LEACH, C.J. The question referred must be answered against the assessee and in the manner indicated by the Commissioner in his statement of the case. There is overwhelming authority for the opinion expressed by the Department.
The assessee is a shareholder in the Lakshmi Mills Company Limited, which carries on a spinning business at Coimbatore. For the year of assessment (1940-1941) the assessee returned an income of Rs. 11,213-14-0 which included a sum of Rs. 10,000 said to be a dividend received from the Lakshmi Mills Company Limited. The Income-tax Officer discovered that the Rs. 10,000 had not been paid to the assessee in cash, but represented the nominal value of certain bonus shares which had been allotted to the assessee in accordance with a resolution passed at a general meeting of the company held on July 11, 1939. During the year ending March 31, 1939 the company had made a profit of Rs. 4,51,946-8-1. In the previous year a profit of Rs. 5,320-8-11 had been earned, but had not been distributed. The directors proposed that these profits together with a sum of Rs. 1,42,732-15-0 taken from the general reserves of the company making in all Rs. 6,00,000 should be capitalised in the form of bonus shares and distributed to the shareholders in proportion to their holdings. This resolution was passed and in due course the assessee received bonus shares of the value of Rs. 10,000 which represented the 'dividend'. The company had, of course, paid income-tax on its profits and was taxed at a higher rate than the assessee. Consequently he sought to recover from the Income-tax authorities the difference between the amount the company had paid on the Rs. 10,000 and what he would have paid if the tax had been levied according to the rate appropriate to his income. Section 2(6A) of the Income-tax Act says that the word 'dividend' includes inter alia distribution by a company of accumulated profits, whether capitalised or not, if the distribution entails the release by the company to its shareholders of all or any part of the assets of the company. By reason of this section the Income-tax authorities refused to recognise the claim for a refund. They said that the delivery to the assessee of the bonus shares did not represent the payment of a dividend within the meaning of the Act. This is the question which forms the subject matter of the reference.
Now it is manifest that unless the distribution of bonus shares amounts to a 'release' of assets by the company to the shareholders, the assessee cannot claim the Rs. 10,000 to be a dividend with the meaning of the Act. The House of Lords in Inland Revenue Commissioners v. Blott, Inland Revenue Commissioners v. Greenwood (1) (1921) 2 A.C. 171 ; 8 Tax Cas. 101 held that a distribution of bonus shares does not represent the payment of a dividend, and the reasoning there was applied by the Privy Council in Commissioner of Income-tax, Bengal v. Mercantile Bank of India Ltd., (2) (1936) 63 I.A. 457 ; 4 I.T.R. 239. In the former case Lord Haldane said :-
'For the reasons I have given I think that it is a matter of principle within the power of an ordinary joint stock company with articles such as those in the case before us to determine conclusively against the whole world whether it will withhold profits it has accumulated from distribution to its shareholders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this is done, the money so applied is capital and never becomes profit in the hands of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company. His new shares do not give him an immediate right to a larger amount of the existing assets. These remain where they were. The new shares simply confer a tile to a large proportion of the surplus assets, if and when a general distribution takes place, as in the winding-up'.
In the same case Viscount Finaly said :-
'The second contention of the Crown is that the allotment of the preference shares was equivalent to the payment of the bonus. To appreciate this point it is necessary to consider closely what it was that the shareholder got, did he get anything in the nature of payment of income It is obvious that he did not. He gave up any claim to the income. What might have been paid as income went to increase the capital of the company. The shareholder got his proportionate share in the business of the company as increased by the additional capital........................... Instead of his getting any dividend, or anything in the nature of a dividend, the fund which might have been divided was impounded to increase the capital of the business. How is it possible to treat any advantage accruing from this as a payment of income The case differs toto caelo from a case in which a dividend is paid not in money but in moneys worth by the delivery, say, of goods or of securities.'
Coutts Trotter, C.J., and Ramesam, J., applied the decision in Inland Revenue Commissioners v. Blott, Inland Revenue Commissioners v. Greenwood (1) (1921) 2 A.C. 171 ; 8 Tax Cas. 101 in deciding Commissioner of Income-tax v. Binny & Co., (2) (1924) 47 Mad. 837 ; A.I.R. 1924 Mad. 802 whether it was sought to make the assessee liable to super-tax on the value of bonus shares. It was held that the Indian Income-tax Act contained no such power. After quoting from the judgment of Viscount Finlay in Inland Revenue Commissioners v. Blott, Inland Revenue Commissioners v. Greenwood (1) (1921) 2 A.C. 171 ; 8 Tax. Cas. 101, Coutts Trotter, C.J., observed :-
'You cannot say that there is a notional payment of a dividend to a shareholder when the position is that, if he sued for it, his action must be dismissed, that is to say, when the whole conception that he is entitled to the dividend is one that the law refuses to countenance.'
The shareholders of the Laxmi Mills Company have received no portion of the profits which were made in the years ending March 31, 1938 and the March 31, 1939. The money representing the profits remains with the company. All that the shareholders have got are share certificates representing the capitalisation of these profits and an additional sum taken from the reserve. Therefore there has been no release of assets of the company to the shareholders.
It has been said by Mr. Subbaraya Ayyar that the capitalisation of these moneys has not been lawfully carried out. He admits that the company has by reason of its memorandum and articles of association power to capitalise profits, but he says that the notice of the meeting contained no intimation that this would be part of the business before the meeting. In saying this the learned advocate overlooks the fact that with the notice the shareholders received a copy of the annual report in which the directors make the proposal to capitalise the sums making up the Rs. 6,00,000. The Court is only concerned with the question referred, but assuming that the resolution had not been validly passed, even assuming that the meeting had done something which by reason of the memorandum and articles of association it had not power to do, the assessees position here would be in no way improved. The bonus shares received by him would still not represent dividend income, and he has received nothing but the bonus shares.
We answer the question referred in the negative, and the assessee will pay the Commissioners costs Rs. 250.
Reference answered in the negative.