SAKKAK, - (1.) THE following Judgments Qf the court were delivered by
(2.) 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. 5,84,283.00 and was holding them in January 1945. In that month the Rohtas Industries Ltd. distributed bonus shares at the rate of one ordinary bonus share for each original share and so the assessee got 31,909 bonus shares. Between that time and 31/12/1947, the assessee sold 14,650 of the original shares with the result that on 1/01/1948 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 1/01/1948 thus came to 1,10,747 shares which in its books had been valued at Rs. 15,57,902.00. In arriving at this figure the assessee had valued the bonus shares at the face value of Rs. 10.00 each and the other shares at actual cost. On 29/01/1948, the assessee sold all these shares for the total sum of Rs. 15,50,458.00, that is, at Rs. 14.00 per share and in its return for the year 1949-50 claimed a loss of Rs. 7,444.00 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 equivalent to their face value for nothing had in fact been paid and he computed their cost at Rs. 6-8-0 per share. He arrived at this price by the following method, which has 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.(1). The Bombay High court later followed this case in Emerald and Co. Ltd. v. Commissioner of Income-tax, Bombay City, Bombay (2). On that basis he held that the assessee had made a profit of Rs. 2,39,317.00 by way of capital gains and levied tax on it accordingly. On appeal the Appellate Assistant Commissioner held that these shares were not investment 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. 3,19,090.00. This figure, it may be observed, represented the cost of the bonus shares at their face value. It% his opinion the bonus shares had to be valued at nit. The appellate Commissioner's conclusion was that the assessee was liable to be taxed on a trading profit of Rs. 3,11,646.00 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 assessee 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. 3,11,646.00 on the sale of shares in Rohtas Industries Ltd. was in accordance with law?' The answer to this question admittedly depends on the cost of acquisition, if any, to be properly attributed to the bonus shares. If the Appellate Commissioner's method of valuing them at nil was wrong, the question had to be answered in the negative. The High court, following the judgment of Lord Sumner in Swan Brewery Company Limited v. The King(1), held that the real cost of 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 Commissioner of Inland Revenue v. Blott(2) , no doubt, lend 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(3). 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 case (2) 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 because 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 (2) the articles gave the power which had been acted upon. Lord Sumner on the other hand held that since a company 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 shareholder to pay for the bonus share issued to him.
(3.) I think the preferable view is that taken by the majority of the Judges. When the articles permit the issue of bonus shares and thetransfer of undivided profits direct to the share capital account, it cannot be said that a cash dividend must be deemed to have been declared which could be set off against the liability to pay for the shares. This is not what was done in fact. What in fact was done, and legally done, was to transfer the profits to the share capital account by a resolution passed by the majority of the shareholders so that the shareholders 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(1) and Commissioner of Income-tax, Bengal v. Mercantile Bank of India Limited(2). 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(3) 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 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 same reasons the two suggested methods for ascertaining the actual cost of these shares have also to be rejected. If however it were to be said that these methods were for finding out the market value of the bonus shares-the importance of which value for the present purpose will soon be seen-I would say that the only way to find out the market value is from the market itself. ;