1986 (6) TMI 30 - HC - Income Tax

Summary

Issues:
1. Whether issuing bonus shares from the development rebate reserve amounts to distribution of profits within the meaning of specific sections of the Income-tax Act, 1961?
2. Whether the Income-tax Officer was justified in withdrawing the development rebate based on the issuance of bonus shares?

Analysis:

Issue 1:
The case involved the interpretation of whether the issuance of bonus shares from the development rebate reserve constitutes a distribution of profits as per the provisions of section 34(3)(a)(i) and section 155(5)(ii)(a) of the Income-tax Act, 1961. The Income-tax Officer withdrew the development rebate upon noticing that the company had transferred amounts from the reserve to the share capitalisation account through bonus shares issuance. The Appellate Assistant Commissioner disagreed, stating that the bonus shares issuance was for the business purpose. The Tribunal upheld this view, emphasizing that although bonus shares issuance technically involves profit distribution, it does not meet the statutory requirements of the sections in question. The Tribunal highlighted that the reserve should be utilized for business purposes, not for dividend distribution, and considered bonus shares issuance as not violating this condition.

Issue 2:
The second issue revolved around whether the Income-tax Officer's decision to withdraw the development rebate based on the issuance of bonus shares was justified. The High Court analyzed the statutory provisions of section 34(3)(a) and emphasized that the creation of the reserve is a prerequisite for claiming the development rebate. It noted that the conditions for obtaining the allowance should be strictly construed, as development rebate is a special concession subject to specific conditions. The court opined that issuing bonus shares, although not equivalent to dividend distribution, still constitutes profit distribution and depletes reserves, enriching shareholders. Consequently, the High Court ruled in favor of the Revenue, stating that issuing bonus shares from the development rebate reserve amounts to distribution of profits, contravening the statutory requirement of section 34(3)(a)(i).

In conclusion, the High Court answered both questions in the negative and in favor of the Revenue, holding that issuing bonus shares from the development rebate reserve indeed constitutes distribution of profits, thereby justifying the withdrawal of the development rebate.