1970 (4) TMI 17 - SC - Income Tax

Bonus shares deemed issued on resolution date for paid-up capital calculation

The Supreme Court held that the bonus shares should be included in the paid-up capital for the relevant assessment year and were deemed issued on December ... Bonus shares - distribution of the bonus shares became effective as from Dec. 30, 1954 - shares so allotted became the property of the shareholders as from that date subject to the qualification that they are entitled to get dividends on those shares only as from Jan. 1, 1955 - Under cls. (b) and (c) of the resolution, certain directions were given to the directors in the matter of implementation - Hence, there was no justification in reducing the rebate - Assessee's appeal allowed Issues Involved:1. Whether the bonus shares of the face value of Rs. 50,07,500 should be included in the paid-up capital of the assessee within the meaning of that term in pursuance of sub-section (1) of the Explanation to Paragraph D of Part II of the Finance Act, 1956, for the relevant assessment year.2. Whether the bonus shares in question can be said to have been issued within the meaning of the second proviso to Paragraph D of Part II of the Finance Act, 1956, to the shareholders by the assessee during the accounting year ended 31st December, 1955, relevant for the assessment year 1956-57.Issue-Wise Detailed Analysis:1. Inclusion of Bonus Shares in Paid-Up Capital:The primary question was whether the bonus shares should be included in the paid-up capital of the assessee. The appellant company passed a resolution on December 30, 1954, to capitalize Rs. 50,07,500 from its undivided profits and distribute it as bonus shares to its ordinary shareholders. The resolution indicated that these shares would be credited as fully paid up and rank equally with existing shares, except for dividends before December 31, 1954. The Income-tax Officer excluded these bonus shares from the paid-up capital for calculating excess dividends over 6% of the paid-up capital, resulting in a reduced rebate. The Appellate Assistant Commissioner included the bonus shares in the paid-up capital, interpreting that the shareholders were put into possession of these shares on January 1, 1955. However, the Tribunal and the High Court later sided with the department, excluding the bonus shares from the paid-up capital.The Supreme Court clarified that the resolution's language implied that the bonus shares became the property of the shareholders from the date of the resolution, i.e., December 30, 1954. The expression 'be capitalised and distributed' meant 'is hereby capitalised and distributed.' The court emphasized that the resolution's clauses (b) and (c) were procedural and did not affect the ownership established in clause (a). The court referenced legal principles stating that the issuance of shares does not necessarily require the issuance of certificates and that the shareholders were indeed in possession of the shares from the resolution date. Therefore, the bonus shares should be included in the paid-up capital for the relevant assessment year.2. Issuance of Bonus Shares within the Relevant Accounting Year:The second issue was whether the bonus shares were issued within the meaning of the second proviso to Paragraph D of Part II of the Finance Act, 1956, during the accounting year ending December 31, 1955. The department contended that the bonus shares were issued during the previous year, thereby reducing the rebate. The Appellate Assistant Commissioner and the Tribunal had differing views on the exact issuance date, but the High Court ultimately ruled in favor of the department.The Supreme Court examined the resolution and concluded that the shareholders became owners of the bonus shares on December 30, 1954, the date of the resolution. The court rejected the notion that shares are only issued when certificates are issued, citing legal precedents that shares can be considered issued once shareholders are in possession, even if formalities like issuing certificates are pending. The court determined that the bonus shares were effectively issued on December 30, 1954, and not during the accounting year ending December 31, 1955.Conclusion:The Supreme Court allowed the appeal, ruling that the bonus shares should be included in the paid-up capital for the relevant assessment year and that they were issued on December 30, 1954. The court answered both questions in favor of the assessee, directing the revenue to pay the costs incurred by the assessee in both the Supreme Court and the High Court. The appeal was thus allowed.