DALMIA INVESTMENT COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case the assessee is a public limited company holding investment of shares and also dealing in shares. On January 1, 1948, that is, the first day of the accounting period, the assessee was holding 1,10,747 shares of the Rohtas INdustries Limited at a book value of Rs. 15,57,902. The details of the shares are as follows : <FRM>JUDGEMENT_705_ITR41_1961Html1.htm</FRM>

(2.) IT appears that in 1944 the assessee was holding 31,909 ordinary shares of the old issues of the Rohtas Industries Limited. In that year the Rohtas Industries Limited allotted one bonus share for each ordinary share held by the shareholders. The assessee accordingly received 31,909 bonus shares. These shares were of the face value of Rs. 3,19,090 at the rate of Rs. 10 per share. The assessee, therefore, debited the share account by Rs. 3,19,090 with a corresponding entry in the capital reserve account for the same amount. The entire lot of 1,10,747 shares was sold by the assessee on January 29, 1948, to Messrs. Dalmia Cement &amp; Paper Marketing Limited for a consideration of Rs. 15,50,458. The sale price was deducted from the book value of Rs. 15,57,902 and the assessee claimed a loss of Rs. 7,444 on the sale of the shares. The claim was rejected by the Income-tax Officer on the ground that the cost of the bonus shares should be computed at an "average basis" in view of the principle laid down by the Bombay High Court in Emerald and Co. Ltd. v. Commissioner of Income-tax. The Income-tax Officer computed the net profit of the assessee to be Rs. 2,39,317 which was liable to be taxed under section 12B of the Income-tax Act. The assessee took the matter in appeal to the Appellate Assistant Commissioner, who held that section 12B of the Income-tax Act was not applicable to the case, but the assessee had received the bonus shares free of cost, and the cost of Rs. 3,19,090 for the bonus shares shown in the account books of the assessee was a fictitious entry. The Appellate Assistant Commissioner accordingly held that the assessee was liable to be taxed on the amount of profit to the extent of Rs. 3,11,646. When the matter came up in appeal before the Income-tax Appellate Tribunal, it was contended on behalf of the assessee that the Appellate Assistant Commissioner was wrong in holding that the cost of 31,090 bonus shares was nil. In the alternative the contention of the assessee was that at any rate the bonus shares should have been valued on average basis according to the decision of the Bombay High Court in Emerald and Co. Ltd. v. Commissioner of Income-tax. The Appellate Tribunal rejected both the contentions of the assessee and held that the bonus shares were issued free of cost to the assessee and the decision of the Appellate Assistant Commissioner was correct.

(3.) IT is manifest, in view of these statutory provisions, that the bonus shares are not issued free to the shareholders, but the consideration for the issue of the bonus shares is the dividend or bonus which is provided and declared by the company out of its undistributed profits. IT is true that no cash is paid by the shareholders for the allotment of the bonus shares, but the consideration given by a shareholder for the bonus share is something in the nature of a set-off for the dividend which is due to be paid to the shareholder out of the undistributed profits of the company. My concluded opinion, therefore, is that the real cost of the bonus shares to the assessee in this case is the value of the shares as shown in the books of account of the Rohtas Industries Limited. This view is borne out by the decision of the Judicial Committee in Swan Brewery Co. Ltd. v. King. IT appears that the Dividend Duties Act, 1902 (of Western Australia), provided by section 6 that a company carrying on business in Western Australia and not elsewhere which declared any dividend shall pay a duty equal to one shilling for every twenty shillings of the amount or value of such dividend. Section 2 of the above Act provided that "dividend" shall include "every dividend, profit, advantage or gain intended to be paid or credited to or distributed among any members or directors of any company except the salary or other ordinary remuneration of directors." The appellant in that case passed resolutions : (1) that the capital of the company should be increased by Pounds 101,450 divided into 81,160 new shares of Pounds 1 5s. each; (2) that the sum of Pounds 101,450, being a portion of accumulated profits standing to the credit of the reserve fund, should be transferred to the credit of the share capital account; (3) that the new shares should be allotted as fully paid up among the shareholders pro rata. IT was held by the Judicial Committee that the transactions were tantamount to a declaration of a dividend amounting to Pounds 101,450 within the Dividend Duties Act, 1902, and that the appellant company was liable to pay duty upon the amount under that Act. At page 235 of the report Lord Summer has stated the legal position as follows :