Issue of bonus shares does not result in inflow of fresh funds or increase in the capital employed
The Supreme Court on Thursday resolved a prolonged legal controversy over the nature of expenses incurred by a company in issuing bonus shares, ruling that it cant be taxed.
The court agreed with the earlier rulings of Bombay and Calcutta high courts on the same issue and held that the views of Gujarat and Andhra Pradesh high courts were erroneous.
The judgment is a fall out of a dispute between General Insurance Corporation and Commissioner of Income Tax, Mumbai, over the on whether the expenditure incurred in issuing bonus shares is entitled to tax relief.
GIC, which has four subsidiaries, filed a return on income of over Rs. 58.52 crore for 1991-92. The Income Tax department disallowed a few expenses incurred as revenue expenditure, one of them being over Rs. 1.4crore incurred towards the stamp duty and registration fees, paid in connection with the increase in authorized share capital.
GIC had, during the accounting year, incurred expenditure separately for the increase of its authorised share capital and the issue of bonus shares.
According to the IT Department , the expenses incurred were towards a capital asset of a durable nature for the acquisition of a capital asset and, therefore could only be attributable towards the capital expenditure. The GIC challenged this.
A Bench of Justices Ashok Bhan and Markandey Katju observed that 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 capitalisation of reserves is merely a reallocation of companys fund, they said, while giving an illustration indicating that bonus shares leaves the capital employed untouched before and after issuance of bonus shares. Issue of bonus shares doesnt add to inflow of fresh funds or increase in the capital employed, the bench said.