LEGAL ASPECT OF BUSINESS

Assignment on:
SHARES OF COMPANY

Submitted To:
PROFESSOR TILAK RAJ

Submitted By:
HIMANSHU (09)
MURALI KRISHNA KUMAR. D (13)

UNIVERSITY BUSINESS SCHOOL

PANJAB UNIVERSITY CHANDIGARH
SUBMITED ON 15TH-MARCH-2022
A company's most significant criterion is its share capital. It is subdivided into a
defined number of indivisible units. 'Shares' are the name for these units. A
share is a share in a company's share capital, according to Section 2 (46) of the
Companies Act, 1956, and includes stock unless a distinction between stock and
shares is indicated or implied.

The person who owns the shares is known as a 'Shareholder,' and the return on
his investment is known as a 'Dividend.'

A share is a unit of stock ownership in a corporation. Shareholders are entitled

to a portion of any earnings the company generates in the form of dividends.
They are also the ones who bore the brunt of the company's losses. Simply said,
if you are a shareholder of a firm, you own a percentage of the issuing company
based on the number of shares you purchased. Shares can be further categorized
into two types. These are:

 Equity shares
 Preference shares

They differ in terms of profitability, voting rights, and how they are treated in
the case of a liquidation.

WHAT DO EQUITY SHARES MEAN?

These are also known as common shares, and they make up the majority of a
company's stock. Investors routinely trade equity shares on stock exchanges
because they are transferable. You have the right to receive dividends as an
equity shareholder, in addition to voting rights on corporate issues.

These dividends, on the other hand, are not guaranteed. Equity shareholders are
likewise liable for the company's losses, up to the amount they invested. The
following factors can be used to further split equity shares:

• Shareholders' equity

• Definition

• Returns
CLASSIFICATION OF EQUITY SHARES BASED ON
DEFINITION
Based on the definition, here's how equity shares are classified:

• Bonus Shares: The term "bonus share" refers to additional stocks that are
given to current shareholders for free or as a bonus.

• Rights Shares: A firm can distribute new shares to its current owners - at a set
price and for a specific amount of time - before they are offered for trade on
stock exchanges.

• Sweat Equity Shares: If you have made a substantial contribution as a firm

employee, the company may reward you by issuing sweat equity shares.

• Voting And Non-Voting Shares: While the majority of shares have voting
rights, the corporation can make an exception and issue shareholders with
differential or zero voting rights.

CLASSIFICATION OF EQUITY SHARES BASED ON

RETURNS
Here are some of the different types of shares based on their returns:

• Dividend Shares: A firm might opt to pay dividends on a pro-rata basis by

issuing new shares.

• Expansion Stocks: These stocks are associated with companies that have seen
rapid growth. While such companies may not pay dividends, the value of their
shares rises swiftly, rewarding investors with financial gains.

• Worth Shares: These are stocks that are traded on stock exchanges at a
discount to their true value. Investors should expect prices to rise over time,
resulting in a higher share price.
PREFERENCE SHARES
When compared to ordinary shareholders, preferential shareholders get first dibs
on a company's profits. Furthermore, in the event of a company's liquidation,
preferential shareholders receive payment before ordinary shareholders. The
following are the many types of shares in this category:

• Cumulative And Non-Cumulative Preference Shares: If a corporation does

not declare an annual dividend, the benefit is carried forward to the next
financial year in the case of cumulative preference shares. Outstanding dividend
benefits are not available with non-cumulative preference shares.

• Participating Preference Shares vs. Non-Participating Preference Shares:

Participating preference shares allow shareholders to earn surplus profits after
the company pays dividends. This is in addition to receiving dividends. Apart
from receiving dividends on a regular basis, non-participating preference shares
have no such advantages.

• Convertible/Non-Convertible Preference Shares: Convertible preference

shares can be converted into equity shares if the company's Article of
Association (AoA) criteria are met, whilst non-convertible preference shares
have no such advantages.

• Redeemable/Irredeemable Preference Share: At a set price and time, a firm

can repurchase or claim redeemable preference shares. These shares do not have
a set maturity date. Irredeemable preference shares, on the other hand, are
exempt from these restrictions.

FEATURES OF PREFERENCE SHARES

Several characteristics of preference shares have made ordinary investors

exceptional earners even during economic downturns. The following are the
most appealing qualities of preference shares:

1. They have the ability to be converted into common stock.

The conversion of preference shares to common equity is simple. A
shareholder's holdings are converted into a specified number of preference
stocks if they choose to modify their holdings.

Some preference shares state that they can be converted after a certain date,
while others may require authorization and approval from the company's board
of directors.

2. Dividend Recipients
Preference shares allow shareholders to get dividends when other stockholders
may be receiving dividends later or not at all.

3. Preference for Dividends

When it comes to dividends, preference shareholders have a significant
advantage over equity and other shareholders in that they receive dividends
first.

4. Right to Vote
In the event of an extraordinary event, preference shareholders are able to vote.
However, this is only the case in a few instances. In most cases, buying shares
in a corporation does not grant you voting rights in the firm's management.

5. Assets of Preference
Preference shareholders get priority over non-preferential shareholders when
discussing a company's assets in the event of liquidation.

ADVANTAGES OF PREFERENCE SHARE:

1. Attract Cautious Investors: Preference shares can be easily offered to
investors who desire acceptable capital safety and a consistent and predictable
return.

2. No Dividend Obligation: If a company's profits in a given year are

insufficient, it is not obligated to pay a dividend on preference shares. In the
event of cumulative preference shares, it can potentially postpone the dividend.
Its finances are not burdened in any way.

3. No Interference: Preference shares do not usually come with voting rights.

As a result, a corporation can raise funds without sacrificing control. The
company's equity stockholders have complete control.

4. Equity Trading: The dividend rate on preference shares is fixed. As a result

of the increase in earnings, the corporation can provide equity shareholders the
benefits of trading on equity.

5. Assets are not subject to a charge: Preference shares do not generate a lien
or charge on the company's assets. The corporation can retain its fixed assets
free in the future to raise financing.

6. Adaptability: For a limited time, a firm can issue redeemable preference

shares. When the capital is no longer needed in the business, it can be repaid.
Overcapitalization is not a concern, and the capital structure remains flexible.

7. Variety: Depending on the needs of investors, several forms of preference

shares might be issued. To attract daring and adventurous investors,
participating preference shares or convertible preference shares may be issued.
Giving specific rights and benefits to preference shares, such as voting rights,
the right to convert into equity shares, the right to profits shares, and the ability
to redeem at a premium, can help them become more popular.
DISADVANTAGES OF PREFERENCE SHARES:
1. The corporation is under a permanent obligation to pay a fixed dividend rate
before paying anything on other shares.

2. From a control and risk standpoint, it is not helpful to investors. Preference

shares do not have voting rights, hence management has no say in the matter.

3. When compared to other fixed-income securities like debentures, The cost of

increasing preference share capital is usually higher.

DIFFERENCES BETWEEN PREFERENCE SHARES

AND EQUITY SHARES

BASIS FOR
COMPARISO EQUITY SHARES PREFERENCE SHARES
N

Meaning Equity shares are the Preference shares are the shares that
ordinary shares of the carry preferential rights on the
company representing the matters of payment of dividend and
part ownership of the repayment of capital.
shareholder in the
company.

Payment of The dividend is paid after Priority in payment of dividend over

dividend the payment of all equity shareholders.
liabilities.

Repayment of In the event of winding up In the event of winding up of the

capital of the company, equity company, preference shares are
shares are repaid at the repaid before equity shares.
end.
 BASIS FOR
COMPARISO EQUITY SHARES PREFERENCE SHARES
N

Rate of Fluctuating Fixed

dividend

Redemption No Yes

Voting rights Equity shares carry voting Normally, preference shares do not
rights. carry voting rights. However, in
special circumstances, they get
voting rights.

Convertibility Equity shares can never Preference shares can be converted

be converted. into equity shares.

Arrears of Equity shareholders have Preference shareholders generally

Dividend no rights to get arrears of get the arrears of dividend along
the dividend for the with the present year's dividend, if
previous years. not paid in the last previous year,
except in the case of non-cumulative
preference shares.

CASE STUDY:
Calcutta High Court
Shree Gopal Paper Mills Ltd. vs Commissioner Of Income-Tax on 5 February,
1965
Equivalent citations: 1967 37 Comp Cas 240 Cal, 1967 64 ITR 233 Cal
Author: Datta
Bench: Datta, Laik

JUDGMENT Datta, J.

1. This reference relates to the application of the provisions for rebate contained
in Paragraph D of Part II of the Finance Act, 1956. `

2. On 30th December, 1954, the assessee-company passed several resolutions

relating to the capital structure of the company including a resolution relating to
the issue of fully paid-up bonus shares.

3. The assessee-company in its return for the assessment year 1956-57

corresponding to the accounting year 1955 claimed a rebate on account of the
issue of bonus shares and the increase in the paid-up capital consequent upon
the issue of bonus shares. The Income-tax Officer held that the rebate on the
face value of the bonus shares is to be reduced in the year when these shares are
issued by the company to its shareholders. In the accounting year 1955 only a
resolution for increase of capital by issue of new shares was passed. The passing
of the resolution in the accounting year did not tantamount to the issue of bonus
shares to the shareholders. He further held that Clause (b) of the said resolution
makes it patent that the shares were not issued in the accounting year ended 31st
December, 1955, and, accordingly, he disallowed the rebates claimed.

4. The assessee-company thereupon filed an appeal before the Appellate

Assistant Commissioner of Income-tax, Range (II), Central, Calcutta.

5. The Appellate Assistant Commissioner observed:

" In my judgment therefore the Income-tax Officer was fully justified in coming
to the conclusion that these shares had been issued in the previous year under
consideration and not preceding the accounting period ending 31st December,
1954. He was of the opinion that in view of the definition of paid-up capital as
"paid-up capital (other than capital entitled to dividend at a fixed rate) of the
company as on the 1st day of the previous year relating to the assessment for the
year ending on 31st March, 1957 ", and in the light of the facts set forth above, I
think that the bonus shares of the face value of Rs. 50,000 should be included in
the paid-up capital of the appellant within the meaning of this term in the Indian
Finance Act, 1956. The appellant's contention on this point is therefore
accepted. The Income-tax Officer will please amend his computation of taxes
accordingly. "
6. Thereupon both the Commissioner of Income-tax and the assessee took up
the matter to the Tribunal for each of them lost on one ground before the
Appellate Assistant Commissioner. The Income-tax Tribunal, however, held
that, in neither case, the assessee was entitled to the rebate.

7. Thereupon the assessee made an application to the Commissioner of Income-

tax for referring the matter to the Income-tax Tribunal. Thereupon the Tribunal
referred the following questions for our opinion:

"(1) Whether, on the facts and in the circumstances of the case, the bonus shares
of the face value of Rs. 50,07,500 should be included in the paid-up capital of
the assessee within the meaning of that term in pursuance of Sub-section (1) of
the Explanation to Paragraph D of Part II of the Finance Act, 1956, for the
relevant assessment year?

(2) Whether, on the facts and in the circumstances of the case, the bonus shares
in question can be said to have been issued within the meaning of the second
proviso to Paragraph D of Part II ,of the Finance Act, 1956, to the shareholders
by the assessee during the accounting year ended 31st December, 1955, relevant
for the assessment year 1956-57 ?".

Thereafter this matter came before us for hearing.

The second question may be considered first, for it raises the primary
controversy between the parties.

8. The relevant provisions of the second proviso to Paragraph D of Part II of the

Finance Act of 1956 are as follows;

" Provided further that--

(i) the amount of the rebate under Clause (i) or Clause (ii), as the case may be,
of the preceding proviso shall be reduced by the sum, if any, equal to the
amount or the aggregate of the amounts, as the case may be, computed as here
under; --....

(b) on the amount representing the face value of any bonus shares or the amount
of any bonus issued to its shareholders during the previous year with a view to
increasing the paid-up capital, except to the extent to which such bonus shares
or bonus have been issued out of premiums received in cash on the issue of its
shares............

at the rate of two annas per rupee".

It is now necessary to consider the meaning and scope of the words "issued to
the shareholders" before considering the meaning and effect of the words "
bonus shares issued to the shareholders ".

The phrase "share issued to the shareholders" comprises of three components.

The word " share " has more than one meaning in common parlance.

9. The Indian Companies Act defines shares: " Share" means under Section

2(16) "share in the share capital of the company and includes stock except when
a distinction between stock and shares is expressed or implied".

10. Therefore the statutory meaning of share covers the three phases of the
share, share when it is a part of the share capital still remaining unexploited by
the company, share when it is exploited by the company finding a shareholder
and lastly when the share is converted into stock.

11. The first phase arises because under the company law "Every company
limited by shares " has nominal or authorised or registered share capital. This
capital is one of the essential features in the company's constitution. It is to be
mentioned in the memorandum of association and the capital so mentioned is to
be divided into shares of a fixed amount. The capital is usually fixed at some
round figures according to the requirements of the company assessed by the
promoters of the company. Therefore, it seems to me that the first part of the
definition of the word " share " in the Companies Act refers to the share in this
limited sense when the share is still in the womb of the company or in the shell
of the company and has no shareholder.

The second phase arises when it attracts Section 28 of the Indian Companies
Act.

12. Section 28 of the Indian Companies Act is as follows:

" (1) The shares or other interests of any member in a company shall be
movable property, transferable in the manner provided by the articles of the
company.

(2) Each share in a company having a share capital shall be distinguished by its
appropriate number."

13. Therefore, the share when it becomes associated with a member becomes a
movable property. It is however not movable property whose transfer is solely
regulated by the Sale of Goods Act. Its transfer is also governed by
the Companies Act and/or articles of the company. Each share again bears a
distinguishing number.

14. It may be noticed that certificate of share is not the shares or a share. A
certificate under Section 29 of the Indian Companies Act is " a certificate, under
the common seal of the company, specifying any shares or stock held by any
member, shall be prima facie evidence of the title of the member to the shares or
stock therein specified ". Hence, a share certificate is not the share. It is only a
prima facie evidence of the title to the share. Therefore, it is necessary to
consider what is the character of a share.

15. Section 28 says it is a movable property. It is however not a tangible

property for it is not the share certificate. Therefore, it must consist of a bundle
of rights and obligations. The nature of a share has received judicial
consideration. Romer L.J. observed in In re Paulin, [1935] 1 K.B. 26, 57 as
follows :

" Share is a right to receive a proportion of the profits of the company and it is
assessed on winding up and all other benefits to membership combine the
obligation to contribute to its liabilities, all measured by a certain sum of money
which is the nominal value of the share, and all subject to control by the
regulations of the company. "

16. Therefore, a share can be either in the first phase or stage or in the second
phase or stage. It remains either in its shell as a part of the capital or resides in a
shareholder. It cannot lie suspended in any intermediate phase or stage.

17. Hence it is necessary to find out the modus operandi of the transit from one
phase or stage to another to appreciate the meaning of the word '' issue ", which
ordinarily means " sending out " or " putting out".

18. Section 30 of the Companies Act furnishes the modus operandi or

mechanism for the transformation and ultimately the completion of the transit.

19. Clause (1) of Section 30 states that a subscriber to a memorandum becomes

a member when his name is entered in the register of members. Clause (2)
of Section 30 lays down that every other person (those who are not covered by
Clause (1), who agrees to be a member and whose name is entered in the
register of members becomes a member.

20. In the case of subscribers to the memorandum, no agreement is necessary

but an entry in the register must be made before the subscriber becomes a
member. In the other class of case there must be at first an agreement which is
regulated by the Contract Act.
21. There must be an offer, an acceptance and a communication of the
acceptance under the Contract Act to constitute a contract. Therefore, the same
requisites are necessary for a completion of the agreement to take shares. In the
Companies Act, the offer is made generally when an application for share is
signed by the applicant. It has been held however that an application by word of
mouth is equally effective. It is accepted when the board of directors allot the
shares. It is however not sufficient to constitute a contract then. It is only when
an allotment is communicated to the prospective shareholders that it becomes a
completed contract. The agreement is not sufficient to make the applicant a
member. There must be an entry in the register of members.

The entry in the share register is a sine qua non in both cases.

22. Therefore, though the subscription to the memorandum or an agreement to

take a share may keep the share in preparedness by fulfilling the preliminary
requirements for its exit and transit to the owner, it still remains in the womb or
shell of the company, though it may be then in an animated condition. The exit
and transit, however, takes place when the entry in the register is made. Hence,
in my opinion, issue of the share takes place when entry of the name of the
subscriber or the successful offerer is made in the register of members. It
follows from the foregoing observation that a share is issued when it finds an
owner.

It is now necessary to turn to the decisions in England and our country as. to the
meaning of the word " issue ".

23. It was held in England in Bush's case, (1874) 9 Ch. App. 554 in Grenfell v.
Inland Revenue Commissioners, (1876) 1 Ex. D. 242 and in In re Perth Electric
Tramways Ltd., [1906] 2 Ch. 216 that a share is issued when a share certificate
is issued. In In re Heaton's Steel and Iron Co. : Blyth's case, (1876) 4 Ch. D. 140
it was held that the issue of share certificate was not necessary for the issue of
shares.

24. In England it has been held in Oswald Tillotson Ltd. v. Inland Revenue
Commissioners, [1933] 1 K.B. 134 (C.A.) it refers to a stage after allotment.

In England again it has been held that no share is issued before an entry in the
register after the contract of purchase : see In re Ambrose Lake Tin and Copper
Co., also known as Clarke's case, (1878) 8 Ch. D. 635 Stark's case, [1897] 1 Ch.
575, Spitzel's case, (1899) 80 L.T. 347 and Regent's case, [1904] 1 K.B. 263.

25. There is practically only one Indian reported decision on the point which
incidentally considered the meaning of the word " issue ". This is the case of Sri
Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd., [1963] 33
Comp. 33 Comp. Cas. 862 (S.C.) where the question was whether the sale or the
re-allotment or the re-issue of issued shares is an allotment of shares within the
meaning of Sub-section (1) of Section 75 of the Companies Act, 1956. There,
Bachawat J. observed, inter alia, that the allotment of shares precedes all issues.
Allotment of share means appropriation of unissued shares to a specified
number of persons. Issue of shares is something distinct from allotment and is
some subsequent act whereby the title of the allottee becomes complete. His
Lordship left the matter at that stage. This question was broached in the case
of Nanalal Zaver v. Bombay Life Assurance Co.,[1950] 20 Comp. Cas. 179;
[1950] S.C.R. 391 in connection with the interpretation of Section 105C of the
Indian Companies Act. There is, however, no clear expression of opinion.

26. In my opinion, on a reference to the authorities, it seems to me that on the

whole they support my view. It is now necessary to ascertain the meaning of the
word " to " in the relative phrase. It seems to me that the word "to" connotes a
movement with a direction or destination. The next mentioned word in the
phrase is " shareholders".

27. In company law a member is a shareholder and a shareholder is a member :

see Palmer's Company Law (Topham, 18th Edition, page 88).

28. A person may become a member or shareholder in any of the following

ways:

" (1) By subscribing the memorandum of association, before its registration

(which is in essence Section 30, Clause (1), of the Companies Act).

(2) By agreeing with the company to take a share or shares, and being placed on
the register of members (which is in substance Section 30, Clause (2), of
the Companies Act).

(3) By taking a transfer of a share or shares, and being placed on the register of
members (which is in substance Section 34 of the Companies Act).

(4) By registration on succession to a deceased or bankrupt member (which is

equivalent to Section 35).

(5) By allowing his name to be on the register of members or otherwise holding

himself out or allowing himself to be held out as a member (which follows from
the ordinary principle of estoppel)."

Hence the words " to shareholders " do not have the destination at large but
circumscribe the destination to shareholders. This destination, that is,
shareholder, can be reached only when an existing shareholder becomes the
owner or holder of the share and not otherwise.

29. Therefore, the words " share issued to shareholders " signify that the share
in the shell or womb of the company has found an owner in an existing
shareholder, for, once it issues out, it cannot remain in the air but it becomes
attached to a purchaser or owner.

30. Therefore, having regard to the words " issued to the shareholders " in the
phrase " shares issued to the shareholders ", it is clear that the share is used in
the narrowest sense, that is to say, when it is in the womb or shell of the
company and is divorced from a shareholder. It follows that when a share is
issued to the shareholder, it bears an extensive meaning indicating that the share
has reached its destination, an existing shareholder who may have partly or fully
paid up share or sharestin the company.

31. It is now necessary to turn to the provisions of the Indian Companies

Act which loomed largely in the submission made before us as also another
provision which may have been incidentally mentioned in the course of the
argument. In all these provisions the word " issue " occurs.

32. Section 50 of the Indian Companies Act provides, inter alia, as follows :

" (1) A company limited by shares, if so authorised by its articles, may alter the
conditions of its memorandum as follows (that is to say), it may--

(a) increase its share capital by the issue of new shares of such amount as it
thinks expedient."

33. Therefore, the object of Section 50 is to issue new shares for increasing the
share capital, " when the authorised capital of a company has been fully issued,
and further capital is needed for development or other purposes." Thus, Section
50 enables the company to create shares for increasing the authorised capital of
the company. Hence the effect of a resolution under Section 50 is the increase in
the share capital simpliciter. The shares so created are still in the possession of
the company or in the womb or shell of the company and capable of being
exploited by the company. The company can and is now in readiness to raise
capital by issuing the shares to the shareholders which means that at this stage
there is no addition to the capital of the company in terms of money which is
ordinarily the object of increasing the share capital or, in other words, the shares
are yet without shareholders or owners.

34. The word " issue " also occurs in Regulation 46 (42 ?) in Table A of the
Indian Companies Act, 1913. Regulation 46 is not applicable when there is
direction to the company in the resolution sanctioning the increase of capital.
Regulation 46 comes into play, when there is no direction to the contrary or
where there is a direction in conformity with regulation 46,

35. Be that as it may, regulation 46 can come into operation only when there is
an increase of share capital by the issue of new shares, that is to say, when a
resolution had been passed under Section 50 of the Indian Companies Act,
1913. It is, in other words, a consequential and subsequent stage after the
increase of share capital by the issue of new shares. It consists of several steps
which culminate in the passing out oi the newly created shares from the domain
of the company to the existing shareholders and, if they are unwilling, to
outsiders or even to other shareholders who had received their usual proportion
of share of the increased share capital.

36. The word " issue " has again been used in Section 105C, which was
introduced in the Indian Companies Act, 1913, in order that the increase of
share capital may not be a device to increase the voting powers of the directors,
for, under regulation 46, they were not compelled to issue newly created shares
to the existing shareholders in the same proportion as their holding was before
new shares were created. It makes it incumbent upon the company and/or its
directors to offer the newly created shares in proportion to their existing
shareholdings. Hence it is very similar to the provision contained in the
regulation. It is however debatable whether, unlike regulation 46, Section
105C not only covers cases of newly created shares under Section 50 but also
covers the issue of the unissued share capital where the entire share capital had
not been issued or, in other words, there are reserve shares in the company
which may be utilised in raising the capital. This point, however, requires no
determination for answering the proposed question before us. The word " issue "
in this regulation comprises several steps which culminate in the issue of the
shares to the shareholders. In other words, it results in the ownership of the
shares by the existing shareholders and, in case of refusal by them, by others.

37. Hence, there is a gulf of difference between the meaning of " issue "
in Section 50 and Section 105C and regulation 46. In the case of .section
50 there is an increase of the share capital of the company. The shares are
created by increasing the authorised capital. The shares so created, however, are
not, by virtue of the relative resolutions, passed out to the shareholders or sent
out by the company. In other words, the ownership of the shares when a
resolution is passed under Section 50 is yet at large. It is only when shares are
issued to the shareholders in terms of Section 105C that the new issue finds its
owners either in the existing shareholders or elsewhere. Hence, Section 50 is
only an enabling section authorising the company or its directors to raise
increased capital by the disposal of the shares. Section 50 by itself does not lead
to the disposal of the shares. This can be only done under Section 105C when
shares are actually transferred to the shareholders or in case of their refusal to
others.

38. It is now necessary to consider whether the meaning of the word "issued to
the shareholders " undergoes a change in the phrase " bonus share issued to
shareholders ". The word " bonus shares " means " special dividend ". A
dividend is ordinarily paid in cash direct to the shareholders. A shareholder may
again be compelled to allow the undistributed profit to be appropriated towards
the consideration money for the issue of new or additional shares to him, the
existing shareholder. Hence, bonus share is a special type of share.

39. The resolution for the capitalisation of the undistributed profits, resolution
for the issue of new shares and a resolution for the appropriation of the
undistributed profits pro rata for payment in full of the shares may suggest that
not only is there a creation of shares but there is also the change in the location
of the shares and/or transfer of the shares to the shareholders,

40. In other words, these steps or acts may suggest that there is a complete
creation of capital coupled with the issue of shares to the shareholders.

41. The move to issue bonus shares presupposes a large undistributed

capitalised profits. Hence bonus shares are created by the company often by
passing resolutions for issue of new shares, capitalisation of the undivided
profits, the appropriation of the undivided profits for pro rata payment in full of
the new shares. At this stage when the resolutions are passed there are however
only expressions of the will of the company, for the company can express its
will only through a meeting duly convened ; there is no expression of the will of
the individual shareholder and at any rate for those who are not present in the
meeting personally or by proxy, there is no allotment of shares followed by the
issue of a letter of allotment and there is no registration of the newly created
bonus shares. Hence in reality there is no actual issue of the shares.

42. It may be noticed that the words " issued to the shareholders " do not mean
issue of share certificates which are only conclusive evidence of the ownership
of the shares. Therefore, what is material is not the transfer of the share
certificates. The words " bonus shares issued to the shareholders " suggest
movement of shares to the shareholders, something passing from the company
to the shareholders or giving of something to the shareholders. What is giving is
only the rights and obligations of a shareholder and not the share certificate
which is only a piece of evidence. In that sense there is only a notional transfer
of the rights and no physical transfer in the ordinary acceptance of the word.
43. In this view of the matter there seems to be no difference between the issue
of shares to the shareholders and the issue of bonus shares to the shareholders.

This brings us to the consideration of the resolution and the surrounding facts in
this case.

44. It may be noticed at the outset in this case, the resolution for capitalisation
of the undivided capital, the issue of new shares and the resolution for the
appropriation of the undistributed profits were all passed by the company.

45. In England, as will appear from Palmer's Company Precedents, 18th

Edition, Form No. 490, at page 874, that a similar resolution like that of Clause
(a) in the instant case for capitalisation of the undivided profits is passed by the
company. In England, however, resolutions analogous to clauses (b) and (c) are
not passed by the company at its extraordinary general meeting but similar
resolutions are passed by the board of directors (see Form No. 492, at page 875,
of the same book).

46. In other words, in England the company only enables the directors to issue
the unissued shares, capitalise the reserve fund, distribute the same amongst the
shareholders and the board of directors carry out and give effect to the same.

47. Hence, at the stage when a resolution is passed by the company for
capitalisation in English Jaw, there is no issue of shares by the company
whatever meaning may be ascribed to the word " issue ", though there is an
increase of share capital by the issue of new shares. In India, as it appears from
the resolutions in the present case, the company passes a composite resolution
which not only includes the resolutions usually passed by the company in
England but also the resolutions which are passed by the directors of the
company pursuant to such authority given in the resolution by the company.
This passing of the composite resolution in India cannot change the legal
character of clauses (a), (b) and (c) when they are passed by the company itself
instead of by the board of directors.

Clause (a) of the agreement may be considered in the first place.

48. The words " be capitalised and distributed, the said capital be applied " and
the wor.ds "that the holders thereof will not participate in any dividend in
respect of any period ending on or before 31st December, 1954, " clearly
indicate that the capitalisation did not take place then and there and likewise the
application of the capital did not take place then and there by virtue of the
resolution. The words " will not participate in any dividend in respect of any
period ending on or before 31st December, 1954, " likewise clearly point to the
fact that the capitalisation and application was to take place after 31st
December, 1954, that is to say, after the accounting year ending with 31st
December, 1954. In other words, it is significant to note that the words are not
"hereby capitalised or applied " and that the shareholders will participate in the
dividend from 31st December, 1954. It is left to the future for completion of
these acts.

Clause (b) may now be examined.

49. The words " the directors be and hereby are directed to issue " clearly
indicate that the issue had not taken place even at that stage when Clause (b)
was passed. The words " the said 5,07,500 new ordinary shares of Rs. 10 each
credited as fully paid up amongst the persons whose names are registered as
such in the books of the company as on the 1st day of January, 1955, " again
clearly point to the fact that the distribution and crediting of the amounts
amongst the existing shareholders did not take place before the 31st December,
1954, but was directed to take place as on the 1st day of January, 1955. The
words "provided that no allotment of shares issued as aforesaid shall be made to
non-resident shareholders till the approval of the Reserve Bank of India is
obtained for the same " again indicate that all the shares could not be issued
until and unless the approval of the Reserve Bank of India for the non-resident
shareholders was obtained. Hence, Clause (b) supports the conclusion arrived at
on an independent consideration of Clause (a) that the shares were not issued
even at that stage.

Clause (c) of the resolution may be considered next.

50. The words "that the directors be authorised to affix the company's seal on
duplicate endorsements of such agreement as and when the same shall have
been signed on behalf of the members holding ordinary shares in the company
on 1st January, 1955, by some person to be appointed by the directors in that
behalf which the directors be and hereby are authorised to do " clearly indicate
that the agreement providing for the allotment of the same new ordinary shares
and satisfaction of the same capital bonus was to come into existence not in the
accounting year ending with 31st December, 1954, but on a future date in the
subsequent accounting year.

51. It may be incidentally noticed here that the word "hereby" is used more than
once in this clause in contradistinction to such phrase " as and when the same
shall have been signed." The word " hereby " has been used in order to signify
that certain things have been done and completed. It is significant that the word
"hereby" is absent in Clause (a) of the resolution.

52. Clause (c) again strengthens the conclusion that the shares were not issued
to the shareholders even when the draft agreement was duly entered into.
53. The agreement dated the 31st January, 1955, even when it was executed, did
not result in the issue of bonus shares to the shareholders as will appear, inter
alia, from the following contents thereof :

" Now therefore it is agreed as follows :--

(1) The company shall allot to each of the persons named in the schedule the
number of new ordinary shares of Rs. 10 each set opposite to his or her name in
the second column of the same schedule......

(2) The said shares shall be numbered 500751 to 993813 (both inclusive) and
shall be credited as fully paid up, (3) The said shares so credited shall be
accepted in full satisfaction of the said capitalised sum."

54. It is now necessary to turn to the actual accounting position. In the balance-
sheet the sum of Rs. 5,00,750 which was sought to be capitalised and thereafter
distributed amongst the shareholders with a view to apply the same in payment
in full for Rs. 5,00,750 ordinary shares of Rs. 10 each was shown as the balance
on the 31st December, 1954, under the heading " General Reserve ". This
indicates clearly that the sum of Rs. 50,07,500 was still in the accounting year
considered as a part of the reserve and still remaining part of the undivided
profits and consequently not capitalised. If further appears from the statement of
facts that the shares were not issued to the shareholders till some time in 1955.

55. Therefore, on a consideration of the resolution and the subsequent facts, it is

clear that the bonus shares were not issued to the shareholders in the relevant
accounting year which is the calendar year 1955 corresponding to the
assessment year 1956-57.

In the result, question No. 2, which has been dealt with first, must be answered
against the assessee.

It is now necessary to deal with question No. 1.

56. The relative provision of Sub-section (1) of the Explanation of Paragraph D

of Part II of the Finance Act, 1956, is as follows :

" The expression ' paid up capital' means the paid up capital (other than capital
entitled to a dividend at a fixed rate) of the company, as on the first day of the
previous year relevant to the assessment ior the year ending on the 31st day of
March, 1957, increased by any premiums received in cash by the company on
the issue of its shares standing to the credit of the share premium account as on
the first day of the previous year aforesaid."
57. The facts before us make it abundantly clear that the undivided profits were
capitalised and distributed in June, 1955. The undistributed capital remained in
the books undistributed and as a part of the reserve until the middle of June.
This capitalised sum was thereupon distributed to the shareholders by
appropriation against the face value of the newly issued shares to the existing
shareholders. Hence the paid up capital of the company was not increased until
June, 1955, that is to say, neither in 1954 nor on the first day of the year 1955-
Hence on these grounds the assessee cannot get any rebate under the relative
provision of the Finance Act.

58. There is another possible approach to the problem. The resolution marked as
Clause (a) and the agreement between the company and its shareholders through
one of its representatives clearly indicate that the bonus shareholders will be
entitled to dividends as from 1st January, 1955. In these circumstances, it may
be contended that unless the paid up capital is deemed to be paid up capital as
from the 1st January, 1955, the company was not competent to declare a
dividend on the shares with effect from the 1st January, 1955. Hence the paid up
capital must be deemed to have been increased as from 1st January, 1955,
though in fact the paid up capital was increased in the books of the company
from June, 1955. In the relative provision, however, there is no provision for
taking into account the deemed paid up capital. It is referable only to paid up
capital which means in its ordinary significance capital actually paid up. Hence
on this ground also the assessee is not entitled to the rebate.

Hence, on either view of the matter, this question again must be answered
against the assessee.

In the result, the reference is dismissed with costs.

Laik, J.

59. In this reference, the assessee claimed a rebate in the accounting year 1955
for the issue of the bonus shares and the increase in the paid up capital,
consequent upon such issue. The respondent, on the other hand, supported the
view of the Appellate Tribunal and contended, for reasons which will appear in
the sequel, that the two questions, namely, (1) whether the bonus shares should
be included in the paid up capital of the assessee within the meaning of Sub-
section (1) of the Explanation to Paragraph D of Part II of the Finance Act,
1956, and (2) whether the bonus shares can be said to have been issued within
the meaning of the second proviso to the said paragraph to the shareholders by
the assessee during the accounting year ended 31st December, 1955, should be
answered against the assessee.
60. The rival contentions raise questions of general importance on the company
law which is elaborately discussed by my learned brother. The relevant
legislative history of the subject, however, is short and the answers to the
questions entirely depend on the meaning of the expression " issue of bonus
shares to the shareholders ", i.e., at what point of time such shares are taken to
be issued on the facts of this case.

61. To appreciate the various English decisions (most of which again are dealt
with by my learned brother) and to make them applicable to the Indian
Companies Act, it is better to remember at the outset that the word '' issue " is a
word of flexible meaning. It was found in the English Companies Act of 1867
(Section 25 repealed) which had given rise to some difficulty. Section 25 was
mitigated by Section 1 of the English Act of 1898. Both the said sections of the
said two Acts were repealed by the Act of 1900, which again, in its turn, is
subsequently repealed. Section 52 of the English Act of 1948 now provides for
a penalty in such cases.

62. In this country, prior to 1936, there was no check on the directors' powers to
issue blocks of shares, either to themselves or to their nominees, within the
authorised limit, unless such powers are circumscribed by the articles of
association. The managing agents, who usually dominated the board of
directors, could, to secure their own position, induce the board to issue shares to
the managing agents or their nominees. To check one of such mischiefs of the
managing agency system, Section 1050 was introduced in the Indian Companies
Act, 1913, in the year 1936. This section is raised and discussed before us,
though the Tribunal does not refer to the same.

63. Antecedent to this period, regarding increase of capital, Regulations 26 to

28 were there in Table A of the Act of 1882. In the Act of 1913, under the
heading " alteration of capital " , Regulations 41 to 43 appear in Table A. The
question of issue of new shares by the directors was dealt with by article 42 of
the articles of association in the Schedule to the Act of 1913. It might be taken
note of that regulation 42 and Section 105C do not cover the same.

64. Section io5C, which has no counter part in the English Act, was interpreted
by the Supreme Court in the case of Nanalal Zaver v. Bombay Life Assurance
Co. Ltd., [1950] 20 Comp. Cas. 179, 184, 197 ; [1950] S.C.R. 391.

Kania C. J. held, inter alia, at page 396 of the authorised reports, that the
directors are obliged :

"... to offer the shares issued to the shareholders on the register of the company
and not to any one else......"
Mahajan J. held, at page 412, that the directors :

"... were under no obligation to Singhanias, who had not yet even been entered
as shareholders on the register of shareholders ".

They are " complete strangers to the company", says Das J., at page 4171.

Mahajan J. freely used the expressions " issue ", "offer ", " allotment " and "
sale " in his judgment. At page 406, he held:

" It was not disputed that the directors in the present case had not sold these
shares to any one and that these have remained unissued."

At page 407, [1950] 20 Comp. Cas. 179, 193, 213 ; S.C.R. 117.

[1950] S.C.R. 391. it was further held that at the stage when Section
105C comes into operation, if, out of the shares offered, some cannot be taken
up by the shareholders:

".. . the only result is that those shares remain unoffered and thus
unissued.........the shares have to be offered to the existing shareholders......... "

Lastly, S.R. Das J. (as his Lordship then was) held at page 433:

" It is true that 272-4/5 shares remain in hand. At best, although issued, they
have not been offered to any one. "

" Clause 8 (of the directors' resolution) ", continues Das J., " on a true
construction of the resolution as a whole ", " covers only those shares which
have been actually issued but have not been applied for. In point of fact the
directors have not yet allotted any of these 272-4/5 shares. "

65. According to him, " there has been no contravention of the provisions
of Section 105C. "

Therefore, this much is clear that the shareholders must have to be on the
register of shareholders so that the shares might be issued to them.

The Supreme Court, again, in the case of Mathalone v. Bombay Life Assurance
Co., [1954] 24 Comp. Cas. 1; [1954]observed at page 129 of the reports :

" The English Law can furnish no guidance for its solution as there is no
provision corresponding to Section I05-C in the English Companies Act. "
66. In refuting Mr. Patnaik's argument that the receiver could not acquire the
newly issued shares in his name, it was held at page 143:

"... privilege was conferred by Section 105C only on a person whose name was
on the register of members. "

67. In dealing with the question as to whether the re-issue of forfeited shares is "
allotment " within the meaning of Section 75(1) of the Companies Act, 1956,
corresponding to Section 104(1) of the Companies Act of 1913, Sarkar J.,
delivering the judgment on behalf of the Supreme Court, held in the case of Sri
Gopal Jalan & Co. v. Calcutta Stock Exchange, [1963] 33 Comp. Cas. 862
(S.C.) , that a " re-issue of forfeited shares is not an allotment of share." The
word " allotment " has not been defined in the Companies Act either in our
country or in England. After reviewing several English decisions, it was held
that:

" in company law, allotment means the appropriation out of the previously
unappropriated capital of a company, of a certain number of shares to a person.
Till such allotment, the shares do not exist as such. "

By the amendment of 1935, the meaning of the word " allotment" in Section
105(1) was not altered. This decision does not go against the contention of the
revenue.

68. Some of the decisions cited by Mr. Meyer are sought to be distinguished by
the learned counsel, Mr. S. Choudhry, viz., that the decision in Oswald's case,
[1933] 1 K.B. 134 is a case on the Stamp Act and that it is based on a particular
section of the Finance Act of a particular year. The decision in Mowatt's case,
(1886) 34 Ch. D. 58 is a case of debenture and not of shares (debentureholders
were strangers to the company and there must have been delivery in the very
nature of debenture). The decision in Clarke's case, (1878) 8 Ch. D. 635 is a
case of a new company. The decision of Bachawat J. (as his Lordship then was)
in the case of Sri Gopal Jalan,[1963] 33 Comp. Cas. 862 (S.C.) is in another
context and is contrary to the Supreme Court decision of Nanalal Zaver v.
Bombay Life Assurance Co., [1950] 20 Comp. Cas. 179 (S.C.). Further, the
decision in Bush's case was not accepted by Mr. Buckley, James L.J. being a
party to the decision in Blyth's case, (1876) 4 Ch. D. 140 reconsidered the case
in Bush's case, (1874) 9 Ch. App. 554.

69. Prolonged and learned arguments were advanced by the learned counsel on
both sides, but in my view this reference can be disposed of ultimately by
referring to the facts arising in question No. I, in the background of the
legislative history stated above.
70. We have really to find out the " paid-up " capital, and not merely, capital on
1st January, 1955. We shall have also to interpret the resolution dated 30th
December, 1954, and the agreement dated 31st January, 1955, referred to by my
learned brother. The resolution uses the expression " shall allot". In my view, it
is not effective on the date of resolution. It could have been rescinded the next
day. The agreement is prospective. As a matter of fact, there is no transfer from
the general reserve to the capital before late June, 1955. It never became paid up
capital until June in view of the recognised distinction between issued capital
and paid up capital.

71. Different views have no doubt been taken as to when the issue to the
shareholders takes place. It is said to be issued when the transaction is complete
and again, not until before the registration of the contract. It is also said to be
issued when the allottee has become complete master of the shares, and further
when the certificates are actually issued and also when the shareholders are put
in complete possession of the shares. In my judgment it is not necessary to
combine all those tests because the conclusion is one more of fact than of law
on a consideration of all the circumstances in a given case.

72. Though the expression " issue " appears in Section 50 of the Companies
Act, in the Finance Act of 1956 the expression is " issue to the shareholders ".
In my view, it is not tautology. It is not a case of issue of shares to the world at
large. The difference between issue and allotment is not a matter of mere form
but really of substance. Actual issue cannot be complete only on resolution to
allot shares.

73. Resolution is not necessarily the issue of them. It is not a mechanical act.
Non-participation of dividend is a factor to be kept in view, as the shareholders
only are entitled to participate in dividend. Consent of the Reserve Bank again
is necessary. Clause (b) in the agreement in the instant case modifies Clause (a)
and the shareholders were not on the register on the relevant date.

74. In my judgment, therefore, the assessee is not entitled to rebate and both the
questions should be answered against the assessee. I respectfully agree with the
order including the order for costs proposed by my learned brother.