1996 (5) TMI 83 - SC - Income Tax

Whether on the facts and in the circumstances of the case and having regard to rule 3 of the Second Schedule to the Companies (Profits) Surtax Act 1964 the share capital of the company should be increased proportionately on account of issue of bonus shares for the purpose of computation of capital under the Companies (Profits) Surtax Act 1964 ? Held that - By issuing the bonus shares in the assessment year in question there had only been a conversion of the reserves into fully paid bonus shares which conversion did not add up to the capital or reserve base which was not there on the first day of the previous year. No hesitation in approving the view taken in New India Industries case 1992 (9) TMI 57 - GUJARAT High Court that before rule 3 of the Surtax Act 1964 can be made applicable an increase in the capital base as computed under rule 1 has to be shown to have taken place. In order that rule 3 could apply the capital base of the company as computed in accordance with rule 1 of Schedule II to the Surtax Act 1964 must have increased during the previous year and such increase should be on account of increase of paid-up share capital or issue of debentures referred to in clause (iv) or borrowing of any moneys referred to in clause (v) of rule 1. Unless these conditions are satisfied there would be no occasion for the assessee-company to get the benefit contemplated by the second part of rule 3 of Schedule II to the Surtax Act 1964. The Bombay Madras and Delhi High Courts have also taken the same view without however elaborating the implication of rule 3 of Schedule II to the Surtax Act 1964 as has been done by the Gujarat High Court. The incidence of rule 2 of Schedule II to the Super Profits Tax Act 1963 being different the interpretation of the said rule by the Himachal Pradesh High Court is not germane for interpreting rule 3 of Schedule II to the Surtax Act 1964. The aforesaid interpretation is quite reasonable and is clearly discernible in rule 3. The decisions cited by Mrs. Ramachandran relating to the principle of interpretation of taxing statutes do not call for any change in the view we have taken on the language of the rule. Appeal dismissed.

Summary

Issues Involved:
1. Computation of capital under Rule 3 of Schedule II to the Companies (Profits) Surtax Act, 1964.
2. Interpretation of Rule 2 of Schedule II to the Super Profits Tax Act, 1963, versus Rule 3 of Schedule II to the Surtax Act, 1964.
3. Validity of the increase in capital base due to the issuance of bonus shares.

Issue-wise Detailed Analysis:

1. Computation of capital under Rule 3 of Schedule II to the Companies (Profits) Surtax Act, 1964:

The core issue was the computation of capital under Rule 3 of Schedule II to the Companies (Profits) Surtax Act, 1964. The appellant-company issued 20,400 bonus shares by capitalizing part of its general reserves, converting Rs. 20,40,000 into bonus shares. The company argued that this amount should be added to the capital for computation purposes under Rule 3. The Income-tax Officer rejected this, but the Income-tax Appellate Tribunal accepted the company's contention. The matter was referred to the Madras High Court, which held that the process of converting reserves into bonus shares did not increase the overall capital of the company. The High Court emphasized that Rule 3 required a fresh influx of capital to attract its application. The Supreme Court upheld this view, stating that the issuance of bonus shares merely converted reserves into paid-up capital without increasing the capital base.

2. Interpretation of Rule 2 of Schedule II to the Super Profits Tax Act, 1963, versus Rule 3 of Schedule II to the Surtax Act, 1964:

The appellant's counsel argued that Rule 2 of Schedule II to the Super Profits Tax Act, 1963, and Rule 3 of Schedule II to the Surtax Act, 1964, were essentially similar and should have the same legal incidence. The Madras High Court, however, disagreed, noting that the language of the two rules was not pari materia. The Supreme Court supported this distinction, referencing the Gujarat High Court's explanation in Commr. of Surtax v. New India Industries Ltd. [1993] 202 ITR 619. The Gujarat High Court clarified that Rule 2 allowed for capital computation based on mere increase in paid-up share capital, whereas Rule 3 required an actual increase in the capital base as computed under Rule 1. The Supreme Court found this differentiation reasonable and upheld the interpretation that Rule 3 required an increase in the capital base, not just a conversion of reserves.

3. Validity of the increase in capital base due to the issuance of bonus shares:

The appellant-company contended that the issuance of bonus shares should qualify for proportionate inclusion in the capital base. The Supreme Court, however, agreed with the High Courts' view that the issuance of bonus shares did not constitute an influx of additional capital. The Court noted that the conversion of reserves into bonus shares did not increase the capital base as required by Rule 3. The Supreme Court emphasized that the capital base must have increased during the previous year due to an influx of new capital, not merely a reallocation of existing reserves. This interpretation was consistent with the decisions of the Bombay, Madras, and Delhi High Courts, and the Supreme Court found no reason to interfere with the impugned decisions of the Madras High Court.

Conclusion:

The Supreme Court dismissed the appeals, upholding the Madras High Court's decision that the issuance of bonus shares did not increase the capital base for the purposes of Rule 3 of Schedule II to the Companies (Profits) Surtax Act, 1964. The Court emphasized the need for a fresh influx of capital to attract the application of Rule 3 and distinguished it from Rule 2 of Schedule II to the Super Profits Tax Act, 1963. The appeals were dismissed without any order as to costs.