COMMISSIONER OF INCOME TAX, MUMBAI A
i:
MIS. GENERAL INSURANCE CORPORATION
SEPTEMBER 25. 2006
[ASHOK BHAN AND MARKANDEY KA TJU, JJ.] B
Companies Act, 1956:
Section 8 I-Expenditure incurred in connection with issuance of bonus
shares-Held: ls revenue expenditure and not capital expenditure. C
The question which has arisen for consideration in the present appeal
is whether the expenditure incurred in connection with the issuance of bonus
shares is a capital expenditure or revenue expenditure.
Dismissing the appeal, the Court D
HELD: 1.1. The expenditure on issuance of bonus shares is revenue
expenditure and not capital expenditure. 1570-AJ
1.2. Issuance of bonus shares does not result in any inflow of fresh funds
or increase in the capital employed. The capital base of the company prior to E
or after the issuance of bonus shares remains unchanged. Issuance of bonus
shares by capitalization of reserves is merely a reallocation of company's fund.
If that be so, then it cannot be held that the Company has acquired a benefit
or advantage of enduring nature. The total funds available with the company
will remain the same and the issue of bonus shares will not result in any F
change in the capital structure of the company. (569-8, F(
C/Tv. Dalmia Investment Co. Ltd., (1964) 52 ITR 567 (SC), relied on.
Bombay Burmah Trading Corporation Ltd. v. CIT, (1984) 145 ITR 793;
Richardmn Hindustan Limitedv. CIT, (1988) 169 ITR 516 (Bombay) and Wood G
Craft Products Limitedv. Commissioner of Income-Tat, (1993) 204 ITR 545,
approv~
Ahmedabad Manufacturing and Calico Pvt. Ltd. v. Commissioner of
561 H
562 SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R.
A Income-Tax, (1986) 162 ITR 800; C!Tv. Mihir Textiles limtied, (1994) 206
ITR 112 (Gujarat); C!Tv. Aiit Mills limited, (1994) 210 ITR 658; Va::ir Sultan
Tobacco Co. Ltd v. CIT. (1990) 184 ITR 70 and Va::ir S11/tan Tobacco Co.
ltd v. CIT. (1988) 174 ITR 689, overruled.
Punjab State Industrial Developmem Corporation ltd. v. CIT, (1997)
B 225 ITR 792 (SC); Gujarat Steel Tubes ltd. v. CIT. (1994) 210 ITR 358; Union
Carbide India ltd v. CIT, (1993) 203 ITR 584; Brooke Bond India limitedv.
CIT, (1997) 225 ITR 798(SC) and C/Tv. Alo/Or Industries Co. ltd, (1998)
229 ITR 137, Distinguished.
Empire Jute Co. ltd. v. CIT. (1980( 4 SCC 25, referred to.
c
Atherton v. British Insulated and Helsby Cables ltd., 10 TC 155 and
Eisner v. Macomber, (1920) 252 U.S. 189, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4422 of2001.
D From the Judgment and Order dated 18.9.2000 of the High Court of
Judicature at BoPlbay in Income Tax Appeal No. 45712000.
Mohan Parasaran, A.S.G., Harish Chander, O.P. Srivastava, T.A. Khan
and D.S. Mahra for the Appellant.
E F.V. Irani and K..B. Hathikhanawala for the Respondent.
The Judgment of the Court was delivered by
BHAN, J. The question which arises for consideration in this appeal is,
as to whether the expenditure incurred in connection with the issuance of
F bonus shares is a capital expenditure or revenue expenditure. The question
of law framed in the High Court was:
(i) Whether on the facts and in the circumstances of the case and
in law the Tribunal was right in holding that the expenditure
incurred on account of share issue is allowable expenditure?
G
·-
The Assessee is an Insurance Company which has four subsidiaries.
For the assessment year 1991 ·92 the assessee filed a return of income of Rs.
58,52,80,850/- along with the audit report. The assessing Officer disallowed a
few expenses incurred as revenue expenditure, one of them being in the sum
H
COMMR. OF INCOME TAX, MUMBAI i·. GENERALINSURANCECORPN. [BHAN. J] 563
of Rs. 1,04,28,500/- incurred towards the stamp duty and registration fees paid A
in connection with the increase in authorized share capital. The respondent-
assessee had during the accounting year, incurred expenditure separately for:
(i) The increase of its authorized share capital and
(ii) The issue of bonus shares.
B
The Assessing Officer disallowed both the items of expenditure as
revenue expenditure. According to him, the expenses incurred were towards
a capital asset of a durable, nature for the acquisition of a capital asset and,
therefore, the expenses could only be attributable towards the capital
expenditure.
c
The assessee being aggrieved filed an appeal under Section 143 (3)
before the CIT (Appeals). Disallowance of Rs. 1,04,28,500/- in respect of
stamp duty and registration fees incurred in connection with the increase in
the authorized share capital were bifurcated by the CIT (Appeals) into two
categories, one relating to the increase in authorized share capital from Rs. D
75 crores to Rs. 250 crores and second relating to issue of bonus shares. Jn
respect of the first category of expenditure it was held that the same was not
allowable in terms of the judgments of the Bombay High Court in the case
of Bombay Burmah Trading Corporation v. CIT (1984) 145 ITR 793 and
Richardson Hindustan Limited v. CIT, ( 1988) 169 ITR 516. The expenditure
falling under second category was allowed as revenue expenditure being E
directly covered by the decision in Bombay Burmah Trading Corporation's
case's (supra).
The revenue being aggrieved challenged the order passed by the CIT
(Appeals) before the Income Tax Appellate Tribunal (for short "the Tribunal"). F
The Tribunal upheld the decision of the CIT (Appeals) treating the expenses
incurred towards the issue of bonus shares as revenue expenditure by
observing inter alia as under:
"We have carefully considered the rival submissions. The basis for
the judgment by Hon 'ble Supreme Court in the case of Brooke Bond G
India limited v. CIT, (1997) 225 ITR 798 (SC), has been that the
expenditure was connected with the expansion of the capital base of
the Company and therefore such expenditure was capital expenditure.
However in the case of issue of bonus shares there does not take
place an expansion of the capital base of the company but only re-
H
564 SUPREME COURT REPORTS [2006) SUPP. 6 S.C.R.
A allocation of the existing funds. We, therefore, hold that the Learned
CIT (Appeals) rightly decided this issue in favour of the assessee.
This ground of appeal is therefore rejected."
The revenue thereafter filed an appeal under Section 260-A of the
Income tax Act for short "the Act") before the High Court of Bombay, raising
B two questions of law. The High Court in its judgment has affirmed the
Tribunal's judgment by following its earlier decision in the case of Bombay
Burnah Trading Corporation (supra). This Court granted leave qua the
question of law as reproduced in para I of this judgment.
On the question, as to whether the expenses incurred in connection
C with the issue of bonus shares is a revenue expenditure or a capital expenditure,
there is a conflict of opinion between the High Courts of Bombay and
Calcutta on the one hand and Gujarat and Andhra Pradesh on the other.
Bombay and Calcutta High Courts have taken the view that the expenses
incurred in connection with the issue of bonus shares is a revenue expenditure
D whereas Gujarat and Andhra Pradesh High Courts have taken the view that
the expenses incurred in connection with the bonus shares is in the nature
of capital expenditure.
Learned counsel for the appellant relying upon the commentary to the
Companies Act by A Ramaiya, Sixteenth Edition 2004, which occurs in the
E commentary to Section 81 of the Indian Companies Act, - "When a company
prospers and accumulates a large surplus it converts this surplus into capital
and divides the capital among its members in proportion to their rights. This
is done by issuing fully paid shares representing the increased capital. The
shareholders to whom the shares are allotted have to pay nothing. The
F purpose is to capitalize the gains which may be available for division or utilize
quasi-capital gains. Bonus shares go by the modem name "capitalization of
shares". And the judgments of the Gujarat High Court in Ahmedabad
Manufacturing and Calico Pvt. Ltd. v. Commissioner of Income-Tax. (1986)
162 ITR 800, CIT v. Mihir Textiles Limited, (1994) 206 ITR 112 (Gujarat),
Gujarat Steel Tubes Limited v. CIT. (1994) 210 ITR 358. CIT v. Ajit Mills
G Limited.. ( 1994) 210 ITR 658 and the two judgments of the Andhra Pradesh
High Court in l'azir Sultan Tobacco Co. Ltd. v. CIT. ( 1990) 184 ITR 70 and
Vagir Sultan Tobacco Co. Ltd v. CIT. ( 1988) 174 ITR 689 wherein it has been
held that the issuance of bonus shares increases the issued and paid up
capital of the company and the bonus shares of the company are directly
connected with the acquisition of capital and an advantage of enduring
H
COMMR. OF INCOMETAX, MUMBAI ''· GENERAL INSURANCE CORPN. [BHAN, J.) 565
nature. CONTENDS that the expenses incurred towards issue of bonus shares A
confers an enduring benefit to the company which has a resultant impact on
the capital structure of the company and therefore, it should be regarded as
the capital expend;•ure. Reliance has also been placed upon the judgments of
this Court in Punjab State Industrial Development Corporation ltd. v. CIT.,
(1997) 225 ITR 792 (SC) and Brooke Bond India ltd. v. CIT, (1997) 225 ITR
798 (SC). He also relied upon in C/Tv. Motor Industries Co. ltd., (1998) 229 B
ITR 137 ofKarnataka High Court, in C/Tv. Ajit Mills limited. (1994) 210 ITR
658, Gujarat Steel Tubes Ltd. v. CIT, ( 1994) 210 ITR 358 of Gujarat High Court
& Union Carbide India Ltd. v. CIT, (1993) 203 ITR 584 of Calcutta High Court.
As against this, learned senior counsel appearing for the respondent C
contends that undoubtedly increase in share capital by the issue of fresh
shares leads to an inflow of fresh funds into the company expands or adds
to, its capital employed resulting in expending its profit making apparatus, but
THE ISSUE OF BONUS SHARES by capitalisation of reserves is merely a
reallocation of a company's funds. There is no inflow of fresh funds or
increase in the capital employed, which remains the same. The issue of bonus D
shares leaves the capital employed unchanged and therefore, does not resu It
in conferring an enduring benefit· to the company and the same has to be
regarded as revenue expenditure. He has relied upon the judgment of this
Court in C/Tv. Dalmia Investment Co. ltd., (1964) 52 ITR 567 (SC), Bombay
Burii1ah Trading Corporation Ltd. v. CIT, (1984) 145 ITR 793, Richardson E
Hindustan limitedv. CIT, (1988) 169 ITR 516 (Bombay) and the subsequent
judgments of the same Court taking the same view and the judgment of the
Calcutta High Court in Wood Craft Products Limited v. Commissioner of
Income-Tat, (1993) 204 ITR 545.
We may at the outset indicate that this Court has laid down the test for F
determining whether a particular expenditure is revenue or capital expenditure
in the case of Empire Jute Co. Ltd. v. CIT, [I 980] 4 SCC 25. This Court after
considering the law on the subject in detail observed at page 8 as under:
"The decided cases have, from time to time, evolved various tests for
distinguishing between capital and revenue expenditure but no test is G
paramount or conclusive. There is no all embracing formula which can
provide a ready solution to the problem; no touchstone has been
devised. Every case has to be decided on its own facts keeping in
mind the broad picture of the whole operation in respect of which the
expenditure has been incurred. But a few tests formulated by the
H
566 SUPREME COURT REPORTS 12006] SlPP. 6 S.C.R.
A courts may be referred to as they might help to arrive at a correct
decision of the controversy between the parties. One celebrated test
is that laid down by Lord Cave. L.C. in Atherton v. British Insulated
and Helsby Cables ltd.. I 0 TC 155, where the learned Law Lord
stated:
B When an expenditure is made, not only once and for all, but with
a view to bringing into existence an asset or an advantage j(Jr the
enduring benefit ofa trade, there is very good reason (in the absence
of special circumstances leading to an opposite conclusion) for treating
such an expenditure as properly attributable not to revenue but to
capital."
c
[Emphasis supplied)
In short, what has been held in this case is that if the expenditure is
made once and for all with a view to bringing into existence an asset or an
advantage for the enduring benefit of a trade then there is a good reason for
D treating such an expenditure as properly attributable not to revenue but to
capital. This is so, in the absence of special circumstances leading to an
opposite conclusion.
Decisions of this Court in Punjab State Industrial Development
E Corporation Ltd.. (supra) and Brooke Bond India ltd. (supra) and CIT v.
Motor Industries Co. Ltd., (1998) 229 ITR 137 of Karnataka High Court, CIT
v. Ajit Mills Limited, (1994) 210 ITR 658, Gujarat Steel Tubes ltd. v. CIT.
(1994) 210 ITR 358 & Union Carbide India ltd v. CIT. (1993) 203 ITR 584 of
Calcutta High Court are of not much assistance to us. All these cases relate
to the issue of fresh shares which lead to an inflow of fresh funds into the
F company which expands, or adds to its capital employed in the company
resulting in the expansion of its profit making apparatus. Expenditure incurred
for the purpose of increasing company's share capital by the issue of fresh
shares would certainly be a capital expenditure as has been held by this Court
in the cases cited above.
G Effect of issuance of bonus share has been explained by this Court in
Dalmia Investment Co. ltd. (supra) where the question of valuation of bonus
share was considered. After ~Hoeing the decision in the case of Eisner v.
Macomber, (1920) 252 U.S. 189, of the Supreme Court of United States of
America, Mr. Justice Hidayatullah explained ihe consequences of issue of
H bonus shares by observing thus:
COMMR. OF INCOME TAX, MUMBAI r. GENERALINSURANCECORPN. [BHAN, l] 567
" .... In other words, by the issue of bonus shares pro rata, which A
ranked pari passu with the existing shares, the market price was
exactly halved, and divided between the old and the bonus shares.
This will ordinarily be the case but not when the shares do not rank
pari passu and we shall deal with that case separately. When the
shares rank pari passu the result may be stated by saying that what B
the shareholder held as a whole rupee coin is held by him, after the
issue of bonus shares, in two 50 nP coins. The total value remains the
same, but the evidence of that value is not in one certificate but in
two."
It is further observed at pages 577-578:
c
"It follows that though profits are profits in the hands of the
company, when they are disposed of by converting them into capital
instead of paying them over to the shareholders, no income can be
said to accrue to the shareholders because the new shares confer a
title to a larger proportion of the surplus assets at a general distribution. D
The floating capital used in the cumpany which formerly consisted
of subscribed capital and the reserves now becomes the subscribed
capital."
[Emphasis supplied]
E
The Gujarat High Court in Ahmedabad Manufacturing and Calico Pvt.
Ltd. v. Commissioner of Income-Tax, (I 986) 162 !TR 800 has held, that the
expenses incurred towards the issuance of bonus shares is a capital expenditure.
Bonus shares issued by the assessee company also constitute its capital
bonus shares, as right shares are an integral part of the permanent structure
of the company and are not in any way connected with the working capital F
of the company which is utilized to carry on day to day operations of the
business. Negativing the contention of the assessee that no benefit whatsoever
is derived by the assessee company when its profits and/or reserves are
converted into paid-up shares, it was held that as a result of the increase in
the paid up share capital the creditworthiness of the assessee-company would G
increase which would be a benefit or advantage of enduring nature. That the
bonus shares are an integral part of the permanent structure of the assessee-
company. The bonus shares are not different from rights shares as, according
to it, in the case of bonus shares a bonus is first paid to the shareholders
who pay it back to the company to get their bonus shares. This reasoning
of the Gujarat High Court was evident from the following extracts from its H
568 SUPREME COURT REPORTS [2006J SUPP. 6 S.C.R.
A judgment:
At page 808:
"It is clear that when bonus shares are issued, two things take
place: (i) bonus is paid to the shareholders; and (ii) wholly or partly
B paid-up shares are issued against the bonus payable to the
shareholders. The shareholders invest the bonus paid to them in the
shares and that is how the bonus shares are issued to them.
In our opinion, therefore, it would not make any difference whether
paid-up share capital is augmented by issuance of right shares or
C bonus shares to the shareholders ................... .
As already pointed out above, bonus shares are not different from
rights shares ........ "
The above observation is completely contrary to the observation of this
D Court in Dalmia Investment Co. ltd.. (supra). which judgment had not been
referred to by the Gujarat High Court. In the case of Dalmia Investment Co.
Ltd., (supra) this Court has held that floating capital used in the company
which formerly consisted of subscribed capital and the reserves now becomes
the subscribed capital. The conversion of the reserves into capital did not
involve the release of the profits to the shareholder; the money remains where
E it was, that is to say, employed in the business. In the face of these
observations the reasoning given by the Gujarat High Court cannot be upheld.
We do not agree with the view taken by the Gujarat High Court that
increase in the paid up share capital by issuing bonus shares may increase
F the creditworthiness of the company but that does not mean that increase in
the credit worthiness would be a benefit or advantage of enduring nature
resulting in creating a capital asset.
The Aiidhra Pradesh High Court has in Vuzir Sultan Tobacco Co. ltd.
v. CIT. (1990) 184 ITR 70 (AP), taken the view that the expenditure incurred
G on the issue of bonus shares was capital in nature because the issue of bonus
shares led to an increase in the company's capital base.
The observations and conclusions a~e ~rroneous as they run contrary
to the observation made by this Court in Da/mia Investment Co. ltd. (supra).
The capital base of the company prior to or after the issuance of bonus shares
H
COMMR. OF INCOME TAX, MUMBAI '"GENERAL INSURANCECORPN. [BHAN, J.] 569
remains unchanged. A
Issuance of bonus shares does not result in any inflow of fresh funds
or increase in the capital employed, the capital employed remains the same.
Issuance of bonus shares by capitalization of reserves is merely a reallocation
of Company's fund. This is illustrated by the following hypothetical tabulation
which establishes that bonus shares leaves tire capital employed untouched, B
because in the hypothetical example, the capital employed remains the same
(i.e. Rs. 600) both pre and post issuance of bonus shares.
SI.No. Partic,ulars Pre-Bonus On Bonus Post Bonus
Issue Issue shares
Rs. Rs. Rs. c
I. Pre-paid share 100 !oo+l00=200 200
capital
2. Reserve 500 500-100=400 400
3. Total 600 600 600 D
As observed earlier, the issue of bonus shares by capitalization of
reserves is merely a reallocation of company's funds. There is no inflow of
fresh funds or increase in the capital employed, which remains the same. If
that be so, then it cannot be held that the Company has acquired a benefit E
or advantage of enduring nature. The total funds available with the company
will remain the same and the issue of bonus shares will not result in any
change in the capital structure of the company. Issue of bonus shares does
not result in the expansion of capital base of the company.
The case Wood Craft Products limited (supra) of the Calcutta High F
Court is similar to the case of the respondent. In that case as well there was
increase of authorized share capital by the issue of fresh shares and a
separate issue of bonus shares. The Calcutta High Court drew a distinction
between the raising of fresh capital and the issue of bonus shares and held
that expenditure on the former was capital in nature as it changed the capital
base. On the other hand, in the case of bonus shares, was held to be revenue G
expenditure following the decision of the Supreme Court in Dalmia Investment
Co. ltd. (supra) on the ground that there was no change in the capital
structure at all.
In our considered opinion, the view taken by the Bombay and Calcutta H
570 SUPREME COURT REPORTS [2006) SUPP. 6 S.C.R.
A High Courts is correct to the effect that the expenditure on issuance of bonus
shares is revenue expenditure. The contrary judgments of Gujarat and Andhra
Pradesh High Courts are erroneous and do not lay down the correct law.
For the reasons stated above, the question referred to us, is answered
in the affirmative, i.e., in favour of the assessee and against the revenue.
B
D.G. Appeal dismissed.