1968 (9) TMI 14 - SC - Income Tax

Assessees dealing in shares and securities held in the relevant years as part of their stock-in-trade shares of certain companies - sale proceeds of bonus shares which had been issued in respect of shares which formed part of the assessees stock-in-trade of the share dealing business are liable to inclusion in the assessees total incomes for the respective years as profits of the share dealing business - Revenue s appeal allowed

Summary

Issues:
1. Taxability of sale proceeds of bonus shares received by the assessees as part of their stock-in-trade.
2. Interpretation of bonus shares as capital or income for the purpose of taxation.
3. Examination of the Tribunal's findings and its reliance on evidence in determining tax liability.

Analysis:
The case involved the tax treatment of sale proceeds from bonus shares received by the assessees, who dealt in shares and securities. The Income-tax Officer assessed the proceeds as income arising from the share dealing business. The Tribunal referred the question of law to the High Court to determine if the sale proceeds of bonus shares should be included in the assessees' total income as profits of the share dealing business. The High Court, with a Full Bench majority, answered the question in the negative, leading to an appeal to the Supreme Court.

The Supreme Court analyzed the nature of bonus shares issued by companies, emphasizing that under the Income-tax Act, 1922, bonus shares from capitalization of accumulated profits were not considered as dividend. Citing precedents like Commissioners of Inland Revenue v. John Blott and Commissioner of Income-tax v. Mercantile Bank of India, the Court established that bonus shares, absent contrary provisions, are to be treated as capital and not income for shareholders.

The Court disagreed with the Tribunal's conclusion that the sale proceeds of bonus shares were part of the assessees' profit from the share dealing business. It noted that bonus shares, although accretions to the stock-in-trade, do not ipso facto become part of the business's stock-in-trade. The assessees received the bonus shares as capital, which could be converted into stock-in-trade or retained as a capital asset. The lack of evidence supporting the Tribunal's finding that the bonus shares were incorporated into the stock-in-trade weakened its position.

Moreover, the Court highlighted that the High Court must accept the findings of fact made by the Tribunal in an Income-tax Act reference unless challenged appropriately. Since the assessees failed to challenge the Tribunal's findings on evidence validity, they could not dispute the findings before the High Court. Consequently, the Court discharged the High Court's answer and held that the sale proceeds of the bonus shares were not taxable as income but as capital. The appeals were allowed with no order as to costs.