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Commissioner of Income-tax, Gujarat-i Vs. Chunilal Khushaldas - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 4 of 1969
Judge
Reported in[1974]44CompCas90(Guj); [1974]93ITR369(Guj)
ActsIncome Tax Act, 1961 - Sections 2(14), 2(42A), 45, 48, 55(2) and 114; Wealth Tax Act, 1957 - Sections 5(1)
AppellantCommissioner of Income-tax, Gujarat-i
RespondentChunilal Khushaldas
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredCommissioners of Inland Revenue v. John Blott
Excerpt:
direct taxation - period of holding - sections 2 (14) and 2 (42a) of income tax act, 1961 - bonus shares issued by company acquired by share holders - such bonus shares considered to be held by share holders from date of their issue not from date when original shares acquired by share holder. - - 1. this reference raises a short but interesting question as to what is the date from which bonus shares issued by a company can be said to be held by an assesse :is it the date when they are issued or is it the date when the original shares in respect of which they are issued were acquired by the assessee ? the question assumes importance because when bonus shares are sold by the assessee and there is capital gain, the incidence of tax on such capital gain varies according as the bonus.....bhagwati, c.j. 1. this reference raises a short but interesting question as to what is the date from which bonus shares issued by a company can be said to be held by an assesse : is it the date when they are issued or is it the date when the original shares in respect of which they are issued were acquired by the assessee the question assumes importance because when bonus shares are sold by the assessee and there is capital gain, the incidence of tax on such capital gain varies according as the bonus shares are short-term capital assets or long-term capital assets. if they are short term capital assets, the incidence is highe : if they are long-term capital assets, the incidence is lowe : and the question whether they are short-term capital assets or long-term capital assets depends on.....
Judgment:

Bhagwati, C.J.

1. This reference raises a short but interesting question as to what is the date from which bonus shares issued by a company can be said to be held by an assesse : is it the date when they are issued or is it the date when the original shares in respect of which they are issued were acquired by the assessee The question assumes importance because when bonus shares are sold by the assessee and there is capital gain, the incidence of tax on such capital gain varies according as the bonus shares are short-term capital assets or long-term capital assets. If they are short term capital assets, the incidence is highe : if they are long-term capital assets, the incidence is lowe : and the question whether they are short-term capital assets or long-term capital assets depends on how long they have been held by the assessee immediately preceding the date of transfer.

2. The short fact giving rise to the reference may be briefly stated as follow : Some time prior to January 1, 1954, the assessee purchased 79 shares of the face value of Rs. 500 each in the share capital of Sarangpur Cotton . (hereinafter referred to as ' the company'). In 1961, the company sub-divided its shares of the face value of Rs. 500 each into shares of smaller denomination by converting each share of the face value of Rs. 500 into two shares of the face value of Rs. 250 each. The result was the in lieu of 79 shares of the face value of Rs. 500 each, the assessee received 58 shares, each of the face value of Rs. 250. Thereafter, on August 23, 1961, the company at an annual general meeting resolved to capitalise its accumulated profits and apply them in issuing one fully paid up bonus share of the face value of Rs. 250 for every four shares of the face value of Rs. 250 each held by a share-holder. The assessee accordingly received on September 5, 1961, 39 fully paid up bonus shares for the by virtue of its existing holding of 158 shares. Within a few says thereafter, on 12th September, 1961, the assessee sold off these 39 bonus shares for the aggregate price of Rs. 64,155. There was obviously capital gain to the assessee and the question, therefore, arose in the course of the assessment of the assessee to income-tax for the assessment year 1962-63, the corresponding account year being the calendar year 1961, as to how the capital gain should be computed and on what basis and at what rate it should be taxed. We are not concerned in the present reference with the first aspect of the question which relates to the mode of computation of capital gain and we need not, therefore, state any facts in regard to it. So far as the second aspect of the question is concerned, namely, on what basis and at what rate the capital gain should be taxed, a controversy arose as to whether the bonus shares were short-term capital assets or long-term capital asset : how long they were held by the assessee immediately preceding the date of sale The assessee contended that the bonus shares did not represent acquisition of the new capital asset by they were part of the original share carved out of them and any must, therefore, be held to have been acquired when the original shares were purchased and since the original shares were purchased prior to January 1, 1954, the bonus shares must be taken to be held by the assessee since prior to that date and, consequently, they must be held to be long term capital assets. This contention of the assessee was rejected by the Income-tax Officer and on appeal by the Appellate Assistant Commissioner. These officers took the view that the bonus shares were acquired by the assessee when they were issued and they were, therefore, held by the assessee from the date of issue and not from the date when the original shares were acquired and, on this view, treated the bonus shares as short-term capital assets. The assessee thereupon appealed to the Tribunal and in the appeal, the assessee was successful in persuading the Tribunal to accept his point of view. The Tribunal held that the bonus shares were held by the assessee from the date when the original shares were acquired and they were, therefore, long-term capital assets. This view taken by the Tribunal is assailed in the present reference at the instance of the revenue.

3. We shall presently set out the rival arguments of the parties in regard to the interesting question before us the before we do so, it would be convenient at this stage to refer to some of the relevant provisions of the Income-tax Act, 1961. Section 45 imposes charge of capital gains tax on 'any profits or gains arising from the transfer of a capital asset effected in the previous year' and provides that such profits and gains shall be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place. What is a 'capital asset' is defined in section 2(14) and, apart from certain exclusions, it means property of any kind held by an assessee. It was common ground between the parties in the present case that the bonus shares constituted 'capital asset' transferred by the assessee. Section 48 provides the mode of computation of capital gains; it says that capital gains shall be computed by deducing from the fully value of the consideration received or accruing as a result of the transfer of the capital asset, expenditure incurred wholly and exclusively in connection with such transfer as also the cost of acquisition of the capital asset and the cost of any improvement to it. 'Cost of acquisition', in relation to a capital asset, in a case where the capital asset became the property of the assessee before January 1, 1954, is defined in section 55(2)(i) to mean the cost of acquisition of the asset to the assessee or the fair market value of the asset on the first day of January, 1954, at the option of the assessee. Now, the incidence of tax on capital gains varies according as the capital asset transferred is a short-term capital asset of a long-term capital asset. If what is transferred is assessable at the rates applicable to ordinary income whereas capital gains arising from the transfer of a long-term capital asset is only partially assessabl : Vide section 114 of the Income-tax Act, 1961, as it was in force during the relevant assessment year. It is, therefore, necessary to know what is a short-term capital asset. That is defined in section 2(42A) to mean 'a capital asset held by an assessee for the more than twelve months immediately preceding the date of its transfer.......' Clause (ii) of the Explanation to section 2(42A) provides tha :

'in respect of capital assets other than those mentioned in clause (i), the period for which any capital asset is held by the assessee shall be determined subject to any rules which the board may make in this behalf.'

4. There are admittedly no rules made by the Board under this clause and, therefore, the question as to what is the period for which any capital asset is held by the assessee has to be determined on first principle. If the bonus shares were held by the assessee for not more than twelve months immediately preceding the date of their transfer, they would be short-term capital assets; otherwise, they would be long-term capital assets.

5. The argument of the revenue was that the bonus shares came into existence for the first time when they were issued and, therefore, they could not be held by the assessee before the date of their issue. They were held by the assessee only since the date of their issue, namely, September 5, 1961, and since they were sold within a few days on September 12, 1961, they were short term capital assets. The assessee sought to repel this submission by advancing a very interesting argument. The assessee contended that in order to ascertain the true nature of the transaction which takes place when bonus shares are issued, the court must look at the substance of the transaction and not its form. If regard is had to the substance of the transaction and not its form. If regard is had to the substance of the transaction, it is clear that when bonus shares are issued, there is no creation of a new capital asset by the company or acquisition of a new capital asset by the shareholder. The bonus shares add nothing to the interest of the shareholder and take nothing out of the pocket of the company. What was owned by the shareholder previously by virtue of original share certificates is after the issue of bonus shares held on the basis of more certificates. There is nothing new acquired by the shareholder. There is no addition to his interest in the company; his proportional interest remain the same. The bonus shares and the original shares represented before the issue of bonus shares. The effect of issue of bonus shares is as if the original shares are split up. The bonus shares are, therefore, really, in effect and substance, part of the original shareholding and must be held to have been acquired when the original shares were purchased and the conclusion must inevitably follow as a necessary and logical consequence that the assessee held the bonus shares from the date when the original shares were acquired. This argument was sought to be supported by certain observations of Hidayatullah J in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. as also by the majority decision of the United States Supreme Court in Eisner v. Macomber.

6. Some reliance was also placed on the observations to be found in a book called 'Taxation of Short Term Capital Gains' by Percy F. Hugesh. The argument was certainly an ingenious one advanced with great ability but we are afraid we cannot accept it. We must hold with the revenue that the bonus shares were acquired by the assessee when they were issued and they were, therefore, held by the assessee only from the date of their issue and consequently they must be regarded as short-term capital assets. Our reasons for saying so are as follow :

The capital asset transferred in the present case consists of bonus shares and, therefore, it would be convenient first to ascertain what is a bonus share. To do so, we would have to examine two question : one, what is the juridical nature of a share and the other, what happens when a company issues bonus shares So far as the first question is concerned, the position is now fairly clear. We had occasion to consider it in Commissioner of Income-tax v. R. M. Amin.

7. The words 'share', as pointed out by Gower in his book on Modern Company Law, third edition, at page 34 :

'has become something of a misnomer for shareholders no longer share any property in common; at the most they share certain rights in respect of dividends, return of capital on a winding-up, voting, and the like.'

8. Though for the purposes of the Sale of Goods Act a share is included in the definition of 'goods' and it is regarded as movable property, so far as the law in India is concerned, it is in its true nature, what the English law calls, a chose-in-action which entitles its owner to certain rights in action as distinguished from rights in possession. What is the broad spectrum of those rights in action is clear from the following passage from the judgment of Mukherjee J. in Chiranjitlal Chaudhuri v. Union of India, where the learned judge say :

'His interest (that is, interest of a shareholder) is represented by the share he holds and the share is a movable property according to the Indian Companies Act... Ordinarily, he is entitled to enjoy the income arising from the shares in the shape of dividends; the share like any other marketable commodity can be sold or transferred by was of mortgage or pledge. The holding of the share in his name gives him the right to vote at the election of directors and thereby take a part, though indirectly, in the management of the company's affairs. If the majority of shareholders sides with him, he can have a resolution passed which would be binding on the company and, lastly, he can institute proceedings for winding up of the company which may result in a distribution of the net assets among the shareholders.'

9. This is only a broad statement of the rights in action which a shares confers on a shareholder. These rights are numerou : they are rights in the company as well as against it. They are contractual as well as conferred by the Companies Act, 1956. But, whatever be the nature and extent of these rights conferred by a share, one thing is clear, as pointed out by Gower, and that is tha :

'the share itself is an object of dominion, i.e., of right in rem and not so to regard it would be barren and academic in the extreme. For all practical purposes, shares are bought, sold, mortgaged and bequeathed. They are indeed the typical items of property of the modern commercial era and particularly suited to its demands because of their exceptional liquidity.'

10. We then proceed to consider what really happens when bonus shares are issued by a company. A company must state in its memorandum of association the amount of capital with which the company desires to do business and the number of shares into which that capital is to be divided. The company need not issue all its capital at one time. It may issue only a part of its capital initially and issue the rest of the unissued capital or a part of it at a later date. Now, if a company prospers and earns profits, it may do one of two things with the profits. It may either distribute the profits by way of dividend among the shareholders or accumulate them. Generally, when a company accumulates profits it carries them to various reserves which appear on the liabilities side of the balance-sheet. Ordinarily, these undistributed profits are employed in the business either in acquisition of fixed assets or as working capital and really represent an increase in the capital employed in the business. When these increase to a considerable extent, the issued capital of the company ceases to bear a true relation to the real capital employed in the business. The company may, in such a case, decide to bring its issued capital into a truer relationship with capital actually employed in the business or, to use the words of Gower, 'more into line with the true excess of assets over liabilities' and may for that purpose capitalise its accumulated profits and issue fully paid up bonus shares of a nominal value equal to the amount capitalised to its shareholder. These bonus shares may be either ordinary or preference shares and, even amongst preference shares, they may be cumulative preference shares or non-cumulative preference shares, redeemable preference shares or irredeemable preference shares, and preference shares with priority in repayment of capital on winding up of preference shares without such priority. Where this happens the accumulated profits which are capitalised remain in the coffers of the company and no part of them actually goes into the pockets of the shareholder : the only change that takes place is that the accumulated profits which prior to capitalisation were employed in the business as accumulated profits are thenceforth employed as part of the issued capital of the company. The accumulated profits which might have been divided amongst the shareholders as dividend are impounded to increase the capital of the company and what the shareholders get is not any payment out of the accumulated profits but bonus shares credited as fully paid up. The transaction, to use the words of Viscount Cave in Commissioners of Inland Revenue v. John Blott takes 'nothing out of the company's coffers and' puts 'nothing into the shareholders' pockets', but what happens is that the accumulated profits which are capitalised are applied in paying up the mounts due on bonus shares to be issued to the shareholders as fully paid up bonus shares. The shareholders receiving bonus shares credited as fully paid up are given credit for the capital sums which they would otherwise have had to contribute in respect of the bonus shares allotted to them, if those shares had not been issued credited as fully paid up and this credit is given by application of the capitalised accumulated profits in payment of such capital sums. As observed by Hidayatullah J. in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. after the accumulated profits are converted into capital and bonus shares are issued credited as fully paid up ' the company employs that employs that money not as reserved of profits, but as its proper capital issued to and contributed by the shareholder'. Then it ceases to be available for distribution amongst the shareholders and becomes part of the share capital which cannot be returned to the shareholder except on reduction of share capital.

11. The analysis of the mechanics of issue of bonus shares is clearly borne out by regulation 96 in Table A to the Companies Act, 1956. The material portion of this regulation provide :

'96. (1) The company in general meeting may, upon the recommendation of the board, resolve -

(a) that it is desirable to capitalise any part of the amount for the time being standing to the credit of any of the company's reserve accounts, or to the credit of the profit and loss account, or otherwise available for distribution; and

(b) that such sum be accordingly set free for distribution in the manner specified in clause (2) amongst the members who would have been entitled thereto, if distributed by way of dividend and in the same proportions.

(2) The sum aforesaid shall not be paid cash but shall be applied, subject to the provision contained in clause (3), either in or towards.....

(ii) paying up in full, unissued shares or debentures of the company to be allotted and distributed, credited as fully paid up, to and amongst such members in the proportions aforesaid....'

12. Whenever such a resolution is passed in general meeting, regulation 97 provides that the board shall make all appropriations and application of the undivided profits resolved to be capitalised and all allotments that when a resolution is passed by the company at a general meeting for capitalising its accumulated profits and issue of bonus shares credited as fully paid up, the board of directors would allot fully paid up bonus shares to the shareholders in the proportion of their respective holdings by appropriating and applying the accumulated profits capitalised for the purpose. The bonus shares would then come into existence and the capitalised accumulated profits would constitute additional share capital issued to and contributed by the shareholders Till then it cannot be said that the bonus shares are in existence. That is very clear from the observations of the Supreme Court in Gopal Jalan and Co. v. Calcutta Stock Exchange Association where Sarkar J. said, though in a slightly different contex : 'in company law 'allotment' means the appropriation out of the previously unappropriated capital of a company, of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence.'

13. But even apart from authority, from a purely semantic point of view, it is difficult to see how bonus shares which are an object of dominion transferable in the peculiar manner provided by company law can be said to be acquired or held by a shareholder before they come into existence by allotment and issue. Moreover, bonus shares are clearly a distinct item of property which carries with it certain rights in the company and against it. The bonus shares, as pointed out by hidayatullah J., in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. entitle the shareholders 'to an additional share in the increased capital' and again, to quote the words of Hidayatullah J., in the same case, they ar :

'property from which income in the shape of money may be derived in the future'.

14. There is in fact very little difference between bonus shares issued out of capitalised accumulated profits and rights shares issued out of new share capital. It is true that in the former the additional share capital is obtained by capitalising accumulated profits while in the latter the additional share capital is obtained by subscription from the existing share holders and consequently there is addition to the assets of the company in the latter while there is no such addition in the former. But where the rights issue is taken up by the existing shareholder - and under the existing provisions of company law, the rights issue must be offered to the existing shareholders in proportion to their respective holdings - the proportional interest of each shareholder would remain the same just as it would in case of issue of bonus shares. Now, if the rights shares can be regarded as capital assets acquired by the shareholder when they are issued, as obviously they must, there is no reason why bonus shares should not the regarded as capital assets acquired by the shareholder when they are issued. The mere fact that the proportional interest of the shareholder in the company remains the same after issued of bonus shares as it was before is irrelevant to the determination of the question as to when bonus shares can be said to have been acquired by the shareholder. Since bonus shares are issued to the shareholders in proportion to their respective holdings and no new share capital is subscribed by the shareholders but the capital sums due on the bonus shares are paid up out of capitalised accumulated profits, the proportional interest of each shareholder in the company would undoubtedly remain the same. But that is not determinative of the question as to when bonus shares can be said to have been acquired by the shareholder. The bonus shares plainly and indubitably confer right on the shareholder to an additional share in the increased capital of the company and also entitle him to an additional right to vote as also to obtain income in the shape of money out of the profits of the company and they must, therefore, be held to be acquired when they are issued by the company.

15. There is also inherent evidence in the provisions of the Income-tax Act, 1961, which goes to show that bonus shares cannot be regarded as having been acquired by a shareholder before they are issued. The definition of short-term capital asset in section 2(42A) contemplates that the capital asset must be held by an assessee for not more than twelve months immediately preceding the date of its transfer. There was some argument advanced before us on the construction of the word 'held ' in this definition and it was urged on behalf of the revenue the this word indicated that the assessee must be a registered holder of the bonus shares. The bonus shares, it was contended, could not be said to be held by the assessee unless they stood in the name of the assessee in the share register of the company and since they would be registered in the name of the assessee only after they are issued, the date from which the period of holding the bonus shares should be counted for the purpose of the definition could not be anterior to the date of issue of the bonus shares. The revenue sought to draw support for this contention from the decision of this court in Commissioner of Wealth-tax v. Harshad Rambhai Patel

16. We do not see how this decision on the construction of section 5(1)(xvi) of the Wealth-tax Act, 1957, can be of any help in the construction of section 2(42A) of the Income-tax Act. The question which arose for determination in this case was whether national Savings Certificates which were beneficially owned by the assessee but which stood in some other name or names were liable to be excluded in computing the net wealth of the assessee under section 5(1)(xvi) exempted from computation of net wealth all National Savings Certificates and other certificates 'held' by the assessee. The argument of the revenue was that this exemption was limited only to those certificates which stood in the name of the assessee and did not extend to certificates which stood in the names of his nominees, though the assessee had beneficial ownership in such certificates. This argument was accepted by a Division Bench of this court and the Division bench took the view that the word 'held', in the context in which it occurred, was used to denote certificates registered in the name of the assessee. This view was taken by the Division Bench because the legislature had used two different expressions in the provisions of the Wealth-tax Act, namely, 'belonging to' and 'held' and this deliberate use of two different expressions clearly indicated that the legislature intended to use them in different senses and the word 'held' could not, therefore, be given its broad general meaning, namely, 'belonging to' or 'of the ownership of' the assessee. The Division Bench also took into account the fact that the certificates referred to in section 5(1)(xvi) were issued by the Central Government under a scheme which provided that an individual can purchase such certificates only to the extent of Rs. 25,000 and no more. This decision cannot, therefore, be regarded as having any binding authority so far as the construction of the word 'held', in section 2(42A) of the Income-tax Act is concerned. The word 'held', according to its plain natural sense, means 'belonging to' or 'of the ownership of'. Where a capital asset is of the ownership of an assessee but is held by him in the name of his nominees, it can appropriately, without any straining of language, be said that the capital asset is held by the assessee. The capital asset may be held by the assessee in his own name or in the name of any other person. Moreover, it must be remembered, that the word 'held' is used in section 2(42A) with reference to any capital asset. It is not limited to shares. The concept of a registered holder cannot, therefore, be introduced in the construction of the section. So long as the bonus shares are beneficially owned by the assessee, whether in his own name or in the name of another, they would be held by the assessee within the meaning of section 2(42A). The extreme contention of the revenue seeking to read the word 'held' as meaning 'held as a registered owner' cannot, therefore, be accepted. but the revenue is right in its contention that the requirement that the capital assets must be held by the assessee for not more than twelve months immediately preceding the date of its transfer does indicate that the capital asset must exist as an indentifiable capital asset during the period it is claimed that it is held by the assessee. If the capital asset consists of bonus shares, the bonus shares must exist as bonus shares throughout the period for which they are supposed to be held by the assessee. Now, obviously there would be no bonus shares prior to the date of their issu : there would be only original shares at that stage. Even if a view be taken that the interest in the company represented by bonus shares in included in the interest of the company represented by the original shares prior to the date of issue of the bonus shares, such interest would not exist as a distinct and indentifiable capital asset until the issue of the bonus shares. The bonus shares representing a distinct and identifiable interest in the company would come into existence only when they are issued and, therefore, the period for which they are held by the assessee cannot commence before the date of their issue.

17. We may also profitably consider what would be the position if bonus shares which are issued by the company are preference shares, cumulative or non-cumulative, redeemable or irredeemable, or having priority in repayment of capital or otherwise. Can it be said in respect of such bonus shares that they are part of the original shareholding or that they are held by the assessee from the date when the original shares were purchased The rights conferred by such bonus shares would be wholly different from those belonging to the assessee under the original shares and it would not be possible to say that the interest in the company represented by such bonus shares was comprised in the interest of the company represented by the original shares before the issue of such bonus shares. It is no doubt true that the bonus shares issued in the present case are ordinary shares of the same class as the original shares, but what we have said above demonstrates clearly and pointedly the utter unatainability of the argument put forward on behalf of the assessee.

18. Then, again, section 55(2)(i) which defines 'cost of acquisition' in relation to a capital asset speaks of a case 'where the capital asset became the property of the assessee before the first day of January, 1954'. We would, therefore, have to ask the questio : When do bonus shares become the property of the assessee Can they become the property of the assessee before they are issued The answer is plainly no. If the bonus shares were regarded as property of the assessee from the date when the original shares were acquired, how would section 55(2)(i) be applied in a case where the original shares were acquired prior to January 1, 1954 How would the assessee in such a case be able to exercise the option given by section 55(2)(i) How would it be possible to ascertain the fair market value of the bonus shares on January 1, 1954, when they were not in existence The market value of the original shares on January 1, 1954, could not be taken as the market value of the bonus shares nor could it be proportionally distributed because, as pointed out by Pennington in his book on Company Law (second edition), at page 132, it is often found after the issue of bonus shares that 'the aggregate price for he original shares and the bonus shares issued in right of it is greater than the price of the original shares before the issue'. These circumstances clearly indicate that the bonus shares can be said to be held by the assessee only from the date of their issue and not from the date when the original shares were purchased by the assessee.

19. The assessee, however, relied strongly on certain observations of Hidayatullah J. in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. as also on the majority decision of the United States Supreme Court in Eisner v. Macomber.

20. We shall presently refer to these cases but before we do so, we must reiterate what has often been said before, that when we are considering the pronouncements of judges which are binding upon us, the greatest possible care must be taken to relate the observations of a judge to the precise issues before him and to confine such observations, even though expressed in broad terms, to the general compass of the question before him, unless he makes it clear that he intended his remarks to have a wider ambit. It is not possible for judges always to express their judgment so as to exclude entirely the risk that in some subsequent case, their language may be misapplied and any attempt at such perfection of expression would only lead to the opposite result of uncertainty or even obscurity as regards the case in hand. With these prefatory observations to guide us we may not proceed to examine the two cases cited before us on behalf of the assessee.

21. We will first refer to the decision of the Supreme Court in Commissioner of Income-tax v. Dalmia investment Co. Ltd.

22. The question which arose for decision in that case was as to how the cost of acquisition of bonus shares should be determined for the purpose of computation of capital gains arising from their transfer. Hidayatullah J., speaking on behalf of the majority, pointed out that there are four possible methods for determining the cost of bonus shares. The first method is to take the cost as the equivalent of the fact value of the bonus shares. This method was followed by the assessee in making entries in its books. The second method is, and that was the method adopted by the department, that as the shareholder pays nothing in cash for the shares. cost should be taken at nil. The third method is to take the cost of the original shares and to spread over the original shares and the bonus shares taken collectively. The fourth method is to find out the fall in the price of the original shares on the stock exchange and to attribute this to the bonus shares. Having set out these four methods, the learned judge proceeded to examine the merits of each method. He first took up for consideration the first method. The argument in support of the first method was that the issue of bonus shares involves a two-fold operation - the creation of new shares and the declaration of a dividend or bonus, which dividend or bonus must be deemed to be paid to the shareholder and to be returned by him to acquire the new shares. Since the amount credited in the books of the company as contribution of capital by the shareholder is the face value of the bonus shares, it was contended that the cost to the shareholder is equal to the face value of the bonus shares. The foundation of this argument was that the issue of bonus shares involves payment of dividend and return of that dividend by the shareholder as his contribution in respect of the bonus shares issued to him. The learned judge was, therefore, called upon to consider that the learned judge made the following observations which were strongly relied upon on behalf of the assesse :

'As a matter of accounting the original shares in a winding up before the increase of issued capital would have yielded to the shareholder the same return as the old shares and the new shares taken together. What was previously owned by the shareholder by virtue of the original certificates is after the issue of bonus shares, held by them on the basis of more certificates... In this sense, there is no payment to him but an increase of issued capital and the right of the shareholder to it is evidence not by the original number of certificates held by him but by more certificates.... When the shares rank pari passu the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 np. coins. That total value remains the same, but the evidence of that value is not in on certificate but in two.'

23. If we have regard to this context in which the observations were made and particularly the words ' as a matter of accounting ', it is clear that these observations were intended to do no more than emphasize that when bonus shares are issued, no payment is received by the shareholder, because the conversion of reserves into capital does not involve release of any profits to the shareholde : bonus shares take nothing from the coffers of the company and add nothing to the pockets of the shareholder. The monetary value of interest of the shareholder remains the sam : what the original shares in a winding-up before the issue of bonus shares would have yielded to him is not augmented by the issue of bonus shares, for even after the issue of bonus shares the old shares and the bonus shares taken together would yield to him the same return in winding up. So far as the monetary value of the interest is concerned, what was formerly represented by the original shares is now, after the issue of the bonus shares, represented by the original shares and bonus shares taken together. There is, therefore, no receipt of monetary value by the shareholder which can be regarded as dividend when bonus shares are issued. These observations made in the context of a totally different question and for a wholly different purpose cannot be taken out of their context and utilised for the purpose of supporting a contention that the bonus shares must be held to be acquired by the shareholder when the original shares are purchased. Hidayatullah J. has not said anywhere in the judgment that the bonus shares must be held to be carved out of the original shareholding. He, undoubtedly, accepted the third method of determining the cost of bonus shares but that was not on the ground that the bonus shares are part of the original shareholding. On the contrary, he took care to make it clear at page 580 of the report that the bonus shares are accretions to the original shares and that we the reason why he took the view that the cost of the original shares should be spread over the original shares are accretions to the original shares and that was the reasons why he took the view that the cost of the original shares should be spread over the original shares and bonus shares taken collectively. it is indeed difficult to see how bonus shares could be treated as carved out of the original shares when in the words of Hidayatullah J. they represented 'an additional share in the increased capital' and 'confer title to a larger proportion of the surplus assets at a general distribution'. The bonus shares are clearly a new capital asset acquired by a shareholder, though after the acquisition, the monetary value of the interest of the shareholder represented by the original shares and bonus shares remains the same as it was prior to the acquisition.

24. We then turn to consider the decision of the United States Supreme Court in Eisner v. Macomber.

25. The statute which came up for consideration in this case was the Revenue Act of 1916, which sought to tax stock dividends issued by a corporation as income. The constitutional validity of this statute was challenged on the ground that it sought to tax something which was not income within the meaning of the Sixteenth Amendment. The question which therefore, arose for determination before the Supreme Court was whether a stock dividend issued by a corporation, which is the same as the bonus shares issued by a company in India or England, could be said to be come within the meaning of the Sixteenth Amendment. This question evoked difference of opinion amongst the judges and the majority took the view - it was the same as that taken by the House of Lords in Commissioners of Inland Revenue v. John Blott that no income is received by a shareholder when a stock dividend is issued to him. It was in this context that Mr. Justice Pitney, who gave the leading opinion on behalf of the majority, observed at page 527 of the report (64 Law. Ed.).

'A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased..... The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones..... In short, the corporation is no poorer and the stockholder is no richer than they were before........ What was happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new.'

26. These observation were also quoted with approval by Hidayatullah J. in Commissioner of Income-tax v. Dalmia Investment Co. Ltd., but we fail to see how they throw any light on the question before us. They were, like the observations of Hidayatullah J. In commissioner of Income-tax v. Dalmia Investment Co. Ltd., made in a totally different context where the question was whether any income is received by the shareholder when a stock dividend is issued to him. It was for this reason that Mr. Justice Pitney said that ' a stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders'. The corporation is no poorer and the stockholder is no richer than they were before. These observations cannot be torn out of their context and projected into the determination of a wholly different question namely, when can the stock-dividend be said to be acquired by a shareholder. No reliance can, therefore, be placed on these observations in support of the contention urged on behalf of the assessee.

27. We are, therefore, of the view that bonus shares issued by a company are acquired by a shareholder when they are issued and they must be taken to be held by the shareholder from the date of their issue and not from the date when the original shares in respect of which they are issued were acquired by the shareholder. The bonus shares in the present case were, therefore, acquired by the assessee on September 5, 1961, and they were held by him from that date and since they were sold within a few days on September 12, 1961, the conclusion must inevitably follow that they were held by the assessee for not more than twelve months immediately preceding the date of their transfer and they were accordingly short-term capital assets within the meaning of section 2(42A). The Tribunal was, therefore, not right in holding that the capital gain arising from the sale of the bonus shares did not arise out of the sale of short-term capital assets.

28. We, therefore, answer the question referred to us in the negative. The assessee will pay the costs of the reference to the Commissioner.

29. Question answered in the negative.


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