Law: Income Tax Act, 1922

Section: 66(2)

Section 4 of the Income-tax Act, 1961 [Corresponding to section 3 of the Indian Income-tax Act, 1922] - Income - Chargeable as - Assessment years 1946-47 and 1948-49 to 1950-51 - Assessee dealing in business of shares and securities during relevant assessment year held shares of certain companies as stock-in-trade - Assessee received bonus shares on said shares held in stock-in-trade - ITO treated sale proceeds of bonus share as revenue receipt of assessee, which was upheld by both AAC and Tribunal -Whether since Tribunal found that sale proceeds of bonus shares were received in course and as part of assessee's business same could not be interfered with - Held, yes - Whether therefore, in view of aforesaid, it was to be held that - Held, yes FACTS The assessee, dealt in shares and securities. They held in the relevant years as part of their stock-in-trade shares of certain companies. The assessees received from the companies at different times bonus shares proportionate to their equity holding. From time to time the assessees sold the bonus shares received by them. The ITO brought to tax the sale proceeds of the bonus shares, holding that those receipts represented income of the assessees arising from their business in shares. The order of the ITO was confirmed by the AAC and by the ITAT. On reference the High Court allowed the reference in favour of the assessee. On appeal to the Supreme Court : HELD It was assumed that the companies had issued bonus shares in exercise of the power conferred upon them by the articles of association, and no argument had been raised in that behalf. A company when authorised by its articles of association may convert its accumulated profit into capital and then utilize such profit by issuing additional shares by way of bonus to the shareholders. Under the 1922 Act, at the relevant time, issue of such bonus shares by capitalisation of the accumulated profit was not treated as distribution of dividend. Bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that…

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