V. BALASUBRAMANIAN, VICE- PRESIDENT - Order : assessee, Trust assessed as AOP, sold 2,400 equity shares of Standard Mills Co. Ltd. and received surplus computed at Rs. 26,475. ITO included this surplus as long term capital gain in total income. Before CIT (A), assessee claimed that shares of Standard Mills Co. Ltd. sold were bounds shares and so no capital gains should have been assessed on surplus. number of decision were cited before CIT (A) to support claim that no capital gain arose on transfer of asset for which no cost of acquisition can be ascribed. CIT (A) rejected assessee s claim and confirmed ITO s order. It is thus that matter is in appeal before Tribunal. 2. When matter came up for hearing before Tribunal, reliance was placed by Department on earlier decision of Tribunal in I. T. A. No. 654/Bom/1982 dt. 28th July, 1983 in matter of Radhika Trust No. 1. In rejecting assessee s claim for relief on basis of Supreme Court decision in CIT vs. B. C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) Bench in that case had held that Supreme Court decision would not apply to case. Bench felt that in case of bonus shares conceptually as well as practically it could not be stated that it was not self- generated asset but had been brought into existence in some particular form of acquisition and it was also necessary to give findings as to nature of original of this asset. Bench felt that earlier decision in Radhika s Trust could not be applied tot he present case. It is thus that matter has come up for hearing before Special Bench. At time of hearing, Podar Organization (P) Ltd., appellant in I. T. A. No. 594 (Bom)/1983 also intervened as similar point was involved in its case. 3 . ld. counsel for assessee has pointed out that bonus shares formed asset peculiar in itself like goodwill. Earlier question of origin of shares was not considered at all in decisions relating to assessment of profit on sale of bonus share whether treated as stock-in-trade or as capital asset. With decision in Srinivasa Setty s case, entire approach has to be changed. earlier decisions dealing with finding of profit on sale of shares based on some method of valuation could not, therefore, apply. Several of decision referred to and relied on by Department were decisions prior to Srinivasa Setty s case. In these cases, Courts, especially Supreme Court were concerned with limited question of method of valuation of bonus shares whether for purpose of computing business profits or capital gain. Court was not concerned with cost of acquisition. Method of valuation is different from cost of acquisition. According to ld. counsel, first is to be determined on equitable grounds for determination of profit realised. latter was concerned with question of outlay. There are several cases such as decision in Evans Fraser Co. Ltd. (In liquidation) vs. CIT (1981) 25 CTR (Bom) 128 : (1982) 137 ITR 493 (Bom) which also supported assessee s case that no capital gains should be assessed on sale of bonus shares. In cases such as CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC), CIT vs. Gold Mohore Investment Co. Ltd. (1968) 68 ITR 213 (SC), Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC), Court was concerned with questions not covered by Srinivasan Setty s case. questions was what should be cost in trading account allocable to bonus shares while computing profits. Dalmia Investment Co. dealt with equitable considerations relevant for determining commercial profits, whereas Gold Mohore dealt with method of valuation especially as dealer in shares. In Miss Dhun Dadahbhoy Kapadia s case, according to ld. counsel, case of investor, two distinguishing facts were there viz. question of right share issue and valuation of right shares. Right issue had potential value unlike bonus shares. It involved payment of price. question relating to fall in prices of shares was also considered. 4. According to ld. counsel, what was relevant in case under appeal was to find out how much assessee spent on acquisition of bonus shares from his pocket. cost of acquisition was concept different from method of valuation in involved in cost of bonus shares. It was real value. case of spreading cost over was notional concept. It is also pointed out that there was element of fixity involved in cost of acquisition which was incapable of varying with time. It depended on actual time of acquisition. On this basis cost of acquisition of bonus shares was nil . It is also pointed out that when shares were issued, they constituted distinct and separate capital asset. This has been brought out clearly in decision in CIT vs. Madan Gopal Radhey Lal (1969) 73 ITR 652 (SC). That was case of dealer in share who received bonus shares in relation to shares held by him as stock- in-trade. Cost of acquisition also involved definite and positive expenditure of money. provisions of s. 55(2) (v) supported assessee s case. According to ld. counsel, if Department s view was to be accepted, in background of ss. 49 and 50 of IT Act, There should have been specific provision in s. 49 attributing to bonus shares fictional cost. Reliance is placed on several decision of Courts, especially in Shekhawati General Traders Ltd. vs. ITO 1972 CTR (SC) 120 : (1971) 82 ITR 788, CIT vs. B. C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) and Evans Fraser & Co. Ltd. vs. CIT (1981) 25 CTR (Bom) 128 : (1982) 137 ITR 493 (Bom) support his case. 5. On behalf of intervener Podar Organization (P) Ltd., it was pointed out that bonus shares are separate and distinct asset forming part of original shares. decision of Gujarat High Court in CIT vs. Chunilal Khushadas (1974) 93 ITR 369 (Guj) is pressed into service in this context. When shareholder receives bonus shares he makes no payment. Bonus shares from their very nature are not available to any one prepared to expend money and seeking to acquire them but only to persons specified under Rules of particular company. According to ld. counsel, bonus share is not asset which falls within contemplation of s. 45 of IT Act, This is made clear by decision of Supreme Court in CIT vs. B. C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC). Referring to s. 55(2) (v), it is pointed out that there is no fiction of law also providing for assumption of cost of acquisition for bonus shares. Here was, therefore, asset not available for money but having specific characteristic referred to in (1981) 128 ITR 294 (SC) (supra). comparison with right shares is not proper. cases referred to for Department never considered question of cost of acquisition as such. 6. For Department, stress is laid on orders of authorities below. 6. For Department, stress is laid on orders of authorities below. According to ld. counsel for Department, before tax on capital gains can be levied, there must be sale of asset and asset must be capital one as defined in Act. Bonus share are capital assets as defined in s. 2(14) of income-tax being property of any kind. decision of Supreme Court in CIT vs. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC) (supra) clearly brings out this concept especially at p. 297. Under provisions of Act only asset coming under exclusion clause can escape tax on capital gain. Bonus shares do not fall in this category. 7 . Dealing with question whether bonus shares constitute asset in acquisition of which it is possible to envisage cost, ld. counsel has referred to decision in CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC) (supra). In computing capital gains, one has first to address himself to cost. Method of arriving at cost is subsequent event. Reference is made, in this connection, to decisions in CIT vs. Gold Mohore Investment Co. Ltd. (1969) 74 ITR 62 (SC) and Escorts Farms (Ramgarh) Ltd. vs. CIT (1983) 35 CTR (Del) 170 : (1983) 143 ITR 749 (Del) . It is pointed out that in Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) (supra), Supreme Court h s not rejected argument that right to secure new shares was embedded on rights of original shareholder. Dalmia Investment dealth with determination of cost of acquisition. Decision in CIT vs. Chunilal Khusaldas (1974) 93 ITR 369 (Guj) (supra) of Gujarat High Court specifically dealth with market rate on date of acquisition. These decision as well as decision in H. H. Maharaja Rana Hemant Singhji vs. CIT 1976 CTR (SC) 188 : (1976) 103 ITR 61 (SC) dealing with cost of improvement, according to learned counsel, clearly support Department s case. simple question is whether there has been transfer of capital asset. If further question is asked viz., whether it is possible to quantify surplus on such transfer, answer will be clear Yes Concepts like "capital asset", "date of acquisition" and "cost of acquisition" are all well know concepts. Reference is also made in this context to decisions dealing with conversion of debentures into Equity shares. Particular attention is invited to decision in Mrs. A. Ghosh vs. CIT (1983) 33 CTR (Cal) 179 : (1983) 141 ITR 45 (Cal), AIR (1980) Supreme Court 1707 and AIR (1970) (Delhi) 29. decision in Escorts Farms (Ramgarh) Ltd. vs. CIT (1983) 35 CTR (Del) 170 : (1983) 143 ITR 749 (Del) (supra) also supports Department s case. 8. Dealing with decision in Evans Fraser & Co. Ltd. vs. CIT (1981) 25 CTR (Bom) 128 : (1982) 137 ITR 493 (Bom) (supra), it is pointed out that whatever is said with reference to goodwill would not apply to case of bonus shares. Cases have also shown that it does not matter whether holder of shares is investor or dealer. decisions in W. H. Brady & Co. Ltd. vs. CIT (1979) 10 CTR (Bom) 221 : (1979) 119 ITR 359 (Bom) and Harish Mahindera & Another vs. CIT (1981) 25 CTR (Bom) 168 : (1982) 135 ITR 191 (Bom) are of relevance. Referring to provisions of s. 55(2), it is pointed out that sub-cl. (v) deals with meaning with particular reference to certain situations. Both Supreme Court decisions and factual position of bonus share clearly attribute to them cost of acquisition. According to ld. counsel, therefore, decision in Srinivasa Setty s case , referring to situation of no cost of acquisition, would not be relevant in context of bonus shares. 9 . facts lie in short compass. assessee sold certain shares of Standard Mills Co. Ltd. They are stated to constitute bonus shares, having been received as such from company under its regulations. It is not clarified as to why these shares were considered to be bonus shares. Perhaps this is based on fact that distinctive numbers carried by these share relate them to bunch of shares distributed by company in connection with bonus share distribution. assessee s stand is that like goodwill and similar assets bonus shares have no cost of acquisition. It is only slightly hinted that they do not surface at any time before sale but like good will involved uncertain origin. If decision in Srinivasa Setty s case is directly applicable to assessee s case, surplus calculated whatever be method followed on sale of bonus shares would not be liable to capital gains. 10. In CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC) Supreme Court considered question of valuation of bonus share in case of assessee who was dealer in shares and sold them. majority judgment of M. Hidayatullah and J. C. Shah, JJ. held that their real cost to assessee cannot be taken to be nil or their face value. Bonus shares had to be valued by spreading cost of old share over old shares and new issue viz ; bonus shares taken together if they rank pari passu. minority judgment of A. K. Sarkar, J. held that bonus shares have to be valued at market value on date when they were acquired. In that case, in 1944 assessee acquired 31,909 ordinary share of Rohtas Industries Ltd. at cost of Rs. 5,48,283. In January, 1945 Rohtas Industries Ltd. distributed bonus shares at rate of one ordinary share for each original shares. assessee got 31,909 bonus shares. Between that time and December, 1947 assessee sold 14,650 of original shares. In 1st Jan., 1948 it held 17,259 original share acquired in 1944; 31,909 bonus shares issued in January, 1945 ; 59,079 newly issued share acquired in year 1945 after issue of bonus shares; and 2,500 further shares acquired in 1947. Total holding of Rohtas Industries Ltd. Shares of assessee on 1st Jan., 1948 came to 1,10,747 shares valued in books at Rs. 15,57,902. In arriving at this figure assessee had valued bonus shares at their face value of Rs. 10 each and other shares at actual cost. On 29th Jan., 1948 assessee sold all share for total amount of Rs. 15,50,458 i. e. at Rs. 40 per share and in its return for asst. yr. 1949-50 claimed loss of Rs. 7,444. ITO computed cost of he bonus shares at Rs. 6-8.0 by following what he called method of averaging and arrived at profit of Rs. 2,39,370. AAC, holding that assessee paid nothing for bonus shares, enhanced profit to Rs. 3,11,646 which was confirmed on appeal by Tribunal. Tribunal did not, however, give finding as to whether profit was trading profits or capital gain. minority judgment of Sarkar J. relied on decision in CIT vs. Bai Shrininbai K. Kooka (1962) 46 ITR 86 (SC) and held that bonus shares must be deemed to have been acquired at market value on that date of their issue and worked out profit on basis. 11. majority judgment delivered by M. Hidayatullah, J. found that there are bonus possible methods for determining cost of bonus shares. At page 574 of Report, this is pointed out : "The first method is to take cost as equivalent of face value of bonus shares. This method was followed by assessee-company in making entries in its books. second method adopted by Department is making entries in its books. second method adopted by Department is that as shareholder pays nothing in cash for shares, cost should be taken at nil. third method is to take cost of original shares and to spread it over original shares and bonus shares taken collectively. fourth method is to find out fall in price of original shares on stock exchange and to attribute this to bonus shares. Before us assessee-company presented for our acceptance first method and Department third method. They suggested method of valuation by spreading entire out-lay over original holding of shares and bonus shares together and arriving at average cost for purpose of determining profits. Explaining process of issue of bonus shares. Their Lordships observe at page 576 that : "The conversion of reserves into capital does not involve release of profits to shareholder, money remains where it was that is to say employed in business. Thereafter company employs that money not as reserves of profit but as its proper capital issued to and contributed by shareholder. If shareholder were to sell his bonus shares, as shareholders often do, shareholder parts with right to participation in capital of company and cash he receives is not dividend but price of that right. bonus share when sold may fetch more or may fethch less then face value and this shows that certificate is not voucher to receive amount mentioned on its face. To regard certificate as cash or as representing cash paid by shareholders is to overlook internal process by which that certificate comes into being." They also stressed point "that bonus share cannot be said to have cost nothing to shareholders because on issue of bonus shares, there is instant loss to him in value of original holding. earning capacity of capital employed remains same even after reserve is converted into bonus shares." (page 579 of 52 ITR). 12. detailed reference to Dalmia Investment case has been made here because is major plank of Department s argument is based on this. In CIT vs. Gold Mohore Investment Co. Ltd. (1968) 68 ITR 213 (SC) Supreme Court followed its decision in (1964) 52 ITR 567 (SC). In D.M. Dahanukar vs. CIT (1973) 88 ITR 454 and W.H. Brady & Co. Ltd. vs. CIT (1979) 10 CTR (Bom) 221 : (1979) 119 ITR 359 (Bom), Bombay High Court followed Dalmia Investment C o . Ltd. s case (supra) for purpose of valuation of bonus shares. In Dahanukar s case, Bombay High Court also averred that it was not permissible to contend that case of investor in shares was different from that of dealer in shares. In Miss Dhun Dadabhoy Kapadia vs. CIT (1967) 63 ITR 651 (SC) Supreme Court dealt with case where assessee holder of shares in company with right to renounce new shares offered renounced such right and claimed loss in value of old shares as result of issue of new shares as deduction. Supreme Court held that assessee was entitled to deduct loss suffered by way of depreciation in old shares. At page 655 of Report, Court held : "In working out capital gain or loss, principles that have to be applied are those which are part of commercial practice or which ordinary man of business will resort to when making computation for his business purposes. principles of accounting indicated by us above are clearly principles that must have applied in order to find out net capital gain or loss arising out of transaction of nature with which we are concerned." 13. In CIT vs. General Investment Co. Ltd. (1981) 20 CTR (Cal) 339 : (1981) 131 ITR 366 (Cal), Calcutta High Court applied ratio of Dalmia Investment Co. s case (supra) and held that correct method of valuing bonus shares is to take cost of original shares spreading it over original shares and bonus shares collectively and finding out average price of all shares. It was claimed for Revenue in that case that Dalmia Investment s was decision dealing with cost of valuation of shares in context of dealer in shares as to how he should value shares as closing stock and not computation of cost of acquisition of asset in case of capital gain. This Their Lordships held is of no significance. 14. Three other decisions are of importance in context. first is decision of Supreme Court in CIT vs. Madan Gopal Radhey Lal (1969) 73 ITR 652 (SC) (supra) where assessee, who held shares and securities as part of his business as dealer, received bonus shares in respect of shares held as stock-in-trade. Supreme Court held that bonus shares did not become part of stock-in-trade of assessee but were received as capital n d could be converted by assessee into stock-in-trade or explained as capital asset. Supreme Court decision in Shekhawati General Traders Ltd. vs. ITO 1972 CTR (SC) 120 : (1971) 82 ITR 788 (SC) and Gujarat High Court decision in CIT vs. Chunilal Khushaldas (1974) 93 ITR 369 (Guj) dealt with question of date from which bonus shares are held first in connection with substitutions of fair market value as on 1st Jan., 1954 in place of cost price and second for identification of capital gains as short or long term. Both these decisions referred to Dalmia Investment. 15. above decisions, we find, referred to different aspects of matters relating to bonus shares. Cases like CIT vs. Dalmia Investments Co. Ltd. (supra) dealt with position of dealer in shares, whereas others like CIT vs. General Investment Co. Ltd. (1980) 20 CTR (Cal) 339 : (1981) 131 ITR 366 (Cal) and Dahanukar dealt with investors in shares, (1968) 68 ITR 213 (SC) (supra), dealt with application of s. 23 A, whereas (1971) 82 ITR 788 (SC) (supra), dealt with re-opening of assessment. These cases where decided prior to decision of Supreme Court in Srinivasa Shetty case (1981) 128 ITR 294 (SC) (supra) where for first time question of cost of acquisition came up in abstract form as distinct from its being considered for purpose of computing excess or surplus on sale of asset. There is no doubt about fact that actual nature of acquisition of asset itself was not considered in any of these cases. In Gujarat High Court decision in CIT vs. Chemical Khusal Dass (1974) 93 ITR 369 (Guj) and Supreme Court decision Shekhawati General Traders Ltd. vs. ITO 1972 CTR (SC) 120 : (1971) 82 ITR 788 (SC) question of date of acquisition was also considered. In Dahanukar s case as well as Calcutta High Court decision in (1981) 151 ITR 366 (Cal) (supra) Courts generally held that there was no particular difference between valuation for purpose of computing business profits and for purpose of working out capital gain. point to be considered in present appeal is whether decisions dealing with working out of profit whether for business or for capital gain purposes would apply to more fundamental question of cost of acquisition referred to s. 48. IT Act is dealing with capital gains had made special provision for computation of cost of acquisition in fictional manner in specific cases such as inheritence, gift, etc. vide s. 55 but case of bonus shares or goodwill have been left out in this enumeration. 1 6 . following observations in CIT vs. General Investment Co. Ltd. (1981) 20 CTR (Cal) 339 : (1981) 131 ITR 366 (Cal) at p. 372 deal with nature of issue of bonus shares : "The question is computation of capital gains. That question again has to be determined in relation to cost of acquisition of asset. Now, cost of acquisition of asset must not necessarily be bereft of principle how ordinary man estimates cost of acquisition. There is evidence of actual payment of cost in particular case or payment for addition of particular asset. As we have mentioned before, in case of acquisition of asset payment, cost of acquisition, unless payment is unreal or inflated or not genuine, should normally be taken to be cost. But, whenever assessee obtains something without payment, question arises whether he obtains such asset free, viz., without any cost to himself. Now, in such circumstances, naturally, if there is any cost that cost had to be estimated and estimation of such cost must be based on certain commonsense and commercial principle. I n connection with valuation of bonus shares, it is necessary to remember what nature of interest share represents. share in company represents r ig h t of participation in capital as also other necessary rights in management which shareholders enjoys in limited liability company. Therefore, whenever bonus share is issued by company to holder of ordinary share or additional bonus shares are issued to holder of bonus shares, his total right of participation is not thereby increased but only it is measure of his quantification which is expressed in different form." Their Lordships also referred to U. S. Supreme Court s decision in case of Eisner vs. Macomber (1920) 252 US 189, 64 Ed. 521, decision referred to with approval by Supreme Court in Dalmia Investment Co. as follows : "A stock dividend really takes nothing from property of corporation, and adds nothing to interest of shareholders. Its property is not diminished, and their interests are not increased............. proportional interest of each shareholder remains same. only change is in evidence which represents that interest, new shares and original shares together representing to same proportional interest that original shares represented before issue of new one ...... In short, corporation is no poorer and stock holder is no richer than they were before ................if plaintiff gained any small advantage by change, it certainly was not advantage of Rs. 417,450, sum upon which he was taxed......... What has happened is that plaintiff s old certificates have been split up in effect and have diminished in value to extent of value of new. .........If shareholder sells dividend stock, he necessarily disposes of part of his capital interest, just as he should sell part of his old stock, either before or after dividend. What he retains no longer entitles him to same proportion of future dividends as before sale. His part in control of company likewise is dismissed." 1 7 . In case (1981) 128 ITR 294 (SC) B. C. Srinivasan Setty s - Supreme Court considered taxability of capital gain on transfer of goodwill. It is this context they observed (at pages 298 & 299): "Its (goodwill) value may fluctuate from one moment to another depending on changes in reputation of business. It is affected by everything relating to business, personality and business rectitude of owners, nature and character of business, its name and reputation, its location, its impact on contemporary market, prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of factors producing it. It is also impossible to predicate moment of its birth. It comes silently into world, unheralded and unproclaimed and its impact may not be visible felt for undefined period. Imperceptible at birth it exists enwrapped in concept, growing or fluctuating with numerous imponderables pouring into, and affecting, business. Undoubtedly, it is asset of business, but is it asset contemplated by s. 45?" Continuing further, their Lordships observed : "Sec. 45 charges profits or gains arising from transfer of capital asset to income-tax. asset must be one which falls within contemplation of section. It must bear that quality which brings s. 45 into play ............All transactions encompassed by s. 45 must fall under governance of its computation provisions. transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be subject of charge....." "The point to consider then is whether if expression "asset" in s. 45 is construed as including goodwill of new business, it is impossible to apply computation section for qualifying profits and gains on its transfer............" "What is contemplated is asset in acquisition of which it is possible to envisage cost. intent goes to nature and character of asset, that it is asset which possesses inherent quality of being available on expenditure of money to person seeking to acquire it. It is immaterial that althought asset belongs to such class, it may, on facts of certain case, be acquire without payment of money. That kind of case is covered by s. 49 and its cost, for purpose of s. 48, is determined in accordance with those provisions. There are other provisions which indicate that s. 48 is concerned with asset capable of acquisition at cost. Sec. 50 is one such provision. So also is sub-s. (2) of s. 55 None of provisions pertaining to head "Capital gains" suggests that they include asset in acquisition of which no cost at all can be conceived." (Underlined, italicized in print, supplied). They also note : "In case of goodwill generated in new business there is further circumstance that it is not possible to determine date when it comes into existence. date of acquisition of asset is material factor in applying computation provision pertaining to capital gains. It is possible to say that "cost of acquisition" mentioned in s. 48 implied date of acquisition, and that inference is strengthened by provisions of ss. 49 and 50 as well as sub-s. (2) s. 55" For above reasons, their Lordships came to conclusion that goodwill generated in newly commenced business cannot be described as "asset" within meaning of s. 45 leading to capital gains on its transfer. Their Lordships relied on twin facts : impossibility of determining cost of acquisition and date of acquisition either by assessee or pervious owner. 18. In Evans Fraser & Co. Ltd. vs. CIT (1981) 25 CTR (Bom) 128 : (1982) 137 ITR 493 (Bom), Bombay High Court considered nature of goodwill and examined Supreme Court decision in Srinivasan Setty s case at length. Evan Frasher s decision went further than Srinivasan Setty s in holding that even if moment of acquisition of goodwill and its cost of acquisition can be pin-pointed its cost of improvement cannot be ascertained in terms of money - another factor which also leads to any capital gains arising on sale of such goodwill being not taxable. 19. In light of above decisions, to which both parties before us and intervener have made profuse references, we have to decide issue before us. assessee s case is that bonus shares have no cost of acquisition. On ratio of Srinivasan Setty s case (supra) capital gains, therefore, arising from sale of bonus share cannot be computed or taxed. In earlier decision of Supreme Court such as Dalmia Investment Co. Ltd. (supra), and decisions of High Court which followed that decision, profits arising on transfer of bonus share were brought to tax. In working out this profit apparently trading account was cast wherein on cost side total financial outlay on purchase of original shares which gave rise to bonus share was regarded as constituting outlay all shares including bonus shares. surplus was worket out as difference between sale price and such outlay, effect, these decision made out trading account where total outlay in share including bonus share was entered on left hand side and sales realisation including value of closing stock of shares was entered on right hand side to arrive at surplus. If one were to ascertain excess on holding of shares originally purchased for price but which subsequently gave rise to bonus shares being sold as entire lot or part by part thereof, certainly Supreme Court decision and High Court decisions following them have laid down guideline. issue before us, however, is not ascertainment of such surplus but more fundamental question as to whether tin respect of bonus shares in ligh of decision in Srinivasan Setty s case (supra) and Evan Fraser s case (Supra), computation of surplus leading to taxability is at all justified ? In our view, even though in casting trading account to arrive at surplus share were treated as having value on method of averaging, question whether it has "cost of acquisition" as understood in s. 45 has to be answered on its own and in light of Srinivasan Setty and other cases. There are two different issues. 2 0 . When assessee pays certain amount of money to acquire certain number of shares, cost of acquisition of those shares is fixed. Even while holding those shares and without any further outlay of money on his part, assessee is given bonus shares, In fact, assessee does not invest any money or incur any expenditure in acquisition of these bonus shares. It would, therefore, be correct to say that as matter of fact he has not paid any money or incurred any cost of acquisition in getting these share. question whether he has spent any money for acquiring these shares factually and legally has only one answer viz., definite "no". In first place, if one looks for amount of money invested in acquiring bonus shares, it is clear that no such amount has been invested. Secondly, cost of acquisition of asset, whether for s. 45 or for any other purpose, would be fixed figure. It cannot go on fluctuating from time to time or be variable figure. "Cost" means financial outlay and whatever be manner in which such outlay is made, there cannot be any doubt about fixity of amount invested. If manner of determining cost leads to ambiguity or variation from time to time, that would make cost of acquisitions unascertainable. application of decision like Dalmia Investment Co., (supra) as suggested by Department ld. counsel to determination of cost of acquisition of bonus shares, definitely leads to fluctuating figure of cost. 21. If assessee purchased 1000 shares at Rs. 100 each, paying Rs. 1,00,000 and later on got 1,000 shares by way of bonus issue, his outlay of Rs. 1 1,00,000 and later on got 1,000 shares by way of bonus issue, his outlay of Rs. 1 lakh resulted in his acquisition of 2,000 Share. Following Supreme Court decision, cost of bonus share would be Rs. 5 (Rs. 1lakh divided by 2,000). If another assessee purchased 1,000 shares of same company on some other date at Rs. 80 per shares. thus spending Rs. 80,000, that assessee also gets 1,000 shares by way of bonus issue. In case of second assessee, average cost for purposes of determining surplus would be Rs. 80,000 / 2,000 i. e. Rs. 4 issue of bonus shares on same day by same company yields on average cost of Rs. 5 for first assessee but average cost of Rs. 4 for second assessee. Even though, therefore, same company issued same bonus issue on same date, application of average principle makes "cost of acquisition" very from shareholder to shareholder even though it would be same for issuer company. If assessee purchased 1,000 shares at Rs. 100 and another 1000 shares at Rs. 80 and bonus shares, were received on his holding of 2,000 shares , average method puts cost to be ascribed for bonus shares at Rs. 1,80,000/ 4,000 i. e. Rs. 4.5. Where another assessee purchased some share at same price, sold some shares, in-between got some bonus shares issue and otherwise dealt with this conglomeration of shareholding, then on average method alleged "cost of acquisition" of bonus share would be entirely different figure. In other words, averaging method of ascribing cost to bonus shares for purpose of working out surplus as envisaged in Dalmia Investment Co. and other cases definitely imparts variable Figure of cost for these shares varying with differences of purchase, with person who makes purchases and also with other transactions in shareholding which recipient of bonus shares share indulges in. alleged "Cost of acquisition" is thus not only not fixed figure but one subject to widest fluctuations depending on shareholder, his activities, his holdings and any member of other variable factors. 22. There is also another difficulty. Where assessee holding purchased share acquired bonus shares and sold bonus shares, Supreme Court decision (prior to B. C. Srinivasan Setty s case) on concession that sale of bonus share resulted in capital gains taxable under s. 45, took value of bonus shares sold as average price of both original share and bonus shares taken together. Thus, if 1,000 shares purchased for Rs. 1,00,000 fetched 1,000 bonus shares with no further outlay and bonus shares were sold for Rs. 2,50,000 owner retaining original shares cost of bonus shares would be taken as Rs. 50,000 on average basis and profit on sale would be Rs. 2,00,000. Suppose instead of bonus shares, original share were sold. original shares actually cost Rs. 1,00,000 being money laid out for purchase. It is fixed cost. IF these original share are for Rs. 2,50,000 owner retaining 1,000 bonus share receiving free would it mean that profit on sale of original share would be Rs. 2,50,000 minus Rs. 1,00,000 = Rs. 1,50,000. Or would it, when average price for original shares and bonus share is taken, be only Rs. 2,00,000 even though they really cost Rs. 1,00,000. This would show that averaging is purely notional process intended to meet particular issue before Court. fact that where shares do not rank pari passu principle of averaging is to be modified even according to Supreme Court further strengthens this view. 23 . Though, therefore, decision indicate manner of working out surplus received on sale of shares including bonus shares, it would not be proper to regard these decision as assigning particular cost of acquisition for these shares for purpose of s. 45. This is effect of decision of Supreme Court in B. C. Srinivasan Setty s case or other decision like Evan Fraser. In our view. manner of arriving at surplus would not, therefore, be complete and conclusive guide in deciding whether bonus shares as such have cost of acquisition. On contrary, as matter of fact, person who receives bonus shares on account of his holdings of some original share does not have to pay any amount for getting bonus shares. person who does not hold shares in company cannot get bonus shares either by making payment of money or by any other method. only source of receipt of bonus shares is holding of shares in company and not parting with any money or its equivalent. This aspect of purchase by payment of money is also stressed in context of goodwill in B. C. Srinivasam Setty s case (vide passage extracted above). 24. position thus is that set of cases before Supreme Court and High Courts assumed that bonus shares when sold would necessarily result High Courts assumed that bonus shares when sold would necessarily result in capital gains. Since assessee did not challenge that position and in fact they conceded it, Department s attempt to compute capital gains on basis that no money was spent when bonus shares were received led to inequitable position that not surplus on sale of bonus share but actual value of bonus shares on sale was brought to tax. Faced with this incongruity, Supreme Court adopted device of notionally drawing up trading account to ascertain surplus. It was in this context that out of several methods proposed method of averaging between bonus and original shares was recommended. This is clear from passage from Dhun Kapadia quoted at p. 12 above. basic question whether bonus share could be subject to capital gains when no payment at all was made acquiring it was never raised by assessee or considered by Supreme Court. 25. In Srinivasan Shetty s case, on other hand, similar asset, namely, goodwill, come up for consideration before Supreme Court. As in case of bonus shares, surplus could be calculated and was received on sale of goodwill. same inequity of treating entire consideration received for sale at taxable surplus was, however, apparent. When very question of goodwill having any cost of acquisition was disputed Court interpreted provisions dealing with taxability of capital gains holding that one essential condition was that asset should have positive cost of acquisition. In other words, Court held that when there was no payment or parting with of money on its purchase, asset like goodwill even if it fetched money in its sale cannot be subjected to tax on capital gains. calculation of surplus was necessary only if capital gains were taxable. If very concept of taxability is frustrated at one or other anterior stage by non-fulfilment of any condition, there was no question of calculating surplus. Then B. C. Srinivasan Setty s case was decided, decision of Supreme Court and High Courts dealing with capital gains, s. 45 of IT Act and allied sections were before and known to Supreme Court. When their Lordships said : "What is contemplated is asset in acquisition of which it is possible to envisage cost", if they felt that decision in Dalmia Investment s case, Gold Mohur s case and other cases governed situation, they would certainly have followed those decisions. Supreme Court did not apparently do so because they were not called upon to compute surplus on concession being made that capital gains are to be taxed but had to decide more fundamental question of whether capital gains have arisen at all. This was question to be decided even at threshold. decision of B. C. Srinivasan Setty s case is thus clear refinement and dealt with more basic and fundamental issue than in earlier decisions and should be regarded as modifying if not overruling them to this extent. 26. important question is whether what applies to goodwill applies to bonus shares. legal and factual position of these items treated as assets are same. When goodwill comes into existence in running business, owner of business makes no payment for its acquisition. It is asset added on to existing business without any payment being made. case of bonus share is also same. They constitute asset for which receiver pays no price just as in case or goodwill generated. Bonus shares are also addition to assets already held by owner. Again, while no payment is made by person who acquires bonus shares or goodwill in initial stage, when sold to third party, they would get price for same. Bonus share even as goodwill thus do not have inherent quality of being available on expenditure of money to any person desiring to acquire them. Both these can, however, be acquired from person who initially acquired them by payment of money. Referring to date of acquisition, Court noted that it is not possible to determine date on which goodwill generated in business comes into existence. Bonus shares really represent available accumulated profits converted into capital of company and are thus self-generated like goodwill. Though share are actually declared and made available to existing shareholders and as on particular day, accumulation of profits leading to bonus share was going on for period, and was generated in business miss earlier. It would, therefore, be equally impossible to determine exact date when profit converted into bonus shares came into existence. Because bonus share are issued to shareholder on particular day, it is incorrect to say that its date of acquisition is known. In fact, on this line of reasoning, even in he case of goodwill, day can be chosen at date for its valuation or for its being in identified. Both these assets can be sold for price by subsequent seller who would get them only on payment of price., Thus. conceptually, both bonus shares and goodwill attached to business are similar. Even as goodwill goes with business, bonus shares represent and go with company doing business. 27. We have, therefore, no hesitation holding that looked at from point of view of application of s. 45 and meaning of cost of acquisition regarded as fundamental to application of section by decisions like B. C. Srinivasa Setty of Supreme Court, bonus shares received as such cannot be said to have cost of acquisition. If person purchases cow by paying certain amount of money and cow subsequently gives birth to calf, to hold that he calf has cost owner of cow any money or that owner has to incur cost of acquisition for calf would be plain untruth. case of bonus shares is in no way different. Both in law as well as matter of fact, there is no outlay of money leading to cost of acquisition when person receives bonus shares issued by company. It is thus worth noting that s. 49 and s. 55 of IT Act which have made adequate provision for computation of cost in certain specific instances have not made any provision for artificial ascertainment of cost of bonus shares or similar asset issued or received free in certain contingencies. This aspect of matter also finds stressed in Supreme Court decision B. C. Srinivasa Setty s case. Even though, therefore, earlier decision like Dalmia Investment Co. Gold Mohur, etc. of Supreme Court and decision of High Court following them indicated method of arriving at surplus to be worked out and taxed on transfer of bonus shares whether on business account or on capital account after decision of Supreme Court in B. C. Srinivasa Setty s case regarding cost of acquisition was fundamental concept basic to very application of s. 45 no capital gain can be said to arise on sale of bonus shares. decision in Srinivasan Setty s case has completely altered concept of taxability itself of assets which have no cost of acquisition. 28. There is, however, one difficulty. share in company has distant meaning In general way, it represents conglomeration of shareholders rights in company as member thereof. definition of share most widely quoted is that of Farewell, J. in Borland s Truster vs. Steel Brothers widely quoted is that of Farewell, J. in Borland s Truster vs. Steel Brothers (1901) 1 Ch. 279 at p. 288 : " share is interest of shareholders in company measured by sum of money, for purpose of liability in first place and of interest in second, but also consisting of series of mutual covenants entered into by all shareholders inter se in accordance with (s. 20 of Companies Act, 1948). contract contained in articles of association is one of original incidents of share. share is not sum of money.....but is interest measured by sum of money and made up of various rights contained in contract including right to sum of money of more or less amount." definition stresses to some extent contractual nature of shareholders rights but emphasises fact that he has interest in company. According to Gower s Principles of Modern Company Law (4th Edition, page 399) : "The theory seems to be that contract constituted by articles of association defines nature of rights, which however, are not purely personal rights but instead confer some sort of proprietary interest in company though not in its property." In CIT vs. Standard Vacuum Oil Co. AIR 1966 SC 1393 Supreme Court held : "By share in company is meant not any sum of money but interest measured by sum of money and made up of diverse rights conferred on its holder by articles of company. Which constitute contract between him and company." holder of share in company is granted share certificate which is essentially is indication of right and title to bundle of advantages represented by share. Palmer (Company Law, 23 rd Edn. Vol. 1 Page 385) sums up position by stating "holding of share in company limited by shares generally carries right to receive proportion of profits of company and of its assets in winding up, and all other benefits of membership, combined with obligation to contribute to its liabilities, all measured by certain sum of money which is nominal value of share, and all subject to memorandum and articles of company". Sec. 82 of Indian Companies Act, 1959 specifies that share or other interests of member in company shall be movable property, transferable in manner provided by articles of company. definition "goods" in Sales of Goods Act, 1930, specifically includes stock and shares. holder of shares is issued certificate. This certificate or scrip is prima facie evidence of holder s title to shares. Sec. 83 of companies Act provides for number for shares stating that each share in company having share capital shall be distinguished by its appropriate number. When person is registered as holder of certain shares in company, distinctive numbers of shares allotted to him are marked in register and certificates in his hands also carry distinctive numbers. 29. above nature and legal position of shares, however, do not make scrip or certificate representing title to membership of company asset by itself. share certificate is only indication and evidence of holder s rights, etc., in company. When, according to methods prescribed for transfer of shares, shareholder transfers or sell his shares to another, letter steps into shoes of former as regards all his rights as member of company. Where in company capital is divided into particular number of shares (ignoring for moment different types of shares for purpose) each shareholder is entitled to his proportionate share of assets, rights, etc., in company. transfer of shares connotes transfer of this proportionate share in company. In this background of legal nature of shares, number given to share certificate does not have any effect on rights of shareholder or his relation with company. distinctive numbers are useful only, firstly, to keep count of shares issued by company from time to time and, secondly, to help shareholder himself to identify his particular title deed (share certificate) if it were to get lost. Distinctive numbers put on shares cannot be regarded as in any way referring to any particular or distinctive part of assets of company. inevitable result is that rights. etc., of all shareholders are same; whatever be distinctive number on shares certificate it has no particular meaning ; and more important, since original of shares can be by way of first issue or later issue or right share or bonus share, distinctive numbers except in giving mark or sequence to issue of shares cannot by themselves create any legal significance of their own. Thus, person who holds shares in company cannot by looking into distinctive numbers in share certificates held by specify whether they are originally purchased shares, second or later issues or bonus shares. Even if at time of issue distinctive number may refer to above nature of issue, after these shares have passed through and or more hands by sale gift, etc., such significance gets completely lost. Thus, if shareholder holding shares No. 1 to 100 gets bonus share 1,000 to 1,100 but after some time all shares are sold successively to A, B, C, etc., but on later occasion share numbers 1,005 to 1,020 are again purchased by original shareholder, could he say that these shares are bonus shares even though when he originally received them before sale to he received them as bonus shares from company ? If you ask share broker to you bonus share only of X Y Z company, what would be reply ? At any rate, will he give it without gleeful twinkle in his eye ? 30. We have considered nature of shareholdings and function of distinctive number at length to identify and understand problem raised in these appeals, but significance of which does not seem to have been fully appreciated. assessee-holder of some shares earlier and recipient of bonus shares subsequently is stated to have sold bonus shares. above details would indicate that from mere look at share certificate or even from rights subsumed by these certificates, own cannot say whether shares held by person came from first issue, bonus issue or any other issue. There is no difference either from legal or factual point of view between one share and another shares whatever be occasion for issuing shares by company. When shareholder is, therefore, possessed of bunch of shares, part of which is purchased and other part obtained as bonus shares, he would not be in position to distinguish between these two shares. From purely historical point of view, he may be in position to say that shares having such and such distinctive numbers were purchased and shares with other distinctive numbers were received as bonus. From this knowledge, if he claimed that he had sold bonus share or original shares, in our view, from purely legal or even factual point of view, it would not be correct statement. What shareholder sold is only share of company. added clarification that it is bonus share or originally received share having no basis in law or fact is mere fiction of imagination. We are, therefore, really surprised to see that where assessee sells shares he could say that he has sold bonus shares only or originally purchased shares. What we want to emphasise is that very controversy raised in these appeals bristles with difficulties even at threshold, since identification or differentiation of shares sold as bonus or others itself involves factual inaccuracies. Our point is strengthened by fact that even though our Company s Act still retains provisions for numbering of shares, elsewhere law has dispensed with requirement of distinctive numbers. Thus, while s. 74 of U.K. Companies Act, 1948 requires that shares must bear distinctive numbers, proviso thereto specifies that Directors may dispense with requirement of numbering when certain conditions are satisfied, such as that shares are fully paid up, rank pari passu and are all issued shares of company or issued shares of particular class. Palmer (op. cit. p. 386) observes that in practice numbers are frequently dispensed with. As matter of fact, therefore, stand of assessee that he has sold bonus shares or any other shares at particular sale would be factually incomprehensible. 31. If above be position and application of Supreme Court decision in B.C. Srinivasa Setty s case (supra) leaves bonus shares with no cost of acquisition, question would be as to how to deal with capital gains on sale of shares. assessee may possess 1000 shares of company purchased by him. He may acquire by bonus issue 500 shares. If he decides to sell 300 shares out of these, question is : would it lead to capital gain ? If original shares have been sold, B.C. Srinivasa Setty s case would not apply. There would be capital gain. If shares acquired on bonus distribution are sold, B.C. Srinivasa Setty s case (supra), would apply and there would be no capital gain. Where 300 shares are sold as above, perhaps assessee would claim in suitable case that he sold bonus shares. Department might claim that original shares were sold; or as in present case, even in case of bonus shares excess would be computed by Department following Dalmia Investment Co. s case (supra). decision on question is not easy but in view of what is stated above, it is not very difficult eithe. In our view, owner of any property has right to choose what part of it he decides to sell and what part he wants to retain for himself. Exercising this general right, if holder of both bonus and other shares stated that he sold shares received on bonus distribution that would be accepted. If on contrary for reasons of his own, he prefers to have other purchased shares treated as sold that should be allowed to him. In any case, computation should be made on basis of stand taken and declaration made by assessee as owner of property. 32. There was discussion about reduction in value of shares of company when company issues bonus shares. In case of Miss Dhun Dadabhoy Kapadia s case (supra), Supreme Court permitted to deduct certain amount from excess received on sale of shares on this account. Reference was made to this decision. In our opinion, actual nature and significance of deduction permitted in this case does not seem to have been fully appreciated in argument before us. In first place here as in earlier cases. Their Lordships were considering question of working out surplus in what could be regarded as something like trading account cast. In such computation, loss incidental to sale transaction has to be taken into account, which was not done by Revenue. Secondly, bonus shares are issued against accumulated but undistributed profits. Inevitably, therefore, these shares issued are backed up by sufficient fresh capital and assets in company. Though each share holder who receives bonus share has now two shares instead of one he originally held, both shares are backed by sufficient assets and capital in company. issue of bonus shares by itself, in our opinion, does not reduce value of shares of company since there is no reduction in proportionate assets of company. Nor does issue of bonus shares constitute case of sub-division of stock or shares. In fact, their Lordships did not refer to any such reduction at all. On contrary, situation considered was when shares were sold. At that time more shares being put in market play of demand and supply position depresses value of shares. It is in this context that account cast for determining surplus gave factual reduction in market value of shares. According to us, there was no depression in nominal value of shares, its cost of acquisition or any other aspect of its intrinsic value. This, in our opinion, does not, therefore, affect question before us at all. 23 . Summarising position, we hold that : (i) decisions of Supreme Court in Dalmia Investment Co. and Gold Mohur and of High Courts following these decisions went on assumption that on sale of bonus shares taxable capital gains arose. In calculating surplus to be taxed on above concession, cost of bonus shares was notionally adopted by averaging cost of purchased shares amongst those shares as well as bonus shares and not by considering actual money that lay on acquisition of bonus shares. (ii) For first time B.C. Srinivsa Sety s case focussed attention on origin, nature and cost of acquisition of such assets as distinct concept in order to find out whether capital gains arise at all on sale of such assets. To extent this decision is applicable to issues like present, there is nothing inconsistent in this decision with earlier decisions of Supreme Courts. Dalmia Investment Company s method of computation of capital gains would not, therefore, be decisive of altogether different question whether capital gains or not at all. (iii) Shares represented by share certificate as to their title, form peculiar and special type of property. Whatever be origin and time of their distribution, whether original or subsequent or by way of bonus, all shares of same type (i.e., which are pari passu) are identical, similar as to rights etc., and cannot be distinguished from one another, like one currency note from another. (iv) Basically, it would be inaccurate to say when on sells shares of company that he has sold bonus shares or other shares. manner of acquiring shares by shareholder, however, being fixed even though their identity cannot be established person who has received bonus shares can say that he owns these shares for which he has not rendered any money payment. (v) As owner of property, shareholder who owns both shares purchased at cost as well as bonus shares received without money outlay would be free to put on sale whichever of these category of shares that he likes. If, therefore, while selling shares he declares that he has sold bonus shares received by him rather than shares he purchased by payment of money, he exercises right exclusive to owner of property. computation of capital gain in that case should be made by accepting that declaration. If his claim is that he sold bonus shares there would be no capital gains to be computed under s. 45. If he declares that he has sold purchased shares, capital gains would have to be computed on that basis. After selling one type of shares, other type of shares which remains should be dealt with on its own basis. I.T.A. No. 5544 (Bom) of 1983 is allowed. This decision would apply in I.T.A. No. 594 (Bom) of 1983 on this point. ITA No. 5544 (Bom) / 1983 D.S. Meenakshisundaram, J.M. (for himself and Shri T.D. Sugla, President) We have perused order propsed by our ld. brother, Dr. V. Balasubramanian. With great respect to him, we regret our inability to agree with said order, for following reasons. 3 4 . controversy in these two cases before Special Bench is whether these two assessees are liable to tax on surplus arising on sale of certain bonus shares held by them, as capital gains chargeable to tax under s. 45 of IT Act, 1961. To appreciate arguments that were urged before us in their proper and correct perspective, it is necessary to set out relevant facts leading upto present appeals. 35. appellant, in main appeal in ITA No. 5544 (Bom) 1983, is Rohiniben Trust. assessment year is 1981-82, for which previous year ended on 31st Dec., 1980. During year, assessee-trust had sold 2,400 equity shares of Standard Mills Co. Ltd., giving rise to surplus of Rs. 26,475. While declaring this amount of Rs. 26,475, as Long Term Capital Gain in its ``Statement of Total Income, assessee trust stated as follows in Note No. 8, below said statement : "8 Bonus Shares : Capital gain shown above includes Capital Gain on sale of Bonus Shares. These gains are without prejudice to claim that sale of Bonus Shares give rise to no taxable capital gain as actual cost of acquisition of bonus shares in Nil. assessee inter alia relies on Supreme Court decision in CIT vs. B. C. Srinivasan Setty (1981) 21 CTR (SC) 138 : 128 ITR 294 (SC)." assessee-trust also furnished full and complete details of cost of acquisition in respect of these 2,400 shares for purpose of capital gain, as could be seen from statements at pp. 14 to 17 of assessee s paper-book. 36. After examining said claim, ITO held that assessee-trust had made Long Term Capital gains of Rs. 26,475 as per statement filed, on sale of 2,400 equity shares of Standard Mills Co. Ltd. and that same was assessable in hands of trust. Apparently ITO did not accept assessee s contention based on decision of Supreme Court in B. C. Srinivasa Setty s case. 37. On appeal, CIT (A) negative assessee s contentions as not tenable in view of principles laid down by Supreme Court in case of Dalmia Investment Co. (1964) 52 ITR 567 (SC). He pointed out that principles of distributing cost over original and bonus shares, applied where shares were held as stock-in-trade or as investment and that this view was supported by decisions of Gujarat High Court in CIT vs. Chunilal Khushaldas (1974) 93 ITR 369 (Guj) and of Calcutta High Court in CIT vs. General Investment Co. (1981) 20 CTR (Cal) 339 : (1981) 131 ITR 266 (Cal). CIT (A), therefore, confirmed order of ITO and dismissed appeal. It is against this order of CIT (A), assessee-trust had came up in appeal to Tribunal raising following ground : "1. learned CIT (A) erred in not accepting appellant s claim that surplus on sale of bonus shares was not exigible to capital gains tax since actual cost of bonus shares was `nil and hence, Supreme Court decision in B. C. Srinivasa Shetty (128 ITR 294) applied to appellant s case. In appellant s submission, CIT (A) ought to have held that surplus on sale of bonus shares were not exigible to capital gains." 38. In case of Intervener, M/s Podar Organisation (P) Ltd., facts are following. assessee is Private Limited Company. In statements accompanying its return of income for asst. yr. 1979-80, for which previous year ended on 31st Dec., 1978, assessee had shown sum of Rs. 1,44,407 as short-term capital gains arising on sale of 376 bonus shares of Bajaj Auto Ltd. and sum of Rs. 1,63,408 as Long Term Capital Gains arising on sale of 424 equity shares of Bajaj Auto Ltd. out of which 245 were bonus shares received by assessee in 1971 and 1973. In course of assessment proceedings, assessee filed statement showing revised calculation of capital gains. In this revised statement, assessee company claimed as follows : "Relating to short-term capital assets (other than Land and Building) : Sale proceeds of 376 Equity shares of Bajaj Auto 1,60,428 Ltd. sold to Kailashnarain Parasrampuria, Bombay. Note : As whole of these shares are out of Bonus Shares received in 1975, no capital gains is chargeable in . view of decision of Bombay High Court, in 107 ITR 609. Relating to long-term capital assets (other than land and building) (1) Sale proceeds of 179 Equity Shares of Bajaj Auto 76,612 Ltd. @ Rs. 428/- per share. Less : Cost of same . 37,576 x 179 . 196 . . 34,317 Gain 42,295 Note : No capital gains is chargeable on sale proceeds of 245 Equity Shares of Bajaj Auto Ltd. amounting to Rs. 1,04,860 since these shares were shares received as Bonus Shares during 1971 and 1973 in view of decision of Bombay High Court in CIT vs. Home Industries & Co. 1977 CTR (Bom) 23 8 : (1977) 107 ITR 609 (Bom). 39. ITO and CIT (A) did not accept assessee contentions. It would be useful to quote para 4 of CIT (A) order as he has discussed issue raised by assessee in some detail : "4. After careful consideration of submissions advanced on behalf of appellant-company, I am unable to agree that capital gains on sale of bonus shares does not attract tax. cases relied upon by learned representative are both in respect of asset in form of goodwill, which is self-created or self-generated asset. In asset of that type, it is surely not possible to comprehend any cost in terms of money and such asset was, therefore, held to be not contemplated by s. 48(ii), so that profit arising on transfer thereof was, therefore, held not liable to tax under s. 45. As far as bonus share is concerned, such asset is available on expenditure of money to person, who seeks to acquire it. It cannot be said to be asset in acquisition of which no cost at all can be conceived. In fact, very proposition, which was canvassed before Supreme Court in case of Dalmia Investment Co. Ltd. viz. that cost to assessee to such shares was to be taken to be nil, was not accepted by Court which held that cost of such shares has to determined by process of averaging, that is by spreading cost of old shares over those shares and new issue (viz. bonus shares) taken together if they rank pari passu. In fact, in one of later judgment of Supreme Court affirming decision in 52 ITR 567, Court had, at one place compared issue of two bonus share vis-a-vis original share to be by way of two eight-annas coins, in place of single rupee. It is, therefore, wholly incorrect to say that no cost in terms of money can be envisaged when bonus shares are issued. As rightly pointed out by ITO, cost of such shares has to be determined by process of averaging, as approved by Supreme Court, in CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC) reaffirmed in subsequent decision such as CIT vs. Gold Mohore Investment Co. Ltd. (1968) 68 ITR 213 (SC) and CIT vs. Gold Mohore Investment Co. Ltd. (1968) 74 ITR 62 (SC). In fact Bombay High Court, in case of W. N. Brady & Co. (1979) 10 CTR (Bom) 168 : (1979) 119 ITR 359 (Bom) has, following said decisions of Supreme Court, approved average cost to be correct "cost of acquisition of bonus shares for purpose of computation of capital gains under s. 48. No doubt, proposition that all transactions encompassed must fall within governance of computation provisions, in manner it was canvassed in CIT vs. B. C. Srinivasan Setty (1981) 21 CTR (SC) 138 : 128 ITR 294 (SC) was not advanced at time of said rulings, as urged by representative. However, that proposition would not take appellant s case out of purview of s. 45, because in respect of bonus shares, it is surely possible to envisage cost. contentions to effect that profit earned on sale of bonus shares is outside purview of s. 45 are, therefore, not acceptable. ITO s action in adopting computations of capital gains as per original statement accompanyings return is, therefore, quite valid in law and is upheld." 40. Against this decision of CIT (A) intervener-company has raised following two grounds as ground Nos. (1) and (2) in ITA No. 594 (Bom) 1983 : "1. ld. ITO and ld. CIT (A) have erred in computing short term capital gains at Rs. 1,44,409 as against correct figure of Rs. nil. appellant respectfully submits that no part of sale proceeds of 276 Equity Shares of Bajaj Auto Ltd., amounting to Rs. 1,60,428 is liable to capital gains since whole of these shares were out of Bonus Shares received in 1976. 2.The ld. ITO and ld. CIT (A) have further erred in computing long term capital loss at Rs. 2,228 as against correct amount of Rs. 1, 23 ,341. appellant respectfully submits that no part of sale proceeds of 245 Equity Shares of Bajaj Auto Limited, amounting to Rs. 1,04,860 is liable to capital gains since whole of these shares were out of Bonus Shares received during years 1971 and 1973." 41. Since arguments of ld. counsel on both sides have been fully set out in paras 3 to 8 of order of ld. Vice- President, we do not propose to burden this order by repeating same. Suffice it sy say that main trust of arguments of ld. counsel for two appellants is totally based on decision of Supreme Court in B. C. Srinivasa Setty s case (1981) 25 CTR (SC) 138 : (1981) 128 ITR 294 (SC) and of Bombay High Court in Evans Fraser & Co. s case (1981) 25 CTR (Bom) 128 : (1982) 137 ITR 493 (Bom). 42. At outset we would like to emphasis that entire case of two appellants is based on undisputed factual position that shares sold by them and giving rise to surpluses in their hands, were "Bonus Shares". There is also no dispute about dates or years of acquisition of these Bonus Shares by two appellants. This would be clear from statements filed at pp. 14, 16 and 17 of assessee s paper-book, in case of Rohiniben Trust. In case of intervener Podar Organisation (P) Ltd., it could be clear from revised calculation of capital gains quoted above and also from "Annexure D-Capital Gains" at p. (1) of appellant s papers. Thus, it is clear that two appellants accept true nature of these shares sold by them as "Bonus Shares" as well as dates of acquisition of these bonus shares by them. 43. dispute in these in these appeals, therefore, narrows down to only issue whether there was any cost of acquisition to two appellants in respect of these bonus shares sold. According to assessee, cost of acquisition of these bonus shares to them was `Nil , as indisputably they had not paid anything for acquiring them and consequently they go out of charging provision of s. 45 of IT Act, 1961, in respect of capital gains as held in (1981) 128 ITR 294 (SC) (supra) and (1982) 137 ITR 493 (Bom) (supra). Revenue seeks to meet those contention by relying on catena of cases starting from Dalmia Investment Co. (1964) 52 ITR 567 (SC) and ending with Escorts Farms (Ramgarh) Ltd. s case (1983) 35 CTR (Del) 170 : (1983) 143 ITR 749 (Del). 44. In CIT, Banglore vs. B. C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 129 ITR 294 (SC) Supreme Court held that goodwill generated in newly commenced business cannot be described as "asset" within terms o f s. 45 of IT Act, 1961 (or s. 12B of Indian IT Act, 1922) and that transfer of such goodwill initially generated in business, does not give rise to capital gain for purposes of income-tax. While reaching above conclusion, Supreme Court laid down law in this regard as under : charging s. 45 and computation provisions (i.e., s. 48 etc.) together constitute integrated code, and in case to which computation provisions cannot apply at all, such case is not intended to fall within charging section. At pp. 300 and 301 of reports, Supreme Court held as follows while dealing with provisions relating to computation of income liable to be taxed as capital gain : "What is contemplated is asset in acquisition of which it is possible to envisage cost. intent goes to nature and character of asset, that it is asset which possesses inherent quality of being available on expenditure of money to person seeking to acquire it. It is immaterial that although asset belongs to such class, it may, on facts of certain case, be acquired without payment of money. That kind of case is covered by s. 49 and its cost, for purpose of s. 48, is determined in accordance with those provisions. There are other provisions which indicate that s. 48 is concerned with asset capable of acquisition at cost. Sec. 50 is one such provision. So also is sub-s. (2) of s. 55. None of provisions pertaining to head `Capital gains suggests that they include asset in acquisition of which no cost at all can be conceived. Yet there are asset which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that goodwill generated in new business has been so regarded. elements which create it have already been detailed. In such case, when asset is sold and consideration is brought to tax, what is charged is capital value of asset and not any profit or gain. In case of goodwill generated in new business there is further circumstance that it is not possible to determine date when it comes into existence. date of acquisition of asset is material factor in applying computation provisions pertaining to capital gains. It is possible to say that computation provisions pertaining to capital gains. It is possible to say that `cost of acquisition mentioned in s. 48 implies date of acquisition, and that inference is strengthened by provisions ss. 49 and 50 as well as sub-s. (2) of s. 55. It may also be noted that if goodwill generated in new business is regarded as acquired at cost and subsequently passes to assessee in any o f modes specified in sub-s. (1) of s. 49, it will become necessary to determine cost of acquisition to previous owner. Having regard to nature of asset, it will be impossible to determine such cost of acquisition. Nor can sub-s. (3) of s. 55 be invoked, because date of acquisition by previous owner will remain unknown. We are of opinion that goodwill generated in newly commenced business cannot be described as `asset within terms of s. 45 and, therefore, its transfer is not subject to income-tax under head `Capital gains ." 45. pertinent questions that have to be considered are following : (i) Is "Bonus Share" asset in acquisition of which it is possible to envisage or conceive cost? (ii) Is "Bonus Share" asset which possesses inherent quality of being available on expenditure of money to person seeking to acquire it? (iii) Whether "Bonus Share" is asset for which it is possible to pinpoint date of its acquisition? 46. According to us, answer to third question does not present any difficulty. In case of Rohiniben Trust, dates of acquisition are clearly specified in statement at p. 14 appellant s paper-book under head "date and mode of acquisition". It is seen from this statement that dates of acquisition of these bonus shares in that case were 31st July, 1985, 14th Dec., 1961, 23 rd Feb., 1972, 10th Feb., 1976 and 12th Oct., 1966 as specified in said statement. Similarly, in case of intervaner, years of acquisition of bonus shares are indicated as 1971 and 1973 as could be seen from particulars set out in para 6 (supra). Thus, it is clear that date of issue of bonus shares by company to its shareholders is easily and indisputably date of their acquisition. 47. answer to first question is provided in various decisions of Supreme Court starting from CIT, Bihar vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 567 (SC). In this case, Supreme Court held that where bonus shares are issued in respect of ordinary shares held in company by assessee, who is dealer in shares, their real cost to assessee cannot be taken to be `nil or their face value. According to majority judgment of Supreme Court, they have to be valued by spreading cost of old shares over old shares and new issue (viz. bonus shares) taken together if they rank pari passu and if they do not, price may have to be adjusted either in proportion to face value they bear (if there is not other circumstances to differentiate them) or on equitable considerations based on market price before and after issue. careful study of entire judgments in this case, would establish that Supreme Court was unanimous in rejecting contention that cost of acquisition of bonus shares is `nil . At p. 571 of reports, his Lordship Justice Sarkari (as His Lordship then was) held as follows : "How then is cost of bonus shares to be determined? We start with this that nothing in fact was paid for them. But if cost of acquisition is nil. whole of sale proceeds of shares would be taxable profits. In CIT vs. Bai Shirinbai K. Kooka, (1962) 46 ITR 86 (SC) this Court has approved of Bombay High Court s view that `Obviously, whole of sale proceeds or receipts could not be treated as profits and made liable to tax, for that would make no sense. `So profits cannot be ascertained on basis that bonus shares had been acquired for nothing. view taken by AAC and Tribunal cannot be supported." Delivering majority judgment, his Lordships Justice Hidayatullah (as Lordship then was) held as follows at p. 578 of reports : "Can we then say that bonus shares area gift and are acquired for nothing? At first sight, it looks as if they are so, but impact of issue of bonus shares has to be seen to realise that there is immediate detriment to share-holder in respect of his original holding. ITO in this case., has shown that in 1945 when pro of shares became stable it was Rs. 9 per share, while value of shares before issue of bonus shares was Rs. 18 per share. In other words, by issue of bonus shares pro rata which ranked pari passu with existing halved, shares, market price was exactly halved, and divided between old and bonus shares. This will ordinarily be case but not when shares do not rank pari passu and we shall deal with that case separately. When shares rank pari passu result may be stated by saying that what shareholder held as whole rupee coin is held by him , after issue of bonus share, in two 50 np. coins. total value remains same, but evidence of that value is not in one certificate but in two." (Underlined, italicized in print, supplied) After quoting from decision of Supreme Court of United States o f America in Eisner vs. Mucomber. His Lordship rejected method of calculation which places value of bonus shares at nil as incorrect in following words : " It follows that bonus shares cannot be said to have cost nothing to shareholder because on issue of bonus shares, there is instant loss to him in value of his original holding. earning capacity of capital employed remains same, even after reserve is converted into bonus shares. By issue of bonus shares there is corresponding fall in dividends actual or expected and market price moves accordingly. method of calculation which places value of bonus shares at nil cannot be correct." (emphasis, italicized in print, supplied) Thereafter, Supreme Court examined other two methods for ascertaining cost of acquisition of bonus shares at p. 580 of reports and held as follows : "The leaves for consideration other two methods. Here we may point out that new shares may rank pari passu with old shares or may be different. method of cost accounting may have to be different in each case but in essence and principle there is no difference. One possible method is to ascertain exact fall in market price of shares already held and attribute that fall to price of bonus shares. This market price must be middle price and not as represented by any unusual fluctuation. other method is to take amount spent by shareholder in acquiring his original shares and to spread it over old and new shares treating new as accretion to old and to treat cost old price of original shares as cost price of old shares and bonus shares taken together. This method is suggested by Department in this case. Since bonus shares in this case rank pari passu with old shares there is no difficulty in spreading original cost over old and new shares and contention of Department in this case is right. But this is not end of present discussion. This simple method may present difficulties when shares do not rank pari passu or are of different kind. In such cases, it may be necessary to compare resultant price of two kinds of shares in market to arrive at proper cost valuation. In other words, if shares do not rank pari passu, assistance may have to be taken of other evidence to fix cost price of bonus shares. It may them be necessary to examine result as reflected in market to determine equitable cost." 4 8 . This decision was followed by Supreme Court in CIT vs. Gold Mohore Investment Co. Ltd. reported in (1968) 68 ITR 213 (SC). In CIT, Calcutta vs. Gold Investment Co. Ltd. (1969) 74 ITR 62 (SC). Supreme Court approved their earlier view in CIT vs. Dalmia Investment Co. Ltd. (1969) 52 ITR 567 (SC). At p. 65 of reports, Supreme Court held as follows : "In decision of this Court in Dalmia Investment Co. Ltd., four methods of calculation were considered. first method is to take cost as equivalent to face value of bonus shares. This method was followed by assessee-company. second method is to take cost of bonus shares t nil, method adopted by ITO in relation to Howrah Mills Co. Ltd. third method is to take cost of original shares and to spread it over original shares and to spread it over original share and bonus shares taken collectively, and fourth method is to find out fall in price of taken collectively, and fourth method is to find out fall in price of original shares at stock exchange and to attribute this to bonus shares. After considering all four methods, this Court held that correct method to apply in cases where bonus shares rank pari passu is to follow third method, namely, to take cost of original shares and to spread it over all original as well as bonus shares and to find out average price of all shares." After referring to doubt raised by counsel on basis of earlier decision of Court in case of Emerald & Co. Ltd. vs. CIT (1959) 36 ITR 257 (SC). Their Lordships of Supreme Court held as follows at p. 66 of reports : "In other words, this Court did not go into question of valuation of bonus shares at all but decided case on basis of original holding, its cost price and its sale price. matter was gone into more closely in Dalmia s case and every method of calculation was considered there. We were invited to depart from decision in Dalmia s case and to take view which appeared to have been taken in Emerald s case. We have considered matter once again and are of opinion that method followed in Dalmia s case is correct method and there seems to be some error in stating that method of Tribunal in Emerald s case was finally accepted. Perhaps Court intended saying that method of ITO was preferable but by error put down name of Tribunal. In any case that case did not decided matter fully because, as Court itself observed, difference in two methods only resulted in Rs. 18 being either added to or deducted from ultimate result." We accordingly accept third method. answers recorded by High Court are discharged and we answer question in negative. cases will be disposed of in light of our observations by Tribunal by calculation profit and loss by spreading cost over original and bonus shares and finding out average cost per share. appeals are allowed with costs." (emphasis, italicized in print, supplied) Their Lordships reiterated this position again in case CIT vs. Gold Co. Ltd. decided by them on same day but reported in later volume, i.e., (1970) 78 ITR 16 (SC). by following their decision in Gold Mohore Investment Co. Ltd. 49. We would refer to two decisions, one of Bombay High Court and other of Delhi High Court, where ratio of these decisions of Supreme Court has been followed and applied. In W. H. Brady & Co. Ltd. vs. CIT (1979) 10 CTR (Bom) 221 : (1979) 119 ITR 359 (Bom), question before t h e Bombay High Court was regarding cost of acquisition of bonus shares sold by assessee for purpose of computing capital gains. Their Lordships of Bombay High Court followed decision of Supreme Court in Dalmia Investment Co. s case referred to above and distinguished decision of Supreme Court in case of Shekhawati General Traders Ltd. vs. ITO 1972 CTR (SC) 120 : (1971) 82 ITR 788 (SC). At p. 368 of report, High Court has held as follows : "Reference was made by Mr. Dastoor to decision of Supreme Court i n case Shekhawati General Traders Ltd. vs. ITO 1972 CTR (SC) 120 : (1971) 82 ITR 788 (SC). This was case where Court was concerned with issue of bonus shares after 1st Jan., 1954. We are not concerned with case of that type. Actually in this case questions with which we are concerned did n o t arise for consideration and any attempt to pick up isolated sentence shown from context is of no assistance to Court in view of clear pronouncements of Supreme Court in Dalmia Investment Co. Ltd. s case (1964) 52 ITR 567 (SC) where principles are fully crystallised." (emphasis, italicized in print, supplied) In fact, in this judgement, Their Lordships also referred to late decision of Supreme Court in Gold Mohor Investment Co.(supra). Their Lordships also rejected assessee s contention that in Dalmia Investment Co. Ltd. s case (supra) Supreme Court was concerned with as dealer in shares, whereas in case before them assessee was investor in shares. Bombay High Court at pp. 368 and 369 of Reports pointed out that there was no distinction between dealer in shares and investor in shares by relying on their earlier decision in D. M. Dahanukar vs. CIT (1973) 88 ITR 454 (SC). 50. In Escorts Farms (Ramgarh) Ltd. vs. CIT, New Delhi (1983) 35 CTR (Del) 170 : (1983) 243 ITR 749 (Del), Delhi High Court had considered cost of acquisition of original shares in respect of which bonus shares were issued for purposes of finding out capital gains on sale of original shares. first question, which was referred to High Court was as follows : "Whether, on facts and in circumstances of case, Tribunal w s justified in determining cost of acquisition of original shares by spreading original cost over original and bonus shares and then averaging same and no that basis working out capital gain at Rs. 32,100 and Rs. 12,450 for asst. yrs. 1967-68 and 1968-69 respectively?" At pp. 752 and 753 of reports, Delhi High Court discussed effect of issue of bonus shares on original shares in following words : "We are here concerned with cost of acquisition of original shares and not cost of acquisition of bonus shares. It is original shares that have been sold. They were admittedly purchased after 1954. Therefore, option of taking fair market value as on 1st Jan., 1954, is not available to assessee. cost and date of acquisition of these shares is known. sale price is known. In such case it would appear, normally, that cost of acquisition of original shares should be actual price paid and capital gains should be arrived at after deduction this price from sale price. But what happens when bonus shares have been issued after acquisition and before sale? Is not actual cost of acquisition effected by subsequent event, e.g., issue of bonus shares? issue of bonus shares certainly effects market value of existing shares, which diminishes as result. How then is cost of bonus shares and original shares to be determined? cost of acquisition of assets is normally actual cost. However, if assessee receives asset for free question arises as to cost to be estimated. nature of asset, and reason why assessee has received it without any payment, has to be examined. share in company is bundle of rights of permitting holder to participate in capital and management of company. Bonus shares are issued to holder of original shares. Once bonus shares have been issued they are treated exactly as other shares, if they rank pari passu with other shares. Thereafter, bonus share can be issued also in relation to these earlier bonus share which are new ranking pari passu. Therefore, on issue of bonus shares what happiness is, that though participation of holder is not increased, number of shares is, all holders of original shares being entitled to bonus. As such, shares are split up. In wards of Justice Holmes in Henry R. Ewon vs. Mark Eismer, Collector of United States Internal Revenue for Third District of State of New York (1977) 245 US 418 at 426; 62 L. Ed. 372 at 376, effect and have diminished in value to what has happened is that plaintiff s old certificates have split up in extent of value of new." After referring to various decisions of Supreme Court referred to above as well as decision of Supreme Court in Shekhawati General Traders case, Delhi High Court answered first question referred to them in affirmative and in favour of Revenue in following words at p. 756 of reports : "From layman s point of view, cost of original shares is price paid for them : and cost of bonus shares is nil. But once principle of averaging is accepted, as it certainly has to be in respect of bonus shares at least, it necessarily implies that for original cost assessee must be taken to have acquired both bonus and original shares. In other words, issue of bonus shares, though subsequent, has effect of altering original cost of acquisition of shares. There is nothing illegal in this, as price paid by assessee originally was not only for shares themselves but also for such shares that it may yield subsequently, if any. right to acquire bonus shares is right embedded in original shares, and they are legal accretion thereto. method of spreading over on both bonus and original shares cost of acquisition of original shares would appear to be proper method of determining value of asset. For, there is no doubt that on issuance of bonus shares, value of original shares is proportionately diminished. In simple language it is `split up . As such, cost of acquisition of original shares and their value is closely interlinked and interdependent on issue of bonus shares. Therefore, once bonus shares are issued, averaging out formula has to be followed with regard to all shares. But in view of specific language of s. 55(2)(i) regarding substituted market value of 1st Jan., 1954, this cannot be done where assessee has elected to exercise option as decided in Shekhawat General Traders Ltd. s case 1972 CTR (SC) 120 : (1971) 82 ITR 788 (SC). For reasons outlined above and harmonising principles enunciated in various decisions of Supreme Court it would appear to us that question No. 1 has to be answered in affirmative and in favour of Revenue. 51. From above discussion, it would b clear that `bonus shares is `asset , in acquisition of which it is possible to envisage or conceive cost and that it is too late in day to contend that cost of acquisition of bonus shares to assessee is `nil . In fact, this was stand taken by assessee in W.H. Brady & Co. s case (1979) 10 CTR (Bom) 221 : (1979) 119 ITR 359 (Bom) before Bombay High Court. But this stand of assessee has been negatived by following decisions of Supreme Court referred to above. As pointed out by Delhi High Court in case of Escort Farms (Ramgarh) Ltd. (supra) right to acquire bonus shares is right embedded in original shares and they were legal accretions thereto. It, therefore, follows that cost of acquisition of bonus shares is also embedded in cost of acquisition of original share and that said cost of acquisition of bonus shares has to be ascertained according to third method approved by Supreme Court in case of Dalmia Investment Co. Ltd. (supra). We, therefore, hold, respectfully following decisions of Supreme Courts and Bombay and Delhi High Courts referred to above, that `bonus share is `asset in acquisition of which it is possible envisage or conceive cost. 5 2 . process of issue of bonus shares has been discussed by Supreme Court in case of Dalmia Investment Co. Ltd. at app 575 and 576 of reports and same has been quoted by our ld. brother in paragraph 11 of his order. From said passage it would be clear that on conversion of reserves into capital by issue of bonus shares, company employs said money not as reserve of profits, but as its proper capital issued to and contributed by shareholders. It is for this reason that Their Lordships of Supreme Court unanimously rejected method of calculation, which places value of bonus shares at `Nil as incorrect. Their Lordships have also described result of issue of bonus shares when shares rank pari passu by saying that what shareholder held as whole rupee coin, is held by him, after issue of bonus shares in two 50 np coins and that total value remains same, but evidence of that holding is not in one certificate but in two. It, therefore, follows that answer to second question is that `bonus share is asset which possesses inherent quality of being available to shareholder on capital-isation of reserves of profit by company. After it is issued bonus shares is as good as or as bad as any other equity share, whether acquired originally for price or whether issued later by way of bonus. But question of ascertaining cost of bonus hares is closely inter-linked and interdependent with cost of acquisition of original shares, as cost of bonus shares is also embedded in cost of original shares, just as right to acquire bonus share is embedded in original shares. 53. There is another way of looking at problem. Bonus shares, as such, are not separate species of shares. Shares which are issued by way of bonus are popularly known as `bonus shares in common parlance. Therefore, pertinent question is not whether bonus share is asset which possesses inherent quality of being available on expenditure of money to person seeking to acquire it. It is whether shares issued by way of bonus, which are as good as any equity shares, are available on expenditure of money to any person seeking to acquire them. Considered in this manner, answer to second question whether equity share is available at price cannot but be in affirmative. Looked at from any point of view, it has, therefore, to be held that shares issued by way of bonus are equity shares and which are capable of being purchased for price by any person seeking to acquire them. 54. In view of above discussion, it is clear that decision of Supreme Court in B.C. Srinivasa Setty s case (supra) in inapplicable to facts of present case. For very same reason, decision of Bombay High Court in Evans Fraser & Co. Ltd. vs. CIT (1981) 25 CTR (Bom) 128 : (1982) 137 ITR 493 (Bom) relied on appellants is also inapplicable to facts of present case. That was also case of goodwill only and not of bonus hares. In fact, in this case Their Lordships of Bombay High Court have brought out distinction between goodwill and other tangible assets p. 514 of Reports wherein they have stated as follows : "Goodwill differs from tangible asset such as immovable property or share in joint stock company which retains shape and form but of which market value fluctuates. market value of goodwill also fluctuates, but it fluctuates because of fluid nature of goodwill. Just as it is impossible to pinpoint when goodwill came into existence, so it is equally impossible to pinpoint moment at which goodwill waxed or increased or it waned or decreased, for, process is imperceptible; and just as in case of newly started business it is not possible to ascertain in terms of money cost of addition or alteration to quality of goodwill which led to increase in its value.....................................................Such increase is really due to fact that by further self generation goodwill has increased." Thus it would be seen that this decision of Bombay High Court entirely dealt with case of capital gains arising on sale of goodwill only which was acquired by company and not case of bonus shares with which we are presently concerned. Therefore, this decision is of no help to appellants in present case. 5 5 . For reasons discussed above, we are unable to accept contentions of learned counsel for appellants that no capital gains can arise on sale of bonus shares by two appellants. There is no dispute before us about correctness of amount of capital gains computed by ITO, who has accepted computation made by appellants as correct. We, therefore, confirm orders of CIT(A) on this point in both appeals. 56. In result, I.T.A. No. 5544 (Bom)/1983 filed by Rohiniben Trust is dismissed. Ground Nos. 1 and 2 in I.T.A. No. 594 (Bom)/1983 filed by Podar Organisation (P) Ltd. are rejected. *** ROHINIBEN TRUST v. INCOME TAX OFFICER