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Petitioner: KUNJILAL GUPTA VS Respondent: COMMISSIONER OF INCOME-TAX, U. P.Honorable Justice M. C. DESAIR. L. Gulati and V. B. Upadhya,Gopal Behari
1964 P T D 590
1964 P T D 590
[Allahabad (India)]
(FULL BENCH)
Before M. C. Desai, C. J., Jagdish Sahai and Manchanda, JJ
KUNJILAL GUPTA
Versus
COMMISSIONER OF INCOME‑TAX, U. P.
Income‑tax Reference No. 190 of 1953 with Income‑tax Reference No. 193 of 1955, decided on 17th January 1964.
Income‑---Income or capital‑Sale of bonus shares‑Sale proceeds whether income.
There is no presumption that whenever a dealer in a parti cular commodity acquires it, he acquires it as his stock‑in‑trade and not as capital goods.
There is no nexus between original shares and bonus shares. The basis of the accretion theory that bonus shares are issued because the shareholder holds original shares, is incorrect.
The intention with which a dealer acquires goods of the same nature as his stock‑in‑trade is an important consideration in deciding whether the acquisition is stock‑in‑trade or capital goods. The acquisition of bonus shares is involuntary and as such the way in which a person who receives bonus shares deals with it subsequently, would be the deciding factor.
The assessee, a dealer in shares, received bonus shares from some companies in which it held shares, and sold them later on. The Income‑tax Officer treated the proceeds of the sale as income from business, overruling the assessee's contention that it was a capital receipt:
Held, the bonus shares themselves did not amount to dividend or income of any other kind and as there was no evidence that the assessee intended to treat them as its stock‑in‑trade, the proceeds of the sale was not revenue income.
[Cases referred to].
R. L. Gulati and V. B. Upadhya for the Assessee.
Gopal Behari for the Commissioner.
JUDGMENT
M. C. DESAI, C. J.‑----This is the 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. The 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 Income‑tax Reference No. 193 of 1955 is another statement of a case referred by the same Tribunal at another assessee's instance under section 66 (1) 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 income 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 I T R 382) and Shri Ram Jha v. Commissioner of Income‑tax ((1957) 31 I T R 987). 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 the stock‑in‑trade of the assessee in his share dealing business or not." There upon, 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 February 14, 1948, March 8, 1949 and March 8, 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.
The assessee 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. 2‑8‑0 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 August 16, 1943 and October 26, 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.
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 shareholders and thus the assessee also received bonus shares from them. !t 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 v. Maneklal Chunilal & Sons Ltd. (I. T. R. No. 16 of 1948)
In the connected income‑tax 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 dis regarded by us.
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 person Interested in the company, (4) any sum deemed to be profits under certain provisions of the Act, (5) any capital gain chargeable under section 12‑B and (6) the profits and gains of any business carried on by an 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, (1) 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 shareholders 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 shareholders 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, 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.
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 assessee 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 goods but on the purpose behind their acquisition and the use made of them. Hence, some out of the 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 everything 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 be 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 docs 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 if 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 questions whether he acquires them as stock- in‑trade or as capital assets at once becomes a question of fact.
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, or 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 (P.) Ltd. v. Commissioner of Income‑tax ((1961) 41 I T R 534), a 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 a 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:
" In considering whether a transaction is or is not an adventure in the nature of trade, the problem must be approached in the light of the intention of the assessee . . . The shares were purchased for the purpose of acquiring the managing agency . . . ; they were not purchased in the course of the appellants' business as dealers in shares. By purchasing the shares which facilitated acquisition of the managing agency, a capital asset was acquired and merely because the managing agency could be utilized for earning profit, the acquisition of the shares which led to the acquisi tion of the managing agency could not, in the absence of an intention to trade in those shares, be regarded as acquisition of stock‑in‑trade of the share business . . . . . Nor is the fact that the appellants are dealers in shares . . . . of any importance in the circumstances of the case . . . . If the purpose of the acquisition . . . . was the acquisition of the managing agency, the inference is inevitable that the intention in purchasing the shares was not to acquire them as part of the trade of the appellants in shares."
This is a clear authority for the proposition that intention, which may be inferred from the object behind the acquisition 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 to the United States. It did not buy dollars for the purpose of re‑sale 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 apprecia tion 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 the taxation statute : see Imperial Tobacco Co. (of Great Britain and Ireland Ltd.) v. Kelly ((1943) 25 Tax. Cas. 292, 300, 301). Lord Greene M. R. observed as follows:
" . . . the acquisition of these dollars cannot be re garded 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.
.. 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."
The dollars were held to be part of the stock‑in‑trade of the company because of the purpose for which they were acquired.
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 acquisition; the assessee is bound to accept the shares unless he wishes to renounce them. He has no option of taking something in lieu of them. He must accept them are 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. Subse quent 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 (P.) Ltd. Once the intention was established that they were acquired as stock‑in‑trade or as capital assets the nature of 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 as 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 from 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 there 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, can 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.
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 shareholders whose names appear in the company's register of shareholders on a par ticular day. A shareholder'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 shareholder 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 rot 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 shareholder in the company's register is entitled to bonus shares regard less 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 fact of his holding them. In the circum stances, 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 involun tary 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 rare stock‑in‑trade the bonus shares become stock‑in‑trade and if they are capital assets the bonus shares also become 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 because as I said earlier they are allotted not on account of the original shares but on account of the shareholder'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 Bhikamchand v. Commissioner of Income‑tax ((1959) 36 I T R 577). 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 shares 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 bonus 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.
The nexus theory was…
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