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Issues Involved:
1. Whether the issue of bonus shares by the assessee company is a distribution of profits as dividends as required by Section 23A(1) of the Indian Income-tax Act. 2. Whether the issue of bonus shares by the assessee company was a "distribution" within the meaning of the second proviso to Section 23A. 3. Whether the distribution of profits after six months of the annual meeting is valid. Detailed Analysis: Issue 1: Distribution of Profits as Dividends Under Section 23A(1) The primary issue is whether the issuance of bonus shares by the assessee company can be considered a distribution of profits as dividends under Section 23A(1) of the Indian Income-tax Act. The court clarified that Section 23A(1) mandates that companies in which the public are not substantially interested must distribute at least 60% of their assessable income as dividends within six months of the annual meeting. The term "dividend" is defined as any distribution by a company of accumulated profits, whether capitalized or not, which entails the release of company assets to shareholders. The court emphasized that issuing bonus shares capitalizes profits and does not release any company assets, hence it cannot be considered a distribution of profits as dividends. Therefore, the issue of bonus shares does not satisfy the requirement of Section 23A(1). Issue 2: Distribution Within the Meaning of the Second Proviso to Section 23A The second issue concerns whether the issuance of bonus shares qualifies as a "distribution" under the second proviso to Section 23A. The assessee argued that the second proviso does not specify that the distribution must be as dividends and thus, the issuance of bonus shares should be considered a valid distribution. The court noted that while the main section explicitly requires distribution as dividends, the proviso does not repeat this phrase, leading to the assessee's contention. However, the court held that a proviso should be construed in light of the main section it qualifies. The purpose of the proviso is to provide a grace period for companies that have distributed at least 55% of their assessable income as dividends to make up the difference to 60% within three months upon receiving notice from the Income-tax Officer. Therefore, the court concluded that the term "distribution" in the proviso must also mean distribution as dividends. Consequently, the issuance of bonus shares does not meet the criteria of the second proviso. Issue 3: Distribution of Profits After Six Months of the Annual Meeting The third issue, which arose from the Tribunal's question, was whether the distribution of profits after six months of the annual meeting is valid. Given the court's conclusion that the issuance of bonus shares does not constitute a valid distribution under either Section 23A(1) or the second proviso, this issue became moot. The court did not need to address the timing of the distribution since the fundamental requirement of distribution as dividends was not met. Conclusion: The court reframed the question to focus on whether the issuance of bonus shares by the assessee company was a "distribution" within the meaning of the second proviso to Section 23A. The court answered this reframed question in the negative, concluding that the issuance of bonus shares does not satisfy the requirements of distribution as dividends under Section 23A(1) or the second proviso. Consequently, the assessee company was liable for the orders made under Section 23A. The reference was answered accordingly, with the assessee ordered to pay the costs of the reference.
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