Bonus share cost is not nil when profits are capitalised, defeating the revenue's gain computation.

Bonus shares issued by capitalising undistributed profits are not acquired at nil cost, because the shareholder gives consideration through the appropriation of dividend or bonus to pay for the issue. The shareholder is treated as taking the bonus shares at their face value as reflected in the company's books, so the cost cannot be ignored in computing gain on sale. On that footing, the sale of the full shareholding did not produce a taxable profit under the computation adopted by the revenue, and the nil-cost method was rejected. The reference was answered in favour of the assessee.

---

---

Issues: Whether, on the sale of shares including bonus shares, the assessee could be taxed on a profit computed by treating the bonus shares as having nil cost, or whether the bonus shares had a real cost to the assessee and no taxable profit arose on the transaction.

Analysis: Bonus shares issued pursuant to capitalisation of undistributed profits are not issued for nothing. The consideration for such shares is the amount of dividend or bonus that is set apart and applied towards the shares, so that the shareholder satisfies the obligation to pay for the shares by appropriation of that dividend or bonus. The legal effect is that the shareholder acquires the bonus shares at their face value as shown in the company's books, and the cost cannot be treated as nil. On that basis, the sale of the entire block of shares in the accounting year did not yield a taxable profit of the kind found by the income-tax authorities.

Conclusion: The assessee succeeded on the issue. The profit was not legally taxable on the basis adopted by the income-tax authorities, and the computation treating the bonus shares as having nil cost was rejected.

Final Conclusion: The reference was answered in favour of the assessee, holding that no legally taxable profit arose on the sale of the shares on the footing adopted by the revenue.

Ratio Decidendi: Where bonus shares are issued by capitalising undistributed profits, their cost to the shareholder is the amount appropriated as the consideration for the issue and not nil.

---