TaxTMI 
TaxTMI 
1964 (1) TMI 59
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....ut of it and referred by the Tribunal is: "Whether the sale proceeds of bonus shares which had been issued in respect of shares which formed part of the assessee's stock-in-trade of the share dealing business are liable to inclusion in the assessee's total income for the respective years as profits of the share dealing business?" It will be noticed that the two questions are identical and, therefore, the two statements of cases have been amalgamated. The instant reference came up for hearing before a Bench of which one of us was a member and it referred it to a larger Bench for reconsideration of this court's decision in Motilal v. Commissioner of Income-tax [1961] 41 I.T.R. 382 and Shri Ram Jha v. Commissioner of Income-tax [1957] 31 I.T.R. 987. The connected reference came up for hearing before another Bench, which, finding good authority for the assessee's contention that every receipt of bonus shares is not revenue receipt or income but finding nothing in the statement to show whether the bonus shares after being received were made by the assessee the stock-in-trade of its business, called for a further statement of the case from the Tribunal. The d....
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....f the sale as income from its business overruling its contention that the receipt of the bonus shares was capital, and not revenue, receipt. The Income-tax Officer's order was upheld by the Tribunal, following a decision of Chagla C.J. and Tendolkar J. of the Bombay High Court in Commissioner of Income-tax v. Maneklal Chunilal and Sons Ltd. (I.T.R. No. 16 of 1948). In the connected income-tax reference the Tribunal had no jurisdiction to record fresh evidence and to give fresh findings when submitting a supplementary statement under section 66(4) of the Income-tax Act. Consequently, all the evidence received, and all the findings given, by the Tribunal after it had passed the order under section 33(4) must be disregarded by us. Income within the meaning of the Income-tax Act includes: (1) dividend, (2) the value of any perquisite or profit in lieu of taxable salary, (3) the value of any benefit or perquisite obtained from a company by a director or other person interested in the company, (4) any sum deemed to be profits under certain provisions of the Act, (5) any capital gain chargeable under section 12B and (6) the profits and gains of any business carried on by an insuranc....
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....business of the assessee consisted of buying and selling shares but it does not follow that every buying, and every selling, of shares by them was done in the course of their business. Every profit made by sale of the stock-in-trade of a business is profits and gains of the business but no profit made by sale of any capital assets of the business is profits and gains of the business. There is a distinction recognized by law between stock-in-trade and capital assets and it depends not on the nature of the goods but on the purpose behind their acquisition and the use made of them. Hence, some out of the goods of the same nature owned by a businessman can be his stock-in-trade and others, capital assets. He is entitled to have stock-in-trade and also capital assets and is not forbidden to have capital assets of the same nature as his stock-in-trade. It follows that everything possessed by a businessman is not necessarily his stock-in-trade simply because it is of the same nature as his stock-in-trade. A person carrying on business of selling ready-made clothes has certain ready-made clothes as his stock-in-trade, but he also has other ready- made clothes, such as personal wearing appa....
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....amnarain Sons (P.) Ltd. v. Commissioner of Income-tax [1961] 41 I.T.R. 534 ; [1961] 2 S.C.R. 904., a dealer in shares and also carrying on business as managing agents of companies, in order to acquire the managing agency of a company, purchased shares of the company far in excess of their market price and two months later sold them at a loss. The Supreme Court held that he acquired them not to deal in them as his stock-in-trade but as capital assets in order to facilitate his acquiring the managing agency of the company. Shah J., speaking for the court, observed at page 537: "In considering whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee...The shares were purchased for the purpose of acquiring the managing agency...; they were not purchased in the course of the appellants' business as dealers in shares. By purchasing the shares which facilitated acquisition of the managing agency, a capital asset was acquired and merely because the managing agency could be utilized for earning profit, the acquisition of the shares which led to the acquisition of the managing agency could ....
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.... If the transaction is regarded in that light, it seems to me it is precisely on all fours with the case of any trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment...then finds that he has bought more than he ultimately needs and proceeds to sell the surplus...It had an income character impressed upon it from the very first. ....it was no part of the company's business to buy and sell dollars. But...the commodity...was acquired for the purpose of transactions on revenue account and nothing else." The dollars were held to be part of the stock-in-trade of the company because of the purpose for which they were acquired. Acquisition of shares may be voluntary, i.e., intentional, or involuntary, i.e., unintentional. Intention exists only when the acquisition is voluntary and there cannot arise any question of intention when it is involuntary. Acquisition of bonus shares allotted by a company in lieu of distribution of profits is involuntary acquisition; the assessee is bound to accept the shares unless he wishes to renounce them. He has no option of taking something in lieu o....
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....on. Actually, there is no nexus between the original holding and the receipt of bonus shares; the connection between them, even if it exists, is remote and indirect. Bonus shares are allotted to the shareholders whose names appear in the company's register of shareholders on a particular day. A shareholder's name entered in the company's register remains there so long as it is not removed and another's name is not recorded in respect of the shares. A shareholder may transfer his shares to another but it takes time before his vendee gets his name registered in place of his. Consequently, a person's name may appear in the company's register on a certain date even though he had disposed of the shares previously and, therefore, did not hold them on that day. The bonus shares would still be allotted to him on the ground that his name appeared in the company's register on that day. He is entitled to the bonus shares not because he held original shares on that day but because he was recorded in the company's register on that day as holding them. Every person who is a shareholder in the company's register is entitled to bonus shares regardless of whether....
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....mchand v. Commissioner of Income-tax [1959] 36 I.T.R. 577. Popatlal donated (original) shares to his minor son to whom bonus shares were allotted subsequently on the basis of his holding. The dividend income from the original shares derived by the son was included in the income of Popatlal for assessment in accordance with the provisions of section 16(3)(a)(iv) and the question arose whether the dividend income from the bonus shares also should be included in his income. Shah and S.T. Desai JJ. answered the question in the negative. They did say that the bonus shares were an accretion to the original holding but refused to treat the dividend income from them as arising indirectly from the original holding transferred to his son. In effect, however, they treated the bonus shares as not taking their colour from the original holding; the accretion theory put to its logical conclusion should have resulted in the dividend income from them also being an accretion to the original holding. Accretion by itself does not come under any head of income. The nexus theory was discarded by the House of Lords in Stafford Coal and Iron Co. Ltd. v. Brogan [1963] 3 All E.R. 277; [1963] 1 W.L.R. 905. ....
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....not distribute them at all, but apply them in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profit in the hands of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company. His new shares do not give him an immediate right to a larger amount of the existing assets. These remain where they were. The new shares simply confer a title to a larger proportion of the surplus assets if and when a general distribution takes place, as in the winding up. In these assets, the undistributed profits now allocated to capital, will be included profits which will be used by the company for its business, but henceforth as part of its issued share capital. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in Burland v. Earle [1902] A.C. 83, 93., no court can interfere." He distinguished Swan Brewery Company Limited v. King [1914] A.C. 231. on account of different language being used in the ....
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.... revenue income; their Lordships did not decide anything about bonus shares received by a dealer in shares. The Judicial Committee of the Privy Council followed the decision in Blott's Case [1921] 8 Tax Cas. 101 in Commissioner of Income-tax v. Mercantile Bank of India [1936] 4 I.T.R. 239 (P.C.) and held that when accumulated profits are issued as bonus debentures on the basis of preferred shares held by shareholders the issue of the debentures does not amount to income in the shareholders' hands. The decision in the case of Swan Brewery Company [1914] A.C. 231, 236 turned upon the interpretation of an Australian Act which defined "dividend" to include every advantage or gain intended to be paid, credited or distributed. The issue of bonus shares was held to be dividend because it was found to be an advantage. The transaction was interpreted by the Judicial Committee to involve the shareholders' "acquiescing in such a transfer from reserve to share capital as put an end to any participation in the sum of...in right of the old shares, and created instead a right of general participation in the company's profits and assets in right of the new shares, w....
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....etions...When computing income for purposes of assessment of income- tax, they must be treated as additions to stock-in-trade on the date on which they were received by the assessee." With great respect I dissent. Firstly, these observations are contrary to the observations of the House of Lords in Blott's case [1921] 8 Tax Cas. 101. Secondly, they are contrary to the observations in the case of Sri Ram Jha [1957] 31 I.T.R. 987 decided by V. Bhargava and Mehrotra JJ. Thirdly, as I pointed out, the very basis of the accretion theory that the bonus shares are issued because the shareholder holds original shares is incorrect. The assessee could have received the bonus shares even if it did not hold 500 ordinary shares and might not have received any bonus shares even if it held 500 ordinary shares. Their observation that the bonus shares themselves must be treated as an advantage to the stock-in-trade for the purpose of computing the assessee's income is inconsistent with their decision at page 392 that they "cannot be treated as dividend...because in issuing...the bonus shares the company did not give away any cash or any part of its assets". If the bonus shar....
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.... [1962] 46 I.T.R. 86 (S.C.). This case distinguishes between shares held as stock-in-trade and shares held as capital assets by a dealer in shares. No question of the nature of bonus shares arose in it. The learned judges made it clear at page 757 that "if any part of the amount is not attributable to the business profits of the assessee, then the assessee is not liable to pay tax thereon". The Supreme Court in dismissing the appeal endorsed the view of the High Court that actual profits should be computed according to the ordinary commercial principles. In Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 I.T.R. 506 ; [1954] S.C.R. 219, the Supreme Court had to decide how an assessee following the mercantile system of accounts and adopting the method of valuing the stock at its cost price at the beginning, and at the close, of each accounting year, should value the stock withdrawn by him from the business and converted into capital asset and decided that it should be valued at the market price at the time of the withdrawal. The reasons given by Bose J., speaking for the court, were that the withdrawal was not a business transaction and that the assessee made no....
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....sessment. It is the proceeds of those sales which have been taxed by the income-tax authorities. The sole question requiring consideration at our hands is whether those proceeds were capital assets or revenue receipts. We have heard Sri Gulati for the assessees and Sri Gopal Behari for the income-tax department. Sri Gopal Behari has made a statement before us that the assessees are being taxed on the proceeds of the bonus shares and not on the bonus shares themselves. Section 2(6A)(a) of the Indian Income- tax Act, 1922 (hereinafter referred to as the Act), defines "dividend". The said provision reads as follows: "2. (6A) 'dividend' includes-- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company." There are two ingredients of the definition. One is that there must be a distribution by a company of accumulated profits whether capitalised or not. The other is that the result of the distribution should be the release by the company to its shareholders of all or any part of the assets of the compa....
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....same and, secondly, that inasmuch as the assessees carried on the business of purchasing and selling shares any sale made by them must be construed to have been made in the course of their business. Bonus shares are issued to one whose name is entered in the registers of the company on a particular date even though he may not be a shareholder on that date, having sold his share earlier and the purchaser not having got his name registered in the company's books. The right to receive bonus shares, therefore, is based upon the entry of the name of that person in the register of the company and is not dependent upon the factual position whether or not he holds shares in that company. It is true that when the bonus shares are issued to a person whose name is recorded in the company's registers it is on the assumption that he holds the shares but still the basis is the entry of the name in the registers of the company and not the right to hold the share. The theory of accretion to original shares is therefore not legally correct. With regard to presumption it may be stated that all presumptions are rebuttable. Whether or not the particular goods are stock-in-trade would depend up....
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....ne conclusively against the whole world whether it will withhold profits it has accumulated from distribution to its shareholders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profit in the hands of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company. His new shares do not give him an immediate right to a larger amount of the existing assets. These remain where they were. The new shares simply confer a title to a larger proportion of the surplus assets if and when a general distribution takes place, as in the winding up. In these assets, the undistributed profits now allocated to capital, will be included profits which will be used by the company for its business, but henceforth as part of its issued share capital. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in Burland v. Earle [1902] A.C.....
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....n slight evidence is sufficient. In the present case the assessing authority had before him no material on the basis of which he could hold that either the bonus shares were acquired for the purpose of treating them as stockin-trade or that when they were sold it was so done in the course of business. With regard to the first, we have already said above that since the assessees had no hand in the acquisition of bonus shares there can be no question of their having acquired them for the purpose of treating them as stock-in-trade and not as capital. With regard to the second, there are statements and pleas of the assessees that in fact they never treated the bonus shares as their stock-in-trade but only as their capital assets and when they sold them they did not do so in the course of their business. Whatever presumption could have been drawn in this case stands fully rebutted by the statements of the assessees. Mr. Gopal Behari placed reliance upon the unreported decision of the Bombay High Court in Income-tax Reference No. 16 of 1948 (Commissioner of Income-tax v. Maneklal Chunilal) and D. Motilal v. Commissioner of Income-tax [1943] 25 Tax Cas. 292. In the former case it was obs....
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....Income-tax [1957] 31 I.T.R. 987, 996, where it was stated as follows: "If a capital receipt comes into the hands of any individual in kind and not in cash, the conversion of that asset into cash can only be conversion of capital into cash and not a transaction in the course of business for the purpose of earning profit. The mere coincidence that a particular asset received as capital receipt is of the same nature as the assets forming the stock-in-trade of the business, cannot convert the transaction of receipt and sale of the capital asset into a business transaction for the purpose of earning income." I am with great respect unable to agree with what has been decided in the cases of Maneklal Chunilal I.T. Ref. No. 16 of 1948 and Motilal [1961] 41 I.T.R. 382. In Popatlal Bhikamchand v. Commissioner of Income-tax [1959] 36 I.T.R. 577 the accretion theory was rejected by the Bombay High Court and in Stafford Coal & Iron Company Ltd. v. Brogan [1959] 36 I.T.R. 577 the nexus theory was discarded by the House of Lords. The facts of the former case were that Popatlal gifted away his original shares to his son who received the bonus shares. Since the son was a minor the inco....
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..... shares fully paid, the original shares fell to £ 7. I do not mention these facts merely to question the amount of the assessment but to show the principle upon which it proceeds, i.e., that the allotment of shares must be regarded as a cash payment of the face value of the shares, regarding as immaterial the fact that the shareholder never does receive any cash and can only obtain fully paid shares, increasing the capital of the company and decreasing the participating value of the shares. In other words, the Crown contended that the respondent must be treated as if he had received the two sums of £ 500 and £ 750, and had then been free to spend them as he liked in buying shares in this or another company, Government securities or land or anything else or not to invest them at all but spend them in his own amusements. It seems to me that he is obviously not in fact in this position, and the question is whether he is to be considered to be so in law." Blott's case [1921] 8 Tax Cas. 101 was followed by the Judicial Committee of the Privy Council in Commissioner of Income-tax v. Mercantile Bank of India [1936] 4 I.T.R. 239 (P.C.) and it was held by thei....
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....he sheer circumstance that the assessees were dealers in shares stands fully rebutted by the explanation and the plea of the assessees that they did not sell them in the course of their business nor did they acquire them for that purpose. I would, therefore, answer the question referred to us in each reference in the negative. S.C. MANCHANDA J.--I have had the advantage of reading the judgments of my Lord the Chief Justice and Jagdish Sahai J., which they propose to deliver, but, with great respect, regret that I have to differ. All the facts have already been set out in the judgment of the learned Chief Justice and it is unnecessary to reiterate them in extenso. It will suffice if I set out only the material facts in the connected Income-tax Reference No. 190 of 1953 and which lie within a very narrow compass. The assessee, Kunjilal, was admittedly a dealer in stocks and shares. The relevant assessment year is 1955-56. He held as part of his stock-intrade a block of 24,000 ordinary (equity) shares of Kanpur Textiles Ltd. (hereinafter referred to as the company) of the face value of ₹ 2-8-0 each. 400 shares out of these were held on behalf of one Mr. Talwar. The company h....
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....decision in Shri Ram Jha [1957] 31 I.T.R. 987, but the bench hearing the present reference was of the view that these cases required reconsideration by a larger Bench in view of the apparent conflict between the said two decisions of this court and also because of the decision of the House of Lords in Blott's case [1921] 8 Tax Cas. 101. That is how this case has come before a Full Bench. Undoubtedly, Blott's case [1921] 8 Tax Cas. 101 is the leading case on the subject of nontaxability of bonus shares issued by a company. The question, however, in that case was one which, at any rate, does not arise for consideration in the present case at all. That was a case where the only question which arose was "whether the allotment of bonus shares to the respondent was capital, or was in reality an allotment of annual profits which conferred a benefit chargeable in his hands with income tax, for, if so, it is not in controversy that the super-tax provisions will apply" (page 124 per Viscount Haldane). In other words, the point for decision was whether the mere issue of the bonus shares constituted an income in the hands of the recipient. Viscount Haldane, at page 126, obse....
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....d or carried it temporarily to reserve, came thenceforth under an obligation to retain it permanently as capital. It is true that the shareholder could sell his bonus shares, but in that case he would be realising a capital asset producing income, and the proceeds would not be income in his hands. It appears to me that if the substance and not the form of the transaction is looked to, the declaration of a bonus was, as Mr. Justice Rowlatt said, 'bare machinery' for capitalising profits, and there was no distribution of profits to the shareholders. I think therefore that neither the shares nor their face value should be treated as income of the respondent. "(Underlining [1921] 8 Tax Cas. 101 is mine). It is again manifest that the sole question which the House of Lords was considering was as to whether the issue of bonus shares constituted a distribution of profits of the company to its shareholders and was assessable as such. In other words, whether the mere issue of bonus shares by the company constituted income assessable in the hands of the shareholder as dividend income. If that was the question which arose in the present case then, undoubtedly, Blott's case ....
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....spect of the total income of the previous year of every individual..... "Income" is defined in section 2(15) of the Act: "...total amount of income, profits and gains referred to in sub-section (1) of section 4 computed in the manner laid down in this Act." Therefore, the definition of total income throws one back to section 4 of the Act. The relevant part of section 4 reads: "4. (1) Subject to the provisions of this Act the total income of any previous year of any person includes all income, profits and gains from whatever source derived which......" The words underlined Here printed in italics by me above came up for consideration before a Bench of this court in Lala Indra Sen, In re [1940] 8 I.T.R. 187, 199, where it was laid down that "taxation under the Act is the rule and exemption the exception. All income from whatever source derived must, therefore, be chargeable to income-tax, and the burden of proving that a particular class of income is not so chargeable must necessarily lie on the person claiming exemption from the liability to pay income-tax." The words "from whatever source derived" in section 4(1) are signifi....
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....shares could never have been acquired with the object of investment as those shares were sold without any necessity or reason whatsoever within ten weeks of the receipt thereof. They were also not purchased; indeed they could not have been purchased with the object of obtaining any management, agency or directorship and as such the decision strongly relied upon for the assessee in Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax [1961] 41 I.T.R. 534 ; [1961] 2 S.C.R. 904 can be of little or no avail to the assessee. Bonus shares undoubtedly cannot be purchased or acquired by a shareholder from the company; it is something which he receives gratis. They, however, do not fall from heaven but come to him because he is a registered shareholder in the books of the company on a particular date. The issue of those shares bear a definite relationship to his equity shareholding. In the present case, for every ordinary share held by the assessee he received one bonus share. But for these ordinary shares held, the assessee would never have received any bonus shares. There is, therefore, a definite nexus or casual connection between the bonus shares issued by the company and the equity ....