Case Note & Summary
The dispute concerned the allowability of development rebate under Section 33 of the Income-tax Act, 1961, for the assessment years 1972-73 to 1974-75. The assessee, a public limited company, had claimed development rebate which was initially allowed by the assessing authority. Subsequently, the assessing authority noticed from the balance sheet that the assessee had transferred sums from the development rebate reserve to share capitalisation account by issuing bonus shares. The assessing authority treated this as distribution of profits and withdrew the development rebate under Section 154 read with Section 155(5)(ii)(a). The appellate authority allowed the assessee's appeal and the Income-tax Appellate Tribunal concurred, holding that issue of bonus shares did not amount to distribution by way of dividends or profits. On a reference at the instance of the Revenue, the High Court reversed and held that issue of bonus shares resulted in distribution of profits, thereby answering the referred questions in favour of the Revenue. The assessee appealed to the Supreme Court. The legal issue was whether utilisation of development rebate reserve for issuing bonus shares violated the condition under Section 34(3)(a)(i) that the reserve shall not be utilised for distribution by way of dividends or profits for eight years. The Supreme Court analysed the mechanism of bonus share issue and noted the two competing views: one treating it as a dual operation equivalent to distribution of accumulated profits in cash, and the other as mere capitalisation of profits with no receipt by shareholders. The Court preferred the latter view based on English authorities. In Inland Revenue Commissioners v. Blott, Lord Haldane held that money applied in paying up bonus shares is capital and never becomes profits in the hands of the shareholder. In Commissioners of Inland Revenue v. Fisher's Executors, Viscount Cave held that the whole transaction was bare machinery for capitalising profits and involved no release of assets. The Supreme Court also relied on Commissioner of Income-tax, Bihar v. Dalmia Investment Co. Ltd. where Hidayatullah J. preferred the majority view in Blott and held that floating capital formerly consisting of subscribed capital and reserves becomes subscribed capital of the company. The Court further quoted Eisner v. Macomber to the effect that a stock dividend takes nothing from corporation property and adds nothing to shareholder interests. Applying these principles, the Court held that transfer of amounts standing to the credit of Development Rebate Reserve to share capital account did not involve any disbursement of money by the company; nothing came out of the till of the company to the shareholder. The entire amount remained with the company in another account. Consequently, issuance of bonus shares did not amount to distribution of profits and the conditions of Section 34(3)(a)(i) were not violated. The Supreme Court allowed the assessee's appeal, set aside the High Court judgment, and answered the referred questions in favour of the assessee, holding that the Income-tax Officer was not justified in withdrawing the development rebate.
Headnote
A) Income Tax - Development Rebate - Conditions for Allowance - Income-tax Act, 1961, Section 33, Section 34(3)(a)(i), Section 155(5)(ii)(a) - The assessee transferred sums from development rebate reserve to share capitalisation account and issued bonus shares; assessing authority withdrew rebate under Section 154; High Court held issue of bonus shares resulted in distribution of profits - Supreme Court held that transfer of reserve to share capital account involves no disbursement of money, shareholders receive no income, and issuance of bonus shares is mere capitalisation, not distribution by way of dividends or profits - Held that issue of bonus shares did not violate Section 34(3)(a)(i) or Section 155(5)(ii)(a) (Paras not mentioned). B) Interpretation of Statutes - Capitalisation of Profits vs Distribution - Precedents on Bonus Shares - Income-tax Act, 1961, Section 34(3)(a)(i) - Court followed majority view in Inland Revenue Commissioners v. Blott and Commissioner of Income-tax, Bihar v. Dalmia Investment Co. Ltd., holding that when accumulated profits are capitalised and capital base enlarged, shareholders benefit only by increase in capital, not by receipt of income; company retains money in share capital account - Held that no distribution of profits occurs upon issue of fully paid bonus shares (Paras not mentioned). C) Precedent - Foreign Decisions - Stock Dividend - Income-tax Act, 1961, Section 34(3)(a)(i) - Court relied on Eisner v. Macomber (US Supreme Court) that a stock dividend takes nothing from property of corporation and adds nothing to interests of shareholders; proportional interest remains same; certificates merely split in effect - Held that shareholder gets two shares instead of one and value of original share goes down, not a receipt of income (Paras not mentioned).
Issue of Consideration
Whether issue of bonus shares from out of development rebate reserve amounts to distribution of profits within the meaning of Section 34(3)(a)(i) and Section 155(5)(ii)(a) of Income-tax Act, 1961; whether the Income-tax Officer was justified in withdrawing development rebate under Section 154.
Final Decision
The Supreme Court held that issue of bonus shares from development rebate reserve did not amount to distribution of profits under Section 34(3)(a)(i) or Section 155(5)(ii)(a) of Income-tax Act, 1961. Transfer of amounts from Development Rebate Reserve to share capital account involved no disbursement of money to shareholders. The Court allowed the assessee's appeal, set aside the High Court judgment, and answered the referred questions in favour of the assessee, holding that the Income-tax Officer was not justified in withdrawing the development rebate.
Law Points
- Issue of bonus shares by capitalising development rebate reserve does not amount to distribution of profits under Section 34(3)(a)(i) and Section 155(5)(ii)(a) of Income-tax Act
- 1961
- transfer from reserve to share capital account is mere capitalisation
- not disbursement
- shareholders receive no income upon issue of bonus shares
- stock dividend takes nothing from corporation property and shareholder is no richer
