Commissioner of Income-Tax, Central Calcutl'A v. Gold Mohore Investment Co. Ltd.

Judgment

The Judgment of the Court was delivered by Ridayatoilah, C.J. These are two appeals by the Commis-- [1970] 1 S.C.R· 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 va!W1tion of bonus shares in the assessment yean 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, ~espectively. 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 Asseesment 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 Assessce 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 Assessee Company obtained 3750 shares of the face value of Rs. 10 each. On August 2, 1948, the Assessce Company sold the original ;hares for Rs. 72,087 /8, i.e. at about Rs. 29 per share. On March 18, 1949 the Assessce 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 : ~2500 shares 2,12,500-0-0 (old). 21-6-48 Cost of 1,379-4-0 transfer of shares. 2-7-48 By cre<litin11 capital reserve a/c with the face value of bonus share.~ received free of cost (3750). 370500-0-0 2,51,379-4-0 2-8-48 (2500) sh. (old). 18-3-49 (37SO) sh. (bonus) (1000) •h. bonus. Loss to P AT a/c 6250 62SO sh. 72.087-8-0 70,125.f :, . 25,125·0-0 84,041-12-0 2,s1,379-4-0" 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 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 calculation. According to him the loss was Rs. 46,541-12-0 as follows : C.I.T, V. GOLD INVESTMENT CO. (Hidayatul/ah, C./,) "Dr. o.s. 2500 s1'. (sold) Sold Rs. a.p. 2,12,500-0-0 21-6-48 Cost of transfer 1,378-4-0 ; of shares. 2-7-48 (3700) sh. bonus (sic.) Nil Loss to P&L a/c Cr. Rs. a.p. 2-4-48 (2500) sh .• 72,087-8-0 old. 18-3-49 (2750) 70,125-0-0 bonus. 18-3-49 (1000) 25,125-0-0 bonus. 46,541-12-0 2,13,879-4-0 2,13,879-4-0" On appeal t;i the Tribunal as to which method was correct, the Tribunal accepted the method of valuation of the Income-tax Officer. In the A$sessment year 1950-51, the account year being 1949-50, the.

Assessee Company held 122 first pref.erence 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 receive4 137 shares of the face value of Rs. 100 each. The Asses see 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 Assessee Company returned a profit of Rs. 1,997 as follows : "Dr. Rs. a.p. Cr. Rs. a.p. o.s. (122) 1st Pref. 23,883-12-0 18-3-49 <125) 2nd 14,500-0•0 Pref. (137) 2nd Pref. 13,703-0.0 C.S. (122) 1st Profit P&L a/c l,997-0-0 !st Pref. (12) 23,883-12-0 (259) (12) 2nd Pref. 1,200-0.0 39,583-12-0 (259) 39,583-12-0" 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 : uor. Sold Cr. o.s. 122 !st Pref. 23,833-12-0 14-4-49 125 Pref. 14,503-0-0 137 2nd Pref. free of Nil C.S. 122 !st Pref. C<l<t. 12 2nd Pref. @92/3/6 12,357-5-0 Profit to P&L a/c 2,973-9-0 (259) 26,857-S-0 (259) 26,851-S-O" L12SIPCI/69 14 SUPREME COUllT REPORTS [1970] I S.C.R. Tue Ttibunal confirmed the assessment as made by the A Income-tax Officer. It may' be pointed out that the Appellate Assistani Commissioner had in each case confirmed the order of the ·income-tax Officer. The Income-tax Appellate Tribunal then made a reference to 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?" 195<1-5!. "Whether in the facts and circumstances hereir. stated, the assessee carrying on share dealing business, can add Rs. 13,700 being the face value of bonus share> issued to it free of cost on the basis of its old share holdings, 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 re·,ersed 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. (1). He contends that the method adopted by the Income-tax Officer in relaticm 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 have 11 (t) 41 !.T.R. 70S. (2) S2l.T.R, S67. (.1) 68 l.T.R. 213. C.I.T. v. GOLD INVESTMENT co. (Hidayatu/lah, C.l.)

A been P"1rcbased 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 B · 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 c . 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 origi· nal 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 earlier decision reported in Emerald & Co. Ltd. v. Commissior.er 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 R•. 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 Joss on the basis of the original shares, their c;ost 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 clos~g stock at cost price. In calculating profit and loss m the manner·done by the Tribunal, there is no de~arture 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 o~er words, this Court did not go into !he question of the · valuallon of the bonus shares at all but deCided the case on the basis of the original. holdings, its cos~ price and its sale price. The matter was gone mto more closely m the Dalmia's case(') and every method of calculation was considered there. We were (I) 41 l.T.R. 705. (2) 36 I.T.R. 25;, [1970]

I S.C.R. invited to depart from the decision in the Dalmia' s case ( 1) was to take the view which ap~ared to have been taken in the Emerald's case('). 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 s~:f, that the method of the Tribunal in Emerald's case(') was y 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 dilference in the two methods only resulted in Rs. 18 being either added to or deducted from the ultimate result. We accordi,ngly accept the third method. The an.~era recorded by the High Court are discharged and we answer the qu~tions in the negative.

The cases will be disposed of in the light ol our observations by the Income-Tax Appellate Tribunal by calculating the profit and loss by !preading 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. (l) 41 LT.R. 705 (2) 36 L T.R. 2ST