Bonus shares are not dividend distribution for Section 23A purposes; proviso must track the main clause.

Issue of bonus shares was held not to constitute distribution of profits as dividends under Section 23A(1) of the Income-tax Act, 1922. The High Court construed the proviso consistently with the main provision and held that "distribution" there meant distribution by way of dividends, not a mere capitalisation of profits. Because bonus shares do not release company assets in the manner contemplated by the section, they do not satisfy the statutory requirement for dividend distribution or the second proviso's limited shortfall-cure mechanism. The reference was answered against the assessee.

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Issues: Whether the issue of bonus shares by the assessee company constituted distribution of profits as dividends under Section 23A(1) of the Income-tax Act, 1922, and whether such issue amounted to "distribution" within the second proviso to Section 23A(1).

Analysis: Section 23A(1) required the company to distribute at least sixty per cent of its assessable income by way of dividends. The scheme of the provision, its penal consequence, and the related sub-section showed that the statutory expression "distribution" in the proviso could not be read in isolation from the main clause. The proviso was intended only to give the company a limited opportunity to make up the shortfall in dividend distribution where at least fifty-five per cent had already been distributed as dividends. Issue of bonus shares merely capitalised profits and did not involve distribution as dividends or release of company assets in the manner contemplated by the section.

Conclusion: Issue of bonus shares was not distribution of profits as dividends under Section 23A(1), and it was not "distribution" within the second proviso to Section 23A(1). The reference was answered against the assessee.

Ratio Decidendi: For the purposes of Section 23A of the Income-tax Act, 1922, "distribution" in the proviso must be construed consistently with the main provision as distribution by way of dividends, and issue of bonus shares does not satisfy that requirement.

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