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

CIVIL APPEAL No. 140/1988Supreme Court1997 INSC 74619 November 1997Bench: 2 JudgesAuthor: S.C. SEN, V.N. KHARE HUNSUR PLYWOOD WORKS LTD. A10 pages
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What were the facts?

The assessee, Mis Hunsur Plywood Works Ltd., a public limited company, claimed development rebate for Assessment Years (AYs) 1972-73, 1973-74, and 1974-75, which was initially allowed. Subsequently, the assessing authority observed from the company's balance sheet that sums from the development rebate reserve were transferred to a share capitalization account through the issuance of bonus shares. The assessing authority concluded this constituted a distribution of profits, violating Section 155(5)(ii)(a) of the Income Tax Act, and withdrew the development rebate via an order under Section 154. The appellate authority and the Income Tax Appellate Tribunal (ITAT) upheld the assessee's claim. However, the ITAT referred the matter to the High Court, which ruled that issuing bonus shares amounted to a distribution of profits, violating Section 34(3)(a)(i), and thus the revenue's action was justified. The company appealed this decision.

What did the Supreme Court hold?

The Supreme Court allowed the appeals, setting aside the High Court's judgment. The Court held that the profits made by a company can be distributed as dividends or retained as reserves for business improvement. Capitalizing accumulated profits by enlarging the company's capital base, even through bonus shares, does not constitute a distribution of profits to shareholders in the sense of them receiving money. The Court reasoned that when bonus shares are issued, no money leaves the company's till; the amount remains within the company, albeit in a different account (share capital). The value of the original shares held by shareholders decreases, and their proportional interest remains the same. Therefore, the transfer of amounts from the development rebate reserve to the share capital account for issuing bonus shares did not involve any disbursement of money to shareholders. The Court distinguished the case of Leader Engineering Works, noting that in a partnership, partners could withdraw funds, unlike shareholders in a company. The Court concluded that neither in form nor in substance was there a distribution of profits to shareholders, and the issue of bonus shares was merely a mechanism for capitalizing profits. The withdrawal of development rebate by the revenue was not justified.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that the issue of bonus shares from out of the development rebate reserve did not amount to distribution of profits within the meaning of Section 34(3)(a)(i) and Section 155(5)(ii)(a) of the Income Tax Act, 1961. 2. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in holding that the Income Tax Officer (ITO) was not justified in withdrawing the development rebate. Assessee's Contentions: The assessee argued that the transfer of sums from the development rebate reserve to the share capitalization account by issuing bonus shares did not amount to a distribution of profits. They relied on the principle that issuing bonus shares capitalizes profits but does not involve any disbursement of money to shareholders, and the value of the original shares decreases proportionally. They cited Commissioner of Income-Tax v. Dalmia Investment Co. Ltd. and Eisner v. Macomber. Revenue's Contentions: The revenue contended that the issuance of bonus shares resulted in the distribution of profits, thereby violating the statutory requirements of Section 34(3)(a)(i). They relied on the High Court's interpretation and distinguished the case of Leader Engineering Works v. Commissioner of Income Tax.

Which sections of the Income-tax Act were involved?

Section 33,Section 34(3)(a)(i),Section 155(5)(ii)(a),Section 154

AI-generated summary — verify with the full judgment below

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 Sec

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