Case: Hunsur Plywood Works Limited Vs. Commissioner of Income Tax

It cannot be said that by the issue of bonus shares, the Company had distributed its reserve fund to the shareholders even though it had retained the entire amount with it in the share capital account. 18. It must also be noted that while dealing with the question of valuation of bonus shares in the case of CIT v. Dalmia Investment Co. Ltd. Hidayatullah, J. (as His Lordship then was) after referring to Blott case ( 1921 (2) AC 171 : 1921 ALLER 810 preferred the view expressed by Viscounts Haldane, Finlay and Cave to the dissenting view taken by Lord Dunedin and Lord Sumner. Dealing with 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 a reserves 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. 19. Hidayatullah, J. in Dalmia case also quoted with approval a passage from a decision of the Supreme Court of United States, Eisner v. Macomber 252 US 189 : 64 L Ed 521 (1920). "A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests 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 interest that the original shares represented before the issue of the new ones .... In short, the corporation is no poorer and the stockholder is no richer than they were before. ... If the plaintiff gained any small advantage by the change, it certainly was not an advantage of Pounds 417, 450 the sum upon which he was taxed. ... What has happened is that the plaintiffs old certificates have been split up in effect and have diminished in value to the extent of the value of the new." * 20. When a shareholder gets a bonus share the value of the original share held by him goes down. In effect, the shareholder gets two shares instead of the one share held by him and the market value as well as the intrinsic value of the two shares put together will be the same or nearly the same as the value of the original share before the bonus issue. 21. It appears from the various decisions cited hereinabove, that issuance of bonus shares does not amount to distribution of accumulated profit of a company. The shareholder derives some benefit by the process of capitalising of the accumulated profits but at the same time, the value of his original shareholding goes down. Viewed from any angle, it cannot be said that in this case, the assessee-Company had distributed any part of its development rebate reserve fund when it issued the bonus shares. The accumulated profit lying to the credit of the development rebate reserve has been retained by the Company. The amount has been transferred to the share capital account. If that was not done the intrinsic value of the shares held by the shareholders would have been more. After the issue of the bonus shares, the intrinsic value of the original shares have gone down rateably. The accumulated profits of the Company have remained with the Company in one account or another.22. On behalf of the Revenue, our attention was drawn to the judgment in the case of Leader Engineering Works v. CIT. That was a case of partnership firm. The amount standing to the credit of development rebate reserve account was debited and the capital accounts of the partners in the partnership account were correspondingly credited. It was held that the identity of the development rebate reserve account had completely disappeared. The amount standing to the credit of that reserve was placed at the disposal of the partners who were free to withdraw the same for their own purposes. In that case it was held that the transfer of the amount standing to the credit of the development rebate reserve in the individuals account of the partners amounted to distribution of profits. We fail to see how this decision helps the Revenue in the facts of this case. The shareholders are not entitled to draw any money from the share capital account of the Company. The money standing to the credit of the development rebate reserve is retained by the Company in another account. A shareholder cannot claim that any part of the share capital of the Company belongs to him or make use of it. 23. The question as to the substance of the transaction was also raised. The case, however, has to be decided on the basis of the language of the statute. There has been no distribution from the development rebate fund. The result might have been different had the statute been differently worded but we shall have to take the statute as it is and not in any other sense. Moreover, as was pointed out by Lord Sumner in Fisher case 1926 AC 395 : 95 LJ KB 487) that desires and intentions are things of which a company is incapable. These are the mental operations of its shareholders and officers. The only intention that the company has is such as is expressed in or necessarily follows from its proceedings. It is hardly a paradox to say that the form of a companys resolutions and instruments is their substance. 24. In this case, neither in form nor in substance, has there been any distribution of profits by the Company in making the bonus issue. If the substance and not the form of the transaction is looked to, the issue of bonus shares was, in the language of Rowlatt, J. (sic) "a bare machinery" for capitalising profits and there was no distribution of profits to the shareholders.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]16. In our view, the principle stated by Lord Finlay really resolves the controversy raised in this case. The profits made by the Company may be distributed as dividends or retained by the Company as its reserve which may be used for improvement of the Companys works, buildings and machinery. That will enable the Company to make larger profits. There cannot be any dispute that the shareholders will benefit from the improvements brought about in the profit-making apparatus of the Company. Likewise, if the accumulated profits are capitalised and capital base of the Company is enlarged, this may enable the Company to do its business more profitably. The shareholders will also benefit if the share capital is increased. They may benefit immediately by issue of bonus shares. But neither in the case of improvement in the profit-making apparatus nor in the case of expansion of the share capital of the Company can it be said that the shareholders have received any money from the Company. They may have benefited in both the cases. But this benefit cannot be treated as distribution of the amount standing to the credit of any reserve fund of the Company to itsIn fact, the transfer of the amounts standing to the credit of development rebate reserve to the share capital account, does not involve any disbursement of money by the Company. Nothing comes out of the till of the Company to the shareholder. The entire amount of money shown as development rebate reserve is retained by the Company in another account. It cannot be said that by the issue of bonus shares, the Company had distributed its reserve fund to the shareholders even though it had retained the entire amount with it in the share capitalWhen a shareholder gets a bonus share the value of the original share held by him goes down. In effect, the shareholder gets two shares instead of the one share held by him and the market value as well as the intrinsic value of the two shares put together will be the same or nearly the same as the value of the original share before the bonusIt appears from the various decisions cited hereinabove, that issuance of bonus shares does not amount to distribution of accumulated profit of a company. The shareholder derives some benefit by the process of capitalising of the accumulated profits but at the same time, the value of his original shareholding goes down. Viewed from any angle, it cannot be said that in this case, the assessee-Company had distributed any part of its development rebate reserve fund when it issued the bonus shares. The accumulated profit lying to the credit of the development rebate reserve has been retained by the Company. The amount has been transferred to the share capital account. If that was not done the intrinsic value of the shares held by the shareholders would have been more. After the issue of the bonus shares, the intrinsic value of the original shares have gone down rateably. The accumulated profits of the Company have remained with the Company in one account orIn this case, neither in form nor in substance, has there been any distribution of profits by the Company in making the bonus issue. If the substance and not the form of the transaction is looked to, the issue of bonus shares was, in the language of Rowlatt, J. (sic) "a bare machinery" for capitalising profits and there was no distribution of profits to the shareholders