STAR COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This is a Reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessment year is 1951-52. The corresponding accounting year is the year ending on March 31, 1951. The Assessee was a dealer in shares. In respect of the shares which were its stock-in-trade, it received certain bonus shares. The Assessee was not required to pay any cash for these bonus shares. In the accounting year the Assessee had sold 1,000 bonus shares of the Burrakar Coal Company Limited, 45 of the Pahargoomia Tea Company Limited and 25 of the Bengal Paper Mills Limited. In the books of accounts these shares when received were valued at their face values.

(2.) The Income-tax Officer was of the view that the cost to the Assessee of the bonus shares was 'nil' and that after the issue of the bonus shares the amount that was originally paid for the purchase of the shares became the cost of the original shares and the bonus shares, and on that basis he re-constructed the Assessor s share accounts.

(3.) The computation of profit or loss in the share account by the Income-tax Officer was upheld by the Appellate Assistant Commissioner. Before the Appellate Tribunal, two contentions were raised (i) that the bonus shares were capital in nature and, therefore, any profit arising from these shares was a capital profit and (ii) the value of a bonus share at the time of the receipt was its face value. The Tribunal held that, the closing stock should not be valued on the average cost basis as was done by the Income-tax Officer and directed that in computing the profit or loss from the sale of shares, the value of the closing stock should be altogether ignored. It was also of opinion that the cost of bonus shares to the Assessee was nil as it paid nothing for these shares and disallowed the Assessor s claim for taking the face value of the bonus shares as the cost. It also held that the receipts of the bonus shares were receipts in the revenue account since the Assessee was holding shares as its trading stock-in-trade.