1972 (7) TMI 27 - HC - Income Tax

This reference raises a short but interesting question as to what is the date from which bonus shares issued by a company can be said to be held by an assessee is it the date when they are issued or is it the date the original shares in respect of which they are issued were acquired by the assessee ? The question assumes importance because when bonus shares are sold by the assessee and there is capital gain the incidence of tax on such capital gain varies according as the bonus shares are short-term capital assets or long-term capital assets. If they are short term capital assets the incidence is higher if they are long-term capital assets the incidence is lower and the question whether they are short term capital assets or long-term capital assets depends on how long they have been held by the assessee immediately preceding the date of transfer

Issues Involved:
1. Determination of the date from which bonus shares are held by an assessee.
2. Classification of bonus shares as short-term or long-term capital assets.
3. Computation and taxation of capital gains from the sale of bonus shares.

Detailed Analysis:

Issue 1: Determination of the Date from Which Bonus Shares are Held by an Assessee

The primary issue in the judgment is whether bonus shares are considered held by an assessee from the date of their issuance or from the date the original shares, in respect of which they were issued, were acquired. This distinction is crucial because it affects the classification of the bonus shares as either short-term or long-term capital assets, which in turn impacts the tax incidence on any capital gains arising from their sale.

Issue 2: Classification of Bonus Shares as Short-term or Long-term Capital Assets

The court examined the juridical nature of shares and the mechanics of issuing bonus shares. It was established that a share represents certain rights in action, and when a company issues bonus shares, it capitalizes its accumulated profits without distributing them as dividends. These bonus shares are credited as fully paid up and represent an additional share in the increased capital of the company. The court concluded that bonus shares are a distinct item of property and must be considered acquired when they are issued. Consequently, they cannot be held by the assessee before their issuance date.

Issue 3: Computation and Taxation of Capital Gains from the Sale of Bonus Shares

The court referred to relevant provisions of the Income-tax Act, 1961, particularly sections 45, 48, 2(14), 2(42A), and 55(2)(i), to determine the mode of computation and taxation of capital gains. Section 45 imposes a charge on capital gains arising from the transfer of a capital asset. Section 2(42A) defines a short-term capital asset as one held by an assessee for not more than twelve months immediately preceding the date of its transfer. The court noted that the period for which a capital asset is held must be determined on first principles, as no rules were made by the Board under the relevant clause.

The court rejected the argument that bonus shares should be considered held from the date the original shares were acquired. It emphasized that bonus shares come into existence only upon their issuance and represent a new capital asset. Therefore, they must be regarded as short-term capital assets if sold within twelve months of their issuance.

Conclusion:

The court held that bonus shares are acquired by a shareholder when they are issued and not from the date the original shares were purchased. Consequently, the bonus shares in the present case were considered short-term capital assets, as they were sold within a few days of their issuance. The Tribunal's view that the bonus shares were long-term capital assets was overturned, and the question referred to the court was answered in the negative. The assessee was ordered to pay the costs of the reference to the Commissioner.

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