Dwarka Prasad, J. - (1.)THESE two references have been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, and as identical questions of law have been referred by the Tribunal to this court for its opinion, it would be proper for us to dispose of both the references by a common order.
(2.)THE assessees in both the cases, Smt. Raj Kumari Bangur and Smt. Chandri Devi Bangur, are investors in shares and derived their income from interest on securities and dividends. Smt. Raj Kumari purchased 5,600 shares of Indian Iron & Steel Co. Ltd. prior to 1953 @ Rs. 32.66 per share. On November 13, 1953, she purchased another lot of 4,625 shares @ Rs. 24.75 per share. In April, 1957, the aforesaid company allotted her 5,520 right shares at the concessional rate of Rs. 13.50 per share. In the year 1959, the company issued bonus shares to its shareholders at the rate of one bonus share for every five shares held by the shareholders. Thus 1,120, 925 and 1,104 bonus shares were allotted by the company to Shrimati Raj Kumari in respect of three lots of shares held by her including the right shares. Out of the aforesaid shares, the assessee sold 1,500 and 500 shares in the accounting years relevant to the assessment years 1962-63 and 1966-67, respectively, and she sold the remaining 16,894 shares in the accounting year corresponding to the assessment year 1967-68.
The other assessee, Shrimati Chandri Devi, purchased 4,000 shares of Indian Iron and Steel Co. Ltd. at Rs. 40.69 per share. On April 9, 1967, the assessee was offered 4,000 right shares by the company at the concessional rate of Rs. 13.50 per share, which she acquired thereafter in the year 1969. The company allotted 1,600 bonus shares to the assessee, Smt. Chandri Devi, on the basis of one bonus share for every five shares held by the assessee. Out of the aforesaid shares, the assessee gifted 1,800 and 500 shares in the years relatable to the assessment years 1962-63 and 1963-64, respectively. Thus, in all, 2,300 shares were gifted away by Smt. Chandri Devi. Of the remaining shares, she sold away 2,800 shares and 2,000 shares in the accounting years corresponding to the assessment years 1962-63 and 1966-67, respectively. The remaining 2,500 shares remained with the assessee.

Thus, both the assessees were in possession of three types of shares, namely, (i) original or equity shares acquired after payment of full market price of such shares ; (ii) right shares allotted by the company to the assessees at the concessional rate of Rs. 13.50 per share ; and (iii) bonus shares acquired without incurring any expenditure, at the rate of one bonus share for every five shares held by the assessees. The equity shares and right shares ranked pari passu. As mentioned, Smt. Raj Kumari Bangur disposed of the remaining 16, 894 shares held by her by sale in the accounting year corresponding to the assessment year 1967-68. The last-mentioned lot of shares included original or equity shares, right shares as well as bonus shares. The assessee claimed the value of the aforesaid shares sold by her, for the purposes of computing the capital gain under Section 48 of the I.T. Act, 1961 (hereinafter referred to as "the Act"), by working out the cost of bonus shares by averaging the cost of acquisition of original shares in each lot separately over the shares initially acquired and the bonus shares received in relation thereto. Thus, the cost incurred by the assessee in purchasing the original shares of each lot was divided between the original shares of that lot and bonus shares allotted in respect thereof in order to arrive at the average cost per share, for the purpose of computing the cost price of bonus shares. Similarly, the price of bonus shares acquired by the assessee against the right shares was also arrived at by her by averaging the total price paid by the assessee for acquiring the right shares by spreading the said price equally over the right shares and bonus shares acquired on the basis thereof.

The other assessee, Smt. Chandri Devi Bangur, also worked out the cost price of 800 bonus shares sold by her during the accounting period corresponding to the assessment year 1966-67 along with 1,200 original shares by the method of averaging the cost of equity shares and bonus shares allotted in respect thereof, as was done in the case of Smt. Raj Kumari Bangur, and claimed that she suffered a loss in the transaction of 2,000 shares sold in the aforesaid assessment year. The ITO did not accept the computation of the cost of acquisition of bonus shares as calculated by both the assessees and held that in working out the income or the capital gain, the net cost incurred in acquiring the original and right shares by the assessees was to be adjusted against or deducted from the sale price, and it was erroneous to adjust the cost price of the bonus shares worked out on an average basis. The ITO held that nothing more than the actual cost price of the original and right shares could be allowed to be deducted from the sale price in working out the income or, for that matter, the capital gain of the assessee in relation to the assessment year in question. The ITO totalled up the cost price of all the shares purchased by each assessee from time to time and allotted to the assessee and deducted it from the sale price received by the assessee, in order to work out the income or capital gain of the assessee.

Both the assessees filed appeals before the AAC of Income-tax who discarded the computation of profit and loss made by the ITO and did not also accept the method for such computation adopted by the two assessees. The AAC computed the cost of shares and the capital gain by working out the average cost of shares sold by aggregating the original shares and bonus shares lot-wise and dividing, such cost equally between the originally purchased shares and the bonus shares. The Department felt dissatisfied with the mode of calculation adopted by the AAC of Income-tax and filed appeals before the Income-tax Appellate Tribunal in respect of assessment year 1966-67 in the case of Smt. Chandri Devi and in respect of assessment year 1967-68 in the case of Smt. Raj Kumari Bangur.

(3.)THE contention of the Department before the Tribunal was that the price of the right shares should have been averaged with the price of the shares purchased from the open market as the market value of shares would have fallen on the issue of right shares. THE Tribunal, however, did not accept the above proposition of law advanced on behalf of the Department. On the other hand, the contention advanced by the two assessees before the Tribunal was that when different lots of shares were acquired by the assessee at different rates and the shares in each lot were distinct and clearly identifiable and shares were sold with distinct and identifiable numbers, there was no justification for mixing up the shares purchased in different lots at different prices, in order to arrive at an average purchase price of the right shares and the shares purchased from the open market. THE Tribunal accepted the contention advanced on behalf of the assessees and held that each lot of shares purchased by the assessees including the bonus shares was definite and ascertainable and when sales were made out of that lot, the average price of shares only in that lot including the bonus shares therein should be taken into account. Thus, according to the Tribunal, the right shares acquired by each one of the assessees along with the bonus shares allotted on the basis thereof comprised a separate lot, while the shares purchased by each one of the assessees from the open market and the bonus shares allotted on the basis thereof represented entirely a different lot of shares and there could be no averaging of the cost price of the aforesaid two lots of shares. THE appeals preferred by the ITO before the Tribunal in the case of both the assessees and some other similarly situated assessees were disposed of by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by a common order dated May 9, 1972.
The Addl. CIT, Rajasthan, Jaipur, required the Appellate Tribunal to draw up a statement of the case and refer to this court questions of law arising out of its order dated May 9, 1972, in the case of both the assessees. The Tribunal held that the following questions of law arise out of its order dated May 9, 1972, and referred them to this court for its opinion :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the price of the right shares are not to be averaged with the price of the original shares purchased from the open market for the purpose of determining the cost of acquisition of the shares in computing the capital gain under Section 48 of the Income-tax Act, 1961 ?

2. Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the cost of acquisition of bonus shares has to be determined in terms of Section 48(ii) of the Income-tax Act, 1961, by averaging the cost of the original shares and the bonus shares received with reference to them, in one lot, and by averaging the cost of the right shares and the bonus shares, received with reference to them, in another lot ? "

A limited liability company has to state in its memorandum of association the amount of capital with which the company desires to do business and the number of shares into which the capital is to be divided. The company may not issue all its capital at one time. It may issue only a part of its capital initially and the remaining part or a portion of the unissued capital may be issued by the company on a later date. After the company does business which may result in profits, the same may be distributed amongst the shareholders by the company or may be kept in reserve. When a part of the profits is kept in reserve, the company does not keep the money in its coffers but the same is utilised in the business of the company and as a matter of fact, it represents an increase in the capital employed by the company in doing its business. When the amount of profits thus kept in reserve increases to a considerable extent, the issued capital of the company ceases to bear a true relation to the capital employed by it. Then the company may decide to increase its issued capital and declare a bonus and issue to the shareholders new certificates entitling them to an additional share in the increased capital in lieu of bonus. As a matter of accounting, the original shares and the new bonus shares taken together would yield to the shareholder the same return. However, in point of fact, what the shareholder gets is not cash by way of bonus but shares in lieu thereof, from which income in the shape of money may be derived in future. In this sense, the company does not make any payment to the shareholder in the shape of bonus but there is an increase of issued capital and the right of the shareholder to it is evidenced not by the original number of share certificates held by him but by more certificates issued to him in lieu of bonus. Thus, the conversion of the reserves of profits into capital does not involve the release of the profits to the shareholders, because the money remains with the company where it was and is continued to be employed by the company in its business ; but thereafter the company employs that money not in the shape of reserves of profits, but as a part of its capital issued to and continued (sic) by the shareholders. The bonus shares, when sold by the shareholders, may fetch more price than the face value of such shares or may fetch less value, as the value thereof varies according to the market price of the shares of that company. In this view of the matter, the share certificates in respect of the bonus shares cannot be regarded either as cash or as a voucher to receive the face value thereof nor can it represent the amount paid by the shareholder for obtaining the same, because as a matter of fact no amount at all is actually paid by the shareholder even when bonus shares are allotted to him on the basis of his equity shareholding.