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TMI Blog1964 (1) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether the sale proceeds of bonus shares which had been issued in respect of shares which formed part of the assessee's stock-in-trade of the share dealing business are liable to inclusion in the assessee's total income for the respective years as profits of the share dealing business? It will be noticed that the two questions are identical and, therefore, the two statements of cases have been amalgamated. The instant reference came up for hearing before a Bench of which one of us was a member and it referred it to a larger Bench for reconsideration of this court's decision in Motilal v. Commissioner of Income-tax [1961] 41 I.T.R. 382 and Shri Ram Jha v. Commissioner of Income-tax [1957] 31 I.T.R. 987. The connected reference came up for hearing before another Bench, which, finding good authority for the assessee's contention that every receipt of bonus shares is not revenue receipt or income but finding nothing in the statement to show whether the bonus shares after being received were made by the assessee the stock-in-trade of its business, called for a further statement of the case from the Tribunal. The direction actually given to the Tribunal was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contention that the receipt of the bonus shares was capital, and not revenue, receipt. The Income-tax Officer's order was upheld by the Tribunal, following a decision of Chagla C.J. and Tendolkar J. of the Bombay High Court in Commissioner of Income-tax v. Maneklal Chunilal and Sons Ltd. (I.T.R. No. 16 of 1948). In the connected income-tax reference the Tribunal had no jurisdiction to record fresh evidence and to give fresh findings when submitting a supplementary statement under section 66(4) of the Income-tax Act. Consequently, all the evidence received, and all the findings given, by the Tribunal after it had passed the order under section 33(4) must be disregarded by us. Income within the meaning of the Income-tax Act includes: (1) dividend, (2) the value of any perquisite or profit in lieu of taxable salary, (3) the value of any benefit or perquisite obtained from a company by a director or other person interested in the company, (4) any sum deemed to be profits under certain provisions of the Act, (5) any capital gain chargeable under section 12B and (6) the profits and gains of any business carried on by an insurance association or by a co-operative society. Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares but it does not follow that every buying, and every selling, of shares by them was done in the course of their business. Every profit made by sale of the stock-in-trade of a business is profits and gains of the business but no profit made by sale of any capital assets of the business is profits and gains of the business. There is a distinction recognized by law between stock-in-trade and capital assets and it depends not on the nature of the goods but on the purpose behind their acquisition and the use made of them. Hence, some out of the goods of the same nature owned by a businessman can be his stock-in-trade and others, capital assets. He is entitled to have stock-in-trade and also capital assets and is not forbidden to have capital assets of the same nature as his stock-in-trade. It follows that everything possessed by a businessman is not necessarily his stock-in-trade simply because it is of the same nature as his stock-in-trade. A person carrying on business of selling ready-made clothes has certain ready-made clothes as his stock-in-trade, but he also has other ready- made clothes, such as personal wearing apparel, which are not part of his stock-in-trade; if he sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1961] 41 I.T.R. 534 ; [1961] 2 S.C.R. 904., a dealer in shares and also carrying on business as managing agents of companies, in order to acquire the managing agency of a company, purchased shares of the company far in excess of their market price and two months later sold them at a loss. The Supreme Court held that he acquired them not to deal in them as his stock-in-trade but as capital assets in order to facilitate his acquiring the managing agency of the company. Shah J., speaking for the court, observed at page 537: In considering whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee...The shares were purchased for the purpose of acquiring the managing agency...; they were not purchased in the course of the appellants' business as dealers in shares. By purchasing the shares which facilitated acquisition of the managing agency, a capital asset was acquired and merely because the managing agency could be utilized for earning profit, the acquisition of the shares which led to the acquisition of the managing agency could not, in the absence of an intention to trade in those sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to me it is precisely on all fours with the case of any trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment...then finds that he has bought more than he ultimately needs and proceeds to sell the surplus...It had an income character impressed upon it from the very first. ....it was no part of the company's business to buy and sell dollars. But...the commodity...was acquired for the purpose of transactions on revenue account and nothing else. The dollars were held to be part of the stock-in-trade of the company because of the purpose for which they were acquired. Acquisition of shares may be voluntary, i.e., intentional, or involuntary, i.e., unintentional. Intention exists only when the acquisition is voluntary and there cannot arise any question of intention when it is involuntary. Acquisition of bonus shares allotted by a company in lieu of distribution of profits is involuntary acquisition; the assessee is bound to accept the shares unless he wishes to renounce them. He has no option of taking something in lieu of them. He must accept them or nothing. In such a cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l holding and the receipt of bonus shares; the connection between them, even if it exists, is remote and indirect. Bonus shares are allotted to the shareholders whose names appear in the company's register of shareholders on a particular day. A shareholder's name entered in the company's register remains there so long as it is not removed and another's name is not recorded in respect of the shares. A shareholder may transfer his shares to another but it takes time before his vendee gets his name registered in place of his. Consequently, a person's name may appear in the company's register on a certain date even though he had disposed of the shares previously and, therefore, did not hold them on that day. The bonus shares would still be allotted to him on the ground that his name appeared in the company's register on that day. He is entitled to the bonus shares not because he held original shares on that day but because he was recorded in the company's register on that day as holding them. Every person who is a shareholder in the company's register is entitled to bonus shares regardless of whether he holds them as his stock-in-trade or as his capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R. 577. Popatlal donated (original) shares to his minor son to whom bonus shares were allotted subsequently on the basis of his holding. The dividend income from the original shares derived by the son was included in the income of Popatlal for assessment in accordance with the provisions of section 16(3)(a)(iv) and the question arose whether the dividend income from the bonus shares also should be included in his income. Shah and S.T. Desai JJ. answered the question in the negative. They did say that the bonus shares were an accretion to the original holding but refused to treat the dividend income from them as arising indirectly from the original holding transferred to his son. In effect, however, they treated the bonus shares as not taking their colour from the original holding; the accretion theory put to its logical conclusion should have resulted in the dividend income from them also being an accretion to the original holding. Accretion by itself does not come under any head of income. The nexus theory was discarded by the House of Lords in Stafford Coal and Iron Co. Ltd. v. Brogan [1963] 3 All E.R. 277; [1963] 1 W.L.R. 905. It was in the different set of circumstances but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profit in the hands of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company. His new shares do not give him an immediate right to a larger amount of the existing assets. These remain where they were. The new shares simply confer a title to a larger proportion of the surplus assets if and when a general distribution takes place, as in the winding up. In these assets, the undistributed profits now allocated to capital, will be included profits which will be used by the company for its business, but henceforth as part of its issued share capital. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in Burland v. Earle [1902] A.C. 83, 93. , no court can interfere. He distinguished Swan Brewery Company Limited v. King [1914] A.C. 231. on account of different language being used in the taxation statute. Viscount Finlay pointed out at page 131 that there was no dividend out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittee of the Privy Council followed the decision in Blott's Case [1921] 8 Tax Cas. 101 in Commissioner of Income-tax v. Mercantile Bank of India [1936] 4 I.T.R. 239 (P.C.) and held that when accumulated profits are issued as bonus debentures on the basis of preferred shares held by shareholders the issue of the debentures does not amount to income in the shareholders' hands. The decision in the case of Swan Brewery Company [1914] A.C. 231, 236 turned upon the interpretation of an Australian Act which defined dividend to include every advantage or gain intended to be paid, credited or distributed. The issue of bonus shares was held to be dividend because it was found to be an advantage. The transaction was interpreted by the Judicial Committee to involve the shareholders' acquiescing in such a transfer from reserve to share capital as put an end to any participation in the sum of...in right of the old shares, and created instead a right of general participation in the company's profits and assets in right of the new shares, without any further liability to make a cash contribution in respect of them . In the instant case there was no acquiescence by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch they were received by the assessee. With great respect I dissent. Firstly, these observations are contrary to the observations of the House of Lords in Blott's case [1921] 8 Tax Cas. 101. Secondly, they are contrary to the observations in the case of Sri Ram Jha [1957] 31 I.T.R. 987 decided by V. Bhargava and Mehrotra JJ. Thirdly, as I pointed out, the very basis of the accretion theory that the bonus shares are issued because the shareholder holds original shares is incorrect. The assessee could have received the bonus shares even if it did not hold 500 ordinary shares and might not have received any bonus shares even if it held 500 ordinary shares. Their observation that the bonus shares themselves must be treated as an advantage to the stock-in-trade for the purpose of computing the assessee's income is inconsistent with their decision at page 392 that they cannot be treated as dividend...because in issuing...the bonus shares the company did not give away any cash or any part of its assets . If the bonus shares are not dividend they do not come within the meaning of income. They themselves are not profits or gains of the business because the shareholders' in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of bonus shares arose in it. The learned judges made it clear at page 757 that if any part of the amount is not attributable to the business profits of the assessee, then the assessee is not liable to pay tax thereon . The Supreme Court in dismissing the appeal endorsed the view of the High Court that actual profits should be computed according to the ordinary commercial principles. In Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 I.T.R. 506 ; [1954] S.C.R. 219, the Supreme Court had to decide how an assessee following the mercantile system of accounts and adopting the method of valuing the stock at its cost price at the beginning, and at the close, of each accounting year, should value the stock withdrawn by him from the business and converted into capital asset and decided that it should be valued at the market price at the time of the withdrawal. The reasons given by Bose J., speaking for the court, were that the withdrawal was not a business transaction and that the assessee made no profit or gain nor sustained a loss by it. The contention advanced by the Attorney-General that the withdrawal of stock from the business should be treated as sale of it at the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds were capital assets or revenue receipts. We have heard Sri Gulati for the assessees and Sri Gopal Behari for the income-tax department. Sri Gopal Behari has made a statement before us that the assessees are being taxed on the proceeds of the bonus shares and not on the bonus shares themselves. Section 2(6A)(a) of the Indian Income- tax Act, 1922 (hereinafter referred to as the Act), defines dividend . The said provision reads as follows: 2. (6A) 'dividend' includes-- (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company. There are two ingredients of the definition. One is that there must be a distribution by a company of accumulated profits whether capitalised or not. The other is that the result of the distribution should be the release by the company to its shareholders of all or any part of the assets of the company. Merely by issuing bonus shares companies concerned did not release to their shareholders all or any part of their assets. They had parted with no capital. In fact no amounts were d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir business. Bonus shares are issued to one whose name is entered in the registers of the company on a particular date even though he may not be a shareholder on that date, having sold his share earlier and the purchaser not having got his name registered in the company's books. The right to receive bonus shares, therefore, is based upon the entry of the name of that person in the register of the company and is not dependent upon the factual position whether or not he holds shares in that company. It is true that when the bonus shares are issued to a person whose name is recorded in the company's registers it is on the assumption that he holds the shares but still the basis is the entry of the name in the registers of the company and not the right to hold the share. The theory of accretion to original shares is therefore not legally correct. With regard to presumption it may be stated that all presumptions are rebuttable. Whether or not the particular goods are stock-in-trade would depend upon the intention with which and the purpose for which they were purchased. In the present case there was no act voluntary or involuntary on the part of the assessees which resulted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profit in the hands of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company. His new shares do not give him an immediate right to a larger amount of the existing assets. These remain where they were. The new shares simply confer a title to a larger proportion of the surplus assets if and when a general distribution takes place, as in the winding up. In these assets, the undistributed profits now allocated to capital, will be included profits which will be used by the company for its business, but henceforth as part of its issued share capital. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in Burland v. Earle [1902] A.C. 83, 93, no court can interfere. There is nothing in law which prevents a dealer in shares from acquiring shares for other purposes than to use them as their stock in trade (see Ramnarain Sons (P.) Ltd. v. Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ockin-trade or that when they were sold it was so done in the course of business. With regard to the first, we have already said above that since the assessees had no hand in the acquisition of bonus shares there can be no question of their having acquired them for the purpose of treating them as stock-in-trade and not as capital. With regard to the second, there are statements and pleas of the assessees that in fact they never treated the bonus shares as their stock-in-trade but only as their capital assets and when they sold them they did not do so in the course of their business. Whatever presumption could have been drawn in this case stands fully rebutted by the statements of the assessees. Mr. Gopal Behari placed reliance upon the unreported decision of the Bombay High Court in Income-tax Reference No. 16 of 1948 (Commissioner of Income-tax v. Maneklal Chunilal) and D. Motilal v. Commissioner of Income-tax [1943] 25 Tax Cas. 292. In the former case it was observed by the Bombay High Court as follows: It was because their business was to deal in ordinary shares that they received these bonus shares which became an accretion to their stock-intrade and it is difficult to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto cash and not a transaction in the course of business for the purpose of earning profit. The mere coincidence that a particular asset received as capital receipt is of the same nature as the assets forming the stock-in-trade of the business, cannot convert the transaction of receipt and sale of the capital asset into a business transaction for the purpose of earning income. I am with great respect unable to agree with what has been decided in the cases of Maneklal Chunilal I.T. Ref. No. 16 of 1948 and Motilal [1961] 41 I.T.R. 382. In Popatlal Bhikamchand v. Commissioner of Income-tax [1959] 36 I.T.R. 577 the accretion theory was rejected by the Bombay High Court and in Stafford Coal Iron Company Ltd. v. Brogan [1959] 36 I.T.R. 577 the nexus theory was discarded by the House of Lords. The facts of the former case were that Popatlal gifted away his original shares to his son who received the bonus shares. Since the son was a minor the income-tax authorities included the dividend received on the original shares transferred by Popatlal to the son in the assessment of the former according to the provisions of section 16(3)(a)(iv) and the question arose whether the dividend inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the face value of the shares, regarding as immaterial the fact that the shareholder never does receive any cash and can only obtain fully paid shares, increasing the capital of the company and decreasing the participating value of the shares. In other words, the Crown contended that the respondent must be treated as if he had received the two sums of 500 and 750, and had then been free to spend them as he liked in buying shares in this or another company, Government securities or land or anything else or not to invest them at all but spend them in his own amusements. It seems to me that he is obviously not in fact in this position, and the question is whether he is to be considered to be so in law. Blott's case [1921] 8 Tax Cas. 101 was followed by the Judicial Committee of the Privy Council in Commissioner of Income-tax v. Mercantile Bank of India [1936] 4 I.T.R. 239 (P.C.) and it was held by their Lordships that when accumulated profits are issued as bonus debentures on the basis of preference shares held by the person to whom bonus shares have been issued, the same cannot be treated to be income liable to be taxed in the hands of the shareholders. The cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion referred to us in each reference in the negative. S.C. MANCHANDA J.--I have had the advantage of reading the judgments of my Lord the Chief Justice and Jagdish Sahai J., which they propose to deliver, but, with great respect, regret that I have to differ. All the facts have already been set out in the judgment of the learned Chief Justice and it is unnecessary to reiterate them in extenso. It will suffice if I set out only the material facts in the connected Income-tax Reference No. 190 of 1953 and which lie within a very narrow compass. The assessee, Kunjilal, was admittedly a dealer in stocks and shares. The relevant assessment year is 1955-56. He held as part of his stock-intrade a block of 24,000 ordinary (equity) shares of Kanpur Textiles Ltd. (hereinafter referred to as the company) of the face value of ₹ 2-8-0 each. 400 shares out of these were held on behalf of one Mr. Talwar. The company had a large reserve of undistributed profits. At the general meeting held on the 2nd June, 1943, the company decided to issue fully paid up bonus shares of the face value of ₹ 2-8-0 each. These additional bonus shares were to be allotted as bonus shares to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the House of Lords in Blott's case [1921] 8 Tax Cas. 101. That is how this case has come before a Full Bench. Undoubtedly, Blott's case [1921] 8 Tax Cas. 101 is the leading case on the subject of nontaxability of bonus shares issued by a company. The question, however, in that case was one which, at any rate, does not arise for consideration in the present case at all. That was a case where the only question which arose was whether the allotment of bonus shares to the respondent was capital, or was in reality an allotment of annual profits which conferred a benefit chargeable in his hands with income tax, for, if so, it is not in controversy that the super-tax provisions will apply (page 124 per Viscount Haldane). In other words, the point for decision was whether the mere issue of the bonus shares constituted an income in the hands of the recipient. Viscount Haldane, at page 126, observed: ...I think that it is a matter of principle within the power of an ordinary joint stock company with articles such as those in the case before us to determine conclusively against the whole world whether it will withhold profits it has accumulated from distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in his hands. It appears to me that if the substance and not the form of the transaction is looked to, the declaration of a bonus was, as Mr. Justice Rowlatt said, 'bare machinery' for capitalising profits, and there was no distribution of profits to the shareholders. I think therefore that neither the shares nor their face value should be treated as income of the respondent. (Underlining [1921] 8 Tax Cas. 101 is mine). It is again manifest that the sole question which the House of Lords was considering was as to whether the issue of bonus shares constituted a distribution of profits of the company to its shareholders and was assessable as such. In other words, whether the mere issue of bonus shares by the company constituted income assessable in the hands of the shareholder as dividend income. If that was the question which arose in the present case then, undoubtedly, Blott's case [1921] 8 Tax Cas. 101 would be a complete answer as contended for by the assessee. The question, however, unfortunately for the assessee, is not that but something totally different to which Blott's case [1921] 8 Tax Cas. 101 does not furnish any answer, for the simple reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of total income throws one back to section 4 of the Act. The relevant part of section 4 reads: 4. (1) Subject to the provisions of this Act the total income of any previous year of any person includes all income, profits and gains from whatever source derived which...... The words underlined Here printed in italics by me above came up for consideration before a Bench of this court in Lala Indra Sen, In re [1940] 8 I.T.R. 187, 199, where it was laid down that taxation under the Act is the rule and exemption the exception. All income from whatever source derived must, therefore, be chargeable to income-tax, and the burden of proving that a particular class of income is not so chargeable must necessarily lie on the person claiming exemption from the liability to pay income-tax. The words from whatever source derived in section 4(1) are significant and they are intended to prevent income escaping from tax merely because the source from which it was derived was not clearly discernible. It was also intended to obliterate the emphasis on the source in income-tax matters except for placing income under its proper head as enumerated in section 6 of the Act for purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision strongly relied upon for the assessee in Ramnarain Sons (P.) Ltd. v. Commissioner of Income-tax [1961] 41 I.T.R. 534 ; [1961] 2 S.C.R. 904 can be of little or no avail to the assessee. Bonus shares undoubtedly cannot be purchased or acquired by a shareholder from the company; it is something which he receives gratis. They, however, do not fall from heaven but come to him because he is a registered shareholder in the books of the company on a particular date. The issue of those shares bear a definite relationship to his equity shareholding. In the present case, for every ordinary share held by the assessee he received one bonus share. But for these ordinary shares held, the assessee would never have received any bonus shares. There is, therefore, a definite nexus or casual connection between the bonus shares issued by the company and the equity shares held by the assessee. The proximate, immediate and effective source of bonus shares is, therefore, not the company. The company could not have issued the bonus shares to any one it liked but could only have issued such shares to the shareholders already on its register. The immediate and proximate and effective source, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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