Court affirms bonus shares as short-term capital assets for tax purposes

The court upheld the validity of the Income-tax Officer's jurisdiction under section 147(a) for the assessment years 1968-69 and 1969-70. Regarding the classification of bonus shares for capital gains, the court rejected the assessee's argument and affirmed that bonus shares are considered short-term capital assets from their issuance date. Consequently, the sale of these shares within twelve months of issuance results in short-term capital gains. The court answered question No. 2 in favor of the Revenue and against the assessee, disposing of the reference with no order as to costs.

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Issues Involved:
1. Validity of the jurisdiction of the Income-tax Officer under section 147(a) for assessment years 1968-69 and 1969-70.
2. Classification of the sale of bonus shares as yielding short-term capital gains for assessment years 1968-69 and 1969-70.

Detailed Analysis:

Issue 1: Validity of Jurisdiction under Section 147(a)
- Not Pressed by Assessee: The learned counsel for the assessee did not press this question in view of the Tribunal's finding. Consequently, this issue was not addressed and does not require an answer.

Issue 2: Classification of Bonus Shares for Capital Gains
- Assessee's Argument: The learned counsel for the assessee argued that the decision in Chunilal Khushaldas [1974] 93 ITR 369 should be reconsidered. The counsel contended that the court erred in determining whether bonus shares are short-term or long-term capital assets based on the date of their acquisition rather than the date of acquisition of the original shares. The counsel referenced the Supreme Court decision in Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 and various accountancy books to support the argument that bonus shares do not change the shareholder's proportionate interest in the company.

- Court's View: The court found it difficult to accept the assessee's contention. The Division Bench in Chunilal Khushaldas had already dealt with similar contentions and concluded that bonus shares are short-term capital assets if held for not more than twelve months before their transfer. The court emphasized that bonus shares come into existence upon their allotment, not before.

- Relevant Observations: The court reiterated that the definition of short-term capital assets under section 2(42A) means assets held for not more than twelve months immediately preceding their transfer. The court also referred to the Supreme Court's decision in CIT v. Dalmia Investment Co. Ltd. [1964] 52 ITR 567, which stated that bonus shares confer additional rights and must be considered held from their issuance date.

- Commercial Practice and Legislative Intent: The court acknowledged that while commercial practice principles are important in computing capital gains, the Legislature's definition under section 2(42A) must prevail. The court noted that any hardship caused by this definition does not justify a reinterpretation inconsistent with the statutory language.

- Conclusion: The court concluded that the judgment in Chunilal Khushaldas does not require reconsideration. The bonus shares, being issued out of accumulated profits, are considered short-term capital assets from their issuance date. Therefore, the sale of these shares within twelve months of their issuance results in short-term capital gains.

Final Judgment:
- Question No. 2 Answered: The court answered question No. 2 in the affirmative, in favor of the Revenue and against the assessee.
- Disposition: The reference was disposed of with no order as to costs.

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