Inclusion of gains from bonus shares in income tax as capital gains upheld by High Court

The High Court held that the gains from the sale of bonus equity shares should be included in the assessee's income as capital gains for income tax purposes. The court emphasized that the cost of bonus shares cannot be considered nil and must be valued by spreading the cost of old shares over the old and bonus shares, citing relevant legal precedents. The decision was in favor of the Revenue, with no order as to costs in the case.

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Issues:
1. Whether the gains from the sale of bonus equity shares should be included in the income of the assessee as capital gains for income tax purposes.

Analysis:
The case involved a trust as the assessee for the assessment year 1980-81, where the trust sold 968 equity shares of a company, including 161 bonus shares received earlier. The main issue was whether the capital gains from the sale of these bonus shares should be considered as part of the assessee's income. The Income-tax Officer initially accepted the computation of capital gains, but the assessee appealed to the Appellate Assistant Commissioner, arguing against the inclusion of capital gains from bonus shares in the total income.

The Appellate Assistant Commissioner rejected the assessee's contention, leading to a further appeal before the Tribunal. The assessee argued that the transfer of bonus shares should not result in capital gains for income tax purposes, citing a Supreme Court decision. However, the Tribunal disagreed, relying on other Supreme Court and Bombay High Court decisions that established principles for valuing bonus shares when calculating capital gains.

The High Court carefully analyzed the contentions of the assessee, the Tribunal's order, and the relevant legal precedents. The court emphasized that the cost of bonus shares cannot be considered nil, and they must be valued by spreading the cost of old shares over the old and bonus shares. The court referred to various cases, including CIT v. Dalmia Investment Co. Ltd. and CIT v. Gold Mohore Investment Co. Ltd., to support this valuation method. Additionally, the court highlighted the decision in D. M. Dahanukar v. CIT, which established that the valuation method applies regardless of whether the assessee is a dealer or investor in shares.

Based on the legal principles and precedents discussed, the High Court concluded that the gains from the sale of bonus equity shares should indeed be included in the assessee's income as capital gains for income tax purposes. Therefore, the court answered the question in the affirmative, in favor of the Revenue, and ruled that there would be no order as to costs in the case.

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