1963 (11) TMI 96 - HC - Income Tax

Summary

Issues Involved:
1. Correctness of the computation of capital gains on the sale of bonus shares.
2. Determination of the cost of acquisition for bonus shares.
3. Legal interpretation of bonus shares as gifts or as capitalized profits.

Issue-wise Detailed Analysis:

1. Correctness of the Computation of Capital Gains on the Sale of Bonus Shares:
The primary question referred to the court was whether the capital gains of Rs. 7,269 on the sale of bonus shares, as computed by the Income-tax Officer, was correct and in accordance with the law. The Income-tax Officer assessed the entire sale proceeds of Rs. 7,269 as capital gains, considering the original cost of the bonus shares to be nil. The Tribunal disagreed, suggesting that the cost of the bonus shares should be averaged with the original shares or valued at the market price, whichever is lower. The court had to determine the proper method for computing the capital gains.

2. Determination of the Cost of Acquisition for Bonus Shares:
The court examined the nature and valuation of bonus shares. The assessee argued that the cost should be averaged, while the department contended that the cost was nil. The court noted that bonus shares are issued out of a company's profits and are not obtained free of consideration. They are a distribution of capitalized undivided profits, not gifts. The court cited authoritative texts and previous judgments to support this view, concluding that the cost of acquisition should not be considered nil.

3. Legal Interpretation of Bonus Shares as Gifts or as Capitalized Profits:
The court discussed whether bonus shares should be treated as gifts or as capitalized profits. It cited various legal texts and precedents to argue that bonus shares are not gifts but are issued in lieu of dividends, representing a capitalization of profits. The court disagreed with the Bombay High Court's view in Emerald & Co. Ltd. v. Commissioner of Income-tax, which treated bonus shares as gifts. Instead, it aligned with the Patna High Court's view in Dalmia Investment Co. Ltd. v. Commissioner of Income-tax, which considered the face value of the shares as their cost.

Conclusion:
The court concluded that the Tribunal erred in directing a fresh computation based on averaging or market price. The correct method is to take the face value of the bonus shares as the cost of acquisition. Therefore, the capital gains should be computed as the excess of Rs. 7,269 over the face value of the 94 bonus shares. The reference was answered accordingly, with no order as to costs.