The cost of bonus shares must be determined according to the principle laid down in Bai Shirinbai Kooka's case, (1962) Supp (3) SCR 391. Where it cannot be shown what was paid for the acquisition of a trading asset by a trader, it has for tax purposes to be deemed to have been acquired at the market value of the date when it was acquired.

Headnote:
INCOME TAX - Bonus shares - Cost of acquisition - How to be determined - Whether the cost of bonus shares is nil or the face value of the shares or the market value of the shares on the date of issue - Principles laid down.
Fact of the Case:

The assessee held shares by way of investment and also as stock in trade of his business as a share dealer. In 1944 the assessee acquired 31,909 of these shares at a cost of Rs. 5,84,283/- 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 December 31, 1947, the assessee sold 14,650 of the original shares with the result that on January 1, 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 January 1, 1948 thus came to 1,10,747 shares which in its books had been valued at Rs. 15,57,902/-. In arriving at this figure the assessee had valued the bonus shares at the face value of Rs. 10/- each and the other shares at actual cost. On January 29, 1948, the assessee sold all these shares for the total sum of Rs. 15,50,458/-, that is, at Rs. 14/- per share and in its return for the year 1949-50 claimed a loss of Rs. 7,444/- on the sale.
Finding of the Court:

The cost of bonus shares cannot be taken to be their face value because on the issue of the bonus shares, there is an instant loss to the shareholder in the value of his original holding. The bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an immediate detriment to the shareholder in respect of his original holding. The method of cost accounting which places the value of bonus shares at nil cannot be correct. The cost of the bonus shares must be determined according to the principle laid down in Bai Shirinbai Kooka's case, (1962) Supp (3) SCR 391. Where it cannot be shown what was paid for the acquisition of a trading asset by a trader, it has for tax purposes to be deemed to have been acquired at the market value of the date when it was acquired. The bonus shares must in the present case be deemed to have been acquired at the market value of the date of their issue.
Issues: How to determine the cost of acquisition of bonus shares for ascertaining the profits made on a sale of them.
Ratio Decidendi: The cost of bonus shares cannot be taken to be their face value because on the issue of the bonus shares, there is an instant loss to the shareholder in the value of his original holding. The bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an immediate detriment to the shareholder in respect of his original holding. The method of cost accounting which places the value of bonus shares at nil cannot be correct. The cost of the bonus shares must be determined according to the principle laid down in Bai Shirinbai Kooka's case, (1962) Supp (3) SCR 391. Where it cannot be shown what was paid for the acquisition of a trading asset by a trader, it has for tax purposes to be deemed to have been acquired at the market value of the date when it was acquired. The bonus shares must in the present case be deemed to have been acquired at the market value of the date of their issue.
Final Decision: The appeal is therefore allowed with costs here and in the High Court.

Judgment

SARKAR, J.: This matter has come before us on a case stated by the Income-tax Appellate Tribunal. The question is how to determine the costs 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.

2. 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/- 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 December 31, 1947, the assessee sold 14,650 of the original shares with the result that on January 1, 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 January 1, 1948 thus came to 1,10,747 shares which in its books had been valued at Rs. 15,57,902/-. In arriving at this figure the assessee had valued the bonus shares at the face value of Rs. 10/- each and the other shares at actual cost. On January 29, 1948, the assessee sold all these shares for the total sum of Rs. 15,50,458/-, that is, at Rs. 14/- per share and in its return for the year 1949-50 claimed a loss of Rs. 7,444/- on the sale. It is this return which has led to this appeal.

3. 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 had 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 (Central) Bombay v. Maneklal Chunilal and Sons Ltd., Bombay, I. T. Ref. No. 16 of 1948 D/- 23-3-1949 (Bom) (unreported.) The Bombay High Court later followed this case in Emerold and Co. Ltd. v. Commissioner of Income-tax, Bombay City, 1956-29 ITR 814. On that basis he held that the assessee had made a profit of Rs. 2,39,317 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. This figure, it may be observed, represented the cost of the bonus shares at their face value. In his opinion the bonus shares had to be valued at nil. The Appellate Commissioner s conclusion was that the assessee was liable to be taxed on a trading profit of Rs. 3,11,646/- in respect of the sale of shares. This 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.

4. 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/- on the sal

Click Here to Read the rest of this document

Judicial Analysis