Commissioner of Income-Tax, Central
Calcutta Vs. Gold Mohore, Investment Co. Ltd.  INSC 102 (3 April 1969)
03/04/1969 HIDAYATULLAH, M. (CJ)
HIDAYATULLAH, M. (CJ) SHAH, J.C.
CITATION: 1969 AIR 1183 1970 SCR (1) 199 1969
SCC (1) 460
Company-Allotment of bonus shares against
original holding of shares -Method of calculating profit or loss on sale of
original and bonus shares.
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 194950 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
Incometax, Bihar 41, I.T.R. 705; Commissioner of Income-tax, Bihar v. Dalmia
Investment Co. Ltd. 52 I.T.R. 567; Commissioner of 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.
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
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 Commis200 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 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
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 194950, 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 Assessee Company 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)3 583-12-0It 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 Incometax Officer. It may be pointed out that the
Appellate Assistant Commissioner had in each case confirmed the order of the
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:
"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 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
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 Incometax, Central, Calcutta v. Gold Mohore Investment Co. Ltd.(3).
He contends that the method adopted by the Incometax 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
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
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 concerned. . . . ".
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
We accordingly accept the third method. The
answers recorded 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.