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TMI Blog1985 (6) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... in In re. Radhika Trust No. 1 [IT Appeal No. 654 (Bom.) of 1982 dated 28-7-1983], in rejecting the assessee's claim for relief on the basis of the Supreme Court's decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, the Bench in that case had held that the Supreme Court decision would not apply to the case. The Bench felt that in the case of bonus shares conceptually as well as practically it could not be stated that it was not a self-generated asset but had been brought into existence in some particular form of acquisition and it was also necessary to give a finding as to the nature of the origin of this asset. The Bench felt that the earlier decision in Radhika Trust No. 1's case could not be applied to the present case. It is, thus, that the matter has come up for hearing before a Special Bench. At the time of the hearing, Podar Organization (P.) Ltd. [IT Appeal No. 594 (Bom.) of 1983] also intervened, as a similar point was involved in its case. 3. The learned counsel for the assessee has pointed out that the bonus shares formed an asset peculiar in itself like goodwill. Earlier the question of origin of the shares was not considered at all in decisions relating to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a concept different from the method of valuation involved in the cost of bonus shares. It was a real value. The case of spreading the cost over (sic) was a notional concept. It is also pointed out that there was an element of fixity involved in the cost of acquisition which was incapable of varying with time. It depended on the actual time of acquisition. On this basis, the cost of acquisition of bonus shares was nil. It is also pointed out that when shares were issued, they constituted a distinct and separate capital asset. This has been brought out clearly in the decision in CIT v. Madan Gopal Radhey Lal [1969] 73 ITR 652 (SC). That was the case of a dealer in shares who received bonus shares in relation to the shares held by him as stock-in-trade. Cost of acquisition also involved a definite and positive expenditure of money. The provisions of section 55(2)(v) of the Income-tax Act, 1961 ('the Act') supported the assessee's case. According to the learned counsel, if the department's view was to be accepted, in the background of sections 49 and 50 of the Act, there should have been specific provision in section 49 attributing to bonus share a fictional cost. Reliance is plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost is a subsequent event. Reference is made, in this connection, to the decisions in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62 (SC) and Escorts Farms (Ramgarh) Ltd. v. CIT [1983] 143 ITR 749 (Delhi). It is pointed out that in Miss Dhun Dadabhoy Kapadia's case, the Supreme Court has not rejected the argument that the right to secure new shares was embedded in the rights of the original shareholder. Dalmia Investment Co. Ltd.'s case deals with the determination of the cost of acquisition. The decision in Chunilal Kushaldas's case of the Gujarat High Court specifically deals with the market rate on the date of acquisition. These decisions as well as the decision in H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (SC) dealing with the cost of improvement, according to the learned counsel, clearly support the department's case. The simple question is whether there has been a transfer of the capital asset. If the further question is asked, viz., whether it is possible to quantify the surplus on such a transfer, the answer will be a clear 'Yes'. Concepts like 'capital asset', 'date of acquisition' and 'cost of acquisition' are all well-known concepts. Reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be taken to be nil or their face value. Bonus shares had to be valued by spreading the cost of the old shares over the old shares and the new issue, viz., the bonus shares taken together if they rank pari passu. The minority judgment of A.K. Sarkar, J. held that bonus shares have to be valued at the market value on the date when they were acquired. In that case, in 1944, the assessee acquired 31,909 ordinary shares of Rohtas industries Ltd. at a cost of Rs. 5,84,283. In January 1945, Rohtas Industries Ltd. distributed bonus shares at the rate of one ordinary share for each original share. The assessee got 31,909 bonus shares. Between that time and December 1947, the assessee sold 14,650 of the original shares. On 1-1-1948, it held 17,259 original shares acquired in 1944 ; 31,909 bonus shares issued in January 1945 ; 59,079 newly issued shares acquired in the year 1945 after the issue of the bonus shares ; and 2,500 further shares acquired in 1947. The total holding of Rohtas Industries Ltd. shares of the assessee on 1-1-1948 came to 1,10,747 shares valued in the books at Rs. 15,57.902. In arriving at this figure the assessee had valued the bonus shares at their face value of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the shareholder. If the shareholder were to sell his bonus shares, as shareholders often do, the shareholder parts with the right to participation in the capital of the company, and the cash he receives is not dividend but the price of that right. The bonus share when sold may fetch more or may fetch less than the face value and this shows that the certificate is not a voucher to receive the amount mentioned on its face. To regard the certificate as cash or as representing cash paid by the shareholder is to overlook the internal process by which that certificate comes into being." They also stressed the point : "...That the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding. The earning capacity of the capital employed remains the same, even after the reserve is converted into bonus shares.... 12. A detailed reference to Dalmia Investment Co. Ltd.'s case has been made here because the major plank of the department's argument is based on this. In CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213, the Supreme Court followed its decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es did not become part of the stock-in-trade of the assessee but were received as capital and could be converted by the assessee into stock-in-trade or retained as capital asset. The Supreme Court decision in Shekhawati General Traders Ltd.'s case and the Gujarat High Court decision in Chunilal Khushaldas's case dealt with the question of the date from which bonus shares are held-the first in connection with the substitution of the fair market value as on 1-1-1954 in the place of the cost price and the second for the identification of capital gains as short or long-term. Both these decisions referred to Dalmia Investment Co. Ltd.'s case. 15. The above decisions, we find, referred to different aspects of matters relating to bonus shares. Case like Dalmia Investment Co. Ltd.'s case dealt with the position of a dealer in shares, whereas others like General investment Co. Ltd.'s case and D.M. Dahanukar's case dealt with investors in shares. CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 (SC) dealt with the application of section 23A of the Indian Income-tax Act, 1922 ('the 1922 Act') whereas Shekhawati General Traders Ltd.'s case dealt with the reopening of the assessment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally, if there is any cost that cost had to be estimated and the estimation of such a cost must be based on certain commonsense and commercial principles. In connection with the valuation of bonus shares, it is necessary to remember what nature of interest a share represents. A share in a company represents the right of participation in the capital as also other necessary rights in the management which a shareholder enjoys in a limited liability company. Therefore, whenever a bonus share is issued by a company to the holder of an ordinary share or additional bonus shares are issued to a holder of bonus shares, his total right of participation is not thereby increased but only it is the measure of his quantification which is expressed in a different form...." Their Lordships also referred to the Supreme Court of the United States of America decision in the case of Eisner v. Macomber [1920] 252 US 189, a decision referred to with approval by the Supreme Court in Dalmia Investment Co. Ltd.'s case as follows : "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntemplation of the section. It must bear that quality which brings section 45 into play...All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge.... The point to consider then is whether if the expression 'asset' in section 45 is construed as including the goodwill of a new 'business', it is possible to apply the computation sections for quantifying the profits and gains on its transfer. What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by section 49 and its cost, for the purpose of section 48, is determined in accordance with those provisions. There are other provisions which indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax. In working out this profit, apparently a trading account was cast wherein on the cost side the total financial outlay on the purchase of the original shares which gave rise to the bonus shares was regarded as constituting the outlay on all the shares including the bonus shares. The surplus was worked out as the difference between the sale price and such outlay. In effect, these decisions made out a trading account where the total outlay in the shares including the bonus shares was entered on the left hand side and the sales realisation including the value of the closing stock of shares was entered on the right hand side to arrive at the surplus. If one were to ascertain the excess on the holding of shares originally purchased for a price but which subsequently gave rise to bonus shares being sold as an entire lot or part by part thereof, certainly the Supreme Court decisions and the High Court decisions following them have laid down the guideline. The issue before us, however, is not the ascertainment of such surplus but the more fundamental question as to whether in respect of bonus shares in the light of the decision in B.C. Srinivasa Setty's case and Evans Fraser Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spending Rs. 80,000, that assessee also gets 1,000 shares by way of bonus issue. In the case of the second assessee, the average cost for purposes of determining the surplus would be Rs. 80,000, i.e., Rs. 40. The issue of 2,000 the bonus shares on the same day by the same company yields an average cost of Rs. 5 for the first assessee but an average cost of Rs. 40 for the second assessee. Even though, therefore, the same company issued the same bonus issue on the same date, the application of the average principle makes the 'cost of acquisition' vary from shareholder to shareholder even though it would be the same for the issuer company. If an assessee purchased 1,000 shares at Rs. 100 and another 1,000 shares at Rs. 80 and bonus shares were received on his holding of 2,000 shares, the average method puts the cost to be ascribed for the bonus shares 1,80,000 at Rs. 4,000, i.e., Rs. 45, where another assessee purchased some shares at same price, sold some shares, in between got some bonus shares issue and otherwise dealt with this conglomeration of shareholding, then on the average method, the alleged 'cost of acquisition' of the bonus shares would be an entirely different figure. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decisions as assigning a particular 'cost of acquisition' for these shares for the purpose of section 45. This is the effect of the decision of the Supreme Court in B.C. Srinivasa Setty's case or other decisions like Evans Fraser Co. Ltd.'s case. In our view, the manner of arriving at the surplus would not, therefore, be a complete and conclusive guide in deciding whether bonus shares as such have a cost of acquisition. On the contrary, as a matter of fact, a person who receives bonus shares on account of his holdings of some original shares does not have to pay any amount for getting the bonus shares. A person who does not hold shares in the company cannot get bonus shares either by making a payment of money or by any other method. The only source of receipt of bonus shares is the holding of shares in the company and not parting with any money or its equivalent. This aspect of purchase by payment of money is also stressed in the context of goodwill in B.C. Srinivasa Setty's case (vide passage extracted above). 24. The position, thus, is that a set of cases before the Supreme Court and the High Courts assumed that the bonus shares when sold would necessarily result in capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions in Dalmia Investment Co. Ltd.'s case and Gold Mohore Investment Co. Ltd.'s case and other cases governed the situation they would certainly have followed those decisions. The Supreme Court did not apparently do so because they were not called upon to compute a surplus on a concession being made that capital gains are to be taxed but had to decide the more fundamental question of whether the capital gains have arisen at all. This was a question to be decided even at threshold. The decision in B.C. Srinivasa Setty's case is, thus, a clear refinement and dealt with a more basic and fundamental issue than in the earlier decisions and should be regarded as modifying if not overruling them to this extent. 25. The important question is whether what applies to goodwill applies to bonus shares. The legal and factual position of these items treated as assets are the same. When goodwill comes into existence in a running business, the owner of the business makes no payment for its acquisition. It is an asset added on to the existing business without any payment being made. The case of bonus shares is also the same. They constitute an asset for which the receiver pays no price just as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the calf, would be a plain untruth. The case of bonus shares is in no way different. Both in law as well as a matter of fact, there is no outlay of money leading to a cost of acquisition when a person receives bonus shares issued by a company. It is, thus, worth noting that section 49 and section 55, which have made adequate provision for the computation of cost in certain specific instances have not made any provision for the artificial ascertainment of cost of bonus shares or similar assets issued or received free in certain contingencies. This aspect of the matter also finds stress in the Supreme Court decision in B.C. Srinivasa Setty's case. Even though, therefore, the earlier decisions like Dalmia Investment Co. Ltd.'s case and Gold Mohore Investment Co. Ltd.'s case, etc., of the Supreme Court and the decisions of the High Courts following them indicated a method of arriving at the surplus to be worked out and taxed on the transfer of bonus shares--whether on business account or on capital account--after the decision of the Supreme Court in B.C. Srinivasa Setty's case regarding the cost of acquisition as a fundamental concept basic to the very application of section 45, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng up, and all other benefits of membership, combined with an obligation to contribute to its liabilities, all measured by a certain sum of money which is the nominal value of the share, and all subject to the memorandum and articles of the company'. Section 82 of the Indian Companies Act, 1956" specifies that shares or other interests of a member in a company shall be movable property, transferable in the manner provided by the articles of the company. The definition of 'goods' in the Sale of Goods Act, 1930, specifically includes stocks and shares. The holder of shares is issued a certificate. This certificate or scrip is the prima facie evidence of the holder's title to the shares. Section 83 of the Indian Companies Act provides for a number for the shares stating that each share in a company having a share capital shall be distinguished by its appropriate number. When a person is registered as a holder of certain shares in a company, the distinctive numbers of the shares allotted to him are marked in the register and the certificates in his hands also carry the distinctive numbers. 28. The above nature and the legal position of the shares, however, do not make the scrip or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A, B, C, etc., but on a later occasion, share numbers 1,005 to 1,020 are again purchased by the original shareholder, could he say that these shares are bonus shares even though when he originally received them before sale to 'A', he received them as the bonus shares from the company ? If you ask a share broker to sell to you the bonus shares only of 'X', 'Y', 'Z' company, what would he reply. At any rate, will he give it without a gleeful twinkle in his eye. 29. We have considered the nature of the shareholdings and the function of the distinctive number at length to identify and understand a problem raised in these appeals, but the significance of which does not seem to have been fully appreciated. The assessee holder of some shares earlier and a recipient of bonus shares subsequently, is stated to have sold bonus shares. The above details would indicate that from the mere look at the share certificates or even from the rights subsumed by these certificates, one cannot say whether the shares held by a person came from a first issue, the bonus issue or any other issue. There is no difference either from the legal or the factual point of view between one share and another share w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He may acquire by bonus issue 500 shares. if he decides to sell 300 shares out of these, the question is : would it lead to capital gain ? If the original shares have been sold, B.C. Srinivasa Setty's case would not apply. There would be a capital gain. If the shares acquired on bonus distribution are sold, B.C. Srinivasa Setty's case would apply and there would be no capital gain. Where 300 shares are sold as above, perhaps the assessee would claim in a suitable case that he sold the bonus shares. The department might claim that the original shares were sold ; or as in the present case, even in the case of bonus shares the excess would be computed by the department following Dalmia Investment Co. Ltd.'s case. A decision on the question is not easy but in view of what is stated above, it is not very difficult either. In our view, the owner of any property has the right to choose what part of it he decides to sell and what part he wants to retain for himself. Exercising this general right, if a holder of both bonus and other shares states that he sold the shares received on bonus distribution that should be accepted. If on the contrary, for reasons of his own, he prefers to have th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mia Investment Co. Ltd.'s case and Gold Mohore Investment Co. Ltd.'s case and of the High Courts following these decisions went on the assumption that on the sale of bonus shares taxable capital gains arose. In calculating the surplus to be taxed on the above concession, the cost of the bonus shares was notionally adopted by averaging the cost of the purchased shares amongst those shares as well as the bonus shares and not by considering the actual money outlay on the acquisition of bonus shares. (ii) For the first time, B.C. Srinivasa Setty's case focussed attention on the origin, nature and cost of acquisition of such assets as a distinct concept in order to find out whether capital gains arise at all on the sale of such assets. To the extent that this decision is applicable to issues like the present, there is nothing inconsistent in this decision with the earlier decisions of the Supreme Court. The Dalmia Investment Co. Ltd.'s case method of computation of capital gains would not, therefore, be decisive of the altogether different question whether capital gains arise or not at all. (iii) Shares represented by share certificate as to their title, form a peculiar and special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-trust had sold 2,400 equity shares of the Standard Mills Co. Ltd., giving rise to a surplus of Rs. 26,475. While declaring this amount of Rs, 26,475, as long-term capital gains in its 'Statement of total income', the assessee-trust stated as follows in note No. 8, below the said statement : "8. Bonus Shares : Capital Gain shown above includes Capital Gain on sale of Bonus Shares. These gains are without prejudice to the claim that the sale of Bonus Shares give rise to no taxable capital gain as the actual cost of acquisition of bonus shares is nil. The assessee inter alia relies on the Supreme Court decision in 128 ITR 294." The assessee-trust also furnished full and complete details of cost of acquisition in respect of these 2,400 shares for the purpose of capital gain, as could be seen from the statements at pages 14 to 17 of the assessee's paper book. 4. After examining the said claim, the ITO held that the assessee-trust had made long-term capital gains of Rs. 26,475 as per the statement filed, on the sale of 2,400 equity shares of the Standard Mills Co. Ltd. and that the same was assessable in the hands of the trust. Apparently, the ITO did not accept the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gain is chargeable in view of decision of the Bombay High Court in CIT v. Home Industries Co. [ 1 977] 107 ITR 609. Relating to long-term capital assets (other than land and building) (i) Sale proceeds of 179 equity shares of Bajaj Auto Ltd. at the rate of Rs. 428 per share 76,612 Less : Cost of the same 37,576 x 179 --------------------- 196 34,217 --------------------- Gain 42,295 --------------------- Note : No capital gain is chargeable on sale proceeds of 245 equity shares of Bajaj Auto Ltd. amounting to Rs. 1,04,860 since these shares were the shares received as bonus shares during 1971 and 1973 in view of the decision of the Bombay High Court in Home Industries Co.'s case." 7. The ITO and the Commissioner (Appeals) did not accept the assessee's contentions. It would be useful to quote paragraph No. 4 of the Commissioner (Appeals)'s order as he has discussed the issue raised by the assessee in some detail : "4. After a careful consideration of the submissions advanced on behalf of the appellant-company, I am unable to agree that capital gains on the sale of bonus shares does not attract tax. The cases relied upon by the learned represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said rulings, as urged by the representative. However, that proposition would not take the appellant's case out of the purview of section 45, because in respect of the bonus shares, it is surely possible to envisage a cost. The contentions to the effect that the profit earned on the sale of bonus shares is outside the purview of section 45 are, therefore, not acceptable. The Income-tax Officer's action in adopting the computations of capital gains as per the original statement accompanying the return is, therefore, quite valid in law and is upheld." 8. Against this decision of the Commissioner (Appeals), the intervener-company has raised the following two grounds as ground Nos. 1 and 2 in IT Appeal No. 594 (Bom.) of 1983 : "1. The learned Income-tax Officer and the learned Commissioner (Appeals) have erred in computing short-term capital gains at Rs. 1,44,409 as against the correct figure of Rs. nil. The appellant respectfully submits that no part of sale proceeds of 376 equity shares of Bajaj Auto Ltd., amounting to Rs. 1,60,428 is liable to capital gains since whole of these shares were out of the bonus shares received in 1976. 2. The learned Income-tax Officer and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Escorts Farms (Ramgarh) Ltd.'s case. 12. In B.C. Srinivasa Setty's case, the Supreme Court held that goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of section 45 of the 1961 Act (or section 12B of the 1922 Act) and that the transfer of such goodwill initially generated in a business does not give rise to a capital gain for the purposes of income-tax. While reaching the above conclusion, the Supreme Court laid down the law in this regard as under : The charging section 45 and the computation provisions (i.e., section 48, etc.) together constitute an integrated code, and in a case to which the computation provisions cannot apply at all, such a case is not intended to fall within the charging section. The Supreme Court held as follows while dealing with the provisions relating to computation of income liable to be taxed as capital gain : "What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered are the following : (i) Is 'Bonus share' an asset in the acquisition of which it is possible to envisage or conceive a cost ? (ii) Is 'Bonus share' an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it ? (iii) Whether 'Bonus share' is an as set for which it is possible to pin-point the date of its acquisition ? 14. According to us, the answer to the third question does not present any difficulty. In the case of Rohiniben Trust, the dates of acquisition are clearly specified in the statement at page 14 of the appellant's paper book under the head 'Date and mode of acquisition'. It is seen from this statement that the dates of acquisition of these bonus shares in that case were 31-7-1958, 14-12-1961, 23-2-1972, 10-2-1976 and 12-10-1966 as specified in the said statement. Similarly, in the case of the intervener, the years of acquisition of the bonus shares are indicated as 1971 and 1973 as could be seen from the particulars set out in paragraph No. 6 supra. Thus, it is clear that the date of issue of bonus shares by a company to its shareholders is easily and undisputably the date of their acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f bonus shares was Rs. 18 per share. In other words, by the issue of bonus shares pro rata which ranked pari passu with the existing shares, the market price was exactly halved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu the result may be stated by saying that what the shareholder held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 nP. coins. The total value remains the same, but the evidence of that value is not in one certificate but in two......" [Emphasis supplied] After quoting from the decision of the Supreme Court of the United States of America in Eisner's case, his Lordship rejected the method of calculation which places the value of bonus shares at nil as incorrect in the following words : "...It follows that the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding. The earning capacity of the capital employed remains the same, even after the reserve i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t held as follows : "...In the decision of this Court in Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), four methods of calculation were considered. The first method is to take the cost as equivalent to the face value of the bonus shares. This method was followed by the assessee-company. The second method is to take the cost of the bonus shares at nil, a method adopted by the Income-tax Officer in relation to the Howrah Mills Co. Ltd. A third method is to take the cost of the original shares and to spread it over the original shares and the bonus shares taken collectively, and a fourth method is to find out the fall in the price of the original shares at the stock exchange and to attribute this to the bonus shares. After considering all the four methods, this Court held that the correct method to apply in cases where bonus shares rank pari passu is to follow the third method, namely. to take the cost of the original shares and to spread it over all the original as well as the bonus shares and to find out the average price of all the shares." After referring to the doubt raised by the counsel on the basis of an earlier decision of the Court in the case of Emerald Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uished the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. The High Court has held as follows : "Reference was made by Mr. Dastoor to the decision of the Supreme Court in the case of Shekhawati General Traders Ltd. v. ITO [1971] 82 ITR 788. This was a case where the Court was concerned with an issue of bonus shares after January 1, 1954. We are not concerned with a case of that type. Actually in this case the questions with which we are concerned did not arise for consideration and any attempt to pick up an isolated sentence shorn from the context is of no assistance to the Court in view of the clear pronouncements of the Supreme Court in Dalmia Investment Co. Ltd.'s case [1964] 52 ITR 567 where the principles are fully crystallised." [Emphasis supplied] In fact, in this judgment, their Lordships also referred to the later decision of the Supreme Court in CIT v. Gold Mohore Investment Co. Ltd. [1969] 74 ITR 62. Their Lordships also rejected the assessee's contention that in Dalmia Investment Co. Ltd.'s case, the Supreme Court was concerned with a dealer in shares, whereas in the case before them the assessee was an investor in shares. The Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder to participate in the capital and management of the company. Bonus shares are issued to the holder of the original shares. Once bonus shares have been issued they are treated exactly as other shares, if they rank pari passu with the other shares. Thereafter, bonus shares can be issued also in relation to these earlier bonus shares which are now ranking pari passu. Therefore, on the issue of bonus shares what happens is, that though the participation of the holder is not increased, the number of shares is, all holders of original shares being entitled to the bonus. As such, the shares are split up. In the words of Justice Holmes in Henry R. Towne v. Mark Eismer, Collector of United States Internal Revenue for the Third District of the State of New York [1977] 245 US 418 at 426 ; 62 L. Ed. 372 at 376, 'what has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new'." After referring to the various decisions of the Supreme Court referred to above as well as the decision of the Supreme Court in Shekhawati General Traders Ltd.'s case, the Delhi High Court answered the first question refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court. But this stand of the assessee has been negatived by following the decisions of the Supreme Court referred to above. As pointed out by the Delhi High Court in the case of Escorts Farms (Ramgarh) Ltd., the right to acquire bonus shares is a right embedded in the original shares and they were the legal accretions thereto. It, therefore, follows that the cost of acquisition of bonus shares is also embedded in the cost of acquisition of the original shares and that the said cost of acquisition of the bonus shares has to be ascertained according to the third method approved by the Supreme Court in the case of Dalmia Investment Co. Ltd. We, therefore, hold, respectfully following the decisions of the Supreme Court and the Bombay and the Delhi High Courts referred to above, that 'bonus share' is an 'asset' in the acquisition of which it is possible to envisage or conceive a cost. 20. The process of issue of bonus shares has been discussed by the Supreme Court in the case of Dalmia Investment Co. Ltd. at pp. 575 and 576 and the same has been quoted by our learned brother in paragraph 11 of his order. From the said passage, it would be clear that on the conversion of the reserves i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the decision of the Supreme Court in B.C. Srinivasa Setty's case is inapplicable to the facts of the present case. For the very same reason, the decision of the Bombay High Court in Evans Fraser Co. Ltd.'s case relied on by the appellants is also inapplicable to the facts of the present case. That was also a case of goodwill only and not of bonus shares. In fact, in this case, their Lordships of the Bombay High Court have brought out the distinction between goodwill and other tangible assets, wherein they have stated as follows : "... Goodwill differs from a tangible asset such as an immovable property or a share in a joint stock company which retains its shape and form but of which the market value fluctuates. The market value of goodwill also fluctuates, but it fluctuates because of the fluid nature of goodwill. Just as it is impossible to pin-point when goodwill came into existence, so it is equally impossible to pinpoint the moment at which goodwill waxed or increased or it waned or decreased, for, the process is imperceptible ; and just as in the case of a newly started business it is not possible to ascertain in terms of money the cost of acquisition of goodwill ; ..... X X X X Extracts X X X X X X X X Extracts X X X X
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