Law:

Section:

Section 145 of the Income-tax Act, 1961 [Corresponding to section 13 of the Indian Income-tax Act, 1922] - Method of accounting - Valuation of stock - Assessment years 1949-50 and 1950-51 - Assessee - company was dealing in shares - Its method of valuation at opening and closing of stocks was to value shares at cost - Assessee held certain shares of company which issued bonus shares - Bonus shares rank pari passu with old shares - Subsequently, it sold original shares as well as bonus shares - Whether method to be adopted in valuation of bonus shares was to take cost of original shares and to spread it over original shares and bonus shares collectively and to find out average price of all shares - Held, yes FACTS The assessee-company was a dealer in shares. Its method of valuation at the opening and closing of the stocks was to value shares at the cost in the assessment year 1949-50. The assessee held certain shares of a company which issued bonus shares in June 1948. The bonus shares were to rank pari passuwith the old shares. The original shares were purchased by assessee at Rs. 85 per share. In August 1949, the assessee sold the original share at Rs. 29 per share and bonus shares at Rs. 25 per share. The bonus shares when they were issued were included in the trading account. According to the assessee-company the bonus shares had fetched as profit less the face value of the shares. This profit was set off against the loss on the original shares. The ITO did not accept the mode of calculation. He find out the profit by taking the cost of bonus shares as nil which was upheld by the Tribunal. On reference, the High Court following the decision of the Patna High Court in Dalmia Investment Co. Ltd.v. CIT [1961] 41 ITR 705 decided the case in favour of the assessee. On appeal to the Supreme Court: HELD In the decision of the Supreme Court in CIT v. Dalmia Investment Co. Ltd.[1964] 52 ITR 567 (SC), four methods of calculation were considered. The first method was to take the cost as equivalent to the face value of the bonus shares This method was followed by the assessee-company. The second method was to take the cost of the bonus shares at nil, a method adopted by…

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