1973 PLP 78 (PTD)

O.S. 2500 (sold) 2,12,500‑0‑0 2‑8‑48 (2500)‑sh. 72,087‑8‑0 sh. Cost of old 21‑6‑48 transfer 1,379‑4‑0 18‑3‑49 (2750) 70,125‑0‑0 of shares bonus 2‑7‑48 (3700) sh. Nil (1000) 25,125‑0‑0 bonus (sc) 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 1949‑50, the assessee‑company held 122 first preference shares of Fort Gloster Jute Company Ltd. which had cost to the assessee company Rs. 22,893‑12‑

0. 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 assesses‑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. As. Cr. Rs. As O.S. (122) 1st 23,883‑12‑0 18‑3‑49 (125) 2nd 14,500‑0‑0 Pref. Pref. (137) 2nd 13,703‑0‑0 C.S. (122) Pref. Profit P & 1,997-0-0 1st Pref. 23,883‑12‑0 La/c (12) 2nd , (259) Pref. 1,200‑0‑0 39,583‑12‑0 (259) 39,583‑12‑0." It 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, service. The Income‑tax Officer spread out the cost of 122 1st preference shares (Rs. 23,883‑12‑0) over the 122 shares (first preference) and 137 shares (second preference). He worked dull 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. . O.S. 122 1st 23,833‑12‑0 14‑4‑49 125 Pref. . 14,503‑0‑0 Pref. C .S. 122 1st 1372nd Pref. Nil Pref. 12 free of cost 2nd Pref. ‑92/3/6 12,357‑5‑0 Profit to P & L a/c. 2,973‑9‑0 (259) 26,857‑5‑0 (259) 26,857‑5‑0." The Tribunal .confirmed the assessment as made by the Income‑tax Officer. It may be pointed out that the Appellate Assistant Commissioner had in each case confirmed the order of the income‑tax Officer. 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,‑ 1949‑50 :‑ Whether, in the facts and circumstances herein stated, the assesses, 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 shareholding, as cost of its ' shareholding 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 is of its old shareholdings, as cost of its shareholding 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 No. 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 in Dalmia Investment Go. Ltd. v. Commissioner of Income‑tax ((1961) 41 I T R 705). Mr. Sen. in dealing with these appeals, points that the decision of the Patna High Court In Dalmia Investment Co. Ltd. v. Commissioner of Income‑tax, was reversed by this Court in Commissioner of Income‑tax v. Dalmia Investment Co. Ltd. ((1964) 52 I T R 567 (S C)), and the decision of this Court has further been followed in Commissioner of Income‑tax v. Gold Mohore Investment CO. Ltd. ((1968) 68 I T R 213 (S C)). He contends that the method adopted by the Income tax 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 have been purchased at the average cost and that the profit or loss is to be calculated accordingly. In the decision of this Court in Dalnda Investment Co, Ltd., 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 company. 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 tire 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 d doubt arose because in an earlier decision in Emerald & Co. Ltd. v. Commissioner of Income‑tax ((1959) 36 I T R 257 (S C)), this Court 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 assessee‑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 holding, its cost price and its sale price. The matter was gone into more closely in the Dalmia's case, and every method of calculation was considered there. We were invited to depart from the decision in the Dalmia's case, and to take the view which appeared to have been taken in the Emerald's case. We have considered the matter once again and are of opinion that the method followed in the Dalmia's case is the correct method and there seems to be some error in stating that the method of the Tribunal in Emerald's case 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 ultimate result. We accordingly accept the third method. The answers recorded by the High Court are discharged and we answer the question 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. Appeals allowed: