no reason to hold that the indexation is not available from 1-4-1981 onwards. Dr. Pathak further submitted that after all the intention behind giving the benefit of indexation was to compensate the assessee for the inflation. If that be so, there is no reason as to why this benefit of indexation is to be denied to the assessee from 1-4-1981 when the cost of acquisition (i.e. the FMV) as on 1-4-1981 is to be allowed under section 48. He further submitted that whether the shares were held as stock-in-trade or the capital asset from 1-4-1981, they suffered the same inflation rate and there is no reason to deny the indexation from 1-4-1981. The Scheme of the Act is not to tax, on the facts of this case, profits by way of appreciation in the value of stock of these shares upto 1988 separately and the balance difference as capital gains. When the entire profit on sale of shares (i.e. sale price--the cost of acquisition) is to be taxed as capital gains, the indexation must be allowed from 1-4-1981 onwards.

13. As regards the applicability of the Supreme Court decision in Sir Kikabhai Premchand's case (supra), the learned counsel submitted that this case has no relevance to the issue on hand. In that case, the assessee had withdrawn the stock for his own purposes, at cost. The Supreme Court held that the assessee was justified in transferring the stock-in-trade at cost price to his own investments or for his personal purpose, because no man can make profit out of himself and as in this case the stock-in-trade is transferred from one hand to the other hand by the assessee, no income could accrue to him. In the present context, however, this decision may be irrelevant. In the case of the assessee when the shares were converted from stock-in-trade to investment, conversion was done at the book value in view of the above decision and for the present controversy, therefore, this decision has no applicability.

14. As regards the contention of the learned D.R. that in the cases before the Bombay High Court or Gujarat High Court, when section 48 was being interpreted, the asset was agricultural land, while in the assessee's case the asset is in the form of shares and hence there is a difference in facts, the learned counsel submitted that there is no difference at all, because on the facts of the case, both these assets do not constitute 'the capital asset' as on 1-4-1981 and, therefore, the decisions in the above cases will be squarely applicable to the facts of the assessee's case.

15. Regarding the indexation of Bonus shares, it was submitted by the learned counsel that the contention of the learned senior D.R. that Explanation (iii) has made a difference to the position of law on this issue is incorrect. Further, the D.R.'s contention that the decision of Supreme Court in the case of Escorts Ltd. (supra) would be applicable is also incorrect, because in that case the original shares were acquired after 1-4-1981 and hence that decision was different. In fact, in that case, the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case (supra) was referred to and it was clearly distinguished on this aspect only. As clarified in the case of the assessee, the original shares were held prior to 1-4-1981 and hence, the decision of Shekhawati General Traders Ltd.'s case (supra) would be applicable as the facts are similar.

16. We have considered the rival submissions and perused the facts on record. As per section 2(14) of the Income-tax Act, stock-in-trade is not included in the definition of "capital asset". Mode of computation of capital gain has been provided under section 48, wherein from the full value of consideration received, the "indexed cost of acquisition" has to be deducted. The "indexed cost of acquisition' has been defined in Explanation (iii) to section 48 and reads as under : (iii): 'indexed cost of acquisition' means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later." The insertion of the above Explanation by the Finance Act, 1992 with effect from 1-4-1993 has made a significant difference in the matter of computation of capital gains. The vital phrases in the above-mentioned definitions are "for the first year in which the asset was held by the assessee". The word "asset" used here means the "capital asset", Therefore, the relevant word is "first year in which the capital asset was held by the assessee". Thus, there is a material difference in the language of section 48(ii) before its amendment and which was applicable upto the assessment year 1993-94. The meaning of the phrase "first year in which the asset was held" is the first year in which the asset was held and not the year in which it was not held as a capital asset. Under section 45(2), when a capital asset is converted into stock-in-trade, the capital gains are determined in the year of conversion, but are chargeable in the year in which stock-in-trade is sold/transferred. The indexed cost of acquisition is not charged when the stock-in-trade is sold in a subsequent year. This also shows that the scheme of capital gains tax is such where the period of subsequent holding in respect of stock-in-trade is not counted. Applying the same principles, the period for which the capital asset is held as stock-in-trade, index cost will not be available.

17. In Escorts Ltd.'s case (supra), the Hon'ble Supreme Court has, inter alia, held as under : 'There is a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions - both under section 10(2)(vi) and section 10(2)(xiv) of the 1922 Act or both under section 32(1)(ii) and section 35(1)(iv) of the 1961 Act. The use of the words 'in respect of the same previous year' in clause (d) of the proviso to section 10(2)(xiv) of the 1922 Act and section 35(2)(iv) of the 1961 Act is to indicate that there is a basic scheme, unspoken but clearly underlying the Acts, that the two allowances cannot be and are not intended to be granted in respect of the same asset or expenditure. These provisions mandate that the assessee should, in a case where the assessee qualifies for both the allowances, be granted the special allowance for scientific research and not the routine annual one for depreciation." Viewed in the light of above ratio, if the assessee is granted the benefit of indexation cost for the period in which the asset was held as stock-in-trade, it will lead to unintended double benefit. The assessee is once benefited by increase in the cost of acquisition because of the application of cost inflation index. The assessee is again benefited by valuing the stock-in-trade at market value, if the market price is less. This double benefit is clearly prohibited by the ratio of the Supreme Court decision reproduced supra.

18. It is noted that the assessee itself had taken the cost of shares at the time of conversion at Rs. 17 in the books of account for which the entries were passed. Accordingly, this was the cost of share for determining the cost of share of acquisition of the capital asset. In fact, the cost of acquisition of shares on the date of conversion was about Rs. 50 per share, which was the market value, if the conversions were to be at market price. The difference of Rs. 33 would have been taxable as business income, being appreciation in the value of stock.

However, the assessee chose to convert the stock-in-trade into capital asset at the cost of Rs. 17. This, in our opinion, is the cost of acquisition to the assessee within the definition of capital gain under section 45, as per the decision of the Hon'ble Supreme Court in Sir Kikabhai Premchand's case (supra). This is also true by applying the ratio-in-reverse of the decision of the Supreme Court in the case of Bat Shirinbai K. Kooka (supra). Therefore, we hold that since the assessee itself had chosen to adopt Rs. 17 as the cost of acquisition of the shares at the time of conversion into capital asset, there is no requirement of substituting any other cost for computing the capital gain and, accordingly, the Assessing Officer has rightly computed the capital gains and the CIT(A) has rightly confirmed the same. It is because the date of acquisition for the purpose of computing the capital gain of such shares will be 1-7-1988, i.e. the date, when the stocks were converted into investment.

19. As regards the reliance placed by the learned counsel Dr. Pathak on the judgments of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case (supra) and of the Bombay High Court in Keshavji Karsondas' case (supra), we agree with the learned senior D.R. that the ratio laid down in those judgments is no more applicable to the facts of the present case. Dr. Pathak emphasised on the following extract from the judgment of the Gujarat High Court: "There are no two different acquisitions of property, one is a non-capital asset and the other is a capital asset. The property is acquired by the assessee only once and merely its character changes in the sense that, whereas, originally it was a non-capital asset it now becomes capital asset." Relying upon the above extract, the learned counsel submitted that the shares in this case were property of the assessee and this was acquired only once i.e. in the year 1977 when the firm M/s. Kalyani Brothers transferred 68740 shares to the assessee-company. No doubt, the property is purchased only once, but it will be the nature of the property which will determine the computation of capital gains.

Property is a term of wide import and property includes capital asset and stock-in-trade. Capital gain is to be computed with reference to the property as capital asset and not property as stock-in-trade.

Hence, we do not agree with the learned counsel that the properly (in this case shares) were acquired by the assessee as capital asset. We do agree with the learned D.R. that the learned Judges while delivering the aforesaid two judgments were aware that they were dealing with agricultural land and not shares. They were also aware that the problems posed by the shares are entirely different than the problems posed by agricultural land. That is why on page 742 Keshavji Karsondas' case (supra), the Hon'ble Judges have observed that the decision of the Supreme Court in Bai Shirinbai K. Kooka 's case (supra) and Miss Dhun Dadabhoy Kapadia's case (supra) are not applicable. It will be useful to quote the following extract from the said judgment: "Learned counsel for the assessee referred to the decisions of the Supreme Court in CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86 and Miss Dhun Dadabhoy Kapadia v. CIT [ 1967] 63 ITR 651 in support of his contention that commercial principles should be followed by the courts in determining the capital gains for the purpose of taxation.

We do not think that the above decisions are of any relevance in deciding the question at issue before us. The provisions in the Act as to the mode of computation of capital gains, the cost of acquisition thereof, etc. being clear, it is not open to us to ignore the said provisions, and take resort to some general principles. This view of ours gets full support from the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102, wherein Sabyasachi, Mukharji, J. (as he then was) dealing with the concept of 'real profits' observed as under fat page 152): 'The concept of reality of the income and the actuality of the situation arc relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income.'" 20. Now we come to the determination of the cost of Bonus shares. Dr.

Pathak has relied upon the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case (supra) and Hon'ble Madras High Court decision in G.N. Venkatapathy's case (supra). But, in our considered opinion, the correct decision to be applied would be the later decision of the Supreme Court in the case of Escorts Farms (Ramgarh) Ltd (supra). It is noted that while discussing the decision of Supreme Court in Shekhawati General Traders Ltd.'s case (supra) the Hon'ble Supreme Court has observed on page 522 in Escorts Farms (Ramgarh) Ltd.'s case (supra) as follows : "In this case, the High Court has found that the original shares sold were admittedly purchased after 1954 and, therefore, the option of taking the fair market value as on January 1, 1954 (the statutory cost), was not available to the assessee. It appears to us that the principles laid down in Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC), cannot be applied to a case where the assessee did not and could not exercise the option of the statutory cost of acquisition in the place of the actual cost of acquisition.

The said decision is distinguishable. In view of the larger Bench decisions of this court, it is fairly clear that where bonus shares arc issued and some of the original shares are sold subsequently, their actual cost has to be reckoned only on the basis of 'average value', (as held in Dalmia Investment and other cases) except in rare cases, where 'actual cost' is notionally adopted or determined as it existed on the relevant statutory date Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC). In the instant case, the High Court was justified in law in holding so and in further holding that the subsequent issue of the bonus shares has the effect of altering the original cost of acquisition of the shares as held by this Court in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 and other cases.' In the case before us, it is noted that the option of substituting fair market value as on 1-4-1981 is not available to the assessee, since on that date the shares were not held as capita! asset, but were held as stock-in-trade. Therefore, the ratio laid down by the Hon'ble Supreme Court in the case of Shekhawati General Traders Ltd. (supra) is not applicable. Accordingly, we hold that the cost of Bonus shares is to be determined as per the decision of the Hon'ble Supreme Court in the case of Escorts Farms (Ramgarh) Ltd (supra), which the authorities below have correctly applied. Further, in the case of Bonus shares acquired in 1989, the indexation will have to be allowed from Financial year 1989-90 only, since as per the decision of the Hon'ble Gujarat High Court in the case of Chunilal Khushaldas (supra), these shares came into existence in 1989 and are deemed to be held only from that year.

21. In the light of above discussion, we dismiss this ground of appeal by the assessee.

22. The next grievance of the assessee is that the learned CIT(A) is not justified in holding that the receipt on account of sale of coupons of Bharat Forge Ltd. of Rs. 12,00,580 constituted capital gains which were taxable in the hands of the assessee. During the year under appeal, the assessee had sold coupons of Bharat Forge Ltd. (BFL for short) which it had received alongwith the non-convertible debentures of BFL. The coupons entitled the assessee to acquire equity shares of BFL in future at a premium to be decided by BFL over the cost price.

These coupons were freely traded. The assessee submitted before the Assessing Officer that the sale of such coupons did not give rise to any capital gains in its hands, as there was no cost of acquisition for these coupons. The Assessing Officer did not agree with the view of the assessee and computed the capital gains at Rs. 12,00,580 and brought it to tax.

23. On appeal, the CIT(A) relying upon his decision in the case of one of the group companies of the assessee, i.e., in the case of Yusmarg Investments & Trading (P.) Ltd. for the assessment year 1995-96, upheld the finding of the Assessing Officer. In the said order, the CIT(A) had held that provisions of section 55(2)(aa)(b)(ii) were clearly applicable and the sale consideration was taxable as capital gains. The CIT(A) referred to the letter of offer for debenture for the issue of NCDs by BFL and held as under: "From the terms of the letter of offers for debenture which has been issued on the right basis to the shareholders, it is clear that detachable coupon certificates creates a future right to acquire shares at the time of further issue. The detachable coupons are inextricably linked with the existing shareholdings when the appellant made investment in the NCDs. The coupons were allotted along with NCDs by virtue of holding shares by an equity shareholder who was entitled to subscribe to one debenture for every seven equity shares. By subscribing to the debentures, the shareholder becomes entitled to apply and get allotted one equity share of Rs. 10 at premium not exceeding Rs. 40 and right for entitlement to subscribe to the shares at future date was therefore an entitlement to subscribe a financial asset as mentioned in section 55(2)(aa)(b)(ii). Such an entitlement to subscribe to the financial assets could be renounced in favour of any person before the actual date of conversion. The amended law from the assessment year 1995-96 as mentioned above is very clear and therefore the cost of such coupons have to be taken as Nil for the purposes of computation of capital gains as per sections 48 and 49. As the appellant's case is clearly covered by the amended provision, the case-laws cited by the appellant find no relevance." 24. Dr. Sunil Pathak, the learned counsel for the assessee submitted that the assessee was allotted one coupon alongwith the NCD of Rs. 50 each, which entitled the assessee to buy one share of BFL of the face value of Rs. 10 at a particular premium. He drew our attention to the terms and conditions of the prospectus (pages 60 to 65) and the letter of offer on page 60 wherein, according to him, it is clearly stated by the company that the issue was of the NCDs of Rs. 50 each with a coupon/warrant for each debenture entitling to equity share. He further drew our attention to page 63 wherein it is clearly stated that the coupon will entitle the holder to a right to apply and get allotted on equity share of Rs. 10 after the expiry of 12 months, but before 18 months at a premium not exceeding Rs. 40 or 50% of the market price of the share. On page 64, it is mentioned that the debenture will bear the interest rate of 14.5% and it will be redeemed at par in three equal yearly instalments after 6 years. He submitted that the assessee sold these coupons in the market for a sum of Rs. 12,00,580 and claimed the capital gains as exempt from tax on the ground that there was no cost of acquisition for the coupons. Relying upon the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 justified the plea of the assessee. He further submitted that the coupons could not be acquired by paying a price directly through the mode through which the assessee acquired. For acquiring the coupons, one had to apply for the debentures through this issue.

Accordingly, the capital gains could not be charged on the profit earned by the assessee on sale of coupons. In support of his contentions, he relied upon the following decisions : (iv) Addl. CIT v. K.S. Sheik Mohideen [1978] 115 ITR 243 (Mad.) (FB), The learned counsel further submitted that the same CIT(A) for the earlier assessment year 1994-95 had allowed the assessee's claim in the case of a group concern (Yusmarg Investment & Trading (P.) Ltd. Pune) placed at pages 201 to 203 of the paper book. However, for this year, the CIT(A) has disallowed the claim by relying upon the provisions of section 55(2)(aa)(ii). He submitted that sub-section (2)(aa)(iiia) was brought on the statute book by Finance Act, 1995 with effect from 1-4-1996 and has no application to the ear under appeal, i.e. 1995-96.

25. Shri Naresh Kumar, the learned senior D.R. strongly supported the order of the CIT(A). He submitted that the coupons which the assessee-company had sold were received alongwith the non-convertible debentures of BFL. The warrants entitled the assessee to acquire equity shares of BFL at a cost to be decided by BFL. These coupons were separately traded. He submitted that the CIT(A) rightly rejected the contention of the assessee and held that provisions of section 55(2)(aa), (b)(ii) are clearly applicable and the sale consideration is taxable as capital gains. He submitted that the coupons/warrants are future right acquired alongwith the assets and are marketable securities of like nature to shares. In fact, these warrants would become shares in the near future. As per the terms and conditions, if the company issues Bonus shares before allotment of shares against coupons/warrants, respective entitlement of equity shares of coupons/warrants-holder shall stand augmented in the same proportion in which such Bonus shares are issued. The equity shares issued as above shall rank pari passu in all respects with the then existing fully paid equity shares of the company. According to the learned senior D.R., in other words, the company also treats the warrants as shares for the purpose of issue of Bonus shares even before such warrants were converted into shares. Thus, they are akin to shares and hence are securities within the meaning of clause H of section 2 of the Securities Contract Regulation Act, 1956. He submitted that the warrants are inextracably linked with the existing shareholdings when the assessee made investment in the NCDs. By subscribing to the debentures, the shareholders get warrants without making any payment.

Even though it is a composite offer and a package deal, yet by virtue of the amended provisions of section 55(2)(a), (2)(b)(ii), the value of the NCD has to be taken as Rs. 50 and the cost of acquisition of warrants has to be taken as 'Nil'. He submitted that in view of the amended provisions, the benefit granted to the assessee by the decision of the Supreme Court in the case of Miss Dhun Dadabhoy Kapadia (supra) is no longer available.

26. During the course of arguments, the learned senior D.R. gave an analogy of a person buying a packet of Surf alongwith which he gets a Toothbrush free. He submitted that the person pays the price for both, i.e. Surf and Toothbrush. On the same analogy, when a person purchases non-convertible debentures, he gets free warrant, but while purchasing debentures he surely gets an price/benefit of the warrant. Finally, he relied upon the decision of the Bombay High Court in the case of CIT v.Daulatran Nayar [1976] 105 1TR 843.

27. We have considered the rival submissions and perused the facts on record. In the Book "Guide to SEBI Capital Issues, Debentures & Listing" by K. Sekhar, 2nd Edn. 1996, 'Detachable Warrants' have been defined as under: "These warrants are issued with the host instruments, namely, convertible or non-convertible debentures, preference shares, equity shares or other instruments and traded separately on the stock exchanges. Generally, no upfront payment is required to be made against the warrants." In the same Book, taxation aspect has been discussed in para 2.42 on page 32 as follows : "Under the current tax laws, warrants are treated at par with equity shares. The cost of acquisition for the primary market investor is treated as Nil whereas for the secondary market investor, the actual price paid for the warrant is treated as the cost. Where warrants are issued alongwith NCDs and the NCDs are disposed at a loss, the capital loss on NCDs can be adjusted against the capital gains on warrants." No doubt, a tradable warrant confers a right - a valuable right which can be traded in the market. We also agree that it is not a dead right, but a live and a valuable right. But the warrant confers only a future, uncertain, volatile inchoate right and not an existing right. It cannot be acquired at the time of allotment by paying an identifiable price or cost. In fact, a tradeable warrant/coupon is a sweetner with a debt instrument like NCDs or PCDs to improve the marketability of the main instrument. It is an incentive or inducement for ascribing to original NCDs. Such an incentive/inducement has no acquisition value before section 55(2)(aa)(iiia) was brought on the statute book by the Finance Act, 1995 with effect from 1-4-1996. In the case of Modiram Laxmandas (P.) Ltd (supra), the Hon'ble Bombay High Court held that quota rights and import licences which are given as incentive have no cost of acquisition. The Hon'ble High Court further held that the asset must possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it before it can be subject of capital gains. The warrants have no such inherent quality as they cannot be acquired at the time of allotment by paying an identifiable price or cost for it. If a person wants to acquire an NCD, he has to pay full price of Rs. 50 whether he wants the warrants or not. Further it must be noted that the fact that warrants can be purchased in the open market subsequently is of no relevance. In the case referred to supra, the import licences could be purchased in the open market. Such view has been taken by several High Courts. In Satya Paul's case (supra), the Calcutta High Court has held that in the case of tradable import licences received alongwith foreign remittances, the assessee acquired the right as an inducement or incentive and it cannot be said that it is acquired for a cost nor was its cost capable of being estimated. [Emphasis supplied]. To the same effect are the decisions in K.S. Sheik Mohideen 's case (supra) and T. Kuppuswamy Pillai & Co.'s case (supra). Accordingly, we hold that since the cost of acquisition of coupons is 'NIL', the ratio laid down by the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) will apply and on sale of such coupons, no capita] gain arises. In Smt. Maharani Ushadevi v. CIT [1981] 131 ITR 445' (MP), the assessee purchased 42000 shares of a company in order to acquire a controlling interest in that company and paid Rs. 100 per share when the market value was admittedly only Rs. 76. The department contended that the excess price paid was the price of controlling interest and did not form part of cost of acquisition of the shares. The Hon'ble High Court negatived this contention and held as under : "Controlling interest is an incidence of holding shares in the company. It cannot be separately acquired or transferred. It flows from the fact that a number of shares are held by a person. If for acquiring that number of shares a person is required to pay more than the market price of the share, then the cost of acquisition of the shares is that which he has in fact paid for holding that block." 28. Coming to the finding of the CIT(A) that provisions of section 52(2)(aa)(ii) are applicable, we hold that the above provisions are not applicable in this case, because the coupons were not issued by virtue of holding debentures of the shares. These were mere accompaniments to the debentures and hence the basic condition of section 52(2)(aa)(ii) itself is not satisfied. Clause (ii) is applicable in the case of renouncing the rights entitlement, in this case, the coupons. We have gone through the sample forms for the rights renouncements and the sale of coupons and it is noted that the coupons were to be transferred alongwith the transfer forms unlike the rights renouncements and therefore, from this context also, this clause (ii) is not applicable to the sate of coupons in this case. In our opinion, if at all any clause in section 55(2)(aa) is applicable, it will be clause (iiia) of section 55(2)(aa); but this clause was inserted from 1-4-1996 by the Finance Act, 1995 and hence for the year under appeal, it has no application.

29. In the light of above discussion, we hold that there is no justification for the impugned addition of Rs. 12,00,580. This ground accordingly succeeds and the assessee gets a relief of Rs. 12,00,580.

30. The next grievance of the assessee is that the learned CIT(A) is not justified in confirming the addition of Rs. 1,15,87,808 on account of interest payable by the assessee on the borrowings from BFL and Kalyani Steels Ltd. 31. During the course of assessment proceedings, the Assessing Officer noted that the assessee had taken a sum of Rs. 4 crores as an intercorporate deposit from BFL and a sum of Rs. 5.85 crores from Kalyani Steels Ltd. (KSL for short). Before the Assessing Officer, the assessee explained that there was no arrangement by which these loans were invested in the business as it wanted to make a foray into the capital markets, as stock markets were booming in that period. But it had no infrastructure or expertise available with it. Accordingly, an agreement with Kalyani Consultants (P.) Ltd. (KCPL for short) was made for investing its funds and in return getting the shares purchased by KCPL at a reduced value after some period, thus limiting its risk exposure. The amounts advanced to KCPL were strictly with the business consideration and did not constitute interest free advances. The Assessing Officer was not satisfied with the explanation furnished by the assessee and held that the assessee had diverted interest bearing loans obtained from BFL and KSL for giving interest free loans to KCPL and accordingly disallowed the interest of Rs. 1,27,81,233. In fact, the disallowance was made on the following grounds : (i) The assessee had taken interest bearing loans for giving interest free advances to sister concern. Further, the assessee instead of recovering interest free advance already given for investment, had chosen to give interest free loans.

(ii) There was no need to pay interest to BFL and KSL as there was a practice of giving or taking interest free loans in this group. Both the companies as well as the assessee are controlled by the same group.

(iii) There was no need, in advancing Rs. 9.85 crores in the month of April itself when the assessee was given time to advance the amount till December 1994. Secondly, the assessee should have tried to recover interest free advance already given to KCPL or adjusted it against this deal.

(iv) KCPL, during the course of its proceedings, has claimed that amount received from the assessee is interest free. This raises doubt about the real intention of the agreement, especially in view of the fact that the agreement is between two companies controlled by the same group of people.

(v) As per accounts maintained by the assessee, it was found that on the date of alleged agreement, the assessee already had debit balance with that company amounting to Rs. 5.62 crores on the opening day and during the year under consideration, the assessee has paid another amount of Rs. 78.42 lakhs. However, as per the agreement, the assessee was to advance Rs. 10 crores. It is not understood as to why the debit balance outstanding was not adjusted against amount payable as per agreement.

In view of the above, the Assessing Officer observed that the interest bearing loans taken from BFL and KSL were with a view to reduce taxable income. He further held that the agreement has also been framed in such a way to reduce the current year's income by claiming interest liability, whereas the debit from the investments made by KCPL, if any, will be available only after 31 -12-1997. He therefore held that the interest had not been paid for the purposes of business and, therefore, the interest paid to BFL and KSL amounting to Rs. 56,90,959 and Rs. 70,90,274 respectively could not be allowed as deduction.

32. On appeal, the CIT(A) concurred with the findings of the Assessing Officer observing that the agreement between the assessee and KCPL was a sham agreement and was entered into to reduce the tax liability. He further held that there were disputes in implementation of the agreement and yet both the parties did not refer the matter to the arbitrator. According to him, "the agreement was only on paper." 33. Dr. Sunil Pathak, the learned counsel for the assessee, drew our attention to the agreement between the assessee and KCPL placed at pages 99 to 105 of the paper book and submitted that as per this agreement, the assessee desired to invest some funds in the stock market. The group concern KCPL was already investing its funds in the stock market and therefore, the assessee thought of placing its funds with KCPL instead of dealing in stock market operations on its own.

KCPL had the infrastructure for this line of business available with itself. It had engaged certain consultants. According to the learned counsel, the salient features of the agreement were as below : (i) The assessee would advance a sum not exceeding Rs. 10 crores to KCPL between April 1994 to December 1994.

(ii) KCPL would invest the money in shares, securities, bonds and units, etc.

(III) that assessee had agreed not to charge any interest on the advances made.

(iv) KCPL was always required to main a portfolio of the Scrips to the extent of amounts advanced by the assessee.

(v) The assessee reserved the option of purchasing any of the Scrips after 31-12-1977 at a consideration of 25% below cost. Till that time i.e., 31-12-1977, the assessee could not exercise any option asking for any return on the amounts advanced to KCPL.

(vi) The assessee was required to exercise the option atleast in respect of 50% of the Scrips in value and for the balance amount it could be given compensation by KCPL. The option was to be exercised by the assessee before 30-6-1998.

(vii) The assessee had a lien on all the investments in Scrips made by KCPL till advances are repaid or option is exercised.

34. As regards the contention of the Assessing Officer that there was no need to advance the amount when there was already a debit balance of Rs. 5,62,05,888 with KCPL, the learned counsel submitted that the amount was advanced free of interest and in the past KCPL had also advanced amount to the assessee free of interest. The investment of Rs. 5.62 crores was out of the assessee's own funds. Thus, the assessee did not link this amount with stock investments because when approached, KCPL also hinted that fresh investments be made if the assessee wanted to make a foray in stock market. According to the learned counsel, there is nothing wrong in the commercial world about such transactions.

Dr. Pathak further submitted that there was no practice of taking interest free loans or advances from BFL or KSL which were public limited companies. The Assessing Officer has certainly erred in holding that there was such a practice. In the investment companies of the group, the loans were given from one to another without interest on many occasions, but no such interest free loan was taken from BFL or KSL. On the other hand, taking such loan would have required the Company Law Board/Board of Directors/AGM approval etc. Thus, the Assessing Officer erred in holding that the assessee should have taken interest free loans from BFL and KSL for advancing to KCPL. According to the learned counsel, when the assessee approached KSL and BFL for ICDs (Inter Corporate Deposits), both the companies could spare the funds in April 1994 itself. The assessee thus accepted the ICDs. It naturally handed over the funds to KCPL immediately, because the interest meter had already started on ICDs and there was no reason as to why the assessee should keep the funds idle with itself. This was a time when the share market was also booming and the assessee thought that if the funds arc made available immediately to KCPL, it may buy the shares at lesser price because later on, the prices would increase and the assessee would be a looser. For example, if a share is purchased for Rs. 100 in April, the assessee may buy it under the agreement with KCPL for Rs. 75 but if the same share goes up in December 1994, the assessee may have to shell out a higher price for acquiring the same share from KCPL. Secondly, the agreement itself stated that the assessee would make the funds available from April to December 1994. Thus, the assessee's action of advancing money in April was very much as per the terms of the agreement.

35. Dr. Pathak further submitted that as per the agreement before the CIT(A) it was submitted that the Scrips worth Rs. 5.67 crores (refer page 99 of the paper book) were already taken over by the assessee from KCPL and the C1T(A) erred in not taking cognizance of this development.

Further, it was also submitted that as on 31-12-1977 when the assessee was to exercise the option for buying the Scrips, the share market was tremendously down and, therefore, the assessee sought further time from KCPL for exercising the option. In this connection, he drew our attention to the correspondence placed at page 119/122/124/125 of the paper book. Dr. Pathak submitted that by 16-2-1999 the assessee had settled the account on this transaction with KCPL (page 134 of paper book). According to the learned counsel, the reason why the assessee went into this transaction was that in 1994 the stock market was booming and as the assessee realised that it could get certain funds from BFL and KSL, it made these investments. He drew our attention to the figures of USE Index on pages 137 and 138 of paper book. He submitted that the CIT(A) is not justified in holding that the agreement was only on paper. He submitted that it was a genuine agreement and it was duty acted upon by the assessee. He further submitted that the CIT(A) erred in concluding that the agreement was sham and therefore interest has to be disallowed. The assessee had entered into real transactions and these transactions were not entered on the basis of a pretence and accordingly, the CIT(A) is not justified in brushing aside the agreement which was duly acted upon by the assessee.

36. Shri Naresh Kumar, the learned senior D.R. strongly supported the order of the CIT(A). He submitted that the advance given was in April 1994 itself, i.e., much before the date of 31-12-1994, when the real operation of buying shares was to begin. The manner in which the period before 31-12-1994 is to be regulated remains out of context of the agreement. The assessee was required to pay Rs. 10 crores only by December 1994, yet the assessee chose to pay this amount in April 1994.

By preponing the payment, the assessee does not stand to gain in any manner whatsoever and, therefore, preponing of the advance was not in the interest of the assessee. He wondered as to how the assessee was to be benefited by advancing the amount before the due date. Since the liability under the agreement of the assessee to advance the amount was to start only in December 1994, the interest paid by the assessee for the period from April to December 1994 is not for the purpose of business and hence is not an allowable deduction under section 37(1) of the Income-tax Act. Moreover, on the date of agreement, the assessee-company had already advanced a sum of Rs. 5,62,05,888 to KCPL.

This was an interest free advance. The assessee could have adjusted this amount against the amount payable under the agreement, which was not commercial exigency. He further submitted that it is also interesting to note that the amount advanced as per the agreement has been shown in the Tax Audit Report jointly alongwith other debit balances of the assessee. KCPL has also not shown the same itself.

There was thus no separate account filed before the Assessing Officer in respect of Rs. 9.85 crores obtained as per the agreement. Therefore, interest on this advance is not allowable deduction.

37. Shri Naresh Kumar further drew our attention to the fact that the loans advanced to KCPL were interest free, whereas the assessee has taken interest bearing loans. Therefore, as observed by the CIT(A), this agreement has been entered into, merely to circumvent the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. [ 1969] 74 ITR 723. According to the learned senior D.R. it is not an agreement which a prudent businessman would enter into. The assessee had given interest free advance of Rs. 10 crores. The benefit, if any, would accrue to the assessee only after three years. In 1994, when the assessee advanced a sum of Rs. 10 crores to KCPL, the stock market was in its last phase of the bull run. The BSE-Sensitive Index had already fallen from a peak of about 4600 to about 3800. The newspapers were full of the story of Harshad Mehta's manipulation and JPC had been constituted. In fact, all keen watchers of the stock market were predicting a fall in the market. Therefore, according to the learned senior D.R., to presume that the market would continue rising for the next three years, was not a conclusion which a prudent man would draw.

38. Shri Naresh Kumar further submitted that it is interesting to note that in its books of account, KCPL has not shown it as advance against shares. No note to this effect has been given in the balance-sheet of KCPL. No future liability in respect of the reduction in cost of 25% has been accounted For in the books of account of the KCPL, even though KCPL is under the same management. In fact, in its assessment proceedings, KCPL has shown it only as interest free advance. Thus, conflicting statements by two companies under the same management would show the sham nature of the agreement. The learned senior D.R.submitted that the agreement should be read keeping in view the surrounding circumstances and in support of this contention, he relied upon the judgment of the Hon'ble Supreme Court in CIT v. Durga Prasad More [1971] 82 ITR 540.

39. We have considered the rival submissions and perused the facts on record. The main reason for disallowing the interest on the Inter Corporate Deposits from BFL (Rs. 9.35 crores) and from KSL (Rs. 5.35 crores) is that the agreement entered into with KCPL was a sham agreement. We have gone through the agreement and we have also reproduced the salient features of the agreement in para 33 supra. It is noted that the agreement provided for the executive informing KEIPL of the investments made from time to time (clause 2). The assessee had a lien on all the investments in Scrips till the advance was repaid (clause 9). KCPL had agreed to maintain a minimum portfolio of Scrips to the extent of the amounts advanced (clause 9) and lastly, considering the recession, in case opting for Scrips was not profitable, it was provided that the assessee will get compensation also from KCPL (clause 6). After going through the contents of the agreement, we hold that it was not a sham agreement. A transaction is sham when it is a pretence. In this case, both the companies to whom interest has been paid were having taxable income. It is not a case that by claiming interest in KEIPL (the assessee) the group has resorted to any tax planning. The ICDs from BFL and KCL could have been taken by KCPL and interest was allowable in its hands. Thus, we fail to understand as to how the CIT(A) can hold the view that the agreement is sham. Secondly, as discussed above, the agreement was implemented fully as on the date and hence, it could not be concluded that it existed only on paper. Thirdly, merely because interest is claimed in this year and the profit will be taxable in the future years can also not be the reason for disallowing the interest. Under the Income-tax Act, deduction of interest is as per section 36 under which interest on borrowings for the purpose of business is allowable, even though the profits therefrom are accruing in the later years. For example, in the case of a company newly set up, the interest is allowable in the first year of borrowings, but the profits may accrue later on; that docs not mean that interest is to be disallowed. In view of this fact, we hold that the CIT(A) is not justified in holding that the agreement is sham, because for the proposition that an agreement can be considered to be sham only if it is a pretence and not a reality as held in Trade Team (P.) Ltd. v. Dy. CIT [1995] 54 ITD 306 (Bom.) and Sir Sundar Singh Majithia v. CIT [1942] 10 ITR 457 (PC).

40. As regards the contention of the Assessing Officer that there was no need to advance the amount when there was already a debit balance of Rs. 5.62 crores with KCPL, it is noted that the amount was advanced free of interest and in the past KCPL had also advanced amounts to the assessee free of interest. The investment of Rs. 5.62 crores was out of company's own funds. Thus, the assessee did not link this amount with stock investments because when approached, KCPL also hinted that fresh investments be made if the assessee wanted to make a foray in stock market. In our opinion, there is nothing wrong in the commercial world about such transactions. It is because it is the prerogative of the assessee how to run its business and the Assessing Officer cannot force upon the assessee to adjust the earlier amount against the transaction.

41. Reliance has been placed by the authorities below that KCPL has shown these loans as interest free in its assessment proceedings. We fail to sec as to how this stand contradicts with the assessee's stand.

The funds were interest free and that is why KCPL admitted. Thus, this reasoning of the Assessing Officer confirmed by the CIT(A) and reiterated by the learned senior D.R. is also of no use to the Revenue for disallowance.

42. As regards the contention of the learned senior D.R. that the assessee was already in finance business and hence it could have invested the money itself in share market and the second contention that everybody knew that the markets would crash and such investments in the share market were not justified in the interest of its business, we hold that all these presumptions are totally irrelevant for the present issue. After all, it is the prerogative of the businessman how to run the business and the department cannot advise the assessee to maximise its profits. We further note that the assessee, although was investing in finance market itself, it did not have the expertise and the proper infrastructure like consultants, executives etc. and therefore, it rightly decided to do this business through KCPL and not on its own. The contention of the learned senior D.R. that everybody knew that the market will crash is not justified, because at the time when the agreement was made between the assessee and KCPL, it was shown that the market was good and the Index was rising. Thus, it cannot be said that the assessee knew that the market will crash. In the case of Bombay Samachar Ltd (supra), the Hon'ble Bombay High Court held that the only condition required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital are; firstly, that money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. In our opinion, all the three conditions laid down by the Hon'ble Bombay High Court are fulfilled by the assessee. First of all, it did borrow the amount of Rs. 4 crores from BFL and Rs. 5.85 crores from KSL; these amounts were borrowed for the purpose of business; because the assessee wanted to make a foray in the share business and, thirdly, the assessee did pay interest to BFL and KSL which are both public limited companies and who accounted for these amounts in their respective books of account for taxation purposes. In the case of Bombay Samachar Ltd. (supra) the High Court has further held that even if the assessee had ample resources at its disposal and need not have borrowed is not a relevant matter for consideration.

43. In the light of above discussion, we hold that the assessee did borrow the two amounts of Rs. 4.00 crores from BFL and Rs. 5.85 crores from KSL for business purposes to utilise these amounts for business and accordingly, there is no justification for the impugned additions of Rs. 56,90,959 (BFL) and Rs. 70,90,274 (KSL). We accordingly delete the same.

"The ld. CIT(A) erred in holding that interest under sections 234B and 234C is mandatory and erred in confirming the levy even when there was no express direction in the order of such levy and when these sections were not attracted on the facts of the case at all." This ground is consequential in nature. The Assessing Officer is directed to charge interest under sections 234B and 234C after taking into consideration the relief allowed in this order.

46. After going through the order proposed by my ld. brother very carefully, I have not been able to persuade myself to agree with the conclusions & findings arrived at by him in Paras 16 to 20 of that order for the reasons given hereafter.

47. The question for our consideration relates to the determination of the cost of acquisition of original shares purchased prior to 1-4-1981 and bonus shares received after 1-4-1981. With reference to the original shares, it has been held by my ld. brother that the assessee is not entitled to opt the fair market value as on 1-4-1981 as provided in section 55(2)(b). According to him, the cost of acquisition of such shares is the value taken by the assessee on the date of conversion of shares from stock in trade to capital assets that is on 1-7-1988. Such value was Rs. 17 per share at which shares were originally purchased long back prior to 1-4-1981. As a consequence thereof, it was further held that indexation should be made from assessment year 1989-90 to the year of sale i.e., assessment year 1995-96. The reasons for coming to this conclusion given by him may be stated as under: (1) that Explanation (iii) to section 48 introduced w.e.f. 1-4-1993 has made a significant difference in computation of capital gain.

According to him, the words "for the first year in which the asset was held by the assessee" means the first year in which the asset was held as capital asset and not the year in which it was not held as capital asset.

(2) if the contention of the assessee is accepted, it would amount to double benefit which is not permissible in view of the Supreme Court decision in the case of Escorts Ltd (supra). According to him, the value of shares on 1-7-1988 was Rs. 50 per share while the assessee had converted into capital asset at Rs. 17 per share. If the assessee had valued the same at Rs. 50 per share then he would have been assessable on such difference as business income. The reliance was placed on the two decisions of the Supreme Court in the case of Sir Kikabhai Premchand (supra) and in the case of Bai Shirinbai K. Kooka (supra). The decision of the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel (supra) and Bombay High Court decision in the case of Keshavji Karsondas (supra) relied on by the ld. counsel for the assessee were held to be distinguishable.

48. With reference to the cost of bonus shares, it has been held by him that cost has to be determined according to the decision of the Supreme Court in the case of Escorts Farms (Ramgarh) Ltd. (supra) and the ratio laid down by the Supreme Court in the case of Shekhawati General Traders Ltd. (supra) cannot be applied to the facts of this case inasmuch as the original shares were not held as capital assets prior to 1-4-1981. Conse- quently, the indexation was allowed from assessment year 1989-90 to the assessment year in which the bonus shares were sold.49. After giving deep thoughts to the arguments of the rival parties, the Case Law referred to as well as the relevant provisions of the Statute, it is not possible for me to agree with the legal findings given by my ld. brother. Admittedly, the original shares were acquired by the assessee prior to 1-4-1981. The only objection against the assessee is that prior to 1-7-1988, such shares were held as stock-in-trade and not as capital asset. So the crux of the matter is whether this factor goes against the assessee. The cost of the acquisition has been defined by section 55(2)(b). Relevant portion of the same is being reproduced as under :-- (i) where the capital asset became the property of the assessee before the 1st day of April, 1981, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981, at the option of the assessee." The bare reading of the above section shows that relevant date is the date when the capital asset became the property of the assessee. In my considered opinion, the asset becomes the property of the assessee only once that is when it is purchased by the assessee. When it is acquired by other modes specified in section 49, then the date of such acquisition is the date when the previous owner acquired such asset. In order to avail to option under section 55(2)(b), there is no requirement of law that assessee must have held the property as capital asset as on 1-4-1981. Had it been so intended by the legislature, it would have been easily provided so. The language used by the legislature is clear and unambiguous and therefore, nothing can be imported into it. In order to charge the assessee under the head "capital gain", the only requirement is that asset on the date of transfer must be a capital asset. Further, in order to avail the benefit of indexed cost of acquisition, the asset must be long-term capital asset. There is no dispute that these two conditions are satisfied in the present case. Once these two conditions are satisfied, then, in my opinion, there is no bar for availing the option under section 55(2)(b).

50. This very question came up for judicial consideration for the first time before the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel (supra). In that case the assessee owned large area of agricultural land. He obtained the permission of the Collector to put the land to non-agricultural use on 23rd January, 1963 and thereafter sold the land to two builders in April and July, 1963. It was claimed by the assessee that the lands were agricultural lands and therefore, the profits were not assessable as capital gains. Alternatively, it was claimed that the assessee was entitled to deduct the cost of acquisition of the capital asset equal to the market value of the land as on 23-1-1963 when such lands became capital asset. It was held by the Bombay High Court that lands were not agricultural lands within the meaning of section 2(14) of Income-tax Act, 1961 and therefore, profits from sales were chargeable as capital gains. Regarding alternate contention of the assessee, it was held that assessee was entitled to deduct the cost being fair market value as on 1-1-1954 since the lands were acquired prior to that date. The relevant observations of their Lordships were as under : "The only circumstance which must be satisfied in order to attract the charge to lax on capital gains under section 45 is that the property transferred must be a capital asset at the date of transfer. It is not necessary that it should have been a capital asset on the date of acquisition by the assessee. The words 'cost of acquisition of the capital asset' used in section 55(2) emphasize two aspects - one is 'acquisition' and the other is 'cost'. The reference clearly is to the time when the capital asset was acquired. Where the property transferred was not a capital asset on the date of its acquisition but became one subsequently, only its character has changed, and there cannot be two different acquisitions of the property, one as a non-capital asset and the other as a capital asset. It would be wrong to introduce such a legal fiction, as it would be plainly contrary to the language of section 48(ii) read with section 45.

The intention of the Legislature must be gathered from the words used. It is well-settled that what is unexpressed by the Legislature must be taken as unintended." (Head Note) The perusal of the above judgment clearly shows that the only condition which must be satisfied is that the property purchased should be capital asset on the date of transfer and it is therefore, not necessary that it should be capital asset also on the date of acquisition. This decision has been followed by the Madras High Court in the case of M. Venkatesan v. CIT [1983] 144 ITR 886' and also by Kerala High Court in the case of CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557.

51. The Bombay High Court which is also a jurisdictional High Court has also followed the said decision of the Gujarat High Court in the case of Keshavji Karsondas (supra). In that case, the assessee transferred his agricultural lands on 17-6-1971 which were acquired by his grandfather prior to the year 1941, and the assessee had become the owner of the land by devolution. Such agricultural lands were not capital assets till 1-4-1970 by virtue of definition in section 2(14).

For the purpose of computating capital gains, it was contended on behalf of the assessee that market value of land as on 1-4-1970 should be taken as cost of acquisition in as much as such lands became capital assets on that date. The High Court following the decision of the Gujarat High Court rejected the contention of the assessee by holding as under : "Held, that what was relevant was the 'cost of acquisition' and not the date on which the asset became a capital asset for the purpose of levy of capital gains tax. The cost of acquisition did not change. It was the cost on the date when the asset was actually acquired by the assessee or by his grandfather. The property which was transferred could become the property of the assessee only at one point of time. It would not become the property of the assessee as a non-capital asset at one point of time and as a capital asset at another point of time. The date of acquisition of the land for the purposes of section 48 read with section 49(2) of the Act was the date when the land in question was acquired by the grandfather of the assessee prior to 1941. The assessee, therefore, had the option either to take the original cost of acquisition or its fair market value as on January 1, 1954. Therefore, for the purpose of determining capital gains, the cost of acquisition of the agricultural land belonging to the assessee had to be taken as on January 1, 1954, and not as on April 1, 1970 (see-pp. 740F, 742B, C, 741D, E, 742A, G, H)." 52. The above discussion shows that all the High Courts have taken the uniform view of the matter by holding that:-- (1) The year of acquisition is only one that is the year in which it is purchased for the first time by the assessee. However, when it is acquired by other modes specified in section 49, it is the year in which the previous owner acquired it.

(2) The only condition to be satisfied is that asset must be capital asset only on the date of transfer.

(3) It is not necessary that it should also be capital asset on the date of acquisition or on the statutory date.

(4) Where the asset was acquired prior to this statutory date under section 55(2)(b), the assessee is entitled to opt the fair market value on such statutory date despite the fact that it was not capital asset on such date and became capital asset much after this statutory date.

As far as provisions of Explanation (iii) to section 48 are concerned, in my view, such provisions are not at all apposite for determining the cost of acquisition. Such provisions read as under : (iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; A bare reading of the aforesaid provisions clearly shows that such provisions are relevant only for computing the indexed cost of acquisition by applying a particular formula. Even according to this formula, the indexed cost of acquisition cannot be determined unless cost of acquisition is known. So, the legislature has itself made distinction between cost of acquisition and indexed cost of acquisition. The words "for the first year in which the asset was held by the assessee" qualify the words "Cost Inflation Index". So what the legislature intends is to take the cost inflation index for the year in which asset was held for the first time or year beginning 1-4-1981 whichever is later and then to increase the same in the same proportion in which Cost Inflation Index has increased to year in which asset is sold. This Explanation presupposes the existence of cost of acquisition which clearly shows that it has nothing to do with the determination of Cost of acquisition. Rather this Explanation can be applied only after determination of cost of acquisition. Therefore, in my considered opinion, this Explanation is not apposite at all for determining the cost of acquisition.

53. Further, in my opinion, no conclusion can be drawn that interpretation put forth by the assessee would result in double benefit to the assessee by valuing the shares at cost i.e., Rs. 17 per share on the date of conversion against the market value of Rs. 50 per share on that date on one hand and adopting the fair market value as on 1-4-1984 at Rs. 52.50 as cost of acquisition for the purpose of computing capital gains on the other hand. Such conclusion, if drawn, would be against the judgment of the Supreme Court in the case of Sir Kikabhai Premchand (supra). In that case, the assessee was a dealer in silver and shares. Accounts were maintained as per mercantile system of accounting and stock was valued at cost. During the year under consideration, he withdrew certain silver bars and shares from the business for settling them on trust and credited the business with the cost price of such silver bars and shares.

According to the Assessing Officer, the business should have been credited with the market value. Hence, he assessed the amount of difference between market value and cost price in respect of the assets so withdrawn by the assessee. The matter reached the Supreme Court and it was held that no income arose to the assessee as a result of transfer of silver bars and shares to the Trustees. The relevant observations of their Lordships were as under :-- "As regards the first contention, we are of opinion that the appellant was right in entering the cost value of the silver and shares at the date of the withdrawal, because it was not a business transaction and by that act the business made no profit or gain, nor did it sustain a loss, and the appellant derived no income from it.

He may have stored up a future advantage for himself but as the transactions were not business ones and as he derived no immediate pecuniary gain the State cannot tax them, for under the Income-tax Act the State has no power to lax a potential future advantage. All it can tax is income, profits and gains made in the relevant accounting year." In view of the above observations, it cannot be said that the assessee obtained any benefit by valuing the shares at cost on the date of conversion. In fact, no profit accrues to the assessee till shares are sold. There are also no provisions in the Income-tax Act to the effect that profits would be deemed to accrue on the date of conversion of stock in trade into investment. On the contrary, the legislature has provided in the converse situation that profits would accrue to the assessee under section 45(2). Therefore, the assessee could not be taxed even assuming that it would have valued the shares at market value on the date of conversion. Whatever profit has arisen on the sale of such shares has been offered for taxation in accordance with the law in the year under consideration. Hence, the question of double benefit does not arise. Consequently, the decision of the Supreme Court in the case of Escorts Ltd. (supra), is not apposite for the disposal of the issue before us.

54. In view of the above discussion, it is held that the original shares which were sold in the year under consideration became the property of the assessee prior to 1-4-1981. The fact that such shares were initially held as stock in trade and later on converted into capital asset on 1-7-1988 is not relevant for the purpose of determining the year and cost of acquisition. Thus, in my considered opinion, the assessee was entitled to opt the fair market value as on 1-4-1981 as cost of acquisition.

55. The next question for consideration is as to whether the statutory cost of acquisition can be affected by issue of bonus shares subsequent to statutory date of acquisition. This issue came up for consideration before the Apex Court in the case of Shekhawati General Traders Ltd (supra). It has been held in this case that where statutory cost is to be taken, then any event prior or subsequent to such date are irrelevant and thus statutory cost of acquisition remains unchanged. In that case, the assessee had sold 22,000 shares in assessment year 1962-63 which were acquired on 29-3-1949. Under section 55(2)(b), the assessee opted for fair market value as on 1-1-1954 as cost of acquisition and claimed the deduction accordingly from the sale consideration. The same was accepted by the Assessing Officer.

Subsequently, the Assessing Officer issued notice under section 148 on the ground that claim of assessee regarding fair market value as on 1-1-1954 was in complete disregard of the fact that the same shares had been given as bonus shares in subsequent year i.e., after 1-1-1954.

According to him, the cost of acquisition should have been spread-over the original shares and bonus shares issued after 1-1-1954 in view of the Supreme Court judgment in the case of CIT v. Dalmia Investment Co.

Ltd [1964] 52 ITR 567. This action of the Assessing Officer was challenged in the Writ Petition before the High Court and ultimately, the matter reached the Supreme Court. Their Lordships at page 793 held as under: 'Where the capital asset became the property of the assessee before the first day of January, 1954, the assessee has two options. It can decide whether it wishes to lake the cost of the acquisition of the asset to it as the cost of acquisition for the purpose of section 48 or the fair market value of the asset on the first day of January, 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 Income-tax Officer. Under no principle or authority can anything more be read into the provisions of section 55(2)(i) in the manner suggested by the revenue based on the view expressed in the Dalmia Investment Co's case. The High Court completely overlooked the fact that for the ascertainment of the fair market value of the shares in question on January 1, 1954, any event prior or subsequent to the said date was wholly extraneous and irrelevant and could not be taken into consideration." In view of the above observations, it has to be held that once the fair market value on statutory date is opted, it remains unaltered by any event.

56. The judgment of the Supreme Court in the case of Escorts Farms (Ramgarh) Ltd. (supra), heavily relied upon by the revenue is clearly distinguishable on facts. Even the Apex Court itself has distinguished the earlier judgment in the case of Shekhawati General Traders Ltd. (supra). In the case of Escorts Farms (Ramgarh) Ltd. (supra), shares sold by the assessee were admittedly purchased after statutory date i.e., on 1-1-1954. The assessee contended that such cost cannot be changed on account of issue of bonus shares. Reliance was placed on the decision of Supreme Court in the case of Shekhawati General Traders Ltd. (supra). The Apex Court turned down such plea of the assessee and held that the above decision was distinguishable on facts inasmuch as shares were acquired by the assessee after the statutory date. Their Lordships distinguished the above judgment in Escorts Farms (Ramgarh) Ltd.'s case (supra) at page 522 as under :-- "In this case, the High Court has found that the original shares sold were admittedly purchased after 1954 and, therefore, the option of taking the fair market value as on January 1, 1954 (the statutory cost), was not available to the assessee. It appears to us that the principles laid down in Shekhawati General Traders Ltd v. ITO [1971] 82 ITR 788 (SC), cannot be applied to a case where the assessee did not and could not exercise the option of the statutory cost of acquisition in the place of the actual cost of acquisition. The said decision is distinguishable. In view of the larger Bench decisions of this court, it is fairly clear that where bonus shares are issued and some of the original shares are sold subsequently, their actual cost has to be reckoned only on the basis of 'average value' (as held in Dalmia Investment and other cases) except in rare cases, where 'actual cost' is notionally adopted or determined as it existed on the relevant statutory date Shekhawati Genera! Traders Ltd. v. ITO [1971] 82 ITR 788 (SC). In the instant case, the High Court was justified in law in holding so and in further holding that the subsequent issue of the bonus shares has the effect of altering the original cost of acquisition of the shares as held by this court in CIT v. Dalmia Investment Co. Ltd [1964] 52 ITR 567 and other cases.' 57. In view of the above discussion, it is held that assessee was entitled to opt the fair market value as on 1-4-1981 since the shares sold by the assessee became the property of the assessee prior to 1-4-1981. Once such option was exercised, such statutory cost cannot be changed in any circumstance whatsoever. There is no dispute of the fact that fair market value as on 1-4-1981 was Rs. 52.50 per share.

Therefore, the assessee is entitled to deduction of statutory cost of acquisition at Rs. 52.50 per share subject to further indexation by taking assessment year 1981-82 as base year. It is clarified that revenue has allowed indexation by taking assessment year 1989-90 as base year on the ground that asset became capital asset on 1-7-1988.

Since it is held by me that shares acquired by the assessee became the property of the assessee prior to 1-4-1981 and the assessee was entitled to opt the fair market value as on 1-4-1981, the assessee is entitled as consequence thereof to substitute the said cost by indexed cost of acquisition by taking the base year as 1981-82. The order of CIT(A) is, therefore, set aside on this aspect of the issue and Assessing Officer is directed to take the cost of acquisition at Rs. 52.50 per share and further substitute the same by indexed cost of acquisition by taking assessment year 1981-82 as base year.

58. The other aspect of the matter relates to the determination of the cost of acquisition of bonus shares issued after 1-4-1981. This issue has been discussed in para 20 of the proposed order. My ld. brother has proceeded on the basis that the assessee is not entitled to opt the fair market value as on 1-4-1981 since it was held by him that original shares became the capital asset after statutory date. So according to him, the cost of bonus shares was to be determined by spreading the original cost of Rs. 17 per share over the original shares and bonus shares as held by Supreme Court in the case of Escorts Farms (Ramgarh) Ltd. (supra). According to him, the judgment of Supreme Court in the case of Shekhawati General Traders Ltd. (supra) was not applicable.

59. In my considered view, the judgment of Supreme Court in the case of Escorts Farms (Ramgarh) Ltd. (supra) cannot be applied to the facts of the present case inasmuch as in that case original shares were admittedly purchased after the statutory date while in the present case the original shares were admittedly acquired and became the property of the assessee prior to this statutory date as discussed and held by me in the earlier part of the order. It is also not in dispute that cost of bonus shares cannot be taken as 'Nil' since it has to be computed by spreading the cost of acquisition over the original shares and bonus shares as held by Supreme Court in the case of Dalmia Investment Co.

Ltd. (supra). So the short question is how to compute the cost of bonus shares where the original shares are acquired prior to statutory date.

60. This issue came up for consideration before Hon'ble Madras High Court in the case of G.N. Venkatapathy (supra). In that case, shares were acquired by the assessee prior to 1-1-1964 which was the statutory date while bonus shares were issued in the year 1975. In assessment year 1978-79, certain bonus shares and original shares were sold by the assessee. In computing the capital gains, the assessee took the fair market value as on 1-1-1964 in respect of original shares and the same was spread over the original shares and bonus shares in determining the cost of bonus shares. The assessee showed loss on the sale of shares which was accepted by the Assessing Officer. Later on the order of the Assessing Officer was scrutinised by the CIT, order of Assessing Officer was erroneous in as much as the cost of bonus shares should have been computed by spreading over the actual cost and not the fair market value as on 1-1-1964. The Tribunal, however, held that method of computing the cost of bonus shares by the assessee was correct one.

Hence, the order of CIT under section 263 was quashed. On reference to the High Court, it was held that the Tribunal was right in holding that cost of bonus shares was to be computed by spreading over the statutory cost of acquisition over the original shares and bonus shares and not the actual cost of acquisition. Such conclusion was arrived at by the High Court after applying the ratio of Supreme Court judgment in the case of Shekhawati General Traders Ltd. (supra) and following its earlier decision in the case of CIT v. Prema Ramanujam [1991] 192 ITR 692 (Mad.). This issue again came up before the Madras High Court in the case of S. Ram (supra) wherein it was held as under:-- "In a case where the original shares were obtained before January 1, 1954, and the bonus shares were obtained after January 1, 1954, and where the assessee exercised his option as per the provisions of section 55(2) of the Income-tax Act, 1961, to adopt the fair market value as prevalent on January 1, 1954, while ascertaining the cost of acquisition of the bonus shares, it is not possible to adopt one value for the original shares, viz., the value as on January 1, 1954. Once the value of the original shares is determined in accordance with the statutory provisions, thereafter the said value is unalterable. The said value should be adopted for the purpose of dividing the same by bonus shares as well as the original shares.

Any alteration to the above method would be hit by the provisions contained in section 55(2). While ascertaining the value of bonus shares the value of the shares as opted by the assessee as on January 1, 1954, as per the provisions of section 55(2) has to be taken into account and both the original shares and the bonus shares should be clubbed together and the average value of each share should be found by dividing the fair market value opted on January 1, 1954, by the total number of shares." 61. In view of the above three decisions of Madras High Court and Supreme Court judgment in the case of Shekhawati General Traders Ltd (supra), it is held that it is the statutory cost of acquisition on 1-4-1981 which is to be spread over the original shares and bonus shares for determining the cost of bonus shares. In the present case, the statutory cost has been taken at Rs. 52.50 per share. The total original shares were 64,740 against which assessee received 68,740 bonus shares in June 1981. Thus, the total holding on 20th June, 1981 was 1,37,480 shares. Again in October, 1989, the assessee obtained another 1,37,480 bonus shares. Thus, the total holding came to 2,74,960 shares. Thus the cost of bonus shares would be 1/4th of the statutory cost of acquisition which comes to Rs. 13,125 per share and not Rs. 4.38 as held by Assessing Officer.

62. Before parting with this aspect of the issue, it is to be pointed out that ld. counsel for the assessee had contended that cost of bonus shares should be determined differently on the basis of holding on the respective dates of issue of bonus shares. According to him, the cost of bonus shares issued in 1981 should be ascertained by spreading over this statutory cost over 1,37,480 shares and therefore, the same should be taken at Rs. 26.25 per share while the cost of bonus shares issued in 1989 may be taken at Rs. 13.12 per share. This contention of the ld.counsel for the assessee cannot be accepted. The principle of spreading over the cost of the acquisition is that number of holding in the hands of assessee may be increased from time to time but the value of such holding remains constant. By issue of bonus shares, neither the company becomes poorer nor the shareholders become richer. The Hon'ble Supreme Court in the case of Dalmia Investment Co. Ltd. (supra) quoted with approval at page 579 of the report the following observations of the Supreme Court of United States in the case of Eisner v. Macomber [1920] 252 US 189 :-- "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholder.

Its property is not diminished, and their interests are not increased... The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones... In short, the corporation is no poorer and the stock-holder is no richer than they were before..." In view of the above principle, the total cost of the original shares together with the bonus shares would remain the same as it was before the issue of bonus shares. Thus, the numbers' of holding may go on changing by issue of bonus shares, but the cost of total holding would remain the same. Accordingly, the aforesaid contention of Mr. Pathak is rejected.

63. The next aspect of the matter is the computation of indexed cost of acquisition. Explanation (iii) of section 48 defines the indexed cost of acquisition. Such provisions have already been quoted by me. It provides that the cost of acquisition shall be adjusted in the same proportion in which the cost inflation index for the first year in which asset is held by the assessee or the year beginning on 1-4-1981 whichever is later bears to the cost inflation index for the year in which it is sold. The cost of acquisition has to be determined under section 55(2)(b) which in the case of bonus shares had already been determined by me at Rs. 13.125 per share which will be taken into consideration for determining the indexed cost of acquisition. However, the base year for indexation will be the year in which bonus shares were issued because it is this year when such shares came into existence and were held by the assessee for the first time.

Accordingly, the base year for such bonus shares issued for the first time will be assessment year 1982-83 since such shares were issued in June, 1981 while the base year for the second issue of bonus shares would be assessment year 1990-91 since such shares were issued in October, 1989. The contention of the ld. counsel for the assessee that base year should be taken as assessment year 1981-82 in respect of all bonus shares, therefore, cannot be accepted in view of clear language of Explanation (iii) to section 48. The order of CIT(A) is accordingly modified and the Assessing Officer is directed to compute the indexed cost of acquisition of bonus shares in the light of above discussion.

64. Except as stated above, I agree with the remaining part of the order of my ld. Brother.

1. As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following questions may be referred to a Third Member or to pass such orders as the President may desire : "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e., 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by Indexed Cost of acquisition by taking assessment year 1981 -82 as base year? (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, then whether Index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989?" 1. This appeal by the assessee is directed against the order of the CIT (Appeals)-I, Pune.

2. The assessee is an Investment company floated by Kalyani group.

During the year under consideration, it has shown long-term capital gain on the sale of shares of Bharat Forge Ltd. and also income on account of dealing in the shares of other companies.

3. The first grievance of the assessee is that the Assessing Officer has erred in computing the long-term capital gain on sale of shares of Bharat Forge Ltd. at Rs. 10,44,29,160 as per Annexure of his order and further the CIT (Appeals) is not justified in confirming the action of the Assessing Officer.

4. The facts and the arguments of both the sides are identical to those discussed by us in our order of date in ITA No. 30/PN/99 in the case of Kalyani Exports & Investments Pvt. Ltd. Pune (a group case). As such, our aforesaid decision will apply mutatis mutandis to the facts of the present case. For the detailed reasons given therein, we decline to interfere and dismiss this ground.

5. The next grievance of the assessee is that the learned CIT (Appeals) is not justified in holding that the receipt on account of sale of coupons of Bharat Forge Ltd. of Rs. 21,00,215 constituted capital gains, which were taxable in the hands of the assessee.

6. The facts and the arguments of both the sides are identical to those discussed by us in our order of date in ITA 30/PN/99 in the case of Kalyani Exports & Investments (P.) Ltd Pune (a group case). As such, our aforesaid decision will apply mutatis mutandis to the facts of the present case. For the detailed reasons given therein, we hold that there is no justification for the impugned addition of Rs. 21,00,215.

This ground accordingly succeeds and the assessee gets a relief of Rs. 21,00,215.

8. After going through the order proposed by my learned brother very carefully, I have not been able to persuade myself to agree with the conclusions and findings arrived at by him in para 4 of that order for reasons given hereafter.

9. The question for our consideration relates to the determination of the cost of acquisition of original shares purchased prior to 1-4-1981 and Bonus shares received after 1-4-1981. This issue has been discussed in detail by me in the dissenting note in the case of Kalyani Exports & Investments (P.) Ltd., Pune [ITA No. 30/PN/99]. For the reasons given in that dissenting note, it is held as under:-- 1. That assessee is entitled to opt for fair market value as on 1-4-1981 as cost of acquisition in respect of original shares purchased prior to 1-4-1981.

2. That the aforesaid cost of acquisition shall be further substituted by indexed cost of acquisition as per the provisions of Explanation (iii) to section 48 by taking assessment year 1981-82 as base year.

3. That for determining the cost of Bonus Shares, the cost of acquisition of the original shares shall be taken as fair market value on 1-4-1981 and the same shall be spread over the original shares and Bonus shares as per the guidelines given by me in para 61 of the dissenting note.

4. That the aforesaid cost of Bonus Shares shall be further substituted by indexed cost of acquisition as per the guidelines given in para 63 of my dissenting note.

5. All other observations made in the said dissenting note shall apply mutatis mutandis to the present case.

1. As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following questions may be referred to a Third Member or to pass such orders as the President may desire : "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e., 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by Indexed Cost of acquisition by taking assessment year 1981-82 as base year? (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, then whether Index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989 ?' 1. This appeal by the assessee is directed against the order of the CIT (Appeals)-I, Pune.

2. The assessee is an Investment company floated by Kalyani group.

During the year under consideration, it has shown long-term capital gain on the sale of Shares of Bharat Forge Ltd. and also income on account of dealing in the shares of other companies.

3. The first grievance of the assessee is that the Assessing Officer has erred in computing the long-term capital gain on sale of shares of Bharat Forge Ltd. at Rs. 7,92,28,771 as per Chart of his order and further the CIT (Appeals) is not justified in confirming the action of the Assessing Officer.

4. The facts and the arguments of both the sides are identical to those discussed by us in our order of date in ITA No. 30/PN/99 in the case of Kalyani Exports & Investments (P.) Ltd. Pune (a group case). As such, our aforesaid decision will apply mutatis mutandis to the facts of the present case. For the detailed reasons given therein, we decline to interfere and dismiss this ground.

5. The next grievance of the assessee is that the learned CIT (Appeals) is not justified in holding that the receipt on account of sale of coupons of Bharat Forge Ltd. of Rs. 14,90,403 constituted capital gains, which were taxable in the hands of the assessee.

6. The facts and the arguments of both the sides arc identical to those discussed by us in our order of date in ITA No. 30/PN/99 in the case of Kalyani Exports & Investments (P.) Ltd. Pune (a group case). As such, our aforesaid decision will apply mutatis mutandis to the facts of the present case. For the detailed reasons give therein, we hold that there is no justification for the impugned addition of Rs. 14,90,403. This ground accordingly succeeds and the assessee gets a relief of Rs. 14,90,403.

8. After going through the order proposed by my learned brother very carefully, I have not been able to pursuade myself to agree with the conclusions and findings arrived at by him in para 4 of that order for reasons given hereafter.

9. The question for our consideration relates to the determination of the cost of acquisition of original shares purchased prior to 1-4-1981 and Bonus shares received after 1-4-1981. This issue has been discussed in detail by me in the dissenting note in the case of Kalyani Exports & Investments (P.) Ltd Pune [ITA No. 30/PN/99]. For the reasons given in that dissenting note, it is held as under :-- 1. That assessee is entitled to opt for fair market value as on 1-4-1981 as cost of acquisition in respect of original shares purchased prior to 1-4-1981.

2. That the aforesaid cost of acquisition shall be further substituted by indexed cost of acquisition as per the provisions of Explanation (iii) to section 48 by taking assessment year 1981-82 as base year.

3. That for determining the cost of Bonus Shares, the cost of acquisition of the original shares shall be taken as fair market value on 1-4-1981 and the same shall be spread over the original shares and Bonus shares as per the guidelines given by me in para 61 of the dissenting note.

4. That the aforesaid cost of Bonus Shares shall be further substituted by indexed cost of acquisition as per the guidelines given in para 63 of my dissenting note.

5. All other observations made in the said dissenting note shall apply mutatis mutandis to the present case.

1. As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following questions may be referred to a Third Member or to pass such orders as the President may desire : "(1) Whether on the facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e., 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by Indexed Cost of acquisition by taking assessment year 1981-82 as base year (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, then whether Index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989 ?" 1. The following common questions have been referred to me as Third Member on a difference of opinion between the learned Members of the Pune Bench : "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e., 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by indexed Cost of acquisition by taking assessment year 1981-82 as base year? (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, whether Index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989?" 2. The facts in ITA No. 30/PN/99 may be noticed. The assessee is a company. It had acquired 68,740 shares of Bharat Forge Ltd. in March 1977 on the dissolution of a firm by name Kalyani Brothers, of which it was a partner. On 20-6-1981, bonus shares were issued in the ratio of 1:1. Thus the holding went up to 1,37,480 shares. Again in October 1989, another bonus issue was made in the same ratio and thus the holding went up to 2,74,960 shares. The assessee-company had initially declared the shares in its books of account as stock-in-trade. This position continued upto 30-6-1988. On 1-7-1988, the shares were converted into capital asset at the rate of Rs. 17 per share which was the price at which the shares had been originally purchased in 1977.

3. During the year relevant to the assessment year 1995-96, which is the year under appeal, the assessee sold shares and declared capital gains, and while adopting the cost of acquisition, exercised the option of adopting the fair market value of the shares as on 1-4-1981 in accordance with the provisions of section 55(2)(b)(i) of the Income-tax Act.

4. The Assessing Officer was of the view that the assessee was not entitled to substitute the fair market value as on 1-4-1981 because in his opinion the shares were not held as capital assets on that date. He took the view that both at the point of purchase and at the point of sale the asset should be a capital asset within the meaning of section 2(14). The assessee had no doubt sold a capital asset, but at the point of purchase it was stock-in-trade. Therefore, according to the Assessing Officer, the option of substituting the fair market value of the shares as on 1-4-1981 was not available to the assessee. He opined that the shares were converted into capital assets only on 1-7-1988 and that too at the price of Rs. 17 per share and therefore the cost of acquisition shall be taken at that rate only.

5. The Assessing Officer made another adjustment to the working of the capital gains. While computing the cost of acquisition of the bonus shares which were sold, the assessee had computed the capital gains by spreading over the "indexed cost of acquisition" upto the date of issue of bonus shares and not the cost of acquisition. The correct procedure, according to him, was to spread over the cost of original shares over the original and bonus shares, and not the indexed cost. He cited the ruling of the Supreme Court in the case of Escorts Farms (Ramgarh) Ltd (supra) in support of this method of ascertaining the cost of acquisition of the shares. The indexed cost of acquisition was therefore to be computed from the cost of acquisition and not by spreading the indexed cost of acquisition of the original holding of shares. He accordingly spread the original cost of Rs. 17 per share over the original and bonus shares, over-ruling, in the process, the contention of the assessee based on Shekhawati General Traders Ltd.'s case (supra).

6. The working of the capital gains as per the Assessing Officer is given in an Annexure to the assessment order.

7. The CIT (Appeals) upheld the action of the Assessing Officer on the ground that it was in accordance with the provisions of the Income-tax Act. He further held that on the basis of the judgment of the Supreme Court in Bai Shirinbai K. Kooka's case (supra), the difference between the market rate of Rs. 50 per share as on the date of conversion and the purchase price of Rs. 17 would have been taxable as business income, being appreciation of the value of the stock-in-trade. As regards the cost of bonus shares, he agreed with the Assessing Officer that Escorts Farms (Ramgarh) Ltd's case (supra) applied. He concluded that the indexed cost of acquisition will be worked out as below : (a) in respect of shares converted into capital assets on 1-7-1988, indexation will be allowed from the year 1988-89 to the year of transfer on the average cost as per Escorts' decision (supra); (b) in respect of bonus shares acquired in 1989, indexation will be allowed from 1989-90 to the year of transfer on the average cost as staled above.

8. The assessee preferred further appeal to the Tribunal. After hearing the rival contentions, the learned Accountant Member took the view that the capital gains as worked out by the Assessing Officer was correct, whereas the learned Judicial Member held that the capital gains as worked out by the assessee-company was correct.

9. The learned A.M. gave his reasons like this. Section 2(14) defines capital asset as not including stock-in-trade. According to Explanation (iii) to section 48 inserted w.e.f. 1-4-1993, which has made a significant change in the manner of computation of capital gains, the cost inflation index is to be taken "for the first year in which the asset was held by the assessee" which means the first year in which the asset was held as a capital asset. The scheme of section 45(2) is such that the period of subsequent holding in respect of stock-in-trade is not counted and so for the period for which the asset is held as stock-in-trade the index cost will not be available. If the assessee is given the benefit of indexation cost for the period he held the shares as stock, he will get double benefit which is prohibited by the Supreme Court in Escorts Ltd's case (supra). He is once benefited by increase in the cost of acquisition because of the application of cost inflation index. He is again benefited by valuing the stock at market value, if market value is less. On the date of conversion, the market value was Rs. 50 per share. The assessee converted the shares at cost, which was Rs. 17 per share. The appreciation of Rs. 33 in the value of the stock "would have been taxable as business income". But this is not the case.

Therefore, the cost is only Rs. 17 as per the principles laid down by the Supreme Court in Sir Kikabhai Premchand's case (supra). The same result can be achieved by 'applying the ratio-in-reverse' of the decision of the Supreme Court in the case of CIT v. Bai Shirinbai K.Kooka [1962] 46 ITR 86, Since the assessee itself has chosen to convert the shares at Rs. 17, there is no requirement of substituting any other costs for computing the capital gains. The date of acquisition for the purpose of capital gains will be 1-7-1998 i.e., the date of conversion.

10. In arriving at the above conclusion, the learned A.M. held that the ratio of the judgments of the Hon'ble Bombay High Court in Keshavji Karsondas' case (supra) and the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case (supra) relied upon by the learned counsel for the assessee is no more applicable to the facts of the present case.

11. As regards the other aspect, viz., the cost of bonus shares, the learned A.M. held that the ratio of the Supreme Court decision in Escorts Farms (Ramgarh) Ltd.'s case (supra) applied to the present case and not that of Shekhawati General Traders Ltd's case (supra) or that of the Madras High Court in G.N. Venkatapathy's case (supra). Since on 1-4-1981 the shares were not held as capital assets, the option of substituting the fair market value on that date as cost was not available to the assessee. In the case of bonus shares acquired in 1989, he held that the indexation will have to be allowed in that year, as held by the Gujarat High Court in Chunilal Khushaldas' case (supra).

12. The learned J.M. differed from the decision of the learned A.M. on both issues. As regards the cost of original shares, the learned J.M.held that a capital asset can become the property of the assessee only once and this happened when it was purchased. He referred to section 49 to indicate that when the asset becomes the property by any mode other than purchase/acquisition, the date of purchase/acquisition is that on which the previous owner purchased/acquired it. He pointed out that there is no requirement in section 55 that in order to substitute the fair market value as on 1-4-1981 as cost, the asset must have been held as a capital asset prior to that date and that had the legislature intended to prescribe such a condition it would have expressly said so.

The only condition was that the asset must be a capital asset on the date of transfer. Further, in order to avail of the indexed cost of acquisition, the asset must be a long-term capital asset. Since these two conditions are satisfied in the present case, the assessee has the right to substitute the fair market value as on 1-4-1981 as cost under section 55(2)(6)(i).

13. In coming to the above view, the ld. JM held that the ratio of the Gujarat High Court's decision in Ranchhodbhai Bhaijibhai Patel's case (supra) and the Bombay High Court in Keshavji Karsondas' case (supra) was fully applicable. He accordingly held that it was not necessary that the asset should have been a capital asset even on the date of acquisition and that so long as it as a capital asset on the date of transfer the option under section 55(2)(b)(i) was available.

14. With reference to the ld AM's view based on Explanation (iii) to section 48 the ld. JM held that the true import thereof was that the cost inflation index for the year in which the asset was held for the first time or year beginning 1-4-1981, whichever is later, shall be taken and then it shall be increased in the same proportion in which cost inflation index has increased to the year in which the asset is sold. Since the Explanation presupposes the existence of the cost of acquisition, it has nothing to do with determining the cost of acquisition. The Explanation comes into play only after the cost of acquisition has been determined and therefore it is not apposite to the issue for consideration viz., what is the cost of acquisition of the asset.

15. As regards the question of double benefit, the ld. JM applied Sir Kikabhai Premchand's case (supra) ration and held that the assessee could not have been taxed on the appreciation of the market value of the shares on the date of conversion. He therefore, ruled out the applicability of Escorts Ltd.'s case (supra) to the case.

16. With regard to the cost of acquisition of the bonus shares, the Id.

JM was of the view that the principle laid down by the Supreme Court in Shekhawati General Traders Ltd.'s case (supra) applied to the case and not that of Escorts Farms (Ramgarh) Ltd.'s case (supra). The latter decision was distinguished by him on the ground that in that case the shares sold by the assessee were admittedly purchased after the statutory date i.e., 1-1-1954 (which was the date as per section 55 as it stood at the relevant time), The Supreme Court itself in Escorts Farms (Ramgarh) Ltd.'s case (supra) distinguished Shekhawati General Traders Ltd.'s case (supra) on this ground The ld. JM applied Shekhawati's principle to the present case since the assessee had purchased the shares before 1-4-1981 which was not the case in Escorts Farms (Ramgarh) Ltd (supra) and held at para 57 that the assessee was entitled to opt for the market value of the shares as on 1-4-1981. This was Rs. 52.50 per share. He further held as a consequence that the assessee is entitled to substitute the cost as on 1-4-1981 by the indexed cost of acquisition, taking the base year as 1981-82. He directed accordingly.

17. With regard to the second issue, the cost of acquisition of the bonus shares issued after 1-4-1981, the ld. JM held that Escorts Farms (Ramgarh) Ltd. 's case (supra) cannot be applied inasmuch as in that case the original shares were acquired after the statutory date while in the present case the original shares were purchased before the statutory date (1-4-1981). He held, following Dalmia Investments Co.

Ltd.'s case (supra) that the cost of bonus shares cannot be taken as 'nil' since it has to be computed by spreading the cost of acquisition of the original shares over the original shares and the bonus shares.

He proceeded to note the decisions of the Madras High Court in G.N.Venkatapathy's case (supra) and S. Ram's case (supra) and held that the statutory cost of acquisition as on 1-4-1981 has to be' spread over the original and bonus shares for the purpose of determining the cost of bonus shares. The statutory cost (f.m.v. as on 1-4-1981) was Rs. 52.50 per share. The total holding was 2,74,960 shares (original plus bonus).

The cost of bonus shares would therefore be 1/4th of the statutory cost which comes to Rs. 13.25 per share as against Rs. 4.38 as held by the Assessing Officer on the basis that the cost was Rs. 17 per share.

18. I have heard the rival contentions on the first question viz., whether the assessee is entitled to opt for the fair market value of the shares on 1-4-1981 under section 55(2)(b)(i). Whereas the ld.counsel for the assessee has relied on the order of the ld. JM and the judgment of the Hon'ble Bombay High Court in Keshavji Karsondas' case (supra) and the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case (supra), the ld. Sr. DR sought to distinguish these decisions by saying that in those cases the asset in question was agricultural land which became a capital asset w.e.f. 1-4-1970 by virtue of a statutory amendment and not by any act of the assessee, such as conversion of stock-in-trade, as in the present case. He cited the order of the Chandigarh Bench of the Tribunal in the case of S. Pala Singh v. ITO [ 1992] 41 ITD 482, but fairly stated that it runs counter to the judgment of the Bombay High Court in Keshavji Karsondas' case (supra).

19. On a careful consideration of the issue, my answer to the first question is in the affirmative. The matter appears to me to be concluded by the judgment of the Hon'ble Bombay High Court in Keshavji Karsondas' case (supra). It was held therein that an asset cannot be acquired first as a noncapital asset at one point of time and again as a capital asset at a different point of time. There can be only one acquisition of an asset and that when the assessee acquires it for the first time, irrespective of its character at that point of time. It was therefore, held that what is relevant for the purpose of capital gains is the cost of acquisition and not the date at which the asset became a capital asset. The decision of the Gujarat High Court in Ranchhodbhai Bhaijibhai Patel's case (supra) was followed by the Bombay High Court.

In the decision of the Gujarat High Court, it was held that the only condition to be satisfied for attracting section 45 is that the property transferred must be a capital asset at the date of transfer and it is not necessary that it should also have been a capital asset at the date of acquisition. The Bombay High Court also held that the words "the capital asset" in section 48(ii) are identificatory and demonstrative of the asset, intended only to refer to the property that is the subject of capital gains levy and not indicative of the character of the property at the time of acquisition. It was clearly held that there cannot be two dates of acquisition of the same asset - one as non-capital asset and again as capital asset. The earlier judgments of the Supreme Court in Bai Shirinbai K. Kooka's case (supra) and Miss. Dhun Dadabhoy Kapadia's case (supra) were noticed by the Bombay High Court and held to be of no relevance to the question.

Towards the end of the judgment, the Bombay High Court observed that a similar view has also been taken by the High Courts of Madras, Karnataka, Kerala and Punjab & Haryana.

20. In my view, the matter having been concluded by the judgment of the Hon'ble Bombay High Court, which is the jurisdictional High Court, the contention of the assessee that the shares having been purchased in 1977 March, it must be allowed the option of the substituting the fair market value as on 1-4-1981, must be upheld. I am unable to appreciate the distinction sought to be made by the ld. Sr. DR on the ground that the decision cannot be applied to a case where the asset has become a capital asset by the act of assessee (say, by conversion, as in the present case) and it must be confined to a case where the asset has become a capital asset by legislative intervention. The true ratio of the decision is that there is only one point of acquisition of an asset and the cost on that date has to be reckoned, irrespective of the character of the asset at that point of lime, be it capital asset within the meaning of section 2(14) or not. If that is the true ratio and I firmly believe it is - then the question whether it became a capital asset by the act of the assessee or by an amendment to the law is, in my humble opinion, irrelevant.

21. As regards the provisions of Explanation (iii) to section 48 on which great reliance has been placed by ld. AM, I am inclined to agree with the interpretation placed on them by the ld. JM in para 52 of the dissenting order. As held by him, the Explanation comes into play only after the cost of acquisition has been ascertained. If the cost of acquisition in 1977 is allowed to be substituted by the option under section 55(20)(b)(i) of taking of fair market value as on 1-4-1981, it follows that the statutory cost has to be increased in the same proportion in which the cost inflation index has increased upto the year in which the shares were sold. Explanation (iii), in my opinion, does not concern itself with ascertaining the cost of acquisition; it comes into play after the cost of acquisition is ascertained. In this, I am in agreement with the ld. JM that the said Explanation is not apposite to the determination of the cost of acquisition.

22. In my view, the ld. JM is right in holding that there is no double-benefit to the assessee if it is permitted the option of adopting the fair market value of the shares as on 1-4-1981. The difference between the market value and the conversion price could not have been, at any rate, brought to tax in view of the law laid down in Sir Kikabhai Premchand's case (supra) to the effect that no man can make a profit out of himself. If the assessee is not liable to be taxed in respect of an amount according to the law of the land, as declared by the Supreme Court, that does not amount to any benefit or concession extended to him. It is then his right not to be taxed. If the taxing authorities could not have taxed him at the point of conversion, they cannot be heard to say that when he is given the option to substitute the market value as on 1-4-1981 he gets another "benefit', thus taking a "double-benefit". The right to claim the fair market value as on 1-4-1981 to be substituted is a statutory right which can be exercised when the prescribed conditions are fulfilled. Thus the assessee is protected by two rights - one, the right conferred by the Supreme Court and the other, the right given by section 55(2)(b)(i), it would thus appear that the assessee gets "double rights" and not "double-benefit") No authority or rule was brought to my notice which says that notwithstanding such rights, the assessee must be taxed.

23. The ld. AM as well as the ld. Sr. DR have referred to section 45(2) which provides for a converse situation: conversion of a capital asset into stock-in-trade. In such a case the profits accruing have been expressly made taxable. There is no express provision in the Income-tax Act to provide for taxing the notional profits, if any, where stock-in-trade is converted at a higher price or at the market value into a capital asset. The decision of the Supreme Court in the case of Escorts Ltd. (supra) therefore does not apply, I agree with the view taken by the ld. JM in this regard.

24. For the above reasons, I agree with the view taken by the ld. JM that the assessee is entitled to adopt the fair market value of the shares as on 1-4-1981 under section 55(2)(b)(i) of the Act.

25. The ld. JM has opined, differing from the ld. AM, that the statutory cost of acquisition cannot be affected by the issue of bonus shares subsequent to the statutory date of acquisition, relying on the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case (supra). In this decision, it has been held that the statutory cost does not get affected by any event taking place prior or subsequent to the statutory date. In other words, any bonus issue prior or subsequent to 1-4-1981 does not affect the fair market value as on 1-4-1981. The ld. AM has relied on Escorts Farms (Ramgarh) Ltd's case (supra) in coming to the conclusion that since the assessee did not hold the shares as capital asset on 1-4-1981 the option of adopting the fair market value as on that date as cost of acquisition is not available to it. He has quoted from the observations of the Supreme Court in the said decision at page 522. He has thus ruled out the applicability of Shekhawati General Traders Ltd.'s case (supra) principle. But in my opinion, the facts of the present case attract the Shekhawati principle and not the Escorts farms (Ramgarh) Ltd.'s case (supra) principle. The reasons have, if I may say so with respect, been lucidly brought out by the ld. JM in paras 55 to 61 of the dissenting order.

26. In my view, the difference between Shekhawati General Traders Ltd.'s case (supra) and Escorts Farms (Ramgarh) Ltd.'s case (supra) lies in the fact that in the Former, the original shares were purchased before the statutory date (1-1-1954 at that time) whereas in the latter they were purchased after the statutory date in fact. Their Lordships in Escorts Farms (Ramgarh) Ltd.'s case (supra), distinguished Shekhawati General Traders Ltd.'s case (supra) on this ground. This has been brought out by the ld. JM in his dissenting order and I fully subscribe to his view on this aspect of the case. To put it briefly, if the shares are acquired after the statutory date, any subsequent issue of bonus will affect the cost, as laid down earlier by the Supreme Court in Dalima Investment Co. Ltd.'s case (supra). But if the shares were acquired prior to the statutory date, any issue of bonus shares subsequent to that date will not have the effect of altering the statutory cost. In such a case, it is the statutory cost that has to be spread over the original and bonus shares for ascertaining the cost of the bonus shares. This principle was laid down in Shekhawati General Traders Ltd.'s case (supra) and followed by the Madras High Court in two decisions, G.N. Venkatapathy's case (supra) and S. Ram's case (supra). All these decisions have been noted by the ld. JM with whose decision on this point at para 61.1 concur. The decision of the ld. AM on this point is a corollary to his decision that the option of substituting the fair market value as on 1-4-1981 is not available to the assessee since on that date the assessee was not holding the shares as capital asset. He has therefore not applied the Shekhawati principle. But as I have held, agreeing with the ld. JM, that the assessee was entitled to opt for the fair market value as on 1-4-1981, I hold that it is the Shekhawati principle that is applicable to the present case and not the Escorts Farms (Ramgarh) principle for the purpose of computing the cost of the bonus shares.

27. As regards the other aspects of the questions referred to me, I have already held, agreeing with the ld. JM, that the assessee is also entitled to substitute the fair market value as on 1-4-1981 by the indexed cost of acquisition by taking the assessment year 1981-82 as the base year. 1 am also required to decide whether the indexed cost of acquisition of bonus shares can be determined by taking the assessment year 1982-83 as the base year for bonus shares issued in June 1981 and the assessment year 1990-91 as base year for the bonus shares issued in October, 1989. So far as the bonus shares issued in October, 1989 is concerned, I find from paras 20 and 63 of the order that both the ld.AM and ld. JM have agreed that the base year for the purpose of indexation will be the financial year 1989-90 (assessment year 1990-91). But so far as the bonus shares issued in June 1981 are concerned, they have differed because of the fundamental difference of opinion between them on the issue whether it is necessary that even at the point of acquisition the asset should be a capital asset. Since the ld. AM had opined that it was, and that the shares were held as capital asset only from 1 -7-1988, he had impliedly also held that there was no question of indexing the cost of acquisition of the bonus shares issued in June 1981. But since the ld. JM had opined that it was not necessary that even at the point of acquisition the shares should have been capital assets, he proceeded to hold that the financial year 1981-82 (assessment year 1982-83) was the year in which such shares were held by the assessee for the first time, as per the Explanation (iii) to section 48, as interpreted by him. I have already expressed my agreement with his interpretation of Explanation (iii). Accordingly I also agree with his view expressed in para 63 of the order that the indexation in respect of the bonus shares issued in June, 1981 has to be done taking the financial year 1981-82 (assessment year 1982-83) as the base year.

28. For the aforesaid reasons, I agree with the views expressed by the ld. JM on all the issues posed by the two questions referred to me.

Both the questions are answered in the affirmative.

29. The answers to the questions posed in the other two appeals, with similar facts, are also in the affirmative. All the three appeals will now be placed before the original Bench for appropriate orders.

1. As there was a difference of opinion between the Accountant Member and the Judicial Member, following questions were referred to a Third Member : "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e. 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by indexed cost of acquisition by taking assessment year 1981-82 as base year (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, whether index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989 ?" 2. The learned Judicial Member, Shri R.V. Easwar, sitting as Third Member by his opinion dated 13-10-2000 has concurred with the views of the Judicial Member on all the issues posed by the above two questions and answered both the questions in the affirmative.

In accordance with the majority view, the issues stand decided in favour of the assessee and against the Revenue.

1. As there was a difference of opinion between the Accountant Member and the Judicial Member, following questions were referred to a Third Member : "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e. 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by indexed cost of acquisition by taking assessment year 1981-82 as base year (2) Whether on facts and in taw, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, whether index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989 ?" 2. The learned Judicial Member, Shri R.V. Easwar, sitting as Third Member by his opinion dated 13-10-2000 has concurred with the views of the Judicial Member on all the issues posed by the above two questions and answered both the questions in the affirmative. In accordance with the majority view, the issues stand decided in favour of the assessee and against the Revenue.

1. As there was a difference of opinion between the Accountant Member and the Judicial Member, following questions were referred to a Third Member: "(1) Whether on facts and in law, the assessee is entitled to opt the fair market value on the statutory date i.e. 1-4-1981 as cost of acquisition in respect of original shares purchased before 1-4-1981 and as a consequence thereof, he is further entitled to substitute the said cost by indexed cost of acquisition by taking assessment year 1981-82 as base year (2) Whether on facts and in law, the cost of bonus shares can be determined by spreading over the statutory cost of acquisition of original shares over the original and bonus shares? If yes, whether index cost of acquisition can be determined by taking assessment year 1982-83 as base year for the bonus shares issued in June 1981 and by taking assessment year 1990-91 as base year for bonus shares issued in October, 1989 ?" 2. The learned Judicial Member, Shri R.V. Easwar, sitting as Third Member by his opinion dated 13-10-2000 has concurred with the views of the Judicial Member on all the issues posed by the above two questions and answered both the questions in the affirmative.

In accordance with the majority view, the issues stand decided in favour of the assessee and against the Revenue.