Bonus share cost must be apportioned over original and bonus shares, not treated as face value or nil cost.

Bonus shares issued by capitalisation of reserves and ranking pari passu with original shares are not treated as having a face-value or nil cost merely because no cash is paid on issue. The correct approach is to determine the real commercial and tax cost of the bonus shares by apportioning the original purchase price of the old shares over the original and bonus shares taken together, since the bonus issue diminishes the value of the original holding and the two holdings together represent the same capital interest. The face-value and nil-cost methods were rejected as inconsistent with business accounting principles.

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Issues: Whether the cost of acquisition of bonus shares, issued by capitalisation of reserves and ranking pari passu with the original shares, was to be taken at face value, nil, or by spreading the cost of the original shares over the original and bonus shares for computing the profit on sale.

Analysis: The issue of bonus shares did not involve any cash payment by the shareholder, and the face value could not be treated as the cost merely because the company transferred reserves to share capital. The proper approach was to ascertain what the bonus shares really cost in commercial and tax terms. Where bonus shares rank pari passu with the original shares, the original purchase cost of the old shares must be apportioned over the old and bonus shares taken together, because the issue of bonus shares reduces the value of the original holding and the two holdings together represent the same capital interest. The nil-cost method and the face-value method were rejected as inconsistent with the true nature of the transaction and with business accounting principles.

Conclusion: The cost of the bonus shares was to be determined by spreading the cost of the original shares over the original and bonus shares taken together, and the profit computed by the High Court on the basis of a cost of Rs. 3,11,646 was not in accordance with law.

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