TMI Blog1960 (11) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... urchases 2500 shares brought forward from 1947 39.300 Total shares 1,10,747 valued at ... ₹ 15,57,902 It appears that in 1944 the assessee was holding 31,909 ordinary shares of the old issues of the Rohtas Industries Limited. In that year the Rohtas Industries Limited allotted one bonus share for each ordinary share held by the shareholders. The assessee accordingly received 31,909 bonus shares. These shares were of the face value of ₹ 3,19,090 at the rate of ₹ 10 per share. The assessee, therefore, debited the share account by ₹ 3,19,090 with a corresponding entry in the capital reserve account for the same amount. The entire lot of 1,10,747 shares was sold by the assessee on January 29, 1948, to Messrs. Dalmia Cement Paper Marketing Limited for a consideration of ₹ 15,50,458. The sale price was deducted from the book value of ₹ 15,57,902 and the assessee claimed a loss of ₹ 7,444 on the sale of the shares. The claim was rejected by the Income-tax Officer on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the income-tax authorities were erroneous in holding that the bonus shares were issued free to the assessee and hence the cost price of the bonus shares from the point of view of the assessee was nil. It was submitted by learned counsel that the cost price of the bonus shares should be fixed at the face value of ₹ 10 per share and, accordingly, there was no profit made by the assessee in the accounting year on account of the sale of the entire lot of 1,10,747 shares. It was contended that the computation of profits by the income-tax authorities is wrong and the assessee is not liable to pay any tax on the sale of the shares as no profit was realised out of the transaction. The question presented, therefore, for determination in this case is what is the valuation of the bonus shares-whether the valuation should be at the face value as contended for on behalf of the assessee, or whether it should be at nil as contended for on behalf of the income-tax authorities? In this connection it is important to remember that a company may capitalise profits by issuing fully paid shares to the shareholders. But this can only be done if the articles of the company contain provisions au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the company as fully paid bonus shares. (4)The board shall give effect to the resolution passed by the company in pursuance of this regulation. Regulation 97 is to the following effect: 97. (1) Whenever such a resolution as aforesaid shall have been passed, the board shall- (a)make all appropriation and applications of the undivided profits resolved to be capitalised thereby, and all allotments and issues of fully paid shares or debentures, if any; and (b)generally do all acts and things required to give effect thereto. (2)The board shall have full power- (a)to make such provision, by the issue of fractional certificates or by payment in cash or otherwise as it thinks fit, for the case of shares or debentures becoming distributable in fractions; and also (b)to authorise any person to enter, on behalf of all the members entitled thereto, into an agreement with the company providing for the allotment to them respectively, credited as fully paid up, of any further shares or debentures to which they may be entitled upon such capitalisation, or (as the case may require) for the payment up by the company on their behalf, by the application th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that amount under that Act. At page 235 of the report Lord Sumner has stated the legal position as follows: The new shares were credited as fully paid, and, what is more, they were fully paid, for after the allotment the company held 101,450 as capital produced by the issue of those shares and for that consideration, and no longer as an undivided part of its accumulated reserve fund. True, that in a sense it was all one transaction, but that is an ambiguous expression. In business, as in contemplation of law, there were two transactions, the creation and issue of new shares on the company's part, and on the allottees' part the satisfaction of the liability to pay for them by acquiescing in such a transfer from reserve to share capital as put an end to any participation in the sum of 101,450 in right of the old shares, and created instead a right of general participation in the company's profits and assets in right of the new shares, without any further liability to make a cash contribution in respect of them. In the words of Parker, C.J., 'Had the company distributed the 101,450 among the shareholders and had the shareholders repaid such sums to the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd with due regard to the relations between the shareholders and the company. At page 673 of the report Scrutton, L.J., stated: It is to be noted that the company cannot issue fully paid-up shares by simply capitalizing the reserve fund and applying it to the payment of the shares. For the reserve fund is the company's, and fully paid-up shares must be paid for by someone other than the company. As a matter of machinery therefore a bonus or dividend payable to the shareholder must be declared and then appropriated to the payment up of the bonus shares, so that the shareholder pays for his shares by his bonus or dividend. The point has also been very clearly put by Lord Sumner in his dissenting speech in the House of Lords in the same case at page 142: The scheme and the principle of the statute law on this subject are clear. It takes two to make a paid-up share. A share issued, whether it is part of the company's original issue of capital or is one issued on the occasion of surplus profit arising, is a share to be paid for : paid for by the allottee in meal or in malt; in money, unless by contract between himself and the company he is enabled to satisfy his o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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