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PETITIONER: COMMISSIONER OF INCOME-TAX, CENTRAL CALCUTTA

       Vs.

RESPONDENT: GOLD MOHORE, INVESTMENT CO.LTD.

DATE OF JUDGMENT: 03/04/1969

BENCH: HIDAYATULLAH, M. (CJ) BENCH: HIDAYATULLAH, M. (CJ) SHAH, J.C. RAMASWAMI, V. MITTER, G.K. GROVER, A.N.

CITATION:  1969 AIR 1183            1970 SCR  (1) 199  1969 SCC  (1) 460

ACT: Company-Allotment  of bonus shares against original  holding of  shares -Method of calculating profit or loss on sale  of original and bonus shares.

HEADNOTE: The  respondent company was a dealer in shares.  In  respect of  each  of  its  holdings  of  shares  in  two   different companies, it was allotted a set of bonus shares which  were to  rank pari passu with the old shares.  Upon allotment  of these  bonus  shares,  the respondent  company  credited  an amount  representing  the  face value of  the  bonus  shares received free of cost to a capital reserve account.   Later, both the old as well as the bonus shares were sold and,  in, its assessment to income tax for the assessment years  1949- 50  and  1950-51, the respondent assessee company  showed  a loss  in respect of the sale of one company’s shares  and  a small  profit  on the sale of the second  company’s  shares. Both the profit as well as the loss on each transaction  was calculated  by  taking the actual price paid  for  the  ’Old shares  together with the face value of the bonus shares  as the  cost  of  acquiring all  the  shares.   The  Income-tax Officer  did  not accept this method of calculation  and  he calculated  the profit and the loss on the two  transactions by  spreading the cost of acquiring the old shares over  the total number of shares including the bonus shares acquire  d free of cost.  The Appellate Assistant Commissioner as  well as  the Tribunal upheld his view but, the High Court,  on  a reference, held in favour of the respondent assessee. On appeal to this Court, HELD : The correct method of determining the profit or  loss on the sale of bonus shares in cases where bonus shares rank pari  passu is to take the cost of the original  shares  and spread it over all the original as well as the bonus  shares and to find out the average price of all the shares. [203 B] Dalmia  Investment Company Ltd. v. Commissioner  of  Income- tax, Bihar 41, I.T.R. 705; Commissioner of Income-tax, Bihar v. Dalmia Investment Co. Ltd. 52 I.T.R. 567; Commissioner of

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Income-tar,  Central Calcutta v. Gold Mahore Investment  Co. Ltd. 68 I.T.R. 213 referred to. Emerald  & Co. Ltd. v. Commissioner of Income-tax Bombay  36 I.T.R. 257 considered and distinguished.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos. 1236  and 1237 of 1967. Appeal  from the judgment and order dated April 27, 1963  of the  Calcutta High Court in Income-tax Reference No.  65  of 1954. B.   Sen,  T.  A. Ramachandran and R. N. Sachthey,  for  the appellant (in both the appeals). Sachin  Chaudhuri,  A. N. Miiter and I. N. Shroff,  for  the respondent (in both the appeals). The Judgment of the Court was delivered by Hidayatullah, C.J These are two appeals by the Commis- 200 sioner  of  Income-Tax, Central,  Calcutta  against  Messrs. Gold Mohore Investment Co. Ltd. and arise out of  Income-tax Reference 65/54 decided by the Calcutta High Court on August 27,  1963.   The  point  involved  in  the  appeals  is  the valuation  of  bonus shares in the assessment  years  ending March  31, 1950 and 1951. respectively.  The previous  years corresponding  to  the assessment years were  the  financial years ending 31st March, 1949 and 1950, 1 respectively. The  Assessee Company is a dealer in shares.’ Its method  of valuation  at  the opening and closing of the stocks  is  to value  shares at cost.  In the Assessment Year  1949-50  the Company  held 2,500 shares of the face value of Rs. 10  each in the Howrah Mills Co. Ltd.  They had been purchased at Rs. 85 per share and the total cost to the Assessee Company  was Rs. 2,12,500.  In June, 1948 bonus shares were issued by the Howrah  Mills  Co. Ltd. in proportion of  three  shares  for every  two original shares.  The bonus shares were  to  rank pari passu with the old shares.  As a result, the  Ass-essee Company  obtained  3750 shares of the face value of  Rs.  10 each.   On  August 2, 1948, the Assessee  Company  sold  the original  shares for Rs. 72,087/8, i.e. at about Rs. 29  per share.   On March 18, 1949 the Assessee Company  sold  3,750 shares for Rs. 95,250, that is to say, at Rs. 25 per  share. The  Assessee Company computed a loss of Rs. 84,041/12.   It calculated the loss in the following manner :      "Dr. Sold           CT.      0-8-2500 shares     2,12,500-0-0   2-8-48(2500) sh. 72,087-8-C      (old).              (old).      21-6-48 Cost of     1,379-4-0 18-3-49(3750) sh.             7 0,125-0-0      transfer of              (bonus)      shares.             (1000) sh.     25,125-0-0                     bonus.      2-7-48 By crediting      Loss to P84,041-12-0      capital reserve a/c      &T a/c    6250      with the face value      6250 sh.      of bonus shares      received free of      cost (3750).   37,500-0-0           2,51,379-4-0             2,51,379-4-0" The bonus shares when they were issued were included in  the trading  account.   According to the  Assessee  Company  the bonus shares had fetched as profit Rs. 95,250 less the  face value  of the shares, Rs. 37,500.  This profit was  set  off

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against  the loss on the original shares Rs.  2,12,500  less Rs.  72,087/8, giving the overall los of Rs.  84,041/12,  as stated above. The Income-tax Officer did not accept this mode of  calcula- tion.   According  to him the loss was  Rs.  46,541-12-0  as follows                             201 "Dr.            Sold                             Cr.                Rs.  a.P. Rs. a.p.      O.S. 2500 sh. (sold)     2,12,500-0-0   2-4-48   (2500) sh. 72,087-8-0                          old.      21-6-48   Cost of transfer    1,378-4-0 18-3-49 (2750)70,125-0-0           of shares.          bonus.      2-7-48 (3700)  sh. bonus (sic.)    Nil_18-3-49 (1000) 25,125-0-0                     bonus.           Loss to P&L a/c          46,541-12-0                2,13,879-4-0        2,13,879-4-0" On  appeal to the Tribunal as to which method  was  correct, the Tribunal accepted the method of valuation of the Income- tax Officer. In the Assessment year 1950-51, the account year being 1949- 50, the Assessee Company held 122 first preference shares of Fort  Gloster  Jute  Company  Ltd. which  had  cost  to  the assessee  company Rs. 22,883/12/-.  In the year  of  account there  was an issue of bonus shares (second preference)  and the  Assessee Company received 137 shares of the face  value of  Rs.  100  each.  The Assessee Company  sold  125  shares (second preference) for Rs. 14,500.  It was, therefore, left with  122  shares (first preference) and 12  shares  (second preference).   The AssesseeCompany returned a profit of  Rs. 1,997 as follows : "Dr. Rs.         a.p.    Cr.  Rs.      a.p. O.S. (122)     1 st Pref.     23,883-12-0    18-3-49   (125) 2nd14,500-0-0           Pref (137)     2nd Pref. 13,703-0-0     C.S. (122) 1st      Profit P&L a/c 1,997-0-0lst Pref. (12)23,883-12-0 (259)               (12) 2nd Pref. 1,200-0-0      39,583-12-0    (259)3 583-12-0- It  will be seen that the cost of bonus shares was shown  at the  face value of the shares plus a minor charge of Rs.  3. Rs. 13,703 were credited to capital reserve.  The Income-tax Officer  spread  out the cost of 122 1st  preference  shares (Rs.  23,883/12) over the 122 shares (first preference)  and 137  shares (second preference).  He worked out the  average cost at Rs. 92/3/6 per share and found the profit to be  Rs. 2,973.  His method of calculation was as follows "Dr.        Sold                         Cr.      0,S. 122  1st Pref.23,833-12-0     14-4-49   125   Pref 14,503-0-0      137 2nd Pref. free of    NilC.S. 122 lst Pref      cost.          12 2nd Pref                @9213/6   12,357-5-0      Profit to P&L a/c   2,973-9-0      (259)     26,857-5-0     (259)26,857-5-0"      L 12 Sup CI/69-14 202 The Tiibunal confirmed the assessment as made by the Income- tax  Officer.   It  may be pointed out  that  the  Appellate Assistant Commissioner had in each case confirmed the  order of the Income Officer. The  Income-tax Appellate Tribunal then made a reference  to

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the High Court and referred the following questions for  the determination of the High Court:               "1949-50.               "Whether in the facts and circumstances herein               stated the assessee carrying on share               dealing business, can add Rs. 37,500 being the               face  value of bonus shares issued to it  free               of cost on the basis of its old share-holding,               as  cost of its share holding for the  purpose               of determining loss in dealing in Howrah Mills               Co. Ltd. shares?"               1950-51.               "Whether in the facts and circumstances herein               stated,   the  assessee  carrying,  on   share               dealing business, can add Rs. 13,700 being the               face  value of bonus shares issued to it  free               of  cost on the basis of its old  share  hold-               ings,  as  cost of its share holding  for  the               purposes  of determining profit in dealing  in               Fort Gloster Jute Co. shares?" The  High  Court,  by its judgment dated  August  27,  1963, following  its decision in Income-tax reference No.  54/1960 (from which Civil Appeal 1239 of 1967 is also being  decided today)  held  in favour of the Assessee Company.   The  High Court purported to follow a decision of the Patna High Court reported  in Dalmia Investment Company Ltd. v.  Commissioner of Incometax, Bihar(). Mr. Sen, in dealing with these appeals, points out that  the decision  of  the  Patna High Court in  41  I.T.R.  705  was reversed by this Court in Commissioner of Income-tax,  Bihar v.  Dalmia Investment Co. Ltd.(2) and the decision  of  this Court  has further been followed in Commissioner of  Income- tax,  Central,  Calcutta  v.  Gold  Mohore  Investment   Co. Ltd.(3). He contends that the method adopted by the  Income- tax  Officer in relation to the Fort Gloster Jute shares  is the method approved of by this Court, namely, that where the shares  are  pari passu and the valuation is to be  made  at cost,  the price of the original shares must be spread  over the old and the new shares and they must be held to liave (1) 41 I.T.R. 705. (2) 52 I.T.R. 567. (3) 68 I.T.R. 213. 203 been purchased at the average cost and the profit or loss  . is  to be calculated accordingly.  In the decision  of  this Court  in  Dalmia  Investment Co. Ltd.(1)  four  methods  of calculation  were considered.  The first method is  to  take the  cost  as  equivalent to the face  value  of  the  bonus shares.   This method was followed by the Assessee  Company. The second method is to take the cost of the bonus shares at Nil, a method adopted by the Income-tax Officer in  relation to the Howrah Mills Co. Ltd.  A third method is to take  the cost  of  the  original shares and to  spread  it  over  the original shares and the bonus shares taken collectively, and a fourth method is to find out the fall in the price of  the original shares at the stock exchange and to attribute  this to  the  bonus  shares.   After  considering  all  the  four methods, this Court held that the correct method to apply in cases  where bonus shares rank pari passu is to  follow  the third  method,  namely,  to take the cost  of  the  original shares and to spread it over all the original as well as the bonus  shares and to find out the average price of  all  the shares. These cases would normally have been decided on the strength of the ruling of this Court but a doubt arose because in  an

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earlier   decision  reported  in  Emerald  &  Co.  Ltd.   v. Commissioner  of Income’-tax, Bombay(2), this Courts  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 assessees 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 con-               cerned. . . . ". 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 holdings, its cost  price and  its sale price.  The matter was gone into more  closely in the Dalmia’s case(1) and every method of calculation  was considered there.  We were (1) 411.T.R.705. (2) 36 I.T.R. 257. 204 invited to depart from the decision in the Dalmia’s  case(1) was  to take the view which appeared to have been  taken  in the Emerald’s case (2).  We have considered the matter  once -again  and are of opinion that the method followed  in  the Dalmia’s case(1) is the correct method and there seems to be some  error  in stating that the method of the  Tribunal  in Emerald’s  case(2) 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. We  accordingly  accept the third method.  The  answers  re- corded  by the High Court are discharged and we  answer  the questions in the negative.  The cases will be disposed of in the  light of our observations by the  Income-Tax  Appellate Tribunal by calculating the profit and loss by spreading the cost over the original and the bonus shares and finding  out the  average cost per share.  The appeals are  allowed  with costs. R.K.P.S.               Appeal allowed. (1)  41 I.T.R. 705                                   (2)  36 I.T.R. 257 205