Yahya Ali, J.
1. This is an application made under the Indian Companies Act for a direction to the first respondent company to rectify the company's register of members so as to include in it the name of the applicant Mrs. Sivagnanammal, as being a member of the respondent company holding in her sole name 50 bonus shares of the company. Sivagnanammal is the widow of one Parasurama Mudaliar who died on the 29th May, 1942. The said Parasurama Mudaliar and one Pithambara Mudaliar were partners of the firm S. R. Ponnuswamy Mudaliar and Brothers and as such held in the first respondent company 100 shares of the face value of Rs. 100 each. The shares were registered in the books of the company jointly in their names. During the life time of Parasurama Mudaliar, Pithambara Mudaliar died and the shares which stood jointly in the name of Parasurama Mudaliar and Pithambara Mudaliar were duly transferred in the names of Parasurama Mudaliar and Neelamega Mudaliar, the younger brother of Pithambara Mudaliar. Parasurama Mudaliar left a last will and testament made on 4th June, 1941, by which he bequeathed to his wife Sivagnanammal his interest in the shares in the first respondent company for her lifetime and he provided that she should enjoy only the income (varumanam) derived therefrom and that after her death the shares should become the property of his heir and brother's son K. Ratna Mudaliar who would be the owner of the corpus. On Parasurama's death in May, 1942, the registry of shares was transferred in the books of the Company in the name of Neelamega Mudaliar representing the interest of Pithambara Mudaliar, and Sivagnanammal and Ratnam representing the interest of Parasurama Mudaliar. This seems to have been effected with the consent of all the concerned parties. Ratnam died in 1946 leaving three undivided sons Dharmaraja and his two minor brothers. Dharmaraja is the 2nd respondent in this application and Neelamega was subsequently impleaded as 3rd respondent. No change in the registry was made after the death of Ratnam as no application was made by any of the concerned parties and the registry at present stands as it was prior to Ratnam's death. At an extraordinary meeting of the general body of the shareholders held on the 29th December, 1946, it was resolved inter alia to increase the capital of the company and since there was a large profit it was decided that instead of distributing it as dividends, fully paid-up bonus shares should be issued to shareholders registered in the registry of the company as on 28th November, 1946. The resolution is as follows:
A bonus of Rs. 100 per share for the ordinary shares of the company held by the shareholders registered in the registers of the company as on 28th November, 1946 and the bonus of every Rs. 100 that, is to be given in this manner instead of being given in cash, shall be given as one fully paid-up ordinary share of this company and for giving bonus like this, the present Reserve Fund shall be used.
Sivagnanammal in her present application claims that she is entitled to an absolute right to 50 of these bonus shares in her sole name and that, since that claim was not countenanced by the company, she applies for a rectification of the register of shares for causing her name to be entered in the register of members as the sole holder of 50 bonus shares of Rs. 100 each.
2. This case raises an important question of Company Law which, as far as I am able to gather, is not covered by the decision of any Indian High Court. The question is whether when a company decides to capitalise its profits and issues fully paid-up bonus shares to the shareholders, the sums represented by those shares are in the nature of capital or can for any purpose be treated as income. If it is to be regarded as capital, then having regard to the provisions of the will they will be virtually the property of the remainderman and not of the life-tenant, as under the directions contained in the will the life-tenant is only entitled to the varumanam of the shares. If, however, it is to be regarded as income on the ground that its origin is traceable to the profits of the company then under the will, it will be exclusively the property of Sivagnanammal and she will be entitled to the separate registry of those shares in her name. Before dealing with this interesting question, I may dispose of one or two minor points that incidentally arise. The contention of the applicant is that for all practical purposes she was considered to be the owner of 50 original shares after her husband's death and that even during her husband's life time he was regarded as owner of 50 shares, although the registry of the entire stock of 100 shares was throughout in the names of the joint owners. This contention does not stand scrutiny. No doubt dividends have been distributed separately but the registry has throughout been joint. When Pithambara was alive it was in the names of Parasurama and Pithambara. After Pithambara's death it stood in the joint names of Neelamega and Parasurama and after Parasurama's death, it was changed into the joint names of Neelamega, the petitioner and Ratnam. The second objection is that the applicant had no notice of the meeting of the general body held on the 29th December, 1946, and that therefore the resolution of that date capitalising the profits and authorising the issue of bonus shares is not binding upon her. It seems to me that this contention shows that the petitioner is approbating and reprobating at the same time, because her present application is on the footing that bonus shares having been issued she must be registered exclusively as the owner of 50 bonus shares. Even otherwise, I find no substance in this objection. Article 16 of the Articles of Association of the company explicitly provides that if any share is held under joint ownership in partnership, the person whose name is entered first in the books shall be treated as the important person for all proceedings and notices, etc., shall be given to him only. In this case, it is admitted that at the time when the meeting was called the name of Neelamega was entered first and it is also admitted that notice was duly served upon him.
3. Coming to the main question there can be no doubt that it is open to a company either to distribute its earned profits as dividends among its shareholders or to carry the whole or a portion thereof to the reserve fund. The shareholder individually has no right to claim that profits should necessarily be distributed as dividends and in fact the shareholder as such acquires no right in the profits of the company until the dividend is declared and distributed. If the Articles confer the necessary power upon the company, it may genuinely capitalise its undistributed profits and appropriate the same either by adding it to its capital or using it for the purpose of organising or expanding its business or for acquiring fresh assets. It usually does so by adding the profits either to its reserve fund or to its nominal capital. One of the recognised methods of capitalising undivided profits is to add to its capital issue in the shape of either bonus debentures or bonus shares. They may be either partly paid-up or fully paid-up. When fully paid-up bonus shares are issued to the shareholders what actually happens is that the profits are capitalised and the existing shareholders instead of receiving any moneys out of the undistributed profits only receive pro rata fresh shares out of the old shares converted as fully paid-up or out of the new issue. The present is the case of a new issue of shares. The significant circumstance is that in such a case the assets, i.e., the profits, remain with the company as capital and what the shareholders receive is merely a paper certificate as evidence of their interest in the additional capital of the company. The new shares would confer a title to a larger proportion of the surplus assets of the company only if and when a general distribution of assets takes place as when the company is wound up or when the capital is duly reduced. Until then the company's shares issued in such circumstances retain the character of capital. This in my opinion is the legal position under the Company Law with reference to bonus shares issued out of capitalised profits. As I have already indicated there is no direct decision of any Indian Court bearing upon this question; but the principles have never been in doubt in the British Courts. I shall first refer to the two leading cases on the subject. In Bouch v. Sproute (1887) 12 A.C. 385, a testator had bequeathed his residuary personal estate to his executor in trust for his wife for her life and after her death to a remainderman. Part of the residuary estate consisted of shares in a company whose directors had power, before recommending a dividend, to set apart out of the profits such sums as they thought proper as a reserve fund. After the testator's death the directors of the company decided to allot new shares (partly paid-up) to each shareholder, and to apply the bonus dividend in part payment of the new shares. This proposal was carried out and new shares were allotted to the remainderman and registered in his name. The Court of Appeal reversing the judgment of the Court below has held that the bonus belonged to the life-tenant. The House of Lords reversed that decision and held that the real nature of the transaction was that the Company did not pay or intend to pay any sura, as dividend, but intended to and did appropriate the undivided profits as an increase of the capital stock, that the bonus dividend was therefore capital of the testator's estate and that the life-tenant was not entitled to the bonus or the new shares. In the judgment of Lord Herschell all the previous cases were fully reviewed and finally the opinion of Lord Justice Fry given in an earlier case was endorsed and that opinion was to the following effect:
When a testator or settlor directs or permits the subject of his disposition to remain as shares or stocks in a company which has the power either of distributing its profits as dividend or of converting them into capital, and the company validly exercises this power such exercise of its power is binding on all persons interested under the testator or settlor in the shares, and consequently what is paid by the company as dividend goes to the tenant for life, and what is paid-up by the company to the shareholder as capital, or appropriated as an increase of the capital stock in the concern, enures to the benefit of all who are interested in the capital.
In the present case there can be no question that the company had power to increase its capital and to appropriate its profits to such an increase and that it did so by capitalising its entire amount of profits and adding them to its capital by the issue of fully paid bonus shares to shareholders. The next important case where the question has been fully and authoritatively discussed is another decision of the House of Lords in Inland Revenue Commissioners v. Blott (1921) 2 A.C. 171. That case arose under the Finance Act, 191 o, and was concerned with super-tax. A resolution was passed by the company in exercise of the power conferred in that behalf by the Articles declaring that out of its undivided profits a bonus should be paid to its shareholders and authorising the distribution among the shareholders of certain of its unissued shares credited as fully paid-up. The question was whether for the purpose of super-tax the shares so allotted to the respondent should be treated as part of his 'total income from all sources for the previous year' within the meaning of Section 66 of the Finance Act. Their Lordships held that they were not part of his income but were an addition to his capital in that year and in doing so followed Bouch v. Sproule (1887) 12 A.C. 385. Viscount Haldane in his speech said:
I. am, therefore, of opinion, both on principle and on authority, that the transaction in the present case was one in which the company was in law dominant on the question whether the money in question was to be capital or income for all purposes....
The juristic position was put in a lucid manner by Sir John Simon, as he then was. At page 174 of the report he argued:
Assume that a company makes a profit, one of three things may happen. First, it may declare a dividend in the ordinary way....Secondly, instead of distributing its profits, it may put a certain amount to reserve fund. That is only a reserve pro tem available in the company's hands as floating capital....Thirdly, the company may, in the exercise of its powers of domestic management, take that reserve fund and strike it permanently with the character of capital....It is within the constitutional powers of a company either temporarily or permanently to capitalise its undivided profits and it thereby puts it out of its power to distribute the sum so capitalized as profits.
This exposition of the principle was adopted by the majority. These two decisions have been treated as final authority on the question and were followed in a catena of cases ever since. I shall only refer to one case as the facts of that case approximate to the facts of the present case. In In re Spoir (1924) 1 Ch. D. 359 (Holt v. Spoir) a testatrix bequeathed 300 ordinary shares in a limited company upon trust to pay the 'dividends, bonuses and income' thereof to certain persons during their lives and to the survivor of them during the life of such survivor and after the death of the survivor the trustees were directed to hold the shares upon trust for the Infirmary absolutely. The company had accumulated as such a large reserve fund out of its profits and also had a large amount of undistributed profits in its hands not carried to the reserve. The company proposed to distribute by way of bonus a certain sum and the method adopted by the company was to capitalise that sum, and instead of distributing it in cash, to distribute it in the shape of fully paid shares. As in the present case the transaction was carried out by appropriate resolutions duly agreed to by the shareholders. A summons was taken out to have it decided whether the bonus shares so allotted to the trustees ought to have been transferred to the tenants for life or were rightly retained by the trustees as capital subject to the trusts of the will. It was held by the Court of Appeal applying the test laid down in Bouch v. Sproule (1887) 12 A.C. 385 and Inland Revenue Commissioners v. Blott (1921) 2 A.C. 171 that as a question of fact the issue of new shares by the company must be regarded as a distribution of capital, and not of income; and that in the construction of the will the words 'dividends, bonuses and income' did not cover the shares in question so as to pass them to the tenant for life. It is significant that even though the word ' bonuses' occurred in the will it was held that the expression did not cover the bonus shares issued in that case. The present case is a fortiori from that point of view because the only word used in Parasurama's will is 'varumanam.' Next there is a case which went up on appeal to the Privy Council from the Supreme Court of New South Wales. The decision is found reported in Robert Alan Hill v. The New Permanent Trust Company of New South Wales (1930) 60 M.L.J. 330 : 1930 A.C. 720. After reviewing the various authorities including the cases cited above, their Lordships laid down the principles in concrete propositions. Two of them may be set out here as having a direct bearing upon the question at issue:
Other considerations arise when a limited company with power to increase its capital and possessing a fund of undivided profits, so deals with it that no part of it leaves the possession of the company but the whole is applied in paying up new shares which are issued and allotted proportionately to the shareholders, who would have been entitled to receive the fund had it been, in fact, divided and paid away as dividend.
The result of such a dealing is obviously wholly different from the result of paying away the profits to the shareholders. In the latter case, the amount of cash distributed disappears on both sides of the company's balance sheet. It is lost to, the company. The fund of undistributed. profits which has been divided ceases to figure among the company's liabilities; the cash necessary to provide the dividend is raised and paid away, the company's assets being reduced by that amount. In the former case the assets of the company remain undiminished, but on the liabilities' side of the balance sheet (although the total remains unchanged) the item representing the undivided profits disappears, its place being taken by a corresponding increase of liability in respect of issued share capital. In other words, moneys, which had been capable of division by the company as profits among its shareholders have ceased for all time to be so divisible, and can never be paid to the shareholders except upon a reduction of capital or in a winding up. The fully paid shares representing them and received by the trustees are therefore received by them as corpus and not as income.
The only Indian decision in which the point involved here came up in an indirect manner for consideration is the decision of the Privy Council in The Commissioner of Income-tax, Bengal v. The Mercantile Bank of India, Limited (1936) 71 M.L.J. 525 : 1936 L.R. 63 LA. 457 (P.C.). That arose out of an income-tax reference. In that case also the company had very large accumulations of undistributed profits and the proposal was to capitalise the company's reserves and make a distribution to the shareholders in the form of debentures on redemption of which the funds required would be available. The question raised was whether the assessee thereby received ' income, profits or gains ' within the meaning of Section 4 of the Indian Income-tax Act. It was held by their Lordships of the Judicial Committee that the capitalised profits distributed by way of debentures were not ' income, profits or gains ' within the meaning of Section 4 of the Income-tax Act and that the assessees were not liable to be taxed in respect of those debentures. It was pointed out that on the point, as to the capitalised profits being not liable to tax there was no distinction between the Indian and the United Kingdom enactments.
4. From the foregoing discussion of the principles it is abundantly clear that the bonus shares duly issued by the company in the present case are impressed with the character of capital and they are not in the nature of income for any purpose whatever. Upon a true construction of the will and a proper application of the principles the only possible conclusion is that the applicant is not entitled to any separation of the shares or to the allocation and separate registry of those bonus shares exclusively in her own name.
5. The application is dismissed with taxed costs, one set to the company (1st respondent) and one set to be shared between the 2nd and 3rd respondents.