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Commissioner Of Income Tax, U.P All The Appeals v. Madan Gopal Radhey Lal All The Appeals .
Factual and Procedural Background
M/s Madan Gopal Radhey Lal (“the assessees”) carried on the business of dealing in shares and securities. During the relevant assessment years they held certain shares as stock-in-trade and, in proportion to that holding, received bonus shares from the issuing companies. The assessees subsequently sold the bonus shares.
The Income Tax Officer treated the sale proceeds as business income and brought to tax the following sums: Rs 55,607 (A.Y. 1946-47), Rs 4,625 (A.Y. 1948-49), Rs 1,43,050 (A.Y. 1949-50) and Rs 33,170 (A.Y. 1950-51). The Appellate Assistant Commissioner and the Income Tax Appellate Tribunal (ITAT) affirmed that view.
At the assessees’ instance the ITAT referred a question of law to the Allahabad High Court. A Full Bench (Manchanda, J. dissenting) answered the question in the negative, holding that the sale proceeds were not taxable as business profits. The Commissioner appealed to the Supreme Court with a certificate granted by the High Court.
Legal Issues Presented
- Whether the sale proceeds of bonus shares issued in respect of shares forming part of the assessee’s stock-in-trade are liable to be included in its total income for the relevant years as profits of the share-dealing business.
Arguments of the Parties
Assessees’ Arguments
- The ITAT’s conclusion that the bonus shares had been converted into stock-in-trade was “cryptic” and unsupported by evidence.
- Balance-sheets for the relevant periods did not show the bonus shares as part of stock-in-trade; the sale proceeds were credited to the capital account, indicating a capital—rather than revenue—character.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioners of Inland Revenue v. John Blott | Bonus shares issued out of accumulated profits are capital, not dividend/income. | Quoted to explain the general principle that bonus shares are normally capital accretions. |
| CIT, Bengal v. Mercantile Bank of India | Affirmed the Blott principle under the Indian Income-tax Act, 1922. | Cited to reiterate that, absent special provisions, bonus shares are capital. |
| CIT v. Maniklal Chunnilal & Sons Ltd. (Bombay) | Held that bonus shares received by a share dealer automatically become stock-in-trade. | Supreme Court expressly disagreed with this view, rejecting an automatic presumption of stock-in-trade. |
| India Cements Ltd. v. Commissioner of Income Tax, Madras | High Court in a reference must accept ITAT’s findings of fact unless specifically challenged under Section 66(1). | Applied to bar the assessees from attacking the ITAT’s factual finding that the receipts were part of the business. |
Court's Reasoning and Analysis
1. The Court accepted the general legal position that bonus shares are ordinarily capital accretions, citing John Blott and Mercantile Bank of India.
2. However, whether a particular receipt is capital or revenue depends on the intention and treatment accorded by the recipient. There is no automatic presumption that everything acquired by a trader becomes stock-in-trade; the matter is factual.
3. In this case the ITAT had expressly found that the sale proceeds of the bonus shares were “received by [the assessee] in the course and as part of his share-dealing business”. Although the Tribunal’s reasoning was terse, that factual conclusion stood unchallenged by any proper application under Section 66(1).
4. Relying on the principle in India Cements, the Supreme Court held that it could not, at the reference stage, reassess the evidentiary basis of the ITAT’s finding. The only question was whether, given that finding, the receipts were taxable as business profits. On that premise, the sale proceeds were clearly revenue in nature.
5. The Bombay decision in Maniklal Chunnilal, which presumed automatic conversion to stock-in-trade, was rejected as an incorrect statement of law; nevertheless, on the specific facts found by the ITAT here, the conversion had in fact occurred.
Holding and Implications
HOLDING: The question is answered in the affirmative – the sale proceeds of the bonus shares are liable to inclusion in the assessee’s total income as profits of the share-dealing business.
Implications: The decision reverses the Allahabad High Court’s negative answer and restores the assessments made by the Revenue for the four years in question. It emphasises that, although bonus shares are generally capital assets, they can constitute stock-in-trade when so treated by a dealer, and that findings of fact by the ITAT are conclusive in a statutory reference unless properly challenged. No broader precedent on the capital/revenue distinction was altered.
The Judgment of the Court was delivered by
J.C Shah, J.— M/s Madan Gopal Radhey Lal — hereinafter called “the assessees” — deal in share; 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 4625 in Assessment Year 1948-49; Rs 1,43,050 in Assessment Year 1949-50 and Rs 33,170 in 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.
2. At the instance of the assesses, the Tribunal referred the following question of law to the High Court of Allahabad for opinion:
“Whether the sale proceeds of bonus shares which had been issued in respect of shares which formed part of the assessee's stock-in-trade of the share dealing business are liable to inclusion in the assessee's total incomes for the respective years as profits of the share dealing business?”
3. The High Court called for a supplementary statement of case. A Full Bench of the High Court (Manchanda, J., dissenting) answered the question in the negative. The Commissioner has appealed to this Court with certificate granted by the High Court.
4. The Articles of Association of the various Companies which had issued the bonus shares are not on the record. It has been assumed that the Companies had issued bonus shares in exercise of the power conferred upon them by the Articles of Association, and no argument has been raised in that behalf. A company when authorised by its 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.
5. In Commissioners of Inland Revenue v. John Blott 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.”
6. Similarly Lord Cave observed at p. 135:
“The profits remained in the hands of the Company as capital, and the shareholders received a paper “certificate as evidence of his interest in the additional capital so set aside. The transaction took nothing: out of the Company's coffers, and put nothing into the shareholders' pockets; and the only result was that the Company, which before the resolution could have distributed the profit by way of dividend or carried it temporarily to reserve, came thenceforth under an obligation to retain it permanently as capital. It is true that the shareholder could sell his bonus shares, but in that case he would be realising a capital asset producing income, and the proceeds would not be income in his hands.”
7. The principle of the case was affirmed by the Judicial Committee in a case arising under the Indian Income Tax Act, 1922, CIT Bengal v. Mercantile Bank of India. 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.
8. We are unable to agree with the judgment of the Bombay High Court (to which reference was made by the Tribunal) in CIT v. Maniklal Chunnilal and Sons Ltd. Bombay — ITR Reference No. 16 of 1948 — that bonus shares received by a shareholder who carries on business in shares and securities “ipso facto become accretion to his stock-in-trade”. Bonus shares would normally be deemed to be distributed by the Company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity.
9. Bonus shares having been received by the assessees in respect of their stock-in-trade did not therefore become part of their stock-in-trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital they could be converted by the assessees into their stock-in-trade or retained as their capital asset.
10. The Tribunal observed in para 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 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 it s conclusion and has made a cryptic statement which is not capable of the interpretation that the assessees had converted the bonus shares into their stock-in-trade. If there is no presumption that the accretion to the stock-in-trade necessarily gets incorporated into the stock-in-trade, says Mr Chagla, in the absence of evidence showing that the bonus shares were treated by the assessees as stock-in-trade the finding of the Tribunal cannot be sustained. Counsel invited our attention to the supplementary statement of case in which the Tribunal recorded that in the copies of balance sheets filed by the assessees as of February 14, 1948, March 8, 1949 and March 8, 1950, the shares did not find a place and that the sale proceeds of the bonus shares were credited in the capital account of the assessees for the four years in question on the last dates of the relevant accounting years.
11. 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. liven 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 at inference in favour of the assessees. The question posed for the opinion of the Court was not whether the conclusion of the Tribunal was founded on evidence, but whether the sale proceeds of the bonus shares were of the nature of revenue. On this question an enquiry into whether the conclusion of the Tribunal is supported by the evidence cannot be made.
12. In India Cements Ltd., v. CIT 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 those findings first by an application under Section 66(1). If he has failed to file an application under Section 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 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.
13. 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.
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