1. This is an appeal by the assessee and is directed against order dated 28^th April 1998, passed by the CIT(A) IV Mumbai, in the matter of assessment under Section 143(3) of the Income Tax Act 1961 (hereinafter referred to as the Act).
2. The short but interesting point requiring our adjudication in this appeal is whether or not the CIT(A) was justified in holding that, on the facts and circumstances of this case and for the purpose of computing capital gains on the sale of shares, the cost of acquisition of those shares was required to be taken on the basis of average cost, i.e. by spreading the actual purchase cost on the bonus shares as well, and not on the basis of 'actual cost' - which is challenged in this appeal at the instance of the assessee.
3. The issue in appeal lies in a narrow compass of undisputed facts.
During the course of scrutiny assessment proceedings, the Assessing Officer noticed that while the profit and loss account of the assessee reflects profit on sale of shares at Rs. 75,200, in the computation of income the same has been excluded for being considered separately, and that the computation of capital gains, in turn, reflects a loss of Rs. 5,532 which has been claimed as eligible for carry forward as long term capital loss. It was further noticed that the aforesaid capital loss pertained to sale of shares of three different companies, out of which two companies had received bonus shares but, as the assessee himself stated by way of note on computation to capital gains, shares were valued at cost and bonus shares were ignored. In response to Assessing Officer's requisition for further details, the assessee clarified that since the bonus shares were not sold during the relevant previous year, and in view of amendments in Section 55 of the Act which provides that the cost of acquisition of bonus shares is required to be taken at nil, 'it is mandatory for the assessee to keep lot wise details of shares for the purpose of computing capital gains'. It was thus urged that facts and circumstances of the case did not warrant or justify the cost of acquisition of the shares being taken as average cost, i.e. by spreading the cost of acquisition of shares over the number of original shares purchased plus the number of bonus shares issued, and that the cost of acquisition was required to be taken at the price of purchase of relevant lot of shares divided by the number of shares so purchased.
The Assessing Officer was, however, far from impressed. He rejected the assessee's claim for the reason that the amendment in Section 55 was effective 1^st April 1996, and, therefore, so far as sale transactions of shares in the pre amendment period were concerned, the cost of acquisition in respect of the shares was required to be taken at 'average cost' in accordance with the settled judicial position. It was in this backdrop that the Assessing Officer computed the long term capital gains at Rs. 57,241 as against returned long term capital loss of Rs. 5,532. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. While dismissing the appeal, the CIT(A) inter alia observed as follows : "Having carefully considered the facts of the case, I find the issue is settled by the decision of Supreme Court in Escort Farms (Ramgarh) Ltd v. CIT (222 ITR 509). It is a decision in which the Supreme Court has discussed both the decisions on which AR has placed his reliance. It was held that where bonus shares are issued and some of the original shares were sold subsequently, their cost has to be reached only on the basis of average value. This formula is in line with the decision of Dalmia Investment's case (supra).
Moreover, the principle laid down in Shekhawati General's case (supra) cannot be applied to a case where the assessee did not and could not exercise the option of the statutory cost of acquisition in place of original cost of acquisition. The facts of the present case are similar to Escort Farm's case. As regards the cost of acquisition computed by the Assessing Officer for original shares in response of which rights shares were acquired, the position also remains the same. The issue of right shares has the effect of depreciating the value of old shares. Therefore, for the purpose of computing the capital gains on the sale of original (old) shares, the average cost of acquisition of such shares is to be taken. The principle is the same which governs the determination of the cost of original shares in respect of which bonus shares are issued. On these facts, I do not find any infirmity in the computation adopted by the Assessing Officer and the same is, therefore, confirmed.
Aggrieved by the order of the Commissioner (Appeals) as well, the assessee is in second appeal before us.
4. Shri P.J. Pardiwala and Shri P.P. Bhandari appeared for the assessee, and revenue was represented by Shri K.K. Sharma. Rival contentions are conscientiously heard, orders of the authorities below carefully perused, and applicable legal position duly deliberated upon.
5. In order to adjudicate on the issue in this appeal, it is necessary to take a careful look at the paradigm shift in the scheme of computation of capital gains on sale of shares, brought by the virtue of insertion of Clause (iiia) in Sub-section 55(2). Let us, therefore, first take a look at this amendment itself. It may be recalled that Clause (iiia), which provides that for the purpose of computing capital gains, cost of acquisition of bonus shares is required to be taken as nil, was added to Section 55(2) vide Finance Act 1995 and with effect from 1^st April 1996. It may be useful to reproduce Section 55(2)(iiia) which provides as follows: (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee.
6. This amendment was in the nature of, what was termed as, 'simplified procedure for computation of capital gains on transfer of bonus shares'. The aforesaid statutory amendment was made in backdrop of the fact that the law, as it then stood, required the cost of a bonus share is to be determined by averaging the cost of original shares and bonus shares. While elaborating upon the scope and effect of this amendment, CBDT Circular No 717 dated 14^th August 1995 (215 !TR Stat 70, relevant portion at page 89) stated as follows: "Bonus shares are issued to an existing shareholder without making a payment in cash. Presently, cost of acquisition of these shares is taken on the basis of principle laid down by the Supreme Court [CIT v. Dalmia Investment Co Ltd (52 ITR 567) refers]. It has been held that after a bonus issue, the cost of each bonus shares as also each of the original shares is to be determined by spreading the cost of original shares over the number of original and bonus shares. There are no specific provisions under the Income Tax Act to deal with computation of the cost of acquisition in such cases.
Computation of the cost of bonus shares on the principles of averaging is, however, not simple. It is very difficult to correlate bonus shares to the corresponding original shares purchased on different dates and at different costs. Naturally, separate streams of calculations have to follow for each set of original shares purchased on a particular date and every time a sale of shares takes place. In order to overcome the problem of complexity, a simple method has been laid down for computing the cost of acquisition of bonus shares. For the sake of clarity and simplicity, the cost of bonus shares is to be taken as nil while the cost of original shares is to be taken as the amount paid to acquire them. This procedure will also be applicable to any other security where a bonus issue has been made. Here the expression 'security' will take its meaning from the definition in Clause (h) of Section 2 of the Securities Contracts (Regulations) Act 1956.
The period of holding of the bonus shares will be reckoned from the date of allotment of such asset.
These amendments will take effect from 1^st April 1996, and will, accordingly, apply to the securities transferred on or after 1^st April 1995.
7. In the backdrop of this legislative amendment, let us take a look at the undisputed factual position of the case before us. It is an undisputed position that the assessee had purchased shares of certain companies, and consequent to such purchases the assessee also received some bonus shares. It is also not in dispute that, in the relevant previous year, the assessee sold a part of the shares originally purchased, while he continued to hold the bonus shares received. On these facts, in case the cost of acquisition of the shares sold is to be taken by averaging the purchase price over the entire share holding of that company (i.e. aggregate of original shares purchased plus the bonus shares received) and the cost of bonus shares which assessee may sell in post 1^st April 1995 period, in view of the insertion of Clause (iiia) inn Section 55(2), is to be taken as nil, an incongruity may arise that the capital gains computation will not show the true picture inasmuch as the cost of acquisition in that computation will be even less than the actual cost of acquisition. It appears that such a state of affairs is contrary to the very scheme of computation of capital gains under the Income Tax Act. Our present concern is how to deal with this incongruity.
8. One thing which is immediately clear is that in view of the legislative amendment in Section 55(2), any bonus shares that the assessee owns as on, or comes to be owner of after, 1^st April 1995, are to be valued at nil for the purpose of computation of capital gains on sale of such bonus shares. In our humble understanding, we cannot be oblivious of this limitation while applying the principle of averaging out the cost of shares over the shares purchased and the shares received as bonus shares. It would thus follow that, in view of the amendment in the statute, the bonus shares held by the assessee as on 1^st April 1995 are to be excluded from any computation for averaging the cost of shares.
9. We must also make it clear that the above approach is based on the premises that the amended provisions of Section 55(2) will apply to 'the securities transferred on or after 1^st April 1995' (CBDT Circular No 717- paragraph 30.2; 215 ITR Stat 70) contrary to the school of thought advocated by Sampath Iyengar's Commentary on Law of Income Tax (9^th Edition; page 3245) that the amended provisions of Section 55(2) are to be treated as applicable on 'bonus shares allotted subsequent to 31^st March 1995' cost of which alone will thus be taken as nil. Once revenue takes a view that the provisions of Section 55(2)(iiia) will apply to all 'the securities transferred on or after 1^st April 1995', as the revenue has indeed has taken in the CBDT Circular No 717, it will also imply that irrespective of whether the bonus shares were issued prior to 1^st April 1995, or thereafter, in case these shares are sold on or after 1^st April 1995, the cost of acquisition of such bonus shares is to be taken as nil. For the present purposes, therefore, we are not required to go into the controversy as to whether the cost of acquisition in respect of bonus shares allotted prior to 1^st April 1995 can also be taken as nil or whether the provisions of Section 55(2)(iiia) are only applicable on the bonus shares allotted on or after 1^st April 1995. We leave it at that.
10. In the case of CIT v. Dalmia Investment Co Ltd (52 ITR 567), the question before the Hon'ble Supreme Court was whether the cost of acquisition of bonus shares could be taken as nil as was done by the revenue in that case. The answer to this question, as observed in the judgment itself, depended 'on the cost of acquisition, if any, to be properly attributable to bonus shares'. It was in this context that Their Lordships of had held that "the bonus shares can be valued by spreading the cost of the old shares over the old shares and the new issue (i.e. bonus shares) taken together".
11. In the case of Escort Farms (Ramgarh) Limited v. CIT (222 ITR 507), Hon'ble Supreme Court reiterated the same principle and observed that "................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 determined only on the basis of 'average value' (as held in Dalmia Investments and other cases)........". In coming to this conclusion, Their Lordships also observed that "We should bear in mind that it is after discussing the effect or impact of the issue of the bonus shares, on the value of the original shares generally and also the various possible methods for determining the cost of the bonus shares, this Court in Dalmia Investment Co.'s case (supra) stated that the real cost to the assessee of the bonus shares cannot be taken to be nil or their face value and they have to be valued by spreading the cost of the old shares over the old shares and the new issue (bonus shares), taken together." We, therefore, find that in coming to the conclusion that "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 determined only on the basis of 'average value' (as held in Dalmia Investments and other cases)", Their Lordships were undisputedly guided by the fact that the bonus shares are to be valued by spreading the cost of old shares over the old shares and bonus shares taken together. It would thus follow that in a situation where cost of acquisition of the bonus shares is statutorily required to be taken as nil, the question of averaging will not arise. In this context, we are reminded of the observations of Justice Bhat, in the case of SRF Finance Ltd. v. CBDT (211 ITR 961) that 'it is well settled rule of construction that judgments must be read as a whole and observations from the judgments should be considered in the light of the questions which were before the Court.' When the aforesaid judgment in the case of Escort Farms (Ramgarh) Ltd (supra) is read as a whole, it only leads us to the principle that where the cost of acquisition of bonus shares is to be taken by spreading the cost of original shares over the original shares as well as the bonus shares, as a corollary to assigning such cost to the bonus shares, the cost of original shares is also be computed on the basis of same formulae for 'average price'. In our humble understanding, this would not imply that even where the cost of acquisition of bonus shares is statutorily required to be taken as nil, yet the cost of original holding is to be averaged out for bonus shares. Coming back to the principles of interpretation, we may also mention that referring to the judgment of Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works Pvt Ltd (198 ITR 297) and in the case of SRF Finance Limited (supra), Their Lordships of Hon'ble Delhi High Court further mentioned that : "As observed by the Supreme Court in CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC), it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court, divorced from the context of question under consideration and treat it to be the complete law declared by the Supreme Court. A decision of Supreme Court takes its colours from the question involved in the case in which it is rendered and, while applying it to a later case, the Courts must carefully try to ascertain the true principles laid down by the decision. It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing full exposition of law on a question when the question did not even fall to be answered in that judgment." 12. It was not even the case of the revenue, in the matter of Escort Farms (supra), that even where cost of acquisition for the purpose of bonus shares is statutorily required to be taken as nil, yet the cost of acquisition for the purpose of original holding is required to be taken on the basis of averaging the purchase price over the original shares as well as the bonus shares. In fact, the question of cost of acquisition of original shares being averaged arises as a consequence to assigning a notional cost of acquisition, on the basis of averaging, to the bonus shares. Therefore, when admittedly the bonus shares are to be taken as nil value, in our humble understanding, there cannot be any question of averaging of the cost of acquisition of original shares, by spreading the cost over the original shares as well as the bonus shares. The observations made by the Hon'ble Supreme Court in the cases of Dalmia Investments (supra) and Escort Farms (supra) cannot be applied in a case where the cost of acquisition of bonus shares is statutorily required to be taken as nil.
13. We may, in this regard, also refer to the observations of Hon'ble Supreme Court itself, in Mumbai Kamgar Sabha v. Abdulbhai Faizullbhai AIR "It is trite, going by Anglophonic principles, that a ruling of superior Court is binding in law. It is not of spiritual sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors the milieu we cannot impart the eternal vernal value to the decision, exalting the doctrine of precedents into prison house of bigotry, regardless of varying circumstances and myriad developments, Realism dictates that a judgment has to be read, subject to the facts directly presented for consideration and not affecting those matters which may lurk in the dark".
14. When examined in this perspective also, it is clear that the facts directly presented for consideration of Hon'ble Supreme Court in the case of Dalmia Investments (supra) and Escort Farms (supra) were not in pari materia with the facts of this case inasmuch as in those cases the cost of acquisition of bonus shares was required to be taken at the average value, whereas in the case before us in case the assessee sells these bonus shares on or after 1^st April 1995, the cost of acquisition of those shares will statutorily be required to be taken as nil. The observations made by the Hon'ble Supreme Court, therefore, cannot have any application in a case where the value of bonus shares is required to be taken as nil. In any event, in our considered view, Hon'ble Supreme Court's observations should not be used as a blind man's walking stick, as it would amount to if we are to be guided by those observations alone without examining the material facts of the situation where the observations are sought to be applied, vis-a-vis material facts of the case before Their Lordships in which those observations have been made. For these reasons also, Hon'ble Supreme Court's observations in the case of Dalmia Investments (supra) and Escort Farms (supra) have no application in the matter.
15. In the light of the above discussions, we are of the considered view that in a situation in which the cost of acquisition of bonus shares, in terms of the provisions of Section 55(2)(iiia), is required to be taken as nil, those bonus shares are required to be excluded for ascertaining the 'average price' of shares for the purpose of computation of capital gains and in terms of the judgment of Hon'ble Supreme Court in the cases of Dalmia Investments (supra) and Escort Farms (supra). As a corollary to this exclusion, however, it can not be open to the assessee to claim that the bonus shares allotted prior to 1^st April 1995 will not be hit by the provisions of Section 55(2)(iiia). Accordingly, in our considered view, cost of acquisition for such bonus shares also will have to be, for the purpose of computation of capital gains, taken as nil.
16. We now come to learned Departmental Representative's plea that in the present appeal, we are in seisin of the assessment year 1994-95 and, therefore, the Assessing Officer could not be expected to have clairvoyance of knowing whether or not the assessee will continue to hold the bonus shares till or beyond 1^st April 1995.
17. We have noted that the related income tax return was filed, as evident from Assessing Officer's observations in the very first sentence of the assessment order, on 17^th May 1995. This date was clearly after the cut off date of 1^st April 1995 visualized by the scheme of amendment in Section 55. Therefore, in our considered view, there was no element of uncertainty or tentativeness in the claim of the assessee, as is sought to have been made out by the learned Departmental Representative.
18. Be that as it may, this plea could have been perhaps available to the Assessing Officer if the assessment was completed on a date prior to 1^st April 1995 but then the impugned assessment order was passed on 28^th February 1996 and the last of date of assessment hearing, as noted on the impugned order, was 12^th February 1996. It is difficult to comprehend as to what prevented the Assessing Officer from examining whether or not the bonus shares were held by the assessee on 1^st April 1995. In any event, the assessee had volunteered the fact of his claim in the note accompanying the income tax return and, even under the scheme of Section 153(1)(a) of the Act, the Assessing Officer could have completed the assessment, and thus requisitioned related information, till 31^st March 1997 (i.e. within two years from the end of the relevant assessment year). We, therefore, also reject this plea of the revenue.
19. Learned counsel for the assessee was fair enough to state that the assessee has no objection to the matter being restored to the file of the Assessing Officer for the purpose of verification of fact as to whether or not the assessee had continued to hold the relevant bonus shares as on 1^st April 1995.
20. In view of the above, as also bearing in mind entirety of the case, we deem it fit and proper to restore the matter to the fie of the Assessing Officer for the limited purpose of verification of facts as to whether or not the assessee had continued to hold the relevant bonus shares as on 1^st April 1995. In case the assessee actually held those shares as on 1^st April 1995 and in terms of conclusions arrived at by us in paragraph 15 above, those shares will be excluded from the computation of average cost for the purpose of ascertaining 'cost of acquisition' of shares sold during the relevant previous years. With these directions, the matter is hereby restored to the file of the Assessing Officer.