1967 (7) TMI 9 - SC - Income Tax

High Court was right in holding that the bonus shares should have been valued at their face value and the loss of Rs. 35,000 on the valuation of the shares as such should have been considered in determining the applicability of s. 23A - proper method of valuation is to spread the cost of the old shares over the old shares and the new issue (viz., the bonus shares) taken together - Case remanded

Summary

Issues:
1. Interpretation of section 23A(1) of the Income-tax Act, 1922 regarding distribution of dividends.
2. Valuation of bonus shares and its impact on the application of section 23A(1).
3. Consideration of tax liability in determining the applicability of section 23A(1).

Analysis:
The case involved an appeal from the Calcutta High Court regarding the interpretation of section 23A(1) of the Income-tax Act, 1922. The Income-tax Officer had deemed a certain amount to be distributed as dividends by the respondent, based on the valuation of bonus shares and past losses. The Appellate Assistant Commissioner canceled the Income-tax Officer's order, citing inadequate profits to justify section 23A. However, the Appellate Tribunal overturned this decision, emphasizing the valuation of bonus shares and past losses. Subsequently, the High Court addressed two questions referred by the Appellate Tribunal, focusing on profits made and tax liability for the assessment year. The High Court ruled against the respondent on both questions, highlighting errors in considering tax liability for dividend payment.

The main issue in the appeal to the Supreme Court was the valuation of bonus shares and its impact on section 23A(1) application. The appellant argued that the High Court's view on valuing bonus shares at face value was incorrect, citing a precedent in Commissioner of Income-tax v. Dalmia Investment Co. Ltd. The Supreme Court agreed with the appellant, stating that bonus shares should not be valued at face value alone. Instead, the cost of old shares and bonus shares should be spread if they rank pari passu. The Court emphasized the need for recomputation based on the principle from the Dalmia case to determine the applicability of section 23A(1).

Consequently, the Supreme Court allowed the appeal, setting aside the High Court's judgment, and directed a rehearing considering the valuation principle from the Dalmia case. The Court suggested calling for a supplementary statement of the case from the Appellate Tribunal for a comprehensive review. The parties were instructed to bear their own costs up to this stage. The appeal was allowed, and the case was remanded for further proceedings based on the correct valuation principle for bonus shares.