Capitalisation - Indian Laws - General

Word capitalisation According to the Dictionary of English Law by Earl Jowitt, volume 1, capitalisation means the conversion of profits or income into capital, e.g., by resolution of a company . Buckley on the Companies Acts, thirteenth edition,- profits carried to reserve do not cease to be profits unless and until they are effectually capitalised . Says the learned author at page 912 after referring to article 128 corresponding to regulation 96 of Table A of the Indian Companies Act : A company may, if its constitution so allows, capitalize profits, instead of dividing them, by applying them in paying up unissued shares, or debentures or other securities, and issuing such shares or securities as fully paid to its members, thereby transferring the sum capitalized from profit and loss or reserve account to share or loan capital account. To the same effect is the statement of the law to be found in Palmer s Company Law, twenty-first edition, page 673. The capitalisation of profits , says the learned author , means that profits which otherwise are available for distribution among the shareholders are not divided among them in cash, but that the shareholders are allotted further shares--or debentures --which are, paid up wholly or in part out of those profits. The amount paid by the company out of its divisible profits on account of these newly issued shares is known as the bonus, and the shares are referred to as bonus shares. Lord Herschell in the case of Ann Bouch and William Bouch v. William Bouch Sproule was considering as to what was the nature and substance of the transaction in question in that case. The learned and noble Lord said at page 398 : I think we must look both at the substance and form of the transaction .................. And it was obviously contemplated, and was, I think, certain that no money would, in fact, pass from the company to the shareholders, but that the entire sum would remain in their hands as paid-up capital. Reference- PK BADIANI VERSUS COMMISSIONER OF INCOME-TAX, BOMBAY- 1976 (9) TMI 3 - SUPREME COURT