M/S. Hunsur Plywood Works Ltd vs The Commissioner Of Income-Tax

Hon'ble Mr. Justice Suhas C.Sen Hon'ble Mr. Justice V.N. Khare Gopal Jain, Adv. for Mukul Mudgal, Adv. for the appealing party J. Ramamurthy, Sr.Adv., T.C.Sharma, N.K.Agarwal, B.K.Prasad, Advs. with him, for the Respondent J U D G M E N T, The taking after Judgment of the Court was conveyed: SEN, J.
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Brief

The appealing party could be an open restricted company. The appraisal included are 1972-73, 1973-74, and 1974-75. In regard to the over appraisal a long time, within the returns of Wage recorded by the appealing party sometime recently the evaluating specialist, a claim towards the stipend of advancement discount beneath section 33 of the Income-tax Act, 1961 (hereinafter alluded to as the Act) was made., The evaluating specialist permitted the claim as made by the company. In this way, the evaluating specialist took a note from the adjust sheet of the appealing party company that the company had made an exchange for entirety from the improvement discount save to share capitalization account by the issue of reward offers. The surveying specialist concluded that the issuance of reward offers summed to the conveyance of benefits by capitalization and hence the surveying specialist was of the see that the arrangements of section 155(5) (ii) (a) of the Act connected to the moment case, as the improvement discount save has been used for conveyance by way of profit or benefits. Appropriately, the surveying specialist passed an arrangement beneath section 154 of the Act pulling back the advancement discount claim permitted earlier.

The Company went up on the offer. The re-appraising specialist permitted its offer. The claim of the appealing party for improvement discount was sustained. 

The re-appraising Tribunal on the Revenue’s request concurred with the see taken by the primary re-appraising specialist and concluded that there was no dispersion by way of dividend or benefits within the issue of reward shares. Thereafter, on the application by the Commissioner of Income-tax, the taking after questions of law alluded to the High Court: 

Issues

(a) Whether on the truths and within the circumstances of the case the ITAT is right in law in holding that issue of reward offers from out of the advancement discount save did not account to the conveyance of benefits inside the meaning of section 34(3)(a)(i) and section 155(5)(ii)(a)?

 (b) Whether or not the actualities and within the circumstances of the case the ITAT is right in law in holding that the ITO isn’t defended in pulling back the advancement rebate?” The High Court after looking at the arrangements of Section 34(3)(a)(i) and Section 155(5)(ii)(a) of the Income Tax Act held that the issue of bonus shares come about in the dissemination of benefits and so, the statutory prerequisite of Section 34(3)(a)(i) of the Act had been abused. The High Court replied to both the questions within the negative and in support of the Income. The assessee has come upon offer to this Court.

Contentions

Section 33 of the Act bargains with stipend of advancement discount in regard of an unused dispatch or modern apparatus or plant possessed by the assessee, on the off chance that it was entirely utilized for the reason of trade carried on by him. The remittance is given subject to a number of conditions. We are concerned in this case with the condition laid down in Section 34, which is as under:

The conclusion alluded to in Section 33 might not be permitted unless a sum break even with to seventy-five percent of the advancement discount to be really permitted is charged to the benefit and misfortune account of the important past year and credited to our savings account to be used by the assessee amid a period of eight a long time following taking after for the purposes of the commerce of the undertaking, other than- 

  1. for conveyance by way of profits or profits.” Section 155(5) 
  2. which is additionally pertinent in this case is as beneath : 

Where a settlement by way of change markdown has been made totally or to some degree to a survey in respect to an alacrity, device, or plant presented after the 31st day of December 1957 in any evaluation year underneath Section 33 of the Indian Income-tax Act, 1992 (XI of 1922), and subsequently- 

  • At any time some time recently the expiry of the eight a long time alluded to in sub-section (3) of Section 34, the assessee used the sum credited to the save account beneath clause (a) of that sub-section- 
  • For dissemination by way of profits or profits.

The assessee made an advancement discount support to a profit of the conclusion beneath Section 33. Section 34(3) (a) does not disallow the assessee from utilizing any sum credited to the support for the reason of the trade but he cannot use the sum for eight a long time for “dissemination by way of profits or benefits’. In case the Income-tax Officer finds that the assessee had used any sum out of the save support for conveyance by way of profits or benefits, he can pull back the stipend given beneath Section 33 by shareholders entitling them to take part within the sum of the save but as it were a portion of the capital. 

The instrument and impact of the issue of reward offers have been clarified by the English Courts in a number of cases. Master Haldane within the case of Inland Income Commissioners vs. Blott (1921) AC 171 held:

“My Lords, for the reasons I have given I think it is a matter of rule, inside the control of a conventional joint-stock company with articles such as those within the case sometime recently us to determine conclusively against the total world whether it’ll withhold benefits it has gathered from dispersion to its shareholders as wage, and as an elective not disseminate them at all, but apply them in paying up the capital sums which shareholders choosing to require up unissued offers would otherwise need to contribute. If this is often done, the money so applied is capital and never gets to be benefits within the hands of the shareholder at all. What the last-mentioned gets is no question an important thing. But it could be a thing within the nature of an additional share certificate within the company.”

In that case, Viscounts Haldane, at long last and Cave held that a sum break even with the confront esteem of the offers may not be respected as gotten by the shareholders. An opposite view was taken by Master Dunedin and Master Summer who held that the word “capitalization” was to some degree foggy and the sum that was capitalized had to be treated as to have been paid to the shareholders. 

In the case of Commissioners of Inland Income v. Fisher’s Agents, (1926) A.C. 395, Viscount Cave managed to continue beneath Section 155. In this case, there’s no charge that the assessee has dispersed any profit out of the sums standing to the credit of the finance. But the assessee issued reward offers and for that reason exchanged the sum standing to the credit of the finance to the share capital account. The address is whether beneath these circumstances issuance of reward offers will sum to dissemination of profits.

The reply to the address isn’t simple. One see is that the issue of reward offers to the shareholders includes a double operation by which a sum is discharged to the shareholders from a safe finance but was held by the Company and connected in an installment of the reward offers which were issued as completely paid up. The shareholders are treated as having paid for the reward offers and the gathered installments by the shareholders are taken to share capital account from saving finance of the Company. In impact, the shareholders have paid the confront esteem of the reward offers. It was to all entomb and purposes proportionate to the dissemination of amassed benefits in cash by the Company.

The moment to see is that when reward offers are issued a sum rise to the confront esteem of the offers cannot be respected as having been gotten by the shareholders. The issuance of reward offers was nothing but unimportant capitalization of the benefits of the company in regard to which certificates are issued to the case of a company which had expansive undistributed benefits. It chose to capitalize a portion of these benefits and convey its master rate among the standard shareholders as a reward within the shape of five percent debenture stock. The stock was appropriately issued, conditions giving that the Company might recover the stock after a certain time and on certain occasions. The address that came up for choice was whether the reward paid within the frame of debenture stock was wage within the hands of the shareholders and was, in this manner, obligated to supercharge. Viscount cave held:

“The entire exchange was “uncovered apparatus” for capitalizing benefits and included no discharge of resources either as salary or as capital.” 

In coming to this conclusion, Viscount Cave depended upon the taking after perception of Lord Finlay in Blott’s case:

“The common scope and impact of these exchanges is past debate. There was an increment within the capital of the company by the maintenance of the sums accessible for dividends. The utilization of the wholes which had been available for profit to extend capital would empower the company to carry on a larger and more beneficial trade, which may well be anticipated to abdicate bigger profits. The profits, be that as it may, were to be within the future. As far as the show was concerned there was no profit out of the collected benefits; these were committed to expanding the capital of the company. The company had control to do what it was satisfied with any benefits which it might make. It might spend the collected benefits within the advancement of the company’s works and buildings and apparatus. These changes might lead to an incredible increase of commerce and increment of benefits by which each shareholder would advantage, but of course, it seems not for a minute be fought that such an advantage would render him obligated to super assess in regard to it. The benefit would not be within the nature of wage, and supercharge can be exacted as it were on income.”

Within it, the rule expressed by Lord Finlay truly settles the contention raised in this case. The benefits made by the Company may be disseminated as profits or held by the Company as its savings which may be utilized for enhancement of the company’s works, buildings, and apparatus. That will enable the company to create bigger benefits. There cannot be any debate that the shareholders will benefit from the changes brought approximately within the benefits making device of the Company. Moreover, in the event that the gathered benefits are capitalized and the capital base of the Company is extended, this may empower the Company to do its commerce more beneficially. The shareholders will take advantage in case the share capital is expanded. They may be advantaged instantly by the issue of reward offers. But not one or the other within the case of change within the benefit-making device or within the case of extension of the share capital of the Company, can it be said that the shareholders have gotten any cash from the Company. They may have profited in both cases. But this advantage cannot be treated as dispersion of the sum standing to the credit of any safe support of the Company to its shareholders.

In reality, the exchange of the sums standing to the credit of Progression Rebate Spare to the share capital account does not include any payment of cash by the Company. Nothing comes out of the till of the Company to the shareholder. The complete sum of cash appeared as an advancement discount save is held by the Company in another account. It cannot be said that by the issue of reward offers, the company had disseminated it’s safe support to the shareholders even though it had held the whole sum with it within the share capital account.

It must moreover be famous that whereas managing with the address of valuation of reward offers within the case of Commissioner of Income-Tax, Bihar vs. Dalmia Venture Co.Ltd. 52 ITR 567, Hidayatullah, J. (as His Lordship at that point was) after alluding to Blott’s case (supra), favoured the see communicated by Viscounts Haldane, Finlay, and Cave to the contradicting see taken by Ruler Dunedin and Ruler Summer. Managing the impact of the issue of reward offers, Hidayatullah, J. held that “the floating capital utilized within the company which once consisted of subscribed capital and the savings presently gets to be the subscribed capital of the Company”. The certificates within the hands of the shareholders were property from which salary will be determined in the future.

Hidayatullah, J. in Dalmia’s Case, moreover cited with endorsement an entry from a choice of the Preeminent Court of Joined together States, Eisner v. Macomber (1920) 252 U.S. 189

“A stock profit truly takes nothing from the property of the enterprise and includes nothing to the interface of the shareholders. Its property isn’t lessened, and its interface is not increased. The relative intrigue of each shareholder remains the same. The only change is within the proof which represents that intrigued, the modern offers and the first offers together speaking to the same corresponding interface that the first offers spoke to sometime recently the issue of the modern ones. In brief, the enterprise is no poorer and the stockholder is no wealthier than they were before. If the offended party picked up any little advantage by the alteration, it certainly was not an advantage of 417,450 the entirety upon which he was taxed. What has happened is that the plaintiff’s ancient certificates have been part of the impact and have reduced in esteem to the degree of the esteem of the new.” 

Judgment

When a shareholder gets a reward share the esteem of the initial share held by him goes down. In impact, the shareholder gets two offers rather than the one share held by him and the showcase esteem, as well as the inborn esteem of the two offers put together, will be the same or about the same as the esteem of the initial share some time recently the reward issue.

It shows up from the different choices cited hereinabove, that issuance of reward offers does not sum to the conveyance of amassed benefit of a company. The shareholder infers a few advantages by the method of capitalizing off the gathered benefits but at the same time, the esteem of his unique shareholding goes down. Seen from any point, it cannot be said that in this case, the assessee-Company had conveyed any portion of its Development Rebate Reserve Fund when it issued the reward offers. The collected benefit lying to the credit of the Advancement Discount Save has been held by the Company. The sum has been exchanged to the share capital account, In the event that that was not done the intrinsic esteem of the offers held by the shareholders would have been more. After the issue of the reward offers, the intrinsic esteem of the initial offers has gone down really. The amassed benefits of the Company have remained with the Company in one account or another.

For sake of the Income, our consideration was drawn to the judgment within the case of Pioneer Building Works vs. Commissioner of Income Tax, Amritsar-II 124 ITR 44. That was the case of an organization firm. The sum standing to the credit of advancement discount save account was charged and the capital accounts of the accomplices within the organization account were correspondingly credited. It was held that the personality of the improvement discount save account had totally vanished. The sum standing to the credit of that save was set at the transfer of the accomplices who were free to pull back the same for their claim purposes. In that case, it was held that the exchange of the sum standing to the credit of the advancement discount saved within the individual’s account of the accomplices summed to the dissemination of profits. We come up short to see how this choice makes a difference in the Income within the realities of this case. The shareholders are not entitled to draw any cash from the share capital account of the company. The money standing to the credit of the Development Rebate Reserve is held by the Company in another account. A shareholder cannot claim that any portion of the share capital of the company has a place for him or make use of it. 

The address as to the substance of the exchange was moreover raised. The case, in any case, has got to be chosen on the premise of the dialect of the statute. There has been no dispersion from the improvement discount support. The result might have been diverse had the statute been differently worded but we shall get to take the stature because it is and not in any other sense. Additionally, as was pointed out by Ruler Summer in Fisher’s case that wants and eagerly are things of which a company is unable. These are the mental operations of its shareholders and officers. The as it were purposeful that the company has is such as is communicated in or essentially takes after from its procedures. It is barely a conundrum to say that the frame of a company’s resolutions and disobedience is their substance.

In this case, not one or the other in frame not in substance, has there been any dispersion of benefits by the company in making the reward issue? 

In the event that the substance and not the frame of the exchange is looked to, the issue of a reward offered was, within the dialect of Rowlatt, J. “an uncovered apparatus” for capitalizing benefits and there was no dissemination of benefits to the shareholders. 

We are incapable of maintaining the view communicated by the High Court that the issue of reward offers within the truths of this case produced to the dispersion of amassed benefits of the Company appeared as Advancement Discount Save Support. The offers are permitted. The judgment beneath the request is set aside. There will be no arrangement as to costs.

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