9911796707
TMI Blog1963 (11) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... ount ended 13th April, 1959, relevant to the assessment year 1959-60, the assessee sold 94 bonus shares for ₹ 7,268.94 nP. The Income-tax Officer was of the opinion that the original cost of these bonus shares was nil and therefore assessed the entire sale proceeds of ₹ 7,269 to tax as capital gains under section 12B of the Act. The assessee contended that the cost of the bonus shares should be fixed by adopting the average cost in respect of each share, taking into account the total number of shares held by him, original shares plus the bonus shares. But the Income-tax Officer did not accept this contention. The assessee preferred an appeal to the Appellate Assistant Commissioner, who, however, affirmed the decision of the Income-tax Officer. The view of the Appellate Assistant Commissioner was that the assessee had not incurred any expenditure for acquiring these shares and that the original cost must be deemed to be nil. There was a further appeal by the assessee to the Income-tax Appellate Tribunal. The Tribunal disagreed with the view of the department and held that the original cost of the bonus shares should not be taken as nothing. The Tribunal referred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res go by the modern name capitalisation shares . If the articles of association empower, the company can capitalise profits or reserves, and issue fully paid shares of a nominal value equal to the amount capitalised to its shareholders. But in some cases, the articles provide for an option to the shareholders to take cash instead of shares. This would make no difference in the position, except of course to the extent to which the option is exercised (Inland Revenue Commissioners v. Fisher's Executors [1926] A.C. 395; 10 Tax Cas. 302 and Commissioner of Income-tax v. Mercantile Bank of India [1936] A.C. 478; [1936] 4 I.T.R. 239 (P.C.). Where the articles authorise the satisfaction of a dividend or bonus in fully paid shares the declaration of the dividend or bonus makes the shareholder a creditor or the company for the amount of his proportion; the release of his claim against the company for this amount is a good and valuable consideration or set-off so as to make the shares fully paid, even though the release is compulsory. Spicer and Pegler in their book Book-keeping and Accounts state that a bonus issue of shares adds nothing to the net assets of the company, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e opinion that bonus shares are not gifts in the hands of the shareholders. At page 193, he observes: Shares issued for past consideration or by way of a gift cannot be treated as paid up and the allottees can be made liable to pay for them. Different is the position where bonus shares are issued because in that case the shares are fully paid up out of profits of the company available for distribution by way of dividend or otherwise available. Pennington in his book on Company Law states that the issue of bonus shares must be treated as an issue for a consideration other than cash. At page 276, he observes: It is common, however, for articles to contain a power for the company to capitalise profits or reserves, and to issue fully paid shares or debentures of a nominal value equal to the amount capitalised to its shareholders. These new shares or debentures are known as bonus shares or debentures, but the name is misleading in that it implies that they are a gift from the company. If they were a gift, they would not be paid up at all, and in the case of bonus shares, the company could call on their holders to pay for them in cash. In fact, they are not a gift, and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erroneous, that the proper profit and loss could only be arrived at by averaging the cost of 350 shares taking into consideration the fact that 50 bonus shares were received free and that the method of valuation adopted by the department was right. At page 817, the learned Chief Justice observed as follows: The contention of Mr. Kolah is that although the bonus shares were given free if these shares had not been given he would have received a larger dividend and these bonus shares have been paid out of profits of the company. We are not concerned with the reason which induced the company to issue these bonus shares. The fact remains that the bonus shares were received free and the assessee-company paid nothing for the bonus shares. This decision was taken up on appeal to the Supreme Court and their Lordships reversed the judgment of the Bombay High Court in Emerald Co. Ltd. v. Commissioner of Income-tax [1959] 36 I.T.R. 257 (S.C.). Their Lordships held that, for the purpose of assessing the loss for the accounting year, the question of the proper method of valuing the bonus shares was not relevant, as they were not sold and were still retained in the hands of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efer to the following observation of Lord Greene, Master of the Rolls, at page 306: It was strenuously argued on behalf of the Crown that if a company acquired stock in consideration of the issue of fully paid shares to the vendor, that stock must, for the purpose of ascertaining the company's profits, be treated as having been acquired for nothing, with the result that when it comes to be sold, the revenue is entitled to treat the whole of the purchase price obtained on the sale as profit. This is a remarkable contention and it would require conclusive authority before we could accept it. The cases relied on in its support were Commissioners of Inland Revenue v. Blott [1921] 8 Tax Cas. 101 and Lowry v. Consolidated African Selection Trust Ltd. [1940] A.C. 648; 23 Tax Cas. 259. neither of which, in our view, has any bearing on the point. The argument really rests on a misconception as to what happens when a company issues shares credited as fully paid for a consideration other than cash. The primary liability of an allottee of shares is to pay for them in cash; but when shares are allotted, credited as fully paid, this primary liability is satisfied by a consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of that case were as follows: An investment company was carrying on business in India and it capitalised its accumulated undistributed profits and issued to its shareholders bonus debentures, which were subsequently redeemed. It was held that the shareholders did not, as a result of those transactions, receive any taxable income, profits or gains within the meaning of section 4 of the Indian Income-tax Act, 1922. The personal motive or purpose of the individual shareholders, even though they held controlling interest in the company, was held to be irrelevant, if it was made out that the company had in fact capitalised the accumulated profits. The view of the Judicial Committee, therefore, was that undistributed profits of the company applied and appropriated for the issue of bonus shares would never become profits in the hands of the shareholder at all. The bonus share was held to be something in the nature of extra share certificate in the company. Indeed, this position, that bonus shares allotted to a shareholder would not represent taxable income in his hands, is conceded by learned counsel for the department. The case of Malam v. Hitchens [1894] 3 Ch. 578. was relied u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns represent the excess realisation made by the assessee over and above the cost of acquisition. Taking the allotment of bonus shares, it might plausibly be contended that the price paid by the shareholder is the amount of undistributed profits which he would have got if they had been distributed as dividends. But we do not think that it would be a sound way of ascertaining the true value of the bonus shares. The moment shares are issued, the recipient obtains the scrips which have a face value. Whether the shares were issued by the company at a premium or a discount, the actual share is only of the value denominated therein. There is thus a good deal to be said in favour of the view that the cost of acquisition of the bonus shares is really the face value. The other alternative is to find out the market value of the shares. On the date of the issue of the bonus shares, the original shares may have a market value. How far the issue of bonus shares would operate as a bull in the market is not easy to determine. Of course, it can be safely assumed that the shares of a company, which is in a position to issue bonus shares, would normally be selling at a premium and not at a discount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s available for declaration of dividend amount to ₹ 50,000. Cum-dividend the share will be worth each ₹ 1.50 nP. If bonus shares are issued at par the share capital will be increased to ₹ 1,50,000 but there will be corresponding increase of shares to 1,50,000 from 1,00,000. Each share will be worth rupee one but each shareholder will be having fifty per cent. more shares. The shareholder gains nothing. He gets more shares but the pecuniary advantage is nil. The stock market might quote a higher value for the one rupee shares on the basis of a good percentage of dividend declared in the past. After capitalisation of the profit it is reasonable to expect that only a lesser dividend would be declared. This must bring down even the market quotation. But yet people might gamble on the dividend not dropping down much and stimulate a value in excess of the real value. The position on the issue of bonus shares becomes very uncertain, and the so-called market value is really a fiction. Surely, it cannot be said that the market value of the shares of the company as a whole, the original shares as well as the bonus shares obtaining a few shares after the issue, should be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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