M/S HUNSUR PLYWOOD WORKS LTD. versus THE COMMISSIONER OF INCOME TAX

Citation: [1997] SUPP. 5 S.C.R. 285 · Decided: 19-11-1997 · Supreme Court of India · Bench: S.C. SEN · Disposal: Appeal(s) allowed

Judgment (excerpt)

MIS HUNSUR PLYWOOD WORKS LTD. 
A 
v. 
THE COMMISSIONER OF INCOME TAX 
NOVEMBER 19, 1997 
[SUHAS C. SEN AND V.N. KHARE, JJ.] 
B 
Income Tax Act. 1961 : 
Sections 33,34(3)(a)(i), ! 55(5)(ii)(a) and 154-Development rebate 
reserve-Utilised/or issuing bonus share-AYs 1972-73, 1974-75-Company's C 
claim to development rebate allowed by the assessing authority-Subsequently 
Company transferre<f sums ji-om the development reserve to share 
capitalisation account by issue of bonus shares-Held did not amount to 
distribution of profits within the meaning of Sections 34(3)(a)(i) and 
I 55(5)(ii)(a)-Hence Revenue's order withdrawing the development rebate D 
not justified 
The appellant, a public1imited company, claimed development rebate 
under Section 33 of the Income Tax Act for AYs 1972-73, 1973-74 and 1974-
75 and it was allowed. Subsequently, the assessing authority noticed from the 
balance sheet of the Company that it had transferred sums from the 
development rebate to share capitalisation account by issue of bonus share. £ 
The assessing authority concluded that the issuance of bonus share amounted 
to distribution of profits by capitalisation and therefore the Company violated 
Section 155(5)(1 l)(a) of Income Tax Act. Accordingly, the assessing authority 
passed an order under Section 154 of the Act. withdrawing the development 
rebate allowed earlier. 
The appellate authority as well as the Tribunal, sustained the claim of 
F 
the appellant for development rebate. However, the matter was referred by the 
Tribunal to the High Court for its Opinion. The High Court held that the 
issue of bonus shares resulted in distribution of profits and therefore, the 
statutory requirement of Section 34(3)(a)(i) of the Act had been violated. G 
Hence this appeal by the Company. 
Allowing the appeals, this Court 
HELD: 1.1. The profits made by the Company may be distributed as 
dividends or retained by the Company as its reserve which may be used for H 
285 
286 
SUPREME COURT REPORTS [1997] SUPP. 5 S.C.R. 
A 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, ifthe accumulated profits 
are capitalised and capital base of the Company is enlarged, this may enable 
B the Company to do its business ~ore profitably. The shareholders will also 
benefit if the share capital is imjreased. 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 liave received any money from 
the Company. (291-E-Gl 
c 
inland Revenue Commissioners v. Bio//, (1921) AC 171 and 
Commissioner of Inland Revenue v. Fisher's Executors, (1926) AC 395, 
referred to. 
1.2. In fact, the transfer of the amounts standing to the credit of 
D development rebate reserve to the share capital amount, does not involve any 
disbursement of money by the Company. Nothing comes out of the till of the 
Company to the shareholder. The entire amount of money shown as 
development rebate reserve is retained by the Company in another account. 
ft cannot be said that by the issue of bonus shares, the Company had distributed 
E its reserve fund to the shareholders even though it had retained the entire 
amount with it in the share capital account. (291-H; 292-A-BI 
2.1. When a shareholder gets a bonus share the value of original 
share held by him goes down. In effect, the shareholder gets two shares 
instead of the· one share held by hi!D and the market value as well as the 
F intrinsic value of the two shares put together will be the same or nearly the 
same as the value of the original shares before the bonus issue.(292-G-H) 
G 
Commissioner of Income Tax v. Dalmia Investment Co. ltd., 52 ITR 
567, relied on. 
Eisner v. Macomber, (19201 252 U.S. 189, referred to. 
Leader Engineering Works v. Commissioner of Income Tax, 124 ITR 44, 
distinguished. 
2.2. In the instant case, neither in form not in substance, has there 
H been any distribution of profits by the Company in making the bonus issue. 
HUNSURPLYWOODv. C.I.T. [SEN,J.] 
287 
If the substance and not the form of th.e transaction is looked to, the issue A 
of bouus shares was "a bare machinery" for capitalising profits and there 
was no dis

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