Introduction- Hon’ble Supreme Court in the case of Commissioner of Income-tax Vs. General Insurance Corporation (2007)19 CLA-BL Supp 85 (SC) (decided on 25 September, 2006) (hereinafter referred to as ‘CIT Vs. GIC’) has held that expenditure incurred by the company on account of stamp duty and registration fee for the issue of bonus shares is allowable expenditure. The Supreme Court has reiterated its view as already expressed in 1964 in CIT Vs. Dalmia Investment Co Ltd (1964) 52 ITR 567 (SC). However, the Gujrat High Court in Ahmedabad Mfg. & Calico Pvt Ltd Vs. CIT (1986) 162 ITR 800 (Guj) in 1986 and in other cases up to 1994 has taken a contrary view. Further, the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd Vs. CIT (1988) 174 ITR 689 (AP) and (1990) 184 ITR 70 (AP) in 1988 and up to 1990 has also taken a contrary view. It is unfortunate that Hon’ble Gujrat High Court and Hon’ble Andhra Pradesh High Court have clearly violated the mandate of Article 141 of the Constitution; the concept is discussed in detail later on hereinafter.
1. Effect of issuance of bonus share
The effect of issuance of bonus share has been explained by the Supreme Court in CIT Vs. Dalmia Investment Co Ltd (supra) where the question of valuation of bonus share was considered. The court observed at pages 577 – 578 “It follows that though profits are profits in the hands of the company, when they are disposed of by converting them into capital instead of paying them over to the shareholders, no income can be said to accrue to the shareholders because the new shares confer a title to a larger proportion of the surplus assets at a general distribution. The floating capital used in the company which formerly consisted of subscribed capital and the reserves, now becomes the subscribed capital.”
2. Test for determining whether a particular expenditure is revenue or capital
The Supreme Court has laid down the test for determining whether a particular expenditure is revenue or capital expenditure in the case of Empire Jute Co. Ltd Vs. CIT 1980 (4) SCC 25 (in para 8 ) “One celebrated test is that laid down by Lord Cave, L C in Atherton Vs. British Insulated and Helsby Cables Ltd, 10 TC 155, where the learned Law Lord stated : “… when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.”
3. Observations of Gujrat High Court completely contrary to the observations of Supreme Court
In CIT Vs. GIC the Supreme Court has noted that the Gujrat High Court in Ahmedabad Mfg. & Calico Pvt Ltd Vs. CIT (supra) has held that the expenses incurred towards the issuance of bonus shares is a capital expenditure and observed (in para 17) thus “the above observation is completely contrary to the observation of this court in CIT Vs. Dalmia Investment Co Ltd (supra) which judgment had not been referred to by the Gujrat High Court. In Dalmia Investment Co Ltd this court has held that floating capital used in the company which formerly consisted of subscribed capital and the reserves now becomes the subscribed capital. The conversion of the reserves into capital did not involve the release of the profits to the shareholder; the money remains where it was, that is to say, employed in the business. In the face of these observations the reasoning given by the Gujrat High Court can not be upheld.”
4. Observations of Andhra Pradesh High Court completely contrary to the observations of Supreme Court
In CIT Vs. GIC the Supreme Court has observed (in para 19) that “the Andhra Pradesh High Court has in Vazir Sultan Tobacco Co. Ltd Vs. CIT (supra) taken the view that the expenditure incurred on the issue of bonus shares was capital in nature because the issue of bonus shares led to an increase in the company’s capital base.” The Supreme Court further observed (in para 20) “the above observations and conclusions are erroneous as they run contrary to the observation made by this Court in Dalmia Investment Co Ltd (supra). The capital base of the company prior to or after the issuance of bonus shares remains unchanged.”
The Supreme Court observed in concluding para (para 24) “in our considered opinion, the view taken by the Bombay and Calcutta High Courts is correct to the effect that the expenditure on issuance of bonus shares is revenue expenditure. The contrary judgments of Gujrat and Andhra Pradesh High Courts are erroneous and do not lay down the correct law.”
5. Law declared by Supreme Court to be binding on all Courts
Article 141 of the Constitution provides that “the law declared by the Supreme Court shall be binding on all Courts within the territory of India.” Now let us examine the concept in detail as held by the Supreme Court in its various decisions (Source: The Book “Shorter Constitution of India” by D.D.Basu 11th edition 1994 Pp 475-479)
5.1 Binding force of Supreme Court Decisions
All courts in India are bound to follow the decision of the Supreme Court even though they are contrary to the decisions of the House of Lords or of the Privy Council.
‘Law declared’ – In case of conflict between decisions of the Supreme Court itself, it is the latest pronouncement which will be binding upon the inferior courts; unless the earlier was of a larger bench. If the later decision is that of a larger bench the previous decision will be deemed to have been overruled and completely wiped out. This rule is followed by the Supreme Court itself.
5.2 Duty of High Court and inferior Courts
(i) When some principle has been laid down by the Supreme Court or some practice deprecated, it should be the duty of the High Court or a subordinate court to follow the decision of the Supreme Court, even though it may not have the approval of the judge of the inferior court, where the Supreme Court decision is cited.
(ii) A judgment of the High Court which refuses to follow the directions of the Supreme Court, or seeks to revive a decision of the High Court which had been set aside by the Supreme Court, is a nullity.
(iii) If a direction of the Supreme Court is clear, a party cannot approach the court for a clarification for assisting the High Court, which would be tantamount to nullifying the Supreme Court order or notification.
(iv) The binding force of a Supreme Court decision can not be assailed on the ground that it did not consider a particular argument, provided the point to which the argument relates was actually decided therein.
6. Gujrat High Court and Andhra Pradesh High Court were bound to follow the judgment of Supreme Court
The effect of issuance of bonus share had been explained by the Supreme Court in CIT Vs. Dalmia Investment Co Ltd (supra) in 1964. Further, the Supreme Court had laid down the test for determining whether a particular expenditure is revenue or capital expenditure in the case of Empire Jute Co. Ltd Vs. CIT (supra) in 1980. However, the Gujrat High Court in Ahmedabad Mfg. & Calico Pvt Ltd Vs. CIT (supra) in 1986 and in other cases (refer CIT Vs. GIC) up to 1994 has taken a contrary view. Further, the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd Vs. CIT (supra) in 1988 and up to 1990 has also taken a contrary view. It is unfortunate that Gujrat High Court and Andhra Pradesh High Court have clearly violated the mandate of Article 141 of the Constitution.
6. State is a major litigant before the High Courts and the Supreme Court
According to a survey about 70% of the appeals before the High Courts and the Supreme Court are filed by the State, either Central or a State Govt. It appears that the appeals are filed as a matter of routine without examining the merits of each case, which create a heavy burden on the High Courts and the Supreme Court, as well as on public exchequer. There is a need for immediate introspection and to design a system of careful scrutiny before filing an appeal on behalf of the State. So that valuable time of the High Courts and the Supreme Court may be saved by avoiding unnecessary litigation.
The Ministry of Law should take initiative to bring into existence a system by which the judgment of the Supreme Court on a particular issue can be codified, which may be referred by the High Courts, inferior courts and others. This can be achieved by computerisation of Supreme Court judgments by the experts in the field of law. The High Courts and inferior courts need to be meticulous in following the judgment of Supreme Court on a particular point in issue before it. It would be advantageous to hold that a judicial discipline is the need of the hour and it is high time to evolve the concept of judicial accountability.
Note: The views expressed are my personal and a view point only.
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