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TMI Blog1964 (3) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate of one ordinary bonus 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. 10 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. The Income-tax Officer held that the assessee was not entitled to charge as the cost of acquisition of the bonus shares a sum eqnivalent to their face value for nothing had in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bonus shares to the assessee was the face value of the shares and answered the question in the negative. The observations of Lord Sumner which he later expressed more fully in Commissioners of Inland Revenue v. Blott, no doubt, lends support to the High Court's view. I shall consider the view expressed by Lord Sumner later. Now, I 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 with 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferred 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 averaging which is the method adopted by the Bombay High Court in the cases earlier mentioned. The other is the method of finding out the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. I would, therefore, answer the question framed in the negative. HIDAYATULLAH J.---This appeal by the Commissioner of Income-tax, Bombay, raises the important question how bonus shares must be valued by an assessee who carries on business in shares. The assessee here is the Dalmia Investment Co. Ltd. (now Shri Rishab Investment Co. Ltd.) which is a public limited company and the bonus shares were issued in the calendar year 1945 by Rohtas Industries Ltd. in the proportion 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 hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; -------------------- Total 1,10,747 Rs.15,57,902.00 nP. -------------------- ---------------------------------------------------------------------------- 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 of 1,10,747 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 shares when bonus shares were issued, was Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares in Rohtas Industries Ltd. was in accordance with law ?" The reference was heard by V. Ramaswami C. J. and Kanhaiya Singh J. They held that the income-tax authorities were wrong in holding that the profit should be computed at Rs. 3,11,646 or at any other amount. According to them, there was no profit on the sale of 31,909 shares and they answered the question in favour of the assessee. Before the High Court it was contended by the assessee company that the bonus shares must be valued at their face value of Rs. 10 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 prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as put an end to any participation in the sum of pound 1,01,450 in right of the old shares, and created instead a right of general participation in the company's profits and assets in right of the new shares, without any further liability to make a cash contribution in respect of them." Lord Sumner adhered to his view later in the House of Lords in Commissioners of Inland Revenue v. John Blott but Lord Dunedin and he were in 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 that 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 money is used in the business and really represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istributed 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, however, defined dividend to include "every profit, advantage or gain intended to be paid or credited to or distributed among the members of any company". It is obvious that it was impossible to hold that the bonus shares were outside the extended definition. Swan Brewery's case has been accepted as rightly decided on the special terms of the section as indeed it was. In Blott's case, Rowlatt J. observed that the bonus shares were included in the expression "advantage" occurring in the highly artificial definition of the word "dividend". In the Court of Appeal, L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 shareholders 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 v. Mercantile Bank of India Ltd. Lord Thankerton distinguished Swan Brewery's case and followed Blott's case, though in Nicholas v. Commissioner of Taxes of the State of Victoria, Blott's case was distinguished on the ground that the definition in the Unemployment Relief Tax (Assessment) Act, 1933, also inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased . . . The proportional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. . . . In short, the corporation is no poorer and the stock-holder is no richer than they were before . . . . If the plaintiff gained any small advantage by the change, it certainly was not an advantage of pound 4,17,450 the sum upon which he was taxed . . . . 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. . . . If a shareholder sells dividend stock, he necessarily disposes of a part of his capital interest, just as if he should sell a part of his old stock, either before or after the dividend. What he retains no longer entitles him to the same proportion of future dividends as before the sale. His par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 10 of Schedule IX to the Finance Act, 1962, provides for such matters and for valuing rights issue but we are not concerned with these matters and need not express an opinion. It remains to refer to three cases to which we have already referred in passing and on which some reliance was placed. In Commissioner of Income-tax v. Manecklal Chunnilal and Sons Ltd.the assessee held certain ordinary shares of the face value of Rs. 100 in Ambica Mills Ltd. and Arvind Mills Ltd. These two companies then declared a bonus and issued preference shares in the proportion of two to one of the face value of Rs. 100 each. These preference shares were sold by the assessee and if the face value was taken as the cost, there was small profit. The department contended that the entire sale proceeds were liable to be taxed, because the assessee had paid nothing for the bonus shares and everything received by it was profit. The assessee's view was that the cost was equal to the face value of the shares. The High Court rejected both these contentions and held that the cost of the shares previously held must be divided between those shares and the bonus shares in the same proportion as their fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt's decision was reversed by this court because the High Court ignored all intermediate transactions and averaged the 300 shares with the 50 bonus shares. The shares in respect of which the bonus shares were issued were already averaged with the bonus shares. This was not a case of bonus shares issued in the year of account. It involved purchase and sale of some of the shares. The average cost price of the original and bonus shares was already fixed in an earlier year by the department and this fact should have been taken into account. No doubt, Chagla C.J. observed that it was not known which of the several shares were sold in the year of account, but in the statement of the case it was clearly stated that bonus shares were untouched. The decision of this court in Emerald Co.'s case however lends support to the view which we have expressed here. 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 do not, the price may have to be adjusted either in the proportion of the face value they bear (if there is no other circumstance differentiating them) or on equitable cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; ------------------ Profit Rs. 1,72,421 Add loss returned Rs. 7,444 ------------------ Profit to be added to the income returned &n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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