Law: Income Tax Act, 1961

Section: 34,34(3)(a)(i)&155(5)(ii)(a)

Indian Income Tax Act, 1961--Sections 34(3)(a)(i) & 155(5)(ii)(a) - Development Rebate Reserve - Assessee was a public Ltd. Company it transferred sums from the development rebate reserve to the share capital account by issue of loans shares - Claim towards allowance of development rebate allowed by the Assessing officer but subsequently withdrawn holding that the development rebate reserve had been utilised for distribution of dividend or profits to the share holders - Appeal of the assessee accepted by the appellate authority - Decision upheld in appeal by the Tribunal concurring with the first appellate authority that there was no distribution by way of dividend or profits - Reference to High Court on an application of C.I.T - High Court held that the issue of loans shares resulted in the distribution of profits - Appeal against - Effect of issue of loans shares out of development rebate reserve - whether amounts to distribution of profits - justification for the withdrawal of claim of the assessee - Determination of - Whether Tribunal was justified in holding that issue of loans shares from out of the development rebate reserve did not amount to distribution of profits within the meaning of section 34(3)(a)(i) and section 155(5) (ii)(a) - Held no - Whether Development Rebate granted to the assessee could be withdrawn - Held No. The profits made by the company may be distributed as dividends or retained by the company as its reserve which may be used for Improvement of the company's works, buildings and machinery. That will enable the company to make larger profits. There cannot be any dispute that the shareholders will benefit from the improvements brought about in the profit-making apparatus of the company. Likewise, if the accumulated profits are capitalised and the capital base of the company is enlarged, this may enable the company to do its business more profitably. The shareholders will also benefit lf the share capital is increased. They may benefit immediately by issue of bonus shares. But neither fn the case of improvement in the profit-making apparatus nor in the case of expansion of the share capital of the company, can it be said that the…

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