TMI Blog1964 (9) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... ummarized as follows: Sakarlal Ballabhai and Company (hereinafter referred to as the company), at all material times carried on business as managing agent of another limited company called Sarangpur Cotton Manufacturing Company Limited, which owned a cotton textile mill situate in the City of Ahmedabad. On or about 13th December, 1951, the company capitalised its accumulated profits to the extent of ₹ 3,84,000 and issued 3,840, 4% redeemable preferences shares of ₹ 100 each, credited as fully paid up to the holders of ordinary shares in the company. The assessee was not one of the ordinary shareholders in the company and she did not, therefore, receive any of these redeemable preference shares without payment of cash consideration. But on or about 14th September, 1955, the assessee purchased 380 shares from her brother-in-law who was the original allottee of those shares by paying the price of ₹ 38,000 and those shares were transferred to her name in the records of the company. Prior to this date, however, a resolution was passed by the board of directors of the company on 23rd August, 1955, that the aforesaid 3,840 redeemable preference shares be redeemed as on 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of ₹ 38,000 was, therefore, dividend within the meaning of that section. The claim for deduction of the price paid by the assessee for the acquisition of 380 redeemable preference shares was also made by the assessee in the alternative, but that claim was also rejected by the Appellate Assistant Commissioner. The assessee then preferred an appeal before the Tribunal. It appears that before the Tribunal the revenue sought to uphold the inclusion of the amount of ₹ 38,000 in the assessment not only under section 2(6A)(a) but also under section 2(6A)(d). The Tribunal, however, did not go into the question of applicability of section 2(6A)(d) since on a consideration of the true legal position the Tribunal took the view that the amount of ₹ 38,000 represented distribution of capitalised accumulated profits entailing release of assets of the company and was, therefore, liable to be regarded as dividend within the meaning of section 2(6A)(a). The Tribunal having found that the amount in question constituted dividend within the meaning of section 2(6A)(a) proceeded to consider whether the assessee was entitled to claim the price paid by her for the acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of ₹ 38,000 has been rightly taxed in the hands of the assessee as dividend under section 2(6A)(a). Now ordinarily when a company earns profits and distributes them amongst the shareholders, the amount received by the shareholders being dividend, would be taxable in their hands. But there may be diverse ways in which accumulated profits of a company may reach the hands of the shareholders without being dividend stricto sensu and in such a case they would escape taxation in the hands of the shareholders. The legislature, therefore, enacted section 2(6A) extending the connotation of dividend so as to comprise items of distribution or payment by a company which may not normally be regarded as dividend. By the various clauses of section 2(6A) the legislature sought to bring within the net of taxation cases of distribution or payment out of or to the extent of accumulated profits of the company, whether capitalised or not. There are five clauses of section 2(6A) which deal with distribution or payment under different circumstances so as to make the ambit of taxation wide and extensive, but we are here concerned only with the first of those clauses, namely, clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reinforce it--that when the redeemable preference shares were redeemed, what were distributed were the current profits of the company for the year 1955, since it was out of those profits that the amount required for the purpose of redemption was provided and the distribution being thus a distribution of current profits and not of accumulated profits, the terms of section 2(6A)(a) were not satisfied and the amount received by the assessee could not be regarded as dividend within the meaning of that section. The revenue disputed the validity of both these contentions and adopted the position that when the accumulated profits were capitalised and the redeemable preference shares were issued credited as fully paid up, there was no distribution at all of the capitalised accumulated profits even apart from the requirement that the distribution must be of such a character as would entail release of the assets of the company and the distribution of the capitalised accumulated profits took place for the first time when the redeemable preference shares were redeemed. It was also urged on behalf of the revenue that it was not true that the current profits of the company for the year 1955 wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired by the second condition. If distribution in the first condition is construed to mean physical distribution of accumulated profits among the shareholders, that would necessarily entail release of assets of the company but in that event the prescription of the second condition would be rendered superfluous, for the second condition would then be always implied in the first condition. Now it must be remembered that though a parliamentary enactment (like parliamentary eloquence) is capable of saying the same thing twice over without adding anything to what has already been said once, this repetition in a legislative enactment is not to be assumed. When a legislature enacts a particular phrase in a statute, the presumption is that it is saying something which has not been said immediately before. The rule that a meaning should, if possible, be given to every word in the statute implies that, unless there is good reason to the contrary, the words add something which has not been said immediately before. We must not, therefore, construe the word distribution occurring in the first condition in such a manner as to render the second condition those and a mere futile repetition. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount coming to the share of each on distribution. Such a requirement does not appear to be an essential element of distribution even according to its dictionary meaning. It is true that there are certain observations in the judgment in this case which at first sight seem to suggest that according to the Full Bench the concept of distribution necessarily involves physical payment or delivery but if those observations are read in their context, we do not think that the Full Bench intended to lay down any such absolute definition of the meaning of distribution applicable in all cases. That was a case under section 2(6A)(d) and it was in the context of that section which talks of distribution on reduction of capital that these observations were made and they cannot, therefore, be relied on by the revenue as laying down a construction of the word distribution in section 2(6A)(a). This decision does not, therefore, assist the argument of the revenue. It is, therefore, clear that all that the first condition requires is that there should be a distribution of accumulated profits, whether capitalised or not. Such distribution may entail release of assets of the company or may not. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company may, in such a case, decide to bring its issued capital into a truer relationship with the capital actually employed in the business or, to use the words of Grower, more into line with the true excess of assets over liabilities and may for that purpose capitalise its accumulated profits and issue fully paid up bonus shares of a nominal value equal to the amount capitalise to its shareholders. These bonus shares may be either ordinary or preference shares on the one hand or redeemable preference shares on the other. The company may also instead of issuing bonus shares issue bonus debentures by capitalising its accumulated profits. In all these cases the accumulated profits which are capitalised remain in the coffers of the company and no part of them actually goes into the pockets of the shareholders: the only change that takes place is that the accumulated profits which prior to capitalisation were employed in the business as accumulated profits are thenceforth employed as part of the issued or loan capital of the company according as the issue is of bonus shares or bonus debentures. The accumulated profits which might have been divided among the shareholders as dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shareholders receive any part of them. But the accumulated profits are applied in paying up the capital sums which the shareholders would otherwise have had to contribute for the purchase of new shares. The shareholders receiving bonus shares credited as fully paid up are given credit for the capital sums which they would otherwise have had to contribute in respect of the bonus shares allotted to them if those shares had not been issued credited as fully paid up and this credit is given by application of the capitalised accumulated profits in payment of such capital sums. As observed by Hidayatullah J. in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. [1964] 52 I.T.R. 567 (S.C.) 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 profits, 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 capitalised accumulated profits, though that distribution does not take the form of payment of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accumulated profits are capitalised and applied in paying up in full bonus shares issued and allotted credited as fully paid up to the shareholders, is distribution of accumulated profits. Now if the legislature in enacting regulation 96 regards capitalisation of accumulated profits by issue of bonus shares credited as fully paid up as distribution of accumulated profits by a company, we do not see why distribution in section 2(6A)(a) should be read in a narrow and constricted manner so as to exclude what the legislature had called distribution in regulation 96. Both section 2(6A)(a) and regulation 96 refer to distribution of accumulated profits by a company, the former to distribution in general while the latter to one particular mode of distribution and the latter would certainly be included in the former. It is, therefore, clear that there is distribution of capitalised accumulated profits when bonus shares are issued credited as fully paid up and it is precisely because of this that the second condition has been introduced by the legislature in section 2(6A)(a) requiring that the distribution in order to fall within the section must entail release of assets of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the dividends are paid the company releases part of its assets. This distinction is clear and well-settled. It is clear from the passage quoted above that Chagla C.J. regarded issue and allotment of bonus shares credited as fully paid up to the shareholders as distribution of accumulated profits within the meaning of the first condition in section 2(6A)(a), but took the view that, since such distribution did not entail release of assets of the company, it did not constitute dividend within the meaning of the section. We find that to the same effect there are observations of M.C. Desai C.J. in Kunjilal Gupta v. Commissioner of Income-tax [1964] 52 I.T.R. 27, 34 (F.B.), where the learned Chief Justice said: Though in one sense it may be said that the issue of bonus shares by the companies is distribution of their accumulated profits because they are issued in lieu of accumulated profits, it cannot be said that the distribution entails the release by the companies to their shareholders of any part of their assets. Not only the Bombay High Court and the Allahabad High Court in the cases just cited but also the Court of Appeal in England has taken the same view and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations for all that these observations declare is that when the accumulated profits are capitalised, they are impounded to increase the capital of the business and they can no longer be distributed amongst the shareholders as dividend and there can be no dispute about it. The accumulated profits when capitalised certainly remain with the company as part of its paid up capital and cannot be physically distributed amongst the shareholders except by following the procedure for reduction of capital on redeeming the bonus shares, if they are redeemable preference shares, but that does not mean that there is no distribution of accumulated profits otherwise than by payment in cash when bonus shares are issued credited as fully paid up. As a matter of fact, it is clear from the speeches of Viscount Haldane and Viscount Finlay that they did recognise that there would be distribution of accumulated profits otherwise than by payment in cash when bonus shares are issued credited as fully paid up. The learned Lords took the view that although in that case, in form, a dividend was declared, it was inevitably at once applied to payment of the capital sums which the shareholders would otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts once again when the redeemable preference shares are redeemed and it was, therefore, necessary to find out whether there is any distribution of capitalised accumulated profits when redeemable preference shares are issued as bonus shares and, if so, what is the nature or character of such distribution. We must, therefore, now proceed to examine in the light of this discussion as to what happens when redeemable preference shares issued as bonus shares are redeemed by the company. When accumulated profits are capitalised and redeemable preference shares are issued as bonus shares credited as fully paid up, the capitalised accumulated profits are converted into preference share capital. The balance-sheet thereafter shows the profit and loss account or reserves at a reduced figure and the issued capital at a correspondingly increased figure, the only effect being that one item on the liabilities side of the balance-sheet becomes replaced in whole or part by another item, namely, preference share capital, while the assets side of the balance-sheet remains unaffected. Now it is a fundamental principle of company law that the capital of a company must be maintained intact, for the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Hence, although the redeemable preference shares disappear on redemption, the capital which they represent is retained for accounting purposes and there is no reduction of the capital yardstick. This analysis of the mechanics of redemption clearly shows that when redeemable preference shares are redeemed, the preference share capital is returned to the shareholders and since such return of the preference share capital would deplete the capital of the company and consequently affect the sanctity of the principle of maintenance of capital which is regarded as a principle of paramount importance, the law requires that the preference share capital so returned should be replaced by other capital either provided by a fresh issue of shares made for the purpose of redemption or transferred out of the profits of the company in case redemption is made out of profits or out of sale proceeds of any property of the company. It is undoubtedly true that redemption cannot be made except out of profits of the company or out of proceeds of a fresh issue of shares made for the purpose of redemption or out of sale proceeds of any property of the company, but these merely indicate the sources of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are returned to the shareholders on redemption are the amounts paid up on the preference shares and since the amounts paid up on the preference shares are capitalised accumulated profits, it must follow as a necessary consequence that capitalised accumulated profits reach the hands of the shareholders when redemption takes place and consequently there is distribution of capitalised accumulated profits on redemption. It was contended on behalf of the assessee that since there is a distribution of capitalised accumulated profits when the accumulated profits are capitalised and redeemable preference shares are issued, there cannot be a second distribution of the same capitalised accumulated profits once again when the preference shares are redeemed. The argument was stressed in the form of the proposition that what is already distributed once cannot be distributed over again. Now undoubtedly put in this form the proposition appears to be almost axiomatic but a little scrutiny will show that it suffers from the fault of over-simplification. If distribution referred to in both the limbs of the proposition is of the same kind, then of course the proposition would be true, but if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... talised accumulated profits takes place when accumulated profits are capitalised and preference shares are issued credited as fully paid up, it is a distribution which does not entail release of assets of the company and it is only when the preference shares are redeemed that a distribution of the capitalised accumulated profits takes place entailing release of assets of the company. This being the position we cannot accept the contention of the assessee that the capitalised accumulated profits having been distributed when redeemable preference shares were issued by the company, there could not be a second distribution of the same capitalised accumulated profits over again when the preference shares were redeemed and that what were distributed to the shareholders in the process of redemption were, therefore, not those capitalised accumulated profits which were already distributed at the time of issue of the preference shares but the current profits for the year 1955 which were utilised for the purpose of redemption. There was in our opinion a distribution of capitalised accumulated profits entailing release of assets of the company when the preference shares were redeemed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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