BHAGWATI DEVELOPERS versus PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. AND ORS.

Citation: [2005] SUPP. 2 S.C.R. 502 · Decided: 09-08-2005 · Supreme Court of India · Bench: S.N. VARIAVA · Disposal: Dismissed
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Judgment (excerpt)

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B 
c 
D 
E 
F 
G 
BHAGW A TI DEVELOPERS 
v. 
PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. 
AND ORS. 
AUGUST 9, 2005 
[S.N. VARIAVA AND DR. AR. LAKSHMANAN, JJ.] 
Companies Act, 1956 : 
S. 205-Issue of Bonus Shares-Permissibility of-Peerless General 
Finance and Investment Company-Article of Association-Articles 2 and 
182-Company issuing bonus shares out of Revaluation Reserve-Held, 
Companies Act specifically permits utilization of reserve arising from 
revaluation of assets for purpose of issuing fully paid up bonus shares-
Accordingly, Article 182 authorises the Company to issue Bonus Shares out 
of reserve arising from revaluation of capital assets. 
Reserve Bank of India issued directions to investment companies, 
inter alia, that depositors' monies must be shown in their balance-sheets 
as a "liability" instead of income. Accordingly, Respondent No. I, being 
such investment company, become liable to transfer certain amount to 
depositors' Account by debiting the Profit and Loss Account with the 
equal amount. The Reserve Bank oflndia asked the respondent to prepare 
its balance-sheet in conformity with its directions. In order to increase the 
share capital, the company proposed to issue Bonus Shares out of 
Revaluation Reserve. The appellant, one of the share-holders of the 
Company, challenged the move the respondent by filing a suit for 
declaration that the respondent was not entitled to issue Bonus Shares out 
of Revaluation Reserve. He later filed an api:;eal before the High Court 
and prayed for an injunction restraining the respondent from issuing 
Bonus shares. The appeal was disposed of by the Division Bench of the 
High Court holding that the respondent was entitled to issue Bonus shares 
out of Revaluation Reserve. Aggrieved, the share-holder filed the present 
appeal. 
Dismissing the appeal, the Court 
HELD : 1.1. Section 205 of the Companies Act, 1956 provides that 
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the dividend could only be issued out of profits of the company. The 
502 
BHAGWATI DEVELOPERS v. PEERLESS GEN. FIN. & INVT. CO. LTD.503 
proviso to sub-s.(3) of s.205 permits capitalization of profits or re,erve 
of a company for the purpose of issuing fully paid up bonus shares or 
paying up any amount for the time being unpaid or any shares held by 
the members of the company. Thus the Companies Act specifically permits 
utilization of reserve arising from revaluation of assets for purpose of 
issuing fully paid up bonus shares. When the law so permits, Articles 182 
of Articles of Association of the respondent-company authorizes the 
company to issue Bonus shares out of reserves arising from revaluation 
of capital assets. [509-C-E] 
1.2. The word 'dividend' as defined in Article 2 of Articles of 
Association of the Company includes 'bonus'. Thus the words 'available 
for dividends' appearing in Article 182 would necessarily mean "available 
for dividend/bonus". Further, the words, "available for dividends" would 
be applicable to all categories of funds mentioned in the said Article. 
Thus, even though the interpretation given by the High Court on Article 
A 
B 
c 
182 is not correct, still the final conclusion that Article 182 does not 
prohibit issuance of Bonus shares is correct and requires no interference. 
D 
[507-F-G; 509-A-B; D-E) 
•Peerless General Finance and Investment Co. Ltd v. Reserve Bank of 
India, [1992) 2 SCC 343, referred to. 
2. The SEBI guidelines, which have been relied upon by the appellant, 
were clarified on 13th August, 1992 wherein it has been stated that these 
guidelines do not apply to issue of securities by existing private/closely held 
and other unlisted companies. In view of this clarification, there is no 
infirmity in the impugned judgment wherein it has been held thatthe SEBI 
guidelines were not applicable to the Respondent Company. [506-F-G) 
3. There is nothing wrong in the observation, in the impugned 
judgment, to the effect that the Circular dated 6th September, 1994 does 
not have any mandatory effect. This circular is merely advisory in 
character. 
E 
F 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 12640 of G 
1996. 
From the Judgment and Order dated 23.8.95 of the Calcutta High Court 
in A. No. 665 of 1994. 
C. Mukund, Ashok Jain, Pankaj Jain and Bijoy Kumar Jain for the 
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504 
SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R. 
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Appellant. 
Ashok Desai, Bhaskar P. Gupta, Abhijit Chatterjee, S. Sukumaran, A. 
Deb Kumar, Ramesh Babu M.R., Ms. Radha Rangaswamy and Pradeep 
Kumar
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