Income Tax Appellate Tribunal - Kolkata
Income-Tax Officer vs Unique Mfg. And Marketing Co. Ltd. on 26 March, 1987
Equivalent citations: [1987]21ITD478(KOL)
ORDER
S.N. Rotho, Accountant Member
1. This appeal has been filed by the department .against the order dated 16-10-1985 of the Commissioner (Appeals) relating to the assessment year 1981-82 on the following ground :
That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in holding that the original shares of Kesoram Cotton & Industries Ltd. should be valued with reference to the original cost to the appellant and not by averaging the cost of original shares with bonus.
2. The assessee is a limited company deriving income from inter alia share dealings during the previous year under consideration which was the calendar year 1980. The assessee claimed that it had suffered a loss in its share dealings. It had purchased 19900 shares of Kesoram Cotton & Industries Ltd. at a cost of Rs. 8,32,230. During the previous year under consideration, it received 4950 bonus shares from the same company against its original holding of 19900 shares. The original 19900 shares were sold during the previous year for Rs. 6,97,120. The assessee retained the bonus shares with it. The assessee had to calculate the difference between the cost and sale proceeds of the 19900 original shares which were sold. For this purpose, the assessee took the cost of 4950 bonus shares at nil so that the entire sum of Rs. 8,32.230 became the cost of the original shares. As the sale proceeds of those shares amounted only to Rs. 6,97,120, the assessee claimed the difference of Rs. 1,35,110 as loss from its business of share dealing. The ITO did not accept the above computation of loss made by the assessee. Relying on the decisions of the Supreme Court in the cases of CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567 and CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62, he held that the original cost of 19900 shares had to be spread over the total holding of 19900 plus 4950 shares amounting in all to 24850 shares. He calculated the average cost of each of the above 24850 shares on the above basis and arrived at a lower figure of cost for the 19900 shares. On the above basis, he computed a profit of Rs, 30,500 instead of the loss of Rs. 1,35,110 shown by the asesssee on the aforesaid sale of the original 19900 shares. He made the assessment accordingly.
3. The assessee appealed to the Commissioner (Appeals) and contended that the calculation made by it should have been accepted. Reliance was placed on the decision in the case of Smt. Protima Roy v. CIT [1982] 138 ITR 536 (Cal.). It was also urged before the Commissioner (Appeals) that the two decisions relied on by the ITO were not applicable to the facts of this case because in the case of the assessee, the assessee sold the original shares, and not the Jaonus shares. The Commissioner (Appeals) agreed with the contention of the assessee and directed the ITO to accept the computation of loss as made by the assessee.
4. Shri S.K. Lahiri, the learned representative for the department, urged before us that the learned Commissioner (Appeals) erred in his decision. He pointed out that the case of Smt. Protima Roy (supra) was decided on different facts. In that case, the assessee had certain shares and received certain bonus shares after 1-1-1964. The assessee sold both the original as well as the bonus shares after 1-1-1964. She elected the cost as on 1-1-1964 under Section 55(2) of the Act as the basis for computing capital gains. The Revenue took the stand that the cost of the original shares was reduced by the subsequent issue of bonus shares. The High Court did not agree. Relying on the decision in the case of Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788 (SC), the Court held that the cost of acquisition as on the elected date of 1-1-1964 cannot change for the purpose of calculating capital gains by any issue of bonus shares subsequent to that specified statutory date. Hence, the original cost was maintained so that the capital gains became less. Shri S.K. Lahiri referred to the decision in the case of Shekhawati General Traders Ltd. (supra) which has laid down a rule that any issue of bonus shares subsequent to the statutory date laid down for computation of the cost for the purpose of capital gains will not affect the original cost. He pointed out that the instant case is that of a trader in shares. It is not a case of capital gains and so the question of determining cost on a particular date does not arise in this case. When the assessee sold the shares it was already in possession of the original shares as well as the bonus shares. Under such circumstances, the cost of the shares had to be worked out by spreading the cost of the original shares over the original shares as well as the bonus shares. The business profit or loss has to be arrived at on the basis of such average cost. He relied on the decision in the case of Gold Mohore Investment Co. Ltd- (supra) in this connection. In that case, it has been laid down that in the case of a dealer in shares who values his stock at cost, where bonus shares issued in respect of ordinary shares held by him rank pari passu with the original shares, the correct method of valuing the cost to the dealer of the bonus shares is to take the cost of the original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares. This decision approved the earlier decision in the case of Dalmia Investment Co. Ltd. (supra). He pointed out that in the case of Gold Mohore Investment Co. Ltd. (supra) the bonus shares were sold while in the case of Dalmia Investment Co. Ltd. (supra) the original shares were sold. Both were dealers in shares and so whether the original or the bonus shares were sold was of no consequence. In the circumstances, he urged that the learned Commissioner (Appeals) wrongly applied the decision in the case of Smt. Protima Roy (supra) to the facts of this case while the ITO had applied the correct decisions that are applicable to the instant case.
5. Shri K.V. Singh, the learned representative for the assessee, on the other hand, supported the order of the Commissioner (Appeals). He stated that the cases of Dalmia Investment Co. Ltd. (supra) and Gold Mohore Investment Co. Ltd. (supra) were not applicable to the facts of this case because the question as to the method of accounting regularly followed by the assessee in valuing its stock of shares was not considered in those cases. On the other hand, he pointed out that the assessee had valued the bonus at nil and the method of valuation regularly employed by the assessee was cost or market price, whichever was lower. According to him, the original shares which were sold were valued according to the above method at its original cost. In this connection, he drew our attention to Schedule B to the printed balance sheet of the assessee as at 31-12-1980 where the valuation of the bonus shares remaining in stock has been taken at nil on the ground that their cost to the assessee was nil and such zero cost lower than the prevailing market price. He urged that the order of the Commissioner (Appeals) deserved to be upheld.
6. We have considered the contentions of both the parties as well as the facts on record. In our opinion, the contentions raised for the revenue carry force. The assessee is a dealer in shares. During the year under consideration it sold the original shares and retained the bonus shares. The question is as to how the cost of the shares sold has to be determined. The decision of the Supreme Court in the case of Gold Mohore Investment Co. Ltd. (supra) gives a complete answer to this issue. It has been held therein that the cost of the shares sold has to be determined by spreading the original cost over the total shares inclusive of the bonus shares. We find that in that case the Supreme Court had also taken note of the fact that the assessee was valuing the shares at cost. Hence, it cannot be said that the method of valuation of closing stock was not considered in the said case. Besides, one of the recognized methods is cost or market value, whichever is less. The question which arises in this appeal is as to what is the cost for the purpose of determining whether the same is lower or higher than the market value. It is for determining this cost that the case of Gold Mohore Investment Co. Ltd. (supra) squarely applies to the facts of this case. As in that case, the assessee before us is a dealer in shares. It not a case of determining the cost on a specified date for the purpose of determining the capital gains. Hence, we agree with the learned representative for the department that the decision in the case of Smt. Protima Roy (supra) does not apply to the facts of this case. Consequently, we vacate the order of the Commissioner (Appeals) and restore the order of the ITO.
7. In the result, the appeal is allowed.