# COMMISSIONER OF INCOME-TAX, BIHAR v. DALMIA INVESTMENT CO. LTD

- **Citation:** [1964] 7 S.C.R. 210
- **Court:** Supreme Court of India
- **Decided:** 1964
- **Bench:** Ak. Sarkar, M. Hidayatullah, J. C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bihar-v-dalmia-investment-co-ltd-3106
- **Pages:** 18

## Headnote

~
Income-tax Act-Business-Investment company-Dealing in
shares-Bonus shares-Valuation.
The assessee company dealt in shares and also held investments of shares on January 1, 1948. The assessee held 1,10,747.
shares of Rohtas Industries at a book value of Rs. 15,57,902/-.
Of these shares 31,909 were bonus shares issued by Rohtas Industries in 1945 at the face value of Rs. 10/- each and the assessee
had debited the investment account in respect of the bonus
shares by Rs. 3,19,090 with a· corresponding entry in the capital
reserve account on its credit side for the same amount. The.
assessee acquired these bonus shares at a cost of Rs. 5,84,283 in
1944. On January 29, 1948, the assessee sold the entire lot of
1,10,747 shares for Rs. 15,50,458. The assessee deducted the sale
price from the book value of Rs. 15,57,902 and claimed a loss
of Rs. 7,444 on the sale of shares. The appellate Tribunal valued
the bonus shares at nil and held that the assessee had made a
profit of Rs: 3,11,646/-. On a reference the High Court held that
the Tribunal was wrong in holding that the assessee had made
a profit of Rs. 3,11,646/-.
Held (per Hidayatullah and Shah, JJ.): (i) The Income-tax
Act defines "dividend" and also extends it in some directions
but not so as to make the issue of bonus shares a release of
reserves as profits so that they could be included in the term.
The face value of the shares cannot therefore be taken to be dividend by reason of anything in the definition. The shares certific
cate which is issued as bonus entitles the holder to a share in
the assets of the company and to participate in future profits.
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. The market
price is affected by many impcmderables, one such being the
yield or the expected yield. The detriment to the share holder,
if any, must therefore be calculated on some principle, but the
method of computing the cost of bonus shares at their face value
does not accord either with fact or business accountancy.
Swan Brewery Co. Ltd. v. Rex (1914) AC. 231, disapproved·
Commissioner of Inland Revenue v. John Blott, 8 Tax Cases
101, approved.
Bouch v. Sproule, (1887) 12 A.C. 385, referred to.
Commissioner of Income-tax, Bengal v. Mercantile Bank of
India Ltd., 1936 A.C. 478 and Nicholas v. Commissioner of Taxes
of'the State of Victoria, 1940 A.C. 744, referred to.
(ii) The bonus sh.ares cannot be said to have cost nothing to
the share holder because on the issue of its 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. By the iS5ue of
the bonus shares there is a corresponding fall in the divici~nds
\
)
'7 S.C.R.
SUPREME COURT REPORTS
211
actual or expected and the market price moves accordingly.
The method of calculation which places the value of bonus
shares, at nil cannot be correct.
(iii) The bonus shares can be valued by spreading the cost
of the old shares over the old shares, and the new issue taken
together, if the shares rank pari passu: When they d.o not, the
price may have to be adiusted either m the proport10n of the
face value they bear (if there is no other circumstances differentiating them) or on equitable considerations based on the
market price before and after the issue taking the middle price
not that represented by any unusual fluctuations. On the facts of
this case it was held that since the bonus shares in this case rank
pari passu with the old shares there is no difficulty in spreading.
the original cost over the old and the new shares.
Commissioner of Income-tax v. Maneklal Chunilal and Sons,
Income-tax Reference No. 16/1948, dt. 23-3-1949, disapproved.
Emerald and Co. Ltd. v. Commissioner of Income-tax, Bombay City, (1956) 29 I.T.R. 814, distinguished.
Eisner v. Macomber,

## Text

_Characters 0–39,937 of 51,071. This is a partial read: ask again with offset=39937 for what follows._

1§61
March 1.3
210
SUPREME COURT REPORTS
[1964}
COMMISSIONER OF INCOME-TAX, BIHAR
v.
DALMIA INVESTMENT CO. LTD.
[AK. SARKAR, M. HIDAYATULLAH AND J. C. SHAH, JJ.]
~
Income-tax Act-Business-Investment company-Dealing in
shares-Bonus shares-Valuation.
The assessee company dealt in shares and also held investments of shares on January 1, 1948. The assessee held 1,10,747.
shares of Rohtas Industries at a book value of Rs. 15,57,902/-.
Of these shares 31,909 were bonus shares issued by Rohtas Industries in 1945 at the face value of Rs. 10/- each and the assessee
had debited the investment account in respect of the bonus
shares by Rs. 3,19,090 with a· corresponding entry in the capital
reserve account on its credit side for the same amount. The.
assessee acquired these bonus shares at a cost of Rs. 5,84,283 in
1944. On January 29, 1948, the assessee sold the entire lot of
1,10,747 shares for Rs. 15,50,458. The assessee deducted the sale
price from the book value of Rs. 15,57,902 and claimed a loss
of Rs. 7,444 on the sale of shares. The appellate Tribunal valued
the bonus shares at nil and held that the assessee had made a
profit of Rs: 3,11,646/-. On a reference the High Court held that
the Tribunal was wrong in holding that the assessee had made
a profit of Rs. 3,11,646/-.
Held (per Hidayatullah and Shah, JJ.): (i) The Income-tax
Act defines "dividend" and also extends it in some directions
but not so as to make the issue of bonus shares a release of
reserves as profits so that they could be included in the term.
The face value of the shares cannot therefore be taken to be dividend by reason of anything in the definition. The shares certific
cate which is issued as bonus entitles the holder to a share in
the assets of the company and to participate in future profits.
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. The market
price is affected by many impcmderables, one such being the
yield or the expected yield. The detriment to the share holder,
if any, must therefore be calculated on some principle, but the
method of computing the cost of bonus shares at their face value
does not accord either with fact or business accountancy.
Swan Brewery Co. Ltd. v. Rex (1914) AC. 231, disapproved·
Commissioner of Inland Revenue v. John Blott, 8 Tax Cases
101, approved.
Bouch v. Sproule, (1887) 12 A.C. 385, referred to.
Commissioner of Income-tax, Bengal v. Mercantile Bank of
India Ltd., 1936 A.C. 478 and Nicholas v. Commissioner of Taxes
of'the State of Victoria, 1940 A.C. 744, referred to.
(ii) The bonus sh.ares cannot be said to have cost nothing to
the share holder because on the issue of its 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. By the iS5ue of
the bonus shares there is a corresponding fall in the divici~nds
\
)
'7 S.C.R.
SUPREME COURT REPORTS
211
actual or expected and the market price moves accordingly.
The method of calculation which places the value of bonus
shares, at nil cannot be correct.
(iii) The bonus shares can be valued by spreading the cost
of the old shares over the old shares, and the new issue taken
together, if the shares rank pari passu: When they d.o not, the
price may have to be adiusted either m the proport10n of the
face value they bear (if there is no other circumstances differentiating them) or on equitable considerations based on the
market price before and after the issue taking the middle price
not that represented by any unusual fluctuations. On the facts of
this case it was held that since the bonus shares in this case rank
pari passu with the old shares there is no difficulty in spreading.
the original cost over the old and the new shares.
Commissioner of Income-tax v. Maneklal Chunilal and Sons,
Income-tax Reference No. 16/1948, dt. 23-3-1949, disapproved.
Emerald and Co. Ltd. v. Commissioner of Income-tax, Bombay City, (1956) 29 I.T.R. 814, distinguished.
Eisner v. Macomber, 252 U.S. 189-64 L.Ed. 521, referred to.
Per Sarkar, J. (dissenting): (i) The view taken by the majority of Judges in Blott's case is a correct one. In that case the
learned Judges held that when the articles of a company authorise the issue of bonus shares and the transfer of a sufficient
amount out of the accumulated profits in its hands representing
their face value to the share capital account, what happens when
the articles are acted upon is a capitalisation of the profits and
the bonus shares issued are not in the hands of the snare holder
income liable to tax. Following the majority opinion in Blott's
case it was held that the High Court was in error in the·'\iiew
it took in the present case. There is no foundation for proceeding on the basis as if the bonus shares had been acquired by the
assessee at their face value. Its profits cannot be computed on
that basis.
Commissioner of Inland Revenue v. Blott (1921)2 AC. 171,
relied on.
Swan Brewery Co. Ltd. v. King (1914) A.C. 231, disapproved.
Osborne (H.M. Inspector of Taxes) v. Steel Blzrrel Co. Ltd.,
24 T.C. 293, inapplicable.
Commissioner of Inland Revenue v. Fisher's Executors
(1926) AC. 395 and Commissioner of Income-tax, Bengal v. Mer~
cantile Bank of India Ltd., (1936) A.C. 478, referred to.
Commissioner of Income-tax··v. Maneklal Cliunilal and Sons
LM ... I.T. Ref. No. 16 of 1948 and Emerald and Co. Ltd. v. Commissioner of Incomg-tax, Bombay City, 29 I.T.R. 814, referred to .
. (Iii) Bai Shirinbai Kooka's case is the authority for the proposit!on. that where .it cannot be shown what was paid for the
acqmsit10n of a tradmg asset by a trader, it has for tax purpose•
to be deem<;<! to have b.een acquired at the market value of the
date when it was ~cqmred. On the basis of this authority the
Ijonu.s shares must m the present case be deemed to have been
acqmred at the market value of the date of their issue.
(iii) On the basis of the same authority, it would not be correct to say that the bonus shares had been acquired for nothlng.
1964
CommiBsianera of
I ncometax, Bihar
v.
Dalmia lnveatment
Co. Ltd.
•
212
SUPREME COURT .,REPORTS
[1964]
1964
The view taken by the Appellate Commissioner and the Trib~al
CmnmUJaioner of cannot be supported.
Jnwmetax, Bihar
v.
Commissioner of Income-tax v. Bai Shirinbai K. Kooka,
Dolmia Inveatmen• [1962] Supp. 3 S.C.R. 391, relied on.
Go. Lid.
Sarkar, J,
CIVIL APPELLATE fuRISDICTION: Civil Appeal No. 780
of 1962. Appeal by special leave from the judgment and
decree dated November 28, 1960, of the Patna High Court,
in Miscellaneous Judicial Case No. 724 of 1958.
K. N. Rajagopal Sastri and R. N. Sachthey, for the appellant.
S; K. Kapur and B. N. Kirpal, for the respondent.
March 13, 1964. The judgment of HIDAYATULLAH and
SHAH, JJ. was delivered by HIDAYATULLAH J. SARKAR J.,
delivered a dissenting opinion.
SARKAR, J .-This matter has come before us on a case
stated by the Income-tax Appellate Tribunal. The question is
how to determine the cost of acquisition of bonus shares for
ascertaining the profits made on·a sale of them. The assessment
year concerned is 1949-50 for which the accounting year is the
calendar year 1948.
·
The assessee held shares by way of investment and also as
stock in trade of his business as a share dealer. We are concerned in this case only with its holdings of ordinary shares in
Rohtas Industries Ltd .. In 1944 the assessee acquired 31,909
of these shares at a cost of Rs. 5,84,283 /- and was holding them
in January 1945. In that month the Rohtas Industries Ltd.
distributed bonus shares at the rate of one ordinary bonu~
share for each original share and so the assessee got 31,909
bonus shares. Between that time and December 31, 1947, the
assessee sold 14,650 of the original shares with the result that
on January 1, 1948 it held the following shares:-(a) 17,259
original shares acquired in 1944, (b) 31,909 bonus shares issued
in January 1945, (c) 59,079 newly issued shares acquired in the
year 1945 after the issue of the bonus shares and (d) 2,500
further shares acquired in 1947. The total holding of the
assessee on January 1, 1948 thus came to 1,10,747 shares
which in its books had been valued at Rs. 15,57.902/-. In
arriving at this figure the assessee had valued the bonus shares
at the face value of Rs. JO/- each and the other shares at
actual cost. On January 29, 1948, the assessee sold all these
shares for the total sum of Rs. 15,50,458/-, that is, at Rs. 14/-
per share and in its return for the year 1949-50 claimed a loss
of Rs. 7,444/- on the.sale. It is this return which has led to this.
appeal.
7 S.C.R.
SUPREJ\ffi COURT REPORTS
213
The Income-tax Officer held that the assessee was not en1964
titled to charge as the cost of acquisition of the bonus shares Commissioner of
a sum equivalent to their face value for nothing had in fact
Inwmetax, Biha•
been paid and he computed their cost a.t Rs. 6-8-0 per share. Dalmi• I~vestment
He arrived at this price by the following method, which has
oo. Lid.
been called as the method averaging:
584283 x Face value of bonus shares:
319090 x 1 /31909.
In adopting this procedure the Income-tax Officer purported to follow the decision of the Bombay High Court in
Commissioner of Income-tax v. Maneklal Chunilal and Sons
Ltd.('). The Bombay High Court later followed this case in
Emerald and Co. Ltd. v. Commissioner of Income-tax, Bombay City. Bombay('). On that basis he held that the assessee
had made a profit of Rs. 2,39.317 by way of capital gains and
levied tax on it accordingly. On appeal the Appellate Assistant
Commissioner held that these shares were not investmept
shares but formed the assessee's stock in trade on which it was
liable to pay income-tax and not capital gains tax. He also
held that the assessee having adopted the method of valuing
the stocks at cost and no price having actually been paid for
the bonus shares, it must be held that there was an inflation in
the opening stock by Rs. 3,19,090. This figure, it may ,be
observed, represented the cost of the bonus shares at their face
value. In his opinion the bonus shares had to be valued at nil.
The appellate Commissioner's conclusion was that the
'assessee was liable to be taxed on a trading profit of
Rs. 3, 1 L646 /- in respect of the sale of shares. Thise view was
confirmed on a further appeal to the Appellate Tribunal. It is
however not clear whether the Tribunal held that there had
been a trading profit or capital gains. This matter does not
seem to have been raised at any stage after the Appellate Commissioner's order and is not material to the real question that
has to be decided.
After the Tribunal's judgment the a~sessee got an order
from the High Court directing the Tribunal to refer the following question to it:
"Whether on the facts and circumstances of the case
the profit computed at Rs. 3,11,646/- on the sale
of shares in Rohtas Industries Ltd. was in accordance with law?"
The ~~~wer !O this question admittedly depends on the cost of
acqu1s1tion, 1f any, to be properly attributed to the bonus
shares. If the Appellate Commissioner's method of valuing
(') (I.T. Ref. No. 16 of 1948, unreported).
{') 29 l.T.R. 814.
Sarkar, J.
214
SUPREME COURT REPORTS
(1964]
1964
them at nil was wrong. the .question had to be answered in the
·oommiS&iom:r of negative. The High Court, following the judgment of Lord
Incometax, Bihm Sumner in Swan Brewery Company Limited v. The King('),
· ~-· . v1.
,
, held that the real cost of the bonus shares to the assessee was
4/U-~mia nvu men
.
.
co. LtrJ.
the face value of the shares and answered the quest10n m the
Sarkar J.
negative. The observations of Lord Sumner which he la.ter
expressed more fully in Commissioner of Inland Revenue ·v.
Blott('), no doubt, lend support to the High Court's view. I
shall consider the view expressed by Lord Sumner later. Now,
[ wish to notice another case on which the High Court also
relied and that was Osborne (H.M. Inspector of Taxes) v. Steel
Barrel Co. Ltd('). I do not think that the observations of Lord
Greene M. R. in this case to which the High Court referred,
are of any assistance. All that was there said was that when
fully paid shares were properly issued for a consideration other
• than cash, the consideration must be at the least equal in value
to the par value of the shares and must be based on an honest
estimate by the directors of the value of the assets acquired.
In that case fully paid shares had been issued in lieu of stocks
and the question was as to how the stocks were to be valued.
That case had nothing to do '.vith the issue of bonus shares or
the ascertainment of_ the cost of their acquisition.
•
As I have said earlier, Lord Sumner's observation in
Blott's case(') certainly supports the view taken by the High
Court but in that case Lord Sumner was in a minority. The
other learned Judges, excepting Lord Dunedin, who took a
somewhat different view to which reference is not necessary·
beca.use it has not been relied upon, held that when the articles
of a company authorise the issue of bonus shares and the
transfer of a sufficient amount out of the accumulated profits
in its hands representing their face value to the share capital
account what happens when the articles are acted upon is a
capitalisation of the profits and the bonus shares issued are
not in the hands of the share-holder income liable to tax. In
Blott's case(') the articles gave the power which had been acted
upon. Lord Sumner on the other hand held that since a com·
pany could not issue shares for nothing nor pay for them out
of its profits, it must be held that what happened in such a
case was as if the company had issued cash dividend to the
shareholder and had set it off against the liability of the share·
holder to pay for the bonus share issued to him.
I think the preferable view is that taken by the majority
of the Judges. When the articles permit the issue of bonus
shares and the transfer of undivided profits direct to the share
capital account, it cannot be, said that a cash dividend must be
(') (1914) A.C. 231.
(') 24 T.C. 293.
(') (1921) 2 A.C. 171.
'
)
7 S.C.R.
SUPREME COURT REPORTS
215
deemed to have been declared which could be set off against
1964
the liability to pay for the shares. This is not what was done Commis_;;;;;;;, of
in fact. What in fact was done, and legally done, was to trans-Incometax. Bihar
fer the profits to the share capital account by a resolution pass- Dalinia 1~;estment'
ed by the majority of the shareholders so that the shareholders
Co. Ltd.
·
never acquired any right to any part of it. The view taken by
the majority has since been followed unanimously, and even if
it was open to doubt, for myself, at this distance of time, I
would not be prepared to depart from it: Commissioners of
Inland Revenue v. Fisher's Executors(') and Commissioner of
Income-tax, Bengal v. Mercantile Bank of India Limited(').
It is of some significance to observe that the latter is a case
from India.
In the present case the record does not contain any reference to the resolutions resulting in the issue of the bonus
shares nor to the provisions of the articles but the case has
proceeded before us on the basis that the bonus shares had
been legally issued under powers contained in the articles and
the profits had been equally legally transferred to the share
capital account without the shareholders having acquired any
right in them. Following the majority opinion in Blott's case(")
I think I must hold that the High Court was in error in the
view it took in the present case. There is no foundation for
proceeding on the basis as if the bonus shares had been acquired by the assessee at their face value. Its profits cannot be
computed on that basis.
Two other methods of ascertaining the cost of acquisition
of the bonus shares for computing the profits made on their
sale have been suggested. One of them is the method of a.veraging which is the method adopted by the Bombay High Court
in the cases earlier mentioned. The other is the method of
finding out Jhe fall in the price of the original shares on the
issue of the bonus shares and attributing to the latter shares
that fall and to value them thereby. The object of these
methods seems to me to find out what the bonus shares actually
cost the assessee. But this would be an impossible task for they
actually cost the assessee nothing; it never paid anything for
them. There would be more reason for saying that it paid the
face value of the bonus shares because the profits of the Company of a similar amount which might otherwise have come to
it had been directly appropriated to the share capital account
on the issue of the bonus shares. But this method I have
rejected already and, for the reason that no amount was
actually paid for the bonus shares by the assessee. For the samereasons the two suggested methods for ascertaining the actual
(') (1926) A.C. 395.
(') (1921) 2 A.C. 171.
(') (1936) A.C. 478.
Sarkar, J,
•
216
SUPREME COURT REPORTS
[1964]
1964
cost of these shares have also to be rejected. If however it
-. -.
were to be said that these methods were for finding out the
f:C~::!~J;;i:;;, market value of the bonus shares-:--the importance of which
v. '
value for the present purpose will soon be seen-I would say
lJalmia lnv<Btment that the only way to find out the market value is from the
Co. Ltd.
k t "ts If
mar e I e .
Sarkar, J.
How then is the cost of the bonus shares to be determined? We start with this that nothing in fact was paid for them.
But if the cost of acquisition is nil, the whole of the sale
proceeds of the shares would be taxable profits. In Commissioner of Income-tax v. Bai Shirinbai K. Kooka(') this Court
has approved of the Bombay High Court's view tha.t "obviously, the whole of the sale proceeds or receipts could not be
treated as profits and made liable to tax, for that would make
no sense" (p. 397). So the profits cannot be ascertained on the
basis that the bonus shares had been acquired for nothing. The
view taken by the Appellate Commissioner and the Tribunal
cannot be supported.
It seems to me that the cost price of the bonus shares has
to be decided according to the principle laid down in Bai
Shirinbai Kooka's case('). The assessee in that case had purchased shares many years ago by way of investment a.t a comparatively lower price. She started trading with them from
April I, 1945. The question was how the profits on the sale of
these shares were to be ascertaiued. The sale price was known
but what was the cost price? The High Court said that in
order to arrive at real profits one must consider the
accounts of the business on commercial principles and
construe profits in .their normal and natural sense, a sense
which no commercial man would misunderstand. The High
Court's conclusion was this: When the assessee purchased the
shares at a lesser price, that is what they cost her and not the
business; but s<Y far as the business was concerned, the shares
cost the business nothing more or less than their market
value on April I, 1945. This date, it will be remembered, was the date when the business was started. These observations were fully approved by this Court.
Bai Shirinbai Kooka's case(') therefore is authority for the
proposition that where it cannot be shown what was paid for
the acquisition of a trading asset by a trader, it has for tax
-
purposes to be deemed to have been acquired at the market
value of the date when it was acquired. I think on the authority of this case, the bonus shares must in the present case be
deemed to have been acquired at the market value of the date
of their issue.
L would, therefore, answer the question framed in the
negative.
i'~)~[~19~6~2J;::-Su_p_p_.~3~S~.c~.=R-.~39~1-. ~~~~~~~~~-
•
7 S.C.R.
SUPREME COURT REPORTS ,
217
HIDAYATULLAH, J.-This appeal by the Commissioner of
1964
Income-tax, Bombay raises the important question how bonus
Gommi&Bioner of
shares must be valued by an assessee who carries on business Incometax, Bihar
in shares. The assessee here is Dalmia Investment Co. Ltd. D 1 . I"
1
1
(now Shri Rishab Investment Co. Ltd.) which is a public
a m•00. "t:J. men
limited company and the bonus shares were issued in the
calendar year 1945 by Rohtas Industries Ltd. in the proporHidayatullah, J.
tion of one bonus share for one ordinary share already held
by the shareholders. In this way, the assessee company received 31,909 bonus shares of the face value of Rs. 10 /- per share
which shows that its previous holding was 31,909 ordinary
shares. The existing ordinary shares were purchased by the
assessee company for Rs. 5,85,283 /- We now come to the
assessment year 1949-50 which corresponded to the accounting period of the assessee
company~the calendar year
1948. The assessee company was holding shares
as
investment and was also dealing in shares. The shares in
the trading account, being the stock-in-trade, were valued
at the beginning of the year and also at the end of the
year and the book value was based on cost. Between
December 31, 1945 and January 1, 1948, the assessee
company sold some shares of Rohtas Industries Ltd. and
. bought others. Its holding on the first day of January 1948
was 1,10,747 shares which were valued in its books at
Rs. 15,57,902/-. The assessee company sold these shares 0n
January 29, 1948 to Dalmia Cement and Paper Marketing
Company Limited for Rs. 15,50,458 /-. This date, it may be
pointed cut, fell within the period in which capital gains were
taxable. The assessee company returned a loss of Rs. 7,444/-
on this sale. In its books it had valued these shares as follows:
Exist.ing 11hares
(l) 17.259 (out of3l,909 original
s1ar£s).
(2) 31,909 Bonus shares ..
(3) 59,079 NClw Issue she.res
(4) 2,500 Ne'v purehase shares
Totsi 1,10,747 shares
..
Book valuo
3,10,951 ·00 Proportionate cost from Rs.
5,84,283.
Rs.
!>.;:;
3,19,090·00 at face v:i.Jue of Rs. 10 per
aha.re.
8,88,561 ·00 at cost.
39,300 · 00 at tlost.
l5,57,902·0C·
The amount of Rs. 3,19,090/- which represented the cost
of the bonus shares in the above account was debited to the
investment account and an identical amount was credited to
a capital reserve account. The loss which was returned was
the difference between Rs. 15,57,902/- claimed to be the cost
price ofl,10,747 shares and their sale price of Rs.15,50,458/-.
The return Was not accepted by the Income-tax Officer.
Special Investigation Circle, Patna. In his assessment order, the
Income-tax Officer held that the market value of the existing
'
·
218
' SUPREME COURT REPORTS
(1964]
1964
-Sb:at'es when bonus shares were issued, was Rs. 18 /- per share
Oonimi8'ioner of and the value of the shares was Rs. 5,74,362/- (3I,909 x
Incometax, Bihar Rs. 18). He held that the sale of the shares took place at
.iial . ;·
Rs. 14/- per share. To this data he purported to apply a deci-
.
m•~0."£:J'.mcn1 sion of the High Court of Bombay in Commissioner of lncometax v. Maneklal Chunnilal and Sons(') and held that there was
Hidayutidiah, J. profit of Rs. 7 /8/0 per bonus share and thr ~otal profit was
Rs. 2,39,317 /- which he held was capital gain. He brought
Rs. 2,39,317 /-to tax as capital gains.
Before the Appellate Assistant Commissioner, Patna,
reliance was placed upon the decision of the Bombay High
Court in Emerald and Co. Ltd. v. Commissioner of lncometax, Bombay City(') and it was argued that by applying the
principle laid down in that case, the average cost was
Rs. 9/10/0 per share and total ]lfofit Rs. 1,49,355/-. The
Appellate Assistant Commissioner did not accept the above
calculation. According to the Appellate Assistant Commissioner, the bonus shares ha.d cost nothing to the assess1:e company. He omitted Rs. 3,19,090/- from the book valuation and
held that the actual cost of 1,10,747 shares was Rs. 12,38,812/-
and that the assessee company instead of suffering a Joss of
Rs. 7,444 /- on the sale of the shares had actually made profit
of Rs. 3. 11,646 /-. He issued a notice to the asoessee company
and enhanced the assessment.
On further appeal to the Tribunal, the ass.~ssee company
submitted again on the strength of the ruling of the Bombay
High Court in Emerald and Co. Ltd. v. Commissioner of
lncome-tax, Bombay City(') that the actual profit was
Rs. 1.57,326 /-. This was done by spreading the cost of the
31,909 ordinary shares over those shares and bonus shares
taken together and adding to half the cost attributable to the
old ordinary shares the cost of new purchases in the same year
and finding out the average cost of shares other than bonus
shares.
The Tribunal did not accept this calculation. According
to the Tribunal it was not possible to put a valuation upon
shares for which nothing was paid. The Tribunal held that the
old shares and bonus shares could not be "clubbed together"
and the decision of the Appellate Assistant Commissioner was
right. The Tribunal, however, stated a case under s. 66(1) of
the Income-tax Act at the instance of the assessee company ·
suggesting the question for the opinion of the High Court:
"Whether on the facts and circumstances of the case,
the profit computed at Rs. 3.11,646/- on the sale
of shares in Rdhtas Industries Ltd. was in accordance with law?"
(') Income-tax Reference No. 16 of 1948 dt. 23-3-1949.
(') (1956) 29 I.T.R. 814.
7 S.C.R.
SUPREME COURT REPORTff
219
The reference was heard by V. Ramaswamy, C.J. and Kan1964
haiya Singh, J. They held that the Income-tax authorities were commissioner of
wrong in holding that profit should be computed at
lncom<tax. B;/1ar·
Rs. 3,11,646/- or at any other amount. According to them, D 1 . 1v.
,
•
h
a mia nres 11tenP
t ere was no profit on the sale of 31,909 shares and they
co. Ltd.
answered the question in favour of the assessee. Before the '
High Court it was contended by the assessee company that the
Ilidayatullah, J ..
bonus shares must be valued at their face vafue of Rs. 10 I· per ·
share and the Department contended that they should be
valued at nil. It appears that the other methods of calculation
of the cost price of bonus shares were abandoned at that stage.
Ramaswami, C.J. and Kanhaiya Singh, J. held that the issue
of bonus shares was nothing but a capitalisation of the company's reserve account or the profits and the bonus shares
could not be considered to be issued free. According to them,
the payment for the shares must be found in the bonus which
was declared from the undistributed profits and the face value
of the bonus shares represented the detriment to the assessee
company in respect of the undistributed reserves. The present
appeal was brought against the decision of the High Court by
special leave granted by this Court.
It will be seen from the above that there are four possible
methods for determining the cost of bonus shares. The first
method is to take the cost as the equivalent of the face value
of the bonus shares. This method was followed by the assessee
company in making entries in its book)l. The second method
adopted by the Department is that as the shareholder pays
nothing in cash for the shares, cost should be taken at nil. The
third meth9d is to take the co~t of the original shares and to
spread it over the original shares and bonus shares taken collectively. The fourth method is to find out the fall in the price
of the original shares on the stock exchange and to attribute
<
this to the bonus shares. Before us the assessee company presented for our acceptance the first method and the Department
the third method. We shall now consider which is the proper
way to value the bonus shares.
It is convenient to begin with the contention that the cost'
of bonus shares must be taken to be their face value. The
argument requires close attention, because support for it is
sought in certain pronouncements of Lord Sumner to which
reference will be made presently. Mr. Kapur contends that a
company cannot ordinarily issue shares at a discount, and
argues that a. fortiori it cannot issue shares for nothing. He
submits therefore that the issue of bonus shares involves a twofold operation-the creation of.new shares and the declara.tion
of a dividend or bonus which dividend or bonus must be
deemed to be paid to the shareholder and to be returned by
him to acquire the new shares. Since the amount credited in
220
SUPREME COURT REPORTS
[1964]
I
1961
the books of the company as contribution of capital by the
shareholder is the face value of the bonus shares, he, contends
f~::;::;:n;;t;;, that the cost to the shareholder is equal to the face vahie of the
. v. '
bonus shares. He relies upon the decision of the Privy Council
C>alm"!J/"J'.:J.'.me"' in Swan Brewery Company Ltd. v. Rex('). In that case, Lord
Sumner observed:
HidayatuUah, J.
..
"True, that in a sense it was all one transaction, but that
is an ambiguous expression. In business, as in contemplation of law, there were two transa1:tions, the
creation and issue of new shares on the company's
part, and on the allottees' part the satisfaction of
the liability to pay for them by acquiescing in such
a transfer from reserve to share capital as put an
end to any participation in the sum of £101,450 in
right of the old shares, and created instead a right
of general participation in the company's profits
and assets in right on the new shares, without any
further liability to make a cash contribution in
respect of them."
Lord Sumner adhered to his view later in the House of Lords
in Commissioner of Inland Revenue v. John Blott(') but Lord
Dunedin and he were fu a minority. and this view was not
accepted by the majority. In view of this conflict, it is necessary
to state what really happens when a company issues bonus
shares.
A limited liability company must state in its memorandum
of association the amount of capital with which the company
desires to do business and the number of shares into which
tha.t capital is to be divided. The company need not issue all its
capital at the same time. It may issue only a part of its capital
initially and issue more of the unissued capital on a later date.
After the company does business and profits result, it may
distribute the profits or keep them in reserve. When it does the
latter, it does not keep the money in its coffers; the mouey is
used in the business and really represents an increase in the
capital employed. When the reserves increase to a considerable
extent, the issued capital of the company ceases to· bear a true
relation to the capital employed. The company may then
decide to increase its issued capital and declare a bonus and
issue to the shareholders in lieu of bonus, certificates entitling
them ·to an additional share in the increased capital. As a
matter of accounting the original shares in a winding up before
the increase of issued capital would have yielded to the shareholder the same return as the old shares and the new shares
taken together. What was previously ownell by the slweholder
by virtue of the original certificates is after the issue of bonus
(') (1914) A.C. 231.
(') 8 Tax Cases 101.
7 S.C.R.
SUPREME COURT REPORTS
221
.shares, held by them on the basis of more certificates. In point
1964
of fact, however, what the shareholder gets is not cash but Commi .. w.er of.
property from which income in the shape of money may be Incometa.:, Bi/iar
derived in future. In this sense, there is no payment to him Dal . ~; """""'
but an increase of issued capital and the right of the sharemoo. '1u.
holder to it is evidenced not by the original number of certificates held by him but by more certificates. There is thus no
Hidayalullah, J.
payment of dividend. A dividend in the strict sense means a
share in the profits and a share in the profits can only be said
to be paid to the shareholder when a part of the profits is
released to him in cash and the company pays that amount
and the shareholder takes it away. The conversion of the
reserves into capital does nol involve the release of the
profits to the shareholder; the money remains where it
was, that is to say, employed in the business. Thereafter
the company employs that money not as reserves of profits,
but as its proper capital issued to and contributed by the
shareholders. 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 stYld 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 fa:ce. 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.
We may now see what was decided in the Swem
Brewery's(') case. In that case the company had not distributed all its profits in the past. As a ·result, .it had a vast reserve
fund. The company increased its capital and from the reserve
fund, issued shares pro rata. These shares, it was held by Lord
Sumner, were dividend. It was claimed in that case that there
was no dividend and no distribution of dividend, because nothing had been distributed and nothing given. Where formerly
there was one share, after the declaration of bonus there were
two but the right of participation was the same. This argument
was not accepted and the face value of the shares was taken
to be dividend. Section 2 of the Act of Western Australia, howev~r, .defined dividend to include "every profit, advantage <ilr
gam mtended to be paid or credited to or distributed among
the l!lembers of any company." It is obvious that it was impossible to hold that the bonus shares were outside the extend-
· ed definition .
. Swan Brewery'~(') case has been
~ccepted. as rightly
dec1Jed on the special terms of the sect10n, as indeed it was.
In Blott's(') case, Rowlatt, J. observed that the bonus shares
were included in the expressio~ "advantage" occurring in the
(') (1914) AC. 231.
(') 8 Tax Cases,101.
--Z22
SUPREME COURT REPORTS
[19641
1964
highly artificial definition of the word "dividend".
In the
0
. .
Court of Appeal. Lord Sterndale, M. R. and Warrington and:
;:::::,:;,,":'J{;;:J,, Scrutton, L. JJ. distinguished the case on the same ground .
. v.
It was, however, pointed out by the Master of Rolls that in.
Dalmo/"t,~'""nt Bouch v. Sproule(') Lord Herschell had observed that in such
a case, the company does not pay or mtend to pay any sum
HidayatuUah, J. as dividend but intends to and does appropriate the undivided
profits and deals with them as an increase of the capital stock
in the concern.
Blott's(') case then reached the House of Lords. It may be
pointed out at this stage that it involved a question whether
super-tax was payable on the amount represented by the face·
value of the bonus share. For purposes of assessment of supertax which was (as it is in our country) a tax charged in respect
•
of income of an individual the total of ail income from all
sources had to be taken into account and the tax was exigible
if the total increased a certain sum. Such additional duty is
really nothing but additional income-tax and is conveniently
described as super-tax. Viscounts Haldane, Finlay and Cave
held that an amount equal to the face value of the shares
could not be regarded as received by the tax payer and that
there was no more than the capitalisation of the profits of the
company in respect of which certificates were issued to the·
shareholders entitling them to participate in the amount of the
reserve but only as part of the capital. Lords Dunedin and
Sumner, however, held .that the word "capitalisation" was.
somewhat "hazy" and the issue of the shares involved a dual
operation by which an amount was released to the shareholder·
but was retained by the company and applied in payment of
those shares. In our opinion, and we say it respectfully, the
better view is that of the majority and our conclusions set out
earlier accord substantially with it.
It follows that though profits are profits in the hands of
the company but when they are disposed of by converting
them into capital instead of paying them over to the shareholders, no income can be said to accrue to the shareholder because the new shares confer a title to a larger proportion of the surplus assets at a general distribution. The floating·
capital used in the company which formerly consisted of subscribed capital and the reserves now becomes the subscribed
capital. The amount said to be payable to the shareholders as
income goes merely to increase the capital of the company and
in the hands of the shareholders the certificates are property
from which income will be derived. Lord Dunedin did not rely
upon Swan_ Brewery's(') case. He held that as the company·
could not pay for another, the shareholder must be taken to
have paid for the bonus shares himself and the payment was;
(') (1887) 12 A.C. 385.
(') (1914) A.C. 231.
(') 8 Tax Cases 101.
I S.C.R.
SUPREME 00URT REPORTS
223
the amount which came from the accumulated profits as profits. Lord Sumner, however, stated that in Swan Brewery's(')
.case, he did not rely upon the extended definition of dividend
in the Australian Statute, but upon the principle involved. He
observed that as a matter of machinery, what was done was
to keep back the money released to the shareholder for application towards payment for the increased capital.
Lord Sumner had already adhered to his view in an earlier
case of the Privy Council, but Swan Brewery's(') case and'
Blott's(') case were considered by the Privy Council in Commissioner of Income-tax, Bengal v. Mercantile Bank of India
Ltd. and others('). Lord Thankerton distinguished Swan Brewery's(') case and followed Blott's(') case, though in Nicholas
v. Commissioner of Taxes of the State of Victoria('), B/ott's(')
.case was distinguished on the ground that the definition in
the Unemployment Relief Tax (Assessment) Act, 1933 also,
included within a person's assessable income "any dividend,
interest, profit or bonus credited, paid or distributed to him
by the company from any profit derived in or from Victoria
or elsewhere by it", and that bonus shares must be regarded
as dividend under that definition.
The Indian Income-tax Act defines "dividend" and also
•extends it in some directions but not so as to make the issue
of bonus shares a release of reserves as profits so that they
could be included in the term. The face value of the shares
cannot therefore be taken to be dividend by reason of anything
in the definition. The share certificate which is issued as bonus
entitles the holder to a "Share in the assets of the company and
to participate in future profits. As pointed out above, if sold,
it may fetch either more or less. The market price is affected
·by many imponderables, one such being the yield or the
expected yield. The detriment to the shareholder, if any, must
·therefore be calculated on some principle. but the method of
computing the cost of bonus shares at their face value does not
accord either with fact .or business accounta'.ncy.
.
Can we then say that the bonus shares are a gift and are
acquired for nothing? At first sight, it looks as if they are so
but the impact of the issue of bonus shares has to be seen to
realise that there is an immediate detriment to the shareholder
in respect of his original holding. The Income-tax Officer, in
this case, has shown that in 1945 when the price of shares
became stable it was Rs. 91- per share, while the value of the
shares before the issue of bonus shares was Rs. 18 /- per share.
In other words, by the issue of bonus shares pro rat a, which
Tanked pari passu with the existing shares, the market price
·was exactly halved, and divided between the old and the bonus
.-shares.