Full Judgment Text
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PETITIONER:
M/S. SHRI GOPAL PAPER MILLS CO. LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA
DATE OF JUDGMENT:
21/04/1970
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
SHAH, J.C.
GROVER, A.N.
CITATION:
1970 AIR 1750 1971 SCR (1) 323
1970 SCC (2) 80
ACT:
Finance Act. 1956 Sub-cls. (a) and (b) cl. (1) Second
Proviso Paragraph D Part II-Resolution by company
capitalising undivided profits in the form of fully paid up
bonus shares-Whether- the bonus shares could be included in
the paid up capital of the assessee-Share-holders entitiled
to dividends from January 1, 1955- whether bonus shares can
be said to have been issued on the date of resolution i.e.
December 30, 1954-If can be said to have been issued within
the meaning of Second Proviso to Para D of Part II-’Allot’
’distribute meaning.
HEADNOTE:
The appellant company-assessee-at a general meeting on
December 30, 1954 passed a resolution to the effect that a
portion of the accumulated undivided profits "be capitalised
and distributed amongst the holders of the ordinary shares
in the company on the footing that they became entitled
thereto a-, capital and the capital was to be divided into,
bonus shares and allotted to the ordinary shareholders on
the basis of their share holdings and by clause (b) of the
resolution the directors of the company Were directed to
"issue allot and distribute" the new shares, credited as
fully paid up amongst the persons whose names are registered
as such in the books of the company on 1st, January 1955.
The shareholders were entitled to get dividends on those
shares only as from 1st January 1955. For the assessment
year 1956-57 the relevant accounting period ending on
December 31. 1955, the Income-tax Officer determined the
total income of the company and in computing the Corporation
tax due in respect of the income reduced the rebate to which
the appellant company was entitled on two counts; first
under sub-cl. (a) and secondly under sub-cl. (b) of cl. (1)
to the second proviso to paragraph D of Part 11 of the
Finance Act 1956. As a result of proceedings before
authorities under the Act, the following questions were
referred to the High Court
(i)Whether on the facts and in the circumstances of the case
the bonus shares of the face value of Rs. 50,07,500 should
be included in the paid up capital of the assessee within
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the meaning- of that term in pursuance of sub-section (1) of
the explanation and paragraph D of Part 11 of the Finance
Act 1956 for the relevant year and;
(ii) Whether on the facts and in the circumstances of the
case the bonus ,hares in question can be said to have been
issued within the meaning of the second proviso to paragraph
D of Part 11 of the Finance Act 1956, to the shareholders by
the assessee during the accounting year ended 31st December
1955 relevant for the assessment year 1956-57.
The High Court answered both the questions in favour of the
department. In appeal to this Court,
HELD : (i) The company bad ’full powers to convert its
accumulated undivided profits into bonus ,hares and it was
not open to the ordinary shareholders to refuse to accept
those shares when allotted. Under The resolution a portion
of the accumulated undivided profits were converted
324
into capital: that capital was divided into fully paid up
bonus shares and allotted to the ordinary shareholders on
the basis of their share-holdings. The shares so allotted
became the properly of the shareholders as from the date of
the resolution, namely, December 30, 1954 subject to the
qualification that they were entitled to get, dividends on
those shares only from 1st January 1955. The expression "be
capitalised and distributed" in the resolution only means
"is hereby captalised and distributed". The authorities
under the Act and the High Court have placed undue emphasis
on those clauses of the resolution which lay down the
procedure to be adopted in the matter of carrying into
effect the decision of the general meeting. They do not in
any manner cut down the ambit of that resolution. The High
Court as well as the Tribunal were under the erroneous
impression that a share cannot be said to have been issued
to a person until a share certificate is given to him.
Merely because in cl. (b) of the resolution the Directors of
the Company were directed to issue bonus shares it cannot be
said that the bonus sharers had not passed to the share-
holders on December 30, 1954. The meaning of the words
"allot" and "distribute" should be gathered from the context
in which they were used. "Allotment" means the
appropriation out of the previously unappropriated capital
of a company of a certain number of shares to a person. The
word ’-distribute- found in cl. (b) of the resolution in the
context means ’to record the distribution of the shares in
the books of the company. [330 H-. 331 A-F; 332 G-H; 333 G]
There was therefore no justification in reducing the rebate
firstly under sub-cl. (a) of cl. (1) of the second proviso
of paragraph D of Part II and secondly under sub-cl. (b) of
cl. (1) of the first proviso to paragraph D of Part 11, of
the Finance Act. [334 B-C]
Sri Gopal Jalan and Co. v Calcutta Stock Exchange
Association Ltd. t 19641 3 S.C.R. 698, Bush’s case, L.R. IX
Ch. D. 554, Re : Heaton’s Steel and Iron Company, [1876-
77]4 Ch. D. 140 Dalton Time Lock Company v. Dalton. 66 L.T.
704, Re : Florance Land and Public Works Company, 1885) L.R.
29, Ch. D. 421 and Moslev v. Koffyfontain Mines ltd. (1911
) L.R. Ch. 73, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1669 of
1966.
Appeal from the judgment and order dated February 5, 1965 of
the Calcutta High Court in Income-tax Reference NO. 32 of
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1961.
A. K. Sen, T. A. Ramachandran and D. N. Gupta, for the
appellant.
B. Sen, S. K. Aiyar, B. D. Sharma and R. N. Sachthey, for
the respondent.
The Judgment of the Court was delivered by
Hegde, J. This appeal is by a certificate under S. 66A(2) of
the Indian Income Tax Act, 1922 (which will hereinafter be
called ’the Act) issued by the High Court of Calcutta. It
arises out of the judgment and order of that High Court
dated February 5, 1965
325
in a reference under s. 66(1) of the Act.’ In the reference
mentioned earlier, two question of law were referred to the
High Court for its opinion. They are
"(1) Whether on the facts and in the
circumstances of the case the bonus shares of
the face value of Rs. 50,07,500/- should be
included in the paid up capital of the
assessee within the meaning of that term in
pursuance of sub-section (1) of the
explanation to paragraph of Part II of the
Finance Act, 1956 for the relevant assessment
year ?
(2) Whether on the facts and in the
circumstances of the case the bonus shares in
question can be said to have been issued
within the meaning of the second proviso to
paragraph (D) of Part 11 of the Finance Act,
1956 to the shareholders by the assessee
during the accounting year ended 31st
December, 1955 relevant for the assessment
year 1956-57
The facts relevant for the purpose of deciding this appeal
may now be stated : The appellant is a company incorporated
under the Indian Companies Act. It carries on business of
manufacture of paper. On December 30, 19549 it passed the
following resolution unanimously at a General Meeting held
on that date
(a) That a sum of Rs. 50,07,500/- (Rupees
fifty lakhs seven thousand and five hundred)
being part of the undivided profits of the
Company standing to the credit of General
Reserve as on 30th June, 1954, be capitalised
and distributed amongst the holders of the,
ordinary shares in the Company on the looting
that they became entitled thereto as capital
and that the said capital be applied on behalf
of such Ordinary Shareholders in payment in
full for 5,00,750 Ordinary shares of Rs. 10/-
each, in the Company and that such 5,00,750
New Ordinary Shares of Rs. 10/- each, credited
as fully paid up shall rank in all respects
pari passu with the existing Ordinary Shares,
save and except that the holders thereof will
not participate in ’any dividend in Respect of
any period ending on or before 31st December
1954 and that the same shall be treated for
all purposes as an increase of the nominal
amount of the capital of the Company held by
Sup.CI/70- 7
326
each of such Ordinary shareholders and not as
income.
(b) That pursuant to the above resolution
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and in satisfaction of the interest of the
said Ordinary Shareholders in the capitalised
sum, the Directors be and they are hereby
directed to issue, allot and distribute the
said 5,00,750 New Ordinary Shares of Rs. 10/-
each, credited as fully paid up amongst the
persons whose names are registered as such in
the books of the Company as on 1st day of
January 1955, in proportion of one such new
ordinary share for each ordinary share already
held by ;hem on that date, provided that no
allotment of, shares issued as aforesaid shall
be made to nonresident shareholders till
approval of the Reserve Bank of India is
obtained for the same.
(c) That the Draft of the Agreement
providing for the allotment of said New
Ordinary shares in, satisfaction of the said
capital bonus and submitted to this meeting
and signed in the margin by the Chairman, by
way of identification, be and the same is
hereby approved and that the Director be
authorised to affix the Company’s seal to
duplicate endorsement 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 are hereby
authorised to do."
There is no dispute as regards the validity of that
resolution. It was passed in accordance with the Articles
of Association of the Company. ,For the assessment year
1956-67, the relevant accounting period ending on December
31, 1955, the Income-tax Officer had determined by his order
dated September 29, 1958, the total income of the company at
Rs. 42,73,176/-. In computing the Corporation Tax due in
respect of the said income, the Income-tax Officer reduced
the rebate to which the appellant company was/ entitled on
two counts; firstly in accordance with sub-cl. (a) of cl.
(1) to second proviso to S. D of Pt. 11 of the Finance Act,
1956, he reduced the rebate at the rate of 2 annas a rupee
on Rs. 50,07,500 which according to him represented the face
value of the bonus shares issued by the appellant company to
its share-holders during the previous year with a view to
increasing its paid up capital. Secondly he excluded those
bonus
327
shares from the paid up capital of the company as on 1st
January,. 1955 for the purpose of determining the excess
dividends over 6 per cent of the paid up capital on which
the rebate was to be reduced at the rate of 2 annas in a
rupee according to sub-cl. (b) of cl. (1) of the second
proviso to s. D of Pt. 11 of the Finance Act, 1956. The
reduction of the rebate on the first count was. Rs.
6,25,937/50 P. and on the second count it was. Rs.
1,48,127/31 P. The company appealed to the Appellate
Assistant Commissioner and claimed that the bonus shares
were in, fact issued in the year preceding the previous year
relevant to the assessment year 1956-57, therefore, did not
come within the mischief of sub-cl. (a) of cl. ( 1 ) of the
second proviso to s. D of Pt. II. It also contended that
the bonus shares were part of the paid up capital of the
company as on January 1, 1955 and, there more- its case came
within the scope of sub-cl. (b) of the second proviso to s.
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D of Pt. It of the Finance Act, 1956. The Appellate
Assistant Commissioner rejected the first contention of the
company, but accepted the second contention. According to
him, as the. bonus shares were to be credited as fully paid
up amongst persons whose names were registered as such in
the books of the company as on January 1, 1955, the issue
could not possibly take place before that date. But at the
same time he took the view that the shareholders have been
put into possession of the bonus shares on January 1, 1955
and that the shares were actually issued on January 1, 1955.
Hence he held that from that date the ordinary shareholders
became the owners of the bonus shares. He, therefore,
included the face value of the bonus shares in the paid up
capital of the company as on 1st day of the accounting year
for the purpose of sub-cl. (b) of cl. (1) of the 2nd proviso
to s. D of Part If of the Finance Act,. 1956. Both the
company as well as the department appealed against the order
of the Appellate Assistant Commissioner to the extent it
went against them. The Tribunal rejected the contention of
the assessee and accepted that of the department. Thereafter
at the instance of the assessee, it stated a case to the
High Court. The High Court answered both the questions
referred to it in favour of the department.
The Finance Act, 1956 prescribed the rate of super tax in
Part II Paragraph ’D’. That part reads :
Rate
"D. In the case of every company.-
On the whole of total ........ income-tax annas and nine
vies in the rupee.
Provided that-
(i) a rebate at the rate of five annas per rupee of the
328
total income shall be allowed in the case of any company
which-
(a) in respect of its profits liable to tax under the
Income-tax Act for the year ending on the 3 1 St day a
March, 1957, has made the prescribed arrangements for the
declaration and payment within the territory of India, of
the dividends payable out of such profits and for the
deduction of super-tax from dividends in accordance with the
provisions of sub-section (3D) of section 18 of that Act,
and
(b) is a public company with total income not exceeding Rs.
25,000/- to which the’, provisions of section 23A cannot be
made applicable;
(ii) a rebate at the rate of four annas per
rupee of the total income shall be allowed in
the case of any company which satisfies
condition (a) but not condition (b) of the
preceding clause; and
(iii) a rebate at the rate of three annas and
six pies per rupee on so much of the total
income as consists of dividends from a
subsidiary Indian company, and a rebate at the
rate of one anna per rupee on any other income
included in the’ total income shall be allowed
in the case of any company not entitled to a
rebate under either of the preceding clauses
Provided further that-
(i) if the amount of the rebate under clause
(i) or clause (ii), as the case may be, of the
preceding proviso shall be reduced by the sum,
if any, equal to the amount or the aggregate
of the amounts, as the case be, computed as
hereunder
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(a) on the amount representing the, face
value of any bonus shares or the amount of
any bonus issued to its shareholders during
the previous year with a view to increasing
the paid-up capital, except to the ,extent to
which such bonus shares or bonus have been
issued out of premiums received in cash on
the ’issue of its shares; and at the rate of
two annas per rupee.
329
(b)in addition, in the case of a company
referred to in clause (ii) of the preceding
proviso which has distributed to its
shareholders during the previous year
dividends in excess of six per cent of its
paid up capital, not being dividends payable
at a fixed rate-
on that part of the said dividends which
exceeds 6 per cent, but does not exceed 10 per
cent of the paid at the rate of two
up capital;
annas per rupee.
on that part of the said dividends which
exceeds 10 per cent of the at the
rate of three paid up
capital; annas per
rupee.
(ii) where the sum arrived at in accordance
with subclause (b) or both the sub-clause of
clause (i) of this proviso exceeds the amount
of the rebate arrived at in ’accordance with
clause (i) or clause (ii) as the case may be,
of the preceding proviso, only so much of the
amounts-
(a) issued as bonus shares or as bonus, and
(b) distributed as dividends,
as is sufficient, in that order, in accordance
with the rates specified in clause (i) of this
proviso, to reduce the rebate to nil, shall be
deemed to have been taken into account for the
purpose
Provided further that the super-tax payable
by",a company the total income of which
exceeds Rs. 25,000 shall not exceed the
aggregate of-
(a) the super-tax which would have been
payable by the company if its total income had
been Rs. 25,000, and
(b) half of the amount by which its total
income exceeds Rs. 25,000.
330
Explanation.-For the purposes of paragraph D
of this Part-
(i) the expression ’paid up capital’ means
the paid up capital (other than capital
entitled to a dividend at a fixed rate) of the
company as on the first day of the previous
year relevant to the assessment for the year
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;
(ii) the expression ’dividend’ shall be
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deemed to include any distribution included in
the expression ’dividend’ as defined in clause
(6A) of section 2 of the Income-tax Act;
(iii) where any portion of the profits and
gains of the company ii not included in its
total income by reason of such portion being
exempt from tax under any provision of the
Income-tax Act, the amount of the ’paid-up
capital’ of the company, the amount
distributed as dividends (,not being dividends
payable at a fixed rate), the
amount
representing the face value of any bonus
shares and the amount of any bonus issued to
the shareholders, shall each be deemed to be
such proportion thereof as the total income of
the company for the previous year bears to its
total profits and gains for that year other
than capital gains or capital receipts reduced
by such allowances as may be admissible under
the Income-tax Act which have not been taken
into account by the company in its profit and
loss account for that year."
In the Finance Act, 1957, also a similar scheme of
according rebate and reduction thereof in conditions set out
in 1956 Act was :adopted.
The first question that arises for decision is as to ’when
the bonus shares became the property of the shareholders ?
Is it on the date of the resolution of the General Meeting
of the company namely December 30, 1954 or on any later date
? It may be remembered that for the allotment of the bonus
shares, there was no question of calling for applications.
Under the Articles of Association of the Company it was not
open to the ordinary share’holders to refuse to accept those
shares when allotted. The company had full powers to
convert its accumulated undivided profits.
331
into bonus shares. The resolution passed at the General
Meeting specifically says that those accumulated undivided
profits of the company standing to the credit of the general
reserve as on June 30, 1954 "be capitalised and distributed
amongst the holders of the ordinary shares in the Company on
the footing that they had become entitled thereto as capital
and that the said capital be applied on ’behalf of such
Ordinary shareholders in payment in full for 5,00,750
Ordinary shares of Rs. 10/- each, in the Company and that
such 5,00,750 New Ordinary shares of Rs. 10/- each, credited
as fully paid up shall rank in all respects pari passu with
the existing Ordinary shares. . . . "
From this part of the resolution it is clear that the
ordinary shareholders became owners of the bonus shares to
which they Were entitled under the resolution as from the
date of the resolution. The expression "be capitalised and
distributed" in the resolution means "is hereby capitalised
and distributed". In fact the whole tenor of the resolution
shows that the distribution of the bonus shares became
effective as from 30th December, 1954. If the ordinary
shares holders became the owners of the bonus shares on
January 1, 1955 or on some later date, the statement in the
resolution "save and except that the holders thereof will
not participate in any dividend in respect of any period
ending on or before 31st December, 1954" becomes
meaningless. The authorities under the Act and the High
Court placed undue emphasis on cls. (b) and (c) of the
resolution. Those clauses lay down the procedure to be
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adopted in the matter of carrying into effect the decision
of the General Meeting embodied in cl. (a). They do not in
any manner cut down the ambit of that resolution.
The High Court as well as the Tribunal were under the erro-
neous impression that a share cannot be held to have been
issued to a person until a share certificate is given to
him. This misconception appears to have resulted from the
decision in Bush’s case(1). In Buckley ’On the Companies
Acts’ 13th Edn. p. 129, the law on the point is stated thus
:
"It was supposed to have been decided in
Bush’s case that by the ’issue’ of shares was
meant the issue of the certificates for the
shares. But this is a misapprehension. The
expression ’issue’ with regard to shares may
bear various meanings according to the
context. It is not necessarily either the
allotment of the share or the issue of the
certificate that constitutes the issue of the
share. The question may be whether the
shareholder has or has not been put completely
in possession of his share, and this may be
so, although some formal act may not
(1) L.R. IX Ch. D. 554.
332
have been completed. Thus shares may have
been issued which have been allotted, ’but for
which no certificates have ever been issued,
and on the other hand shares as to which a
resolution to allot has been made may not have
been issued.
Shares for which the memorandum of association
has been subscribed are ’issued’ when the
company is registered."
In re Heaton’s Steel and Iron Company(1), the Court of
Appeal held that the issue of certificates is not necessary
to the issue of shares within section 25 of the English
Companies Act, 1867. In that case Brett J. observed :
"that in Bush’s case(1) the issue of
certificate was merely taken as evidence of
the time when the shares were issued, but this
must not be taken to mean that shares are not
issued until the certificates are issued."
James L.J. observed
"I think it is desirable to say, as the
Appellant appears to have been misled by the
marginal note to Bush’s case(2) that the
notion that shares are only issued when the
certificates are issued is a blunder which
could hardly be attributed to us."
In Dalton Time Lock Company v. Dalton(3), the Appeal Court
observed that the share for which the defendant had
subscribed in the memorandum of association, must be held to
have been issued to him upon the registration of the company
and hence he must be held liable to pay the share money. We
are unable to agree with the contention of the Revenue that
merely because in clause (b) of the resolution of the
General Meeting, the Directors of the company were directed
to issue bonus shares, the property in the bonus shares had
not passed to the ordinary shareholders on December 30,,
1954. The words ’allot’ and ’distribute’ found in cl. (b)
of the resolution do not carry the matter further. Their
meaning should be gathered from the context in which they
were used. Clauses (b) and (c) or the resolution must be
read harmoniously with cl. (a). The word "allotment" has
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not been defined in the Companies Act. The meaning, of the
word "allot" or "allotment" will have to be gathered from
the context in which those words are used. This Court
considered the meaning of the word "allotment" in Sri Gopal
Jalan and Co. v. Calcutta Stock Exchange Association Ltd.(4)
Therein it referred to a large number of
(1) (1876-77) 4, Ch. D.4.140. (3) 66, L.T. 704.
(2) L.R. IX Ch. D. 554 (4) [1964] 3, S.C.R. p. 698,
333
English decisions which have considered the meaning of that
word In that decision this Court referred to the
observations of Chitty J. in Re Florence Land and Public
Works Company(1)
"To my mind there is no magic whatever in the
term allotment’ as used in these
circumstances. It is said that the allotment
is an appropriation of a specific number of
shares. It is an appropriation, not of
specific shares, but of a certain number of
shares".
In Gopal Jalan’s case(2) (supra) Sarkar J. (as he then was)
quated with approval the following passage ,from Farwell
L.J. in Mosley v. Koffyfontain Mines Ltd. (3)
"As regards the construction of these particular articles,
it is plain that the words ’creation’, ’issue’ and
’allotment’ are used’ with the three different meanings
familiar to business people as well as to lawyers. There
are three steps with regard to new capital; first, it is
created; till it is created the capital does not exist at
all. When it is created it may remain unissued for years,
as indeed it, was here; the market did not allow of a
favourable opportunity of placing it. When it is issued it
may ’be issued on such terms as appear for the moment expe-
dient. Next comes allotment. To take ;the words of
Stirling J. in Spitzel v. Chinese Corporation, 80 L.T.
347, 35 1, he says: ’What is an allotment of shares?
Broadly speaking, it is an appropriation by the directors or
the managing body of the company of shares to a particular
person’."
After examining the various decisions, Sarkar J.
observed:
"It is beyond doubt from the authorities to
which we have earlier referred, and there are
many more which could be cited to show the
same position, 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. It is on allotment in this sense that
the shares come into existence."
The word "distribute" found in cl. (b) of the resolution in
the context means to record the distribution of the shares
in the books of the company. If the resolution passed at
the General Meeting
(1) (1885) 2 L.R. 29, Ch. D. 421. (2) [1964] 3 S.C.R. 698
(3) (1911) L.R. Ch. 73, 84.
334
of the company on December 30, 1954 is read as a whole,
there is no doubt that on that day a portion of the
accumulated undivided profits were converted into capital;
that capital was divided into bonus shares and allotted to
the ordinary shareholders on the basis of their share
holdings. The shares so allotted ’became the property of
the shareholders as from that date subject to the quali-
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fication that they are entitled to get, dividends on those
shares only as from 1st January 1955. Under cls. (b) and
(c) of the resolution, certain directions were given to the
Directors in the matter of implementation of that
resolution. Hence there was no justification in reducing
the rebate firstly under sub-cl. (a) of cl. ( 1 ) of the
second proviso to Section D of Part II of the Finance Act,
1956 and secondly under sub-cl. (b) of cl. (1) of the second
proviso to Section D of Part 11 of the Finance Act, 1956.
For the reasons mentioned above, we allow this appeal and
answer the questions referred to the High Court in favour of
the assessee. Revenue shall pay the costs of the assessee
both in this Court and in the High Court.
R. K. P. S. Appeal allowed.
335