Holding period for bonus shares begins from allotment date, not original acquisition, for capital gains tax classification.

Whether bonus shares are held from the date of their allotment or from the date of acquisition of the original shares was the dominant issue. HC reasoned that bonus shares constitute distinct assets allotted by the company and are not mere extensions of the original shareholding; the holding period for tax purposes thus commences on the date of allotment/issue of the bonus shares. Consequently, for classification as short-term or long-term capital assets the period of holding is computed from the allotment date, and tax incidence follows accordingly.

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Issues: (i) Whether bonus shares issued by a company are held by the shareholder from the date when the original shares (in respect of which they are issued) were acquired, or from the date of issue/allotment of the bonus shares.

Analysis: The relevant statutory framework includes the charge of capital gains (Section 45), the definition of capital asset (Section 2(14)), the mode of computation of capital gains (Section 48), the definition of cost of acquisition for assets becoming property before 1-1-1954 (Section 55(2)(i)), and the definition of short-term capital asset by reference to the period for which a capital asset is "held" (Section 2(42A)). Company law mechanics and Table A regulations (Regulations 96 and 97) show that capitalisation of reserves and allotment are the events by which bonus shares come into existence as fully paid up shares; until allotment the bonus shares do not exist as distinct, identifiable share capital. The word "held" in Section 2(42A) requires that the capital asset exist as an identifiable asset during the period claimed to be its holding. Comparative analysis with rights issues shows similar treatment where newly issued shares are treated as acquired on allotment. Authorities and policy considerations concerning cost of acquisition (Section 55(2)(i)) and market valuation on specified dates further indicate that bonus shares cannot be treated as having been the property of the shareholder prior to their issue because they were not then an identifiable asset and their market identity did not exist.

Conclusion: Bonus shares are acquired by the shareholder on the date of their issue/allotment and are held from that date for purposes of determining period of holding under the Income-tax Act, 1961; accordingly, where sold within twelve months of issue they are short-term capital assets (adverse to the assessee and in favour of the revenue).

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