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TMI Blog1965 (2) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ares. The Income-tax Officer held that the rebate on the face value of the bonus shares is to be reduced in the year when these shares are issued by the company to its shareholders. In the accounting year 1955 only a resolution for increase of capital by issue of new shares was passed. The passing of the resolution in the accounting year did not tantamount to the issue of bonus shares to the shareholders. He further held that clause (b) of the said resolution makes it patent that the shares were not issued in the accounting year ended 31st December, 1955, and, accordingly, he disallowed the rebates claimed. The assessee-company thereupon filed an appeal before the Appellate Assistant Commissioner of Income-tax, Range (II), Central, Calcutta. The Appellate Assistant Commissioner observed : " In my judgment therefore the Income-tax Officer was fully justified in coming to the conclusion that these shares had been issued in the previous year under consideration and not preceding the accounting period ending 31st December, 1954. He was of the opinion that in view of the definition of paid-up capital as " paid-up capital (other than capital entitled to dividend at a fixed rate) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders 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 ............ It is now necessary to consider the meaning and scope of the words " issued to the shareholders " before considering the meaning and effect of the words " bonus shares issued to the shareholders ". The phrase " share issued to the shareholders " comprises of three components. The word " share " has more than one meaning in common parlance. The Indian Companies Act defines shares : " Share " means under section 2(16) " share in the share capital of the company and includes stock except when a distinction between stock and shares is expressed or implied ". Therefore the statutory meaning of share covers the three phases of the share, share when it is a part of the share capital still remaining unexploited by the company, share when it is exploited by the company finding a shareholder and lastly when the share is converted into stock. The first phase arises because under the company law " Every company limited by shares " has nominal or authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of money which is the nominal value of the share, and all subject to control by the regulations of the company. " Therefore, a share can be either in the first phase or stage or in the second phase or stage. It remains either in its shell as a part of the capital or resides in a shareholder. It cannot lie suspended in any intermediate phase or stage. Hence it is necessary to find out the modus operandi of the transit from one phase or stage to another to appreciate the meaning of the word " issue which ordinarily means " sending out " or " putting out ". Section 30 of the Companies Act furnishes the modus operandi or mechanism for the transformation and ultimately the completion of the transit. Clause (1) of section 30 states that a subscriber to a memorandum becomes a member when his name is entered in the register of members. Clause (2) of section 30 lays down that every other person (those who are not covered by clause (1), who agrees to be a member and whose name is entered in the register of members becomes a member. In the case of subscribers to the memorandum, no agreement is necessary but an entry in the register must be made before the subscriber becomes a mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s practically only one Indian reported decision on the point which incidentally considered the meaning of the word " issue ". This is the case of Sri Gopal Jalan Co. v. Calcutta Stock Exchange Association Ltd., where the question was whether the sale or the re-allotment or the re-issue of issued shares is an allotment of shares within the meaning of sub-section (1) of section 75 of the Companies Act, 1956. There, Bachawat J. observed, inter alia, that the allotment of shares precedes all issues. Allotment of share means appropriation of unissued shares to a specified number of persons. Issue of shares is something distinct from allotment and is some subsequent act whereby the title of the allottee becomes complete. His Lordship left the matter at that stage. This question was broached in the case of Nanalal Zaver v. Bombay Life Assurance Co. in connection with the interpretation of section 105C of the Indian Companies Act. There is, however, no clear expression of opinion. In my opinion, on a reference to the authorities, it seems to me that on the whole they support my view. It is now necessary to ascertain the meaning of the word " to " in the relative phrase. It seems to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... word " issue " occurs. Section 50 of the Indian Companies Act provides, inter alia, as follows : " (1) A company limited by shares, if so authorised by its articles, may alter the conditions of its memorandum as follows (that is to say), it may --- (a) increase its share capital by the issue of new shares of such amount as it thinks expedient." Therefore, the object of section 50 is to issue new shares for increasing the share capital, " when the authorised capital of a company has been fully issued, and further capital is needed for development or other purposes." Thus, section 50 enables the company to create shares for increasing the authorised capital of the company. Hence the effect of a resolution under section 50 is the increase in the share capital simpliciter. The shares so created are still in the possession of the company or in the womb or shell of the company and capable of being exploited by the company. The company can and is now in readiness to raise capital by issuing the shares to the shareholders which means that at this stage there is no addition to the capital of the company in terms of money which is ordinarily the object of increasing the share capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal by them, by others. Hence, there is a gulf of difference between the meaning of " issue in section 50 and section 105C and regulation 46. In the case of section 50 there is an increase of the share capital of the company. The shares are created by increasing the authorised capital. The shares so created, however, are not, by virtue of the relative resolutions, passed out to the shareholders or sent out by the company. In other words, the ownership of the shares when a resolution is passed under section 50 is yet at large. It is only when shares are issued to the shareholders in terms of section 105C that the new issue finds its owners either in the existing shareholders or elsewhere. Hence, section 50 is only an enabling section authorising the company or its directors to raise increased capital by the disposal of the shares. Section 50 by itself does not lead to the disposal of the shares. This can be only done under section 105C when shares are actually transferred to the shareholders or in case of their refusal to others. It is now necessary to consider whether the meaning of the word " issued to the shareholders " undergoes a change in the phrase " bonus share issued to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the rights and no physical transfer in the ordinary acceptance of the word. In this view of the matter there seems to be no difference between the issue of shares to the shareholders and the issue of bonus shares to the shareholders. This brings us to the consideration of the resolution and the surrounding facts in this case. It may be noticed at the outset in this case, the resolution for capitalisation of the undivided capital, the issue of new shares and the resolution for the appropriation of the undistributed profits were all passed by the company. In England, as will appear from Palmer's Company Precedents, 18th Edition, Form No. 490, at page 874, that a similar resolution like that of clause (a) in the instant case for capitalisation of the undivided profits is passed by the company. In England, however, resolutions analogous to clauses (b) and (c) are not passed by the company at its extraordinary general meeting but similar resolutions are passed by the board of directors. In other Words, in England the company only enables the directors to issue the unissued shares, capitalise the reserve fund, distribute the saw amongst the shareholders and the board of dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke place before the 31st December, 1954, but was directed to take place as on the 1st day of January, 1955. The words " provided that no allotment of shares issued as aforesaid shall be made to non-resident shareholders till the approval of the Reserve Bank of India is obtained for the same " again indicate that all the shares could not be issued until and unless the approval of the Reserve Bank of India for the non-resident shareholders was obtained. Hence, clause (b) supports the conclusion arrived at on an independent consideration of clause (a) that the shares were not issued even at that stage. Clause (c) of the resolution may be considered next. The words " that the directors be authorised to affix the company's seal on duplicate endorsements of such agreement as and when the same shall have been signed on behalf of the members holding ordinary shares in the company on 1st January, 1955, by some person to be appointed by the directors in that behalf which the directors be and hereby are authorised to do " clearly indicate that the agreement providing for the allotment of the same new ordinary shares and satisfaction of the same capital bonus was to come into existence no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to deal with question No. 1. The relative provision of sub-section (1) of the Explanation of Paragraph D of Part II of the Finance Act, 1956, is as follows : " 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 before us make it abundantly clear that the undivided profits were capitalised and distributed in June, 1955. The undistributed capital remained in the books undistributed and as a part of the reserve until the middle of June. This capitalised sum was thereupon distributed to the shareholders by appropriation against the face value of the newly issued shares to the existing shareholders. Hence the paid up capital of the company was not increased until June, 1955, that is to say, neither in 1954 nor on the first day of the year 1955. Hence on these grounds the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me such shares are taken to be issued oil the facts of this case. To appreciate the various English decisions (most of which again are dealt with by my learned brother) and to make them applicable to the Indian Companies Act, it is better to remember at the outset that the word " issue is a word of flexible meaning. It was found in the English Companies Act of 1867 (section 25 repealed) which had given rise to some difficulty. Section 25 was mitigated by section 1 of the English Act of 1898. Both the said sections of the said two Acts were repealed by the Act of 1900, which again, in its turn, is subsequently repealed. Section 52 of the English Act of 1948 now provides for a penalty in such cases. In this country, prior to 1936, there was no check on the directors' powers to issue blocks of shares, either to themselves or to their nominees, within the authorised limit, unless such powers are circumscribed by the articles of association. The managing agents, who usually dominated the board of directors, could, to secure their own position, induce the board to issue shares to the managing agents or their nominees. To check one of such mischiefs of the managing agency system, sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o contravention of the provisions of section 105C. " Therefore, this much is clear that the shareholders must have to be on the register of shareholders so that the shares might be issued to them. The Supreme Court, again, in the case of Mathalone v. Bombay Life Assurance Co., observed at page 129 of the reports : " The English Law can furnish no guidance for its solution as there is no provision corresponding to section 105-C in the English Companies Act. " In refuting Mr. Patnaik's argument that the receiver could not acquire the newly issued shares in his name, it was held at page 143 : " . . . privilege was conferred by section 105C only on a person whose name was on the register of members. " In dealing with the question as to whether the re-issue of forfeited shares is " allotment " within the meaning of section 75(1) of the Companies Act, 1956, corresponding to, section 104(1) Of the Companies Act of 1913, Sarkar J., delivering the judgment on behalf of the Supreme Court, held in the case of Sri Gopal Jalan Co. v. Calcutta Stock Exchange, that a " re-issue of forfeited shares is not an allotment of share." The word " allotment " has not been defined in the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be issued when the transaction is complete and again, not until before the registration of the contract. It is also said to be issued when the allottee has become complete master of the shares, and further when the certificates are actually issued and also when the shareholders are put in complete possession of the shares. In my judgment it is not necessary to combine all those tests because the conclusion is one more of fact than of law on a consideration of all the circumstances in a given case. Though the expression "issue" appears in section 50 of the Companies Act, in the Finance Act of 1956 the expression is " issue to the shareholders ". In my view, it is not tautology. It is not a case of issue of shares to the world at large. The difference between issue and allotment is not a matter of mere form but really of substance. Actual issue cannot be complete only on resolution to allot shares. Resolution is not necessarily the issue of them. It is not a mechanical act. Non-participation of dividend is a factor to be kept in view, as the shareholders only are entitled to participate in dividend. Consent of the Reserve Bank again is necessary. Clause (b) in the agreement in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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