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TMI Blog1965 (2) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... sing of the resolution in the accounting year did not tantamount to the issue of bonus shares to the shareholders. He further held that clause (b) of the said resolution makes it patent that the shares were not issued in the accounting year ended 31st December, 1955, and, accordingly, he disallowed the rebates claimed. The assessee-company thereupon filed an appeal before the Appellate Assistant Commissioner of Income-tax, Range (II), Central, Calcutta. The Appellate Assistant Commissioner observed : " In my judgment therefore the Income-tax Officer was fully justified in coming to the conclusion that these shares had been issued in the previous year under consideration and not preceding the accounting period ending 31st December, 1954. He was of the opinion that in view of the definition of paid-up capital as " paid-up capital (other than capital entitled to dividend at a fixed rate) of the company as on the 1st day of the previous year relating to the assessment for the year ending on 31st March, 1937 ", and in the light of the facts set forth above, I think that the bonus shares of the face value of Rs. 50,000 should be included in the paid-up capital of the appellant within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the shareholders " before considering the meaning and effect of the words " bonus shares issued to the shareholders ". The phrase " share issued to the shareholders " comprises of three components. The word " share " has more than one meaning in common parlance. The Indian Companies Act defines shares : " Share " means under section 2(16) " share in the share capital of the company and includes stock except when a distinction between stock and shares is expressed or implied ". Therefore the statutory meaning of share covers the three phases of the share, share when it is a part of the share capital still remaining unexploited by the company, share when it is exploited by the company finding a shareholder and lastly when the share is converted into stock. The first phase arises because under the company law " Every company limited by shares " has nominal or authorised or registered share capital. This capital is one of the essential features in the company's constitution. It is to be mentioned in the memorandum of association and the capital so mentioned is to be divided into shares of a fixed amount. The capital is usually fixed at some round figures according to the requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any intermediate phase or stage. Hence it is necessary to find out the modus operandi of the transit from one phase or stage to another to appreciate the meaning of the word " issue which ordinarily means " sending out " or " putting out ". Section 30 of the Companies Act furnishes the modus operandi or mechanism for the transformation and ultimately the completion of the transit. Clause (1) of section 30 states that a subscriber to a memorandum becomes a member when his name is entered in the register of members. Clause (2) of section 30 lays down that every other person (those who are not covered by clause (1), who agrees to be a member and whose name is entered in the register of members becomes a member. In the case of subscribers to the memorandum, no agreement is necessary but an entry in the register must be made before the subscriber becomes a member. In the other class of case there must be at first an agreement which is regulated by the Contract Act. There must be an offer, an acceptance and a communication of the acceptance under the Contract Act to constitute a contract. Therefore, the same requisites are necessary for a completion of the agreement to take share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin the meaning of sub-section (1) of section 75 of the Companies Act, 1956. There, Bachawat J. observed, inter alia, that the allotment of shares precedes all issues. Allotment of share means appropriation of unissued shares to a specified number of persons. Issue of shares is something distinct from allotment and is some subsequent act whereby the title of the allottee becomes complete. His Lordship left the matter at that stage. This question was broached in the case of Nanalal Zaver v. Bombay Life Assurance Co. in connection with the interpretation of section 105C of the Indian Companies Act. There is, however, no clear expression of opinion. In my opinion, on a reference to the authorities, it seems to me that on the whole they support my view. It is now necessary to ascertain the meaning of the word " to " in the relative phrase. It seems to me that the word " to " connotes a movement with a direction or destination. The next mentioned word in the phrase is " shareholders ". In company law a member is a shareholder and a shareholder is a member: see Palmer's Company Law. A person may become a member or shareholder in any of the following ways : " (1) By subscribing the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent." Therefore, the object of section 50 is to issue new shares for increasing the share capital, " when the authorised capital of a company has been fully issued, and further capital is needed for development or other purposes." Thus, section 50 enables the company to create shares for increasing the authorised capital of the company. Hence the effect of a resolution under section 50 is the increase in the share capital simpliciter. The shares so created are still in the possession of the company or in the womb or shell of the company and capable of being exploited by the company. The company can and is now in readiness to raise capital by issuing the shares to the shareholders which means that at this stage there is no addition to the capital of the company in terms of money which is ordinarily the object of increasing the share capital or, in other words, the shares are yet without shareholders or owners. The word " issue " also occurs in regulation 46 (42?) in Table A of the Indian Companies Act, 1913. Regulation 46 is not applicable when there is direction to the company in the resolution sanctioning the increase of capital. Regulation 46 comes into play, when there is no d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e resolutions, passed out to the shareholders or sent out by the company. In other words, the ownership of the shares when a resolution is passed under section 50 is yet at large. It is only when shares are issued to the shareholders in terms of section 105C that the new issue finds its owners either in the existing shareholders or elsewhere. Hence, section 50 is only an enabling section authorising the company or its directors to raise increased capital by the disposal of the shares. Section 50 by itself does not lead to the disposal of the shares. This can be only done under section 105C when shares are actually transferred to the shareholders or in case of their refusal to others. It is now necessary to consider whether the meaning of the word " issued to the shareholders " undergoes a change in the phrase " bonus share issued to shareholders ". The word " bonus shares " means " special dividend ". A dividend is ordinarily paid in cash direct to the shareholders. A shareholder may again be compelled to allow the undistributed profit to be appropriated towards the consideration money for the issue of new or additional shares to him, the existing shareholder. Hence, bonus share i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outset in this case, the resolution for capitalisation of the undivided capital, the issue of new shares and the resolution for the appropriation of the undistributed profits were all passed by the company. In England, as will appear from Palmer's Company Precedents, 18th Edition, Form No. 490, at page 874, that a similar resolution like that of clause (a) in the instant case for capitalisation of the undivided profits is passed by the company. In England, however, resolutions analogous to clauses (b) and (c) are not passed by the company at its extraordinary general meeting but similar resolutions are passed by the board of directors. In other Words, in England the company only enables the directors to issue the unissued shares, capitalise the reserve fund, distribute the saw amongst the shareholders and the board of directors carry out and give effect to the same. Hence, at the stage when a resolution is passed by the company for capitalisation in English law, there is no issue of shares by the company whatever meaning may be ascribed to the word " issue ", though there is an increase of share capital by the issue of new shares. In India, as it appears from the resolutions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e approval of the Reserve Bank of India for the non-resident shareholders was obtained. Hence, clause (b) supports the conclusion arrived at on an independent consideration of clause (a) that the shares were not issued even at that stage. Clause (c) of the resolution may be considered next. The words " that the directors be authorised to affix the company's seal on duplicate endorsements 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 hereby are authorised to do " clearly indicate that the agreement providing for the allotment of the same new ordinary shares and satisfaction of the same capital bonus was to come into existence not in the accounting year ending with 31st December, 1954, but on a future date in the subsequent accounting year. It may be incidentally noticed here that the word " hereby " is used more than once in this clause in contradistinction to such phrase " as and when the same shall have been signed." The word " hereby " has been used in order to signify that certain thing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending on the 31st day of March, 1957, increased by any premiums received in cash by the company on the issue of its shares standing to the credit of the share premium account as on the first day of the previous year aforesaid." The facts before us make it abundantly clear that the undivided profits were capitalised and distributed in June, 1955. The undistributed capital remained in the books undistributed and as a part of the reserve until the middle of June. This capitalised sum was thereupon distributed to the shareholders by appropriation against the face value of the newly issued shares to the existing shareholders. Hence the paid up capital of the company was not increased until June, 1955, that is to say, neither in 1954 nor on the first day of the year 1955. Hence on these grounds the assessee cannot get any rebate under the relative provision of the Finance Act. There is another possible approach to the problem. The resolution marked as clause (a) and the agreement between the company and its shareholders through one of its representatives clearly indicate that the bonus shareholders will be entitled to dividends as from 1st January, 1955. In these circumstances, it ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which had given rise to some difficulty. Section 25 was mitigated by section 1 of the English Act of 1898. Both the said sections of the said two Acts were repealed by the Act of 1900, which again, in its turn, is subsequently repealed. Section 52 of the English Act of 1948 now provides for a penalty in such cases. In this country, prior to 1936, there was no check on the directors' powers to issue blocks of shares, either to themselves or to their nominees, within the authorised limit, unless such powers are circumscribed by the articles of association. The managing agents, who usually dominated the board of directors, could, to secure their own position, induce the board to issue shares to the managing agents or their nominees. To check one of such mischiefs of the managing agency system, section 105C was introduced in the Indian Companies Act, 1913, in the year 1936. This section is raised and discussed before us, though the Tribunal does not refer to the same. Antecedent to this period, regarding increase of capital, regulations 26 to 28 were there in Table A of the Act of 1882. In the Act of 1913, under the heading " alteration of capital ", regulations 41 to 43 appear in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rresponding to section 105-C in the English Companies Act. " In refuting Mr. Patnaik's argument that the receiver could not acquire the newly issued shares in his name, it was held at page 143 : " . . . privilege was conferred by section 105C only on a person whose name was on the register of members. " In dealing with the question as to whether the re-issue of forfeited shares is " allotment " within the meaning of section 75(1) of the Companies Act, 1956, corresponding to, section 104(1) Of the Companies Act of 1913, Sarkar J., delivering the judgment on behalf of the Supreme Court, held in the case of Sri Gopal Jalan & Co. v. Calcutta Stock Exchange, that a " re-issue of forfeited shares is not an allotment of share." The word " allotment " has not been defined in the Companies Act either in our country or in England. After reviewing several English decisions, it was held that : " in company law, allotment means the appropriation out of the previously unappropriated capital of a company, of a certain number of shares to a person. Till such allotment, the shares do not exist as such. " By the amendment of 1935, the meaning of the word "allotment "in section 105(1) was not al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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