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Unit 9: Financial Management Decisions

the same therefore did not result in conferring an enduring benefit to the company and Notes
therefore the same should be regarded as revenue expenditure. The “enduring benefi t”
is of paramount importance while examining the rival contentions with which these two
concepts are interwoven.
There is also no unanimity in verdicts of various High Courts. In the back ground, the
Supreme Court laid down the test whether a particular expenditure was Revenue or
Capital in Empire Jute Company Ltd. v. CIT whereas the cases of Karnataka and Gujarat High
Court dealt with the issuance of fresh shares and therefore the ratio decided of these courts
did not apply to the issuance of bonus shares. However, the view as taken appears to be as
laying down correct law. The Supreme Court did not agree with the observation of learned
author A. Ramaiya which was of the view that while issuing bonus shares a company
converts the accumulated large surplus into Capital and divides the Capital among the
members in proportion to their rights. The learned author felt that the bonus shares went
by the modern name “Capitalisation of Shares”. The Apex Court has, therefore, marshalled
the entire arithmetic and chemistry of the two very important propositions of the taxation
law i.e. capital expenditure and revenue expenditure and made over a conceptual clarity by

reiterating the evolved principle of “enduring benefit” vis-à-vis reallocation of a company’s
fund. The court has also laid down acid test for determining these two contingencies
although the occasion was the event of issuance of bonus shares. The capital expenditure is
expenditure for long-term betterments or additions.
This expenditure is in the nature of an investment for future chargeable to capital asset
account whereas revenue expenditure is incurred in the purchase of goods for resale,
in selling those goods and administering and carrying of the business of the Company.
The freewheeling dissections by the Apex Court in Commissioner of Income Tax v. General
Insurance Corporation of the various limbs of these twin concepts have cleared much of
the haze. The Court held that the expenditure incurred in connection with the issuance of
bonus shares is in the nature of revenue expenditure. The Bench said “the issue of bonus
shares by capitalisation of reserves is merely a reallocation of company’s funds. There is

no inflow of fresh funds or increase in the capital employed, which remains the same. If
that be so, then it cannot be held that the company has acquired a benefit or advantage of

enduring nature. The total funds available with the company will remain the same and the
issue of bonus shares will not result in any change in the capital structure of the company.
Issue of bonus shares does not result in the expansion of capital base of the company.”
Conclusion
The economy is booming, the markets are buoyant, and Indian companies are increasing
their profitability. Consequential of all this, many companies have announced issues of

bonus shares to their shareholders by capitalising their free reserves this year. In this bullish

market, shareholders have benefited tremendously, even after accounting the inevitable
reduction in share prices post-bonus, since the floating stock of shares increases. The whole

purpose is to capitalise profits. We can say that Bonus shares go by the modern name of

“Capitalisation Share”.
Fully paid bonus shares are not a gift distributed of capital under profit. No new funds are

raised. Earlier there was also a lot of confusion & chaos between the two fi ercely debated
concepts of taxation laws i.e. Capital & Revenue Expenditure which was fi nally settled
after the case which come up in SC in 2006, named Commissioner of Income Tax v. General
Insurance Corporation. Now it is also settled law that a bonus issue in the form of fully paid
share of the company is not income for the Income Tax purpose. The undistributed profi t
of the company is applied and appropriated for the issue of bonus shares.

Contd...

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