Expenses by way of stamp duty and registration for issue of bonus shares Revenue expenditure

Commissioner of Income-tax vs. General Insurance Corporation [286 ITR 232(SC)]

1. The assessee was an Insurance company. During the course of assessment proceedings, the Assessing Officer disallowed a few expenses incurred as revenue expenditure, holding them to be capital expenditure, one of them being the sum of Rs. 1,04,28,500/- incurred towards the stamp duty and registration fees paid in connection with the increase in authorised share capital. The assessee had, during the accounting year, incurred expenditure separately for:

1. the increase of its authorised share capital; and

2. the issue of bonus shares.

2. The Supreme Court discussed the effect of issue of bonus shares by citing decision of Dalmia Investment Co. Ltd. (1964) (52 ITR 567) where the effect on issue of bonus shares is discussed as under :

“….. In other words, by the issue of bonus shares pro rata, which ranked pari passu with the existing shares, the market price was exactly halved, and divided between the old and the bonus shares. This will ordinarily be the case but not when the shares do not rank pari passu and we shall deal with that case separately. When the shares rank pari passu the result may be stated by saying that what the shareholders held as a whole rupee coin is held by him, after the issue of bonus shares, in two 50 NP Coins. The total value remains the same, but the evidence of that value is not in one certificate but in two.”

3. The Supreme Court held that the issue of bonus shares by capitalization 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 doe not result in the expansion of capital base of the company. The expenditure incurred by the company on account of stamp duty and registration fees for the issue of bonus shares is an allowable revenue expenditure.