M/S. SHRI GOPAL PAPER MILLS CO. LTD. vs. COMMISSIONER OF INCOME TAX, CENTRAL CALCUTTA

CIVIL APPEAL No. 1669/1966Supreme Court[1971] 1 S.C.R. 32321 April 1970Bench: 3 JudgesAuthor: J.C. SHAH, K.S. HEGDE, A.N. GROVER B12 pages
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What were the facts?

The appellant, M/s. Shri Gopal Paper Mills Co. Ltd., passed a resolution on December 30, 1954, to capitalize accumulated undivided profits and distribute them as fully paid-up bonus shares to ordinary shareholders. These shares were to rank pari passu with existing shares, except that dividends would be payable only from January 1, 1955. For the assessment year 1956-57 (accounting period ending December 31, 1955), the Income-tax Officer reduced the company's rebate under sub-clauses (a) and (b) of clause (1) of the second proviso to paragraph D of Part II of the Finance Act, 1956. The High Court upheld the Income-tax Officer's decision, leading to this appeal.

What did the Supreme Court hold?

The Supreme Court held that the bonus shares should be included in the paid-up capital and were issued on December 30, 1954. The Court reasoned that the company had the power to capitalize profits and convert them into bonus shares, and shareholders could not refuse them. The resolution meant that profits were capitalized and distributed as shares on December 30, 1954, making them the property of the shareholders from that date, subject only to the dividend entitlement from January 1, 1955. The Court clarified that the words 'allot' and 'distribute' in the directors' directive did not negate the fact that the shares became the shareholders' property upon the general meeting's resolution. The High Court and authorities below erred in believing share certificates were necessary for issuance. The Court cited several English cases to define 'allotment' as the appropriation of shares to a person. Consequently, there was no justification for reducing the rebate under the Finance Act, 1956. The appeal was allowed, and the questions were answered in favour of the assessee.

What were the issues?

1. Whether, on the facts and in the circumstances, the bonus shares of Rs. 50,07,500 should be included in the paid-up capital of the assessee within the meaning of paragraph D of Part II of the Finance Act, 1956 for the relevant assessment year. Assessee's contention: The bonus shares were effectively issued on December 30, 1954, and should be considered part of the paid-up capital. Revenue's contention: The bonus shares were not issued until the accounting year ending December 31, 1955, and therefore, could not be included in the paid-up capital for the relevant period. 2. Whether, on the facts and in the circumstances, the bonus shares can be said to have been issued to the shareholders by the assessee during the accounting year ended December 31, 1955, relevant for the assessment year 1956-57, within the meaning of the second proviso to paragraph D of Part II of the Finance Act, 1956. Assessee's contention: The issue of shares was complete on December 30, 1954, when the resolution was passed and the shares became the property of the shareholders. Revenue's contention: The issuance was not complete until the directors acted on the resolution to issue and distribute the shares, which occurred within the relevant accounting year.

Which sections of the Income-tax Act were involved?

Section 66A(2),Section 66(1)

AI-generated summary — verify with the full judgment below

, B c F G 323 M/S. SHRI GOPAL PAPER MILLS CO. LTD. v. COMMISSIONER OF INCOME TAX, CENTRAL CALCUTI'A April 21, 1970 [J.C. SHAH, K. S. HEGDE AND A. N. GROVER, JJ.)

Finance Act, 1956 Suh-els. (a) and (h) cl. (l) Second Proriso f'arn- graph D Part JJ-Re.\·o/utio11 hy t·o111pllny capiul/ising unclivided profits in the fonn of fully paid· up bonus s'1ares-JVhe1her the bonus shares <:oulcl he 111clucled in the paid up capital of tile asseJ".\'ee-Share-ho/ders t'ntitled to dh•idends fi·o111 Jcuruary 1., J955-Whetlier honu.'I shares can he .\'aid to lu1'Jle been i.'iJlled on rite .c/ate of re.\·o/u!ion i.e. Dece111ber 30, 1954-./f can he said to Ju1l'e heen is.\·ued ·within the 111ea11ing of Second PrOl'i.vo IP Para D of Parr JJ-'Al/ot' 'distribute', 111eaning.

The appellant company-assessee-at a general meeting on December 30, 1954 passed a resolution to the effect that a portion Of the accumulat- ed undivided profits "be capitalised and distributed amongst the- holders of the ordinary shares in the company on the footing that they became entitl- ed thereto as capital and the capital was to be divided into bonus •hares and allotted to the ordinary shareholders on the b

The order continues below.

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