Bonus debentures from capitalised profits were not taxable income in shareholders' hands, despite shareholder control or personal motive.

Bonus debentures issued out of capitalised accumulated profits, in place of a distribution of those profits, were treated as not giving rise to income, profits or gains in the shareholders' hands under Section 4 of the Indian Income Tax Act, 1922. The reasoning applied the principle that a valid corporate capitalisation of accumulated profits through resolutions and instruments does not create taxable income for shareholders merely because they control the company or had a personal motive. The shareholder's private purpose was held irrelevant where the company had in fact capitalised the profits.

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Issues: Whether debentures issued by companies out of capitalised accumulated profits, in lieu of distribution of those profits, gave rise to income, profits or gains in the hands of the shareholders within the meaning of Section 4 of the Indian Income Tax Act, 1922, and whether the shareholders' personal motive or controlling interest altered that conclusion.

Analysis: The decision treated the Indian Income Tax Act as materially analogous to the Imperial income tax legislation for this question and applied the principle that, where a company validly capitalises accumulated profits and applies them in issuing bonus debentures, the amount so capitalised does not become income in the shareholders' hands. The reasoning distinguished a case decided under a differently worded taxing statute and held that the shareholder's private purpose, even where the shareholders controlled the company, was irrelevant if the company had in fact capitalised its accumulated profits through its corporate resolutions and instruments.

Conclusion: The issue was answered in the negative. The bonus debentures did not constitute taxable income, profits or gains in the hands of the assessees.

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