Bonus shares from capitalised profits are treated as capital accretion, not taxable income under the Income-tax Act.

Accumulated profits capitalised and issued as fully paid bonus shares were treated as an accretion to shareholders' capital, not as income, profits or gains chargeable under the Income-tax Act, 1922. The Court distinguished the Western Australian authority as turning on special statutory wording and followed the principle in Blott that such a transaction converts profits into capital rather than distributing income to shareholders. On that basis, bonus shares issued from capitalised reserves and profits were not liable to supertax.

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Issues: Whether bonus shares issued by capitalising accumulated profits constituted income, profits or gains within the meaning of the Income-tax Act, 1922 and were liable to supertax.

Analysis: The company had capitalised sums out of reserve and profits and issued fully paid bonus shares to existing shareholders. The decision turned on whether the shareholder, by receiving such shares, received anything in the nature of income or merely an accretion to capital. The Court held that the Western Australian decision on bonus shares was based on the special wording of that statute and did not compel a different result under the Indian Act. Following the House of Lords in Blott, the Court treated the transaction as a conversion of profits into capital, not as a distribution of income to shareholders.

Conclusion: Bonus shares issued by capitalising profits did not amount to income, profits or gains under the Income-tax Act, 1922 and were not liable to supertax.

Ratio Decidendi: Where accumulated profits are capitalised and issued as fully paid bonus shares, the shareholder receives an accretion to capital and not income, profits or gains chargeable under the taxing statute.

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