M/S. Shri Gopal Paper Mills Co. Ltd. Vs.
Commissioner of Income Tax, Central Calcutta [1970] INSC 101 (21 April 1970)
21/04/1970 HEGDE, K.S.
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-Whetherthe bonus
shares could be included in the paid up capital of the assessee-Share-holders
entitiled to dividends from January 1, 1955whether 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 the meaningof 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 shareholders 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 '-distributefound 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, [187677]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.
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
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/707 326 each of such Ordinary
shareholders and not as income.
(b) That pursuant to the above resolution 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 moreits case came within the scope of
sub-cl. (b) of the second proviso to s. 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 (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 rateon 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 sub clause (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
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 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 erroneous 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 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 expedient. 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 un appropriated 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 qualification 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.
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