Page 376 - DCOM301_INCOME_TAX_LAWS_I

Unit 13: Income from Other Sources

or carried it to a reserve account, comes under an obligation to retain it permanently as its Notes
capital.
Therefore, bonus shares given by a company in proportion to the holding of equity capital by a
shareholder are, in the absence of any express provision to the contrary, not liable to be taxed as
income. Therefore, bonus shares are not dividend or income at all when they are issued to the
holders of equity or ordinary shares.
However, the utilisation of the accumulated profits for the purpose of starting a subsidiary
company and issue of shares of the subsidiary company to its own shareholders as bonus shares
would constitute dividend, as there would be a release of assets by the parent company.
In cases where bonus shares are issued to the holders of preference shares, the market value of
the bonus shares would be liable to distribution tax as income by way of dividends in the hands
of the Company in view of the specific provisions contained in Section 2(22)(b). However, even
in the case of preference shareholders, the liability to tax would be only to the extent to which
the distribution is made by the company out of its accumulated profits, whether capitalised or
not.
Any distribution made by a company out of its accumulated profits would constitute dividend
if the distribution is made on the reduction of share capital of the company. This reduction may
take place even in cases where bonus shares are issued by capitalising the accumulated profits
and reserves of the company and later on paying off the bonus shares. This may also take place
in cases where the accumulated profits are applied first towards making the partly-paid shares
into fully-paid ones and later, the amount of the fully-paid shares is reduced on reduction of
share capital. Even in the case of liquidation of a company, any distribution made by the liquidator
(less than the capital subscribed) would constitute income from dividend to the extent to which
the distribution could be attributable to the accumulated profits of the company which may or
may not have been capitalised during the existence of the company.
The ‘accumulated profits’ for the purpose do not include any capital gain arising to the company
before 1.4.1946 or after 31.3.1948 and before 1.4.1956 because during these periods capital gains
were not chargeable to tax and were consequently not treated as part of the profits of the
company. In the case of every company, the expression accumulated profits must be taken to
include all profits of the company upto the date of distribution or payment including reserves
kept for specific purposes so long as such reserves constitute an appropriation of profit instead
of being a charge against profit.

Example: Amount represented by the balance to the credit of the development rebate
reserves account would form part of the accumulated profits of the company; but if a company
follows the process of crediting the amount of depreciation reserve account such a reserve
would not form part of the accumulated profits of the company because depreciation is a charge
against the profits and not an appropriation of profits. In the case of a company in liquidation,
accumulated profits should be taken to include all the profits of the company upto the date of
liquidation. But in cases where the liquidation is consequent upon the compulsory acquisition
of its undertaking by a government or a corporation owned or controlled by the government
under any law for the time being in force, accumulated profits should not be taken to include
any profits of the company prior to three successive accounting years immediately preceding
the accounting year in which such acquisition of the company was made by the government or
other statutory corporation.
Any payment of loan or other advance by a company, in which the public are not substantially
interested, to its shareholder who has substantial interest in the company would constitute
dividend to the extent to which the company possesses accumulated profits which may or may
not have been capitalised. Similarly, any payment made by a closely held company for the

LOVELY PROFESSIONAL UNIVERSITY 371