COMMISSIONER OF INCOME-TAX vs. RAJIV TRADERS PVT LTD.

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ITR/10/1990HC GujaratGJHC24013197199025 March 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE KUNDAN SINGH3 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the Appellate Tribunal was right in law and on facts in directing the recomputation of capital gains. The Court reasoned that the cost of bonus shares cannot be taken as nil or face value. Instead, they must be valued by spreading the cost of the original shares over all shares, including bonus shares, if they rank pari passu. This approach aligns with the Supreme Court's decision in Escorts Farms (Ramgarh) vs. CIT (222 ITR 509), which held that the actual cost of shares has to be reckoned on the basis of the average value when bonus shares are issued and some original shares are sold subsequently. The Court applied the ratio of the Supreme Court's earlier decision in CIT vs. Dalmiya Investment Company (52 ITR 567). The question referred to the Court was answered in the affirmative, favouring the assessee.

What were the facts?

The assessee, Rajiv Traders Pvt Ltd., sold 2850 shares of M/s. McGaw Ravindra Laboratory (I) Ltd. for Rs. 9,09,150/- in the previous year relevant to assessment year 1983-84. Out of these, 800 were bonus shares. Initially, the assessee did not declare any cost for the bonus shares. During assessment, it was claimed that the cost of acquisition of bonus shares should be the average cost of purchased shares. The Income Tax Officer (ITO) rejected this, holding the cost of bonus shares to be nil. The Commissioner of Income Tax (Appeals) upheld the ITO's decision. The Income Tax Appellate Tribunal (ITAT) reversed this, directing the Assessing Officer to recompute capital gains by valuing bonus shares by spreading the cost of old shares, considering both old and new shares together if they ranked pari passu, following a Special Bench decision in Rohini Trust.

What were the issues?

1. Whether the Appellate Tribunal is right in law and on facts in directing the IAC (Asstt) to recompute capital gains in accordance with the decision of the Special Bench in the case of Rohiniben Trust (13 ITD 830)? Assessee's Contention: The assessee argued that the cost of acquisition of bonus shares should be taken at the average cost of the shares purchased. The Tribunal's direction to recompute capital gains based on the Rohini Trust decision supports this approach. Revenue's Contention: The revenue, through the ITO and CIT (Appeals), contended that the cost of bonus shares was nil. The revenue's position was that even if the average cost was applied, there would be a corresponding reduction in the cost of acquisition of the original shares, leading to the same capital gains as computed in the return of income.

Which sections of the Income-tax Act were involved?

Section 256(1)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 10 of 1990

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge?

-------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus RAJIV TRADERS PVT LTD. -------------------------------------------------------------- Appearance: Mr. B B Naik for MR MANISH R BHATT for Petitioner SERVED BY RPAD - (N) for Respondent No. 1

--------------------------------------------------------------

CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH Date of decision: 25/03/98

ORAL JUDGEMENT (Per R.K.Abichandani,J)

The Income-tax Appellate Tribunal, has referred the following question for the opinion of this Court under section 256(1) of the Income-tax Act, 1961. "Whether, the Appellate Tribunal is right in law and on facts in directing the IAC (Asstt) to recompute capital gains in accordance with the decision of the Special Bench in the case of Rohiniben Trust (13 ITD 830) ?"

2.

The matter relates to the assessment year 1983-84. The assessee company filed return of income on 30.7.1983. It had sold 2850 shares of M/s. McGaw Ravindra Laboratory (I) Ltd. for Rs. 9,09,150/- in the previous year. Out of these shares, 800 were bonus shares. At the time of filing the return, the assessee did not show any cost of bonus shares. Subsequently, during the course of the assessment proceedings, it was claimed that the cost of acquisition of bonus shares be taken at the average cost of the shares purchased. The ITO did not accept this contention and held that the cost of bonus share was `nil' when they were sold alongwith shares purchased. It was held that even otherwise, if cost of bonus shares is adopted at the average cost of shares purchased, there would be a corresponding reduction in the cost of acquisition of the shares purchased. The assessing officer therefore, held that the long term capital gains amounting to Rs. 5,91,597/would be taxed as computed in return of income. The CIT (Appeals) confirmed this decision of the ITO. In the appeal filed by the assessee before the Tribunal, the Tribunal held that the cost of bonus shares could not be taken as `nil' or at face value, but they had to be the Hon'ble Supreme Court in Escorts Farms (Ramgarh) vs.CIT, 222 ITR, 509 in which it was held 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 the average value except in rare case where actual cost is notionally adopted or determined as it existed on the relevant statutory date. It was held that the High Court was justified in holding that the subsequent issue of the bonus shares had the effect of altering the original cost of acquisition of the shares. The Hon'ble Supreme Court applied its Farma's case. The question referred by the Tribunal is therefore, answered in the affirmative in favour of the assessee and against the Revenue. The Reference stands disposed of accordingly with no order as to costs.

... ***darji

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