Commissioner Of Income-Tax. v. Athi V. Ramachandra Chettiar. (1964 52 ITR 96 Mad)

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An organization may, if its Articles authorise, underwrite its benefits by giving completely paid bonus shares. The issue of bonus shares by an organization is a typical component. At the point when an organization is prosperous and gathers huge distributable benefits, it changes these amassed benefits into capital and splits the capital between the current individuals in relation to their qualifications. Individuals don’t need to pay any sum for such shares. Bonus shares are extra shares given to the current shareholders with no extra expense, in view of the quantity of shares that a shareholder claims. These are the organization’s aggregated profits which are not given out as profits, yet are changed over into free shares. Bonus shares are an accounting exchange (in light of the fact that no money changes hands), it underwrites a piece of stores (held income) to bring:

(1) Share capital more in accordance with the resources utilized; and

(2) A high share value back to a more reasonable sum, subsequently improving its market capacity. Albeit the quantity of shares held by every shareholder expands, the worth of the all out shareholding stays as before as before the bonus issue. Additionally called scrip issue, bonus shares, or capitalization issue.

The idea is like a rights issue, then again, actually bonus shares are made by moving cash from an organization’s stores into its value capital (capitalization of stores). This is valuable for an organization that is now flush with money and wishes to underwrite a portion of its fluid resources.

Organizations issue bonus shares to empower retail investment and increment their value base. At the point when cost per share of an organization is high, it gets hard for new financial backers to purchase shares of that specific organization. Expansion in the quantity of shares lessens the cost per share. Be that as it may, the general capital remaining parts are as before, regardless of whether bonus shares are proclaimed.

For instance, the organization may give one bonus share for each five shares held. These are the organization’s collected income which are not given out as profits, however are changed over into free shares.  They are given free.

Sources for issue of Bonus shares, a company may issue fully paid-up bonus shares to its members, in any manner 180 EP-CL whatsoever, from its free reserves; the securities premium account; or the capital redemption reserve account. Also, no issue of bonus shares will be made by underwriting except for those  that are made by the revaluation of resources.

Conditions for issue of Bonus Shares:

no organization will underwrite its benefits or holds for the reason for giving completely settled up bonus shares, it is approved by its articles on the suggestion of the Board and has  been approved in the regular gathering of the organization has not defaulted in installment of interest or head in regard of fixed stores or obligation protections gave by it has not defaulted in regard of the installment of legal levy of the representatives, for example, commitment to fortunate asset, tip and bonus the halfway settled up shares if extraordinary on the date of designation all things considered are made completely settled up.

No Bonus shares in lieu of profit  will be given. Guidelines have been given for Bonus Issue which are contained in Chapter IX of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 as to bonus issues by recorded organizations.

Facts of the case

  1. The assessee is a Hindu unified family. He isn’t a seller of shares. He is getting pay from interest on protections, property, business and profits from shares held in restricted organizations. The assessee held offers in a bank.
  2. The bank issued bonus shares to the assessee in relation to the shares previously held by him in the bank, the assessee sold 94 bonus share for Rs. 7,268.94
  3. The Income-charge Officer was of the assessment that the first expense of these extra offers was nil and thus surveyed the whole deal continuous(?) of Rs. 7,269 to burden as capital additions under segment 12B of the Act.
  4. The assessee battled that the expense of the bonus ought to be fixed by embracing the “average cost” in regard of each share, considering the all out number of offers held by him, unique offers in addition to the extra offers.
  5. But the Income-charge Officer didn’t acknowledge this dispute. The assessee favored an appeal to the Appellate Assistant Commissioner.

Issue of the case

  1. The cost of the bonus shares should be fixed by adopting the “average cost” in respect of each share, taking into account the total number of shares held by him, original shares plus the bonus shares.
  2. Whether the Tribunal is right in directing the department to value the bonus shares on the basis of the average value or the market price whichever is lower.
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 the assessee insisted on the decision of the Income-charge Officer. The perspective of the Appellate Assistant Commissioner was that the assessee had not caused any use for getting these offers and that the first expense should be considered to be nil. There was a further lure  by the assessee to the Income-charge Appellate Tribunal. The Tribunal couldn’t help contradicting the perspective of the office and held that the first expense of the bonus share ought not to be taken as nothing. The Tribunal alluded to the choice of the Supreme Court in Emerald and Co. Ltd. v. Official of Income-charge, where the subject of regarding/considering the extra offers at the hour of  obtaining was left open. Having arrived at this resolution, the Tribunal proceeded to see as follow:

“We hold that the deal of Rs. 7,299 of the 94 offers sold by the assessee doesn’t in total address capital gains as has been held by the annual duty specialists. It is anyway open to the Income-charge Officer to recompute the benefit if so exhorted and found advantageous. On the off chance that it is re-done, the end stock must be esteemed at the first expense of the holding found the middle value of for the first and extra scrips since given or at the market value whichever is lower.”

It is exceptionally hard to follow the thinking of the Tribunal. The worth of the bonus share, at the hour of the issue, would either be the market value or the face value, if the perspective on the division that they were of nil esteem were not to be acknowledged. In any case, based on this end shown up at by the Tribunal, the Income-charge Officer has been coordinated to change the appraisal previously made. The inquiry now before us is whether the Tribunal is directly guiding the division to esteem the bonus share based on the average value or the market value whichever is lower.

The learned (counsel?) for the department, fought that the bonus shares were gotten by the assessee purely via blessing, as an expansion or gradual addition to the first offers held by him, and that it couldn’t be said that the assessee paid any thought for these extra offers. He upheld the view taken by the office that the first expense of the extra offers ought to be taken as of nil esteem.

Learned insight for the division laid significant weight on a choice of the Bombay High Court in Emerald and Co. Restricted v. Official of Income-charge, on the side of his dispute that bonus shares  are blessings, unadulterated and simpliciter. All things considered, the assessee held 350 offers in an organization which included 50 free extra portions of the assumed worth of Rs. 250 each. The assessee sold 300 offers and guaranteed a deficiency of Rs. 35,801 by esteeming the extra offers at their presumptive worth. The division showed up at a deficiency of Rs. 27,766 by embracing the technique for averaging the cost of the offers. The Tribunal proposed a strategy by which the 50 extra offers were totally overlooked and the misfortune was shown up by considering the buy worth the 300 offers and the returns acknowledged by their deal.

It was held that, as the assessee paid nothing for the extra offers, the cost of Rs. 250 couldn’t be put on these offers, that the technique proposed by the Tribunal was wrong, that the legitimate benefit and misfortune must be shown up at by averaging the expense of 350 offers mulling over the way that 50 extra offers were gotten free and that the strategy for valuation received by the office was correct.

Summary of the case and Judgment

This was taken up on appeal to the Supreme Court and their Lordships turned around the judgment of the Bombay High Court in Emerald and Co. Ltd. v. Official of Income-charge. Their Lordships held that, to survey the misfortune for the bookkeeping year, the topic of the appropriate strategy for esteeming the bonus shares was not pertinent, as they were not sold were as yet held in the possession of the assessee, and that the technique for valuation embraced by the Appellate Tribunal was the right technique and the misfortune as determined by the Tribunal was right and as indicated by law. The inquiry whether bonus shares ought to be considered to be endowments was, notwithstanding, left open.

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The question as respects the worth of bonus shares in the possession of the shareholders at the hour of the issue – regardless of whether it ought to be taken as nil or whether it ought to be taken as the face or market value,  didn’t emerge for thought for the situation under the watchful eye of the Supreme Court as it was tracked down that every one of the shares was not sold by the assessee, and that they had held a few shares in any event, during the pertinent year of record. With incredible regard to the learned appointed authorities of the Bombay High Court,  it can’t help contradicting the view that the bonus shares are gotten free by the shareholders and that the first expense of obtaining these shares isn’t anything.It was held that having respect to the standards administering the issue of bonus shares to which they had  effectively averted, there was  no doubt in their view,  that the bonus shares were not given free or ex gratia as the organization got a satisfactory compensation from the shareholders.

The instance of Steel Barrel Co. Ltd. v. Osborne is informational on the inquiry whether bonus shares can be said to have been gained for nil esteem. The realities are to some degree convoluted, and it isn’t important to set them out.

This case plainly upholds the end  that the bonus shares can’t be called endowments in the possession of the shareholders.


We track down that that is the view taken by Patna High Court in Dalmia Investment Co. Ltd. v. Magistrate of Income-charge. The Patna High Court held that the bonus shares were not given by the organization free to its shareholders, as the thought for the issue of the bonus shares was  profit or bonus which was given and proclaimed by the organization out of its undistributed benefits. The High Court further held that the genuine expense of the bonus shares to the assessee was the presumptive worth of the shares and the Tribunal wasn’t right in holding that the assessee had made a benefit. The Patna High Court dissented from the view of the Bombay High Court in Emerald & Co. v. Commissioner of Income-tax.

It is in this way unrealistic to say with any certainty that the worth of the bonus shares is truly comparable to the worth of the first shares on the date of issue. The presentation and flow of bonus shares themselves achieve uncertainty in the worth of the shares; and, as we would see, it is absurd to expect to examine the real market worth of the bonus shares so instant they are given. It should likewise be recalled that the market worth of the shares, if that would be the genuine expense of securing of the shares by the shareholders, ought to be at that hour of the issue. The situation at the hour of the issue is that the organization has available for use just the first shares.


It can be concluded that while coordinating a new calculation of capital gains by esteeming the end stock as the first expense of the holding found the middle value of the first and bonus scrips since given or at the market cost whichever is lower. The genuine model is to take the presumptive worth of the bonus shares and to determine the overabundance, assuming any, acknowledged by the assessee by the offer of these shares in the time of record. it was held by the court that  the inquiry included in the case  as: The amount of Rs. 7,269 can’t be burdened completely as capital additions under area 12B of the Act. What could be brought to burden under that arrangement is just the overabundance of Rs. 7,269, assuming any, over the presumptive worth of the 94 bonus shares held and discarded by the assessee. The reference is addressed as needs be. There was  no structure as to costs. The bonus shares allotted to the members do not represent taxable income in their hands  in this case. [Commissioner of Income Tax, Madras v. A.A.V. Ramchandra Chettiar (1964) 1 Mad CJ 281]. Issue of bonus shares is considered machinery for capitalizing undistributed profits. Also, the vesting of the rights in the bonus shares occur when the shares are actually allotted and not from any earlier date.