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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 ..... ares 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 under Section 4(1) of the 1958 Act. Accordingly, the difference between the value of the shares on yield basis and the face value of Rs. 10/- at which the shares were allotted was sought to be brought to tax under the said section. Aggrieved by the decision of the A.O., the appellant carried the matter in appeal to CIT(A). It was held that the entire exercise undertaken by the appellant was to evade payment of wealth tax by the individual shareholders of the appellant-company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to evade wealth tax. Learned counsel submitted in the alternative that even assuming whilst denying that there was an intention to evade income tax or wealth tax, the correct course open to the Department was to include the income or wealth in the income tax or wealth tax assessment of the concerned assessee. For the aforestated reasons, learned counsel submitted that the High Court should not have interfered with the decision of the Tribunal. 6. Shri Mohan Parasaran, lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Court in the case of S.R. Chockalingam Chettiar (supra), we may state that the said judgment has no application to the facts of the present case. In that case, the facts were as follows. Appellant was a shareholder of S.R.C.M. Ltd.. Appellant was an assessee. Appellant was entitled to apply for 800 equity shares in a fresh issue of capital by the company with a option to renounce the same as provided for in Section 81 of the Companies Act, 1956. On 15.6.1957, appellant renounced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven 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 did not initiate proceedings under the Gift-tax Act against the shareholders who had renounced their rights, particularly when the CIT(A) has specifically said so in her order. For the aforestated reasons, we hold that the word "allotment" indicates creation of shares by appropriation out of the unappropriated share capital to a particular person and that such creation did not amount to transfer. That, in any event, liability to pay gift tax would be on the donor (shareholder) who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssuance 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, the money so applied is capital and never becomes profits in the hands of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company." In that case, Viscounts Haldane, Finlay and Cave held that an amount equal to the face value of the shares could not be regarded as received by the shareholders. A contrary view was taken by Lord Dunedin and Lord Sumner who held that the word "capitalisation" was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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, can it be said that the shareholders have received any money from the Company. They may have benefited in both the cases. But this benefit cannot be treated as distribution of the amount standing to the credit of any reserve fund of the Company to its shareholders. In fact, the transfer of the amounts standing to the credit of development rebate reserve to the share capital account, does not involve any disbursement of money by the Company. Nothing comes out of the till of the Company to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Khodey Distilleries Ltd. worth Rs. 2,40,01,680. According to the Department, the market value of the said shares and the yield from the said shares were totally disproportionate to the investments made by the seven investment companies. Therefore, according to the Department, the modus operandi adopted by the appellant was an exercise in tax evasion. 16. As stated above, we do not know the reason why the Department had not proceeded under the Income-tax Act, 1961 if, according to the Department, the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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