Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court for the assessment year 1972-73 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the capital gains arising from the sale by the assessee of 1,600 bonus shares of Hastings Mills Ltd., Rs. 41,200 should be allowed as the cost of the said shares ? "
(2.) The assessment year involved, as we have mentioned before, is the assessment year 1972-73. The assessee purchased 2,000 shares of M/s. Hastings Mills Ltd. in the year 1948 at the rate of Rs. 103 per share. The entire holding of 2,000 original shares were sold by the assessee on February 7, 1959, at the rate of Rs. 104 per share. Before this transaction, it has to be mentioned that in the year 1951, the assessee received 2,000 bonus shares in the ratio of one bonus share for each ordinary share. In respect of the sale made on February 7, 1959, the assessee claimed capital loss of Rs. 42,000 in the assessment for the assessment year 1960-61 by substituting the market price as on January 1, 1954, which was Rs. 125 per share for the cost price at Rs. 103 per share. The assessee's claim was allowed in the assessment for the assessment year 1960-61. This was in respect of the original shares held by the assessee which were purchased in 1948, as mentioned hereinbefore. The total cost of the shares had been considered in the assessment for the assessment year 1960-61. As mentioned hereinbefore, in 1951, the company, M/s. Hastings Mills Ltd., issued bonus shares in the proportion of one bonus share for each ordinary share. As a result, the assessee had received 2,000 bonus shares in the year 1951. In the year 1967, M/s. Hastings Mills Ltd. again issued bonus shares in the ratio of 1: 1 with the result the assessee got another 2,000 bonus shares in respect of 2,000 ordinary shares which the assessee was then holding which had been received in 1951, as mentioned hereinbefore. It was out of the second set of 2,000 bonus shares that the assessee sold 1,600 bonus shares for Rs. 1,60,200 during the previous year relevant to the assessment year 1972-73. The assessee claimed that the capital gain arising out of this sale should be computed by taking the average price of the original shares and bonus shares by, spreading the cost of the original shares over the original shares and the bonus shares together with the cost per share of 1,600 bonus shares sold. The assessee, accordingly, claimed deduction of Rs. 41,200 as the cost of 1,600 bonus shares from the sale price of Rs. 1,60,200 in computing capital gains. The ITO, however, held that the cost of the bonus shares sold should be taken as nil since the entire cost of the original shares had also been considered in computing the assessee's capital loss arising out of the sale of 2,000 original shares in the assessment for the assessment year 1960-61. The ITO, therefore, did not allow the deduction claimed by the assessee and added Rs. 41,200 to the capital gains of Rs. 1,19,000 disclosed by the assessee as arising out of sale of 1,600 bonus shares. The assessee preferred an appeal before the AAC. The AAC, after discussing the facts mentioned hereinbefore, noted the respective contentions and relying on the decision of the Supreme Court in the case of CIT v. Dalmia Investment. Co. Ltd. directed the ITO to determine the cost of the bonus shares received in the year 1967 on the basis of the principles laid down by the Supreme Court in the said decision and to recompute on that basis the capital gains arising out of the sale of 1,600 bonus shares.
(3.) In this connection, it may be instructive to set out the basis of the argument of the assessee made before the AAC. The assessee had shown long-term capital gains of Rs. 1,20,015 and long-term capital loss of Rs. 53,607, thus arriving at a net capital gain of Rs. 66,408, which was shown in the return. In arriving at the long-term capital gains, the assessee had taken the average cost of 1,600 bonus shares of M/s. Hastings Mills Ltd. at Rs. 25.75. The ITO had found that the assessee had purchased 2,000 shares of the above company at Rs. 103 per share in 1948. The entire 2,000 original shares of M/s. Hastings Mills Ltd. were sold on February 7, 1959, at Rs. 104 per share, as mentioned hereinbefore. Therefore, the basis on which the assessee had computed the value of the bonus shares sold in the year under reference was at Rs. 103 which depreciated by the issue of bonus share to roundabout Rs. 52 per share. This again was further diluted by the issue of 2,000 bonus shares on the bonus shares held by the assessee. Therefore, the value of the bonus shares got depreciated to half, and half of that value was worked out at Rs. 25.75.;