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PETITIONER: M/S. ESCORTS FARMS (RAMGARH) LIMITED

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, NEW DELHI

DATE OF JUDGMENT:       26/09/1996

BENCH: PARIPOORNAN, K.S.(J) BENCH: PARIPOORNAN, K.S.(J) JEEVAN REDDY, B.P. (J)

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      PARIPOORNAN, J. 1.   The  appellant,   a  private  limited  company,  is  an Assessee to  income tax.  It derives income from investment, agriculture and  brick kiln  business. It  is an investor in shares. In  the assessment  years 1967-68  and 1968-69,  the relevant previous  years ending  on 30th  June 1966 and 30th June 1967,  the assessee  sold shares of Escorts Limited and declared the  capital  gains  that  accrued  therefrom.  the Income Tax Officer did not accept the cost of acquisition of the shares,  as returned  by the assessee and worked out the capital gains in a different manner. The computation made by the Income  Tax Officer  regarding the  original shares  was confirmed by  the Appellate  Assistant Commissioner  and the Appellate Tribunal.  In  so  doing,  the  Appellate  on  the decision of  this Court in Commissioner of Income-tax, Bihar v. Dalmia  Investment Co.  Ltd. [(1964)  52 ITR 567]. At the instance of the appellant-assessee, the Income Tax Appellate Tribunal referred  the following  two questions  of law  for both the  Assessment  Years  under  Section  256(1)  of  the Income-tax Act for the decision of the High Court of Delhi.      "1.  Whether on  the facts  and  in      the circumstances  of the  case the      Tribunal    was     justified    in      determining the cost of acquisition      of   the    original   shares,   by      spreading the  original  cost  over      the original  and the  bonus shares      and then  averaging the same and on      that basis  working out the capital      gain   at   Rs.32,100/-   and   Rs.      12,450/- and 1968-69 respectively?      2.   If the answer to question No.1      is in  the  negative,  whether  the      assessee was  justified  in  taking      the value  of the  shares at  their      original cost  under section  45 of

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    the Income-tax Act, 1961?" 2.   The question  that arose for decision was, how the cost of  the   acquisition  of  the  original  shares  should  be determined for  the purposes  of capital  gains  tax.  After referring to  the relevant  decisions, the  High Court  held that the valuation made by the revenue regarding the cost of the original  shares is  proper and  valid in  the facts and circumstances of the case. Question No.1 was answered in the affirmative and  in favour  of the  revenue. The  High Court declined to  answer question  No. 2.  It  is  the  aforesaid decision of  the  High  Court  dated  23.4.1982,  which  the assessee has  assailed in these appeals. The decision of the High Court is reported in (1983) 143 ITR 749. 3.   We heard  counsel. At  our request,  Dr.  Gaurishanker, Senior Advocate  also addressed us and brought to our notice certain decisions  and passages from various text-books. The short question  that arises  for consideration  is, how  the cost  of  acquisition  of  the  original  shares  is  to  be determined when  bonus shares are issued subsequently? It is common ground  that the  appellant admittedly  purchased the original  shares   after  1954.   Such  shares   were   sold subsequently. Since  the acquisition  was  after  1954,  the option of  taking the  fair market value as on 1.1.1954 does not arise.  According to  the appellant, for determining the capital gains  that accrued  when the  original shares  were sold, the  cost of  acquisition should  be taken  at  actual cost". The  subsequent  issue  of  bonus  shares  is  of  no consequence and  will not  have the  effect of  altering the original cost  of acquisition  of the shares. The High Court declined to  accept this  plea. It  was held  that once  the bonus shares  are issued,  it has  impact  on  the  original shares; lt  has the  effect of altering the cost of original shares. lt  was so held by placing reliance on the decisions of this  Court reported  in C.I.T.  v. Dalmia Investment Co. Ltd. (52  ITR 567),  C.I.T. v.  Gold Mohare,  Investment Co. Ltd. (74  ITR 62),  C.I.T. v.  Gold Company Ltd. (78 ITR 16) and distinguishing  the cases  of  this  Court  reported  in Emerald &  Co. Ltd.  v. C.I.T.  (36 ITR  257) and Shekhawati General Traders Ltd. v. I.T.O. (82 I.T.R. 788). 4.   Before  us,   counsel   for   the   appellant-assessee, vehemently argued  that the  High  Court  was  in  error  in holding that  the subsequent  issue of  bonus shares has the effect of  altering the  cost of acquisition of the original shares. Stress  was laid  on the  fact that  in the  instant case, the  shares  sold  were  original  shares  and  by  an "investor", whereas  in the  decisions of  this Court  dealt with by the High Court, the shares sold were "bonus shares", and the  assessees in  those cases were "dealers in shares". It was  further argued  that the question in those cases, is not the  computation of  capital gains,  as a  result of the sale of  the shares  (whether original  or bonus shares) but the computation  of "the profits and gains" in the business. The said  vital difference  was omitted to be noticed by the High Court.  On the  other hand,  counsel  for  the  revenue submitted that the High Court was justified in its reasoning and conclusion in holding that the subsequent issue of bonus shares has  the effect  of altering  the  original  cost  of acquisition of  the shares, irrespective of the fact whether the assessee  is an  investor or dealer in shares and shares sold are original shares or bonus shares. 5.   In order  to resolve  the controversy  in this case, it will be  useful to  bear  in  mind  the  relevant  statutory provisions, as they stood at the relevant time:-      Section  2(14)  of  the  Income-tax      Act.

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    "2  (14)   "capital  asset"   means      property of  any kind  held  by  an      assessee, whether  or not connected      with his  business  or  profession,      but does not include--      (i) any  stock-in-trade, consumable      stores or  raw materials  held  for      the  purpose  of  his  business  or      profession;"      Section 45(1) of the Income-tax Act      "45. Capital  gains.-- Any  profits      or gains  arising from the transfer      of a  capital asset effected in the      previous  year   shall,   save   as      otherwise provided  in sections  53      and 54, be chargeable to income-tax      under the head ’Capital gains’, and      shall be deemed to be the income of      the  previous  year  in  which  the      transfer took place."      (In this  case,  Section  45(2)  to      45(4) added  by Section  12 of  the      Finance Act,  1964 and  omitted  by      Financt Act, 1966 are not relevant)      Section 48 of the Income-tax Act.      "48.  Mode   of   computation   and      deductions. - The income chargeable      under the  head Capital gains shall      be computed  by deducting  from the      full  value  of  the  consideration      received or accruing as a result of      the transfer  of the  capital asset      the following amounts, namely:-      (i) expenditure incurred wholly and      exclusively in connection with such      transfer;      (ii) the cost of acquisition of the      capital asset  and the  cost of any      improvement thereto."      Section 55(2)      "55. Meaning  of "adjusted",  "cost      of improvement"    and    "cost  of      acquisition".      (1) XXX     XXXX    XXXX      (2) For the purposes of sections 48      and 49,  ’cost of  acquisition’, in      relation to a capital asset,-      (i) where  the capital asset became      the property of the assessee before      the 1st day of January, 1954, means      the  cost  of  acquisition  of  the      asset to  the assessee  or the fair      market value  of the  asset on  the      1st day  of January,  1954, at  the      option of the assessee;      xxx       xxxx           xxxxx" 6.   It will  also be useful to note what is meant by "bonus shares" ,  the circumstances under which they are issued and its impact  on the  original shares. Robert R. Pennington in his book  Company Law  5th edition  (1985) at pages 467, 468 and 469 deals with the matter thus:-      "It   is   common,   however,   for      articles to contain a power for the      company by  ordinary resolution  in      general     meeting      on     the

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    recommendation of its directors (a)      to set  free for  distribution  any      part   of its distributable profits      or reserves  and to  apply them  in      paying up  in  whole  or  part  the      issue price  of partly  paid shares      held by  members, or  in paying  in      full  the   nominal  value  of  new      shares or  debentures to  be issued      to members  in the  same manner and      proportions as  a cash  dividend of      the same  amount  would  have  been      distributed; and  (b) to capitalise      any part of the amounts standing to      the credit  of the  company  profit      and loss  accounts  or  to  reserve      accounts which  are  not  available      for  distribution   (i.e.   capital      reserves  and  unrealised  profits)      and  to   apply   the   amount   so      capitalised in  paying in  full the      nominal value  of new  shares to be      issued  to   members  in  the  same      manner and  proportions as  a  cash      dividend of  the same  amount would      have been  distributed. Under  such      provision, in  the articles  it  is      possible   for    a   company    to      capitalise the  net amount  of  its      realised and  unrealised profits or      the amount of reserves representing      them  in   order  to   issue  bonus      shares.  but   only   the   company      accumulated  balance   of  realised      profits may  be used to issue bonus      debentures or  to pay up any unpaid      part of  the issue  price of shares      which have already been issued. New      Shares or debentures issued in this      way on  a capitalisation of profits      or  reserves  are  known  as  bonus      shares or  debentures, but the name      is misleading  in that  it  implies      that  they  are  a  gift  from  the      company. If  they were a gift, they      would not be paid up at all, and in      the  case   of  bonus  shares,  the      company could call on their holders      to pay  for them  in cash.  In fact      they are  not  a  gift,  for  their      nominal value is paid in full or in      part by the capitalised  profits or      reserves which could otherwise have      been     distributed     to     the      shareholders as a cash dividend, or      in the  case of unrealised profits,      retained as a reserve. On the other      hand, since  no  cash  dividend  is      declared, bonus shares are not paid      for  in  cash  by  the  shareholder      himself, because  there  is  at  no      point of time any debt owing to him      by the company which he can set off      against his  liability to  Pay  for      the shares.  Consequently, an issue

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    of bonus  shares must be treated as      an issue  for a consideration other      than  cash,   and  an   appropriate      return and written contract for the      Registrar of Companies.      xxx             xxx            xxx      (a)  They  enable  the  company  to      retain  money   required  for   its      business which  it would  otherwise      have to raise by issuing new shares      or debentures  on the  market or by      borrowing;      (b)  The   market  value   of   the      company’s shares  is reduced  to  a      figure nearer  their nominal value,      and this  makes them more saleable.      But a  bonus  issue  increases  the      total    market    value    of    a      shareholder’s     holding      only      marginally;  he   merely  has  more      shares of  a correspondingly  lower      value each."      (Emphasis supplied.)      Dr. A.N. Agarwala in his book "The Higher Science of Accountancy" (1972  edition) at  page 632  deals with  bonus shares thus:-      "8. BONUS SHARES      Bonus  Shares   out  of  Profits  :      Capitalisation of Profits      Bonus shares  are shares  issued to      existing   shareholders    out   of      profits.  This   is   a   case   of      capitalisation of  profit, that  is      to   say,    instead    of    being      distributed as  dividends,  profits      are  turned   into  shares.   Bonus      shares   are    distributed   among      shareholders in proportion to their      share holdings.  What the  company,      in effect,  does in  such a case is      that it:-      (i)   Declares   a   bonus   (extra      dividend)  out   of   undistributed      profits;      (ii) Issues  a corresponding number      of new (bonus) shares;      (iii) Applies  the bonus in payment      of the  amount due on these shares:      and      (iv) Distributes bonus shares among      existing shareholders.      Shareholders, in  other words,  get      their dividends  in  the  shape  of      shares.  The   advantage  of   this      procedure is  that shareholders get      back  undistributed  profits  which      was hitherto withheld from them. So      far as the company is concerned, it      pays the  shareholders not  in cash      but in  the form of bonus shares to      that its  financial position  is in      no way  impaired. It will mean that      the future  rate of  dividend  will      come down  since the same amount of      profit  will   now   have   to   be

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    distributed over a larger number of      shares.           (Emphasis supplied.)      In the  book "British Master Tax Guide" (1988-89) under the head "Bonus and rights issues" at page 598, bonus issues are dealt with as hereunder:      "Bonus issues      Bonus issues are free distributions      of shares  (e.g. two new shares for      each share already held).      Example: In  1970, A  purchased 300      ordinary shares  in S Ltd. at Pound      3 per  share, total  cost Pound 900      (ignoring expenses for the purposes      of the example).      In 1980,  A received  a bonus issue      of 300 shares.      He then  held 600  shares at  pound      1.50 per share.      They are all as purchased in 1970."           (Emphasis supplied.)      William Pickles  in his book "Accountancy" dealing with bonus shares at pages 23245-23246, states thus:-      "Advantages and Disadvantages.  The      advantages and  disadvantages of an      issue of  bonus shares  are briefly      summarized  (a)   as  regards   the      company, and  (b)  as  regards  the      shareholders.      xxxx           xxxx           xxxx      (b)  The  Shareholder’s  Viewpoint.      (i) Surtax  and Capital  Gains  Tax      may be  payable on  a bonus  shares      distribution.      (ii)  Unless   the  company   makes      increased profits, the fall in rate      of   dividend   or   depletion   of      reserves  will   cause  the  market      price per share to fall--though the      total value  of the  large  holding      may be greater.      (iii) Speculative  dealings in  the      shares may be caused.      4. A  bonus issue  of debentures or      redeemable preference  shares ranks      as a distribution, and so also will      payments  of interest or dividends.      An  issue   of  irredeemable  bonus      shares, however,  unless related to      a previous repayment, does not rank      as a  distribution.  It  should  be      appreciated that  distributions are      chargeable to  Income Tax  Schedule      F,  and   in  the   hands  of   the      recipients   (the    shareholders),      distributions are liable to surtax.      This includes capital  dividenas.      5.  If  the  bonus  is  applied  in      reducing   or   extinguishing   the      uncalled  Capital   (e.g.   marking      shares of  pound 1 each, pound 0.75      paid  into   fully-paid   pound   1      shares)   there   is   a   distinct      tangible benefit to the shareholder      and   therefore   the   amount   is

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    taxable.      A bonus  share dividend is merely a      book entry  effected by  a transfer      from General  Reserve or Profit and      Loss Appropriation Account to Share      Capital- each shareholder receiving      a share  certificate  proportionate      to his  holding-   instead of cash.      Thus,  if   the  share  capital  is      pounds 8,000 in fully-paid ordinary      shares of  pound 1  each and pounds      3,000 is  transferred thereto, each      shareholder will  have the right to      an allotment  of three  new  shares      for every  eight old shares that he      holds.  He  is  usually  given  the      option of  taking up  the shares or      selling his  right of  allotment to      another    person,     that     is,      ‘renouncing’.      As share  holders are  entitled  to      CASH dividends. the sanction of the      Articles or  special resolution  is      required for any dividend otherwise      than in cash, whether it is:      (a) an actual distribution of other      assets;   or   (b)   a   ’notional’      distribution  by  way  of  a  bonus      share  dividend.   Income  Tax   is      normally charged  or, a bonus share      dividend.      Although the  issue of bonus shares      to   ordinary    shareholders    is      generally  regarded   as  a   ’book      entry’, it  may confer a substatial      advantage  to  such  holders  where      there are  preference shares  which      carry a  right in  a winding-up  to      share pari  passu in  a surplus, as      the bonus  issue, by absorbing such      part of the reserves of the company      as is  necessary for  such purpose,      diminishes the  ’surplus’. In other      words,  such   ‘surplus’  has  been      utilized  solely  to  increase  the      claims of the ordinary shareholders      by the  additions of  the  relevant      amount of reserves...... "           (Emphasis supplied)      M.C. Shukla  and T.S.  Grewal in  their book  "Advanced Accounts" (1989) at page 823, have dealt with the impact of the bonus shares on the original shares, thus:-      It should  be remembered  that when      bonus shares  are distributed,  the      shareholders may  not gain  at all.      This is  because of  the fact  that      the  market  value  of  the  shares      depends upon the dividend received.      If the company issues bonus shares,      the profits (which do not increase)      will have  to be distributed over a      larger  number   of  shares,   thus      reducing the  dividend  per  share.      This will  result in  a fall in the      value of  the shares in the market.

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    Thus the  shareholder will  have  a      larger number  of  shares  but  the      total value of his holding will not      increase because  each share now of      a   smaller    value.   Hence   the      shareholder makes  no entry  in his      books on  receipt of  bonus shares.      However,   the   shareholder   will      benefit  in  the  form  of  capital      appreciation  if  there  is  a  net      increase in  the amount of dividend      received by him."           (Emphasis supplied.) 7.   On a  reference to the above standard text books, it is evident that  when bonus  shares are issued by a company, it has its  impact on  the original shares. The market value of the company’s  shares may  get reduced  to a  figure  nearer their nominal  value.  The  value  of  the  original  shares acquired get automatically reduced, notwithstanding the fact that the  total holding of the shareholder may be larger. In this context,  it will  be useful  to refer  to the law laid down by  this Court  in C.I.T. v. Dalmia Investment Co. Ltd. (52 ITR  567).  The  headnote  as  extracted  herein  below, accurately states the law laid down in the said decision.      "Where bonus  shares are  issued in      respect of  ordinary shares held in      a company  by an  assessee who is a      dealer in  shares, their  real cost      to the  assessee cannot be taken to      be nil  or their  face value.  They      have to  be valued by spreading the      cost of the old shares over the old      shares and the new issue (viz., the      bonus  shares)  taken  together  if      they rank  pari passu,  and if they      do not,  the price  may have  to be      adjusted either  in  proportion  of      the face  value they bear (if there      is   no   other   circumstance   to      differentiate them) or on equitable      considerations based  on the market      price before and after issue."      The above  principle was  affirmed by the Constitution, Bench of  this Court in C.I.T. vs. Gold Company Ltd. (78 ITR 16) wherein it was held thus:-      "Where bonus  shares are  issued in      respect of  ordinary shares held by      a dealer  in shares  who values his      stock at cost, and the bonus shares      rank pari  passu with  the ordinary      shares.  the   correct  method   of      valuing the shares is to spread the      cost of  the original  shares  over      the original  shares and  the bonus      shares collectively  and  ascertain      the  average   price  of   all  the      shares." 8.   The sheetanchor  of the appellants case before the High Court and  still before us was, that the cost of acquisition of the original share, is its actual cost. The fact that the bonus shares  were issued  subsequently cannot be taken into account and  it is not open to the revenue to alter the cost of acquisition  of  the  original  shares.  It  was  further contended that  the assessee is only an investor and in such a case what is to be determined is the capital gains and not

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the computation  of business  income, as  in the  case of  a dealer in  shares. Much  stress was  laid on the decision of this Court  in Shekhawati General Traders Ltd. v. Income Tax Officer. Company  Circle 1,  Jaipur, (1971)  82 ITR 788. The Counsel for  the appellants  argued that  the facts  of  the instant case  are identical  to the  facts in  the aforesaid decision of  the Supreme  Court. where  the original  shares were sold  by an investor, in a case where bonus shares were issued   subsequently   and   the   matter   came   up   for consideration. The  Court held  that   the capital  gains or loss should  be calculated  in accordance with the statutory provisions of  Sections 48  and 55(2)  of the Income-tax Act and the  subsequent issue  of bonus  shares  was  completely irrelevant and  extraneous which  should not  be taken  into consideration. 9.   It is  necessary to  understand the scope and impact of the decision  in Shekhawati  General Traders Ltd. v. Income- Tax Officer,  Company Circle  1, Jaipur, (1971 ) 82 ITR 788. In the  said case,  the main  issue posed was with regard to the validity  of the proceedings initiated under Section 147 of the  Income-tax Act. The assessee therein acquired 12,000 ordinary shares  of Orient  Paper  Mills  on  29.3.1949.  It received 12000  bonus shares  on 28.4.1951. Subsequently. on June 4, 1954 and June 26, 1961 it received bonus shares. The assessee sold  22000 shares,  which were  out of  the  24000 shares which  it acquired  prior to  1.1.1954. It calculated the cost  price of  22000 shares  sold by  it (out  of 24000 shares  aforesaid)   at  the   market  value  prevailing  on 1.1.1954. Similarly,  the assessee  acquired shares in Birla Jute Manufacturing  Company before  1.1.1954  and  also  got bonus shares  therein after  1.1.1954. In  other words,  the original cost  of the  acquisition of  the said  shares were taken into  account for the purpose of computing the capital gains or  loss. It  was common  ground that the shares which were sold,  were acquired  or received by the assessee prior to 1.1.1954.  It is  also common  ground that  the  assessee calculated the  cost price  of the shares sold at the market value prevalent  on 1.1.1954  in accordance  with  the  then relevant statutory  provisions. The  Income Tax  Officer  by order dated  20.7.1964 accepted  the statement  made by  the assessee and  held that  the assessee had suffered a capital loss. Subsequently  by notice dated 4.1.1967, the Income Tax Officer informed the assessee that he had reasons to believe that income  chargeable to tax for the assessment year 1962- 63 had  escaped ascaped  assessment within  the  meaning  of Section 147 of the Income-tax Act, and initiated proceedings thereunder. The Income Tax Officer stated that while working out the  cost of  the shares,  the assessee had  claimed the prevalent market price as on 1.1.1954 disregarding the  fact that the  assessee  had  been  given  bonus  shares  in  the subsequent years  after 1.1.1954.  The assessee  objected to the above  proceedings and  contended that  it has exercised the option  under section  55(2) of the Act, and the cost of acquisition was  taken at  the fair  market value  as on the relevant date and the capital loss was Computed accordingly, and there  is no  error  in  the  matter.  Subsequently  the assessee moved  the High  Court under  Article  226  of  the Constitution of  India challenging the validity and legality of the  notice issued under Section 147 of the Act. The High Court dismissed  the writ  petition. When the matter came up before this  Court it  adverted to Sections 45 48 53. 54 and 55(2) of  the Income-tax  Act and distinguishing the earlier Constitution Bench decision of this Court in Commissioner of Income-Tax v.  Dalmia Investment  Co. Ltd. (1964) 52 ITR 567 held thus:

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    "...that decision  was not  at  all      apposite   for   the   purpose   of      deciding the point which has arisen      in the  present case.  No  question      arose there  of the  calculation of      the  capital   gain  or   loss   in      accordance   with   the   statutory      provisions  in  pari  materia  with      sections 48  and 55(2)  of the Act.      In the present case we are confined      to  the   express   provisions   of      section  55(2)   relating  to   the      manner  in   which  the   cost   of      acquisition of  a capital asset has      to be determined for the purpose of      section 48. 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      take 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      principle or authority can anything      more be read into the provisions of      section 55(2)(1)    in  the  manner      suggested by  the revenue  based on      the view  expressed to  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.    If    the      contention of  the revenue  were to      be  accepted   the  acquisition  of      bonus shares  subsequent to January      1. 1954, will have to be taken into      account which  on the  language  of      the statue  it is  not possible  to      do....... "           (Emphasis supplied) 10.  A close  analysis of  the facts  of the above case, and the ultimate  conclusion reached  by this  Court, will go to show that  the learned  Judges laid  stress on the fact that the assessee  had opted  to take  the cost of acquisition as provided by  the relevant  Statute, i.e.,statutory  cost  of acquisition and  thus substituting  the market  value as  on 1.1.1954 in  the place  of actual  cost of  acquisition, and

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only in  such a  case, the  subsequent issue of bonus shares cannot affect  the issue.  It is  implicit  from  the  above decision that  the principle  of averaging  by spreading the cost over  the old  shares  and  the  new  bonus  shares  as enunciated by  this Court,  in Dalmia  Investment Co.’s case (supra) and  other cases,  will apply  as a  general rule in cases where the assessee claims to deduct the actual cost of acquisition, instead  of the  statutory cost of acquisition. It also  stands to reason since the fair market value as per the "statutory  cost of  acquisition" will  be a notional or fictional figure  -- mostly inflated -- having no connection with the  original or  actual cost.  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  (52 ITR  567) 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 etc. The  principle   so  laid   down  is   one  of  the  general application. We  should also state that the character of the owner of  the shares as an "investor" or as a "dealer" is of no consequence.      There is  no ‘dichotomy’,  as to whether the shares are held by  an ’investor’  or ‘dealer’  in shares.  In both the cases, it  is surplus receipt that is brought to tax, either as "capital  gains" or "profit or loss", as the case may be, and in  accordance with  relevant statutory  provisions. The decisions reported  in Madura Mills Co. Ltd. vs. CIT (86 ITR 467 - Madras), D.M. Dahanukar vs. CIT (88 ITR 454 - Bombay), W.H. Brady  & Company  Ltd vs.  CIT, Bombay  (119 ITR  359 - Bombay), Alembic  Chemical Works  Ltd. vs. CIT (194 ITR 457- Gujarat)  are  in  accord  with  the  above  view  and  they represent the  correct law.  The decisions (in Sutlei Cotton Mills Ltd.  vs. CIT  (119 ITR 666), CIT vs. Steel Group Ltd. (131 ITR  234), Smt. Protima Roy vs. CIT (138 ITR 536), etc. etc.) cited  before us,  misapplied the  rule enunciated  in Shekhawati General  Traders Ltd.  vs. ITO (supra) and failed to bear  in mind  the proper principles to be applied in the matter and do not lay down the correct law. 11.  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 1.1.1954 (the statutory cost) was not available to the assessee. It  appears to us that the principles laid down in Shekhawati  General  Traders  Ltd.  v.  Income-Tax  Officer, company Circle  1, Jaipur,  (1971) 82  ITR  788,  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 said subsequently, their  actual cost  has to be reckoned only on the basis of "average value" (as held in Dalmia Investment & 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. I.T.O.). 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 Commissioner of Income-Tax v. Dalmia

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Investment Co. Ltd. (1964) 52 ITR 567 and other cases. 12.  We hold  that the  judgment of the High Court answering Question No. (1) referred to it in favour of the Revenue and against the  assessee does  not merit interference and these appeals should  be dismissed. We do so. However, there shall be no order as to costs.