THE COMMISS1ONER OF INCOME-TAX, LAHORE Versus UMAR SAIGOL

1. MUSHTAQ HUSSAIN, J.‑-- The respondents in these References derived income from various sources during the years under review. They owned two classes of share] of Messrs Kohinoor Industries Ltd., i.e. original shares and bonus shares. 'Three of the latter were issued to the respondents for every five of the former held by them. While working out the capital gain under the provisions of section 12(b)(2)(ii) the Income‑tax Officer assessed the actual cost of each original share at Rs. 10 while he did not assign cast to the three bonus shares issued for each such set of five shares. The result was that, according to his calculations, the total cost of each set of eight shares, i.e. five shares issued originally and three bonus shares issued on the basis of which came to Rs. 50 only. The cost of each share, therefore, worked out at Rs. 6.25. The capital gain was calculated on the basis of this assessment.

2. The respondents did not feel satisfied and appealed to the Appellate Assistant Commissioner claiming that the cost of each bonus share should also be fixed as Rs. 10.00. The Appellate Assistant Commissioner disagreed with their contention and their appeal was dismissed.

3. They had recourse to the Income‑tax Appellate Tribunal which by separate decision in each case dated 18‑11‑1970 came to tile conclusion that the bonus shares are not obtained free of cost and, in fact, "on allotment of the shares to the shareholders, the company earmarks certain finds on behalf of the shareholders and pays the price of the shares." The Tribunal, therefore, directed that the cost of each bonus share for the Purpose of computing the capital gain should be revised and be placed at Rs. 10 per such share.

4. The Commissioner did not agree and, therefore, moved the Tribunal for referring to this Court the question ---

5. "Whether on the facts and in the circumstances of the case the Tribunal was right fn holding that for computation of capital gain the cost of bonus shares should be placed at Rs. 10 each instead of nil taken by the Income‑tax Officer."

6. By its order dated 8‑6‑1971 the Tribunal has referred the afore mentioned question to us for opinion.

7. We answer the question in the affirmative and the Reference is answered accordingly. Our reasons for so stating follow :

8. "Share" as defined in section 2(16) of the Companies Act, 1913 means "share in the share capital of the company anti Includes stock except when a distinction between stock and shares is expressed or Implied." Under the Companies Act, therefore, a share whether allotted on the basis of cash payment or on account of bonus stands on the same footing. Every share allotted by the company has to he paid for in cash or kind because the shares are shares in the share capital of the company. Every share, therefore, represents a part of the capital and is relatable to it. When a share is allotted a certain amount of money has to be credited to the capital account of the company on account of the price of that share. It is axiomatic that a company cannot deal in its own Shares. It cannot purchase its own shares in any case. It consequently follows that when a share of the company is allotted to somebody it Is not the company but the allottee or somebody else on its behalf who has to pay the corresponding amount for being credited to the capital account of the company.

9. When a company makes profit it divides a part of the profit amongst the shareholders In the shape of dividend. This divided can either be paid in cash or instead of making a cash allocation the company can allocate shares of the same value to the shareholder and credit the amount to the capital account of the company which would have otherwise been paid as dividend to the shareholder. Shares so allotted are known as bonus shares. They have perforce to be relatable to the capital of the company and tire payment for it is, therefore made by a person other than the company to it.

10. It is, therefore, incorrect to say that bonus shares are issued on a no cost basis. Their face value is their cost.

11. The Tribunal based its finding upon the decision reported as C. I. T., Madras v. Athi Y. Ramchandra Chettiar ((1964) 52 I T A 86) wherein it was held that the valuation of the bonus shares for the purpose of computing the capital gain should be the face value and following this decision the Tribunal held that the cost of bonus shares should be fixed at Rs. 10 each. The Department has placed reliance on the decision reported as Commissioner of Income‑tax, Bihar v. Dalmia Investment Company Ltd. ((1964) 10 Taxation 75) which has also been reported in A I R 1964 S C 1464. We fully agree with the Tribunal that the decision in this case does not support the case propounded by the Department. It was not held in that case that the bonus shares were to be deemed to have been acquired at no cost. Their Lordships of the Supreme Court of India only laid down the criterion for determining the costs. That case, therefore, need not be referred to in detail.

12. Reference answered.