1965 (2) TMI 3 - HC - Income Tax

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 D of Part II of the Finance Act, 1956, for the relevant assessment year - Held, no

Summary

Issues Involved:
1. Inclusion of bonus shares in the paid-up capital within the meaning of sub-section (1) of the Explanation to Paragraph D of Part II of the Finance Act, 1956.
2. Determination of whether the bonus shares can be said to have been issued within the meaning of the second proviso to Paragraph D of Part II of the Finance Act, 1956, during the accounting year ended 31st December, 1955.

Issue-wise Detailed Analysis:

1. Inclusion of Bonus Shares in Paid-Up Capital:

The primary question was whether 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 sub-section (1) of the Explanation to Paragraph D of Part II of the Finance Act, 1956, for the relevant assessment year.

The relevant provision of sub-section (1) of the Explanation to Paragraph D of Part II of the Finance Act, 1956, states: "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."

The facts revealed that the undivided profits were capitalized and distributed in June 1955, and the undistributed capital remained part of the reserve until then. The paid-up capital of the company was not increased until June 1955, meaning neither in 1954 nor on the first day of the year 1955. Hence, the assessee could not get any rebate under the relative provision of the Finance Act.

Additionally, it was argued that unless the paid-up capital is deemed to be paid-up capital from 1st January 1955, the company was not competent to declare a dividend on the shares with effect from that date. However, the Finance Act does not account for deemed paid-up capital, referring only to capital actually paid up. Therefore, the assessee was not entitled to the rebate on this ground either.

2. Issuance of Bonus Shares During the Accounting Year:

The second question was whether the bonus shares in question could be said to have been issued within the meaning of the second proviso to Paragraph D of Part II of the Finance Act, 1956, to the shareholders by the assessee during the accounting year ended 31st December, 1955.

The relevant provisions of the second proviso to Paragraph D of Part II of the Finance Act, 1956, state: "Provided further that- (i) 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 may be, computed as hereunder: (b) 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."

The court analyzed the meaning of "issued to the shareholders," concluding that a share is issued when the entry of the name of the subscriber or the successful offeror is made in the register of members. The issue of shares involves multiple steps, including the passing of resolutions, allotment, and entry in the register of members.

In this case, the resolution for capitalizing the undivided profits and issuing new shares was passed, but the actual issue of shares did not occur within the accounting year ending 31st December, 1955. The resolution indicated that the capitalisation and application were to take place after 31st December, 1954. The agreement dated 31st January, 1955, also did not result in the issue of bonus shares to the shareholders.

The balance-sheet showed that the sum of Rs. 50,07,500 was still part of the reserve and not capitalized by the end of the accounting year. Therefore, the bonus shares were not issued to the shareholders within the relevant accounting year, leading to the conclusion that the assessee was not entitled to the rebate.

Conclusion:

Both questions were answered against the assessee. The court held that the bonus shares were not included in the paid-up capital within the meaning of the Finance Act, 1956, and were not issued during the accounting year ended 31st December, 1955. Consequently, the assessee was not entitled to the claimed rebate. The reference was dismissed with costs.