9911796707
TMI Blog2005 (4) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Yashwant Y. Chavan, Addl. Commissioner of Income-tax, Bangalore Present for the Applicant - RULING (By Mr. A.S. Narang) - In this case, an application under section 245Q(1) of the Income-tax Act, 1961 was received on 27.12.2004 in Form No.34D (meant for resident applicant) seeking advance ruling from this Authority on the following question:- "Whether, when the applicant allots bonus redeemable preference shares to the existing equity shareholders, any income would accrue to the non-resident equity shareholders being the allottees and therefore, the company is required to deduct tax at source?" 2. The applicant is a Pvt. Ltd. Company registered under the Companies Act, 1956 having its registered office at Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Giri Subramaniam 0.05% 10 shares of Rs.100/- TOTAL 100.00% 3. In the application in Form No.34D the shareholding was shown in the name of Dr. John Andrews (99.95%). However, in the rejoinder dated 3.3.2005 the applicant has clarified that the entire share holding (99.95%) is in the name of Briggs of Burton PLC(U.K.). As on 31.3.2004, the free reserves (General Reserve) of the applicant is Rs.84,11,398/-. The applicant intends to capitalize the free reserves by allotting fully paid redeemable bonus preference shares to the existing shareholders. In particular, the applicant intends to allot 80000 redeemable 12% preference shares of Rs.100/- each as fully paid bonus preference shares to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce shares and hence, it cannot be covered under the above sub-clause. 4. The jurisdictional Commissioner in his comments has stated that from the reading of Section 2(22), it will be clear that not only there has to be a distribution by the company of accumulated profits, but such distribution must entail the release of assets by the company to the share holders. The question is therefore, whether issue of bonus preference shares results in distribution of accumulated profits as well as entailing a release of assets of the Company to the shareholders. The Supreme Court in the case of CIT Vs. Dalmia Investment Company Limited (52 ITR 567, SC) has held that after the accumulated profits are converted into capital and bonus shares are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (a) it will be clear that not only there has to be a distribution by the company of accumulated profits, but such distribution must entail the release of assets by the company to the shareholders. This issue has been dealt with in a number of judicial pronouncements, and the following passages from the decision of Hon'ble Gujarat High Court in the case of Sashibala Navnitlal, lucidly explains the legal position:- "As observed by Hidayatullah J. in Commissioner of Income Tax V. Dalmia Investment Co. Ltd. after the accumulated profits are converted into capital and bonus shares are issued credited as fully paid up "the company employs that money not as reserves of profit, but as its proper capital issued to and contributed by the shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... say, employed in the business. Thereafter the company employs that money not as reserves of profits, but as its proper capital issued to and contributed by the shareholder." "The Indian Income-tax Act defines "dividend" and also extends it in some directions but not so as to make the issue of bonus shares a release of reserves as profits so that they could be included in the term." The above interpretation is further clarified by reading of 2(22)(b) [for which there is no corresponding provision in the 1922 Act], in which the words "if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company" are omitted. In other words, distribution of accumulated profit by way of issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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