# COMMISSIONER OF INCOME-TAX, U.P v. M/S. MADAN GOPAL RADHEY LAL

- **Citation:** [1969] 2 S.C.R. 7
- **Court:** Supreme Court of India
- **Decided:** 1968-09-06
- **Bench:** J. C. Shah, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-u-p-v-m-s-madan-gopal-radhey-lal-4593
- **Pages:** 6

## Headnote

7
Jncome-tax-Assessee, dealer in srocks and shares-Receipt of bonus
shares in proportion to equity holding-Sale of bonus shares-Whether
sale proceeds profits of business or capital.
Practice-No
application
under
Income-tax Act, 1922, s. 66(1),
challenging finding of fact of Tribunal-Challenge of Tribunal's conc/u.
sion-Jurisdiction of High Court to examine whether findings on which
conclusion was based are supported by evidence.
The assessee, a dealer in shares and securities, held as part of its
stock-in-trade, shares of certain companies. The assessee received from
those companies, at different times, bonus shares proportionate to its equity
holding.
On the question whether the sale proceeds of such bonus shares
are liable to be included in the assessee's total income as profits of the
share-dealing business, the Tribunal found that the sale proceeds of the
bonus shares were received by the assessee in the course of and as- part
of it• business in shares, and held that the proceeds were, on that account,
taxable as income. The High Court, on reference, held in favour of the
asses see.
In appeal to this Court,
HELD: (l) A trader may acquire a commodity in which he is deal·
ing, for his own purposes, and hold it apart from the stock-in-trade of his
business. There is no presumption that such an acquisition, even i'.f it is
an accretion to the stock-in-trade of the 'bminess, is an acquisition for the
purpose of his business : in each case the question is one of intention to
be gathered from the evidence of conduct and dealings by the acquirer
with the commodity. Bonus shares given by a company in proportion to
the holding of equity capital by a shareholder are, under the Income-true
Act at the relevant time (194&---50), liable to be treated as capital and
not as income. Therefore, the bonus shares received by the assessee did
not become part of its stock-in·trade merely because they were accretion
to its stock-in-trade. (10 C, F, G]
C.l.T. Central Bombay v. Maneklal Chunilal,
I.T. Ref. No. 16 of
1948 (Bombay High Court), disapproved.
C.l.T.,
Bengal v. Mercantile Bank of India,
4 I.T.R.
239(P.C.),
applied .
Commissioner of Inland Revenue v. John Blott, 8 T.C.
101 (H.L.)
referred to.
( 2) In the present case, however, the Tribunal found that the bonus
shares, received as capital, were converted by the assessee into its stockin-trade and were not retained as a capital asset.
The question posed
for the opinion of the High Court was not whether the finding of the
Tribunal was founded on evidence, but whether the sale proceeds of the
bonus shares were of the nature of revenue. On this question, when the
assessee had not filed any application under s. 66( 1) of the Income-tax
SUPREME COURT REPORTS
[1969] 2 S.CR.
Act, 1922, expressly raising the question about the validity of the
Tribunal's finding df fact, the High Court must accept the finding and
cannot enquire whether the finding is supported by evidence or not. Tbe
High Court was therefore, not justified in interfering with the finding and
conclusion of the Tribunal. [11 D, F-H]
A
India Cements Ltd. v. C.I.T., 60 l.T.R. 52 (S.C.) followed.
;
OVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1764
B
to 1767 of 1967.
Appeals from the judgment and decree dated January 17,
1964 of the Allahabad High Court in Income-tax Reference No.
193 of 1955.
C. K. Daphtary, Attorney-General, R. Gopalakrishnan, R. N. c
Sachthey and B. D. Sharma, for the appellant (in all the appeals).
M. C. Chagla and R. P. Kapur for I. N. Shroff, for the respondent (in C.A. No. 1764 of 1967).
·
I{. P. Kapur for l. N. Shroff, for the respondent (in C.As.
Nos. 1765 to 1767 of 1967).

## Text

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COMMISSIONER OF INCOME-TAX, U.P.
v.
M/S. MADAN GOPAL RADHEY LAL
September 6, 1968
[J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.]
7
Jncome-tax-Assessee, dealer in srocks and shares-Receipt of bonus
shares in proportion to equity holding-Sale of bonus shares-Whether
sale proceeds profits of business or capital.
Practice-No
application
under
Income-tax Act, 1922, s. 66(1),
challenging finding of fact of Tribunal-Challenge of Tribunal's conc/u.
sion-Jurisdiction of High Court to examine whether findings on which
conclusion was based are supported by evidence.
The assessee, a dealer in shares and securities, held as part of its
stock-in-trade, shares of certain companies. The assessee received from
those companies, at different times, bonus shares proportionate to its equity
holding.
On the question whether the sale proceeds of such bonus shares
are liable to be included in the assessee's total income as profits of the
share-dealing business, the Tribunal found that the sale proceeds of the
bonus shares were received by the assessee in the course of and as- part
of it• business in shares, and held that the proceeds were, on that account,
taxable as income. The High Court, on reference, held in favour of the
asses see.
In appeal to this Court,
HELD: (l) A trader may acquire a commodity in which he is deal·
ing, for his own purposes, and hold it apart from the stock-in-trade of his
business. There is no presumption that such an acquisition, even i'.f it is
an accretion to the stock-in-trade of the 'bminess, is an acquisition for the
purpose of his business : in each case the question is one of intention to
be gathered from the evidence of conduct and dealings by the acquirer
with the commodity. Bonus shares given by a company in proportion to
the holding of equity capital by a shareholder are, under the Income-true
Act at the relevant time (194&---50), liable to be treated as capital and
not as income. Therefore, the bonus shares received by the assessee did
not become part of its stock-in·trade merely because they were accretion
to its stock-in-trade. (10 C, F, G]
C.l.T. Central Bombay v. Maneklal Chunilal,
I.T. Ref. No. 16 of
1948 (Bombay High Court), disapproved.
C.l.T.,
Bengal v. Mercantile Bank of India,
4 I.T.R.
239(P.C.),
applied .
Commissioner of Inland Revenue v. John Blott, 8 T.C.
101 (H.L.)
referred to.
( 2) In the present case, however, the Tribunal found that the bonus
shares, received as capital, were converted by the assessee into its stockin-trade and were not retained as a capital asset.
The question posed
for the opinion of the High Court was not whether the finding of the
Tribunal was founded on evidence, but whether the sale proceeds of the
bonus shares were of the nature of revenue. On this question, when the
assessee had not filed any application under s. 66( 1) of the Income-tax
SUPREME COURT REPORTS
[1969] 2 S.CR.
Act, 1922, expressly raising the question about the validity of the
Tribunal's finding df fact, the High Court must accept the finding and
cannot enquire whether the finding is supported by evidence or not. Tbe
High Court was therefore, not justified in interfering with the finding and
conclusion of the Tribunal. [11 D, F-H]
A
India Cements Ltd. v. C.I.T., 60 l.T.R. 52 (S.C.) followed.
;
OVIL APPELLATE JURISDICTION: Civil Appeals Nos. 1764
B
to 1767 of 1967.
Appeals from the judgment and decree dated January 17,
1964 of the Allahabad High Court in Income-tax Reference No.
193 of 1955.
C. K. Daphtary, Attorney-General, R. Gopalakrishnan, R. N. c
Sachthey and B. D. Sharma, for the appellant (in all the appeals).
M. C. Chagla and R. P. Kapur for I. N. Shroff, for the respondent (in C.A. No. 1764 of 1967).
·
I{. P. Kapur for l. N. Shroff, for the respondent (in C.As.
Nos. 1765 to 1767 of 1967).
The Judgment of the Court was delivered by
Shah, J. M/s. Madan Gopal Radhey Lal-hereinafter called
the assessees-deal in shares and securities.
They held in the
relevant years as part of their stock-in-trade shares of certain
companies.
The assessees received from the Companies at different times bonus shares proportionate to their equity holding.
From time to time the assessees sold the bonus shares received by
them. The Income-tax Officer brought to tax Rs.
55,607 in
the assessment year 1946-47; Rs. 41,625 in the assessment year
1948-49; Rs. 1,43,050 in the assessment year 1949-50 and
Rs. 33,170 in the assessment year 1950-51
being the sale proceeds of the bonus shares, holding that those receipts represented
income of the assessee arising from their business in shares. The
order of the Income-tax Officer was confirmed by the Appellate
Assistant Commissioner and by the Income-tax Appellate Tribunal.
At the instance of the assessees, the Tribunal referred the
following question of law to the High Court of Allahabad for
opinion:
"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
incomes for the respective years as profits of the share
dealing business?"
The High Court called for a supplementary statement of case.
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Full Bench of the High Court (Manchanda, J., dissenting) ansD
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C.I.T. V. RADHEY LAL (Shah, J.)
9
wered the question in the negative.
The Commissioner has
appealed to this Court with certificate granted by the High Court.
The Articles of Association of the various Companies which
had issued the bonus shares are not. on the record. It has been
assumed that the Companies had issued bonus shares in exercise
of the power conferred upon them by the Articles of Association,
and no argument has been raised in that behalf.
A company
when authorised by its Articles of Association may convert its
accumulated profit into capital and then utilise such profit by
issuing additional shares by way of bonus to the shareholders.
Under the Income-tax Act, 1922, at the relevant time, issue of such
bonus shares by capitalisation of the accumulate,d profit was not
treated as distribution of dividend.
In Commissione* of Inland Revenue v. John Blott(') the
House of Lords (by majority) held that bonus shares issued by a
Company in exercise of the power under the Articles of Association are not dividend and therefore not income of the shareholder.
Viscount Haldane observed at p. 126 :
" . . . . . . 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 distribution to its shareholders as income, and as an alternative, not distribute them at all, but apply them in
paying up the capital sums which shareholders electing
to take up unissued shares could 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
11ot 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."
Similarly Lord Cave observed at p. 135 :
"The profits remained in the hands of the Company
as capital, and the shareholders received a paper certificate as evidence of his interest in the additional capital
(1} 8 T. C. IOI.
2Sup. C.1.169-2
SUPREME COURT REPORTS
p969] 2 S.C.R,
so set aside.
The transaction took nothing oot of the
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Company's coffers, and put nothing into the shareholders'
pockets; and the only result was that the Company,
which before the resolution could have distributed the
profit by way of dividend or carried it tempocarily to
reserve, came thenceforth under an obligation to retain
it permanently as capital.
It is true that the shareholder
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could sell his bonus shares, but in that case he would
be realising a capital asset producing income, and the
proceeds would not be income in his hands."
The principle of the case was affirmed by the Judicial Committee
in a case arising under the Indian Income-tax Act, 1922 :
Commissioner of Income-tax, Bengal v. Mercantile Bank of India
and Others(').
Accord~gly bonus shares given by a Company
in proportion to the holding of equity capital by a shareholder
are, in the absence of any express provision to the contrary liable
to be treated as capital and not income.
We are unable to agree with the judgment of the Bombay
High Court (to which reference was made by the Tribunal) in
Commissioner of Income-tax, Central Bombay v. Maniklal Chunnilal and Sons Ltd., Bombay-I.T. Reference No. 16 of 1948that bonus shares received by a shareholder who carries on business in shares and securities "ipso facto become accretion to his
stock-in-trade." Bonus shares would normally be deemed to be
distributed by the Company as capital and the shareholder receives
the shares as capital.
The bonus shares are accretions to the
shares in respect of which they are issued, but on that account
those shares do not become stock-in-trade of the business of the
shareholder. A trader may acquire a commodity in which he is
dealing for his own purposes, and ho1d it apart from the stock-intrade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the
purpose of his business : in each case the question is one of intention to be gathered from the evidence of conduct and dealings by
the acquirer with the commodity.
Bonus shares having been received by the assesse.es in respect
of their stock-in-trade did not therefore become part of their
stock-in··trade, merely because they were accretions to the stock-intrade.
The bonus shares were received as capital : they could be
converted by the assessees into their stock-in-trade or retained as
their capital asset.
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The Tribunal observed in paragraph-5 of its order that "the
assessee deals in shares and the sales proceeds of the bonus shares
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was (were) received by him in the course and as part of his share
(I} 4 I.T.R. 239.
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C.I.T. V. RADHEY LAL (Shah, J.)
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dealing business.
The amount received by the assessee is therefore part of his profit from the share dealing business and is liable
to tax as such".
Counsel for the assessees contended that the
Tribunal has not referred to any evidence in support of its conclusion and has made a cryptic statement which is not capable
of the interpretation that the assessees had converted the bonus
shares into their stock-in-trade. If there is no presumption that
the accretion to the stock-in-trade necessarily gets incorporated
into th< stock-in-trade, says Mr. Chagla, in the absence of evidence showing that the bonus shares were treated by the assessees
as stock-in-trade the finding of the Tribunal cannot be sustained
Counsel invited our attention to the supplementary statement of
case in which the Tribunal recorded that in the copies of balancesheets filed by the assessees as of February 14, 1948, March 8,
1949 and March 8, 1950, the shares did not find a place and
that the sale proceeds of the bonus shares were credited in the
capital account of the assessees for the four years in question on
the last dates of the relevant accounting years.
But the Tribunal has found that the sale proceeds of the bonus
shares were received in the course and as part of their business
in shares and were on that account taxable. It is somewhat unfortunate that the Tribunal has not set out in detail the facts found
by it and the inference drawn therefrom.
Even in the supplementary statement no attempt has been made to set out the facts
on which the conclusion was based.
The orders of the Incometax Officer and the Appellate Assistant Cominissioner are also
not before us.
The mere circumstance that in the copies of the
balance-sheets tendered by the assessees the bonus shares did not
find a place has, in our judgment, no importance, and the credit
entries in the capital account on the last dates of the respective
accounting years in the four years in question also do not support
an inference in favour of the assessees.
The question posed for
the opinion of the Court was not whether the conclusion of the
Tribunal was founded on evidence, but whether the sale proceeds
of the bonus shares were of the nature of revenue.
On this question an inquiry into whether the conclusion of the Tribunal is
supported by the evidence cannot be made.
In India Cements Ltd. v. Commissioner of lncome-tax( 1) this
Court observed that in a reference under the Income-tax Act the
High Court must accept the findings of fact made by the Appellate
Tribunal, and it is for the person who has applied for a reference
to challenge these findings first by an application under s. 66 (I).
If he has failed to file an application' under s. 66 (1) expressly
raising the question about the validity of the findings of fact, he
is not entitled to urge before the High Court that the findings are
(1) 60 I.T.R. 52 (S.C.)
12
SUPREME COURT REPORTS
[1969] 2 s:c.R.
vitiated for one reason or another.
The principle of that case
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applies here. It is not open to the assessees to contend on the
question raised that the finding of the Tribunal is not supported
by evidence.
The answer recorded by the High Court is discharged.
The
answer to the question submitted is in the affirmative.
No order
as to costs of the appeal to this Court and of the reference· in the
High Court
V.P.S.
Appeal allowed.
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