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TMI Blog1960 (11) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders. The assessee accordingly received 31,909 bonus shares. These shares were of the face value of ₹ 3,19,090 at the rate of ₹ 10 per share. The assessee, therefore, debited the share account by ₹ 3,19,090 with a corresponding entry in the capital reserve account for the same amount. The entire lot of 1,10,747 shares was sold by the assessee on January 29, 1948, to Messrs. Dalmia Cement & Paper Marketing Limited for a consideration of ₹ 15,50,458. The sale price was deducted from the book value of ₹ 15,57,902 and the assessee claimed a loss of ₹ 7,444 on the sale of the shares. The claim was rejected by the Income-tax Officer on the ground that the cost of the bonus shares should be computed at an " average basis " in view of the principle laid down by the Bombay High Court in Emerald and Co. Ltd.'s case (supra). The Income-tax Officer computed the net profit of the assessee to be ₹ 2,39,317 which was liable to be taxed under section 12B of the Income-tax Act. The assessee took the matter in appeal to the Appellate Assistant Commissioner, who held that section 12B of the Income-tax Act was not applicable to the case, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contended that the computation of profits by the income-tax authorities is wrong and the assessee is not liable to pay any tax on the sale of the shares as no profit was realised out of the transaction. The question presented, therefore, for determination in this case is what is the valuation of the bonus shares-whether the valuation should be at the face value as contended for on behalf of the assessee, or whether it should be at nil as contended for on behalf of the income-tax authorities? In this connection it is important to remember that a company may "capitalise" profits by issuing fully paid shares to the shareholders. But this can only be done if the articles of the company contain provisions authorising such procedure. The principle is that a company cannot issue "bonus shares" for which the shareholders subscribe nothing. But the company can, if its articles so provide, declare a dividend or bonus out of its undistributed profits and at the same time issue corresponding number of new shares, and it can apply the dividend or bonus which then belongs to the shareholders in payment in full of the shares issued to them. Technically the transaction is car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b)generally do all acts and things required to give effect thereto. (2)The board shall have full power- (a)to make such provision, by the issue of fractional certificates or by payment in cash or otherwise as it thinks fit, for the case of shares or debentures becoming distributable in fractions; and also (b)to authorise any person to enter, on behalf of all the members entitled thereto, into an agreement with the company providing for the allotment to them respectively, credited as fully paid up, of any further shares or debentures to which they may be entitled upon such capitalisation, or (as the case may require) for the payment up by the company on their behalf, by the application thereto of their respective proportions of the profits resolved to be capitalised, of the amounts or any part of the amounts remaining unpaid on their existing shares. (3)Any agreement made under such authority shall be effective and binding on all such members." It is manifest, in view of these statutory provisions, that the bonus shares are not issued free to the shareholders, but the consideration for the issue of the bonus shares is the dividend or bonus which is provided and declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but that is an ambiguous expression. In business, as in contemplation of law, there were two transactions, the creation and issue of new shares on the company's part, and on the allottees' part the satisfaction of the liability to pay for them by acquiescing in such a transfer from reserve to share capital as put an end to any participation in the sum of £101,450 in right of the old shares, and created instead a right of general participation in the company's profits and assets in right of the new shares, without any further liability to make a cash contribution in respect of them. In the words of Parker, C.J., 'Had the company distributed the £ 101,450 among the shareholders and had the shareholders repaid such sums to the company as the price of the 81,160 new shares, the duty on the £ 101,450 would clearly have been payable. Is not this virtually the effect of what was actually done? I think it is'." The same view has been expressed by Lord Greene, M.R., in Osborne v. Steel Barrel Co. Ltd. [1941] 24 Tax Cas. 293 as follows: "It was strenuously argued on behalf of the Crown that if a company acquired stock in consideration of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. As a matter of machinery therefore a bonus or dividend payable to the shareholder must be declared and then appropriated to the payment up of the bonus shares, so that the shareholder pays for his shares by his bonus or dividend." The point has also been very clearly put by Lord Sumner in his dissenting speech in the House of Lords in the same case at page 142: "The scheme and the principle of the statute law on this subject are clear. It takes two to make a paid-up share. A share issued, whether it is part of the company's original issue of capital or is one issued on the occasion of surplus profit arising, is a share to be paid for : paid for by the allottee in meal or in malt; in money, unless by contract between himself and the company he is enabled to satisfy his obligation to pay by some other consideration moving from himself to the company. Under the contract in question what consideration so moves from the shareholders ? None that I can see, except the discharge of the company's debt for a dividend, which has become due to him by being declared. When debt for dividend is set off against debt for calls and the account is squared, the equivalent of pa ..... 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