INCOME TAX OFFICER v. UNIQUE MANUFACTURING & MARKETING CO. LTD
[Citation -1987-LL-0326-4]

Citation 1987-LL-0326-4
Appellant Name INCOME TAX OFFICER
Respondent Name UNIQUE MANUFACTURING & MARKETING CO. LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 26/03/1987
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags valuation of closing stock • method of accounting • cost of acquisition • method of valuation • business profit • specified date • original cost • market price • market value
Bot Summary: CIT(A) erred in holding that the original shares of M/s Kesoram Cotton Industries Ltd. should be valued with reference to the original cost to the appellant and not by averaging the cost of original shares with bonus. During the previous year under consideration, it received 4950 bonus shares from the same company against its original holding of 19,900 shares. Relying on the decisions of the Supreme Court in the cases of CIT vs. Dalmia Investment Co. Ltd. 52 ITR 657 and CIT vs. Gold Mohore Investment 74 ITR 62 he held that the original cost of 19,900 shares had to be spread over the total holding of 19,900 plus 4950 shares amounting in all to 24,850 shares. The Revenue took the stand that the cost of the original shares was reduced by the subsequent issue of bonus shares. Under such circumstances the cost of the shares had to be worked out by spreading the cost of the original shares over the original shares as well as the bonus shares. During the year under consideration it sold the original shares and retained the bonus shares. The question is as to how the the original shares and retained the bonus shares.


S. N. ROTHO, A.M.: This appeal has been filed by Department against order dt. 16th Oct., 1985 of CIT(A) relating to asst. yr. 1981-82 on following ground: "That on facts and in circumstances of case, ld. CIT(A) erred in holding that original shares of M/s Kesoram Cotton & Industries Ltd. should be valued with reference to original cost to appellant and not by averaging cost of original shares with bonus." assessee is limited company deriving income from, inter alia, share during dealing previous year under consideration which was calendar year 1980. assessee claimed that it had suffered loss in its share dealings. It had purchased 19,900 shares of M/s Kesoram Cotton & Industries Ltd. at cost of Rs. 8,32,230. During previous year under consideration, it received 4950 bonus shares from same company against its original holding of 19,900 shares. original 19,900 were sold during previous year for Rs. 6,97,120. assessee retained bonus shares with it. assessee had to calculate difference between cost and sale proceeds of 19,900 original shares which were sold. For this purpose, assessee took cost of 4950 bonus shares at 'nil so that entire sum of Rs. 8,32,230 became cost of original shares. As sale proceeds of those shares amounted only to Rs. 6,97,120, assessee claimed difference of Rs. 1,35,110 as loss from its business of share dealing. ITO did not accept above computation of loss made by assessee. Relying on decisions of Supreme Court in cases of CIT vs. Dalmia Investment Co. Ltd. (1964) 52 ITR 657 (SC) and CIT vs. Gold Mohore Investment (1969) 74 ITR 62 (SC) he held that original cost of 19,900 shares had to be spread over total holding of 19,900 plus 4950 shares amounting in all to 24,850 shares. He calculated average cost of each of above 24,850 shares on above basis and arrived at lower figure of cost for 19,900 shares. On above basis, he computed profit of Rs. 30,500 instead of loss of Rs. 1,35,110 shown by assessee on aforesaid sale of original 19,900 shares. He made assessment accordingly. assessee appealed to CIT(A) and contended that calculation made by it should have been accepted. Reliance was placed on decision in case of Smt. Protima Roy vs. CIT (1982) 27 CTR (Cal) 275: (1982) 138 ITR 536 (Cal). It was also urged before CIT(A) that two decisions relied on by ITO were not applicable to facts of this case because in case of assessee, assessee sold original shares, and not bonus shares. CIT(A) agreed with contention of assessee and directed ITO to accept computation of loss as made by assessee. Shri S.K. Lahiri, ld. representative for Department, urged before us that ld. CIT(A) erred in his decision. He pointed out that case of Protima Roy (supra) was decided on different facts. In that case, assessee had certain shares and received certain bonus shares after 1st Jan., 1964. assessee sold both original as well as bonus shares after 1st Jan., 1964. She elected cost as on 1st Jan., 1964 under s. 55(2) of Act as basis computing capital gains. Revenue took stand that cost of original shares was reduced by subsequent issue of bonus shares. High Court did not agree. Relying on decision in case of Shekhawati General Traders 1972 CTR (SC) 120: (1971) 82 ITR 788 (SC) Court held that cost of acquisition as on elected date of 1st Jan., 1964 cannot change for purpose of calculating capital gains by any issue of bonus shares subsequent to that specified statutory date. Hence, original cost was maintained so that capital gains became less. Shri S. K. Lahiri referred to decision in case of Shekhawati General Traders (supra) which has laid down rule that any issue of bonus shares subsequent to statutory date laid down for computation of cost for purpose of capital gains will not affect original cost. He pointed out that instant case is that of trader in shares. It is not case of capital gains and so question of determining cost on particular date does not arise in this case. When assessee sold shares it was already in possession of original shares as well as bonus shares. Under such circumstances cost of shares had to be worked out by spreading cost of original shares over original shares as well as bonus shares. business profit or loss has to be arrived at on basis of such average cost. He relied on decision in case of Gold Mohore Investment (supra) in this connection. In that case, it has been laid down that in case of dealer in shares who values his stock at cost, where bonus shares issued in respect of ordinary shares held by him rank pari passu with original shares, correct method of valuing cost to dealer of bonus shares is to take cost of original shares, spread it over original shares and bonus shares collectively and find out average price of all shares. This decision approved earlier decision in case of Dalmia Investment (supra). He pointed out that in case of Gold Mohore Investment (supra), bonus shares were sold while in case of Dalmia Investment (supra) original shares were sold. Both were dealers in shares and so whether original or bonus shares were sold was of no consequence. In circumstances, he urged that learned CIT(A) wrongly applied decision in case of Protima Roy (supra) to facts of this case while ITO had applied correct decisions that are applicable to instant case. Shri K. V. Singh, learned representative for assessee, on other hand, supported order of CIT(A). He stated that cases of Dalmia Investment and Gold Mohore Investment (supra) were not applicable to facts of this case because question as to method of accounting regularly followed by assessee in valuing its stock of shares was not considered in those cases. On other hand, he pointed out that assessee had valued bonus shares at 'nil and method of valuation regularly employed by assessee was cost or market price, whichever was lower. According to him, original shares which were sold were valued according to above method at its original cost. In this connection, he drew our attention to Schedule B to printed Balance Sheet of assessee as at 31st Dec., 1980 where valuation of bonus shares remaining in stock has been taken at nil on ground that their cost to assessee was nil and such zero cost was lower than prevailing market price. He urged that order of CIT(A) deserved to be upheld. We have considered contentions of both parties as well as facts on record. In our opinion, contentions raised for Revenue carry force. assessee is dealer in shares. During year under consideration it sold original shares and retained bonus shares. question is as to how the original shares and retained bonus shares. question is as to how cost of shares sold has to be determined. decision of Supreme Court in case of Gold Mohore Investment (supra) gives complete answer to this issue. It has been held therein that cost of shares sold has to be determined by spreading original cost over total shares inclusive of bonus shares. We find that in that case Supreme Court had also taken note of fact that assessee was valuing shares at cost. Hence, it cannot be said that method of valuation of closing stock was not considered in said case. Besides, one of recognised methods is cost or market value, whichever is less. question which arises in this appeal is as to what is cost for purpose of determining whether same is lower or higher than market value. It is for determining this cost that case of Gold Mohore Investment (supra) squarely applies to facts of this case. As in that case, assessee before us is dealer in shares. It is not case of determining cost on specified date for purpose of determining capital gains. Hence, we agree with learned representative for Department that decision in case of Protima Roy (supra) does not apply to facts of this case. Consequently, we vacate order of CIT(A) and restore order of ITO. In result, appeal is allowed. *** INCOME TAX OFFICER v. UNIQUE MANUFACTURING & MARKETING CO. LTD.
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