l Appeals Nos
1764 to 1767 of 1967
Appeals from the judgment and decree dated January 17 1964 of the Allahabad High Court in Income tax Reference No 193 of 1955
CK Daphtary Attorney General R Gopalakrishnan RN Sachthey and BD Sharma for the appellant in all the appeals
MC Chagla and RP Kapur for 1
N Shroff for the respondent in CA No 1764 of 1967
RP Kapur for 1
N Shroff for the respondent in CAs
1765 to 1767 of 1967
The Judgment of the Court was delivered by Shah J
Ms Madan Gopal Radhey Lal hereinafter called the assessees deal 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 Income tax Officer brought to tax Rs 55607 in the assessment year 1946 47 Rs 41625 in the assessment year 1948 49 Rs 143050 in the assessment year 1949 50 and Rs 33170 in the assessment year 1950 51 being the sale proceeds of the bonus shares holding that those receipts represented income of the assessee arising from their business in shares
The order of the Income tax Officer was confirmed by the Appellate Assistant Commissioner and by the Income tax Appellate Tribunal
At the instance of the assessees the Tribunal referred the following question of law to
the High Court of Allahabad for opinion Whether the sale proceeds of bonus shares which had been issued in respect of shares which formed part of the assessee s stock in trade of the share dealing business are liable to inclusion in the assessee s total incomes for the respective years as profits of the share dealing business The High Court called for a supplementary statement of case
Full Bench of the High Court Manchanda J dissenting ans 9 wered the question in the negative
The Commissioner has appealed to this Court with certificate granted by the High Court
The Articles of Association of the various Companies which had issued the bonus shares
are not on the record
It has been assumed that the Companies had issued bonus shares in exercise of the power conferred upon them by the ArtiCles of Association and no argument has been raised in that behalf
A company when authorised by its Articles of Association may convert its accumulated profit into capital and then utilise such profit by issuing additional shares
by way of bonus to the shareholders
Under the Income tax Act 1922 at the relevant time issue of such bonus shares by capitalisation of the accumulated profit was not treated as distribution of dividend
In commissioners of Inland Revenue vs John Blott1 the House of Lords by majority held that bonus shares issued by a Company in exercise of the power under the Articles of Association are not dividend and therefore not income of the shareholder
Viscount Haldane observed at p 126  
I think that it is a matter of principle within the power of an ordinary joint stock company with articles such as those in the case before us to determine conclusively against the whole world whether it will  withhold profits it has accumulated from distribution to its shareholders as income and as an alternative not distribute them at all but apply them in_ paying up the capital sums which shareholders electing to take up unissued shares could otherwise have to contribute
If this is done the money so applied is capital and never becomes profit in the hands of the shareholder at all
What the latter gets is no doubt a valuable thing
But it is a thing in the nature of an extra share certificate in the company
His new shares do not give him an immediate right to a larger amount of the existing assets
These remain where they were
The new shares simply confer a title to a larger proportion of the surplus
assets if and when a general distribution takes place as in the winding up
In these assets the undistributed profits now allocated to capital will be included profits which will be used by the company for its business but henceforth as part of its issued share capital
 Similarly Lord Cave observed at p 135 The profits remained in the hands of the Company as capital and the shareholders received a paper certificate as evidence of his interest in the additional capital 1 2Sup
CI69 2 10 so set aside
The transaction took nothing out of the Company s coffers and put nothing into the shareholders  pockets and the only result was that the Company which before the resolution could have distributed the profit by way of dividend or carried it temporarily to reserve came thenceforth under an obligation to retain it permanently as capital
It is true that the shareholder could sell his bonus shares but in that case he would be realising a capital asset producing income and the proceeds would not be income in his hands
 The principle of the case was affirmed by the Judicial Committee in a case arising under the Indian Income tax Act 1922 Commissioner of Income tax Bengal vs Mercantile Bank of India and Others1
Accordingly bonus shares given by a Company in proportion to the holding of equity capital by a shareholder are in the absence of any express provision to the contrary liable to be treated as capital and not income
We are unable to agree with the judgment of the Bombay High Court to which reference was made by the Tribunal in Commissioner of Income tax Central Bombay vs Maniklal Chunnifat and Sons Ltd Bombay IT Reference No 16 of 1948that bonus shares received by a shareholder who carries on business in shares and securities ipso facto become accretion to his stock in trade 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 account those shares do not become stock in trade of the business of the shareholder
A trader may acquire a commodity in which he is dealing for his own purposes and hold it apart from the stock intrade of his business
There is no presumption that every acquisition by a dealer in a particular commodity is acquisition for the purpose of his business in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity
Bonus shares having been received by the assessees in respect of their stock in trade did not therefore become part of their stock in trade merely because they were accretions to the stock intrade
The bonus shares were received as capital they could be converted by the assessees into their stock in trade or retained as their capital asset
The Tribunal observed in paragraph 5 of its order that the assessee deals in shares and the sales proceeds of the bonus shares was were received by him in the course and as part of his share 1 11 dealing business
The amount received by the assessee is therefore part of his profit from the share dealing business and is liable to tax as such
Counsel for the assessees contended that the Tribunal has not referred to any evidence in support of its conclusion and has made a cryptic statement which is not capable of the interpretation that the assessees had converted the bonus shares into their stock in trade
If there is no presumption that the accretion to the stock in trade necessarily gets incorporated into the stock in trade says Mr Chagla in the absence of evidence showing that the bonus shares were treated by the assessees as stockin trade the finding of the Tribunal cannot be sustained Counsel invited our attention to the supplementary statement of case in which the Tribunal recorded that in the copies of balance sheets filed by the assessees as of February 14 1948 March 8 1949 and March 8 1950 the shares did not find a place and that the sale proceeds of the bonus shares were credited in the capital account of the assessees for the four years in question on the last dates of the relevant accounting years
But the Tribunal has found that the sale proceeds of the bonus shares were received in the course and as part of their business in shares and were on that account taxable
It is
somewhat unfortunate that the Tribunal has not set out in detail the facts found by it and the inference drawn therefrom
Even in the supplementary statement no attempt has been made to set out the facts on which the conclusion was based
The orders of the Income tax Officer and the Appellate Assistant Commissioner are also not before us
The mere circumstance that in the copies of the balance sheets tendered by the assessees the bonus shares did not find a place has in our judgment no importance and the credit entries in the capital account on the last dates of the respective accounting years in the four years in question also do not support an inference in favour of the assessees
The question posed for the opinion of the Court was not whether the conclusion of the Tribunal was rounded on evidence but whether the sale proceeds of the bonus shares were of the nature of revenue
On this question an inquiry into whether the conclusion of the Tribunal is supported by the evidence cannot be made
In India Cements Ltd vs Commissioner of Income taxx this Court observed that in a reference under the Income tax Act the High Court must accept the findings of fact made by the Appellate Tribunal and it is for the person who has applied for a reference to challenge these findings first by an application under section 66 1 
If he has failed to file an application under section 661  expressly raising the question about the validity of the findings of fact he is not entitled to urge before the High Court that the findings are 1 12 vitiated for one reason or another The principle of that case applies here
It is not open to the assessees to contend on the question raised that the finding of the Tribunal is not supported by evidence
The answer recorded by the High Court is discharged 
The answer to the question submitted is in the affirmative
No order as to costs of the appeal to this Court and of the reference  in the High Court
VPS Appeal allowed


Summary:
The assessee a dealer in shares and securities held as part of its stock in trade shares of certain companies
The assessee received from those companies at different times bonus shares proportionate to its equity holding
On the question whether the sale proceeds of such bonus shares are liable to be included in the assessee s total income as profits of the share dealing business the Tribunal found that the sale proceeds of the bonus shares were received by the assessee in the course of and as part of its business in shares and held that the proceeds were on that account taxable as income
The High Court on reference held in favour of the assessee
In appeal to this Court HELD 1  A trader may acquire a commodity in which he is dealing for his own purposes and hold it apart from the stock in trade of his business
There is no presumption that such an acquisition even if it is an accretion to the stock in trade of the business is an acquisition for the purpose of his business in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity
Bonus shares given by a company in proportion to the holding of equity capital by a shareholder are under the income tax Act at the relevant time 1946 50 liable to be treated as capital and not as income
Therefore the bonus shares received by the assessee did not become part of its stock in trade merely because they were accretion to its stock in trade
10 C F G CIT Central Bombay vs Maneklal Chunilal IT Ref
No 16 of 1948 Bombay High Court disapproved
CIT Bengal vs Mercantile Bank of India 4 ITR 239PC applied
Commissioner of Inland Revenue vs John Blottt 8 TC 101 HL referred to
2 In the present case however the Tribunal found that the bonus shares received as capital were converted by the assessee into its stockin trade and were not retained as a capital asset
The question posed for the opinion of the High Court was no whether the finding of the Tribunal was rounded on evidence but whether the sale proceeds of the bonus shares were of the nature of revenue
On this question when the assessee had not filed any application under section 661 of the Income tax  expressly raising the question about the validity of the Tribunal s finding of fact the High Court must accept the finding and cannot enquire whether the finding is supported by evidence or not
The High Court was therefore not justified in interfering with the finding and conclusion of the Tribunal
11 D F H India Cements Ltd vs
CIT followed