Tax treatment of bonus shares turns on their character in the holder's hands, not on automatic trading stock presumption.

Bonus shares issued out of accumulated profits are not, by that fact alone, dividend income where no company assets are released. The decisive issue is the character of the bonus shares in the recipient's hands after allotment. A dealer in shares may hold some shares as stock-in-trade and others as capital assets, and there is no presumption that every share received must be trading stock. Because bonus shares are received involuntarily, the recipient's subsequent treatment of them is the best evidence of intention. The accretion and nexus theories were rejected as inconsistent with the distinction between stock-in-trade and capital assets and with the absence of proof of trading intent.

---

---

Issues: Whether the sale proceeds of bonus shares received by a dealer in shares, in respect of ordinary shares held as stock-in-trade, constituted taxable income as business profits or capital receipt.

Analysis: Bonus shares issued by a company out of accumulated profits do not, by themselves, amount to dividend income when the issue does not involve release of the company's assets. The decisive question was the character of the bonus shares in the hands of the assessee after receipt. A dealer in shares may hold some shares as stock-in-trade and some as capital assets, and no presumption arises that every share received by him must be stock-in-trade. Because bonus shares are received involuntarily, the assessee's subsequent treatment of them is the best evidence of whether they were intended to be held as trading stock or as capital. The accretion and nexus theories were rejected as inconsistent with the legal distinction between stock-in-trade and capital assets and with the absence of any proof that the assessee intended to treat the bonus shares as part of its trading stock.

Conclusion: The bonus shares were not shown to have been acquired or held as stock-in-trade, and the proceeds of their sale were not taxable as business income; the answer to the reference was in the negative.

---