I received bonus shares and later sold my holding. What is the cost of the bonus shares: face value, nil, or something else?
Something else. By a majority the Supreme Court rejected both extremes. Face value is wrong, because a bonus share is not a voucher for the amount on its face and nothing was paid for it. Nil is also wrong, because on the issue of bonus shares there is an instant loss in the value of the original holding: the earning capacity of the capital is unchanged, dividends per share fall, and the market price moves accordingly. The correct course, where the bonus shares rank pari passu with the old, is to spread the cost of the original shares over the old and the new taken together. On that basis the cost of Rs 5,84,283 was spread over 31,909 old and 31,909 bonus shares.
Decided by the Supreme Court (Supreme Court of India; A.K. Sarkar, M. Hidayatullah and J.C. Shah JJ. Judgment of Hidayatullah and Shah JJ delivered by Hidayatullah J; Sarkar J dissenting) on 1964-03-13, reported as AIR 1964 SC 1464; (1964) 7 SCR 210. It bears on section 28, section 145, section 55(2), section 48, section 45 of the Income Tax Act 1961, in Capital Gains and Assessment & Scrutiny matters.
This is the decision that settled how bonus shares are costed and it is still the governing authority for shares held as stock-in-trade. Its method, averaging the original cost over the old and the bonus shares, is what a share dealer applies, and the Court set out what to do when the two classes do not rank pari passu: adjust in the proportion of face value if nothing else distinguishes them, or on equitable considerations drawn from the middle market price before and after the issue, ignoring unusual fluctuations. The judgment also contains the Court's fullest treatment of what a bonus issue is. It approved the majority in Blott, that capitalising accumulated profits into share capital is not the receipt of income by the shareholder, and disapproved Swan Brewery, which had treated the issue as a notional cash dividend applied in paying for the new shares. Sarkar J dissented, holding that since nothing was paid, the shares must be deemed acquired at market value on the date of issue, following Bai Shirinbai Kooka.
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The assessee, a public limited company since renamed Shri Rishab Investment Co. Ltd, held shares both as investment and as stock-in-trade of its business as a share dealer. In 1944 it acquired 31,909 ordinary shares of Rohtas Industries Ltd for Rs 5,84,283. In January 1945 Rohtas issued bonus shares, one for each original share, so the assessee received 31,909 bonus shares of Rs 10 face value each. It debited its investment account with Rs 3,19,090 for them and credited capital reserve with the same sum. Between then and 31 December 1947 it sold 14,650 of the original shares. On 1 January 1948 it held 17,259 original shares, 31,909 bonus shares, 59,079 shares issued later in 1945 and 2,500 acquired in 1947, in all 1,10,747 shares, valued in its books at Rs 15,57,902 by taking the bonus shares at face value and the rest at cost. On 29 January 1948 it sold the whole lot for Rs 15,50,458 and returned a loss of Rs 7,444 for assessment year 1949-50. The Income-tax Officer costed the bonus shares by averaging, following the Bombay High Court in Maneklal Chunilal, and found a gain of Rs 2,39,317. The Appellate Assistant Commissioner held the shares were stock-in-trade, valued the bonus shares at nil and found a trading profit of Rs 3,11,646; the Tribunal agreed. The Patna High Court, following Swan Brewery, held the cost was face value and answered in the assessee's favour.
The Commissioner's appeal was allowed with costs here and in the High Court. The answer given by the High Court was wrong; the right answer is that the profit computed at Rs 3,11,646 was not in accordance with law. Of the four possible methods, face value, nil, spreading the original cost over old and new shares, and attributing to the bonus shares the fall in the market price of the old, the majority held the third correct where the shares rank pari passu, as they did here. The cost of Rs 5,84,283 was therefore spread over the 31,909 original and 31,909 bonus shares, giving the bonus shares a cost of Rs 2,92,141 and the retained 17,259 original shares a proportionate cost of Rs 1,58,035. With the 1945 new issue at Rs 8,88,561 and the 1947 purchase at Rs 39,300, total cost came to Rs 13,78,037 against sale proceeds of Rs 15,50,458. Where the shares do not rank pari passu, the price may be adjusted in the proportion of face value if nothing else differentiates them, or on equitable considerations based on the middle market price before and after the issue. Maneklal Chunilal was disapproved so far as it applied proportion of face value to preference and ordinary shares, which do not rank pari passu, and Emerald and Co was distinguished on its facts. Sarkar J dissented and would have valued the bonus shares at market value on the date of issue.
The majority tested each method against what a bonus issue actually is. Face value fails because the Act defines dividend and extends it in some directions, but not so as to make the issue of bonus shares a release of reserves as profits; the certificate issued as bonus entitles the holder to a share in the assets and to participate in future profits, and it may fetch more or less than its face value in the market, which shows it is not a voucher for the sum printed on it. The market price depends on imponderables, chiefly expected yield. So while there is a detriment to the shareholder, it must be measured on some principle, and costing at face value accords neither with fact nor with business accountancy. Swan Brewery, which treated the issue as a notional dividend set off against the price of the new shares, was disapproved, and the majority view in Blott, that what happens is a capitalisation of profits in which the shareholder never acquires a right to the sums transferred, was approved. Nil also fails. Drawing on Eisner v Macomber, the Court reasoned that the old certificates are in effect split up and diminish in value to the extent of the value of the new: the earning capacity of the capital employed is unchanged after the reserve is converted into share capital, so dividends per share fall and the market price moves accordingly. There is thus an instant loss to the holder, and bonus shares cannot be said to have cost him nothing. That leaves the two working methods. Where the new shares rank pari passu with the old, treating the new as accretions to the old and spreading the original cost over both is simple and correct. Where they do not, the market result before and after the issue may have to be examined to arrive at an equitable cost. Sarkar J, dissenting, agreed that face value and nil were both wrong but reasoned from Bai Shirinbai Kooka that where what was paid for a trading asset cannot be shown, it must be deemed acquired at market value on the date of acquisition.
the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding
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Handle my notice → Ask a CA on WhatsAppSomething else. By a majority the Supreme Court rejected both extremes. Face value is wrong, because a bonus share is not a voucher for the amount on its face and nothing was paid for it. Nil is also wrong, because on the issue of bonus shares there is an instant loss in the value of the original holding: the earning capacity of the capital is unchanged, dividends per share fall, and the market price moves accordingly. The correct course, where the bonus shares rank pari passu with the old, is to spread the cost of the original shares over the old and the new taken together. On that basis the cost of Rs 5,84,283 was spread over 31,909 old and 31,909 bonus shares. This was decided by the Supreme Court (Supreme Court of India; A.K. Sarkar, M. Hidayatullah and J.C. Shah JJ. Judgment of Hidayatullah and Shah JJ delivered by Hidayatullah J; Sarkar J dissenting) and bears on section 28, section 145, section 55(2), section 48, section 45 of the Income Tax Act 1961. It is reported as AIR 1964 SC 1464; (1964) 7 SCR 210. This is the decision that settled how bonus shares are costed and it is still the governing authority for shares held as stock-in-trade. Its method, averaging the original cost over the old and the bonus shares, is what a share dealer applies, and the Court set out what to do when the two classes do not rank pari passu: adjust in the proportion of face value if nothing else distinguishes them, or on equitable considerations drawn from the middle market price before and after the issue, ignoring unusual fluctuations. The judgment also contains the Court's fullest treatment of what a bonus issue is. It approved the majority in Blott, that capitalising accumulated profits into share capital is not the receipt of income by the shareholder, and disapproved Swan Brewery, which had treated the issue as a notional cash dividend applied in paying for the new shares. Sarkar J dissented, holding that since nothing was paid, the shares must be deemed acquired at market value on the date of issue, following Bai Shirinbai Kooka. If it applies to you, the first step is this: For shares held as stock-in-trade, spread the original cost over the original and the bonus shares and carry the averaged figure into your stock valuation; do not book the bonus shares at face value with a capital reserve entry, which is what led to the dispute here.
The assessee, a public limited company since renamed Shri Rishab Investment Co. Ltd, held shares both as investment and as stock-in-trade of its business as a share dealer. In 1944 it acquired 31,909 ordinary shares of Rohtas Industries Ltd for Rs 5,84,283. In January 1945 Rohtas issued bonus shares, one for each original share, so the assessee received 31,909 bonus shares of Rs 10 face value each. It debited its investment account with Rs 3,19,090 for them and credited capital reserve with the same sum. Between then and 31 December 1947 it sold 14,650 of the original shares. On 1 January 1948 it held 17,259 original shares, 31,909 bonus shares, 59,079 shares issued later in 1945 and 2,500 acquired in 1947, in all 1,10,747 shares, valued in its books at Rs 15,57,902 by taking the bonus shares at face value and the rest at cost. On 29 January 1948 it sold the whole lot for Rs 15,50,458 and returned a loss of Rs 7,444 for assessment year 1949-50. The Income-tax Officer costed the bonus shares by averaging, following the Bombay High Court in Maneklal Chunilal, and found a gain of Rs 2,39,317. The Appellate Assistant Commissioner held the shares were stock-in-trade, valued the bonus shares at nil and found a trading profit of Rs 3,11,646; the Tribunal agreed. The Patna High Court, following Swan Brewery, held the cost was face value and answered in the assessee's favour. The matter was decided on 1964-03-13 by the Supreme Court (Supreme Court of India; A.K. Sarkar, M. Hidayatullah and J.C. Shah JJ. Judgment of Hidayatullah and Shah JJ delivered by Hidayatullah J; Sarkar J dissenting). On those facts the Supreme Court held as follows. The Commissioner's appeal was allowed with costs here and in the High Court. The answer given by the High Court was wrong; the right answer is that the profit computed at Rs 3,11,646 was not in accordance with law. Of the four possible methods, face value, nil, spreading the original cost over old and new shares, and attributing to the bonus shares the fall in the market price of the old, the majority held the third correct where the shares rank pari passu, as they did here. The cost of Rs 5,84,283 was therefore spread over the 31,909 original and 31,909 bonus shares, giving the bonus shares a cost of Rs 2,92,141 and the retained 17,259 original shares a proportionate cost of Rs 1,58,035. With the 1945 new issue at Rs 8,88,561 and the 1947 purchase at Rs 39,300, total cost came to Rs 13,78,037 against sale proceeds of Rs 15,50,458. Where the shares do not rank pari passu, the price may be adjusted in the proportion of face value if nothing else differentiates them, or on equitable considerations based on the middle market price before and after the issue. Maneklal Chunilal was disapproved so far as it applied proportion of face value to preference and ordinary shares, which do not rank pari passu, and Emerald and Co was distinguished on its facts. Sarkar J dissented and would have valued the bonus shares at market value on the date of issue.
The majority tested each method against what a bonus issue actually is. Face value fails because the Act defines dividend and extends it in some directions, but not so as to make the issue of bonus shares a release of reserves as profits; the certificate issued as bonus entitles the holder to a share in the assets and to participate in future profits, and it may fetch more or less than its face value in the market, which shows it is not a voucher for the sum printed on it. The market price depends on imponderables, chiefly expected yield. So while there is a detriment to the shareholder, it must be measured on some principle, and costing at face value accords neither with fact nor with business accountancy. Swan Brewery, which treated the issue as a notional dividend set off against the price of the new shares, was disapproved, and the majority view in Blott, that what happens is a capitalisation of profits in which the shareholder never acquires a right to the sums transferred, was approved. Nil also fails. Drawing on Eisner v Macomber, the Court reasoned that the old certificates are in effect split up and diminish in value to the extent of the value of the new: the earning capacity of the capital employed is unchanged after the reserve is converted into share capital, so dividends per share fall and the market price moves accordingly. There is thus an instant loss to the holder, and bonus shares cannot be said to have cost him nothing. That leaves the two working methods. Where the new shares rank pari passu with the old, treating the new as accretions to the old and spreading the original cost over both is simple and correct. Where they do not, the market result before and after the issue may have to be examined to arrive at an equitable cost. Sarkar J, dissenting, agreed that face value and nil were both wrong but reasoned from Bai Shirinbai Kooka that where what was paid for a trading asset cannot be shown, it must be deemed acquired at market value on the date of acquisition. In the words reproduced by the source cited on this page: "the bonus shares cannot be said to have cost nothing to the shareholder because on the issue of the bonus shares, there is an instant loss to him in the value of his original holding"
It was decided by the Supreme Court on 1964-03-13 and is reported as AIR 1964 SC 1464; (1964) 7 SCR 210. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 28, section 145, section 55(2), section 48, section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The Commissioner's appeal was allowed with costs here and in the High Court. The answer given by the High Court was wrong; the right answer is that the profit computed at Rs 3,11,646 was not in accordance with law. Of the four possible methods, face value, nil, spreading the original cost over old and new shares, and attributing to the bonus shares the fall in the market price of the old, the majority held the third correct where the shares rank pari passu, as they did here. The cost of Rs 5,84,283 was therefore spread over the 31,909 original and 31,909 bonus shares, giving the bonus shares a cost of Rs 2,92,141 and the retained 17,259 original shares a proportionate cost of Rs 1,58,035. With the 1945 new issue at Rs 8,88,561 and the 1947 purchase at Rs 39,300, total cost came to Rs 13,78,037 against sale proceeds of Rs 15,50,458. Where the shares do not rank pari passu, the price may be adjusted in the proportion of face value if nothing else differentiates them, or on equitable considerations based on the middle market price before and after the issue. Maneklal Chunilal was disapproved so far as it applied proportion of face value to preference and ordinary shares, which do not rank pari passu, and Emerald and Co was distinguished on its facts. Sarkar J dissented and would have valued the bonus shares at market value on the date of issue. It arises in Capital Gains and Assessment & Scrutiny matters, on section 28, section 145, section 55(2), section 48, section 45 of the Income Tax Act 1961, and was decided by Supreme Court of India; A.K. Sarkar, M. Hidayatullah and J.C. Shah JJ. Judgment of Hidayatullah and Shah JJ delivered by Hidayatullah J; Sarkar J dissenting. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check whether the bonus shares rank pari passu with the old ones. If they do not, be ready with market prices immediately before and after the issue, taken at the middle price, to support an equitable apportionment. For shares held as capital assets, do not apply this averaging: section 55(2)(aa) now fixes the cost of bonus shares received on or after 1 April 1981 at nil, so the whole sale consideration is the gain. Keep the resolution and the articles authorising the bonus issue on file; the Court noted the record here contained neither, and the case proceeded on an assumption about them.
Partly overruled — read this first. Nothing in the judgment has been overruled by a court, and the source page records it as cited in some one hundred and forty later cases; its citator shows it followed by the Supreme Court in 1967 and 1969 and distinguished in 1971. The averaging method still governs bonus shares held as stock-in-trade. But for capital assets the result has been displaced by amendment: section 55(2)(aa) of the 1961 Act now provides that the cost of acquisition of bonus shares allotted without payment on or after 1 April 1981 is nil, which is the very method the Court rejected. The status is recorded as partly overruled to reflect that split; the later history was not otherwise traced in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested page is marked as clipped and about 4,390 characters from the middle of Hidayatullah J's judgment are not reproduced. What is missing is the opening of the majority judgment, covering its statement of the facts and the beginning of its discussion, and the text resumes in the middle of the account of the Tribunal's order. The reasoning on face value, on nil, and on the two working methods, and the whole of the operative part, are present, as is the whole of Sarkar J's dissent. The batch line gave the sections as 55(2), 55(2)(aa), 48 and 45. The judgment decides the computation of profit on a sale of shares under the Indian Income-tax Act, 1922, section 10 read with the assessee's method of valuing stock, whose 1961 equivalents are sections 28 and 145; sections 45, 48 and 55 did not exist in the 1922 Act, and section 55(2)(aa) came much later and reverses the result for capital assets. The printed figures in the closing table do not add up: the profit line is printed as Rs 7,444, which was the loss the assessee had returned, whereas the difference between the total cost of Rs 13,78,037 and sale proceeds of Rs 15,50,458 is Rs 1,72,421, which with the returned loss gives the Rs 1,79,865 stated as the addition. The record contained neither the resolution nor the articles under which the bonus shares were issued, and the case proceeded on the assumption that they were validly issued and the profits validly capitalised. Whether the profit was a trading profit or a capital gain was not decided, the Court treating the point as immaterial to the question referred. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Commissioner's appeal was allowed with costs here and in the High Court. The answer given by the High Court was wrong; the right answer is that the profit computed at Rs 3,11,646 was not in accordance with law. Of the four possible methods, face value, nil, spreading the original cost over old and new shares, and attributing to the bonus shares the fall in the market price of the old, the majority held the third correct where the shares rank pari passu, as they did here. The cost of Rs 5,84,283 was therefore spread over the 31,909 original and 31,909 bonus shares, giving the bonus shares a cost of Rs 2,92,141 and the retained 17,259 original shares a proportionate cost of Rs 1,58,035. With the 1945 new issue at Rs 8,88,561 and the 1947 purchase at Rs 39,300, total cost came to Rs 13,78,037 against sale proceeds of Rs 15,50,458. Where the shares do not rank pari passu, the price may be adjusted in the proportion of face value if nothing else differentiates them, or on equitable considerations based on the middle market price before and after the issue. Maneklal Chunilal was disapproved so far as it applied proportion of face value to preference and ordinary shares, which do not rank pari passu, and Emerald and Co was distinguished on its facts. Sarkar J dissented and would have valued the bonus shares at market value on the date of issue.
TaxSphere, “CIT v Dalmia Investment Co Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-dalmia-investment-cost-of-bonus-shares/ (validity last checked 2026-08-29)
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