Khoday Distilleries vs. CIT (Supreme Court)

Where the department held that on the Company allotting rights and bonus shares to its shareholders in a disproportionate manner, it had made a “gift”, HELD, rejecting the contention that:

(i) An allotment of shares is a “creation” of shares and not a “transfer” of shares. There is a vital difference between the two. An “allotment” is the creation of shares by appropriation out of the unappropriated share capital to a particular person. A share is a chose in action. A chose in action implies existence of some person entitled to the rights in action in-contradistinction from rights in possession. There is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer of chose in action. An allotment is not a transfer and does not attract s. 4(1)(a) of the Gift-tax Act.

(ii) The issuance of bonus shares was nothing but mere capitalisation of the profits of the Company in respect of which certificates are issued to the shareholders entitling them to participate in the amount of the reserve but only as part of the capital. When a shareholder gets a bonus share the value of the original share held by him goes down. In effect, the shareholder gets two shares instead of the one share held by him and the market value as well as the intrinsic value of the two shares put together will be the same or nearly the same as the value of the original share before the bonus issue. The issuance of bonus shares does not amount to distribution of accumulated profit of a company. It would be a misnomer to call the recipients of bonus shares as donees of shares from the company.