Page 221 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 21. In a ……………… the face value per share is reduced and the number of shares is increased
proportionately.
22. If bonus shares are held for more than ……………… and sold on a stock exchange, the
capital gains are exempt from tax.

Case Study Issue of Bonus Shares: A Capital v/s Revenue Expenditure:
Fusion & Confusion

t is said that India has the most complex Income-tax legislation. The tax system bristles
with complexities and uncertainties. Consequent upon this there are problems of
Ievasions and avoidance. As such, let us probe two fi ercely debated concepts of taxation
laws i.e. Capital & Revenue Expenditure which is very much relevant mentioning here.
These two propositions are rays with different wave-lengths but from the same source.
While the former is susceptible to tax being more extensive, the latter is advantageous to
assessee.

This is being done with regard to the issuance of bonus shares but simultaneously dealing
with other tests mechanism. The controversy was whether the expenditure incurred by
the assessee Company on account of issue of bonus shares was Revenue Expenditure or
a Capital Expenditure. This was remotely connected with Section 37 of the Income Tax
Act, 1961 and Section 75 (1)(c)(I) of the Companies Act, 1956. On this issue, there was a

conflict of opinion between the High Courts of Bombay & Calcutta on the one hand and
Gujarat & Andhra Pradesh on the other. The Bombay and Calcutta High Courts were of the
view that the expenses incurred in connection with bonus shares is a revenue expenditure
whereas Gujarat and Andhra Pradesh High Courts have taken a contrary view and have
ruled that the expenses incurred in connection with the bonus shares is in the nature of
capital expenditure because it expanded the capital base of the company.

This matter went to the Apex Court in the case of CIT, Mumbai v. General Insurance Corporation.
In the instant case before their Lordships the assessee Company had during the concerned
accounting year - incurred expenditure separately for the increase of its authorised share
capital and the issue of bonus shares. The assessee being unsuccessful at various forums

finally went to the Supreme Court on the second category i.e. the nature of expenditure
incurred in the issuance of bonus shares. In Empire Jute Company Ltd v. CIT Supreme Court
laid down the test for determining whether a particular expenditure is revenue or capital
expenditure. It was observed that there was no all-embracing formula, which could provide
ready solution to the problem, and that no touchstone had been devised. It laid down that
every case had to be decided on its own canvass keeping in mind the broad picture of the
whole operation in respect of which the expenditure has been incurred.
The Apex Court endorsed the text laid down by Lord Cave, LC, in Altherton v. British
Insulated and Helsby Cables Ltd. In this case it was observed that when an expenditure
was made, not only once and for all but with a view to bringing into existence an asset
of advantage for the enduring benefit of a trade then there was a very good reason for

treating such an expenditure as properly attributable not to Revenue but to Capital. This
brings us to the crux of the problem. One of the arguments that could be advanced is that

the expenses incurred towards issue of bonus shares conferred an enduring benefit to the
Company, which resulted in an impact on the capital structure of the company, and in
that perception it should be regarded as capital expenditure. Conversely, the issuance of
bonus shares by capitalisation of reserves was merely reallocation of a company’s fund
and there was no inflow of fresh funds or increase in the capital employed which remained

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