JUDGMENT M.C. Desai, C.J.
1. This is a statement of a case referred to this Court at the assessee's instance by the Income-tax Appellate Tribunal, Allahabad Bench, under Section 66(1) of the Indian Income-tax Act. Tribunal has formulated the following question as one of law arising out of the statement:
"Whether on the facts and in the circumstances of this case the sale proceeds of the bonus shares (received in respect of ordinary shares held by the assessee as a part of his stock in trade) is an income taxable under the Indian Income-tax Act?".
The connected I. T. R. No. 193 of 1955 is another statement of a case referred by the same Tribunal at another assessee's instance under Section 66(i) and the question of law arising out of it and referred by the Tribunal is:
"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?"
It will be noticed that the two questions are identical and, therefore, the two statements of cases have been amalgamated. The instant reference came up for hearing before a Bench of which one of us was a member and it referred it to a larger Bench for reconsideration of this Court's decision in Motilal v. Commissioner of Income-tax, 1961-41 ITR 382 (All) and Shri Rani Jha v. Commissioner of Income-tax U.P., 1957-31 ITR 987: (AIR 1957 All 472). The connected reference came up for hearing before another Bench, which finding good authority for the assessee's contention that every receipt of bonus shares is not revenue receipt or income but finding nothing in the statement to show whether the bonus shares after being received were made by the assessee the stock-in-trade of its business called for a further statement of the case from the Tribunal. The direction actually given to the Tribunal was that it should "consider the material on record and the findings given and the facts admitted and submit a further statement of facts showing as to whether the bonus shares in question were made a part of ths stock-in-trade of the assessee in his share dealing business or not''. Thereupon the Tribunal submitted a further statement of the case. Before doing so it received from the assessee copies of balance-sheets prepared by it on 14-2-1948, 8-3-1949 and 8-3-1950 and found from them that the proceeds of sale of the bonus shares were credited by the assessee in the capital account of Madan Gopal, one of the partners of the assessee firm, for the various assessment years on the last dates of the relevant accounting years and that it did not bring into account the value of the bonus shares either at their face value or at their market value in its own accounts of the accounting years.
2. The assessees in the two cases are dealers in shares and not mere investors. In the instant case the assessment year is 1945-46. The assessee held some shares of a certain company as part of its stock-in-trade of the business in shares. The company decided to capitalize a sum of rupees seven lakhs and odd being part of its undivided profits and to use it as a capital bonus. Accordingly it issued three lakhs fully paid up bonus shares of Rs. 2/8/- each to the registered shareholders. According to this decision of the company the assessee received 2,000 bonus shares which it sold on various dates between 16-8-1943 and 26-10-1943 for Rs. 28,000/- and odd. The Income-tax Officer treated the sum of Rs. 28,000/- and odd as income notwithstanding the assessee's contention that it had received the bonus shares as capital assets and that consequently the proceeds of the sale were capital, and not revenue receipts and not liable to income-tax. The Tribunal upheld the Income-tax Officer.
3. In the connected case the assessment years are 1946-47, 1948-49, 1949-50 and 1950-51. The assessee held shares of five companies as part of its stock-in-trade of the business in shares. These companies issued bonus shares to their registered share-holders and thus the assessee also received bonus shares from them. It sold them during the four assessment years. The Income-tax Officer treated the proceeds of the sale as income from its business overruling its contention that the receipt of the bonus shares was capital, and not revenue, receipt. The Income-tax Officer's order was upheld by the Tribunal, following a decision of Chagla, C.J., and Tendolkar, J., of the Bombay High Court in Commissioner of 'Income-tax (Central) Bombay v. Maneklal Chunilal and Sons Ltd., I. T, Ref. No. 16 of 1948 (Bom).
4. In the connected Income-tat Reference the Tribunal had no jurisdiction to record fresh evidence and to give fresh findings when submitting a supplementary statement under Section 66(4) of the Income-tax Act. Consequently all the evidence received, and all the findings given, by the Tribunal after it had passed the order under Section 33(4) must be disregarded by us.
5. Income within the meaning of the Income-tax Act includes (1) dividend, (2) the value of any perquisite or profit in lieu of taxable salary, (3) the value of any benefit or perquisite obtained from a company by a director or other peison interested in the company, (4) any sum deemed to be profits under certain provisions of the Act, (5) any capital gain chargeable under Section 12B and (6) the profits and gains of any business carried on by ar insurance association or by a co-operative society. Income-tax is charged under Section 3 on the total income, e.g., total amount of income, profits and gains referred to in Section 4(1). The heads of income, profits and gains chargeable to income tax are, vide Section 6, (i) salaries, (2) interest on securities, (3) income from property, (4) profits and gains of business, profession or vocation, (5) income from other sources and (6) capital gains. Dividend includes "any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its share-holders of all or any part of the assets of the company''.
The assessees received the bonus shares in lieu of dividends which do not thereby become dividends themselves. They can be dividends only if they amount to distribution by the companies of accumulated profits and the distribution entails the release by the companies to their share-holders of part of their assets. Though in one sense it may be said that the issue of bonus shares by the companies is distribution of their accumulated profits because they are issued in lieu of accumulated profits it cannot be said that the distribution entails the release by the companies to their shareholders, of any part of their assets. In the case of Motilal, 1961-41 ITR 382 (All) (supra) at page 392 it was held that the receipt of bonus shares is not receipt of dividend. Sri Gopal, Behari made a clear statement before the Court that the assessees were not assessed on the receipt of the bonus shares and that the case of the Commissioner was that they were liable to be assessed on the proceeds of their sale. The case of the Commissioner, therefore, is that the proceeds of sale of the bonus shares, and not the bonus shares themselves, are income. Consequently the question whether the receipt of the bonus shares is receipt of dividend does not arise at all.
6. The proceeds of sale of the bonus shares were taxable only if they could be said to be profits and gains of business. The assessees carried on business in shares. If it can be said that they sold the shares in the course of their business the proceeds of sale would be profits and gains of business. The entire proceeds of sale would be profits and gains of business because the assessees did not spend anything for acquiring them, they having got them as bonus. The business of the assessees consisted of buying and selling shares but it does not follow that every buying, and every selling, of shares by them was done in the course of their business. Every profit made by sale of the stock-in-trade of a business is profits and gains of the business but no profit made by sale of any capital assets of the business is profits and gains of the business. There is a distinction recognized by law between stock-in-trade and capital assets and it depends not on the nature of the gords but on the purpose behind their acquisition and the use made of them. Hence some out of goods of the same nature owned by a businessman can be his stock-in-trade and others, capital assets. He is entitled to have stock-in-trade and also capital assets and is not forbidden to have capital assets of the same nature as his stock-in-trade. It follows that every thing possessed by a businessman is not necessarily his Stock-in-trade simply because it is of the same nature as his stock-in-trade.
A person carrying on business of selling ready-made clothes has certain ready-made clothes as his stock-in-trade, but he also has other ready-made clothes such as personal wearing apparel, which are not part of his stock-in-trade; if he sells ready-made clothes out of the stock-in-trade at a profit the profit is taxable as revenue receipt but if he sells his personal clothes any profit that he makes is not revenue receipt because it is not profits and gains of the business. When he sells his personal clothes he does not, sell them in the course of his business as when he sells clothes out of his stock-in-trade. A dealer in land can have land as his stock-in-trade but he also can own land which is not part of stock-in-trade but is owned by him apart from his business and if he sells it at a profit the profit is not profits and gains of his business. Similarly a, dealer in shares also is entitled to have shares as capital assets and not as stock-in-trade. Simply because he carries on the business in shares he cannot be denied the right of acquiring shares as capital assets and selling them as such.
There can be, and there is, no presumption that whenever a dealer in a particular commodity acquires it he acquires it as his stock-in-trade and not as capital goods. It is obvious that it the law permits him to have capital goods of the same nature as his stock-in-trade it cannot make every acquisition of goods of that nature his stock-in-trade regardless of all circumstances. It is consistent with the law that distinguishes between stock-in-trade and capital goods owned by a dealer that he can acquire as capital assets goods of the same nature as his stock-in-trade. If a dealer can have goods of the same nature partly as stock-in-trade and partly as capital assets and there can be no presumption of law that goods of that nature acquired by him become his stock-in-trade or become his capital assets, the question whether he acquires them as stock-in-trade or as capital assets at once becomes a question of fact.
7. Intention with which a dealer acquires goods of the same nature as the goods of his stock-in-trade is the first and obvious fact to be taken into account in deciding whether the acquisition is stock-in-trade or is capital assets. If he acquires them as stock-in-trade, i.e., with the intention of dealing in them in the course of his business they become his stock-in-trade; otherwise if he acquires them as his capital assets, i.e., not with the intention of dealing in them in the course of his business, they become his capital assets. In Ramnarain Sons (Pr.) Ltd. v. Commissioner of Income-tax, 1961-41 ITR 534: (AIR 1961 SC 1141), 3 dealer in shares and also carrying on business as managing agents of companies, in order to acquire the managing agency of a company, purchased shares of the company far in excess of their market price and two months later sold them at ai loss. The Supreme Court held that he acquired them not to deal in them as his stock-in-trade but as capital assets in order to facilitate his acquiring the managing agency of the company. Shah, J. speaking for the Court observed at page 537: (of ITR): (at p. 1143 of AIR):
This is a clear authority for the proposition that intention, which may be inferred from the object behind the acquistion of shares by a dealer in shares, is the deciding factor. It also supports the view that the fact that the assessee is a dealer in shares may be immaterial if the circumstances show that the acquisition was with the intention of acquiring a capital asset. If an investor can acquire shares as a capital asset there is no reason why a dealer in shares cannot. Imperial Tobacco Co. Ltd. carried on the business of tobacco manufacture for which it had to purchase quantities of tobacco leaf in the United States. To finance the purchases it bought dollars in England and remitted them to its agents in the United States. It did not buy dollars for the purpose of resale as speculation. On the outbreak of war in 1939 the Company stopped further purchases of tobacco leaf in the United States with the result that it was left with a large accumulation of dollars. Under a certain law it was required to sell its dollars to the Treasury and owing to an appreciation in the price of dollars the sale to the treasury resulted in a profit to the Company. The Court of Appeal decided that the profit was income within the meaning of taxation statute; see Imperial Tobacco Co. (of Great Britain and Ireland), Ltd. v. Kelly, (1943) 25 Tax Cas 292. Lord Greene, M. R. observed as follows :
"The acquisition of these dollars cannot be regarded as colourless. They were an essential part of a contemplated commercial operation.
......it seems to me quite impossible to say that the dollars have lost the revenue characteristic which attached to them when they were originally bought and in some mysterious way have acquired a capital character.
......the Appellant Company has sold a surplus stock of dollars which it had acquired for the purpose of effecting a transaction on revenue account. If the transaction is regarded in that light, it seems to me it is precisely on all fours with the case of any trader who, having acquired commodities for the purpose of carrying out a contract, which falls under the head of revenue for the purpose of assessment......... then finds that he has bought more than he ultimately needs and proceeds to sell the surplus...... It had an income character impressed upon it from the very first. (P. 300).
......it was no part of the Company's business to buy and sell dollars. But...... the commodity...
was acquired for the purpose of transactions on revenue account and nothing else". ( p. 301).
The dollars were held to be part of the stock-in-trade of the Company because of the purpose for which they were acquired.
8. Acquisition of shares may be voluntary, i.e., intentional or involuntary, i.e., unintentional. Intention exists only when the acquisition is voluntary and there cannot arise any question of intention when it is involuntary. Acquisition of bonus shares allotted by a company in lieu of distribution of profits is involuntary acquistion; the assessee is bound to accept the shares unless he wishes to renounce them. He has no option of taking something in lien of them. He must accept them or nothing. In such a case in which he acquires bonus shares without any intention on his part how he deals with them subsequent to the acquisition would be the deciding factor. If he decides to include them in his stock-in-trade they would become his stock-in-trade, but it is open to him to treat them as his capital asset. Subsequent treatment of the acquired shares is of no consequence only if they were acquired with a certain intention as in the case of Ramnarain Sons (Pr.) Ltd. 1961-41 ITR 534: (AIR 1961 SC 1141) (supra). Once the intention has established that they were acquired as stock-in-trade or as capital assets the nature of the acquisition cannot be altered by the subsequent dealing with them; but if there was no question of intention because the acquisition was involuntary and, therefore, it was not established that they were acquired as stock-in-trade or aa capital assets the subsequent treatment becomes of great importance.
In an involuntary acquisition there is no intention at the time of the acquisition but immediately after the acquisition an intention to treat them as stock-in-trade or as capital assets can be formed and if it is formed how they are dealt with by the assessee is the best evidence from which it can be inferred. If after the involuntary acquisition the assessee intends to deal with them as stock-in-trade they become his stock-in-trade but they cannot be imposed upon him as his stock-in-trade without regard to his intention to be inferred front the subsequent treatment. In the instant case there is no evidence of how the assessee dealt with the shares after the allotment; in other words them is nothing to show that it treated them as its stock-in-trade. The assessing authority had no data from which to infer that it intended to include them in its stock-in-trade and had no power to assume them to be its stock-in-trade. A dealer in shares, who acquires shares as a capital asset cart subsequently convert them into his stock-in-trade but he can do so by doing certain overt act and the conversion can be proved only by proof of the overt act.
9. The proposition that if the original shares, on account of which an assessee dealing in shares becomes entitled to bonus shares, were held by him as his stock-in-trade the bonus shares become his stock-in-trade cannot be supported by any statutory authority or by reason. Actually there is no nexus between the original holding and the receipt of bonus shares; the connection between them, even if it exists, is remote and indirect. Bonus shares are allotted to the share-holders whose names appear in the company's register of share-holders on a particular day. A share-holder's name entered in the company's register remains there so long as it is not removed and another's name is not recorded in respect of the shares. A share-holder may transfer his shares to another but it takes time before his vendee gets his name registered in place of his. Consequently a person's name may appear in the company's register on a certain date even though he had disposed of the shares previously and, therefore, did not hold them on that day. The bonus shares would still be allotted to him on the ground that his name appeared in the company's register on that day. He is entitled to the bonus shares not because he held original shares on that day but because he was recorded, in the company's register on that day as holding them.
Every person who is a share-holder in the company's register is entitled to bonus shares regardless of whether he holds them as his stock-in-trade or as his capital goods. Consequently an assessee's acquiring bonus shares has absolutely nothing to do with the capacity in which he held the original shares and may have nothing to do even with the iact of his holding them. In the circumstances I do not understand how it can be said that there is any nexus between the acquisition of bonus shares and the capacity in which the original shares were held. The nexus theory is inconsistent with the theory of intention behind the acquisition. It cannot be applied even in the case of involuntary acquisition because the intention formed after the acquisition and to be inferred from the subsequent conduct takes the place of the intention in a voluntary acquisition. The fact that the assessees could not buy bonus shares in open market does not affect the nature of the acquisition. They might not have been able to buy bonus shares from the company but they could certainly buy them from, the shareholders to whom they were allotted by the company. The theory of accretion is nothing but the theory of nexus under another name; according to it bonus shares accrete to the original shares and take their colour from them. If the original shares are stock-in-trade the bonus shares become stock-in-trade and if they are capital assets the bonus shares also beeome capital assets. It will be noticed that the theory does not take into account not only the intention with which they are acquired (because it cannot exist, the acquisition being involuntary) but also the intention with which they are retained after acquisition and that whether they are the stock-in-trade or capital assets is treated entirely as an operation of law. It is as if by operation of law bonus shares become the stock-in-trade or capital assets according to the nature of original holding. Bonus shares certainly do not accrete to the original shares becauses as I said earlier they are allotted not on account of the original shares but on account of the sharet-holder's name appearing in the Company's register. They may accrete to the entry of his name in the Company's register but not to the original shares which may not be even in his ownership at the time when they are allotted. Further no law can be cited in support of the theory of accretion.
The theory was rejected by the Bombay High Court in Popatlal Bhikhamchand v. Commissioner of Income-tax, Bombay City I, 1959-36 ITR 577 : (AIR 1960 Bom 223). Popatlal donated (original) shares to his minor son to whom bonus shares were allotted subsequently on the basis of his holding. The dividend income from the original shared derived by the son was included in the income of Popatlal for assessment in accordance with the provisions of Section 16(3)(a)(iv) and the question arose whether the dividend income from the bonus shares also should be included in his income. Shah and S.T. Desai, JJ. answered the question in the negative. They did say that the bonus shares were an accretion to the original holding but refused to treat the dividend income from them as arising indirectly from the original holding transferred to his son. In effect, however, they treated the bonds shares as not taking their colour from the original holding; the accretion theory put to its logical conclusion should have resulted in the dividend income from them also being an accretion to the original holding. Accretion by itself does not come under any head of income.
10. The nexus theory was discarded by the House of Lords in Stafford Coal and Iron Co., Ltd. v. Brogan, (1963) 3 All ER 277. It was in a different set of circumstances but if it was not adopted in those circumstances it would not be justifiable to adopt it in the instant cases. The assesses was a member of an insurance company and paid premium to it, the company went into liquidation and the assessee received its share in the assets and though the assets consisted of premium paid by members, the share received by the assessee in the assets was held to be capital gain. The premium were trading expenses but the share in the assets consisting of them was not held to be revenue income.
11. The nature of bonus shares was discussed by the House of Lords in the Commissioners of Inland Revenue v. John Blott, (1921) 8 Tax Cas 101. Their Lordships held that bonus shares allotted to a share-holder did not constitute income in his hands for purposes of income-tax. The bonus shares were allotted by the company in lieu of dividend and their Lordships had to decide whether the allotment was, to the share-holder, allotment of annual profits conferring a benefit chargeable to income-tax or a capital gain. They repelled the contention of the Commissioners of Inland Revenue that because the original holding was a source of profit the receipt of the bonus shares arose out of those profits and formed part of them and held that the receipt was capital gain. Viscount Haldane L. C. pointed out at page 125 that "a company is a corporate entity separate from those of its share-holders", that "a share-holder is not entitled to claim that the company should apply its undivided profits in payment to him of dividend", that "whether it must do so or not is a matter of internal management to be decided by the majority of the share-holders" and that "if, acting within its powers, it disposes of these profits by converting them into capital instead of paying them over to the share-holders, that...... is conclusive as against all the outside world, including the Crown, and the form of the benefit which the share-holder receives from the money In the hands of the company is one which is for determination by the company alone."
At page 126 he said:
"......'it is......within the power of an ordinary joint stock company...... to determine conclusively against the whole world whether it will withhold profits it has accumulated from distribution to its share-holders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which share-holders electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profit in the hands of the share-holder 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. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in Burland v. Earle, (1902) AC 83 at p. 93 no Court can interfere."
He distinguished Swan Brewery Co. Ltd. v. The King, (1914) AC 231, on account of different language being used in the taxation statute. Viscount Finlay pointed out at page 131 that "there was no dividend out of the accumulated profits; these were devoted to increasing the capital of the Company, the Company had power to do what it pleased with any profits which it might make"
"Here we have the essential matter not a gain accruing to capital, not a growth or increment of value in the investment, but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital, however invested or employed, and coming in, being 'derived', that is, received or drawn by the recipient the 'tax-payer' for his separate use, benefit and disposal, that is income derived from property; nothing else answers the description" (132).
There is absolutely nothing in these observations of their Lordships to give any support to the nexus or accretion theory. The question discussed before their Lordships was whether the bonus shares, and not proceeds of sale of bonus shares, allotted to a share-holder formed part of his revenue income or capital gain, which question does not arise before us in view of the categorical statement made by Sri Gopal Behari. The accretion theory, if there is any force in it, can apply only to bonus shares and not to proceeds of sale of bonus shares; it is only bonus shares that can be said to accrete to the original shares and proceeds of sale of bonus shares will be not accretion to the original shares but proceeds of sale of accretion. If, as held by the House of Lords, bonus shares do not accreta to the original shares proceeds of sale of bonus shares cannot be accretion. However the observations of their Lordships must be read in the context of the fact that they dealt with an investor and not with a dealer in shares. In the case of an investor bonus shares are not to be included in his revenue income; their Lordships did not decide anything about bonus shares received by a dealer in shares. The Judicial Committee of the Privy Council followed the decision in Blott's case, 1921-8 Tax Cas 101 in Commissioner of Income-tax v. Mercantile Bank of India (1936) 4 ITR 239: (AIR 1936 PC 238), and held that when accumulat ed profits are issued as bonus debentures on the basis of preferred shares held by share-holders the issue of the debentures does not amount to income in the share-holders' hands.
12. The decision in the case of Swan Brewery Co., 1914 AC 231 turned upon the interpretation of an Australian Act which defined "dividend" to include every advantage or gain intended to be paid, credited or distributed. The issue of bonus shares was held to be dividend because it was found to be an advantage. The transaction was interpreted by the Judicial Committee to involve the share-holders' ''acquiescing in such a transfer from reserve to share capital as put an end to any participation in the sum of--in right of the old shares and created instead a right of general participation in the company's profits and assets in right of the new shares, without any further liability to make a cash contribution in respect of them". In the instant case there was no acquiescence by the assessees because, as I said earlier, they had no option in the matter and were obliged to receive the bonus shares in lieu of dividend. This decision was distinguished by the House of Lords in Blott's case, 1921-8 Tax Cas 101 and by the Judicial Committee in the Mercantile Bank of India's case, 1936-4 ITR 239: (AIR 1936 PC 238) (supra). In the latter case the Judicial Committee stated at page 248 (of ITR): (at p. 242 of AIR) that a case under the Indian Income-tax Act is governed by the Blott decision 1921-8 Tax Cas 101 and not by the Swan Brewery Company.
13. The Commissioner of Income-tax strongly relied upon the case of Motilal, 1961-41 ITR 382 (All) (supra). The essential facts in the case were that the assessee carried on two businesses, one of dealing in shares and the other of moneylending, it had 500 shares of a certain company as stock-in-trade of the second business and 975 shares as capital assets and the company issued' 1475 bonus-shares to the assessee in lieu of its holding 1475 ordinary shares. V. Bhargava and Upadhya, JJ. held that 975 bonus, shares became capital assets and 500 shares became stock-in-trade and that when they were sold the proceeds of sale of 500 shares became revenue income. The learned Judges professed to follow the Blott decision but their decision cannot be reconciled with it. They observed at pages 392 and 393 :
"We consider that, by their very nature, all these bonus shares should be treated as accretions to the ordinary shares in respect of which the bonus shares were issued by the company. These bonus shares would not have been received by the assessee if the assesses had not been holding the ordinary shares. It was because he was holding those ordinary shares that the company gave these bonus shares to the assessee. ...... The bonus shares are received by virtue of his holding of ordinary shares and consequently it must be held that it is in the nature of accretion to the ordinary shares held by the share-holder....... Bonus shares, being shares received by virtue of the holding of ordinary shares, the nature of their receipt in the hands of the share-holder for purposes of charge to tax must be determined by determining the nature of the ordinary shares held, to which the bonus shares are accretions...... When computing income for purposes of assessment of income-tax. They must be treated as additions to stock-in-trade on the date on which they were received by the assessee."
With great respect I dissent. Firstly these observations are contrary to the observations of the House of Lords in Blott's case, 1921-8 Tax Cas 101. Secondly they are contrary to the observations in the case of Shri Ram Jha 1957-31 ITR 987 : (AIR 1957 All 472) decided by V. Bhargava and Mehrotra JJ. Thirdly, as I pointed out, the very basis of the accretion theory that the bonus shares are issued because the shareholder holds original shares is incorrect. The assessee could have received the bonus shares even if it did not hold 500 ordinary shares and might not have received any bonus shares even if he held 500 ordinary shares. Their observation that the bonus shares themselves must be treated as an advantage to the stock--in-trade for the purpose of computing the assessee's income is inconsistent with their decision at page 392 that they "cannot be treated as dividend .................. because in issuing ......... the bonus shares the company did not give away any cash or any part of its assets". If the bonus shares are not dividend they do not come within the meaning of income. They themselves are not profits or gains of the business because the shareholders interest in the profits of the company remains as it was. By receiving bonus shares a shareholder does not acquire a larger interest in the profits of the company. Proceeds of sale of bonus shares might amount to income but not they themselves. The learned Judges have not explained how accretion itself comes within the meaning of Income.
14. The facts in the case of Maneklal Chuni-lal and Sons Limited, I. T. Ref. No. 16 of 1948 (Bom) (supra) were similar to those in the instant case. The learned Judges observed:
"It was because the Assessee Company held ordinary shares in stock and it was because their business was to deal in ordinary shares that they received these bonus shares which became an accretion to their stock-in-trade, and it is difficult to understand how it can be contended that an accretion to the stock-in-trade is not a profit which arises in respect of the business carried on by the Assessee Company in respect of which the shares are held as stock-in-trade".
I disagree for the reasons already given. The learned Judges further said that "the Income-tax Department cannot be bound by any entries that the Assessee Company may make in their books of account". This would be true if at the moment of the receipt of the bonus shares it could be said that they were received as stock-in-trade. If they were received as stock-in-trade their nature can certainly not be altered by entries made by the assessee in his accounts. But if the nature of the receipt is not known as in the case of bonus shares involuntarily received, the way in which the assessee deals with them subsequently gives rise to inference about his intention to, treat them as capital assets or as stock-in-trade.
15. The question that arose in the case of Commissioner of Income-tax Bombay City v. Bai Shirinbai K. Kooka Bombay (1956) 30 I. T. R., 753 : (AIR 1956 Bom 586) was quite different, being how the cost price of capital goods acquired on one date and converted into stock-in-trade on a subsequent date is to be estimated. The decision of Chagla, C. J. and Tendolkar, J. that the market price on the date of the conversion, and not the original price paid at the time of acquisition, is the cost price was upheld by the Supreme Court in Commissioner of Income Tax v. Bai Shirin Bai K. Kooka (1962) 46 I. T. R. 86 : (AIR 1963 SC 477). This case distinguishes between shares held as stock-in-trade and shares held as capital assets by a dealer in shares. No quetion of nature of bonus shares arose in it. The learned Judges made it clear at p. 757 (of ITR) : (at p. 588 of AIR) that "if any part of the amount is not attributable to the business profits of the assessee, then the assessee is not liable to pay tax thereon".
The Supreme Court dismissing the appeal endorsed the view of the High Court that actual profits should be computed according to the ordinary commercial principles.
16. In Kikabhai Premchand v. Commissioner of Income Tax (Centrla) Bombay, 1954 SCR 219 : (AIR 1953 SC 509) the Supreme Court had to decide how an assessee following the mercantile system of accounts and adopting the method of valuing the stock at its cost price at the beginning, and at the close, of each accounting year should value the stock withdrawn by him from the business and converted into capital asset and decided that it should be valued at the market price at the time of the withdrawal. The reasons given by Bose, J. speaking for the Court, were that the withdrawal was not a business transaction and that the assessee made no profit or gain nor sustained a loss by it. The contention advanced by the Attorney General that the withdrawal of stock from the business should be treated, as sale of it at the market price was rejected by the learned Judge and he refused to treat the withdrawal as a fictional sale resulting in a fictional profit and denied to the State the power to tax potential profit. Just as in that case there was no sale of stock-in-trade and no actual profit so also in the instant cases there is no sale of stock-in-trade and no actual profit when the bonus shares are sold. When the bonus shares were sold there was undoubtedly a sale and there could undoubtedly arise a question of actual profits, provided the bonus shares were treated as stock-in-trade, if they were treated as capital assets even though they were sold and sold at a profit there would be no income within the meaning of the Income Tax Act. The decision in Kikabhai's case, 1954 SCR 219 : (AIR 1953 SC 509) (supra) was distinguished by the Supreme Court in the case of Bai Shirinbai 1962-46 ITR 86 : (AIR 1963 SC 477) (supra).
17. In the result my conclusions are that the bonus shares themselves did not amount to dividend or income of any other kind, that there was no evidence that the assessees intended to treat them as their stock-in-trade and that consequently the proceeds of the sales were not revenue Income. The question referred, in each reference must, therefore, be answered in the negative.
Jagdish Sahai,, J.
18. Having read the opinion prepared by my Lord the Chief Justice I find myself in respectful agreement with him. However, in view of the importance of the question referred, I would like to incorporate my own views in a separate judgment. The facts of the two cases referred to us have been fully given in the judgment prepared by the learned Chief Justice and it is not necessary for me to reproduce them over again in my own. In both the cases the references have been made at the instance of the assessees who admittedly are dealers in shares. In I, T. Ref. No. 190 of 1953 the assessment year is 1945-46, while in I. I. Ref. No. 193 of 1955 they are 1946-47, 1948-49, 1949-50 and 1950-51. In both the cases the assessees hold shares in certain companies as part of their stock in trade of the business in shares. They received bonus shares from those companies and sold them during the years under assessment. It is the proceeds of those sales which have been taxed by the Income-tax authorities. The sole question requiring consideration at our hands is whether those proceeds were capital assets or revenue receipts.
19. We have heard Sri Gulati for the assessees and Sri Gopal Behari for the Income Tax Department. Sri Gopal Behari has made a statement before us that the assessees are being taxed on the proceeds of the bonus shares and not on the bonus shares themselves. Section 2 (6-A) (a) of the Indian Income-tax Act 1922, (hereinafter referred to as the Act) defines 'dividend'. The said provision reads as follows:
2 (6A) 'Dividend' includes- (a) any distribution by a company of accumulated profits whether capitalised or not, if such distribution entails the release by the company to its share-holders of all or any part of the assets of the company."
There are two ingredients of the definition. One is that there must be a distribution by a company of accumulated profits whether capitalised or not. The other is that the result of the distribution should be released by the company to its share-holders of all or any part of the assets of the company. Merely by issuing bonus shares companies concerned did not release to their share-holders all or any part of their assets. They had parted with no capital. In fact no amounts were debited to their account and credited to that of the share-holders. In other words their assets remained at the same figure even after the issue of bonus as they stood before. Consequently there can be no difficulty in concluding that the mere receipt of bonus shares by a share-holder cannot amount to receipt of dividend.
20. The question, however, that requires consideration is whether the proceeds of sales of the bonus shares could be treated to profits and, gains of business in view of the fact that the assessees carried on business in shares. In other words, the question is whether assessees sold the shares in the course of their business. At this stage I would like to extract the following observations from the opinion of Viscount Cave in (1921) 8 Tax Cas 101:--
"The transaction took nothing out of the Company's coffers, and put nothing into the shareholders' pockets; and 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 share-holder 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".
There can be no dispute that every profit made fay sale of the stock in trade of a business is profits and gains of the business. It is, however, equally clear that no profit made by sale of any capital assets of the business can be treated to be profits and gain of the business. The case of the asses-see is that there is no bar in law against persons dealing in shares holding some of them merely as investments and as capital assets. The case of the Department is that since the assessees are dealers and carry on business of purchasing and selling shares any sales of shares made by them must be presumed to have been made in the course of their business. In other words it is urged, firstly, that inasmuch as the shares held by the assessees were their stock in trade, the bonus shares issued to them must be held to be accretion to the same and, secondly, that inasmuch as the assessees carried on the business of purchasing and selling shares any sale made by them must be construed to have been made in the course of their business. Bonus shares are issued to one whose name is entered in the registers of the company on a particular date even though he may not be a share-holder on that date having sold his share earlier and the purchaser not having got his name registered in the companies books.
The right to receive bonus shares therefore is based upon the entry of the name of that person in the register of the company and is not dependant upon the factual position whether or not he holds shares in that company. It is true that when the bonus shares are issued to a person whose name is recorded in the company's registers it is on the assumption that he holds the shares but still the basis is the entry of the name in the registers of tie company and not the right to hold the share. The theory of accretion to original shares is therefore not legally correct. With regard to presumption it may be stated that all presumptions are rebuttable. Whether or not the particular goods are stock in trade would depend upon the intention with which and the purpose for which they were purchased. In the present case there was no act voluntary or involuntary on the part of the assessees which resulted in their getting bonus shares. There is clear distinction between a company and its share-holders. (See Bacha F. Guzedar v. Commissioner of Income Tax, Bombay, (S) AIR 1955 SC 74).
Whether or not the company would distribute bonus shares would depend upon its management and the general body of share-holders. An individual share-holder can renounce the bonus shares offered to him but he cannot insist that they should or should not be issued nor has he a voice on the question as to for what amount the bonus shares should be issued. In other words it was the act of the company which results in the receipt of bonus shares by the assessee. He did not acquire them by making any efforts and since the receipt of the bonus shares did not depend upon any voluntary or intentional act performed by him it is difficult to say that there was behind the acquisition an intention on the part of the assessee to treat the bonus shares as stock in trade and the purpose for which they were received was to deal with them in the business. When the distribution of bonus shares is an act of the company and the assessees had no say in the matter it cannot be said that they acquired the bonus shares with the intention to treat them as stock in trade.
21. In (1921) 8 Tax Cas 101, it was pointed out that "a company is a corporate entity separate from those of its share-holders", that "a share holder is not entitled to claim that the company should apply its undivided profits in payment to him of dividend", that "whether it must do so or not is a matter of internal management to be decided by the majority of the share-holders" and that "acting within its powers, it disposes of these profits by converting them into capital instead of paying them over to the share-holders, that ...... is conclusive as against all the outside world, including the Crown, and the form of the benefit which the share-holder receives from the money in the hands of the company is one which is for determination by the company alone." In the same case it was held :--
"It is . . ... within the power of an ordinary joint stock company .... to determine conclusively against the whole world whether it will withhold profits it has accumulated from distribution to its share-holders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which share-holders electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profit in the hands of the share holder 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. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in (1902) AC 83, at p. 93 no court can interfere."
There is nothing in law which prevents a dealer in shares from acquiring shares for other purposes than to use them as their stock in trade. See 1961-41 I. T. R., 534 : (AIR 1961 SC 1141), where the assessee was held to have purchased shares as capital assets in order to facilitate his acquiring the managing agency of the company. Reliance has been placed on behalf of the Department on Imperial Tobacco Company (of Great Britain and Ireland) Ltd. v. Kelly (1943) 25 Tax Cas 292 where the Imperial Tobacco Company had purchased dollars in England and remitted them to its agent in the United States for purchasing quantities of tobacco but on the outbreak of was in 1939 the company having stopped further purchases of tobacco leaves in the United States remained in possession of huge stocks of dollars, which it had to sell to the treasury under certain laws. It was held that the dollars were stocks in trade of the company. The decision was based on the finding the the acquisition of dollars by the company was not colourless but was an essential part of a contemplated commercial operation. In other words the ground on which the House of Lords held the proceeds of the sale of the dollars as taxable was that it found that there was a purpose behind the purchase of dollars in England, the same being to buy tobacco leaves in United States in the course of the business of the company.
In the case before us there can be no question of the bonus shares having been received for the purpose of business because, as already stated, their receipt was accidental in so far as the company decided to issue them and was not the result of a voluntary and intentional act of the assessees-inasmuch as the assessees had no say in the matter. Before a person can be held to take certain goods as his stock in trade it must be proved that he had purchased or acquired them with that intention or for that purpose. It is this ingredient which is completely missing in the present cases.
22. I am also unable to see how can there be irrespective of circumstances a presumption that every sale made by a dealer of a commodity in which he deals must be in the course of the business. Besides it is well settled that a presumption is rebuttable and it is trite that for rebutting a presumption even slight evidence is sufficient. In the present case the Assessing Authority had before him no material on the basis of which he could hold that either the bonus shares were acquired for the purpose of treating them as stock in trade or that when they were sold it was so done in the course of business. With regard to the first, we have already said above that since the assessees had no hand in the acquisition of bonus shares there can be no question of their having acquired them for the purpose of treating them as stock in trade and not as capital. With regard to the second there are statements and pleas of the assessees that in fact they never treated the bonus shares as their stock in trade but only as their capital assets and when they sold them they did not do so in the course of their business. Whatever presumption could have been drawn in this case stands fully rebutted by the statements of the assessees.
23. Mr. Gopal Behari placed reliance upon the unreported decision of the Bombay High Court in I. T. Ref. No. 16 of 1948 (Bom) and (1961) 41 I. T. R. 382, (All). In the former case it was observed by the Bombay High Court as follows :
"It was because their business was to deal in ordinary shares that they received these bonus shares which became as accretion to their stock-in-trade and it is difficult to understand how it can be contended that an accretion to the stock-in-trade is not a profit which arises in respect of the business carried on by the assessee Company in, respect of which the shares are held as stock-in-trade."
In the latter case a Division Bench of this Court held that-
"Bonus shares, being shares received by virtue of the holding of ordinary shares, the nature of their receipt in the hands of the share-holder for purposes of charge to tax must be determined by determining the nature of the ordinary shares held, to which the bonus shares are accretion."
The learned Judges also observed as follows :--
"We consider that, by their very nature, all these bonus shares should be treated as accretions to the ordinary shares in respect of which the bonus shares were issued by the company. These bonus shares would not have been received by the assessee if the assessee had not been holding the ordinary shares. It was because he was holding those ordinary shares that the company gave these bonus shares to the assessee ...... The bonus shares are received by virtue of his holding of ordinary shares and consequently it must be held that it is in the nature of accretion to the ordinary shares held by the share-holder. ... . . ..... .Bonus shares, being shares received by virtue of the holding of ordinary shares, the nacure of their receipt in the hands of the share holder for purposes of charge to tax must be determined by determining the nature of the ordinary shares held, to which the bonus shares are accretions . . . ..... When computing income for purposes of assessment of income-tax, they must be treated as additions to stock-in-trade on the date on which they were received by the assessee."
These observations run contrary to what the House of Lords said in Blott's case (1921) 8 Tax Cas 101. I have already held earlier that it cannot be said that there is a nexus between the issue of bonus shares and the holding of the original shares. In any case what the learned Judges said in Moti Lal's case 1961-41 ITR 382 (All) is contrary to what was held by this Court in (1957), 31 ITR 987 : (AIR 1957 AH 472) where it was stated as follows:--
"If a capital receipt comes into the hands of any individual in kind and not in cash, the conversion of that asset into cash can only be conversion of capital into cash and not a transaction in the course of business for the purpose of earning profits. The mere coincidence that a particular asset received as capital receipt in of the same nature as the assets forming the stock-in-trade of the business, cannot convert the transaction of receipt and sale of the capital asset into a business transaction for the purpose of earning income."
I am with great respect unable to agree with what has been decided in the cases of Manik Lal Chunni Lal, IT Ref. 16 of 1948 (Bom) and Moti Lal, 1961-41 ITR 382 (All) (supra). In 1959-36 ITR 577 : (AIR 1960 Bom 223) the accretion theory was rejected by the Bombay High Court and is 1963-3 All E. R. 277 the nexus theory was discarded by the House of Lords. The facts of the former case were that Popat Lal gifted away his original shares to his son who received the bonus shares. Since the son was minor the Income Tax authorities included the dividend received on the original shares transferred by Popat Lal to his son in the assessment of the former according to the provisions of Section 16 (3) (a) (iv) and the question arose whether the dividend income from the bonus shares issued to the son could be included in the income of the father. Shah and S. T. Desai, JJ. held that the dividend income from the bonus shares could not be treated as arising indirectly from the original shares transferred by Popat Lal to his son. In the latter case the assessee was a member of an insurance company and paid premium to it. The company having gone into liquidation and the assessee having received its share in the assets the share received by the assessee in the assets was held to be capital gain and not revenue income though premia were treated to be trading expenses.
The view that I am taking finds support also from the (1921) 8 Tax Cas 101 (supra). In that case bonus shares were held by the company in lieu of dividend and the question for decision wag whether the allotment to the share holders was allotment of annual profits conferring a benefit chargeable to income tax or a capital gain. It was observed as follows :
"The Crown sought to assess the respondent on the face value of the shares, and on the argument before Mr. Justice Rowlett and before us it was pointed out that there should be added to that face value the proportion of the Income Tax paid by the Company on the profits before division. In fact, by such an allotment a share holder does not receive the face value of the shares allotted. To take a simple case, if the capital of the company be doubled and the half newly created allotted to the share-holders, the result is that the profits have to be divided amongst twice, the amount of the shares and the benefit to the shareholder remains the same as before. Probably, in theory, the value of the shares originally held and those would be half that of the former, but practically that is not always the case and the value of the shares allotted depends not only upon the extent to which they participate in profits, but upon the prospects of the company and the state of money market.
In the case of Bouch v. Sproule (1887) 12 A. C. 385, to which reference will be made later, it was stated that, on the issue of, 7 IOS. shares fully paid, the original shares fell to 7. I do not mention these facts merely to question the amount of assessment but to show the principle upon which it proceeds, i. e. that the allotment of shares must be regarded as a cash, payment of the face value of the shares, regarding as immaterial the fact that the shareholder never does receive any cash and can only obtain fully paid share, increasing the capital of the company as decreasing participating value of the shapes. In other words, the Crown contended that the respondent must be treated as if he had received the two sums of 500 and 750, and was then free to spend them as he liked in buying shares in this or another company, Government securities or land or anything else or not to invest them at all to spend them in his own amusement.
It seems to me that he is obviously not in fact in this position, and the question is whether be is to be considered to be so in law."
24. Blott's case was followed by the Judicial Committee of the Privy Council in (1936) 4 ITR 239: (AIR 1936 PC 238), and it was held by their Lordships that when accumulated profits are issued as bonus debentures on the basis of preference shares held by the person to whom bonus shares have been issued, the same cannot be treated to be income liable to be taxed in the hands of the share-holders. The case of (1914) AC 231 is distinguishable from the case before us because the language of the Australian Act is different from that of our statute. Inasmuch as the Australian Act defines "dividend" to include every advantage or gain intended to he paid, credited or distributed on the finding that the bonus shares were the advantage received it was held in Swan Brewery's case 1914 AC 23 r that the bonus shares were dividend. Besides, neither in the case of Swan Brewery nor in (1919) 252 U.S., 189, which was followed in that case, is there anything to support the nexus or accretion theory. Those were cases where the bonus shares themselves and not the proceeds of their sales were being assessed. The decision in Swan Brewery's case, 1914 AC 231 was distinguished by the House of Lords in Blott's case, 1921-8 Tax Cas 101 and by the Privy Council in Mercantile Bank's case 1936-4 ITR 239 : (AIR 1936 PC 238) (supra). The Judicial Committee in the latter case clearly stated that a case under the Indian Income-tax Act is covered by Blott's decision, 1921-8 Tax Cas 101 and not by Swan Brewery Company's decision 1914 AC 231.
25. I have already given my reasons for holding that the nexus theory is not correct. It is for this reason that I find myself in respectful disagreement with what was held in Moti Lal's case, 1961-41 ITR 382 (All). The case of (1956) 30 ITR 753: (AIR 1956 Bom 586) is clearly distinguishable. No question relating to the nature of bonus shares arose in it. 1954 SCR 219: (AIR 1953 SC 509) is also distinguishable. No other cases have Been brought to our notice.
26. For the reasons given above I come to the following conclusion: (i) The bonus shares did not accrete to the original shares held by the assessees; (2) there can be no presumption that the assessees acquired them in order to treat them as stock in trade and (3) any presumption that the bonus shares were sold by the assessees as stock in trade drawn from the sheer circumstance that the assessees were dealers in shares stands fully rebutted by the explanation and the plea of the assessees that they did not sell them in the course of their business nor did they acquire them for that purpose. I would, therefore, answer the question referred to us in each reference in the negative.
S.C. Manchanda,, J.
27. I have had the advnatage of reading the judgments of My Lord the Chief Justice and Jag-dish Sahai, J. which they propose to deliver but with great respect regret that I have to differ.
28. All the facts have already been set out in the judgment of the learned Chief Justice and it is unnecessary to reiterate them in extenso. It will suffice if I set out only the mateiral facts in the connected I. T. Ref. No. 190 of 1953 and which lie within a very narrow campass.
29. The assessee Kunji Lal, was admittedly a dealer in stocks and shares. The relevant assessment year is 1955-56. He held as part of his stock-in-trade, a block of 24,000 ordinary (equity) shares of Kanpur Textiles Ltd. (hereinafter referred to as the Company) of the face value of Rs. 2/8/- each. 400 shares out of these were held on behalf of one Mr. Talwar.
30. The Company had a large reserve of undistributed profits. At the General Meeting held on the 2nd June 1943, the Company decided to issue fully paid-up bonus shares of the face value of Rs. 2/8/- each. These additional bonus shares were to be allotted as bonus shares to the registered share-holders of the Company as on the 22nd May 1943. For every equity share held by a share holder he was to receive one bonus share.
31. As already observed, the assessee on the 22nd May 1943, held 24,000 equity shares in his name. Because of such holding he received 2,400 bonus shares. Out of these 400 shares were transferred to the said Mr. Talwar. The remaining 2000 bonus shares the assessee sold out within a period of ten weeks of the receipt of these shares and realised Rs. 28,500/-. This amount was included in the assessee's total income and subjected to tax by the Income-tax authorities and such inclusion was upheld by the Income-tax Appellate Tribunal.
32. On a reference under Section 66(1) of the Act, the Tribunal referred the following question for the opinion of this Court:
"Whether on the facts and in the circumstances of this case the sale proceeds of the bonus shares received in respect of ordinary shares held by the assessee as a part of his stock-in-trade is an income taxable under the Indian Income-tax Act?"
33. When this matter came up before the Division Bench it was contended on behalf of the assessee, that the receipt of bonus shares was only a capital receipt and the sale proceeds of those shares amounted to the realisation of a capital asset. Reliance for this proposition was placed on the decision of the House of Lords, in Blott's case, 1921-8 Tax Cas 101, and the decision of this Court in 1957-31 ITR 987: (AIR 1957 All 472). On behalf of the department, it was contended that the original shares in respect of which bonus shares were issued to the assessee being his stock-in-trade, the bonus shares amounted to an accretion to the stock in trade and as such the sale proceeds of the shares was a revenue receipt liable to be included in the assessee's total income. Reliance for this proposition was placed on a division bench decision of this Court in 1961-41 ITR 382 (All). The Division Bench which decided Moti Lal's case, 1961-41 ITR 382 (All) had sought to distinguish the earlier decision in Sri Ram Jha, 1957-31 ITR 987; (AIR 1957 All 472) but the Bench hearing the present reference was of the view that these cases required reconsideration by a larger Bench in view of the apparent conflict between the said two decisions of this Court and also because of the decision of the House of Lords in Blott's case, 1921-8 Tax Cas 101. That is how this case has come before a Full Bench.
34. Undoubtedly, Blott's case, (1921) 8 Tax Cas 101, is the leading case on the subject of non-taxability of bonus shares issued by a Company. The question however, in that case was one which, at any rate does not arise for consideration in the present case at all. That was a case where the only question which arose was:
"whether the allotment of bonus shares to the respondent was capital or was in reality an allotment of annual profits which conferred a benefit chargeable in his hands with income-tax, for, if so, it is not in controversy that the super-tax provisions will apply."
(page 124 per Viscount Haldane). In other words, the point for decision was, whether the mere issue of the bonus shares constituted an income in the hands of the recipient. Viscount Haldane (at page 126) observed :
"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 share-holders as income, and as an alternative not to distribute them at all, but apply them in paying up the capital sums which share-holders electing to take tip unissued shares would otherwise have to contribute. If this is done the money so applied is capital and never becomes profits in the hands of the share-holder 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. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in (1902) AC 83 at page 93) no Court can interfere."
35. It is manifest that what was being dealt with was only the relationship inter se between the share holder, the recipient of the bonus shares and the parent company which issued them.
36. Again Viscount Cave pointed out (at page 135):
"The Company's profits were at its own disposal and were in no sense income of the shareholders unless and until they were distributed among them...... The resolution did not give to any share-holder a right to sue for the dividend in cash, his only right being to have an allotment of fully paid shares in the capital of the Company. The profits remained in the hands of the Company as capital and the share-holders received a paper certificate as evidence of his interest in the additional capital so set asides and put nothing into the share-holders' pockets; and the only result was that the Company, which before the resolution could have distributed the profits 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 share-holder could sell bis 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. It appears to me that if the substance and not the form of the transaction is looked to the declaration of a bonus was, as Mr. Justice Rowlatt said, 'bare machinery' for capitalising profits, and there was no distribution of profits to the share-holders. 'I think therefore that neither the shares nor their face value should be treated as income of the respondent' ". (Underlining (here in ' ') is mine). It is again manifest that the sole question which the House of Lords was considering was as to whether the issue of bonus shares constituted a distribution of profits of the company to its shareholders and was assessable as such. In other words whether the mere issue of bonus shares by the Company constituted income assessable in the hands of the share-holder as dividend income. If that was the question which arose in the present case then, undoubtedly Blott's case, 1921-8 Tax Cas 101 would be a complete answer as contended for fey the assessee. The question, however, unfortunately for the assessee, is not that but something totally different to which Blott's case, 1921-8 Tax 'Cas 101 does not furnish any answer for the simple reason that no such question arose before the House of Lords in that case. Therefore, "Blott's case, (1921) 8 Tax Cas 101 and the case of Commr, of Inland Recenue v. Fisher's executor, (1925) to Tax Cas 302, where the House of Lords had followed its earlier decision in Blott's case, (1921) 8 Tax Cas 101 in respect of the issue of debenture and debenture stock must in my judgment, be steered clear off otherwise the real point at issue which arises in the present case is likely to be blurred if not obliterated. In passing, it may be mentioned that the case of (1925) 10 Tax Cas 302 was definitely not accepted by the Indian Legislature when it enacted the provisions of Section 2(6A)(b) of the Income-tax Act 1922 (hereinafter referred to as the Act). The issue of debenture or debenture stock under the aforesaid provision is considered to be ''dividend'' and assessable as such.
37. The point that arises in the present case, as brought out in the question which has been referred under Section 66(1) is not as to whether the bonus shares are assessable as dividend under Section 2(6A) of the Income-tax Act, but whether the sale proceeds of those bonus shares received as a result of the ordinary shares held by the assesses as a part of his stock in trade is texable income? Now the question referred Involves totally different considerations from the assessability of bonus shares as "dividend" simpliciter. It involves a consideration of the nature and character of the receipt in the hands of the recipient. The question posed ignores the company which issued the bonus shares. It also ignores the Company as a source of the bonus snares and requires this Court to give an opinion as to the nature and character of the receipt resulting from the sale proceeds of the bonus shares, in the hands of the assessee, who admittedly is a dealer and not an invester in shares.
38. The scheme of the Income-tax Act is to charge tax on the total income of the assessee. Section 3 is the charging section and it provides for the charging of Income-tax subject to the provisions of this Act......... in respect of the total income of the previous year of every individual.... Income, is defined in Section 2(15) of the Act:
'Total amount of income, profits and gains referred to in Sub-section (i) of Section 4 must be computed in the manner laid down in this Act."
Therefore, the definition of total income throws one back to Section 4 of the Act. The relevant part of Section 4 reads :
"4(1) Subject to the provisions of this Act the total income of any previous year of any person includes all income, profits and gains 'from whatever source derived which'........."
39. The words underlined (here in ' ') by me above came up for consideration before a Bench of this Court in Lala Indrasen 1940-8 ITR 187 at p. 199: (AIR 1940 All 154 at p. 160) where it wag laid down "that taxation under the Act is the rate and exemption the exception. All income from what-ever source derived must, therefore, be chargeable to income-tax and the burden of proving that a particular class of income was not charitable must aecessarily lie on the person claiming exemption from the liability to pay Income-tax."
The words "from whatever source derived" in Section 4(1) are significant and they are intended to prevent income escaping from tax merely because the source from which it was derived was not clearly discernible. It was also intended to obliterate the emphasis on the source in income-tax matters except, for placing income under its proper head as enumerated in Section 6 of the Act for purpose of computation of the income and giving the necessary allowance provided under each of the heads mentioned therein.
40. Income, again, is not a term of art bat one of very wide sweep and embraces almost every receipt unless it is exempt under the Act. Exemptions are contained in Section 4(3) of the Act. Section 4(3) (vii) deals with the receipts of casual and non-recurring nature. It is provided that the exemption contained therein will not apply to receipts of capital nature to which Section 12-B might be applicable nor to receipts arising from business. The definition of "business" in Section 2, Sub-clause (4) of the Act includes any adventure or concern in the nature of trade, commerce or manufacture. It is well settled that the nature of the receipt is determined exclusively by its character in the hand of the recipient and the source from which or the intention with which such payment is made has no relevance whatsoever. The payer may pay out of his capital but that will not necessarily make the character of that receipt in the hands of the payee also that of capital. So, if the company in the present case issued bonus certificates as part of its capital not as part of its profits the bonus shares as such would not be assessable as income under the general provisions or under Section 2(6A) (a), of the Act. But after the bonus shares are received and they are not taxed as such, the conversion of these shares by a dealer in shares into cash must necessarily form part of his stock in trade.
In the circumstances of this case, it would be difficult to hold and the Tribunal has not held that the bonus shares were accepted by the assessee with the object of treating them as an investment. The treatment that he may have given to these bonus shares in his books by throwing or not throwing them into his stock-in-trade, in order to reduce the incidence of taxation will not be conclusive of the matter. The whole course of conduct and the manner in which these bonus shares were acquired and dealt with will have to be considered. The bonus shares could never have been acquired with the object of investment as those shares were sold without any necessity or reason whatsoever within ten weeks of the receipt thereof. They were also not purchased, indeed they could not have been purchased with the object of obtaining any management, agency or director-ship and as such the decision strongly relied upon for the assessee in 1961-41 ITR 534: (AIR 1961 SC 1141) can be of little or no avail to the assessee.
41. Bonus shares undoubtedly cannot be purchased or acquired by a share holder from the Company, it is something which he receives gratis. They, however, do not fall from heaven but come to him because he is a registered share holder in the books of the company on a particular date. The issue of those shares bear a definite relationship to his equity share holding. In the present case, for every ordinary share held by the assessee he received one bonus share. But for these ordinary shares held, the assessee would never have received any bonus shares. There is therefore a definite nexus or causal connection between the bonus shares issued by the Company and the equity shares held by the assessee. The proximate, immediate and effective source of bonus shares is, therefore, not the Company. The company could not have issued the bonus shares to any one it liked but could only have issued such shares to the shareholders already on its register. The immediate and proximate and effective source, therefore, of the bonus shares was the equity share holding by the assessee. The ordinary share holding, admittedly, being the stock in trade of the assessee the bonus shares issued as a result of such holding would ordinarily constitute an adjunct, addition, appendage or accretion to the equity share holding of the assessee. If they are in fact an accretion to the equity shares then it necessarily follows that those bonus shares must take on the same colour and partake of the same nature and character as the equity shares in the hands of the particular assesses.
In other words, if the equity shares are held as an investment, the adjunct or accretion of bonus shares thereto and the receipt thereof by sale will be an accretion to capital, but, if on the other hand, the equity shares are held as stock in, trade and something is added to it, albeit gratis, by the issue of bonus shares the latter will inevitably form part of the stock in trade and sale of stock in trade can never be anything but a revenue receipt. The fact that the Company issues bonus shares to all the share-holders regardless of whether such share-holders are investors or dealers is, in my judgment, a wholly immaterial consideration when the receipt of such bonus shares is not being assessed as "dividend". As already observed, it may be capital in the hands of the company but that would not necessarily make it capital in the hands of the share holder who is a dealer in shares. Such a consideration can only assume importance if the company is to be assessed or the share holders on receipt of such bonus shares simpliciter.
42. In the present case, no question of the assessment of the company or dividends in the hands of the assessee within the meaning of Section 2(6A) arises. The view that I am taking finds support by, an unreported decision of the Bombay High Court, Chagla C. J. and Tendolkar, J., in (I.. T. Ref. No. 16 of 1948, D/- 23-9-1949 (Bom) Annexure A to the paper book); the decision of this Court in 1961-41 ITR 382 (All) and also Kanga's I. T. Act 4th Edition Vol. r pp. 102 and 103.
43. In the view that I have taken it follows that the decision of this Court in 1957-31 ITR 987: (AIR 1957 All 472) does not lay down the correct law, and in any event, requires to be confined to the facts of that case and not to be taken or cited as a precedent.
44. For the reasons given above I would answer the question referred in I. T. Rs. Nos. 190 of 1953 and 193 of 1955 in the affirmative and against the assessee.
BY THE COURT :
For the reasons stated in our judgments our answer to the question is in the negative. We direct that copies of this judgment shall be sent under the seal of the Court and the signature of the Registrar to the Income-tax Appellate Tribunal and the Commissioner of Income-tax as required by Section 66(6) of the Income-tax Act. We further direct that the assessee shall get its costs of the reference, which we assess at Rs. 100/-, from the Commissioner of Income-tax. Counsel's fee is assessed at Rs. 100/-.