COMMISSIONER OF INCOME TAX Vs. CHUNILAL KHUSHALDAS

JUDGEMENT

(1.) THIS reference raises a short but interesting question as to what is the date from which bonus shares issued by a company can be said to be held by an assessee : is it is the date when they are issued or is the date when the original shares in respect of which they are issued were acquired by the assessee ? The question assumes importance because when bonus shares are sold by the assessee and there is capital gain, the incidence of tax on such capital gain varies according as the bonus shares are short term capital assets or long term capital assets. If they are short term capital assets, the incidence is higher; if they are long term capital assets, the incidence is lower : and the question whether they are short term capital assets or long term capital assets depends on how long they have been held by the assessee immediately preceding the date of transfer.

(2.) THE short facts giving rise to the reference may be briefly stated as follows : Some time prior to 1st Jan., 1954, the assessee purchased 79 shares of the face value of Rs. 500 each in the share capital of Sarangpur Cotton Manufacturing Company Ltd. (hereinafter referred to as "the company"). In 1961, the company sub divided its shares of the face value of Rs. 500 each into shares of smaller denomination by converting each share of the face value of Rs. 500 into two shares of the face value of Rs. 250 each. The result was that in lieu of 79 shares of the face value of Rs. 500 each, the assessee received 158 shares, each of the face value of Rs. 250. Thereafter, on 23rd Aug., 1961, the company at an annual general meeting resolved to capitalise its accumulated profits and apply them in issuing one fully paid up bonus share of the face value of Rs. 250 for every four shares of the face value of Rs. 250 each held by a shareholder. The assessee accordingly received on 5th Sept., 1961, 39 fully paid up bonus shares by virtue of its existing holding of 158 shares. Within a few days thereafter, on 12th Sept., 1961, the assessee sold off these 39 bonus shares for the aggregate price of Rs. 64,155. There was obviously capital gain to the assessee and the question, therefore, arose in the course of the assessment of the assessee to income tax for the asst. year 1962 63, the corresponding account year being the calendar year 1961, as to how the capital gain should be computed and on what basis and at what rate it should be taxed. We are not concerned in the present reference with the first aspect of the question which relates to the mode of computation of capital gain and we need not, therefore, state any facts in regards to it. So far as the second aspect of the question is concerned, namely, on what basis and at what rate the capital gain should be taxed, a controversy arose as to whether the bonus shares were short term capital assets or long term capital assets : how long they were held by the assessee immediately preceding the date of sale ? The assessee contended that the bonus shares did not represent acquisition of the any new capital asset but they were part of the original shares carved out of them and they must, therefore, be held to have been acquired when the original shares were purchased and since the original shares were purchased prior to 1st Jan., 1954, the bonus shares must be taken to be held by the assessee since prior to that date and, consequently they must be held to be long term capital assets. This contention of the assessee was rejected by the ITO and on appeal by the AAC. These officers took the view that the bonus shares were acquired by the assessee when they were issued and they were, therefore, held by the assessee from the date of issue and not from the date when the original shares were acquired and, on this view, treated the bonus shares as short term capital assets. The assessee thereupon appealed to the Tribunal and in the appeal, the assessee was successful in persuading the Tribunal to accept his point of view. The Tribunal held that the bonus shares were held by the assessee from the date when the original shares were acquired and they were, therefore, long term capital assets. This view taken by the Tribunal is assailed in the present reference at the instance of the Revenue.

(3.) THERE are admittedly no rules made by the Board under this clause, and, therefore, the question as to what is the period for which any capital asset is held by the assessee has to be determined on first principle. If the bonus shares were held by the assessee for not more than twelve months immediately preceding the date of their transfer, they would be short term capital asset; otherwise, they would be long term capital assets.