TaxTMI 
TaxTMI 
1997 (11) TMI 1
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....ofits by capitalisation and thus the assessing authority was of the view that the provisions of section 155(5)(ii)(a) of the Act applied to the instant case, as the development rebate reserve has been utilised for distribution by way of dividend or profits. Accordingly, the assessing authority passed an order under section 154 of the Act withdrawing the development rebate claim allowed earlier. The company went up on appeal. The appellate authority allowed its appeal. The claim of the appellant for development rebate was sustained. The Appellate Tribunal on the Revenue's appeal concurred with the view taken by the first appellate authority and concluded that there was no distribution by way of dividend or profits in the issue of bonus shares. Thereafter, on the application by the Commissioner of Income-tax, the following questions of law were referred to the High Court (see [1986] 161 ITR 639, 640) : " (a) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that issue of bonus shares from out of the development rebate reserve did not amount to distribution of profits within the meaning of section 34(3)(a)(i) a....
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....annot utilise the amount for eight years for "distribution by way of dividends or profits". If the Income-tax Officer finds that the assessee had utilised any amount out of the reserve fund for distribution by way of dividends or profits, he can withdraw the allowance given under section 33 by proceeding under section 155. In this case there is no allegation that the assessee has distributed any dividend out of the amounts standing to the credit of the fund. But the assessee issued bonus shares and for that purpose transferred the amount standing to the credit of the fund to the share capital account. The question is whether under these circumstances issuance of bonus shares will amount to distribution of profits. The answer to the question is not easy. One view is that issue of bonus shares to the shareholders involves a dual operation by which an amount is released to the shareholders from a reserve fund but was retained by the company and applied in payment of the bonus shares which were issued as fully paid up. The shareholders are treated as having paid for the bonus shares and the supposed payments by the shareholders are taken to share capital account from the reserve fund....
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....n time and in certain events. The question that came up for decision was whether the bonus paid in the form of debenture stock was income in the hands of the shareholders and was, therefore, liable to super tax. Viscount Cave held : " The whole transaction was 'bare machinery' for capitalising profits and involved no release of assets either as income or as capital. " In coming to this conclusion, Viscount Cave relied upon the following observation of Lord Finlay in Blott's case [1921] 2 AC 171, 192 (HL) (page 401 of [1926] AC 395): "The general scope and effect of these transactions is beyond dispute. There was an increase in the capital of the company by the retention of the amounts available for dividends . . . The use of sums which had been available for dividend to increase capital would enable the company to carry on a larger and more profitable business, which might be expected to yield larger dividends. These dividends, however, were to be in the future. So far as the present was concerned there was no dividend out of the accumulated profits ; these were devoted to increasing the capital of the company. The company had power to do what it pleased with any profits which i....
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....(as his Lordship then was), after referring to Blott's case [1921] 2 AC 171 (HL), preferred the view expressed by Viscounts Haldane, Finlay and Cave to the dissenting view taken by Lord Dunedin and Lord Sumner. Dealing with the effect of issue of bonus shares, Hidayatullah J., held that "the floating capital used in the company which formerly consisted of subscribed capital and the reserve now becomes the subscribed capital of the company." The certificates in the hands of the shareholders were property from which income will be derived in future. Hidayatullah J., in Dalmia's case [1964] 52 ITR 567 (SC), also quoted with approval a passage from a decision of the Supreme Court of the United States, Eisner v. Macomber [1920] 252 U.S. 189 (at page 579 of 52 ITR) : " A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the shareholders. Its property is not diminished, and their interests are not increased ... The proportional interest of each shareholder remains the same, The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional inter....