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TMI Blog2008 (11) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Gift-tax Act, 1958 ("1958 Act") on the allotment of rights issue by the appellant company to its shareholders vide Board's Resolution dated 29.1.1986? (ii) Whether there was any element of "gift" as defined under Section 2(xii) in the appellant issuing Bonus shares in the ratio of 1:23 in April/May, 1986? Answer to Question No. 1: 4. On 29.1.1986 the appellant company, on the other shareholders not exercising the option given to them to take up the right shares issued by the appellant, allotted them to the seven investment companies, who were the shareholders in the appellant's company. At this stage, it may be stated, that in all there were twenty-seven shareholders. Twenty shareholders did not subscribe to the rights issue and consequently the appellant-company allotted them to the remaining existing shareholders. The A.O. held that the said allotment by way of rights issue was without adequate consideration within the meaning of Section 4(1)(a) of the 1958 Act. He further held that the modus operandi was an attempt to evade taxes; that it was a colourable transaction and since the shares allotted were without adequate consideration, there was a deemed gift unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only on allotment that shares come into existence. In this connection, learned counsel placed reliance on the judgment of this Court in the case of Sri Gopal Jalan Company v. Calcutta Stock Exchange Association Ltd. reported in 1964 (3) SCR 698. He also relied upon the judgment of this Court in the case of Sangramsinh P. Gaekwad and ors. V. Shantadevi P. Gaekwad (Dead) through LRs. and ors. reported in (2005) 11 SCC 314. Learned counsel further submitted that there is a vital difference between tax planning and tax evasion. According to the learned counsel, it is perfectly legitimate and permissible for an assessee to so arrange his affairs with a view to reduce its tax liability and such tax planning cannot be equated with tax evasion. In this connection, learned counsel submitted that the transaction in question was not sham or fictitious but real and it was given effect to. Moreover, it was contended that the stand taken by the Department, in this case, was conflicting inasmuch as according to the A.O. what was intended to be evaded was income-tax by the Directors of the appellant-company whereas, according to the CIT(A), the exercise undertaken by the appellant-company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on out of the unappropriated share capital to a particular person. 8. In our view, the judgment of this Court in Sri Gopal Jalan Company (supra) squarely applies to the present case. There is a vital difference between "creation" and "transfer" of shares. As stated hereinabove, the words "allotment of shares" have been used to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person. A share is a chose in action. A chose in action implies existence of some person entitled to the rights in action incontradistinction from rights in possession. There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. In this case, when twenty shareholders did not subscribe to the rights issue, the appellant allotted them to the seven investment companies, such allotment was not transfer. In the circumstances, Section 4 (1)(a) was not applicable as held by the Tribunal. 9. Since heavy reliance is placed by the learned Additional Solicitor General on the judgment of the Madras High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58. That is not the situation here. In the present case, the Department has sought to tax the appellant- company as a donor under the 1958 Act for making allotment of right shares. The Department has not taxed the renouncer shareholders despite the decision of CIT(A). Allotment is not a transfer. Moreover, there is no element of existing right in the case of allotment as required under Section 2 (xii) of the 1958 Act. In the case of renunciation for inadequate consideration in a given case Section 4(1)(a) could stand attracted. However, in such a case, the Department has to proceed against the renouncer (shareholder). For the above reasons, the judgment of the Madras High Court in S.R. Chockalingam Chettiar case has no application. 11. One more aspect needs to be mentioned. As stated above, in this case, even according to CIT(A), the right shares were allotted to the seven investment companies because the other existing shareholders did not subscribe for the shares. According to CIT(A), the gift tax proceedings ought to have been initiated against the existing shareholders, who had renounced their rights. We are surprised that despite the orders passed by CIT(A), the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares" finds support in the judgment of this Court in the case of Hunsur Plywood Works Ltd. v. Commissioner of Income- tax reported in (1998) 229 ITR 112. The relevant portion of which reads as under: "...The issuance of bonus shares was nothing but mere capitalisation of the profits of the Company in respect of which certificates are issued to the shareholders entitling them to participate in the amount of the reserve but only as part of the capital. The mechanism and effect of issuance of bonus shares have been explained by the English courts in a number of cases. Lord Haldane in the case of IRC v. Blott (1921) 2 AC 171 (HL) held (page 184): "My Lords, for the reasons I have given I think it is, as matter of principle, within the power of an ordinary joint stock company with articles such as those in the case before us to determine conclusively against the whole world whether it will withhold profits it has accumulated from distribution to its shareholders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this is done, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increase of profits by which every shareholder would benefit, but of course it could not for a moment be contended that such a benefit would render him liable to super tax in respect of it. The benefit would not be in the nature of income, and super tax can be levied only on income." In our view, the principle stated by Lord Finlay really resolves the controversy raised in this case. The profits made by the Company may be distributed as dividends or retained by the Company as its reserve which may be used for improvement of the Company's works, buildings and machinery. That will enable the Company to make larger profits. There cannot be any dispute that the shareholders will benefit from the improvements brought about in the profit- making apparatus of the Company. Likewise, if the accumulated profits are capitalised and capital base of the Company is enlarged, this may enable the Company to do its business more profitably. The shareholders will also benefit if the share capital is increased. They may benefit immediately by issue of bonus shares. But neither in the case of improvement in the profit-making apparatus nor in the case of expansion of the share capital of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an advantage of # 417,450 the sum upon which he was taxed. ... What has happened is that the plaintiff's old certificates have been split up in effect and have diminished in value to the extent of the value of the new." When a shareholder gets a bonus share the value of the original share held by him goes down. In effect, the shareholder gets two shares instead of the one share held by him and the market value as well as the intrinsic value of the two shares put together will be the same or nearly the same as the value of the original share before the bonus issue. It appears from the various decisions cited hereinabove, that issuance of bonus shares does not amount to distribution of accumulated profit of a company. The shareholder derives some benefit by the process of capitalising of the accumulated profits but at the same time, the value of his original shareholding goes down." 15. One of the points raised on behalf of the Department was that the entire exercise undertaken by the appellant constituted tax evasion. According to the Department, by a paltry investment of Rs. 10 lacs (approximately) the seven investment companies became owners of 24,00,168 shares of M/s Kho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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