BHARGAVA, J. - The assessee is a Hindu undivided family carrying on money lending business on a small scale and also a business of dealing in shares. The assessee had been dealing in shares for a number of years and prior to the assessment year 1943-44 all the shares held by the assessee were treated by it as stock-in-trade. On September 2, 1942, the closing day of the account year August 25, 1941, to September 2, 1942, relevant to the assessment year 1943-44 the assessee made an entry in the books of account of certain shares in an account styled as investment account. The shares transferred to the investment account were :
30 Muir Mills ordinary
4 Muir Mills preference
100 Samastipur Central Sugar Co. ordinary
975 Kanpur Textiles ordinary
200 Hansgua Tea Co. ordinary
20 Calcutta Safe Deposit Co. ordinary
10 Elgin Co-operative Credit Society ordinary
It was contended by the assessee that these shares were put in investment account in order to make the position of the family safe so that these shares would remain apart from stock-in-trade of the share business. The return for the assessment year 1943-44 was filed on November 13, 1943, and in that return the transfer of the stock-in-trade in respect of these shares was shown as a transfer to investment account. In assessment proceedings the Income-tax Officer accepted this transfer as a genuine one and held that since the shares had been transferred from stock-in-trade, the transfer should be taken into account for purposes of calculating the profits of the share business at market rate and not at cost. The market rate was computed and thereupon the difference of Rs. 1,819 was included in the taxable income assessed for the assessment year 1943-44. The Income-tax Officer added a remark to his assessment order that 'in future no profit or loss will be taken on the investment shares.' Apart from the 975 shares of Kanpur Textile Mills which were then transferred to the investment account the assessee had another 500 Kanpur Textile Mills shares which were retained as part of the stock-in-trade.
Some time in June, 1943, a date which fell in the accounting year September 3, 1942, to September 1, 1943, relevant to the assessment year 1944-45 bonus shares of the Kanpur Textiles were issued at the rate of one bonus share for ever ordinary share held by a shareholder. As a result in June, 1943, the assessee received 975 bonus shares by virtue of his holding 975 ordinary shares which had been transferred to the investment account and another 500 bonus shares by virtue of holding 500 shares which were still a part of his stock-in-trade of the share business. None of these shares was sold in the accounting period September 2, 1943, to August 22, 1944, relevant to the assessment year 1945-46 (sic). The assessee gifted 200 shares out of 975 ordinary shares which were held in the investment account. This gift was made in favour of the daughter of one Lala Ram Chandra on the occasion of her marriage. The remaining 775 ordinary shares which remained out of those transferred to the investment account and 975 bonus shares received by virtue of those ordinary shares held in investment account were sold during this very previous year relevant to the assessment year 1945-46 resulting in a profit of Rs. 19,415. During this previous year the assessee sold the lot of 500 bonus shares which he had received by virtue of his holding shares of the Kanpur Textiles as stock-in-trade. These shares were sold for as sum of Rs. 7,156. The Income-tax Officer held that both of these sums, Rs. 19,415 and Rs. 7,156, were taxable income of the assessee earned in the previous year September 2, 1943, to August 2, 1944, relevant to the assessment year 1945-46 and added these sums to the income assessed for the assessment year. That decision was upheld by the Appellate Assistant Commissioner as well as by the Income-tax Appellate Tribunal. Thereupon the assessee moved an application under section 66 of the Indian Income-tax Act and prayed that certain question of law be referred to this court for opinion. The Tribunal has on these facts submitted the following questions for our opinion :
'(1) Whether the Income-tax Officer is estopped from challenging the finding and undertaking of the Income-tax Officer given in the assessment order for 1943-44 ?
(2) Whether there was material on which the Tribunal came to the conclusion that the assessee went on dealing with the so-called investment shares in the same manner as his other shares which were his stock-in-trade ?
(3) Whether the bonus shares received by the assessee were a part of the stock-in-trade ?
(4) Whether the surplus of Rs. 19,415 and Rs. 7,156 are revenue receipts in the hands of the assessee and as such liable to be assessed ?'
When this reference was argued before us, learned counsel for the assessee held to concede that so far as the first question in concerned, he could not support the stand taken by the assessee in respect of it. It is now a well established principle that the finding recorded by an Income-tax Officer in proceedings for assessment for one year do not operate as res judicata in assessments of the same assessee in subsequent years. If the findings in an earlier year did not operate as res judicata, there is no question of the Income-tax Officer, dealing with subsequent proceedings, being estopped from going into those questions afresh. It was not a case where the Income-tax Officer has given any assurance during the assessment for the year 1943-44 on which basis the assessee might have taken some action which he would not have otherwise taken so that even the principle of estopped laid down in section 115 of the Indian Evidence Act cannot be invoked by the assessee. It may, however, be mentioned that it has also been recognised now that orders of assessment made in the case of an assessee in an earlier year are relevant and can be read as evidence in proceedings for assessment in subsequent years. The finding given by the Income-tax Officer in the assessment for the year 1943-44 did not, therefore, bind the Income-tax Officer in the proceedings for the assessment year 1945-46 but were relevant and could be taken into account. This is our answer to the first question.
So far as the second question is concerned, we may before answering it deal with the point which was raised by learned counsel for the Department, who instead of confining himself to the statement of the case and the appellate order of the Income-tax Tribunal, desired us to take into account the findings and the reasoning that were recorded by the Income-tax Officer and the Appellate Assistant Commissioner. It may be noted that the Income-tax Appellate Tribunal in its appellate order did go to the extent of affirming the decision of the Income-tax Officer that the proceeds of the shares transferred to the investment account would be assessable to income-tax but the Tribunal did not adopt the reasoning on which this view was expressed by the Income-tax Officer or the Appellate Assistant Commissioner. The Tribunal gave its own independent reasons. The order of the Income-tax Officer and the Appellate Assistant Commissioner were not annexed to the statement of the case and were not made a part of the statement of the case. Therefore, those orders cannot be taken into account when answering this question, and we must confine ourselves to the facts as given in the statement of the case and the appellate order of the Tribunal.
In the statement of the case as well as the appellate order of the Tribunal the finding has been recorded in the following words :
'In this particular case the appellant intended to set apart a portion of stock-in-trade as investment but subsequently he went on dealing with such shares like his other shares which he held as stock-in-trade. The character of investment which he intended to pass on to the shares did not really pass on to the shares which he intended to set apart for his investment. Merely opening an account in the books under the head of investment and transferring a part of stock-in-trade to such account, does not confer upon the stock-in-trade the character of investment.'
This is the entire material which can be found in the statement of the case or the appellate order of the Tribunal which is relevant for the purposes of answering this second question. The material thus mentioned by the Tribunal recognises the fact that the assessee intended to set apart a portion of his stock-in-trade as investment and the further fact that an account was opened in the books under the head investment account and a part of the stock-in-trade was transferred to such account. The Tribunal in an earlier part of its appellate order recognises the right of a stock dealer to set apart any share or portion of his share held as stock-in-trade as investment so that it was recognised that a stock dealer had a right to change the character of shares held by him as stock-in-trade into shares held as investment. Such a transfer can only be made by making appropriate entries in the books of account and, thereafter, dealing with the shares as investment and not as stock-in-trade. The facts found by the Tribunal, as mentioned above, show that the assessee did give effect to his intention by making necessary entries and the only question that remains to be considered is whether the subsequent dealings indicated that the transferred shares were treated as investment or continued to be treated as stock-in-trade. The question of subsequent dealing was, therefore, the crux of the matter and a finding on it had to be recorded by the Tribunal. The extract of the Tribunals judgment quoted above shows that the Tribunal made no mention of any material for recording the finding that subsequent the assessee went on dealing with such shares like his other shares which he held as stock-in-trade. In fact the manner of dealing is not mentioned at all. We have to confine ourselves to the facts taken notice of by the Tribunal in arriving at its finding. It is clear that the answer to the second question has to be in the negative because the Tribunal recorded the view that the assessee went on dealing with the so-called investment shares in the same manner as his other shares which are held as stock in trade without mentioning any material relating to these dealings, so that the finding was without material. Apart from these circumstances, we have considered it advisable to examine other portions of the statement of the case and appellate order of the Tribunal also to find out whether there was any relevant material before the Tribunal which could have justified this finding, even though the Tribunal did not rely on it. With regard to the subsequent dealings of the assessee with those shares, only two facts have been found which are mentioned in the statement of the case and the appellate order of the Tribunal. One fact is that, after the assessment had been made in 1943-44 on the basis that these shares had been transferred to the investment account, the assessee quietly submitted to the additional tax which he was required to pay on that basis. The question of additional tax arose because the Income-tax Officer held that, if the shares were to be treated as genuinely transferred to the investment account, they could be excluded from the stock-in-trade only at their market value at the date of transfer and the difference in the market value and the cost price was to be added to the income for the account year in which the transfer was made. On that basis, a sum of Rs. 1,819 was added to the taxable income assessed and the assessee had to pay extras tax because of this addition to the assessed income. The assessee submitted to it and thus on his part he voluntarily proceeded, to the extent that he was required to do, to treat those transferred shares as genuine investment. If he had intended not to treat them as genuine investment and to treat those shares still as stock-in-trade, he would not have paid the additional tax and would have challenged the order of the Income-tax Officer. His not doing so indicates that he did, in fact, deal with those shares treating them as part of the investment and as shares which had gone out of stock-in-trade. The only other circumstance available is actual disposal of these shares. Two hundred of these shares were transferred by a gift to the daughter of L. Ramchandra on the occasion of her marriage, a deal which is only consistent with treating them as capital investment and not as stock-in-trade. The other transfer was by sale of 775 ordinary original shares and 975 bonus shares in the previous year relevant to the assessment year 1945-46. This sale by itself cannot be said to be a dealing leading to the inference that these shares had been held as a stock-in-trade and not as investment. A person can sell even shares held as investment if there be some reason for doing so apart from the sale of shares held as stock-in-trade. This sale of shares was, therefore, consistent with both positions : either that these shares were held as capital investment or that they were held as stock-in-trade. Taking into account all the subsequent dealing of these shares by the assessee as a whole, it would thus appear that there were two transactions or actions of the assessee indicating that the assessee was treating these shares as investment, whereas there was one transaction which was consistent with the shares being treated as investment as well as stock-in-trade. This being the nature of the subsequent dealings, it is quite clear that there was no material for recording the finding that the assessee went on dealing with these investment shares in the same manner as those which formed the stock-in-trade. Our answer to the second question is, therefore, in the negative.
So far as the third question is concerned, we consider than it will have to be dealt with in two separate parts. The question covers all the bonus shares of the Kanpur Textiles which were received by the assessee in June, 1943. It is to be noticed that 975 bonus shares were received by virtue of the holding of 975 ordinary shares held as investment by the assessee, while 500 bonus shares were received by virtue of holding 500 ordinary shares held as stock-in-trade by the assessee. We consider that, by their very nature, all these bonus shares should be treated as accretions to the ordinary shares in respect of which the bonus shares were issued by the company. These bonus shares would not have been received by the assessee if the assessee had not been holding the ordinary shares. It was because he was holding those ordinary shares that the company gave these bonus shares to the assessee. There is, of course, no doubt that these bonus shares cannot be treated as dividend received by the assessee from the company, because in issuing him the bonus shares the company did not give away any cash or any part of its assets. Whatever profits had been earned by the company remained in the hands of the company as capital. In such cases all that a shareholder receives are paper certificates showing his interest in the additional capital and such a transaction puts nothing in the shareholders pocket as profit. This view of ours is supported by a decision of the House of Lords in Commissioner of Inland Revenue v. John Blott & Benjamin. The same view was also taken by a learned judge of the Madras High Court in Sivagnanammal v. Thirumagal Mills Ltd. The fact, however, that bonus shares are not received as dividends does not by itself determine the nature of the receipt of the shareholder when he receives the bonus shares. When a company issues bonus shares, there is no distribution of dividends or any part of the income of the company, but the question still remains as to what is the nature of the receipt by the shareholder when he gets the bonus shares. The bonus shares are received by virtue of his holding of ordinary shares and consequently it must be held that it is in the nature of accretion to the ordinary shares held by the shareholder. In the present case, therefore, 975 bonus shares received by the assessee must be treated as accretion to the 975 ordinary shares held by the assessee as capital investment, while 500 bonus shares received by the assessee as stock-in-trade. Bonus shares, being shares received by virtue of the holding of ordinary shares, the nature of their receipt in the hands of the shareholder for purposes of charge to tax must be determined by determining the nature of the ordinary shares held, to which the bonus shares are accretions. In the present case, 975 bonus shares received as accretion to the 975 shares held as capital investment would, on these reasoning, be capital gain earned by the shareholder on his 975 shares held as capital investment. So far as the other 500 bonus shares are concerned, they were received by virtue of 500 ordinary shares held a stock-in-trade. When computing income for purposes of assessment of income-tax, they must be treated as additions to stock-in-trade on the date on which they were received by the assessee. In the present case, these shares were received by the assessee in June, 1943 and, consequently, assessment should have been made on the basis that in June, 1943, the stock-in-trade of the assessee increased to the extent of 500 bonus shares without any investment or expenditure by him for purposes of obtaining these bonus shares, which means that he got these shares without incurring any costs. In this connection, learned counsel for the assessee drew our attention to a decision of this court in Shri Ram Jha v. Commissioner of Income-tax and urged that on the reasoning adopted in that case we should hold that even the 500 bonus shares received by virtue of holding 500 ordinary shares held as stock-in-trade were capital receipts and their profits were not liable to be included in assessment of income for purposes of income-tax. We are unable to agree that the decision in that case lays down any such principle as is sought to be inferred by learned counsel for the assessee. To deal with this point we may quote the following relevant passage from the judgment of this court :
'When this point was argued before us, learned counsel for the Department sought to urge that in fact the receipt of these bonus shares by the assessee was not capital receipt at all and, even initially when these shares were received by the assessee, they were revenue income accruing to the assessee liable to income-tax. That point cannot, however, be allowed to be raised in view of the fact that the Income-tax Officer at the initial stage, and the Income-tax Appellate Tribunal at the final stage, at all times proceeded on the basis that the bonus shares received by the assessee were capital receipts and not revenue receipts. Before the Tribunal, there was no contention that the receipt of the bonus shares amounted to revenue receipts and not capital receipts. The Tribunal did not therefore deal with this point and accepted this point as common to both the assessee and the Department. The only aspect, which came up for decision before the Tribunal was whether, after the bonus shares had been received by the assessee as capital receipts, they had to be treated as revenue receipts because the assessee was a dealer in shares. If a capital receipt comes into the hands of any individual in kind and not in cash, the conversion of that asset into cash can only be conversion of capital into cash and not a transaction in the course of business for the purpose of earning profit. The mere coincidence that a particular asset received as capital receipt is of the same nature as the assets forming the stock-in-trade of the business, cannot convert the transaction of receipt and sale of the capital asset into a business transaction for the purpose of earning income.'
This extract from the judgment itself brings out the distinction between that case and the present case before us. In that case the court held that the point which the court could answer was confined to the question whether the bonus shares, which had admittedly been received as capital receipts, had to be treated as revenue receipts simply because the assessee was a dealer in shares. That was the question which was answered against the Department and in favour of the assessee. The other question whether the bonus shares received were capital receipt or accretion to the stock-in-trade did not arise in that case. In fact, this question was sought to be raised by learned counsel for the Department in that case but the court did not allow it to be raised. The question was not allowed to be raised on the ground that the income-tax authorities and the Income-tax Appellate Tribunal had accepted the receipt as a capital receipt. In the case before us, there is no such admission. In fact, the Tribunal has not accepted that any bonus shares at all were received as capital receipts when referring to the nature of the receipt of the bonus shares by the assessee. The finding in the present case by the Tribunal itself was that the receipts of the bonus shares was merely a receipt of stock-in-trade because the shares, in respect of which the bonus shares were received, were the assessees stock-in-trade. To a limited extent, this finding of the Tribunal is being set aside by us inasmuch as we are holding that 975 bonus shares were received in respect of those ordinary shares which were held by the assessee is capital investment and not as stock-in-trade, so that the receipt of those bonus shares will be capital receipt. The other 500 bonus shares were, however, received in respect of 500 ordinary shares held as stock-in-trade and, though it cannot be said that their receipt was in the nature of revenue receipt, the proper way of describing that receipt would be to hold that those shares were accretion to the stock-in-trade, so that the stock-in-trade on the day of their receipt increased to the extent of those 500 bonus shares. For purposes of charge of income-tax, these 500 shares should, therefore, have been taken into account as additional stock-in-trade received by the assessee without any cost on the day on which they were received by the assessee. When so taken into account, these bonus shares could yield profit in the year of account in which they were received if the method of accounting was to value the opening and the closing stock at market rate. In the alternative, if the method of accounting was based on valuation of the opening and closing stock at cost price, they might not show any profit in that year and would only yield profit in the year in the year in which they might be sold, so that their proceeds would be taken into account in calculating the taxable income in that year. This view expressed by us answers the third question.
Question No. 4 referred to us separately mentions two amounts of Rs. 19,415 and Rs. 7,156. The sum of Rs. 19,415, as found by the Tribunal, was earned as profit by selling 775 out of 975 ordinary shares held has capital investment and 975 bonus shares received by the assessee by virtue of holding those ordinary shares. On the findings recorded by us above, this amount would represent capital and capital gains earned by sale of capital and accretions to that capital investment in the form of bonus shares which were themselves received more or less as capital gains, so that this sum of Rs. 19,415 cannot be added to the income of the assessee for purposes of charging it to income-tax. As regards the sum of Rs. 7,156, it represents the proceeds of 500 bonus shares which became accretions to stock-in-trade. These shares were received by the assessee without incurring any costs. For the purpose of income-tax, the method to be adopted would be to treat the accounts of the assessee as amended so as to show these 500 bonus shares as stock-in-trade received in June, 1943. Thereafter, the question how their proceeds are to be taxed will depend on the method of valuation of stock adopted by the assessee at the beginning of each account year and the end of that account year.
Under one system, these bonus shares might affect the taxable profits in the very year in which they are received, which would happen if the system was to value stocks at market price. On the other hand, if the system of accounting was to value stocks at cost price, these shares would yield taxable income only when actually sold. In the present case, the Tribunal has not recorded any clear finding on the method of valuation which used to be adopted by the assessee and which was recognised by the Income-tax Department. Consequently, we consider that on the findings recorded by the Tribunal and the material provided by the Tribunal in the statement of the case, we cannot answer this question in a clear form. In these circumstance, we have had to consider the question whether we should ask for a further statement of the case; but we have come to the view that it is not necessary to do so. We have indicated the manner in which bonus shares have to be included in the accounts of the assessee for the purposes of calculating the assessees taxable income. It will be now for the Income-tax Appellate Tribunal to act in the light of the position explained by us above. This is our answer to the fourth question.
In view of the circumstances that the assessee has succeeded in this reference entirely to the extent of Rs. 19,415 and that the position with regard to the remaining sum of Rs. 7,156 is still to be determined by the Income-tax Appellate Tribunal, we direct that the assessee shall be paid his costs of this reference by the opposite party which we fix at Rs. 250. The fee of the learned counsel for the Department will be taken at the same figure.
Reference answered accordingly.