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PETITIONER: COMMISSIONER OF INCOME-TAX, U.P.

       Vs.

RESPONDENT: M/S. MADAN GOPAL RADHEY LAL

DATE OF JUDGMENT: 06/09/1968

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. GROVER, A.N.

CITATION:  1969 AIR  840            1969 SCR  (2)   7  CITATOR INFO :  R          1986 SC1483  (4)

ACT: 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.

HEADNOTE:  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]

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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  I.T.R. 239(P.C.), applied. 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 stockin-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.

JUDGMENT: 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 1955.     C.K. Daphtary, Attorney-General, R. Gopalakrishnan, R.N. Sachthey  and  B.D. Sharma, for the appellant  (in  all  the appeals).     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 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

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             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

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             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-intrade 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 commodity.     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-intrade. 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

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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 accounting years.   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  discharged’. The answer to the question submitted is in the  affirmative. No order as to costs of the appeal to this Court and of  the reference’ in the High Court. V.P.S.                                     Appeal allowed. 13