1964 (1) TMI 59 - HC - Income Tax

Summary

Issues Involved:

1. Taxability of sale proceeds of bonus shares.
2. Nature of bonus shares as capital or revenue receipts.
3. Jurisdiction of the Tribunal in recording fresh evidence.
4. Nexus and accretion theories concerning bonus shares.
5. Relevance of intention in the acquisition of shares.
6. Presumption regarding shares held by dealers as stock-in-trade.

Issue-wise Detailed Analysis:

1. Taxability of Sale Proceeds of Bonus Shares:
The primary question was whether the sale proceeds of bonus shares received in respect of ordinary shares held as stock-in-trade are taxable under the Indian Income-tax Act. The court concluded that the proceeds of sale of bonus shares were taxable only if they could be said to be profits and gains of business. Since the assessees carried on the business of dealing in shares, the proceeds would be considered business income if the shares were sold in the course of their business. However, it was determined that the bonus shares were not treated as stock-in-trade by the assessees, and thus, the proceeds were not taxable as business income.

2. Nature of Bonus Shares as Capital or Revenue Receipts:
The court examined whether the bonus shares received by the assessees were capital assets or revenue receipts. It was noted that the bonus shares were received involuntarily, and there was no evidence that the assessees intended to treat them as stock-in-trade. The court emphasized that the intention behind the acquisition and subsequent treatment of the shares is crucial in determining their nature. Since the assessees did not treat the bonus shares as stock-in-trade, the proceeds from their sale were considered capital receipts and not taxable as revenue income.

3. Jurisdiction of the Tribunal in Recording Fresh Evidence:
The Tribunal was found to have no jurisdiction to record fresh evidence and give fresh findings when submitting a supplementary statement under section 66(4) of the Income-tax Act. Consequently, all evidence and findings submitted by the Tribunal after passing the order under section 33(4) were disregarded by the court.

4. Nexus and Accretion Theories Concerning Bonus Shares:
The court rejected the nexus and accretion theories, which suggest that bonus shares accrete to the original shares and take their nature. It was held that the bonus shares are allotted based on the shareholder's name appearing in the company's register, not because of the original shares held. Therefore, there is no direct connection between the original shares and the bonus shares. The court also noted that the accretion theory was inconsistent with the intention theory and lacked statutory support.

5. Relevance of Intention in the Acquisition of Shares:
The court emphasized that the intention behind acquiring shares is a crucial factor in determining whether they are stock-in-trade or capital assets. In cases of voluntary acquisition, the intention at the time of acquisition is decisive. However, in involuntary acquisitions, such as receiving bonus shares, the subsequent treatment of the shares by the assessee is significant in inferring the intention. Since the assessees did not treat the bonus shares as stock-in-trade, they were considered capital assets.

6. Presumption Regarding Shares Held by Dealers as Stock-in-trade:
The court held that there is no presumption that every share acquired by a dealer in shares is stock-in-trade. A dealer in shares can hold shares as capital assets, and the intention behind the acquisition and subsequent treatment of the shares determines their nature. The court found no evidence that the assessees intended to treat the bonus shares as stock-in-trade, and thus, the proceeds from their sale were not taxable as business income.

Separate Judgments:

- M.C. Desai C.J. and Jagdish Sahai J.:
Both judges agreed that the bonus shares were not treated as stock-in-trade by the assessees and that the proceeds from their sale were not taxable as business income. They emphasized the importance of intention and subsequent treatment in determining the nature of the shares.

- S.C. Manchanda J.:
In his dissenting judgment, Manchanda J. argued that the bonus shares should be considered an accretion to the original shares held as stock-in-trade and that the sale proceeds should be taxable as business income. He emphasized the nexus between the bonus shares and the original shares and the relevance of the assessee's business as a dealer in shares.

Order:
The court answered the question in the negative, holding that the proceeds from the sale of bonus shares were not taxable as business income. The assessee was awarded costs of Rs. 100, and counsel's fee was assessed at Rs. 100.