If a Company earns profits it may either distribute the profits by way of dividend or accumulate them. Where the Company has accumulated profits or reserves, it may issue new shares or make up its partly paid shares as fully paid up to compensate the share­holders for non-payment of dividend. This way of issuing shares is known as capitalisa­tion of profits or reserves, as the profits or reserves, which are to be utilised for payment of dividend, are converted into share capital and the shares so issued are termed as "bonus shares". The transaction ''takes reining out of the Company's coffers and puts nothing into the shareholders’ pocket but what hap­pens is that the accumulated profits which are capitalised are applied in paying up the amo­unt due on bonus shares or debentures to be issued to the shareholders as fully paid bonus shares or debentures." ( M/S Pak Jute Mills Ltd. Vs. Income Tax Officer and another, 1978, 7 CLC (AD) [6566] )