Commissioner of Income-Tax, U.P. Vs.
M/S. Madan Gopal Radhey Lal  INSC 208 (6 September 1968)
06/09/1968 SHAH, J.C.
CITATION: 1969 AIR 840 1969 SCR (2) 7
R 1986 SC1483 (4)
Income-tax-Assessee, dealer in stocks and
shares-Receipt of bonus shares in proportion to equity holding-Sale of bonus
shares-Whether sale proceeds profits of business or capital.
Practice-No application under income-tax Act,
1922, s. 66(1), challenging finding of fact of Tribunal-Challenge of Tribunal's
conclusion-Jurisdiction of High Court to examine whether findings on which
conclusion was based are supported by evidence.
The assessee, a dealer in shares and
securities, held as part of its stock-in-trade, shares of certain companies.
The assessee 'received from those companies,
at different times, bonus shares proportionate to its equity holding. On the
question whether the sale proceeds of such bonus shares are liable to be
included in the assessee's total income as profits of the share-dealing
business, the Tribunal found that the sale proceeds of the bonus shares were
received by the assessee in the course of and as part of its business in
shares, and held-that the proceeds were, on that account, taxable as income.
The High Court, on reference, held in favour of the assessee.
In appeal to this Court,
HELD: (1 ) A trader may acquire a commodity
in which he is dealing, for, his own purposes, and hold it apart from the
stock-in-trade of his business. There is no presumption that such an
.acquisition, even if it is an accretion to the stock-in-trade of the business,
is an acquisition for the purpose of his business: in each case the question is
one of intention to be gathered from the evidence of conduct and dealings by
the acquirer with the commodity. Bonus shares given by a company in proportion
to the holding of equity capital by a shareholder are, under the income-tax Act
at the relevant time (1946--50), liable to be treated as capital and not as income.
Therefore, the bonus shares received by the assessee did not become part of its
stock-in-trade merely because they were accretion to its stock-in-trade. [10 C,
F, G] C.I.T. Central Bombay v. Maneklal Chunilal, I.T. Ref. No. 16 of 1948
(Bombay High Court), disapproved.
C.I.T., Bengal v. Mercantile Bank of India, 4
Commissioner of Inland Revenue v. John
Blottt, 8 T.C.
101 (H.L.) referred to.
(2) In the present case, however, the
Tribunal found that the bonus shares, received as capital, were converted by
the assessee into its stock in-trade and were not retained as a capital asset.
The question posed for the opinion of the High Court was no whether the finding
of the Tribunal was rounded on evidence, but whether the sale proceeds of the
bonus shares were of the nature of revenue. On this question, when the assessee
had not filed any application under s. 66(1) of the Income-tax 8 Act, 19'22,
expressly raising the question about the validity of the Tribunal's finding of
fact, the High Court must accept the finding and cannot enquire whether the
finding is supported by evidence or not. The High Court was therefore, not
justified in interfering with the finding and conclusion of the Tribunal. [11
D, F-H] India Cements Ltd. v.C.I.T., 60 I.T.R. 52 (S.C.) followed.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 1764 to 1767 of 1967.
Appeals from the judgment and decree dated
January 17, 1964 of the Allahabad High Court in Income-tax Reference No. 193 of
C.K. Daphtary, Attorney-General, R.
Gopalakrishnan, R.N. Sachthey and B.D. Sharma, for the appellant (in all the
M.C. Chagla and R.P. Kapur for 1. N. Shroff,
for the respondent (in C.A. No. 1764 of 1967).
R.P. Kapur for 1. N. Shroff, for the
respondent (in C.As. Nos. 1765 to 1767 of 1967).
The Judgment of the Court was delivered by
Shah, J. M/s. Madan Gopal Radhey Lal hereinafter called the assessees--deal in
shares and securities. They held in the relevant years as part of their
stock-in-trade shares of certain companies. The assessees received from the
Companies at different times bonus shares proportionate to their equity
holding. From time to time the assessees sold the bonus shares received by
them. The Income-tax Officer brought to tax Rs. 55,607 in the assessment year
1946- 47; Rs. 41,625 in the assessment year 1948-49; Rs. 1,43,050 in the
assessment year 1949-50 and Rs. 33,170 in the assessment year 1950-51 being the
sale proceeds of the bonus shares, holding that those receipts represented
income of the assessee arising from their business in shares. The order of the
Income-tax Officer was confirmed by the Appellate Assistant Commissioner and by
the Income-tax Appellate Tribunal.
At the instance of the assessees, the
Tribunal referred the following question of law to. the High Court of Allahabad
"Whether the sale proceeds of bonus
shares which had been issued in respect of shares which formed part of the
assessee's stock-in-trade of the share dealing business are liable to inclusion
in the assessee's total incomes for the respective years as profits of the
share dealing business?" The High Court called for a supplementary
statement of case.
Full Bench of the High Court (Manchanda, J.,
dissenting) ans- 9 wered the question in the negative. The Commissioner has
appealed to this Court with certificate granted by the High Court.
The Articles of Association of the various
Companies which had issued the bonus shares. are not on the record.
It has been assumed that the Companies had
issued bonus shares in exercise of the power conferred upon them by the Articles
of Association, and no argument has been raised in that behalf. A company when
authorised by its Articles of Association may convert its accumulated profit
into capital and then utilise such profit by issuing additional shares. by way
of bonus to the shareholders. Under the Income-tax Act, 1922, at the relevant
time, issue of such bonus shares by capitalisation of the accumulated profit
was not treated as distribution of dividend.
In commissioners of Inland Revenue v. John
Blott(1) the House of Lords (by majority) held that bonus shares issued by a
Company in exercise of the power under the Articles of Association are not
dividend, and therefore not income of the shareholder. Viscount Haldane
observed at p. 126:
" ...... I think that it is a matter of
principle within the power of an ordinary joint stock company with articles
such as those in the case before us to determine conclusively against the whole
world whether it will' withhold profits it has accumulated from distribution to
its shareholders as income, and as an alternative, not distribute them at all,
but apply them in_ paying up the capital sums which shareholders electing to
take up unissued shares could otherwise have to contribute. If this is done,
the money so applied is capital and never becomes profit in the hands of the
shareholder at all. What the latter gets is no doubt a valuable thing.
But it is a thing in the nature .of an extra
share certificate in the company. His new shares do not give him an immediate
right to a larger amount of the existing assets. These remain where they were.
The new shares simply confer a title to a larger proportion of the surplus.
assets if and when a general distribution takes place, as in the winding up. In
these assets, the undistributed profits now allocated to capital, will be
included profits which will be used by the company for its business, but
henceforth as part of its issued share capital." Similarly Lord Cave
observed at p. 135:
"The profits remained in the hands of
the Company as capital, and the shareholders received a paper certificate as
evidence of his interest in the additional capital (1) 8 T.C. 101.
2Sup. C.I./69--2 10 so set aside. The
transaction took nothing out of the Company's coffers, and put nothing into the
shareholders' pockets; and the only result was that the Company, which before
the resolution could have distributed the profit by way of dividend or carried
it temporarily to reserve, came thenceforth under an obligation to retain it
permanently as capital. It is true that the shareholder could sell his bonus
shares, but in that case he would be realising a capital asset producing
income, and the proceeds would not be income in his hands." The principle
of the case was affirmed by the Judicial Committee in a case arising under the
Indian Income-tax Act, 1922: Commissioner of Income-tax, Bengal v. Mercantile
Bank of India and Others(1). Accordingly bonus shares given by a Company in
proportion to the holding of equity capital by a shareholder are, in the
absence of any express provision to the contrary liable to be treated as
capital and not income.
We are unable to agree with the judgment of
the Bombay High Court (to which reference was made by the Tribunal) in Commissioner
of Income-tax, Central Bombay v. Maniklal Chunnifat and Sons Ltd., Bombay--I.T.
Reference No. 16 of 1948that bonus shares received by a shareholder who carries
on business in shares and securities "ipso facto become accretion to his
stock-in-trade." Bonus shares would normally be deemed to be distributed
by the Company as capital and the shareholder receives the shares as capital.
The bonus shares are accretions to the shares
in respect of which they are issued, but on that account those shares do not
become stock-in-trade of the business of the shareholder. A trader may acquire
a commodity in which he is dealing for his own purposes, and hold it apart from
the stock-in trade of his business. There is no presumption that every
acquisition by a dealer in a particular commodity is acquisition for the
purpose of his business: in each case the question is one of intention to be
gathered from the evidence of conduct and dealings by the acquirer with the
Bonus shares having been received by the assessees
in respect of their stock-in-trade did not therefore become part of their
stock-in-trade, merely because they were accretions to the stock-in trade. The
bonus shares were received as capital: they could be converted by the assessees
into their stock-in-trade or retained as their capital asset.
The Tribunal observed in paragraph-5 of its
order that "the assessee deals in shares and the sales proceeds of the
bonus shares was (were) received by him in the course and as part of his share
(1) 4 I.T.R. 239.
11 dealing business. The amount received by
the assessee is therefore part of his profit from the share dealing business
and is liable to tax as such". Counsel for the assessees contended that
the Tribunal has not referred to any evidence in support of its conclusion and
has made a cryptic statement which is not capable of the interpretation that
the assessees had converted the bonus shares into their stock-in-trade.. If
there is no presumption that the accretion to the stock-in-trade necessarily
gets incorporated into the stock-in-trade, says Mr. Chagla, in the absence of
evidence showing that the bonus shares were treated by the assessees as stock in-trade
the finding of the Tribunal cannot be sustained Counsel invited our attention
to the supplementary statement of case in which the Tribunal recorded that in
the copies of balance sheets filed by the assessees as of February 14, 1948,
March 8, 1949 and March 8, 1950, the shares did not find a place and that the
sale proceeds of the bonus shares were credited in the capital account of the
assessees for the four years in question on the last dates of the relevant
But the Tribunal has found that the sale
proceeds of the bonus shares were received in the course and as part of their
business in shares and were on that account taxable.
It is. somewhat unfortunate that the Tribunal
has not set out in detail the facts found by it and the inference drawn
therefrom. Even in the supplementary statement no attempt has been made to set
out the facts on which the conclusion was based. The orders of the Income-tax
Officer and the Appellate Assistant Commissioner are also not before us.
The mere circumstance that in the copies of
the balance- sheets tendered by the assessees the bonus shares did not find a
place has, in our judgment, no importance, and the credit entries in the
capital account on the last dates of the respective accounting years in the
four years in question also do not support an inference in favour of the
assessees. The question posed for the opinion of the Court was not whether the
conclusion of the Tribunal was rounded on evidence, but whether the sale
proceeds of the bonus shares were of the nature of revenue. On this question an
inquiry into whether the conclusion of the Tribunal is supported by the
evidence cannot be made.
In India Cements Ltd. v. Commissioner of
Income-tax(x) this Court observed that in a reference under the Income-tax Act
the High Court must accept the findings of fact made by the Appellate Tribunal,
and it is for the person who has applied for a reference to challenge these
findings first by an application under s. 66( 1 ). If he has failed to file an
application under s. 66(1 ) expressly raising the question about the validity
of the findings of fact, he is not entitled .to urge before the High Court that
the findings are (1) 60 I.T.R. 52 (S.C.) 12 vitiated for one reason or another.
'The principle of that case applies here. It is not open to the assessees to
contend on the question, raised that the finding of the Tribunal is not
supported by evidence.
The answer recorded by the High Court is
The answer to the question submitted is in
No order as to costs of the appeal to this
Court and of the reference' in the High Court.
V.P.S. Appeal allowed.