2005 (4) TMI 9

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....e ruling from this Authority on the following question:- "Whether, when the applicant allots bonus redeemable preference shares to the existing equity shareholders, any income would accrue to the non-resident equity shareholders being the allottees and therefore, the company is required to deduct tax at source?" 2. The applicant is a Pvt. Ltd. Company registered under the Companies Act, 1956 having its registered office at Bangalore. The applicant is a wholly owned subsidiary of Briggs of Burton PLC England (U.K.). The applicants present paid up capital is Rs.20 lakhs, held by the following shareholders: Name and address of the Shareholders No. of shares held Face value of the shares Briggs of Burton PLC (U.K.) 99.95% ....

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....the free reserves (General Reserve) of the applicant is Rs.84,11,398/-. The applicant intends to capitalize the free reserves by allotting fully paid redeemable bonus preference shares to the existing shareholders. In particular, the applicant intends to allot 80000 redeemable 12% preference shares of Rs.100/- each as fully paid bonus preference shares to the existing shareholders in the ratio of their share holding. These bonus preference shares are redeemable within the next ten financial years from the date of allotment. Since the free reserves will be converted into redeemable shares, the applicant desires to know whether this would tantamount to dividend within the meaning of section 2(22) of the Income-tax Act, 1961. It has been furth....

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....refore, whether issue of bonus preference shares results in distribution of accumulated profits as well as entailing a release of assets of the Company to the shareholders. The Supreme Court in the case of CIT Vs. Dalmia Investment Company Limited (52 ITR 567, SC) has held that after the accumulated profits are converted into capital and bonus shares are issued and credited as fully paid up, the company employs that money not as a reserve of profits, but as its proper capital issued to and contributed by the shareholders. It has, therefore, been submitted that mere issue of redeemable bonus preference shares would not tantamount to payment of dividends unless these shares are redeemed by the Company. Only at that stage there will be release....

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....dly explains the legal position:- "As observed by Hidayatullah J. in Commissioner of Income Tax V. Dalmia Investment Co. Ltd. after the accumulated profits are converted into capital and bonus shares are issued credited as fully paid up "the company employs that money not as reserves of profit, but as its proper capital issued to and contributed by the shareholder". If this be the correct legal analysis of what happens when bonus shares are issued by a company, it is clear that at that stage there is a distribution of capitalized accumulated profits, though that distribution does not take the form of payment of accumulated profits in cash to the shareholders and does not, therefore, entail release of any assets of the company so as to fa....