Case: Messrs Escorts Farms (Ramgarh) Limited Vs. Commissioner of Income Tax, New Delhi

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 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. case. The High Court completely overlooked the fact that for the ascertainment of the fair market value of the shares in question on 1-1-1954, 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 1-1-1954, will have to be taken into account which on the language of the statute it is not possible to do." * 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 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. case 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. case stated that the real cost to the assessee of the bonus shares cannot be taken to be nil or at 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. 11. 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. v. CIT (Mad)], D. M. Dahanukar v. CIT (Bom)], W. H. Brady & Co. Ltd. v. CIT Bom)], Alembic Chemical Works Ltd. (No. 1) v. CIT (Guj)] are in accord with the above view and they represent the correct law. The decisions (in Sutlej Cotton Mills Ltd. v. CIT (Cal)], CIT v. Steel Group Ltd. (Cal)], Protima Roy v. CIT (Cal)]) cited before us, misapplied the rule enunciated in Shekhawati General Traders Ltd. v. ITO and failed to bear in mind the proper principles to be applied in the matter and do not lay down the correct law. 12. 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. ITO, 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 sold subsequently, their actual cost has to be reckoned only on the basis of "average value" (as held in Dalmia Investment and 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. ITO. 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 CIT v. Dalmia Investment Co. Ltd. and other cases.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]8. The sheet-anchor 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.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 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. case 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. case stated that the real cost to the assessee of the bonus shares cannot be taken to be nil or at 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 noThere 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 statutorydecisions reported in Madura Mills Co. Ltd. v. CIT (Mad)], D. M. Dahanukar v. CIT (Bom)], W. H. Brady & Co. Ltd. v. CIT Bom)], Alembic Chemical Works Ltd. (No. 1) v. CIT (Guj)] are in accord with the above view and they represent the correct law. The decisions (in Sutlej Cotton Mills Ltd. v. CIT (Cal)], CIT v. Steel Group Ltd. (Cal)], Protima Roy v. CIT (Cal)]) cited before us, misapplied the rule enunciated in Shekhawati General Traders Ltd. v. ITO and failed to bear in mind the proper principles to be applied in the matter and do not lay down the correctIn 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. ITO, 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 sold subsequently, their actual cost has to be reckoned only on the basis of "average value" (as held in Dalmia Investment and 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. ITO. 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 CIT v. Dalmia Investment Co. Ltd. and other