M.C.DESAI, J. - (1.) THE business of the assessee consisted of buying and selling shares but it does not follow that every buying, and every selling, of shares by them was done in the course of their business. Every profit made by sale of the stock -in -trade of a business is profits and gains of the business but no profit made by sale of any capital assets of the business is profits and gains of the business. There is a distinction recognized by law between stock -in -trade and capital assets and it depends not on the nature of the goods but on the purpose behind their acquisition and the use made of them. Hence, some out of the goods of the same nature owned by a businessman can be his stock - in - trade and others, capital assets. He is entitled to have stock -in -trade and also capital assets and is not forbidden to have capital assets of the same nature as his stock -in -trade. It follows that everything possessed by a businessman is not necessarily his stock -in -trade simply because it is of the same nature as his stock -in -trade. There can be, and there is, no presumption that whenever a dealer in a particular commodity acquires it, he acquires it as his stock -in -trade and not as capital goods. It is obvious that if the law permits him to have capital goods of the same nature as his stock -in -trade it cannot make every acquisition of goods of that nature his stock -in -trade regardless of all circumstances. It is consistent with the law that distinguishes between stock -in - trade and capital goods owned by a dealer that he can acquire as capital assets goods of the same nature as his stock -in -trade.
(2.) IF a dealer can have goods of the same nature partly as stock -in -trade and partly as capital assets and there can be no presumption of law that goods of that nature acquired by him become his stock -in -trade or become his capital assets, the question whether he acquires them as stock -in -trade or as capital assets at once becomes a question of fact. Intention with which a dealer acquires goods of the same nature as the goods of his stock -in -trade is the first and obvious fact to be taken into account in deciding whether the acquisition is stock -in - trade or is capital assets. If he acquires them as stock -in -trade, i.e., with the intention of dealing in them in the course of his business they become his stock -in -trade; otherwise, or if he acquires them as his capital assets, i.e., not with the intention of dealing in them in the course of his business, they become his capital assets. Intention, which may be inferred from the object behind the acquisition of shares by a dealer in shares, is the deciding factor. The fact that the assessee is a dealer in shares may be immaterial if the circumstances show that the acquisition was with the intention of acquiring a capital asset. If an investor can acquire shares as a capital asset there is no reason why a dealer in shares cannot. Acquisition of shares may be voluntary, i.e., intentional, or involuntary, i.e., unintentional. Intention exists only when the acquisition is voluntary and there cannot arise any question of intention when it is involuntary. Acquisition of bonus shares allotted by a company in lieu of distribution of profits is involuntary acquisition; the assessee is bound to accept the shares unless he wishes to renounce them. He has no option of taking something in lieu of them. He must accept them or nothing. In such a case in which he acquires bonus shares without any intention on his part, how he deals with them subsequent to the acquisition would be the deciding factor. If he decides to include them in his stock -in -trade they would become his stock -in -trade, but it is open to him to treat them as his capital asset. Once the intention was established that they were acquired as stock -in -trade or as capital assets the nature of the acquisition cannot be altered by the subsequent dealing with them; but if there was no question of intention because the acquisition was involuntary and, therefore, it was not established that they were acquired as stock -in -trade or as capital assets the subsequent treatment becomes of great importance. In an involuntary acquisition there is no intention at the time of the acquisition but immediately after the acquisition an intention to treat them as stock -in -trade or as capital assets can be formed and if it is formed how they are dealt with by the assessee is the best evidence from which it can be inferred. If after the involuntary acquisition the assessee intends to deal with them as stock -in -trade they become his stock -in -trade but they cannot be imposed upon him as his stock - in -trade without regard to his intention to be inferred from the subsequent treatment. In the instant case there is no evidence of how the assessee dealt with the shares after the allotment; in other words there is nothing to show that it treated them as its stock -in -trade. The assessing authority had no data from which to infer that it intended to include them in its stock -in -trade and had no power to assume them to be its stock -in -trade. A dealer in shares, who acquires shares as a capital asset, can subsequently convert them into his stock -in -trade but he can do so by doing certain overt act and the conversion can be proved only by proof of the overt act. The proposition that if the original shares, on account of which an assessee dealing in shares becomes entitled to bonus shares, were held by him as his stock -in -trade the bonus shares become his stock -in -trade cannot be supported by any statutory authority or by reason. Actually, there is no nexus between the original holding and the receipt of bonus shares; the connection between them, even if it exists, is remote and indirect. Bonus shares are allotted to the shareholders whose names appear in the company's register of shareholders on a particular day. A shareholder's name entered in the company's register remains there so long as it is not removed and another's name is not recorded in respect of the shares. A shareholder may transfer his shares to another but it takes time before his vendee gets his name registered in place of his. Consequently, a person's name may appear in the company's register on a certain date even though he had disposed of the shares previously and, therefore, did not hold them on that day. The bonus shares would still be allotted to him on the ground that his name appeared in the company's register on that day. He is entitled to the bonus shares not because he held original shares on that day but because he was recorded in the company's register on that day as holding them. Every person who is a shareholder in the company's register is entitled to bonus shares regardless of whether he holds them as his stock -in - trade or as his capital goods. Consequently, an assessee's acquiring bonus shares has absolutely nothing to do with the capacity in which he held the original shares and may have nothing to do even with the fact of his holding them. In the circumstances, how it can be said that there is any nexus between the acquisition of bonus shares and the capacity in which the original shares were held. The nexus theory is inconsistent with the theory of intention behind the acquisition. It cannot be applied even in the case of involuntary acquisition because the intention formed after the acquisition and to be inferred from the subsequent conduct takes the place of the intention in a voluntary acquisition. The fact that the assessees could not buy bonus shares in open market does not affect the nature of the acquisition. They might not have been able to buy bonus shares from the company but they could certainly buy them from the shareholders to whom they were allotted by the company. The theory of accretion is nothing but the theory of nexus under another name; according to it bonus shares accrete to the original shares and take their colour from them. If the original shares are stock -in -trade the bonus shares become stock -in -trade and if they are capital assets the bonus shares also become capital assets. It will be noticed that the theory does not take into account not only the intention with which they are acquired (because it cannot exist, the acquisition being involuntary) but also the intention with which they are retained after acquisition and that whether they are the stock -in -trade or capital assets is treated entirely as an operation of law. It is as if by operation of law, bonus shares become the stock -in -trade or capital assets according to the nature of original holding. Bonus shares certainly do not accrete to the original shares because they are allotted not on account of the original shares but on account of the shareholder's name appearing in the company's register. They may accrete to the entry of his name in the company's register but not to the original shares which may not be even in his ownership at the time when they are allotted. The accretion theory, if there is any force in it, can apply only to bonus shares and not to proceeds of sale of bonus shares; it is only bonus shares that can be said to accrete to the original shares and proceeds of sale of bonus shares will be not accretion to the original shares but proceeds of sale of accretion. If, bonus shares do not accrete to the original shares proceeds of sale of bonus shares cannot be accretion. In the result the bonus shares themselves did not amount to dividend or income of any other kind, that there was no evidence that the assessees intended to treat them as their stock -in -trade and that, consequently, the proceeds of the sales were not revenue income. -Ramnarain Sons (P) Ltd. vs. CIT (1961) 41 ITR 534 (SC) : (1961) TAX 14(3) -49 : TC12R.809, Popatlal Bhikamchand vs. CIT (1959) 36 ITR 577 (Bom) and IRC vs. John Blott (1921) 8 Tax Cases101 (HL) relied on; Motilal vs. CIT (1961) 41 ITR 392 (All) and Maneklal Chunilal and Sons Ltd. (IT Ref. No. 16 of 1948) over ruled. PER JAGDISH SAHAI, J.
(3.) THERE can be no dispute that every profit made by sale of the stock -in -trade of a business is profits and gains of the business. It is, however, equally clear that no profit made by sale of any capital assets of the business can be treated to be profits and gains of the business. The right to receive bonus shares is based upon the entry of the name of that person in the register of the company and is not dependent upon the factual position whether or not he holds shares in that company. It is true that when the bonus shares are issued to a person whose name is recorded in the company's registers it is on the assumption that he holds the shares but still the basis is the entry of the name in the registers of the company and not the right to hold the share.;