COMMISSIONER OF INCOME-TAX VS G.N. VENKATAPATHY
1999 P T D 453
[225 I T R 952]
[Madras High Court (India)]
Before K.A. Thanikkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
versus
G.N. VENKATAPATHY
Tax Case No. 784 (Reference No. 699 of 1984), decided on 24/06/1996.
Income-tax---
----Capital gains---Computation of capital gains---Cost of acquisition of capital asset---Shares---Bonus shares---Original shares acquired before 1-1-1964 and bonus shares issued after 1-1-1964---Sale of shares ---Assessee opting to value original shares at their fair market value as on 1-1-1964-- Cost adopted by assessee to be taken into account and both original and bonus shares to be clubbed together and their average both original and bonus shares to be clubbed together and their average value taken as cost. of shares---Indian Income Tax Act, 1961, Ss.45 & 55.
In a case where the assessee acquired original shares before January 1, 1964, and bonus shares after January 1, 1964, while ascertaining the value of bonus shares, the value of the shares as opted by the assessee as on January 1, 1964, has to be taken into account according to the provisions of section 55(2)(i) of the Income Tax Act, 1961, and both the original shares and the bonus shares should be clubbed together and the average value of each share should be found by dividing the total number of shares by the original cost opted as on January 1, 1964. The assessee has been given the privilege of adopting the fair market value as on January 1, 1964, when the shares were obtained earlier to that date. This privilege given by the statute cannot be taken away, simply because the Department has got to value the bonus shares, which were acquired subsequent to January 1, 1964.
The assessee held 382 shares in a company. He had been holding these shares even prior to January 1, 1964. On February 9, 1975, he received bonus shares in the ratio of 1:1 in respect of these 382 shares. Thus, as on February 9, 1975, he was holding 764 shares. During the accounting year relevant to the assessment year 1978-79, the assessee sold 167 original shares and 382 bonus shares for a total consideration of Rs.60,340 (the original shares were sold for Rs.20,113 and the bonus shares were sold for Rs.40,227). In the return of income filed, the assessee showed a loss of Rs.32,204. This loss had resulted by reason of adoption of the actual cost of the original shares at Rs.258.50 per share being the fair market value as on January 1, 1964, and the option of the actual cost of the bonus shares at half the value of the original shares, viz., at Rs.129.25 per share. The Income-tax Officer accepted the loss returned and completed the assessment accordingly. Later, the order of the Income-tax Officer came to be scrutinised by the Commissioner of Income-tax who set it aside. According to the Commissioner of Income-tax, there was allowance of excess loss when the Income-tax Officer adopted the cost of acquisition of the bonus shares at Rs.129.50 per share. However, the Tribunal concluded that the adoption by the assessee of the cost of acquisition of the bonus shares at Rs.129.25 per share was justified and in order. Accordingly, the Tribunal came to the conclusion that the Commissioner of Income-tax was not correct in exercising his jurisdiction under section 263 of the Act. On a reference:
Held, (i) that the Tribunal was justified in setting aside the order under section 263;
(ii) that the Tribunal was right in law in holding that the cost of acquisition of the bonus shares which shares were issued subsequent to January 1, 1964, i.e., on February 9, 1975, should be taken at half of the cost of the fair market value of the original shares as on January 1, 1964, i.e., half of Rs.258.50.
Shekhawati General Traders Ltd. v. ITO (1971) 82 ITR 788 (SC) applied.
CIT v. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC) and CIT v. Prema Ramanujam (1991) 192 ITR 692 (Mad.) ref.
C.V. Rajan for the Commissioner
P.P.S. Janarthana Raja for the Assessee
JUDGMENT
K.A. THANIKACHALAM, J. ---At the instance of the Department, the Tribunal referred the following two questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"):
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in setting aside the order under section 263 of the Income Tax Act, 1961, passed by the Commissioner of Income-tax for the assessment year 1978-79?
(2) Whether having regard to the provisions of section 55(2) read with section 50(2) of the income Tax Act, 1961, the Appellate Tribunal was right in law in holding that the cost of acquisition of the bonus shares were issued subsequent to January 1, 1964, i.e., on February 9, 1975, should be taken at half the cost of the fair market value of the original shares as on January 1, 1964, i.e., half of Rs.258.50?"
The assessee held 382 shares in the Coimbatore Pioneer Mills Ltd. He had been holding these shares even prior to January 1, 1964. On February 9, 1975, he received bonus shares in the ratio 1:1 in respect of those 382 shares. Thus, as on February 9, 1975, he was holding 764 shares. During the accounting year relevant to the assessment year 1978-79, the assessee sold 167 original shares and 382 bonus shares for a total consideration of Rs.60,340 (the original shares were sold for Rs.20,113 and the bonus shares were sold for Rs.40,227). In the return of income filed, the assessee showed a loss of Rs.32,204. This loss has resulted by reason of adoption of the actual cost of the original shares at Rs.258.50 per share being the fair market value as-on January 1, 1964, and the adoption of the actual cost of the bonus shares at half the value of the original shares, viz., at Rs.129.25 per share. The Income-tax Officer accepted the loss returned and completed the assessment accordingly. Later, the order of the Income-tax Officer came to be scrutinised by the Commissioner of Income-tax. The Commissioner of Income-tax found that the Income-tax Officer had wrongly adopted the cost of acquisition of the bonus shares at Rs.129.25. Accordingly, the Commissioner of Income-tax initiated proceedings under section 263 of the Income Tax Act, 1961, since the order passed by the Income-tax Officer was erroneous and prejudicial to the interest of the Revenue. According to the Commissioner of Income-tax the correct cost of acquisition of the bonus shares should be asunder:
Total number of equity shares held (original382
cost being face value Rs.100 per share)
Bonus shares received382
Total number of shares after issue of bonus shares764
Value of each share: 38,200 divided by 764.50 per share.
Therefore, cost of 382 bonus shares at the rate of Rs.50 Rs.19,100
According to the Commissioner of Income-tax, there was allowance of excess loss when the Income-tax Officer adopted the cost of acquisition of the bonus shares of Rs.129.50 per share. Accordingly, the Commissioner of Income-tax set aside the order of the Income-tax Officer and directed him to re-compute the total income adopting the short-term capital gains on sale of 382 bonus shares at Rs.21,127. Aggrieved by the order of the Commissioner of Income-tax, the assessee preferred an appeal to the Appellate Tribunal and contended that he was entitled to opt for the fair market value as on January 1, 1964, as the cost of acquisition of the original shares and on that basis he was entitled to take the cost of acquisition of the bonus shares at half the value of the original shares. The Tribunal accepted the contention put forward by the assessee and concluded that the adoption by the assessee of the cost of acquisition of the bonus shares at Rs.129.25 per share was perfectly justified and in order accordingly, the Tribunal came to the conclusion that the Commissioner of Income-tax was not correct in exercising his jurisdiction under section 263 of the Act. It is against this order, the Department has filed this tax case before this Court.
Before us learned standing counsel appearing for the Department submitted that there is no dispute with regard to have value of the shares adopted for original shares at the rate of Rs.285.50 per share, since these shares were acquired prior to January 1, 1964. According to the provisions of section 55(2)(ii) of the Act, the assessee is entitled to exercise his option to adopt the fair market value as on January 1, 1964, when the shares were purchased prior to January 1, 1964. But, according to learned standing counsel; the value adopted for the bonus shares is not in order. Learned standing counsel submitted that the bonus shares were acquired after January 1, 1964, and, therefore, the value of original shares pegged as on January 1, 1964 cannot be adopted for the purpose of valuing the bonus shares. Therefore, according to learned standing counsel; the original cost of acquisition of the original shares, viz., Rs.100 per share alone should be adopted for valuing the bonus shares. Inasmuch as both the original shares and the bonus shares were clubbed together for the purpose of ascertaining the value of bonus shares, half of Rs.100, viz., Rs.50, should be adopted for valuing each of the bonus shares.
On the other hand, learned counsel appearing for the assessee submitted that the original shares were acquired at the rate of Rs.100 per share prior to January 1, 1964. While valuing the original shares the assessee adopted the option and valued the original shares at the rate of Rs.258.50 per share. The bonus shares were acquired at a later stage after January 1, 1964. In order to ascertain the value of the bonus shares, the original shares and the bonus shares should be put together and the value of original shares adopted on January 1, 1964, should be divided into two parts and the value of each bonus shares should be taken at Rs.129.25. It is not open to the Department to withdraw the privilege given to the assessee to adopt the value of the original shares at the rate of Rs.258.50 as on January 1, 1964, by exercising option under section 55(2)(ii) of the Act. Therefore, learned counsel appearing for the assessee submitted that when the shares were valued as per the abovesaid method, which is in accordance with the decisions of various High Courts and the Supreme Court, it cannot be that the order passed by the Income-tax Officer is either erroneous or prejudicial to the interest of the Revenue. Hence, according to learned counsel, the Commissioner of Income tax has no jurisdiction to interfere with the order passed by the Income-tax Officer under section 263 of the Act.
We have heard the rival submission. The fact remains that the assessee held 382 shares in Coimbatore Pioneer Mills Limited. These shares were acquired even prior to January 1, 1964. On February 9, 1975, the assessee acquired bonus shares in the ratio of 1:1 in respect of these 382 shares. Thus as on February 9, 1975, he was holding 764 shares. In the assessment year 1978-79, the assessee sold 167 original shares for Rs.20,113 and 382 bonus shares for Rs.40,227, totalling Rs.60,340. The assessee adopted the fair market value as on January 1, 1964, in valuing the original shares at the rate of Rs.258.50 by exercising his option as conferred on him under section 55(2)(ii) of the Act. According to the assessee, in order to value the bonus shares as well as the original shares, the value as adopted on January 1, 1964, at the rate of Rs.258.50 should be taken and held of the same should be adopted for valuing each of the original shares, that means each original shares should be valued at Rs.129.25. But, according to learned standing counsel appearing for the Department, the bonus shares were acquired after January 1, 1964. Therefore, the value on the January 1, 1964, cannot be adopted for valuing the bonus shares. Learned standing counsel submitted that the value of the bonus shares should be taken at half the original costs incurred for acquiring the original shares, viz. Rs.50 for each bonus shares. If this method is adopted, the assessee would be liable to pay more capital gains tax.
In a matter like this, what is the correct method to be adopted is pointed by the Supreme Court in CIT v. Dalmia Investment Co. Ltd. (1964) 52 ITR 567, that (Page 576):
"What was previously owned by the shareholder by virtue of the original certificates is after the issue of bonus shares, held by them on the basis of more certificate. In point of fact, however, what the shareholder gets is not cash, but property from which income in the shape of money may be derived in future. In this sense, there is no payment to him but an increase of issued capital and the right of the shareholder to it is evidenced not by the original number of certificates held by him but by more certificates. There is thus no payment of dividend. A dividend in the strict sense means a share in the profits and a share in the profits can only be said to be paid to the shareholder when a part of the profits is released to him in cash and the company pay that amount and the shareholder takes it away. The conversion of the reserves into capital does not involve the release of the profits to the shareholder, the money remains where it was that is to say, employed in the business. Thereafter the company employs that money not as reserves of profits, but as its proper capital issued to and contributed by the shareholder. If the shareholder were to sell his bonus shares, as shareholders often do, the shareholder parts with the right to participation in the capital of the company, and the case he receives is not dividend, but the price of that right. The bonus share when sold may fetch more or may fetch less than the face value and this shows that the certificate is not a voucher to receive the amount mentioned on its face. To regard the certificate as cash or as representing cash paid by the shareholder is to overlook the internal process by which that certificate comes into being."
In the matter of valuation of the bonus, the Supreme Court further held as under (page 580)
"This leaves for consideration the other two methods. Here we may point out that the new shares may rank pari passu with old shares or may be different. The method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain the exact fall in the market price of the shares already held and attribute that fall to the price of the bonus shares. This market price must be the middle price and not as represented by any unusual fluctuation. The other method is to take the amount spent by the shareholder in acquiring his original shares and to spread to over the old and new shares treating the new as accretions to the old and to treat the cost old price of the original shares as the costs price of the old shares and bonus shares taken together. The method is suggested by the department in this case. Since the bonus shares in this case rank-pari passu with the old shares there is no difficulty in spreading the original cost over the old and the new shares and the contention of the department in this case is right. But this is not the end of the present discussion. This simple method may present difficulties when the shares do not rank pari passu or are of a different kind. In such cases, it may be necessary to compare the resultant price of the two kinds of shares in the market to arrive at a proper costs valuation. In other words, if the shares do not rank pari passu, assistance may have to be taken of other evidence to fix the costs price of the bonus shares. It may then the necessary to examine the result as reflected in the market to determine the equitable costs. "
While considering a similar issue, the Supreme Court is Shekhawati General Traders Ltd. v. ITO (1971) 82 ITR 788, held as under (at page 793)
"We have set out the facts of this case in detail in order to demonstrate that that decision was nor 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 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 no principle or authority can anything more be read into the provisions of section 55(2)(i) in the manner suggested by the Revenue based on the view expressed in the Dalmia Investment Co's case (1964) 52 ITR 567. "
There is a decisions of this Court rendered in CIT v. Prema Ramanujam (1991) 192 ITR 692, wherein this Court, following the decision of the Supreme Court in CIT v. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 and Shekhawati General Traders Ltd v. ITO (1971) 82 ITR 788, held that while valuing the original shares obtained prior to January 1, 1954, the value as taken by the assessee as on January 1, 1954, by exercising his option under section 55(2)(ii) of the Act should be adopted for the purpose of valuing the original shares.
A combined reading of the decisions cited supra would go to show that in a case where the assessee acquired original shares before January 1, 1964, and bonus shares after January 1, 1964, while ascertaining the value of bonus shares, we have to taken into account the value of the shares as opted by the assessee as on January 1, 1964, as per the provisions of section 55(2)(i) of the Act, and both the original shares and the bonus shares should be clubbed together and find out the average value of each share by dividing the total number of shares by the original cost opted as on January 1, 1964.
By adopting this method, in the present case, the assessee valued each of the bonus shares at the rate of Rs.129.25 by taking into account the value of the original shares opted on January 1, 1964. The assessee divided the total number of both the original shares and the bonus shares by the cost of each shares as opted on January 1, 1964. Thus the loss resulted by reason of adoption of the actual cost of the original shares at Rs.258.50 per share being the fair market value as on January 1, 1964, and the adoption of the cost of the bonus shares at half the value of the original shares, viz., Rs.129.25 per share. Learned standing counsel for the Department submitted that the value of the original shares should be taken as the cost price, viz., Rs.100 per share, in respect of the fair market value opted by the assessee as on January 1, 1964. This contention cannot be accepted since the assessee has been given the privilege of adopting the fair market value as on January 1, 1964, when the shares were obtained earlier to that date. This privilege given by the statute cannot be taken away, simply because the Department has got to value the bonus shares, which were acquired subsequent to January 1, 1964. This was also the view expressed by the Supreme Court cited supra. In view of those reasons, it cannot be said that the order passed by the Income-tax Officer in allowing the loss is either erroneous or prejudicial to the interest of the Revenue, warranting the jurisdiction of the Commissioner of Income-tax under section 263 of the Act. In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs.
M.B.A./1788/FCOrder accordingly.