THE COMMISSIONER OF INCOME-TAX, NORTH ZONE (WEST PAKISTAN), LAHORE Versus MESSRS CRESCENT TEXTILE MILLS LTD., LAHORE

MUSHTAQ HUSSAIN, J.‑-- Messrs Crescent Textile Mills Limited, Lahore, is a company registered under the Companies Act. In consequence of sanction granted by the Central Government to rise the share capital, the Board of Directors of the Company passed a resolution on the 28th February 1958, for the issuance of new shares to the existing shareholders under section 105(c) of the Companies Act.

2. When the shares were offered to the existing share holders they accepted the offer and a sure of Rs. 71,86,800 was deposited in all. This amount was deposited during the financial year ending the 31st of March 1958.

3. On the 21st of June 1958, i.e. after the account year had been closed the following resolution was passed by the Board of Directors :‑

"The Directors having considered the sanction granted by the Controller of Capital issues to the company to issue 1,50,000 B' Class Ordinary shares of Rs. 50 each by capitalising Rs. 75,00,000 out of General Reserve, do hereby resolve that instead of allotment of shares to the acceptor shareholders of the company offered under section 105‑C, steps be taken to secure the amount of acceptor shareholders to waive their right to claim share scripts in respect of newly subscribed shares and instead receive share money in cash for the respective amount.

Resolved further that in the event of majority of acceptor shareholders receiving back the share money in cash, steps be taken to effect the increase in capital by issue of bonus shares."

The amount referred to above was consequently refunded to the shareholders and bonus shares were issued instead.

4. In the balance‑sheet for the financial year referred to above the aforesaid amount was shown in the assets of the company as well as a liability as "share deposit money." The already existing paid‑up share capital was, of course, also shown as a liability:

5. The Company claimed relief under section 15‑B of the Income‑tax Act. The Income‑tax Officer consequently deducted the aforesaid amount from the assets of the company for deter mining the capital under section 15‑B of the Act read with rule 3. The company felt aggrieved and raised the matter before the Tribunal in appeal on the ground that‑

"In terms of the Company Law, the payment made by the existing shareholders described as "share deposit money" must be looked upon as payment of share capital by virtue of the provisions contained in section 105‑C of the Companies Act."

6. The Tribunal agreed with the point of view of the Assessee and came to the following conclusion :‑

"Now in the instant case the offer of shares were made in terms of section 105‑C of the Company Law. The Company had no option in the matter. The offer made was accepted and the shares were also subscribed in fact. The Company does not thereafter seem to have any further discretion on the matter i.e. the contra ct was complete. We have also referred to the views of the commentator. One view is that on an issue of new shares offered to the existing shareholders the acceptance by the latter completes the contract and no allotment is necessary.

Palmer's views are also of identical nature. The facts and cir cumstances of the case fit in with the views expressed above. The circumstances leading to issue of Bonus shares and refund of the share capital under consideration do not in our view make any material difference at least so far as the assessment under review is concerned. It is in this view not necessary to take up detailed discussion of what happened next year. We have no hesitation to hold that the amount of Rs. 71,86,800 is proper share capital in law and not mere deposit of advances. The computation for purposes of section 15‑B should there fore, be made accordingly. The appellant's contention is accepted."

7. The appeal having thus been allowed in part, the Income: tax Commissioner applied for a reference to this Court consequent upon the following question has been referred by the Tribunal for our opinion :‑

"Whether in the facts and circumstances of the case, the Tribunal was right in holding that the disputed sum of Rs. 71,86,800 was 'capital employed' for purposes of computation of capital under section 15‑B of the Income‑tax Act, read with Rules 3 and 9 of the Income‑tax Rules made under that section."

Section 2(7) of the Sale of Goods Act includes "shares" in the definition of "goods." The sale and purchase of share would, therefore, subject to any other law for the time being in force be governed by the provisions of this Act.

8. Section 4 of this Act deals with the formalities of the con tract of sale and subsection (1) thereof provides that‑

"A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part only and another."

The sale of a share is consequently a contract between either the company and the purchaser or if the vendor happens to be another shareholder then between him and the purchaser.

9. A contract is for the sale or transfer of the property in the goods to the buyer for a price.

10. Section 5 deals with the formalities of the contract and lays down the well recognised principle that‑

"A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer."

11. In the case before us, the Company admittedly made an offer to sell the shares in dispute by a resolution passed by the Board of Directors on the 28th February 1958. By this resolution new shares were offered to the existing shareholders and this resolution was put into effect so far as so that even the price aggregating Rs. 71,86,800 for the acquisition of these shares was' duly deposited in the coffers of the Company by the existing share holders who accepted the offer. There was, therefore, an offer by the Company to sell the shires, an acceptance of the offer by the existing shareholders and the payment of the consideration to the Company for the purchase of the shares. All formalities of a con tract as envisaged under section 5 of the Sale of Goods Act were, therefore, complete and the goods being existing goods stood transferred to the shareholders to whom they were allotted as from the date that the shareholders accepted the offer made to them.

12. Section 20 of the Sale of Goods Act may also be referred to with advantage. It provides that------

"Where there is an unconditional contract for the sale of specific goods in a deliverable state the property in the goods passes to the buyer when the contract is made, and it is Im material whether the time of payment of the price or the time of the delivery of the goods, or both, is postponed."

There was an unconditional contract for the sale in the present case. The contract pertained to the definite shares which were, therefore, specific goods and nothing more was to be done for the purpose of putting the shares in a "deliverable state." The property in them, therefore, passed to the shareholders the moment the contract was made. We have already seen that the contract was completed when the shareholders accepted the offer of the Company for the sale of the shares in dispute.

13. A share certificate is nothing more than the documentary evidence of the sale and the share. But there is no provision in any law which makes the transfer of the share or the property in it subject to the issuance of a share certificate. Suction 29 of the Companies Act runs thus -----

"A certificate, under the common seal of the company, specifying any shares or stock held by any member, shall be prima facie evidence of the title of the member to the shares or stock therein specified.

14. Section 28 of the Companies Act lays down that ----

"(1) The shares or other interest on any member in a com pany shall be transferable in manner provided by the articles of the company. Each share in a company having a share capital shall be distinguished by its appropriate number."

It is clear from these sections that the issuance of the certifi cate has nothing to do with the transfer of the property in the shares and as was held in Blyth's case In re : Heaton's Steel & Iron Company ((1876) 4 Ch. D 140) :---

"The issue of the certificate of shares was merely taken as evidence of the time when the shares were issued, but this must not be taken to mean that shares are not issued until the certifi cates are Issued."

In the same case James,. L. J. expressed himself as follows:--

"I think it is desirable to say, as the appellant appears to have been misled by the marginal note to Bush's case, that the notion that shares are only issued when the certificates are issued is a blunder which could hardly be attributed to us."

We respectfully endorse the view expressed by James, L. J.

15. Section 105‑C of the Companies Act under which the shares in the present case were sought to be allotted runs as follows:‑‑

"Where the issue of decide to increase the capital of the offered to the members in Further shares such shares shall be offered to the members in proportion to the existing shares held by each member (irrespective of class) and such offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting time within which the offer, if not accepted, will be deemed g to be declined ; and after the expiration of such time, or on receipt of an intimation from the member to whom such notice is glen that he declines to accept the shares offers, the directors may dispose of the same In such manner as they think most beneficial to the company."

Even the offer by the company was a statutory obligation under the Companies Act which as we have seen in the resent case was accepted, the transfer of the shares was, therefore com plete as we have already pointed out and nothing more remained to be done by the company for making it effective. Whether the share certificates were or were not issued is not a question relevant to the present inquiry.

16. Even according to the department the change in the situation with regard to the shares took place on the 21st of June 1958, i.e. long after the close of the account year with which we are concerned. Whatever happened after the close of the account year is not germane to the determination of the amount of capital employed for the purposes of section 15‑B of the under Income‑tax Act read with rules 3 and 9 of the rules framed there‑

Our answer to the question posed to us, therefore, is in the affirmative and the company shall be entitled to recover its costs from the department.

Reference answered.