COMMISSIONER OF INCOME-TAX, BIHAR versus DALMIA INVESTMENT CO. LTD.

Citation: [1964] 7 S.C.R. 210 · Decided: 13-03-1964 · Supreme Court of India · Bench: A.K. SARKAR, M. HIDAYATULLAH, J.C. SHAH · Disposal: Appeal(s) allowed

Cited by 2 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

1§61 
March 1.3 
210 
SUPREME COURT REPORTS 
[1964} 
COMMISSIONER OF INCOME-TAX, BIHAR 
v. 
DALMIA INVESTMENT CO. LTD. 
[AK. SARKAR, M. HIDAYATULLAH AND J. C. SHAH, JJ.] 
~ 
Income-tax Act-Business-Investment company-Dealing in 
shares-Bonus shares-Valuation. 
The assessee company dealt in shares and also held invest-
ments of shares on January 1, 1948. The assessee held 1,10,747. 
shares of Rohtas Industries at a book value of Rs. 15,57,902/-. 
Of these shares 31,909 were bonus shares issued by Rohtas Indus-
tries in 1945 at the face value of Rs. 10/- each and the assessee 
had debited the investment account in respect of the bonus 
shares by Rs. 3,19,090 with a· corresponding entry in the capital 
reserve account on its credit side for the same amount. The. 
assessee acquired these bonus shares at a cost of Rs. 5,84,283 in 
1944. On January 29, 1948, the assessee sold the entire lot of 
1,10,747 shares for Rs. 15,50,458. The assessee deducted the sale 
price from the book value of Rs. 15,57,902 and claimed a loss 
of Rs. 7,444 on the sale of shares. The appellate Tribunal valued 
the bonus shares at nil and held that the assessee had made a 
profit of Rs: 3,11,646/-. On a reference the High Court held that 
the Tribunal was wrong in holding that the assessee had made 
a profit of Rs. 3,11,646/-. 
Held (per Hidayatullah and Shah, JJ.): (i) The Income-tax 
Act defines "dividend" and also extends it in some directions 
but not so as to make the issue of bonus shares a release of 
reserves as profits so that they could be included in the term. 
The face value of the shares cannot therefore be taken to be divi-
dend by reason of anything in the definition. The shares certific 
cate which is issued as bonus entitles the holder to a share in 
the assets of the company and to participate in future profits. 
The bonus share when sold may fetch more or may fetch less 
than the face value, and this shows. that the certificate is not a 
voucher to receive the amount mentioned on its face. The market 
price is affected by many impcmderables, one such being the 
yield or the expected yield. The detriment to the share holder, 
if any, must therefore be calculated on some principle, but the 
method of computing the cost of bonus shares at their face value 
does not accord either with fact or business accountancy. 
Swan Brewery Co. Ltd. v. Rex (1914) AC. 231, disapproved· 
Commissioner of Inland Revenue v. John Blott, 8 Tax Cases 
101, approved. 
Bouch v. Sproule, (1887) 12 A.C. 385, referred to. 
Commissioner of Income-tax, Bengal v. Mercantile Bank of 
India Ltd., 1936 A.C. 478 and Nicholas v. Commissioner of Taxes 
of'the State of Victoria, 1940 A.C. 744, referred to. 
(ii) The bonus sh.ares cannot be said to have cost nothing to 
the share holder because on the issue of its bonus shares, there 
is an instant loss to him in the value of his original holding. The 
earning capacity of the capital employed remains the same, even 
after the reserve is converted into bonus shares. By the iS5ue of 
the bonus shares there is a corresponding fall in the divici~nds 
\ 
) 
'7 S.C.R. 
SUPREME COURT REPORTS 
211 
actual or expected and the market price moves accordingly. 
The method of calculation which places the value of bonus 
shares, at nil cannot be correct. 
(iii) The bonus shares can be valued by spreading the cost 
of the old shares over the old shares, and the new issue taken 
together, if the shares rank pari passu: When they d.o not, the 
price may have to be adiusted either m the proport10n of the 
face value they bear (if there is no other circumstances differ-
entiating them) or on equitable considerations based on the 
market price before and after the issue taking the middle price 
not that represented by any unusual fluctuations. On the facts of 
this case it was held that since the bonus shares in this case rank 
pari passu with the old shares there is no difficulty in spreading. 
the original cost over the old and the new shares. 
Commissioner of Income-tax v. Maneklal Chunilal and Sons, 
Income-tax Reference No. 16/1948, dt. 23-3-1949, disapproved. 
Emerald and Co. Ltd. v. Commissioner of Income-tax, Bom-
bay City, (1956) 29 I.T.R. 814, distinguished. 
Eisner v. Macomber, 252 U.S. 189-64 L.Ed. 521, referred to. 
Per Sarkar, J. (dissenting): (i) The view taken by the majo-
rity of Judges in Blott's case is a correct one. In that case the 
learned Judges held that when the articles of a company autho-
rise the issue of bon

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