COMMISSIONER OF INCOME TAX, MUMBAIversusM/S. GENERAL INSURANCE CORPORATION

             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-
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     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
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    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.