Case Note & Summary
The dispute concerned the tax treatment of sale proceeds of bonus shares received by a dealer in shares and securities. The assessee, a firm dealing in stocks and shares, held shares of certain companies as part of its stock-in-trade. It received bonus shares from those companies proportionate to its equity holding. The Income Tax Officer assessed the sale proceeds of the bonus shares as business profits. The Appellate Assistant Commissioner confirmed the assessment. On further appeal, the Income Tax Appellate Tribunal found that the bonus shares, though received as capital, were converted by the assessee into its stock-in-trade and were not retained as capital assets. The Tribunal held that the sale proceeds were received in the course of and as part of the assessee's business in shares, and were therefore taxable as business income. On reference, the High Court reversed the Tribunal's decision, holding in favour of the assessee that the sale proceeds represented capital and were not taxable as business profits. The Commissioner of Income Tax appealed to the Supreme Court. The Supreme Court noted the settled legal position that bonus shares given by a company in proportion to the holding of equity capital are, under the Income-tax Act, 1922, at the relevant time (assessment years 1946-50), liable to be treated as capital and not as income. However, a trader may acquire a commodity in which he deals 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, is for the purpose of his business. In each case, the question of intention must be gathered from the evidence of conduct and dealings by the acquirer with the commodity. The Court emphasized that the High Court misdirected itself in law by failing to consider the Tribunal's specific finding that the bonus shares, though received as capital, were actually converted by the assessee into its stock-in-trade. The Supreme Court held that the Tribunal was right in concluding that the sale proceeds were taxable as business profits. Accordingly, the appeal was allowed, the order of the High Court set aside, and the Tribunal's order restored. The decision reaffirms that the character of an asset for tax purposes depends on the intention and conduct of the assessee, not merely on its original nature. The Court disapproved the Bombay High Court's view in C.I.T. Central Bombay v. Maneklal Chunilal and applied the principle laid down by the Privy Council in C.I.T., Bengal v. Mercantile Bank of India. The House of Lords decision in Commissioner of Inland Revenue v. John Blott was also referred to.
Headnote
A) Taxation - Income from Business - Bonus Shares as Business Profits - Income-tax Act, 1922, Section 66(1) - Bonus shares received by a shareholder are capital in nature and not income, but if a dealer in shares converts such bonus shares into stock-in-trade, the sale proceeds become taxable as business profits - The principle that there is no presumption that an accretion to stock-in-trade is automatically for business purposes; intention is to be gathered from conduct and dealings - Held that in the present case the Tribunal found that the bonus shares were converted into stock-in-trade, and therefore the sale proceeds are taxable as business income (Paras 10). B) Taxation - Income from Business - Nature of Bonus Shares - Income-tax Act, 1922 - Under the Income-tax Act at the relevant time (1946-50), bonus shares issued in proportion to equity holding were to be treated as capital and not income - A trader may acquire a commodity for his own purposes and hold it apart from stock-in-trade; no automatic conversion into business asset occurs by mere accretion - Held that the High Court erred in treating the bonus shares as capital without considering the Tribunal's finding of conversion into stock-in-trade (Paras 10).
Issue of Consideration
Whether the sale proceeds of bonus shares received by a dealer in shares, and subsequently converted into stock-in-trade, are taxable as profits of business or as capital gains.
Final Decision
The Supreme Court allowed the appeal, set aside the High Court's order, and restored the order of the Income Tax Appellate Tribunal. It held that the Tribunal's finding that the bonus shares were converted into stock-in-trade was supported by evidence, and the sale proceeds were taxable as business profits.
Law Points
- bonus shares initially capital
- if converted into stock-in-trade by dealer intention and conduct
- sale proceeds are business profits
- no presumption that accretion to stock-in-trade is for business purpose
- question of intention gathered from evidence
