TMI Blog1997 (11) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... m the development rebate reserve to the share capitalisation account by issue of bonus shares. The assessing authority concluded that the issuance of bonus shares amounted to distribution of profits 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 Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated a development rebate fund to avail of the deduction under section 33. Section 34(3)(a) does not prohibit the assessee from using any amount credited to the fund for the purpose of its business but he cannot 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribute it pro rata among the ordinary shareholders as a bonus in the form of five per cent debenture stock. The stock was duly issued, the conditions providing that the company might redeem the stock after a certain 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount with it in the share capital account. 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. [1964] 52 ITR 567 (SC), Hidayatullah J. (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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly 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 individual accounts 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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