COMMISSIONER OF INCOME-TAX, LAHORE Versus UMAR SAIGAL

ORDER

DORAB PATEL, J.--- The respondents in all these sixteen petitions owned shares at the relevant time in a company known as the Kohinoor Industries Limited. In the events that happened, this company declared bonus shares and sometime after they had received the bonus shares tire respondents sold off their shares in the Kohinoor Industries, therefore, they became liable to pay capital gains tax under section 12-B (2) (ii) of the Income-tax Act on the gains made by them on the sale of their shares, And the dispute in these petitions relates only to the calculation of the profits made by the respondents on- the sale of their bonus shares in Khohinoor -Industries.

The face value of the shares was Rs. 10 and the contention of the respondents in all these petitions was that their profits on the sale of their bonus shares was the difference between the price received by them for the sale of their shares and Rs. 10 the face value of the shares, because their common contention was that the cost of bonus shares to them was Rs.

13. As the Income-tax Officer concerned did not accept this contention, he treated the entire sale price of the bonus shares as the capital gains made by the respondents on the sale of their bonus shares and taxed them accordingly. Therefore, the respondents challenged the orders passed by the Income-tax Officer in appeals before the Appellate Assistant Commissioner, but as these appeals were dismissed, the respondents challenged the dismissal of their appeals before the Income-tax Appellate Tribunal. And, according to Mr. Abdul Haque, these appeals were pressed on the basis of a judgment of the Madras High Court reported is Commissioner of Income-tax, madras v. Ramachandra Chettiar ((1964) 52 1 T R 96). The Income-tax Appellate Tribunal followed the Madras Judgment and accepted the contentions of the respondents and held the cost of bonus shares to them was the face value of A those shares therefore the capital gains made by them on the sale of their bonus shares was the difference between the sale price of the shares and the face value of the shares.

As the Income-tax Appellate Tribunal thus allowed the appeals of the respondents the petitioner made a reference in all the sixteen cases to the Lahore High Court under section 66(1) of the Income-tax Act and the question thus referred to the High Court was whether the Tribunal "was right in holding that for computation of capital gains the interest of bonus shares should be placed at Rs. 101 instead of nil taken by the Income-tax Officer".

The petitioner pressed the references on the plea that bonus shares were always issued free of costs to shareholders and his learned counsel appears to have relied on the judgment of the Indian Supreme Court in C. I. T. Bihar v. Dalmia Investment Co. Ltd. (A I R 1964 S C 1464). However, it does not appear that the resolutions passed by the Kohinoor Industries for the issue of bonus shares were part of the record before the High Court. Therefore, after analyzing the provisions of the Companies Act, the learned Judges agreed with his view taken by the Madras High Court in (1964) 52 1 T R 96 and rejected the references. Hence these petitions for leave.

Mr. Abdul Haq repeated before us his contention that a shareholder receives bonus shares free of tax because he does not himself make any payment to the company when he receives bonus shares. It is true that the recipient of a bonus share does not himself make a payment to the company which is allotting to him a bonus share. But this is because bonus shares are paid out of the undistributed profits of the Company which would have been paid to the share holders but for the distribution of bonus shares. In other words, as explained by Lord Finley in Swan Brewery Company Limited v. The King (1914 A C 231) what happens when a- company issues bonus shares is that it declares a dividend or bonus but instead of paying that dividend or bonus to the shareholder the Company retains that dividend or bonus and adjust it against the amount due from the shareholder for the bonus share issued to him. Thus the Company's debt to its shareholder, namely the dividend declared in his favour this debt is set off against the amount due from the share holder for the bonus share and as the amount thus set off is always equal to the face value of the bonus share, the cost of the issue share to the shareholder is its face value.

Now, although in the instant case we have not been supplied with the resolutions passed by the Kohinoor Industries for the capitalization of shares it was not Mr. Abdul Haq's contention that this Company had departed from the normal practice for issuing shares. Therefore as the face value of the shares of the Kohinoor Industries was Rs. 10 presumably what happened when it declared the bonus issue in question was that it first dec lared a dividend or bonus of Rs. 30 on every five shares and then adjusted the amount of this dividend or bona; against the payment for the three bonus shares issued to the shareholders holding five shares. Clearly, therefore the cost of the shares holder of each bonus share was Rs.

10. Accordingly as we agree with the view taken in the judgment under appeal these petition are dismissed.

Petitions dismissed.