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TMI Blog1972 (7) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... The short facts giving rise to the reference may be briefly stated as follows : Some time prior to 1st January, 1954, the assessee purchased 79 shares of the face value of Rs. 500 each in the share capital of Sarangpur Cotton Manufacturing Company Ltd. (hereinafter referred to as " the company ") In 1961, the company sub-divided its shares of the face value of Rs, 500 each into shares of smaller denomination by converting each share of the face value of Rs. 500 into two shares of the face value of Rs. 250 each. The result was that in lieu of 79 shares of the face value of Rs. 500 each, the assessee received 158 shares, each of the face value of Rs. 250. Thereafter, on 23rd August, 1961, the company at an annual general meting resolved to capitalise its accumulated profits and apply them in issuing one f ally paid up bonus share of the face value of Rs. 250 for every four shares of the face value of Rs. 250 each held by a shareholder. The assessee accordingly received on 5th September, 1961, 39 fully paid up bonus shares by virtue of its existing holding of 158 shares. Within a few days thereafter, on 12th September, 1961, the assessee sold off these 39 bonus shares for the aggreg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to some of the relevant provisions of the Income-tax Act, 1961. Section 45 imposes charge of capital gains tax on " any profits or gains arising from the transfer of a capital asset effected in the previous year " and provides that such profits and gains shall be chargeable to income-tax under the head " Capital gains " and shall be deemed to be the income of the previous year in which the transfer took place. What is a " capital asset " is defined in section 2(14) and, apart from certain exclusions, it means property of any kind held by an assessee. It was common ground between the parties in the present case that the bonus shares constituted " capital asset " transferred by the assessee. Section 48 provides the mode of computation of capital gains; it says that capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, expenditure incurred wholly and exclusively in connection with su h transfer as also the cost of acquisition of the capital asset and the cost of any improvement to it. " Cost of acquisition ", in relation to a capital asset, in a case where the capital asset became t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction and not its form. If regard is had to the substance of the transaction, it is clear that when bonus shares are issued, there is no creation of a new capital asset by the company or acquisition of a new capital asset by the shareholder. The bonus shares add nothing to the interest of the shareholders and take nothing out of the pocket of the company. What was owned by the shareholder previously by virtue of original share certificates is after the issue of bonus shares held on the basis of more certificates. There is nothing new acquired by the shareholder. There is no addition to his interest in the company; his proportional interest remains the same. The bonus shares and the original shares together now represent the same proportional interest which the original shares represented before the issue of bonus shares. The real effect of issue of bonus shares is as if the original shares are split up. The bonus shares are, therefore, really, in effect and substance, part of the original shareholding and must be held to have been acquired when the original shares were purchased and the conclusion must inevitably follow as a necessary and logical consequence that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to enjoy the income arising from thre shares in the shape of dividends; the share like any other marketable commodity can be sold or transferred by way of mortgage or pledge. The holding of the share in his name gives him the right to vote at the election of directors and thereby take a parti though indirectly, in the management of the company's affairs. If the majority of shareholders sides with him, he can have a resolution passed which would be binding on the company and, lastly, he can institute proceedings for winding up of the company which may result in a distribution of the net assets among the shareholders. This is only a broad statement of the rights in action which a share confers on a shareholder. These rights are numerous: they are rights in the company as well as against it. They are contractual as well as conferred by the Companies Act, 1956. But, whatever be the nature and extent of these rights conferred by a share, one thing is clear, as pointed out by Gower, and that is that : " the share itself is an object of dominion, i.e., of right its rem and not so to regard it would be barren and academic in the extreme. For all practical purposes, shares are recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the accumulated profits which prior to capitalisation were employed in the business as accumulated profits are thenceforth employed as part of the issued capital of the company. The accumulated profits which might have been divided amongst the shareholders as dividend are impounded to increase the capital of the company and what the shareholders get is not any payment out of the accumulated profits but bonus shares credited as fully paid up. The transaction, to use the words of Viscount Cave in Commissioners of Inland Revenue v. John Blott takes nothing out of the company's coffers and " puts " nothing into the shareholders' pockets ", but what happens is that the accumulated profits which are capitalised are applied in paying up the amounts due on bonus shares to be issued to the shareholders fully paid up bonus shares. The shareholders receiving bonus shares credited as fully paid up are given credit for the capital sums which they would otherwise have had to contribute in respect of the bonus shares allotted to them, if those shares had not been issued credited as fully paid up and this credit is given by application of the capitalised accumulated profits in payment of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional share capital issued to and contributed by the shareholders. Till then it cannot be said that the bonus shares are in existence. That is very clear from the observations of the Supreme Court in Gopal Jalan and Co. v. Calcutta Stock Exchange Association where Sarkar J. said, though in a slightly different context: " in company law ' allotment ' means the appropriation out of the previously unappropriated capital of a company, of a certain number of shares to a person. Till such allotment the shares do not exist as such. It is on allotment in this sense that the shares come into existence. " But even apart from authority, from a purely semantic point of view, it is difficult to see how bonus shares which are an object of dominion transferable in the peculiar manner provided by company law can be said to be acquired or held by a shareholder before they come into existence by allotment and issue. Moreover, bonus shares are clearly a distinct item of property which carries with it certain rights in the company and against it. The bonus shares, as pointed out by Hidayatullah J., in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. entitle the shareholders " to an addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is also inherent evidence in the provisions of the Income-tax Act, 1961, which goes to show that bonus shares cannot be regarded as having been acquired by a shareholder before they are issued. The definition of short-term capital asset in section 2(42A) contemplates that the capital asset must be held by an assessee for not more than twelve months immediately preceding the date of its transfer. There was some argument advanced before us on the construction of the word " held " in this definition and it was urged. on behalf of the revenue that this word indicated that the assessee must be a registered holder of the bonus shares. The bonus shares, it was contended, could not be said to be held by the assessee unless they stood in the name of the assessee in the share register of the company and since they would be registered in the name of the assessee only after they are issued, the date from which the period of holding the bonus shares should be counted for the purpose of the definition could not be anterior to the date of issue of the bonus shares. The revenue sought to draw support for this contention from the decision of this court in Commissioner of Wealth-tax v. Hars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be held by the assessee in his own name or in the name of any other person. Moreover, it must be remembered, that the word " held " is used in section 2(42A) with reference to any capital asset. It is not limited to shares. The concept of a registered holder cannot, therefore, be introduced in the construction of the section. So long is the bonus shares are beneficially owned by the assessee, whether in his own name or in the name of another, they would be held by the assessee within the meaning of section 2(42A). The extreme contention of the revenue seeking to read the word " held " as meaning " held as a registered owner " cannot, therefore, be accepted. But the revenue is right in its contention that the requirement that the capital assets must be held by the assessee for not more than twelve months immediately preceding the date of its transfer does indicate that the capital asset must exist as an identifiable capital asset during the period it is claimed that it is held by the assessee. If the capital asset consists of bonus shares, the bonus shares must exist as bonus shares throughout the period for which they are supposed to be held by the assessee. Now, obviously ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would the assessee in such a case be able to exercise the option given by section 55(2)(i) ? How would it be possible to ascertain the fair market value of the bonus shares on 1st January, 1954, when they were not in existence. The market value of the original shares on 1st January, 1954, could not be taken as the market value of the bonus shares nor could it be proportionally distributed because, as pointed out by Pennington in his book company Law (second edition), at page 132, it is, oftenfound after the issue of bonus shares that " the aggregate price for the original shares and the bonus shares issued in right of it is greater than the price of the original shares before the issue ". These circumstances clearly indicate that the bonus shares can be said to be held by the assessee only from the date of their issue and not from the date when the original hares were purchased by the assessee. The assessee, however, relied strongly on certain observations of Hidayatullah J. in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. as also on the majority decision of the United States Supreme Court in Eisner v. Macomber. We shall presently refer to these cases but before we do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y him to acquire the new shares. Since the amount credited in the books of the company as contribution of capital by the shareholder is the face value of the bonus shares, it was contended that the cost to the shareholder is equal to the face value of the bonus shares. The foundation of this argument was that the issue of bonus shares involves payment of dividend and return of that dividend by the shareholder as his contribution in respect of the bonus shares issued to him. The learned judge was, therefore, called upon to consider whether there is any payment of dividend to the shareholder when bonus shares are issued by a company. It was in the context of this question that the learned judge made the following observations which were strongly relied upon on behalf of the assessee : " 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 owned by the shareholder by virtue of the original certificates is after the issue of bonus shares, held by them on the basis of more certificates . . . In this sense, there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onus shares are accretions to the original shares and that was the reason why he took the view that the cost of the original shares should be spread over the original shares and bonus shares taken collectively. It is indeed difficult to see how bonus shares could be treated as carved out of the original shares when in the words of Hidayatullah J. they represented " an additional share in the increased capital " and " confer title to a larger proportion of the surplus assets at a general distribution ". The bonus shares are clearly a new capital asset acquired by a shareholder, though after the acquisition, the monetary value of the interest of the shareholder represented by the original shares and bonus shares remains the same as it was prior to the acquisition. We then turn to consider the decision of the United States Supreme Court in Eisner v. Macomber. The statute which came up for consideration in this case was the Revenue Act of 1916, which sought to tax stock dividends issued by a corporation as income. The constitutional validity of this statute was challenged on the ground that it sought to tax something which was not income within the meaning of the Sixteenth Amendment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired by a shareholder. No reliance can therefore, be placed on these observations in support of the contention urged on behalf of the assessee. We are, therefore, of the view that bonus shares issued by a company are acquired by a shareholder when they are issued and they must be taken to be held by the shareholder from the date, of their issue and not from the date when the original shares in respect of which they are issued were acquired by the shareholder. The bonus shares in the present case were, therefore, acquired by the assessee on 5th September, 1961, and they were held by him from that date and since they were sold within a few days on 12th September, 1961, the conclusion must inevitably follow that they were held by the assessee for not more than twelve months immediately preceding the date of their transfer and they were accordingly short-term capital assets within the meaning of section 2(42A). The Tribunal was, therefore, not right in holding that the capital gain arising from the sale of the bonus shares did not arise out of the sale of short-term capital assets. We, therefore, answer the question referred to us in the negative. The assessee will pay the costs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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