{"id":1944,"date":"1964-03-13T00:00:00","date_gmt":"1964-03-12T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-dalmia-investment-co-ltd-on-13-march-1964"},"modified":"2016-01-22T11:10:41","modified_gmt":"2016-01-22T05:40:41","slug":"commissioner-of-income-tax-vs-dalmia-investment-co-ltd-on-13-march-1964","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-dalmia-investment-co-ltd-on-13-march-1964","title":{"rendered":"Commissioner Of Income-Tax, … vs Dalmia Investment Co. Ltd on 13 March, 1964"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income-Tax, … vs Dalmia Investment Co. Ltd on 13 March, 1964<\/div>\n
Equivalent citations: 1964 AIR 1464, \t\t 1964 SCR (7) 210<\/div>\n
Author: A Sarkar<\/div>\n
Bench: Sarkar, A.K.<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME-TAX, BIHAR\n\n\tVs.\n\nRESPONDENT:\nDALMIA INVESTMENT CO.  LTD.\n\nDATE OF JUDGMENT:\n13\/03\/1964\n\nBENCH:\nSARKAR, A.K.\nBENCH:\nSARKAR, A.K.\nHIDAYATULLAH, M.\nSHAH, J.C.\n\nCITATION:\n 1964 AIR 1464\t\t  1964 SCR  (7) 210\n CITATOR INFO :\n F\t    1967 SC 614\t (5)\n F\t    1969 SC1183\t (7,8)\n D\t    1971 SC2389\t (3,5,6)\n\n\nACT:\nIncome-tax   Act-Business--Investment\tcompany-Dealing\t  in\nshares-Bonus shares-Valuation.\n\n\n\nHEADNOTE:\nThe  assessee company dealt in shares and also held  invest-\nments  of  shares  on January 1, 1948.\t The  assessee\theld\n1,10,747, shares of Rohtas Industries at a book value of Rs.\n15,57,902\/-.   Of  these  shares 31,909\t were  bonus  shares\nissued by Rohtas Industries in 1945 at the face value of Rs.\nlo\/,  each  and\t the assessee  had  debited  the  investment\naccount in respect of the bonus shares by Rs. 3,19,090\twith\na corresponding entry in the capital reserve account on\t its\ncredit\tside  for the same amount.   The  assessee  acquired\nthese  bonus shares at a cost of Rs. 5,84,283 in  1944.\t  On\nJanuary\t 29,  1948,  the assessee sold\tthe  entire  lot  of\n1,10,747  shares for Rs. 15,50,458.  The  assessee  deducted\nthe  sale  price from the book value of\t Rs.  15,57,902\t and\nclaimed\t a  loss of Rs. 7,444 on the sale  of  shares.\t The\nappellate  Tribunal valued the bonus shares at nil and\theld\nthat the assessee had made a profit of Rs. 3,11,646\/-.\tOn a\nreference the High Court held that the Tribunal was wrong in\nholding\t that  the  assessee  had  made\t a  profit  of\t Rs.\n3,11,646\/-.\nHeld  (per Hidayatullah and Shah, JJ.): (i)  The  Income-tax\nAct   defines  \"dividend\"  and\talso  extends  it  in\tsome\ndirections but not so as to make the issue of bonus shares a\nrelease\t of  reserves  as  profits so  that  they  could  be\nincluded  in the term.\tThe face value of the shares  cannot\ntherefore  be taken to be dividend by reason of anything  in\nthe  definition.  The shares certificate which is issued  as\nbonus  entitles the holder to a share in the assets  of\t the\ncompany\t and  to participate in future profits.\t  The  bonus\nshare  when sold may fetch more or may fetch less  than\t the\nface  value,  and this shows that the certificate is  not  a\nvoucher\t to receive the amount mentioned on its\t face.\t The\nmarket\tprice  is affected by many imponderables,  one\tsuch\nbeing the yield or the expected yield.\tThe detriment to the\nshare  holder, if any, must therefore be calculated on\tsome\nprinciple,  but\t the method of computing the cost  of  bonus\nshares at their face value does not accord either with\tfact\nor business accountancy.\nSwan Brewery Co. Ltd. v. Rex (1914) A.C. 231, disapproved.\nCommissioner  of Inland Revenue v. John Blott, 8  Tax  Cases\n101, approved.\nBouch V. Sproule, (1887) 12 A.C. 385, referred to.\nCommissioner  of  Income-tax, Bengal v. Mercantile  Bank  of\nIndia  Ltd., 1936 A.C. 478 and Nicholas v.  Commissioner  of\nTaxes of the State of Victoria, 1940 A.C. 744, referred to.\n(ii) The bonus shares cannot be said to have cost nothing to\nthe  share holder because on the issue of its bonus  shares,\nthere is an instant loss to him in the value of his original\nholding.   The\tearning\t capacity of  the  capital  employed\nremains\t the same, even after the reserve is converted\tinto\nbonus  shares.\tBy the issue of the bonus shares there is  a\ncorresponding fall in the dividends\n211\nactual\tor expected and the market price moves\taccordingly.\nThe  method of calculation which places the value  of  bonus\nshares, at nil cannot be correct.\n(iii)\t  The  bonus shares can be valued by  spreading\t the\ncost  of  the old shares over the old shares,  and  the\t new\nissue  taken together, if the shares rank pari passu.\tWhen\nthey do not, the price may have to be adjusted either in the\nproportion of the face value they bear (if there is no other\ncircumstances\tdifferentiating\t  them)\t or   on   equitable\nconsiderations\tbased on the market price before  and  after\nthe  issue taking the middle price not that  represented  by\nany unusual fluctuations.  On the facts of this case it\t was\nheld  that  since the bonus shares in this  case  rank\tpari\npassu  with  the  old  shares  there  is  no  difficulty  in\nspreading the original cost over the old and the new shares.\nCommissioner  of Income-tax v. Maneklal Chunilal  and  Sons,\nIncome-tax    Reference\t  No.<\/a>\t16\/1948,   dt.\t  23-3-1949,\ndisapproved.\nEmerald\t and Co. Ltd. v. Commissioner of Income-tax,  Bombay\nCity,<\/a> (1956) 29 I.T.R. 814, distinguished.\nEisner v. Macomber, 252 U.S. 189-64 L.Ed. 521, referred to.\nPer Sarkar, J. (dissenting): (i) The view taken by the majo-\nrity  of Judges in Blott's case is a correct one.   In\tthat\ncase  the  learned Judges held that when the articles  of  a\ncompany authorise the issue of bonus shares and the transfer\nof a sufficient amount out of the accumulated profits in its\nhands  representing  their face value to the  share  capital\naccount, what happens when the articles are acted upon is  a\ncapitalisation\tof the profits and the bonus  shares  issued\nare  not in the hands of the share holder income  liable  to\ntax.  Following the majority opinion in Blott's case it\t was\nheld that the High Court was in error in the view it took in\nthe present case.  There is no foundation for proceeding  on\nthe  basis as if the bonus shares had been acquired  by\t the\nassessee  at  their  face  value.   Its\t profits  cannot  be\ncomputed on that basis.\nCommissioner  of Inland Revenue v. Blott (1921)2  A.C.\t171,\nrelied on.\nSwan Brewery Co. Ltd. v. King (1914) A.C. 231, disapproved.\nOsborne (H.M. Inspector of Taxes) v. Steel Barrel Co.  Ltd.,\n24 T.C. 293, inapplicable.\nCommissioner of Inland Revenue v. Fisher's Executors, (1926)\nA.C.  395  and Commissioner of Income-tax,  Bengal  v.\tMer-\ncantile Bank of India Ltd., (1936) A.C. 478, referred to.\nCommissioner  of  Income-tax v. Maneklal Chunilal  and\tSons\nLtd., I.T. Ref.\t No.<\/a> 16 of 1948 and Emerald and Co. Ltd.  v.\nCommissioner  of  1ncome-tax, Bombay City,  29\tI.T.R.\t814,\nreferred to.\n(ii) Bai  Shirinbai  Kooka's case is the authority  for\t the\nproposition that where it cannot be shown what was paid\t for\nthe  acquisition of a trading asset by a trader, it has\t for\ntax  purposes  to  be deemed to have been  acquired  at\t the\nmarket value of the date when it was acquired.\tOn the basis\nof this authority the Bonus shares must in the present\tcase\nbe  deemed to have been acquired at the market value of\t the\ndate of their issue.\n(iii)\t  On  the basis of the same authority, it would\t not\nbe  correct to say that the bonus shares had  been  acquired\nfor nothing.\n212\nThe  view  taken  by  the  Appellate  Commissioner  and\t the\nTribunal cannot be supported.\nCommissioner of Income-tax v. Bai Shirinbai K. Kooka,<\/a> [1962]\nSupp. 3 S.C.R. 391, relied on.\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 780 of  1962.
\nAppeal\tby special leave from the judgment and decree  dated
\nNovember 28, 1960, of the Patna High Court, in Miscellaneous
\nJudicial Case No. 724 of 1958.\n<\/p>\n
K.   N. Rajagopal Sastri and R. N. Sachthey, for the  appel-
\nlant.\n<\/p>\n
S. K.  Kapur and B. N.\tKirpal, for the respondent.
\nMarch 13, 1964.\t The judgment of HIDAYATULLAH and SHAH,\t JJ.
\nwas  delivered\tby  HIDAYATULLAH J. SARKAR  J.\tdelivered  a
\ndissenting opinion.\n<\/p>\n
SARKAR,\t J.-This matter has come before us on a case  stated
\nby  the Income-tax Appellate Tribunal.\tThe question is\t how
\nto  determine  the cost of acquisition of bonus\t shares\t for
\nascertaining  the  profits  made on a  sale  of\t them.\t The
\nassessment   year  concerned  is  1949-50  for\t which\t the
\naccounting year is the calendar year 1948.
\nThe  assessee held shares by way of investment and  also  as
\nstock  in trade of his business as a share dealer.   We\t are
\nconcerned  in this case only with its holdings\tof  ordinary
\nshares\tin  Rohtas  Industries Ltd.  In\t 1944  the  assessee
\nacquired 31,909 of these shares at a cost of Rs. 5,84,283 \/-
\nand  was  holding them in January 1945.\t In that  month\t the
\nRohtas Industries Ltd. distributed bonus shares at the\trate
\nof  one ordinary bonus share for each original share and  so
\nthe assessee got 31,909 bonus shares.  Between that time and
\nDecember 31, 1947, the assessee sold 14,650 of the  original
\nshares\twith the result that on January 1, 1948 it held\t the
\nfollowing  shares: -(a) 17,259 original shares\tacquired  in
\n1944,  (b) 31,909 bonus shares issued in January  1945,\t (c)
\n59,079\tnewly issued shares acquired in the year 1945  after
\nthe  issue of the bonus shares and (d) 2,500 further  shares
\nacquired  in  1947.  The total holding of  the\tassessee  on
\nJanuary\t 1, 1948 thus came to 1,10,747 shares which  in\t its
\nbooks  had been valued at Rs. 15,57,902\/-.  In\tarriving  at
\nthis figure the assessee had valued the bonus shares at\t the
\nface  value of Rs. 10\/- each and the other shares at  actual
\ncost.\tOn  January 29, 1948, the assessee  sold  all  these
\nshares\tfor the total sum of Rs. 15,50,458 \/ -, that is,  at
\nRs.  14\/  per share and in its return for the  year  1949-50
\nclaimed a loss of Rs. 7,444 on the sale.  It is this  return
\nwhich has led to this appeal.\n<\/p>\n
\t\t\t    213<\/span><\/p>\n
The  Income-tax officer held that the assessee was  not\t en-
\ntitled\tto  charge as the cost of acquisition of  the  bonus
\nshares a sum equivalent to their face value for nothing\t had
\nin  fact been paid and he computed their cost at  Rs.  6-8-0
\nper  share.   He  arrived at this  price  by  the  following
\nmethod, which has been called as the method averaging:
\n584283 x Face value of bonus shares:\n<\/p>\n
319090 x 1\/31909.\n<\/p>\n
In adopting this procedure the Income-tax Officer  purported
\nto  follow  the\t decision  of  the  Bombay  High  Court\t  in
\nCommissioner  of  Income-tax v. Maneklal Chunilal  and\tSons
\nLtd.<\/a>(1).  The Bombay High Court later followed this case  in
\nEmerald\t and Co. Ltd. v. Commissioner of Income-tax,  Bombay
\nCity,  Bombay<\/a> (2).  On that basis he held that the  assessee
\nhad  made a profit of Rs. 2,39,317 by way of  capital  gains
\nand  levied tax on it accordingly.  On appeal the  Appellate
\nAssistant  Commissioner\t held  that these  shares  were\t not
\ninvestment  shares but formed the assessee’s stock in  trade
\non  which  it was liable to pay income-tax and\tnot  capital
\ngains  tax.  He also held that the assessee  having  adopted
\nthe method of valuing the stocks at cost and no price having
\nactually  been\tpaid for the bonus shares, it must  be\theld
\nthat  there  was an inflation in the opening  stock  by\t Rs.
\n3,19,090.  This figure, it may be observed, represented\t the
\ncost  of  the  bonus shares at their face  value.   It%\t his
\nopinion\t the  bonus  shares had to be valued  at  nit.\t The
\nappellate  Commissioner’s conclusion was that  the  assessee
\nwas liable to be taxed on a trading profit of Rs. 3,11.646\/-
\nin respect of the sale of shares.  Thise view was  confirmed
\non  a  further\tappeal to the  Appellate  Tribunal.   It  is
\nhowever\t not clear whether the Tribunal held that there\t had
\nbeen  a trading profit or capital gains.  This\tmatter\tdoes
\nnot  seem  to  have  been raised  at  any  stage  after\t the
\nAppellate  Commissioner’s order and is not material  to\t the
\nreal question that has to be decided.\n<\/p>\n
After the Tribunal’s judgment the assessee got an order from
\nthe High Court directing the Tribunal to refer the following
\nquestion to it:\n<\/p>\n
\t      “Whether on the facts and circumstances of the
\n\t      case the profit computed at Rs. 3,11,646\/-  on
\n\t      the  sale of shares in Rohtas Industries\tLtd.
\n\t      was in accordance with law?”\n<\/p><\/blockquote>\n
The  answer to this question admittedly depends on the\tcost
\nof  acquisition,  if any, to be properly attributed  to\t the
\nbonus  shares.\t If the Appellate Commissioner’s  method  of
\nvaluing
\n(1)  (I.T. Ref.\t No. 16 of 1948, unreported).
\n(2)  29 I.T.R. 814.\n<\/p>\n
214<\/span><\/p>\n
them  at nil was wrong, the question had to be\tanswered  in
\nthe  negative.\t The High Court, following the\tjudgment  of
\nLord Sumner in Swan Brewery Company Limited v. The  King(1),
\nheld that the real cost of the bonus shares to the  assessee
\nwas  the face value of the shares and answered the  question
\nin  the negative.  The observations of Lord Sumner which  he
\nlater expressed more fully in Commissioner of Inland Revenue
\nv.  Blott(2)  , no doubt, lend support to the  High  Court’s
\nview.\tI shall consider the view expressed by\tLord  Sumner
\nlater.\tNow, I wish to notice another case on which the High
\nCourt  also relied and that was Osborne (H.M.  Inspector  of
\nTaxes) v. Steel Barrel Co. Ltd(3).  I do not think that\t the
\nobservations of Lord Greene M. R. in this case to which\t the
\nHigh  Court referred, are of any assistance.  All  that\t was
\nthere  said  was that when fully paid shares  were  properly
\nissued\t for   a   consideration  other\t  than\t cash,\t the
\nconsideration must be at the least equal in value to the par
\nvalue of the shares and must be based on an honest  estimate
\nby  the directors of the value of the assets  acquired.\t  In
\nthat  case  fully  paid shares had been issued\tin  lieu  of
\nstocks and the question was as to how the stocks were to  be
\nvalued.\t That case had nothing to do with the issue of bonus
\nshares\t or   the  ascertainment  of  the  cost\t  of   their
\nacquisition.\n<\/p>\n
As I have said earlier, Lord Sumner’s observation in Blott’s
\ncase (2) certainly supports the view taken by the High Court
\nbut  in that case Lord Sumner was in a minority.  The  other
\nlearned Judges, excepting Lord Dunedin, who took a  somewhat
\ndifferent  view to which reference is not necessary  because
\nit has not been relied upon, held that when the articles  of
\na  company  authorise  the issue of  bonus  shares  and\t the
\ntransfer  of  a\t sufficient amount out\tof  the\t accumulated
\nprofits\t in its hands representing their face value  to\t the
\nshare  capital account, what happens when the  articles\t are
\nacted upon is a capitalisation of the profits and the  bonus
\nshares\tissued\tare  not in the hands  of  the\tshare-holder
\nincome liable to tax.  In Blott’s case (2) the articles gave
\nthe  power  which had been acted upon.\tLord Sumner  on\t the
\nother hand held that since a company could not issue  shares
\nfor nothing nor pay for them out of its profits, it must  be
\nheld that what happened in such a case was as if the company
\nhad issued cash dividend to the -shareholder and had set  it
\noff against the liability of the shareholder to pay for\t the
\nbonus share issued to him.\n<\/p>\n
I think the preferable view is that taken by the majority of
\nthe  Judges.   When the articles permit the issue  of  bonus
\nshares\tand the transfer of undivided profits direct to\t the
\nshare  capital\taccount,  it  cannot be\t said  that  a\tcash
\ndividend must be
\n(1) (1914) A.C. 231.\t    (1921) 2 A.C. 171.\n<\/p>\n
(3)  24 T.C. 293.\n<\/p>\n
\t\t\t    215<\/span><\/p>\n
deemed to have been declared which could be set off  against
\nthe  liability to pay for the shares.  This is not what\t was
\ndone in fact.  What in fact was done, and legally done,\t was
\nto  transfer the profits to the share capital account  by  a
\nresolution  passed  by the majority of the  shareholders  so
\nthat  the shareholders never acquired any right to any\tpart
\nof  it.\t  The  view taken by the  majority  has\t since\tbeen
\nfollowed unanimously, and even if it was open to doubt,\t for
\nmyself, at this distance of time, I would not be prepared to
\ndepart from it: Commissioners of Inland Revenue v.  Fisher’s
\nExecutors(1)  and  Commissioner\t of  Income-tax,  Bengal  v.
\nMercantile  Bank  of  India  Limited(2).   It  is  of\tsome
\nsignificance  to  observe  that the latter is  a  case\tfrom
\nIndia.\n<\/p>\n
In  the present case the record does not contain any  refer-
\nence to the resolutions resulting in the issue of the  bonus
\nshares\tnor to the provisions of the articles but  the\tcase
\nhas  proceeded before us on the basis that the bonus  shares
\nhad  been  legally  issued under  powers  contained  in\t the
\narticles   and\t the  profits  had  been   equally   legally
\ntransferred  to\t the  share  capital  account  without\t the
\nshareholders  having acquired any right in them.   Following
\nthe majority opinion in Blott’s case(3) I think I must\thold
\nthat the High Court was in error in the view it took in\t the
\npresent case.  There is no foundation for proceeding on\t the
\nbasis  as  if  the bonus shares had  been  acquired  by\t the
\nassessee  at  their  face  value.   Its\t profits  cannot  be
\ncomputed on that basis.\n<\/p>\n
Two other methods of ascertaining the cost of acquisition of
\nthe  bonus  shares for computing the profits made  on  their
\nsale  have  been suggested.  One of them is  the  method  of
\naveraging  which  is the method adopted by the\tBombay\tHigh
\nCourt  in  the cases earlier mentioned.\t The  other  is\t the
\nmethod of finding out the fall in the price of the  original
\nshares\ton the issue of the bonus shares and attributing  to
\nthe latter shares that fall and to value them thereby.\t The
\nobject\tof  these methods seems to me to find out  what\t the
\nbonus shares actually cost the assessee.  But this would  be
\nan  impossible\ttask  for they actually\t cost  the  assessee
\nnothing;  it never paid anything for them.  There  would  be
\nmore  reason for saying that it paid the face value  of\t the
\nbonus  shares  because\tthe profits of\tthe  Company  of  a,
\nsimilar\t amount\t which might otherwise have come to  it\t had
\nbeen  directly appropriated to the share capital account  on
\nthe  issue  of\tthe bonus shares.  But this  method  I\thave
\nrejected  already  and, for the reason that  no\t amount\t was
\nactually paid for the bonus shares by the assessee.  For the
\nsame reasons the two suggested methods for ascertaining\t the
\nactual
\n(1) (1926) A.C. 395.\t\t  2)  (1936) A.C. 478.\n<\/p>\n
(3 )  (1921) 2 A.C. 171.\n<\/p>\n
216<\/span><\/p>\n
cost  of these shares have also to be rejected.\t If  however
\nit  were to be said that these methods were for finding\t out
\nthe market value of the bonus shares-the importance of which
\nvalue for the present purpose will soon be seen-I would\t say
\nthat  the only way to find out the market value is from\t the
\nmarket itself.\n<\/p>\n
How  then is the cost of the bonus shares to be\t determined?
\nWe  start with this that nothing in fact was paid for  them.
\nBut if the cost of acquisition is nil, the whole of the sale
\nproceeds of the shares would be taxable profits.  In Commis-
\nsioner of Income-tax v. Bai Shirinbai K. Kooka<\/a>(1) this Court
\nhas approved of the Bombay High Court’s view that  “obvious-
\nly, the whole of the sale proceeds or receipts could not  be
\ntreated\t as profits and made liable to tax, for\t that  would
\nmake  no  sense”  (P.  397).   So  the\tprofits\t cannot\t  be
\nascertained  on\t the basis that the bonus  shares  had\tbeen
\nacquired  for  nothing.\t  The view taken  by  the  Appellate
\nCommissioner and the Tribunal cannot be supported.
\nIt  seems to me that the cost price of the bonus shares\t has
\nto  be decided according to the principle laid down  in\t Bai
\nShirinbai  Kooka’s case(1).  The assessee in that  case\t had
\npurchased  shares many years ago by way of investment  at  a
\ncomparatively  lower price.  She started trading  with\tthem
\nfrom April 1, 1945.  The question was how the profits on the
\nsale of these shares were to be ascertained.  The sale price
\nwas known but what was the cost price?\tThe High Court\tsaid
\nthat  in order to arrive at real profits one  must  consider
\nthe  accounts of the business on commercial  principles\t and
\nconstrue profits in their normal and natural sense, a  sense
\nwhich  no  commercial  man would  misunderstand.   The\tHigh
\nCourt’s conclusion was this: When the assessee purchased the
\nshares at a lesser price, that is what they cost her and not
\nthe business; but so far as the business was concerned,\t the
\nshares\tcost  the business nothing more or less\t than  their
\nmarket\tvalue  on  April 1, 1945.  This\t date,\tit  will  be
\nremembered,  was  the date when the  business  was  started.
\nThese observations were fully approved by this Court.
\nBai Shirinbai Kooka’s case(1) therefore is authority for the
\nproposition that where it cannot be shown what was paid\t for
\nthe  acquisition of a trading asset by a trader, it has\t for
\ntax  purposes  to  be deemed to have been  acquired  at\t the
\nmarket\tvalue of the date when it was acquired.\t I think  on
\nthe  authority\tof this case, the bonus shares must  in\t the
\npresent\t case be deemed to have been acquired at the  market
\nvalue of the date ,of their issue.\n<\/p>\n
I  would,  therefore,  answer the  question  framed  in\t the
\nnegative.\n<\/p>\n
(1)  [1962] Supp. 3 S.C.R. 391.\n<\/p>\n
\t\t\t    217<\/span><\/p>\n
HIDAYATULLAH, J.-This appeal by the Commissioner of  Income-
\ntax,  Bombay raises the important question how bonus  shares
\nmust  be  valued by an assessee who carries on\tbusiness  in
\nshares.\t  The  assessee here is Dalmia Investment  Co.\tLtd.
\n(now  Shri  Rishab Investment Co. Ltd.) which  is  a  public
\nlimited\t company  and the bonus shares were  issued  in\t the
\ncalendar year 1945 by Rohtas Industries Ltd. in the  propor-
\ntion of one bonus share for one ordinary share already\theld
\nby  the\t shareholders.\tIn this way,  the  assessee  company
\nreceived  31,909 bonus shares of the face value of Rs.\t10\/-
\nper  share which shows that its previous holding was  31,909
\nordinary   shares.   The  existing  ordinary   shares\twere
\npurchased  by the assessee company for Rs.  5,85,283\/-.\t  We
\nnow  come to the assessment year 1949-50 which\tcorresponded
\nto  the\t accounting  period  of\t the  assessee\t company-the
\ncalendar year 1948.  The assessee company was holding shares
\nas investment and was also dealing in shares.  The shares in
\nthe  trading account, being the stock-in-trade, were  valued
\nat the beginning of the year and also at the end of the year
\nand the book value was based on cost.  Between December\t 31,
\n1945  and  January 1, 1948, the assessee company  sold\tsome
\nshares\tof  Rohtas Industries Ltd. and bought  others.\t Its
\nholding on the first day of January 1948 was 1,10,747 shares
\nwhich  were  valued in its books at  Rs.  15,57,902\/-.\t The
\nassessee  company sold these shares on January 29,  1948  to
\nDalmia\tCement and Paper Marketing Company Limited  for\t Rs.
\n15,50,458\/-.  This date, it may be pointed cut, fell  within
\nthe  period  in\t which\tcapital\t gains\twere  taxable.\t The
\nassessee company returned a loss of Rs. 7,444\/on this  sale.
\nIn its books it had valued these shares as follows:\n<\/p>\n
————————————————————–\n<\/p>\n
Existing shares\t\t\t\t   Book value\n<\/p>\n
—————————————————————<\/p>\n
\n(1) 17,259 (out of 31,909 original    13,10,951\t  Proportionate\nshares).\t\t\t\tcost from Rs.\n\t\t\t\t\t 5,84,283.\n\t\t\t\t\t  RS.\n<\/pre>\n
(2) 31,909 Bonus shares\t\t\t3,19,090. 00 at face
\n\t\t\t\t\t value of Rs. 10 per
\n\t\t\t\t\t    share
\n(3) 59,079 Now Issue shares\t\t 8,88,561-00at cost.
\n(4) 2,500 New purchase shares\t\t 39,300 – 00at cost.\n<\/p>\n
\t\t\t\t\t——————\n<\/p>\n
     Total 1,10,747 shares\t\t  15,57,902. 00\n<\/p>\n
\t\t\t\t\t——————\n<\/p>\n
The  amount of Rs. 3,19,090\/- which represented the cost  of
\nthe  bonus  shares in the above account was debited  to\t the
\ninvestment account and an identical amount was credited to a
\ncapital\t reserve account., The loss which was  returned\t was
\nthe  difference\t between Rs. 15,57,902\/- claimed to  be\t the
\ncost  price of 1, 10,747 shares and their sale price of\t Rs.
\n15,50,458\/.\n<\/p>\n
 The  return  was not accepted by the  Income-tax   Officer,
\nSpecial\t Investigation\tCircle, Patna.\t In  his  assessment
\norder, the Income-tax Officer held that the market value  of
\nthe existing
\n218<\/span>
\nshares when bonus shares were issued, was Rs. 18\/- per share
\nand the value of the shares was Rs. 5.74,362\/- (31,909 x Rs.\n<\/p>\n
18).  He held that the sale of the shares took place at\t Rs.
\n14\/ – per share.  To this data he purported to apply a deci-
\nsion of the High Court of Bombay in Commissioner of  Income-
\ntax  v. Maneklal Chunnilal and Sons(1) and held\t that  there
\nwas  profit  of\t Rs. 7\/8\/0 per bonus share  and\t the,  total
\nprofit\twas Rs. 2,39,317\/- which he held was  capital  gain.
\nHe brought Rs. 2,39,317\/- to tax as capital gains.
\nBefore the Appellate Assistant Commissioner, Patna. reliance
\nwas  placed  upon the decision of the Bombay High  Court  in
\nEmerald\t and Co. Ltd. v. Commissioner of  Incometax,  Bombay
\nCity<\/a>(2)\t and  it was argued that by applying  the  principle
\nlaid down in that case, the average cost was Rs. 9\/10\/0\t per
\nshare  and  total  profit  Rs.\t1,49,355\/-.   The  Appellate
\nAssistant Commissioner did not accept the above calculation.
\nAccording to the Appellate Assistant Commissioner, the bonus
\nshares had cost nothing to the assessee company.  He omitted
\nRs.  3,19,090\/-\t from the book valuation and held  that\t the
\nactual\tcost of 1,10,747 shares was Rs.\t 12,38,812\/and\tthat
\nthe  assessee  company instead of suffering a  loss  of\t Rs.
\n7,444\/-\t on the sale of the shares had actually made  profit
\nof  Rs.\t 3,11,646\/-.   He issued a notice  to  the  assessee
\ncompany and enhanced the assessment.\n<\/p>\n
On  further  appeal to the Tribunal,  the  assessee  company
\nsubmitted again on the strength of the ruling of the  Bombay
\nHigh  Court  in\t Emerald and Co.  Ltd.\tv.  Commissioner  of
\nIncome-tax,  Bombay City<\/a>(2) that the actual profit  was\t Rs.
\n1,57,326\/-.   This  was done by spreading the  cost  of\t the
\n31,909\tordinary shares over those shares and  bonus  shares
\ntaken  together and adding to half the cost attributable  to
\nthe  old  ordinary shares the cost of new purchases  in\t the
\nsame  year and finding out the average cost of shares  other
\nthan bonus shares.\n<\/p>\n
The Tribunal did not accept this calculation.  According  to
\nthe  Tribunal  it was not possible to put a  valuation\tupon
\nshares\tfor which nothing was paid.  The Tribunal held\tthat
\nthe  old  shares  and bonus shares  could  not\tbe  “clubbed
\ntogether”  and\tthe  decision  of  the\tAppellate  Assistant
\nCommissioner  was  right.  The Tribunal, however,  stated  a
\ncase under s. 66(1) of the Income-tax Act at the instance of
\nthe assessee company suggesting the question for the opinion
\nof the High Court:\n<\/p>\n
\t      “Whether on the facts and circumstances of the
\n\t      case, the profit computed at Rs. 3,11,646\/- on
\n\t      the  sale of shares in Rohtas Industries\tLtd.
\n\t      was in accordance with law?”\n<\/p><\/blockquote>\n
(1)  Income-tax Reference No. 16 of 1948 dt. 23-3-1949.
\n(2)  (1956) 29 I.T.R. 814.\n<\/p>\n
\t\t\t    219<\/span><\/p>\n
The  reference was heard by V. Ramaswamy, C.J. and  Kanhaiya
\nSingh,\tJ.  They held that the Income-tax  authorities\twere
\nwrong  in  holding  that profit should be  computed  at\t Rs.
\n3,11,646\/- or at any other amount.  According to them, there
\nwas no profit on the sale of 31,909 shares and they answered
\nthe  question  in favour of the assessee.  Before  the\tHigh
\nCourt  it  was contended by the assessee  company  that\t the
\nbonus shares must be valued at their face value of Rs.\t10\/-
\nper  share and the Department contended that they should  be
\nvalued\tat  nil.   It  appears that  the  other\t methods  of
\ncalculation of the cost price of bonus shares were abandoned
\nat that stage.\tRamaswami, C.J. and Kanhaiya Singh, J.\theld
\nthat   the  issue  of  bonus  shares  was  nothing   but   a
\ncapitalisation\tof  the\t company’s reserve  account  or\t the
\nprofits\t and the bonus shares could not be considered to  be
\nissued free.  According to them, the payment for the  shares
\nmust  be  found\t in the bonus which was\t declared  from\t the
\nundistributed profits and the face value of the bonus shares
\nrepresented the detriment to the assessee company in respect
\nof  the\t undistributed\treserves.  The\tpresent\t appeal\t was
\nbrought\t against the decision of the High Court\t by  special
\nleave granted by this Court.\n<\/p>\n
It will be seen from the above that there are four  possible
\nmethods for determining the cost of bonus shares.  The first
\nmethod\tis  to take the cost as the equivalent of  the\tface
\nvalue of the bonus shares.  This method was followed by\t the
\nassessee company in making entries in its books.  The second
\nmethod adopted by the Department is that as the\t shareholder
\npays nothing in cash for the shares, cost should be taken at
\nnil.   The third method is to take the cast of the  original
\nshares\tand to spread it over the original shares and  bonus
\nshares taken collectively.  The fourth method is to find out
\nthe  fall in the price of the original shares on  the  stock
\nexchange and to attribute this to the bonus shares.   Before
\nus  the\t assessee company presented for our  acceptance\t the
\nfirst method and the Department the third method.  We  shall
\nnow  consider  which is the proper way to  value  the  bonus
\nshares.\n<\/p>\n
It is convenient to begin with the contention that the\tcost
\nof  bonus shares must be taken to be their face value.\t The
\nargument requires close attention, because support for it is
\nsought\tin  certain pronouncements of Lord Sumner  to  which
\nreference will be made presently.  Mr. Kapur contends that a
\ncompany\t cannot ordinarily issue shares at a  discount,\t and
\nargues\tthat a fortiori it cannot issue shares for  nothing.
\nHe submits therefore that the issue of bonus shares involves
\na  twofold  operation-the  creation of new  shares  and\t the
\ndeclaration  of a dividend or bonus which dividend or  bonus
\nmust  be  deemed  to be paid to the shareholder\t and  to  be
\nreturned by him to acquire the new shares.  Since the amount
\ncredited in
\n220<\/span>
\nthe  books of the company as contribution of capital by\t the
\nshareholder  is\t the  face value of  the  bonus\t shares,  he
\ncontends  that the cost to the shareholder is equal  to\t the
\nface value of the bonus shares.\t He relies upon the decision
\nof the Privy Council in Swan Brewery Company Ltd. v. Rex(1).
\nIn that case, Lord Sumner observed:\n<\/p>\n
\t      “True,  that  in\ta  sense  it  was  all\t one
\n\t      transaction,   but   that\t is   an   ambiguous
\n\t      expression.  In business, as in  contemplation
\n\t      of  law,\tthere  were  two  transactions,\t the
\n\t      creation\tand  issue  of\tnew  shares  on\t the
\n\t      company’s part, and on the allottees’ part the
\n\t      satisfaction of the liability to pay for\tthem
\n\t      by acquiescing in such a transfer from reserve
\n\t      to  share\t capital  as  put  an  end  to\t any
\n\t      participation  in the sum of pound 101,450  in
\n\t      right of the old shares, and created instead a
\n\t      right   of   general  participation   in\t the
\n\t      company’s\t profits and assets in right on\t the
\n\t      new  shares, without any further liability  to
\n\t      make a cash contribution in respect of them.”\n<\/p><\/blockquote>\n
Lord Sumner adhered to his view later in the House of  Lords
\nin Commissioner of Inland Revenue v. John Blott(2)  but Lord
\nDunedin\t and  he were in a minority, and this view  was\t not
\naccepted  by the majority.  In view of this conflict, it  is
\nnecessary to state what really happens when a company issues
\nbonus shares.\n<\/p>\n
A limited liability company must state in its memorandum  of
\nassociation  the  amount of capital with which\tthe  company
\ndesires\t to do business and the number of shares into  which
\nthat  capital is to be divided.\t The company need not  issue
\nall its capital at the same time.  It may issue only a\tpart
\nof  its\t capital initially and issue more  of  the  unissued
\ncapital\t on a later date.  After the company  does  business
\nand  profits result, it may distribute the profits  or\tkeep
\nthem in reserve.  When it does the latter, it does not\tkeep
\nthe money in its coffers-, the money is used in the business
\nand  really represents an increase in the capital  employed.
\nWhen  the  reserves increase to a considerable\textent,\t the
\nissued capital of the company ceases to bear a true relation
\nto  the\t capital employed.  The company may then  decide  to
\nincrease its issued capital and declare a bonus and issue to
\nthe  shareholders in lieu of bonus,  certificates  entitling
\nthem to an additional share in the increased capital.  As  a
\nmatter\tof  accounting the original shares in a\t winding  up
\nbefore the increase of issued capital would have yielded  to
\nthe  shareholder the same return as the old shares  and\t the
\nnew shares taken together.  What was previously owned by the
\nshareholder by virtue of the original certificates is  after
\nthe issue of bonus
\n(1) (1914) A.C. 231.\n<\/p>\n
\t\t    (2) 8 Tax Cases 101.\n<\/p>\n
221<\/span><\/p>\n
shares, held by them on the basis of more certificates.\t  In
\npoint  of  fact, however, what the shareholder gets  is\t not
\ncash  but property from which income in the shape  of  money
\nmay  be\t derived  in future.  In this  sense,  there  is  no
\npayment\t to  him but an increase of issued capital  and\t the
\nright  of  the\tshareholder to it is evidenced\tnot  by\t the
\noriginal  number  of certificates held by him  but  by\tmore
\ncertificates.\tThere  is thus no payment  of  dividend.   A
\ndividend  in the strict sense means a share in\tthe  profits
\nand  a share in the profits can only be said to be  paid  to
\nthe  shareholder when a part of the profits is\treleased  to
\nhim  in\t cash  and  the company pays  that  amount  and\t the
\nshareholder  takes it away.  The conversion of the  reserves
\ninto capital does not involve the release of the profits  to
\nthe shareholder-, the money remains where it was, that is to
\nsay,  employed\tin  the business.   Thereafter\tthe  company
\nemploys\t that money not as reserves of profits, but  as\t its
\nproper\t capital   issued   to\tand   contributed   by\t the
\nshareholders.\tIf  the shareholder were to sell  his  bonus
\nshares, as shareholders often do, the shareholder parts with
\nthe  right to participation in the capital of  the  company,
\nand  the cash he receives is not dividend but the  price  of
\nthat right.  The bonus share when sold may fetch more or may
\nfetch  less  than  the face value and this  shows  that\t the
\ncertificate is not a voucher to receive the amount mentioned
\non  its\t face.\t To regard the certificate  as\tcash  or  as
\nrepresenting cash paid by the shareholder is to overlook the
\ninternal process by which that certificate comes into being.
\nWe  may\t now see what was decided in the  Swan\tBrewery’s(1)
\ncase.  In that case the company had not distributed all\t its
\nprofits\t in  the past.\tAs a result, it had a  vast  reserve
\nfund.\tThe  company  increased its  capital  and  from\t the
\nreserve fund, issued shares pro rata.  These shares, it\t was
\nheld by Lord Sumner, were dividend.  It was claimed in\tthat
\ncase  that  there  was no dividend and\tno  distribution  of
\ndividend,  because nothing had been distributed and  nothing
\ngiven.\t Where\tformerly  there was  one  share,  after\t the
\ndeclaration  of\t bonus\tthere  were two\t but  the  right  of
\nparticipation was the same.  This argument was not  accepted
\nand  the face value of the shares was taken to be  dividend.
\nSection 2 of the Act of Western Australia, however,  defined
\ndividend  to  include  “every  profit,\tadvantage  or\tgain
\nintended to be paid or credited to or distributed among\t the
\nmembers\t of  any  company.” It is obvious that\tit  was\t im-
\npossible  to  hold that the bonus shares  were\toutside\t the
\nextended definition.\n<\/p>\n
Swan Brewery’s(1) case has been accepted as rightly  decided
\non  the special terms of the section, as indeed it  was.  In
\nBlott’s(2) case, Rowlatt, J. observed that the bonus  shares
\nwere included in the expression “advantage” occurring in the
\n(1) (1914) A.C. 231.\n<\/p>\n
(2) 8 Tax Cases 101.\n<\/p>\n
222<\/span><\/p>\n
highly artificial definition of the word “dividend”.  In the
\nCourt  of Appeal, Lord Sterndale, M. R. and Warrington\tand’
\nScrutton, L. JJ. distinguished the case on the same  ground.
\nIt was, however, pointed out by the Master of Rolls that  in
\nBouch v. Sproule(1) Lord Herschell had observed that in such
\na case, the company does not pay or intend to pay any sum as
\ndividend  but intends to and does appropriate the  undivided
\nprofits\t and deals with them as an increase of\tthe  capital
\nstock in the concern.\n<\/p>\n
Blott’S(2) case then reached the House of Lords.  It may  be
\npointed\t out  at  this stage that  it  involved\t a  question
\nwhether\t super-tax was payable on the amount represented  by
\nthe  face  value  of  the  bonus  share.   For\tpurposes  of
\nassessment of supertax which was (as it is in our country) a
\ntax charged in respect of income of an individual the  total
\nof all income from all sources had to be taken into  account
\nand  the tax was exigible if the total increased  a  certain
\nsum.  Such additional duty is really nothing but  additional
\nincome-tax  and\t is  conveniently  described  as  super-tax.
\nViscounts Haldane, Finlay and Cave held that an amount equal
\nto  the\t face value of the shares could not be\tregarded  as
\nreceived  by the tax payer and that there was no  more\tthan
\nthe capitalisation of the profits of the company in  respect
\nof  which  certificates\t were  issued  to  the\tshareholders
\nentitling  them to participate in the amount of the  reserve
\nbut only as part of the capital.  Lords Dunedin and  Sumner,
\nhowever,  held that the word “capitalisation”  was  somewhat
\n“hazy” and the issue of the shares involved a dual operation
\nby  which an amount was released to the shareholder but\t was
\nretained  by  the company and applied in  payment  of  those
\nshares.\t  In  our opinion, and we say it  respectfully,\t the
\nbetter view is that of the majority and our conclusions\t set
\nout earlier accord substantially with it.
\nIt  follows that though profits are profits in the hands  of
\nthe company but when they are disposed of by converting them
\ninto  capital  instead\tof paying them over  to\t the  share-
\nholders, no income can be said to accrue to the\t shareholder
\nbecause the new shares confer a title to a larger proportion
\nof  the\t surplus  assets at  a\tgeneral\t distribution.\t The
\nfloating   capital  used  in  the  company  which   formerly
\nconsisted of subscribed capital and the reserves now becomes
\nthe  subscribed capital.  The amount said to be\t payable  to
\nthe  shareholders  as  income goes merely  to  increase\t the
\ncapital of the company and in the hands of the\tshareholders
\nthe  certificates  are property from which  income  will  be
\nderived.   Lord Dunedin did not rely upon Swan\tBrewery’s(3)
\ncase.\tHe  held  that\tas the company\tcould  not  pay\t for
\nanother, the shareholder must be taken to have paid for\t the
\nbonus shares himself and the payment was
\n(1887) 12 A.C. 385.\t(2  ) 8 Tax Cases 101.\n<\/p>\n
(3)  (1914) A.C. 231.\n<\/p>\n
\t\t\t    223<\/span><\/p>\n
the  amount which came from the accumulated profits as\tpro-
\nfits.\t Lord\tSumner,\t however,  stated   that   in\tSwan
\nBrewery’s(1)  case,  he\t did  not  rely\t upon  the  extended
\ndefinition  of dividend in the Australian Statute, but\tupon
\nthe  principle\tinvolved.  He observed that as a  matter  of
\nmachinery, what was done was to keep back the money released
\nto  the shareholder for application towards payment for\t the
\nincreased capital.\n<\/p>\n
Lord  Sumner had already adhered to his view in\t an  earlier
\ncase  of the Privy Council, but Swan Brewery’s(1)  case\t and
\nBlott’s(2) case were considered by the Privy Council in Com-
\nmissioner of Income-tax, Bengal v. Mercantile Bank of  India
\nLtd. and others(3).  Lord Thankerton distinguished Swan Bre-
\nwery’s(1)  case\t and  followed Blott’s(2)  case,  though  in
\nNicholas   v.  Commissioner  of\t Taxes\tof  the\t  State\t  of
\nVictoria(4),  Blott’s  (2) ,case was  distinguished  on\t the
\nground\tthat the definition in the Unemployment\t Relief\t Tax
\n(Assessment)  Act,  1933  also included\t within\t a  person’s
\nassessable  income “any dividend, interest, profit or  bonus
\ncredited, paid or distributed to him by the company from any
\nprofit derived in or from Victoria or elsewhere by it”,\t and
\nthat  bonus shares must be regarded as dividend\t under\tthat
\ndefinition.\n<\/p>\n
The  Indian  Income-tax\t Act  defines  “dividend”  and\talso
\nextends\t it  in some directions but not so as  to  make\t the
\nissue  of bonus shares a release of reserves as\t profits  so
\nthat they could be included in the term.  The face value  of
\nthe  shares  cannot  therefore be taken to  be\tdividend  by
\nreason of anything in the definition.  The share certificate
\nwhich  is issued as bonus entitles the holder to a share  in
\nthe  assets  of\t the company and to  participate  in  future
\nprofits.  As pointed out above, if sold, it may fetch either
\nmore  or  less.\t  The  market  price  is  affected  by\tmany
\nimponderables,\tone  such being the yield  or  the  expected
\nyield.\t The  detriment\t to the shareholder,  if  any,\tmust
\ntherefore be calculated on some principle, but the method of
\ncomputing the cost of bonus shares at their face value\tdoes
\nnot accord either with fact or business accountancy.
\nCan  we\t then say that the bonus shares are a gift  and\t are
\nacquired  for nothing?\tAt first sight, it looks as if\tthey
\nare so but the impact of the issue of bonus shares has to be
\nseen to realise that there is an immediate detriment to\t the
\nshareholder  ‘in  respect  of  his  original  holding.\t The
\nIncome-tax  Officer,  in this case, has shown that  in\t1945
\nwhen  the price of shares became stable it was Rs. 9  –\t per
\nshare,\twhile  the value of the shares before the  issue  of
\nbonus shares was Rs. 18\/- per share.  In other words, by the
\nissue of bonus shares pro rata, which Tanked pari passu with
\nthe  existing shares, the market price was  exactly  halved,
\nand divided between the old and the bonus shares.  This will
\nordinarily be the case but not when the shares
\n(1)(1914) A.C. 231.\n<\/p>\n
(3)(1936) A.C. 478.\n<\/p>\n
(2)  8 Tax Cases 101.\n<\/p>\n
(4)  (1940) A.C. 744.\n<\/p>\n
224<\/span><\/p>\n
do  not\t rank pari passu and we shall deal  with  that\tcase
\nseparately.  When the shares rank pari passu the result\t may
\nbe  stated  by saying that what the shareholder\t held  as  a
\nwhole  rupee coin is held by him, after the issue  of  bonus
\nshares,\t in  two 50 nP coins.  The total value\tremains\t the
\nsame,  but  the\t evidence  of  that  value  is\tnot  in\t one
\ncertificate  but in two.  This was expressed  forcefully  by
\nthe Supreme Court of United States of America, quoting\tfrom
\nan earlier case, in Eisner v. Macomber(1) thus:\n<\/p>\n
\t      “A  stock dividend really takes  nothing\tfrom
\n\t      the  property  of the  corporation,  and\tadds
\n\t      nothing to the interests of the  shareholders.
\n\t      Its  property  is not  diminished,  and  their
\n\t      interests are not increased. …………\t The
\n\t      proportional  interest  of  each\t shareholder
\n\t      remains  the same.  The only change is in\t the
\n\t      evidence\twhich represents that interest,\t the
\n\t      new  shares and the original  shares  together
\n\t      representing  the same  proportional  interest
\n\t      that  the original shares\t represented  before
\n\t      the  issue  of the new ones    In\t short,\t the
\n\t      corporation is no poorer and the\tstock-holder
\n\t      is  no  richer than they were before   If\t the
\n\t      plaintiff\t gained any small advantage  by\t the
\n\t      change,  it certainly was not an advantage  of
\n\t      $417,450 the sum upon which he was taxed\tWhat
\n\t      has  happened  is\t that  the  plaintiff’s\t old
\n\t      certificates have been split up in effect\t and
\n\t      have diminished in value to the extent of\t the
\n\t      value of the new.\n<\/p><\/blockquote>\n
\t      necessarily disposes of a part of his  capital
\n\t      interest, just as if he should sell a part  of
\n\t      his  old\tstock, either before  or  after\t the
\n\t      dividend.\t What he retains no longer  entitles
\n\t      him to the same proportion of future dividends
\n\t      as  before the sale.  His part in the  control
\n\t      of the company likewise is diminished.”\n<\/p><\/blockquote>\n
Swan  Brewery’s\t (2)  case,  it\t may  be  pointed  out,\t was
\ndistinguished  here  also  on  the  basis  of  the  extended
\ndefinition. it follows that the bonus shares cannot be\tsaid
\nto have cost nothing to the shareholder because on the issue
\nof the bonus shares, there is an instant loss to him in\t the
\nvalue of his original holding.\tThe earning capacity of\t the
\ncapital employed remains the same, even after the reserve is
\nconverted  into\t bonus shares.\tBy the issue  of  the  bonus
\nshares there is a corresponding fall in the dividends actual
\nor  expected  and the market price moves  accordingly.\t The
\nmethod of calculation which places the value of bonus shares
\nat nil cannot be correct.\n<\/p>\n
(1) 252 U.S. 189-64 L.Ed. 521.\t\t\t   (2)(1914)
\nA.C. 231.\n<\/p>\n
225<\/span><\/p>\n
This  leaves for consideration the other two methods.\tHere
\nwe  may\t point out that the new shares may rank\t pari  passu
\nwith  old  shares  or  may  be\tdifferent.   The  method  of
\ncost  .accounting may have to be different in each case\t but
\nin  essence  and  principle there  is  no  difference.\t One
\npossible method is to ascertain the exact fall in the market
\nprice of the shares already held and attribute that fall  to
\nthe  price of the bonus shares.\t This market price  must  be
\nthe  middle  price  and not as represented  by\tany  unusual
\nfluctuation.   The other method is to take the amount  spent
\nby  the shareholder in acquiring his original shares and  to
\nspread\tit over the old and new shares treating the  new  as
\naccretions  to\tthe old and to treat the cost price  of\t the
\noriginal  shares  as the cost price of the  old\t shares\t and
\nbonus  shares taken together.  This method is  suggested  by
\nthe Department in this case.  Since the bonus shares in this
\ncase  rank  pari  passu\t with the old  shares  there  is  no
\ndifficulty  in spreading the original cost over the old\t and
\nthe new shares and the contention of the Department in\tthis
\ncase  is  right.   But this is not the end  of\tthe  present
\ndiscussion.   This  simple method may  present\tdifficulties
\nwhen the shares do not rank pari passu or are of a different
\nkind.\tIn  such cases, it may be necessary to\tcompare\t the
\nresultant price of the two kinds of shares in the market  to
\narrive\tat a proper cost valuation.  In other words, if\t the
\nshares\tdo  not rank pari passu, assistance may have  to  be
\ntaken  of other evidence to fix the cost price of the  bonus
\nshares.\t  It may then be necessary to examine the result  as
\nreflected in the market to determine the equitable cost.  In
\nEngland\t paragraph  10 of Schedule Tax to the  Finance\tAct,
\n1962 provides for such matters and for valuing Rights  issue
\nbut  we\t are not concerned with these matters and  need\t not
\nexpress an opinion.\n<\/p>\n
It remains to refer to three cases to which we have  already
\nreferred  in passing and on which some reliance was  placed.
\nIn  The Commissioner of Income-tax (Central), Bombay v.\t M\/s
\nManeklal  Chunnilal and Sons Ltd., Bombay<\/a>(1),  the  assessee
\nheld certain ordinary shares of the face value of Rs.  100\/-
\nin  Ambica Mills Ltd. and Arvind Mills Ltd.  These two\tcom-
\npanies then declared a bonus and issued preference shares in
\nthe proportion of two to one of the face value of Rs.  100\/-
\neach.  These preference shares were sold by the assessee and
\nif  the face value was taken as the cost, there was a  small
\nprofit.\t  The  Department  contended that  the\tentire\tsale
\nproceeds  were liable to be taxed, because the assessee\t had
\npaid nothing for the bonus shares and everything received by
\nit  was profit.\t The assessee’s view was that the  cost\t was
\nequal  to  the\tface value of the shares.   The\t High  Court
\nrejected  both these contentions and held that the  cost  of
\nthe  shares  previously held must be divided  between  those
\nshares and the bonus shares in the same (1)I.T. Ref.  No. 16
\nof 1948 d. 23rd March 1949.\n<\/p>\n
226<\/span><\/p>\n
proportion  as\ttheir  face value, and the  profit  or\tloss
\nshould\tthen  be  found\t out by\t comparing  the\t cost  price
\ncalculated  on\tthis  basis with the  sale  price.   In\t our
\nopinion,  there is difficulty in the High Court’s  decision.
\nThe  preference shares and the ordinary shares could  hardly
\nbe  valued  in\tthe proportion of  their  face\tvalue.\t The
\nordinary  shares and the preference shares do not rank\tpari
\npassu.\n<\/p>\n
The next case is Emerald Co. Ltd. v. C.I.T., Bombay City<\/a>(1).
\nIn  that  case, the assessee had, at the  beginning  of\t the
\nyear,  350 shares of which 50 shares were bonus\t shares\t and
\nall were of the face value of Rs. 250\/- each.  The  assessee
\nsold  300  shares  and claimed a loss of Rs.  35,801  \/-  by
\nvaluing\t the  bonus shares at face  value.   The  Department
\narrived at a loss of Rs. 27,766\/- by the method of averaging
\nthe  cost,  following the earlier case of  the\tBombay\tHigh
\nCourt  just  referred to.  The Tribunal\t suggested  a  third
\nmethod.\t  It  ignored  the  50\tshares\tand  the  loss\t was
\ncalculated  by considering the cost of 300 shares and  their
\nsale  price.  The loss worked out at Rs. 27,748\/-,  but\t the
\nTribunal  did  not  disturb  the  order\t of  the   Appellate
\nAssistant Commissioner in view of the small difference.\t The
\nHigh  Court held that the method adopted by  the  Department
\nwas proper but this Court, on appeal, held that in that case
\nthe method adopted by the Tribunal was correct.\t This  Court
\ndid not decide which of the four methods was the proper\t one
\nto  apply, leaving that question open.\tThe reason was\tthat
\nthe assessee originally held 50 shares in 1950; in 1951,  it
\nreceived  50  bonus shares.  It sold  its  original  holding
\nthree days later and then purchased another 100 shares after
\ntwo months.  In the financial year 1950-51 (assessment\tyear
\n1951-52),  the Income-tax Officer averaged the price of\t 150
\nshares\tand found a profit of Rs. 1,060\/- on the sale of  50
\nshares\tinstead of a loss of Rs. 1,365\/- which was  claimed.
\nThe assessee did not appeal.  In the financial year  1951-52
\n(assessment  year  1952-53), the assessee started  with\t 150
\nshares (100 purchased and 50 bonus).  It then purchased\t 200
\nshares\tin two lots and sold 300 shares, leaving 50  shares.
\nThe  assessee company claimed a loss of Rs. 35,801 \/-.\t The
\nIncome-tax Officer computed the loss at Rs. 27,766\/- and the
\nTribunal  computed  the\t loss at Rs.  27,748  The  Tribunal,
\nhowever, did not disturb the loss as computed by the Income-
\ntax  Officer in view of the slender difference of Rs.  18\/-.
\nThe  High  Court’s  decision was  reversed  by\tthis  Court,
\nbecause the High Court ignored all intermediate transactions
\nand  averaged the 300 shares with the 50 bonus shares.\t The
\nshares in respect of which the bonus shares were issued were
\nalready averaged with the bonus shares.\t This was not a case
\nof bonus shares issued in the year of account.\tIt  involved
\npurchase  and sale of some of the shares.  The average\tcost
\nprice of the original and bonus shares was
\n(1)(1956) 29 I.T.R. 814.\n<\/p>\n
227<\/span><\/p>\n
already fixed in an earlier year by the Department and\tthis
\nfact should have been taken into account.  No doubt, Chagla,
\nC.J.  observed\tthat it was not known which of\tthe  several
\n:shares\t were  sold  in\t the year of  account,\tbut  in\t the
\nStatement  -of\tthe Case it was clearly\t stated\t that  bonus
\nshares were untouched.\n<\/p>\n
The  decision  of this Court in Emerald\t Company’s(1)  case.
\nhowever,  lends support to the view which we have  expressed
\nhere.  The bonus shares can be valued by spreading the\tcost
\nof  the\t old shares over the old shares and  the  new  issue
\ntaken together, if the shares rank pari passu.\tWhen they do
\nnot,  the  price  may  have to be  adjusted  either  in\t the
\nproportion of the face value they bear (if there is no other
\ncircumstance   differentiating\t them)\t or   on   equitable
\nconsiderations\tbased on the ,market price before and  after
\nthe issue.\n<\/p>\n
Applying  the  principles to the present case, the  cost  of
\n31,909\tshares, namely, Rs. 5,84,283\/- must be\tspread\tover
\nthose  shares  and the 31,909 bonus shares  taken  together.
\nThe  ,cost  price  of the bonus\t shares\t therefore  was\t Rs.
\n2,92,141 \/because the bonus shares were to rank equal to the
\noriginal ,shares.  The account would thus stand as  follows:\n<\/p>\n
–\n<\/p>\n
Share in Rohtas Industries Ltd.\n<\/p>\n
\t\t\t\t\t\t   Rs.\n<\/p>\n
1 .  Old issue of 17,259 shares brought
\nforward from 1945, at (proportionate) cost\t1,58, 035\n<\/p>\n
2.   Bonus shares 31,909 received in 1945,
\nat (proportionate, spread out) cost\t\t 2,92,141\n<\/p>\n
3.   New issue 59,079 shares brought
\n forward from 1945\t\t\t\t  8,88,561\n<\/p>\n
4.   New purchases 2,500 shares brought
\n forward from 1947\t\t\t\t    39,300
\n\t Total 1,10,747 shares\t\t     13,78,037
\nSales of all theabove shares in 1948\t      15,50,458
\n     Profit\t\t\t\t\t7,444
\nProfit to be added to the
\nincome returned\t\t\t\t\t    1,79,865
\nThe  answer  to\t the question given by the  High  Court\t was
\ntherefore  erroneous and the right answer would be that\t the
\nprofit computed at Rs. 3,11,646\/- was not in accordance with
\nlaw.  The appeal is therefore allowed with costs here and in
\nthe High Court.\n<\/p>\n
Appeal allowed.\n<\/p>\n
(1956) 29 I.T.R. 814.\n<\/p>\n
UP (D)SCI-8(a)
\n228<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income-Tax, … vs Dalmia Investment Co. Ltd on 13 March, 1964 Equivalent citations: 1964 AIR 1464, 1964 SCR (7) 210 Author: A Sarkar Bench: Sarkar, A.K. PETITIONER: COMMISSIONER OF INCOME-TAX, BIHAR Vs. RESPONDENT: DALMIA INVESTMENT CO. LTD. DATE OF JUDGMENT: 13\/03\/1964 BENCH: SARKAR, A.K. BENCH: SARKAR, A.K. HIDAYATULLAH, M. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-1944","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income-Tax, ... vs Dalmia Investment Co. 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