Judgment

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 assessees 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.

2. At the instance of the assessees, the Tribunal referred the following question of law to the High Court of Allahabad for opinion :

"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 ?"

3. The High Court called for a supplementary statement of case. A Full Bench of the High Court (Manchanda, J., dissenting) answered the question in the negative. The Commissioner has appealed to this Court with certificate granted by the High Court.

4. 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 Article 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.

5. In Commissioners of Inland Revenue v. John Blott, (1921) 8 Tax Cas 101 the House of Lords (by majority) held that bonus shares issue 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 so set aside. The transaction took nothing out of the Company