Judgment:
Ajit K. Sengupta, J.
1. In this reference under Section 256(2) of the Income-tax Act, 1961, for the assessment year 1981-82, the following question of law has been referred to this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of the original shares were to be reduced spreading it over the bonus shares ?'
2. Shortly stated, the facts are that the assessee is a limited company deriving income from, inter alia, share dealings during the previous year under consideration which was the calendar year 1980. The assessee claimed that it had suffered a loss in its share dealings. It had purchased 19,900 shares of M/s. Kesoram Cotton and Industries Ltd. at a cost of Rs. 8,32,230. During the previous year, it received 4,950 bonus shares from the same company against its original holding of 19,900 shares. The original 19,900 shares were sold during the previous year for Rs. 6,97,120. The assessee retained the bonus shares with it. The assessee had to calculate the difference between the cost and sale proceeds of 19,900 original shares which were sold. For this purpose, the assessee took the cost of 4,950 bonus shares at 'nil' so that the entire sum of Rs. 8,32,230 became the cost of the original shares. As the sale proceeds of those shares amounted only to Rs. 6,97,120, the assessee claimed the difference of Rs. 1,35,110 as loss from its business in share dealing. The Income-tax Officer did notaccept the above computation of loss made by the assessee. Relying on the decisions of the Supreme Court in the cases of Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) and Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) , he held that the original cost of 19,900 shares had to be spread over the total holding of 19,900 plus 4,950 shares amounting in all to 24,850 shares. He calculated the average cost of each of the above 24,850 shares on the above basis and arrived at a lower figure of cost for the 19,900 shares. On the above basis, he computed a profit of Rs. 30,500 instead of the loss of Rs. 1,35,110 shown by the assessee on the aforesaid sale of the original 19,900 shares. He made the assessment accordingly.
3. Being aggrieved, the assessee appealed to the Commissioner of Income-tax (Appeals) and contended that the calculation made by it should have been accepted. Reliance was placed on the decision in the case of Smt. Protima Roy : [1982]138ITR536(Cal) . It was also urged before the Commissioner of Income-tax (Appeals) that the two decisions relied on by the Income-tax Officer were not applicable to the facts of this case because, in the case of this assessee, the assessee sold the original shares and not the bonus shares. The Commissioner of Income-tax (Appeals) agreed with the contention of the assessee and directed the Income-tax Officer to accept the computation of loss as made by the assessee.
4. The Departmental representative argued before the Tribunal that the decision in the case of Smt Protima Roy : [1982]138ITR536(Cal) is not applicable in the assessee's case as the facts of that case are different. He also referred to a decision in the case of Shekhawati General Traders Ltd. : [1971]82ITR788(SC) and urged that the cost of the shares had to be worked out by spreading the cost of the original shares over the original shares as well as the bonus shares. The business profit or loss has to be arrived at on the basis of such average cost. He relied in this connection on the case of Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) . In the circumstances, the Departmental representative urged that the Commissioner of Income-tax (Appeals) wrongly applied the decision in the case of Smt Protima Roy : [1982]138ITR536(Cal) to the facts of this case while the Income-tax Officer had applied the correct decisions that are applicable to the instant case.
5. The representative of the assessee supporting the order of the Commissioner of Income-tax (Appeals) stated that the cases of Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) and Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) were not applicable to the facts of this case because the question as to the method of accounting regularly followedby the assessee in valuing its stock of shares was not considered in those cases. On the other hand, he pointed out that the assessee had valued the bonus shares at 'nil' and the method of valuation regularly employed by the assessee was cost or market price, whichever was lower. According to him, the original shares which were sold were valued according to the above method at its original cost. In this connection, he referred to Schedule B of the printed balance-sheet as at December 31, 1980, where the valuation of the bonus shares remaining in stock has been taken at 'nil' and such zero cost was lower than the prevailing market price. He urged that the order of the Commissioner of Income-tax (Appeals) deserved to be upheld.
6. After considering the contentions of both the parties, the Tribunal held that the cost of the shares has to be determined by spreading the original cost over the total shares inclusive of bonus shares. The Tribunal further held that the decision in the case of Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) was applicable in the instant case. The Tribunal also held that the decision in the case of Smt. Protima Roy [1980] 138 ITR 536 is not applicable to the facts of this case. As a result, the Tribunal restored the order of the Income-tax Officer.
7. We have heard learned counsel appearing for the parties and we have gone through the facts and circumstances of the case.
8. In our view, the question referred to us is fully concluded by the decision of the Supreme Court in the case of CIT v. Gold Mohore Investment Co. Ltd : [1969]74ITR62(SC) . There, the Supreme Court laid down that, in the case of a dealer in shares who values his stock at cost, where bonus shares issued in respect of ordinary shares held by him rank pari passu with the original shares, the correct method of valuing the cost to the dealer of the bonus shares is to take the cost of the original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares. Therefore, the principles laid down in the aforesaid case will apply to the facts of this case.
9. This court in CIT v. General Investment Co. Ltd. : [1981]131ITR366(Cal) , considered the decision in Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) as follows (at page 376) :
'The Supreme Court itself, we find, had an occasion to explain this position that there was no apparent conflict between these two decisions in the case of CIT v. Gold Mohore Investment Co. Ltd. : [1969]74ITR62(SC) . There, the Supreme Court held in the case of a dealerin shares, who valued his stock at cost, where bonus shares issued in respect of ordinary shares held by him rank pari passu with the original shares, the correct method of valuing the cost to the dealer of the bonus shares was to take the cost of the original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares. It was urged before the Supreme Court that there was an apparent conflict between the decision of the Supreme Court in the case of CIT v. Dalmia Investment Co, Ltd. : [1964]52ITR567(SC) and the decision in the case of Emerald and Co. Ltd. v. CIT : [1959]36ITR257(SC) . The Supreme Court negatived that contention at page 66 of the report in the following words :
'These cases would normally have been decided on the strength of the ruling of this court but a doubt arose because in an earlier decision in Emerald and Co. Ltd. v. CIT : [1959]36ITR257(SC) this court seemed to have approved of another method. In that case the bonus shares were not sold. In applying different methods, the difference was only Rs. 18 and the court did not, therefore, express a final view on the matter and accepted the calculation of the Tribunal which was to ignore the bonus shares which were not sold and to calculate the profit and loss on the basis of the original shares, their cost and sale prices. The court observed as follows :
'The bonus shares are still there, and have not been sold. When they are sold, the question will arise as to what they cost. The books of the assessee-company, as stated in the statement of the case, include the closing stock at cost price. In calculating profit and loss in the manner done by the Tribunal, there is no departure from this system. All the ordinary shares which were bought were sold, their purchase price is known, as also their sale price. The first assessment is closed, so far as the assessee-company is concerned.'
In other words, this court did not go into the question of the valuation of the bonus shares at all but decided the case on the basis of the original holding, its cost price and its sale price. The matter was gone into more closely in Dalmia's case : [1964]52ITR567(SC) and every method of calculation was considered there. We were invited to depart from the decision in Dalmia's case : [1964]52ITR567(SC) and to take the view which appeared to have been taken in Emerald's case : [1959]36ITR257(SC) . We have considered the matter once again and are of the opinion that the method followed in Dalmia's case : [1964]52ITR567(SC) is the correct method and there seems to be some error in stating that themethod of the Tribunal in Emerald's case : [1959]36ITR257(SC) was finally accepted. Perhaps the court intended saying that the method of the Income-tax Officer was preferable but by error put down the name of the Income-tax Appellate Tribunal. In any case that case did not decide the matter fully because, as the court itself observed, the difference in the two methods only resulted in Rs. 18 being either added to or deducted from the ultimate result.'
The Supreme Court reiterated, in other words, the principle enunciated by the Supreme Court in its decision in the case of CIT v. Dalmia Investment Co. Ltd. : [1964]52ITR567(SC) . Learned advocate for the Revenue again stressed before us that that was a decision dealing with the cost of valuation of shares in the context of a dealer in shares as to how he should value the shares at the closing stock and not the computation of cost of acquisition of asset in the case of capital gains. But this, as we have mentioned before, is of no significance.'
10. In Smt. Protima Roy v. CIT : [1982]138ITR536(Cal) the question was how in computing the capital gains the cost of acquisition of original shares would be computed where bonus shares are issued. It was held that the cost would not be affected by subsequent issue of bonus shares. It was held there as follows (at page 547) :
'So far as this question is concerned, namely, how the cost of acquisition of the original shares would be computed, in our opinion, it must be done with regard to the terms of the section, that is to say, the cost of acquisition of the original shares to the assessee as modified in cases, where applicable, by Sub-section (2) of Section 55. Subsequent deflation or inflation of the value of shares by a subsequent event would not and cannot alter the original cost to the assessee. The frame of the section does not permit such a theory to attribute the cost to the assessee in respect of the original shares to fluctuate with the value of the shares subsequently by the happening of such an event like the issuing of bonus shares or otherwise.'
11. There, this court followed the decisions in Shekhawati General Traders Ltd. v. ITO : [1971]82ITR788(SC) and Sutlej Cotton Mills Ltd. v. CIT : [1979]119ITR666(Cal) in holding that the issue of bonus shares would not decrease the cost of acquisition of the original shares for purposes of computation of capital gains on the sale of such shares.
12. This case has no application to the facts and circumstances of the present case and, in our view, the Tribunal has come to a correct conclusion.
13. For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the Revenue.
14. There will be no order as to costs.
Shyamal Kumar Sen, J.
15. I agree.