Case: M/S. Shri Gopal Paper Mills Co. Ltd Vs. Commissioner Of Income Tax, Central Calcutta

1. This appeal is by a certificate under section 66A (2) of the Indian Income Tax Act, 1922 (which will hereinafter be called by Act) issued by the High Court of Calcutta. It arises out of the judgment and order of that High Court dated February 3, 1965 in a reference under section 66 (1) of the act. In the reference mentioned earlier, two question of law were referred to the High Court for its opinion. TheyWhether on the facts and in the circumstances of the case the bonus shares of the face value of Rupees 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 on the facts and in the circumstances of the case 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 yearThe facts relevant for the purpose of deciding this appeal may now be stated: The appellant is a company incorporated under the Indian Companies Act. It carried on business of manufacture of paper, On December 30, 1954, it passed by following resolution unanimously at a General Meeting held on thatThat a sum of Rs. 50,07,500/- (Rupees fifty lakhs seven thousand and five hundred) being part of the undivided profits of the company standing to the credit of General Reserve as on 30th June, 1954, be capitalised and distributed amongst the holders of the ordinary shares in the Company on the footing that they became entitled thereto as capital and that the said capital be applied on behalf of such Ordinary Shareholders in payment in full for 5,00,750 Ordinary shares of Rs. 10/- each, in the Company and that such 5,00,750 New ordinary shares of Rs. 10/- each, credited as fully paid up shall rank in all respects pari passu with the existing ordinary shares, save and except that the holders thereof will not participate in any dividend in respect of any period ending on or before 31st December 1954 and that the same shall be treated for all purposes as an increase of the nominal amount of the capital of the Company held by each of such ordinary shareholders and not as income.(b) That pursuant to the above resolution and in satisfaction of the interest of the said Ordinary Shareholders in the capitalised sum, the Directors be and they are hereby directed to issue, allot and distribute the said 5,00,750 New Ordinary Shares of Rs. 10/- each, credited as fully paid up amongst the persons whose names are registered as such in the books of the Company as on 1st day of January 1955, in proportion of one such new ordinary share for each ordinary share already held by them on that date, provided that no allotment of shares issued as aforesaid shall be made to non-resident shareholders till approval of the Reserve Bank of India is obtained for the same.(c) That the Draft of the Agreement providing for the allotment of said New Ordinary shares in satisfaction of the said capitable bonus and submitted to this meeting and signed in the margin by the Chairman, by way of identification, be and the same is hereby approved and that the Director be authorised to affix the Companys seal to duplicate endorsement of such Agreement as and when the same shall have been signed on behalf of the members holding Ordinary shares in the company on 1st January, 1955, by some person to be appointed by the Directors in that behalf, which the Directors be and are hereby authorised to do.There is no dispute as regards the validity of that resolution. It was passed in accordance with the Articles of Association of the Company. For the assessment year 1966-67, (1956-57?) the relevant accounting period ending on December 31, 1955, the Income-tax Officer had determined by his order dated September 29, 1958, the total income of the company at Rs. 42,73,176/-. In computing the Corporation Tax due in respect of the said income, the Income-tax Officer reduced the rebate to which the appellant-company was entitled on two counts; firstly in accordances with sub-cl. (a) of cl. (1) to second proviso to S. D. of Pt. II of the Finance Act, 1956, he reduced the rebate at the rate of 2 annas a rupee on Rs. 50,07,500/- which according to him represented the face value of the bonus shares issued by the appellant company to its shareholders during the previous year with a view to increasing its paid up capital. Secondly he excluded these bonus shares from the paid up capital of the company as on 1st January, 1955 for the purpose of determining the excess dividends over 6 per cent of the paid up capital on which the rebate was to be reduced at the rate of 2 annas in a rupee according to sub-cl. (b) of cl. (1) of the second proviso to S. D. of Pt. II of the Finance Act, 1956. The reduction of the rebate on the first count was Rs. 6,25,937/50 P. and on the second count it was Rs. 1,48,127/31 P. The company appealed to the Appellate Assistant Commissioner and claimed that the bonus shares were in fact issued in the year preceding the previous year relevant to the assessment year 1956-57, therefore, did not come within the mischief of sub-cl. (a) of cl. (1) of the second proviso to S. D. of Pt. II. It also contended that the bonus shares were part of the paid up capital of the Company as on January 1, 1955 and, therefore, its case came within the scope of sub-cl. (b) of the second proviso to S. D. of Pt. II of the Finance Act, 1956. The Appellate Assistant Commissioner rejected the first contention of company but accepted the second contention, According to him, as the bonus shares were to be credited as full paid up amongst persons whose names were registered as such in the books of the company as on January 1, 1955, the issue could not possibly take place before that date. But at the same time he took the view that the shareholders have been put into possession of the bonus shares on January 1, 1955 and that the shares were actually issued on January 1, 1955. Hence he held that from that date the ordinary shareholders became the owners of the bonus shares. He, therefore, included the face value of the bonus shares in the paid up capital of the company as on the 1st day of the accounting year for the purpose of sub-cl. (b) of cl.(1) of the 2nd proviso to S. D. of Part II of the Finance Act, 1956. Both the company as well as the department appealed against the order of the Appellate Assistant Commissioner to the extent it went against them. The Tribunal rejected the contention of the assessee and accepted that of the department. Thereafter at the instance of the assessee, it stated a case to the High Court. The High Court answered both the questions referred to it in favour of the department.

Court's reasoning:
7. From this part of the resolution it is clear that the ordinary shareholders became owners of the bonus shares to which they were entitled to under the resolution as from the date of the resolution. The expression "be capitalised and distributed" in the resolution means "is hereby capitalised and distributed" In fact, the whole tenor of the resolution shows that the distribution of the bonus shares became effective as from 30th December, 1954. If the ordinary shareholders became the owners of the bonus shares on and after January 1, 1955 or on some later date, the statement in the resolution "save and except that the holders thereof will not participate in any dividend in respect of any period ending on or before 31st December, 1954" becomes meaningless.The authorities under the Act and the High Court have placed undue emphasis on cls. (b) and (c) of the resolution. Those clauses lay down the procedure to be adopted in the matter of carrying into effect the decision of the general meeting embodie in cl. (a). They do not in any manner cut down the ambit of that resolution.8. The High Court as well as the Tribunal were under the erroneous impression that a share cannot be held to have been issued to a persons until a share certificate is given to him.The word "distribute" found in cl. (b) of the resolution in the context means to record the distribution of the shares in the books of the company. If the resolution passed at the general meeting of the company on December 30, 1954, is read as a whole, there is no doubt that on that day a portion of the accumulated undivided profits were converted into capital;that capital was divided into bonus shares and allotted to the ordinary shareholders on the basis of their share holdings. The 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 1st January 1955. Under cls. (b) and (c) of the resolution, certain directions were given to the Directors in the matter of implementation of that resolution. Hence, there was no justification in reducing the rebate firstly under sub-clause (a) of clause (1) of the second proviso to Section D of Part II of the Finance Act, 1956, and secondly under sub-clause (b) of cl. (1) of the second proviso to Section D of Part II of the Finance Act, 1956.