COMMISSIONER OF INCOME-TAX, U.P. vs. M/S. MADAN GOPAL RADHEY LAL

CIVIL APPEAL No. 1764/1967Supreme Court[1969] 2 S.C.R. 706 September 1968Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, A.N. GROVER6 pages
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What were the facts?

The assessee, M/s. Madan Gopal Radhey Lal, is a dealer in shares and securities. During the assessment years 1946-47, 1948-49, 1949-50, and 1950-51, the assessee received bonus shares from companies in proportion to its equity holding. The assessee sold these bonus shares. The Income-tax Officer, the Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal held that the sale proceeds of these bonus shares were taxable as income from the assessee's share-dealing business. The assessee appealed to the High Court, which answered the reference in favour of the assessee. The Commissioner of Income-tax appealed this decision to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that bonus shares, under the Income-tax Act, 1922, at the relevant time, were to be treated as capital and not income. While bonus shares received in respect of stock-in-trade are accretions, they do not automatically become part of the stock-in-trade; the intention of the holder, gathered from conduct and dealings, determines this. However, the Tribunal had found that the assessee had converted the bonus shares into its stock-in-trade and that the sale proceeds were received in the course of business. The Court emphasized that the question posed to the High Court was whether the sale proceeds were revenue in nature, not whether the Tribunal's finding was supported by evidence. Since the assessee had not filed an application under Section 66(1) of the Income-tax Act, 1922, challenging the validity of the Tribunal's finding of fact, the High Court was bound to accept that finding and could not enquire into its evidentiary basis. Therefore, the High Court was not justified in interfering with the Tribunal's conclusion. The appeal was allowed, and the High Court's answer was discharged, with the answer to the submitted question being in the affirmative.

What were the issues?

1. Whether the sale proceeds of bonus shares, issued in respect of shares that formed part of the assessee's stock-in-trade of its share-dealing business, are liable to be included in the assessee's total income for the respective years as profits of the share-dealing business (a question of law turning on the interpretation of the Income-tax Act, 1922, and the nature of bonus shares). Assessee's contention (as understood from the High Court's decision and the Supreme Court's analysis): The bonus shares, even if accretions to stock-in-trade, were received as capital and not automatically incorporated into the stock-in-trade. The Tribunal's finding that the sale proceeds were received in the course of business was not supported by evidence, and the High Court was justified in interfering with this finding. Revenue's contention (as understood from the Supreme Court's decision): The Tribunal's finding that the bonus shares were converted into stock-in-trade and their sale proceeds were part of the business income was a finding of fact that the High Court should not have disturbed, especially since the assessee did not file an application under Section 66(1) of the Income-tax Act, 1922, challenging the validity of this finding.

Which sections of the Income-tax Act were involved?

Section 66(1)

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A ' B c D E F ' G • • H COMMISSIONER OF INCOME-TAX, U.P. v. M/S. MADAN GOPAL RADHEY LAL September 6, 1968 [J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.] 7 Jncome-tax-Assessee, dealer in srocks and shares-Receipt of bonus shares in proportion to equity holding-Sale of bonus shares-Whether sale proceeds profits of business or capital. Practice-No application under Income-tax Act, 1922, s. 66(1), challenging finding of fact of Tribunal-Challenge of Tribunal's conc/u. sion-Juri iction of High Court to examine whether findings on which conclusion was based are supported by evidence. 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 it• business in shares, and held that the proceeds were, on t

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