Commissioner of Income Tax Vs. R. Ramachandran - Court Judgment

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counsels: c.v. rajan, for the revenue s.a. balasubramaniam, for the assessee head note: income tax capital gains--cost of acquisitionsale of original shares and bonus shares catch note: during assessment year 1973-74, assessee sold 500 shares in m company ltd., of which, assessee had acquired 25 shares prior to 1-1-1954, and in respect of which assessee was entitled to opt for treating fair market value as on 1-1-1954, as cost of acquisition under section 55(2) of income tax act--the assessee exercised the option. assessee had received bonus shares in subsequent years which were relatable in part to shares subsequently purchased by assessee, and in part relatable to shares held prior to 1-1-1954--while computing the capital gains, the income tax officer did not assign any value to bonus shares--that order having been confirmed by the commissioner (appeals), assessee appealed to tribunal which held that bonus shares were required to be assigned a value by spreading the cost of acquisition over original shares and bonus shares, but in respect of the shares held prior to 1-1-1954, cost of acquisition of shares could not be disturbed--not justified--shares acquired prior to 1-1-1954, are to be assigned the statutory cost as cost of acquisition, bonus shares acquired are also to be given a value by spreading that cost over number of shares; insofar as shares acquired subsequent to 1-1-1954, are concerned, shares purchased, as also bonus shares relatable thereto are to be valued by spreading cost of acquisition of shares purchased over shares so purchased, as also bonus shares relatable thereto. held: the value of the shares held prior to 1-1-1954, cannot be disturbed, the assessee having opted to have the fair market value of that asset as on 1-1-1954, as the cost of acquisition. the value of the bonus shares subsequently received which are relatable to those shares cannot be regarded as being without any value. their value has to be determined by spreading that statutory cost over the 17 shares. thus, while the 25 shares acquired prior to 1-1-1954, are to be assigned the statutory cost as the cost of acquisition, the bonus shares acquired are also to be given a value by spreading that cost over the number of shares. insofar as the shares acquired subsequent to 1-1-1954, are concerned, the shares purchased, as also the bonus shares relatable thereto are to be valued by spreading the cost of acquisition of the shares purchased over the shares so purchased, as also the bonus shares relatable thereto. the tribunal was not right in leaving undisturbed the cost of acquisition of the shares purchased after 1-1-1954. case law analysis: shekhawati general traders ltd. v. income tax officer (1971) 82 itr 788 (sc) and escorts farms (ramgarh) ltd. v. cit (1996) 222 itr 509 (mad) applied; cit v. t. v.s. & sons ltd. (1983) 143 itr 644 (mad) distinguished. application: also to current assessment year. decision: in favour of revenue. income tax act 1961 s.45 in the madras high court r. jayasimha babu & k. gnanaprakasam, jj. - r. jayasimha babu, j.during the assessment year 1973-74, the assessee sold 500 shares in madras motor and general insurance company ltd., of which, the assessee had acquired 25 shares prior to 1-1-1954, and in respect of which the assessee was entitled to opt for treating the fair market value as on 1-1-1954, as the cost of acquisition under section 55(2) of the income tax act. the assessee exercised the option. the assessee had received bonus shares in the subsequent years which were relatable in part to the shares subsequently purchased by the assessee, and in part relatable to the shares held prior to 1-1-1954. it is not in dispute that 17 bonus shares received in subsequent years are relatable to the 25 shares held by the assessee prior to 1-1-1954.2. while computing the capital gains, the income tax officer did not assign any value to the bonus shares. he however, adopted the cost as given by the assessee for the other shares which was the statutory cost for 25 shares and the cost of acquisition of the shares purchased in subsequent years. that order having been confirmed by the commissioner (appeals), the assessee appealed to the tribunal which held that the bonus shares were required to be assigned a value by spreading the cost of acquisition over the original shares and the bonus shares, but in respect of the shares held prior to 1-1-1954, the cost of acquisition of shares could not be disturbed. the tribunal also held that the actual cost of acquisition for the shares held subsequent to 1-1-1954, should also be left undisturbed.3. the supreme court in the case of shekhawati general traders ltd. v. income tax officer : [1971]82itr788(sc) held that for the purpose of determining the fair market value of the shares held prior to 1-1-11954, by an assessee, the subsequent issue of bonus shares in respect of the shares so held is not to be taken into account. the court held that the fair market value of the shares held on 1-1-1954, cannot be reduced by spreading that value over the shares held as on that date, and the shares subsequently received as bonus shares.4. in the case of escorts farms (ramgarh) ltd. v. cit : [1996]222itr509(sc) , it was held by the court that the bonus shares cannot be regarded as having no value, or given their face value while determining the capital gain. it was held that the value of the bonus shares has to be determined by spreading the cost of the old shares over the old shares and new shares. however, while so holding, the court distinguished the case before it from that of sekhawati general traders (supra), as no question of considering the manner in which the statutory cost of acquisition of shares held prior to 1-1-1954, arose for consideration in the case of escorts farms (supra). the principle laid down in the case of shekhawati general traders (supra) was left undisturbed.5. this court in the case of cit v. tv.s. & sons ltd. : [1983]143itr644(mad) held that when all the shares, the original as also the bonus shares, are sold, there is no need for calculating the value of the bonus shares for determining the cost of acquisition. that was not a case where the assessee had held shares prior to 1-1-1954, in respect of which he had opted to have the statutory cost assigned in those shares.6. it is clear that having regard to the law laid down in the case of shekhawati general traders (supra), that the value for the shares held prior to 1-1-1954, cannot be disturbed, the assessee having opted to have the fair market value of that asset as on 1-1-1954, as the cost of acquisition. the value of the bonus shares subsequently received which are relatable to those shares cannot be regarded as being without any value. their value has to be determined by spreading that statutory cost over the 17 shares. thus, while the 25 shares acquired prior to 1-1-1954, are to be assigned the statutory cost as the cost of acquisition, the bonus shares acquired are also to be given a value by spreading that cost over the number of shares. insofar as the shares acquired subsequent to 1-1-1954, are concerned, the shares purchased, as also the bonus shares relatable thereto are to be valued by spreading the cost of acquisition of the shares purchased over the shares so purchased, as also the bonus shares relatable thereto. the tribunal was not right in leaving undisturbed the cost of acquisition of the shares purchased after 1-1-1954.7. the assessee through his counsel has placed before us a working of the values as by applying the method set out in the preceding paragraph. the difference in the amount of the capital gain worked out in that manner, and the capital gain as determined by the income tax officer is only rs. 155. in place of the amount determined by the income tax officer, the amount of capital gain for the purpose of taxation shall be the sum of rs. 66,301, and the tax liability of the assessee is to be calculated accordingly. we make this direction as the working placed before us has been accepted as correct by the revenue.