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TMI Blog2006 (9) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital. The respondent-assessee had during the accounting year, incurred expenditure separately for: (i) the increase of its authorized share capital; and (ii) the issue of bonus shares. The Assessing Officer disallowed both the items of expenditure as revenue expenditure. According to him, the expenses incurred were towards a capital asset of a durable nature for the acquisition of a capital asset and, therefore, the expenses could only be attributable towards the capital expenditure. The assessee being aggrieved filed an appeal under section 143(3) before the Commissioner of Income-tax (Appeals). Disallowance of Rs. 1,04,28,500 in respect of stamp duty and registration fees incurred in connection with the increase in the authorized share capital were bifurcated by the Commissioner of Income-tax (Appeals) into two categories, one relating to the increase in authorized share capital from Rs. 75 crores to Rs. 250 crores and the second relating to issue of bonus shares. In respect of the first category of expenditure it was held that the same was not allowable in terms of the judgments of the Bombay High Court in the cases of Bombay Burmah Trading Corporation Ltd. v. CIT [1984 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g upon the commentary to the Companies Act by A Ramaiya, sixteenth edition 2004, which occurs in the commentary to section 81 of the Indian Companies Act: "When a company prospers and accumulates a large surplus it converts this surplus into capital and divides the capital among its members in proportion to their rights. This is done by issuing fully paid shares representing the increased capital. The shareholders to whom the shares are allotted have to pay nothing. The purpose is to capitalize the gains which may be available for division or utilize quasi-capital gains. Bonus shares go by the modern name "capitalisation of shares." and the judgments of the Gujarat High Court in Ahmedabad Manufacturing and Calico P. Ltd. v. CIT [1986] 162 ITR 800; CIT v. Mihir Textiles Ltd. [1994] 206 ITR 112, Gujarat Steel Tubes Ltd. v. CIT [1994] 210 ITR 358; CIT v. Ajit Mills Ltd. [1994] 210 ITR 658 and the two judgments of the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1990] 184 ITR 70 and Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 wherein it has been held that the issuance of bonus shares increases the issued and paid up capital of the company and the bonus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, L.C. in Atherton (H.M. Inspector of Taxes) v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL) where the learned Law Lord stated: '... When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.'" In short, what has been held in this case is that if the expenditure is made once and for all with a view to bringing into existence an asset or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, no income can be said to accrue to the shareholder because the new shares confer a title to a larger proportion of the surplus assets at a general distribution. The floating capital used in the company which formerly consisted of subscribed capital and the reserves now becomes the subscribed capital." The Gujarat High Court in Ahmedabad Manufacturing and Calico P. Ltd. v. CIT [1986] 162 ITR 800, has held, that the expenses incurred towards the issuance of bonus shares is a capital expenditure. Bonus shares issued by the assessee-company also constitute its capital. Bonus shares, as rights shares are an integral part of the permanent structure of the company and are not in any way connected with the working capital of the company which is utilized to carry on day to day operations of the business. Negativing the contention of the assessee that no benefit whatsoever is derived by the assessee-company when its profits and/or reserves are converted into paid-up shares, it was held that as a result of the increase in the paid up share capital the creditworthiness of the assessee-company would increase which would be a benefit or advantage of enduring nature. That the bonus shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Ltd. [1964] 52 ITR 567. The capital base of the company prior to or after the issuance of bonus shares remains unchanged. Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalization of reserves is merely a reallocation of the company's fund. This is illustrated by the following hypothetical tabulation which establishes that bonus shares leave the capital employed untouched, because in the hypothetical example, the capital employed remains the same (i.e. Rs. 600) both pre and post issuance of bonus shares. Sl. No. Particulars Pre-bonus issue Rs. On bonus issue Rs. Post bonus shares Rs. 1 Pre-paid share capita 100 100+100=200 200 2 Reserve 500 500-100=400 400 3 Total 600 600 600 As observed earlier, the issue of bonus shares by capitalization of reserves is merely a reallocation of company's funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. If that be so, then it cannot be held that the company has acquired a benefit or a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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