Judgment

HEGDE, J.: This appeal is by a certificate under section 66A (2) of the Indian Income Tax Act, 1922 (which will hereinafter be called by Act ) issued by the High Court of Calcutta. It arises out of the judgment and order of that High Court dated February 3, 1965 in a reference under section 66 (1) of the act. In the reference mentioned earlier, two question of law were referred to the High Court for its opinion. They are:

"(1) Whether on the facts and in the circumstances of the case the bonus shares of the face value of Rupees 50,07,500/- should be included in the paid up capital of the assessee within the meaning of that term in pursuance of sub-section (1) of the explanation to paragraph (D) of Part II of the Finance Act, 1956 for the relevant assessment year?

(2) Whether on the facts and in the circumstances of the case the bonus shares in question can be said to have been issued within the meaning of the second proviso to paragraph (D) of Part II of the Finance Act, 1956 to the shareholders by the assessee during the accounting year ended 31st December, 1955 relevant for the assessment year 1956-57?"

2. The facts relevant for the purpose of deciding this appeal may now be stated: The appellant is a company incorporated under the Indian Companies Act. It carried on business of manufacture of paper, On December 30, 1954, it passed by following resolution unanimously at a General Meeting held on that date:

(a) That a sum of Rs. 50,07,500/- (Rupees fifty lakhs seven thousand and five hundred) being part of the undivided profits of the company standing to the credit of General Reserve as on 30th June, 1954, be capitalised and distributed amongst the holders of the ordinary shares in the Company on the footing that they became entitled thereto as capital and that the said capital be applied on behalf of such Ordinary Shareholders in payment in full for 5,00,750 Ordinary shares of Rs. 10/- each, in the Company and that such 5,00,750 New ordinary shares of Rs. 10/- each, credited as fully paid up shall rank in all respects pari passu with the existing ordinary shares, save and except that the holders thereof will not participate in any dividend in respect of any period ending on or before 31st December 1954 and that the same shall be treated for all purposes as an increase of the nominal amount of the capital of the Company held by each of such ordinary shareholders and not as income.

(b) That pursuant to the above resolution and in satisfaction of the interest of the said Ordinary Shareholders in the capitalised sum, the Directors be and they are hereby directed to issue, allot and distribute the said 5,00,750 New Ordinary Shares of Rs. 10/- each, credited as fully paid up amongst the persons whose names are registered as such in the books of the Company as on 1st day of January 1955, in proportion of one such new ordinary share for each ordinary share already held by them on that date, provided that no allotment of shares issued as aforesaid shall be made to non-resident shareholders till approval of the Reserve Bank of India is obtained for the same.

(c) That the Draft of the Agreement providing for the allotment of said New Ordinary shares in satisfaction of the said capitable bonus and submitted to this meeting and signed in the margin by the Chairman, by way of identification, be and the same is hereby approved and that the Director be authorised to affix the Company s seal to duplicate endorsement of such Agreement as and when the same shall have been signed on behalf of the members holding Ordinary shares in the company on 1st January, 1955, by some person to be appointed by the Directors in that behalf, which the Directors be and are hereby authorised to do."

3. There is no dispute as regards the validity of that resolution. It was passed in accordance with the Articles of Association of the Company. For the assessment year 1966-67, (1956-57?) the relevant accounting period ending on December 31, 1955, the Income-tax Of