CASE ANALYSIS

NAME OF THE CASE: Shree Gopal Paper Mills Ltd. vs Commissioner of

Income Tax

DECIDED ON: 5 February, 1965

CITATION NUMBER: 1967 37 Comp Cas 240 Cal, 1967 64 ITR 233 Cal

JUDGES: Datta, J and Laik, J.

PROVISIONS INVOLVED:
Indian Companies Act, 1913 - Sections 2(16), 28, 30, 50,105C;

Companies Act, 1956 - Section 75;

Finance Act, 1956

BRIEF FACT:

This reference relates to the application of the provisions for rebate contained in
Paragraph D of Part II of the Finance Act, 1956. On 30th December, 1954, the
assessee-company passed several resolutions relating to the capital structure of the
company including a resolution relating to the issue of fully paid-up bonus shares.
The assessee-company in its return for the assessment year 1956-57 corresponding
to the accounting year 1955 claimed a rebate on account of the issue of bonus
shares and the increase in the paid-up capital consequent upon the issue of bonus
shares.

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:

The bonus shares of the face value of Rs. 50,000 should be included in the
paid-up capital of the appellant within the meaning of this term in the Indian
Finance Act, 1956. The appellant's contention on this point is therefore
accepted. The Income-tax Officer will please amend his computation of taxes
accordingly. '
Thereupon the assessee made an application to the Commissioner of Income-tax
for referring the matter to the Income-tax Tribunal.
ISSUES:
1. Whether, on the facts and in the circumstances of the case, the bonus shares
of the face value of Rs. 50, 07,500 should be included in the paid-up capital
of the assessee within the meaning of that term in pursuance of Sub-section
(1) of the Explanation to Paragraph D of Part II of the Finance Act, 1956, for
the relevant assessment year?

2. Whether, on the facts and in the circumstances of the case, the bonus shares
in question can be said to have been issued within the meaning of the second
proviso to Paragraph D of Part II, of the Finance Act, 1956, to the
shareholders by the assessee during the accounting year ended 31st
December, 1955, relevant for the assessment year 1956-57?

Thereafter the matter came before The Income-tax Tribunal for hearing;

The second question may be considered first, for it raises the primary controversy
between the parties.

ARGUMENTS ADVANCED:
 Secondary Issue:-

Whether, on the facts and in the circumstances of the case, the bonus
shares in question can be said to have been issued within the meaning of
the second proviso to Paragraph D of Part II, of the Finance Act, 1956, to
the shareholders by the assessee during the accounting year ended 31st
December, 1955, relevant for the assessment year 1956-57?
Tribunal’s view

The relevant provisions of the second proviso to Paragraph D of Part II of the

Finance Act of 1956 are as follows;

Provided further that--

(i) the amount of the rebate under Clause (i) or Clause (ii), as the case may be, of
the preceding proviso shall be reduced by the sum, if any, equal to the amount or
the aggregate of the amounts, as the case may be, computed as hereunder ;

(b) on the amount representing the face value of any bonus shares or the amount of
any bonus issued to its shareholders 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
at the rate of two annals per rupee'.

It is now necessary to consider the meaning and scope of the words 'share 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 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,

Phase I: when the share is a part of the share capital still remaining unexploited by
the company,

Phase II: when the share is exploited by the company finding a shareholder and

Phase III: when the share is converted into stock.

The first phase arises because under the company law 'Every company limited by
shares ' has nominal or authorized or registered share capital. This capital is one of
the essential features in the company's constitution. It is to be mentioned in the
memorandum of association and the capital so mentioned is to be divided into
shares of a fixed amount. The capital is usually fixed at some round figures
according to the requirements of the company assessed by the promoters of the
company. Therefore, it seems to me that the first part of the definition of the word
' share ' in the Companies Act refers to the share in this limited sense when the
share is still in the womb of the company or in the shell of the company and has
no shareholder.

The Phase II arises when it attracts Section 28 of the Indian Companies Act.

Section 28 of the Indian Companies Act is as follows:

(1) The shares or other interests of any member in a company shall be movable
property, transferable in the manner provided by the articles of the company.

(2) Each share in a company having a share capital shall be distinguished by its
appropriate number.'

Therefore, the share when it becomes associated with a member becomes a

movable property. It is however not movable property whose transfer is solely
regulated by the Sale of Goods Act. Its transfer is also governed by the Companies
Act and/or articles of the company.

It may be noticed that certificate of share is not the shares or a share. A certificate
under Section 29 of the Indian Companies Act is ' a certificate, under the common
seal of the company, specifying any shares or stock held by any member, shall be
prima facie evidence of the title of the member to the shares or stock therein
specified '.

Hence, a share certificate is not the share. It is only a prima facie evidence of the
title to the share. Therefore, it is necessary to consider what the character of a share
is. Section 28 says it is a movable property. It is however not a tangible property
for it is not the share certificate. Therefore, it must consist of a bundle of rights and
obligations. The nature of a share has received judicial consideration.

In,

Re Paulin, [1935] 1 K.B. 26, 57

Romer L.J. observed, “Share is a right to receive a proportion of the profits of the
company and it is assessed on winding up and all other benefits to membership
combine the obligation to contribute to its liabilities, all measured by a certain sum
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 in the second phase. 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 member.
The entry in the share register is a sine qua non in both cases.

Therefore, though the subscription to the memorandum or an agreement to take a

share may keep the share in preparedness by fulfilling the preliminary requirements
for its exit and transit to the owner, it still remains in the womb or shell of the
company, though it may be then in an animated condition. The exit and transit,
however, takes place when the entry in the register is made. Hence, in my opinion,
issue of the share takes place when entry of the name of the subscriber or the
successful offered is made in the register of members. It follows from the foregoing
observation that a share is issued when it finds an owner.

A person may become a member or shareholder in any of the following ways:

(1) By subscribing the memorandum of association, before its registration (which

is in essence Section 30, Clause (1), of the Companies Act).

(2) By agreeing with the company to take a share or shares, and being placed on
the register of members (which is in substance Section 30, Clause (2), of the
Companies Act).

(3) By taking a transfer of a share or shares, and being placed on the register of
members (which is in substance Section 34 of the Companies Act).

(4) By registration on succession to a deceased or bankrupt member (which is

equivalent to Section 35).

(5) By allowing his name to be on the register of members or otherwise holding

him out or allowing him to be held out as a member (which follows from the
ordinary principle of estoppels).

Hence the words “to shareholders” do not have the destination at large but
circumscribe the destination to shareholders. This destination, that is, shareholder,
can be reached only when an existing shareholder becomes the owner or holder of
the share and not otherwise.

Therefore, the words “share issued to shareholders” signifies that the share in the
shell or womb of the company has found an owner in an existing shareholder, for,
once it issues out, it cannot remain in the air but it becomes attached to a purchaser
or owner.
Therefore, having regard to the words ' issued to the shareholders ' in the phrase '
shares issued to the shareholders ', it is clear that the share is used in the narrowest
sense, that is to say, when it is in the womb or shell of the company and is divorced
from a shareholder. It follows that when a share is issued to the shareholder, it
bears an extensive meaning indicating that the share has reached its destination, an
existing shareholder who may have partly or fully paid up share or shares in the
company. It is now necessary to turn to the provisions of the Indian Companies Act
which loomed largely in the submission made before us as also another provision
which may have been incidentally mentioned in the course of the argument. In all
these provisions the word ' issue ' occurs.

Section 50 of the Indian Companies Act provides, inter alia, as follows:

(1) A company limited by shares, if so authorized by its articles, may alter the
conditions of its memorandum as follows (that is to say), it may 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 authorized 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 authorized 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 capital or, in other words, the shares are yet without shareholders or owners.

The word ' issue ' has again been used in Section 105C, which was introduced in
the Indian Companies Act, 1913, in order that the increase of share capital may not
be a device to increase the voting powers of thedirectors, for, under regulation 46,
they were not compelled to issue newly created shares to the existing shareholders
in the same proportion as their holding was before new shares were created. It
makes it incumbent upon the company and/or its directors to offer the newly
created shares in proportion to their existing shareholdings. Hence it is very similar
to the provision contained in the regulation. It is however debatable whether,
unlike regulation 46, Section 105C not only covers cases of newly created shares
under Section 50 but also covers the issue of the unissued share capital where the
entire share capital had not been issued or, in other words, there are reserve shares
in the company which may be utilized in raising the capital.

 Primary Issue:-

Whether, on the facts and in the circumstances of the case, the bonus shares
of the face value of Rs. 50, 07,500 should be included in the paid-up capital
of the assessee within the meaning of that term in pursuance of Sub-section
(1) of the Explanation to Paragraph D of Part II of the Finance Act, 1956, for
the relevant assessment year?

Tribunal’s view
It is now necessary 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 or 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
capitalized 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
capitalized 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 can’t the assessee get any rebate under the relative provision of the
Finance Act. There is another possible approach to the problem. The resolution
marked as Clause (a) and the agreement between the company and its shareholders
through one of its representatives clearly indicate that the bonus shareholders will
be entitled to dividends as from 1st January, 1955. In these circumstances, it may
be contended that unless the paid up capital is deemed to be paid up capital as from
the 1st January, 1955, the company was not competent to declare a dividend on the
shares with effect from the 1st January, 1955. Hence the paid up capital must be
deemed to have been increased as from 1st January, 1955, though in fact the paid
up capital was increased in the books of the company from June, 1955. In the
relative provision, however, there is no provision for taking into account the
deemed paid up capital. It is referable only to paid up capital which means in its
ordinary significance capital actually paid up. Hence on this ground also the
assessee is not entitled to the rebate.

DECISION OF THE COURT:-

In the opinion of the justice Datta, and Laik, it was held that It is now necessary
to turn to the actual accounting position. In the balance-sheet the sum of Rs.
5,00,750 which was sought to be capitalized and thereafter distributed amongst the
shareholders with a view to apply the same in payment in full for Rs. 5,00,750
ordinary shares of Rs. 10 each was shown as the balance on the 31st December,
1954, under the heading ' General Reserve '. This indicates clearly that the sum of
Rs. 50, 07,500 was still in the accounting year considered as a part of the reserve
and still remaining part of the undivided profits and consequently not capitalized.
If further appears from the statement of facts that the shares were not issued to the
shareholders till some time in 1955. Therefore, on a consideration of the resolution
and the subsequent facts, it is clear that the bonus shares were not issued to the
shareholders in the relevant accounting year which is the calendar year 1955
corresponding to the assessment year 1956-57. The assessee is not entitled to
rebate and both the questions should be answered against the assessee.
CONCLUSION:
The share issue to the shareholders takes place. It is said to 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. Clause (b) in the agreement in the instant case modifies
Clause (a) and the shareholders were not on the register on the relevant date.

In my judgment, therefore, the assessee is not entitled to rebate and both the
questions should be answered against the assessee. I respectfully agree with the
order dismissed with the costs.