Jagannatha Shetty, Actg. C.J.
1. In these references under section 256(1) of the Income-tax Act, 1961, the common questions referred by the Tribunal are :
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that issue of bonus 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)
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the Income-tax Officer is not justified in withdrawing the development rebate ?'
2. The assessee is a company and the assessment years concerned are 1972-73, 1973-74 and 1974-75. In the assessments for these years, the Income-tax Officer allowed development rebate. Later on, however, he noticed from the balance-sheet of the company that the company had transferred amounts from the development rebate reserve to the share capitalisation account by issue of bonus shares. He formed an opinion that issuance of bonus shares would amount to distribution of profits by capitalisation and could not be considered for the purpose of the business. He accordingly withdrew the development rebate.
3. The assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner did not agree with the view taken by the Income-tax Officer. He annulled the order of the Income-tax Officer stating that the utilisation of the reserve by issuing the bonus shares was only for the purpose of the business of the undertaking. Aggrieved by that order, the Revenue appealed to the Tribunal. The Tribunal, after considering the statutory requirements contained in section 34(3)(a)(i) and section 155(5)(ii)(a) of the Act, agreed with the view taken by the Appellate Assistant Commissioner. It also held that the assessee had not distributed any sum by way of dividends when the bonus shares were issued. The Tribunal, however, has observed that issuance of bonus shares might be technically a distribution of profits, but that does not meet the requirements of the statutory provisions. The Tribunal has also observed that the main requirement is that the reserve should be used in the business and not to be utilised for distribution of dividend or profits but the issue of bonus shares, in substance, cannot be considered as distribution of profits.
4. Let us now examine the statutory provisions :
5. Section 34, so far as it is relevant, provides :
'34. (3) (a) The deduction referred to in section 33 shall not be allowed unless an amount equal to seventy-five per cent. of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking, other than -
(i) for distribution by way of dividends or profits.'
6. Section 155(5)(ii)(a) in so far as it is relevant provides :
'(5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year under section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (XI of 1922), and subsequently -......
(ii) at any time before the expiry of the eight years referred to in sub-section (3) of section 34, the assessee utilises the amount credited to the reserve account under clause (a) of that sub-section -
(a) for distribution by way of dividends or profits.'
7. The creation of the reserve contemplated by section 34(3)(a) is a condition precedent for obtaining the allowance of development rebate. The grant of allowance is made subject to the condition that the amount shall not be utilised by the assessee for distribution by way of dividends or profits. Where, therefore, conditions are expressly imposed to entitle an assessee to an allowance, the conditions cannot be ignored on any theory of beneficial construction. Where the assessee fails to satisfy the conditions requisite for obtaining the allowance, it will not be for the court or the Tribunal to state that in substance the action of the assessee should be looked into although technically the action falls within the embargo. The conditions, in other words, should be strictly construed because development rebate is a special concession or relief granted by the Act which cannot be ignored unless the statutory condition attached to it is satisfied. That means, the reserve shall not be used for distribution by way of dividends or profits.
8. There are only two ways known to us by which profits could be distributed by a company - one by way of distribution of dividends to the shareholders and another by way of issue of bonus shares. The latter category certainly is not distribution of dividend but none the less it is also distribution of profit. By the distribution of bonus shares, it is not in dispute that capital is created and reserve is depleted. When capital is created by issuing bonus shares, the shareholders are enriched. Shareholders could be enriched by issue of dividends or by issue of bonus shares. changing the terminology of profits into shares cannot, therefore, in our opinion, take the distribution out of the embargo imposed by section 34(3)(a)(i). It may not be, therefore, correct to state that by issue of bonus shares, the Company has utilised the profits for the purpose of business. Issue of bonus shares, in our opinion, is, therefore, nothing but distribution of profits and clearly violates the statutory requirement of section 31(3)(a)(i).
9. In the result and for the reasons stated above, we answer the first question in the negative and in favour of the Revenue. The answer to the second question also must be in the negative and in favour of the Revenue and accordingly we answer it.
10. In the circumstances, We make no order as to costs.