Court Rules Bonus Shares as Short-Term Assets for Capital Gains Tax

The court determined that the holding period for bonus shares starts from the date of their issuance, not from the date of acquisition of the original shares. Bonus shares sold within twelve months of issuance are classified as short-term capital assets. In this case, bonus shares issued on 5th September 1961 and sold on 12th September 1961 were deemed short-term assets. The capital gains tax on the sale of these shares was assessed at rates applicable to ordinary income. The court rejected the assessee's argument that bonus shares should be considered long-term assets. The Tribunal's decision was overturned, and the assessee was directed to pay costs to the Commissioner.

---

---

Issues Involved:
1. Determination of the holding period for bonus shares.
2. Classification of bonus shares as short-term or long-term capital assets.
3. Computation of capital gains tax on the sale of bonus shares.

Comprehensive, Issue-Wise Detailed Analysis:

1. Determination of the Holding Period for Bonus Shares:
The primary issue in this case was to ascertain the date from which bonus shares issued by a company can be considered to be held by an assessee. The question was whether the holding period starts from the date of issuance of the bonus shares or from the date when the original shares, in respect of which the bonus shares were issued, were acquired by the assessee.

The court examined the juridical nature of shares and the mechanics of issuing bonus shares. It was determined that bonus shares come into existence only when they are issued and allotted to the shareholders. The court stated, "bonus shares cannot be regarded as having been acquired by a shareholder before they are issued." The bonus shares are distinct items of property with their own rights and cannot be considered part of the original shares before their issuance.

The court concluded that the holding period for bonus shares starts from the date of their issuance, not from the date of acquisition of the original shares.

2. Classification of Bonus Shares as Short-Term or Long-Term Capital Assets:
The classification of bonus shares as short-term or long-term capital assets depends on how long they have been held by the assessee immediately preceding the date of transfer. According to Section 2(42A) of the Income-tax Act, a short-term capital asset is one held by an assessee for not more than twelve months immediately preceding the date of its transfer.

The court held that since bonus shares are acquired on the date of their issuance, the period for which they are held by the assessee cannot commence before that date. Therefore, if the bonus shares are sold within twelve months from the date of their issuance, they would be classified as short-term capital assets.

In this case, the bonus shares were issued on 5th September 1961 and sold on 12th September 1961. The court concluded that the bonus shares were held for not more than twelve months immediately preceding the date of their transfer, classifying them as short-term capital assets.

3. Computation of Capital Gains Tax on the Sale of Bonus Shares:
The computation of capital gains tax depends on whether the asset is classified as short-term or long-term. Short-term capital gains are taxed at rates applicable to ordinary income, whereas long-term capital gains are only partially assessable.

The court referred to the relevant provisions of the Income-tax Act, including Sections 45, 48, and 55(2)(i), to determine the mode of computation of capital gains and the applicable tax rates. Since the bonus shares in this case were classified as short-term capital assets, the capital gains arising from their sale were assessable at the rates applicable to ordinary income.

The court rejected the assessee's contention that the bonus shares should be considered as long-term capital assets held from the date of acquisition of the original shares. The court stated, "We must hold with the revenue that the bonus shares were acquired by the assessee when they were issued and they were, therefore, held by the assessee only from the date of their issue and consequently they must be regarded as short-term capital assets."

Conclusion:
The court concluded that the bonus shares were acquired by the assessee on the date of their issuance and were held from that date. Since the bonus shares were sold within twelve days of their issuance, they were classified as short-term capital assets. The Tribunal's decision that the capital gain arising from the sale of the bonus shares did not arise out of the sale of short-term capital assets was overturned. The court answered the reference question in the negative and ordered the assessee to pay the costs of the reference to the Commissioner.

---