TMI Blog1999 (9) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... as held by the trustee and their relatives and hence, in view of the provisions of section 21A of the said Act, the trust was not entitled to the exemption granted under section 5(1)(i) of the Act. The Wealth-tax Officer held that similar was the position with the investment in the other company known as Mehta Corporation Private Limited. The contention raised by the assessee was that by virtue of the second proviso to section 21A of the Act, it did not lose the entire exemption, but the exemption could be denied only to the funds invested with these companies, because, the investment was less than five per cent. of the total investment of these companies. The Wealth-tax Officer negatived the claim of the assessee, holding that the meaning attributed to the word "capital" by the assessee was misleading and that capital in the normal sense means, the surplus of assets over the liabilities and not the assets, and in relation to a company, it means the subscribed capital and nothing else. Against the order of the Wealth-tax Officer rejecting the claim of the assessee-trust, an appeal was carried to the Commissioner of Wealth-tax (Appeals) and by its order dated October 14, 1980, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal of a concern within the meaning of section 13(4) of the Act would include even borrowed money employed as capital in the concern. The contention of the assessee in fact was that the capital as mentioned in section 13(4) of the Income-tax Act, should be construed to mean not only the paid-up capital of the company in which the funds of the trust were invested, but also the reserves and that if the reserves were taken into consideration, the investments of the assessee trust in the said companies did not exceed five per cent. of their total capital. The Tribunal held that as in section 80J of the Income-tax Act, even in section 13(4) thereof, the capital of a business or concern was distinct or different from the capital of a person who may be interested in the business or may even be the proprietor of the concern. It was held that the exemption under section 11 of the Act could not be denied to the assessee on the ground that it was not available because the aggregate funds that it had invested in the concern exceeded five per cent. of the capital of the concern. This decision of the Tribunal given in the context of the provisions of section 11 read with section 13(4) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, if we are persuaded to take a different view of the matter. It was contended that there was no reason for giving a narrow meaning to the word "capital" and the word "capital of a concern" would include the reserves. Placing reliance on the decision of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53, it was contended that the reserves are appropriations of profits and the assets by which they are represented being retained to form part of the capital employed in the business, should be treated as capital. Relying upon the meaning of the word "capital" from dictionaries, counsel contended that any money received by a company or a benefit which enables it to carry on its business must be considered as its capital. He relied upon the decision in Municipal Council of Vizagapatam v. Tea Districts Labour Association [1932] 2 Comp Cas 213 (Mad), in support of his contention and also referred to Venkataramaiya's Law Lexicon and Legal Maxims (second edition-1980), volume 1, wherein at page 341 it is described that any money received by a company is a benefit and that society or an association which enables it to carry on its business must necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or any part of the income of the trust created on or after April 1, 1962, enures for the benefit of any person referred to in sub-section (3) of section 13 of the Income-tax Act, wealth-tax shall be leviable upon, and recoverable from, the trustees or manager in the like manner and to the same extent as if the property was held by an individual who is a citizen of India and resident in India for the purposes of the Act at the rates specified therein. Under the second proviso to section 21A it has been laid down that in a case where the aggregate of the funds of the trust invested in a concern, in which any person referred to in sub-section (3) of section 13 of the Income-tax Act, has a substantial interest as provided in Explanation 3 to that section, does not exceed five per cent. of the capital of that concern, the exemption under clause (i) of sub-section (1) of section 5 shall not be denied in relation to any property other than such investment, by reason only that the funds of the trust have been invested in a concern in which any person referred to in sub-section (3) of section 13 of the Income-tax Act, has such substantial interest. The second proviso is similar to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly pounds 9,000, his capital is not intact, and he has lost. It is exactly the same principle that has to be applied to a trading company under the Companies Act, and the capital that has to be regarded for the purpose of the Act of Parliament is the capital according to the Act and not the things, whether houses, goods, boots and shoes, or hats, or whatever it may be for the time being representing the capital, in the sense of being things in which the capital has been laid out." In the context of a partnership concern, by the capital of a partnership is meant the aggregate of the sums contributed by the partners for the purpose of commencing or carrying on the partnership business and intended to be risked by them in that business. The capital of a partnership is therefore, not the same thing as its assets which may vary from day-to-day and would include everything belonging to the firm, which has money value. There is a fundamental distinction between a firm's capital on the one hand and its assets, often called "capital assets" on the other. That distinction is critical to an understanding of the true nature of capital. Where a partner brings in the assets and is credited wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve, and if the assets subsequently increase in value the amount neither has been nor will be part of the capital. If, therefore, a part of that balance is being used in paying a dividend, that dividend is not paid out of such capital, because such sum never became capital (Farwell J., in Bond v. Barrow Haematite Steel Co. [1902] 1 Ch. 353 at pages 364, 365). A reserve fund would be a fund which at the time at which it was created arose from the fact that there were available assets (after deducting all liabilities of every kind, including the amount which is represented by the share capital) which might have been applied as the company thought fit without thereby doing any violence to the provisions of the Companies Act or to the memorandum and articles of the company. The surplus carried to the reserve fund represented that which could have been used in paying further dividends to the shareholders. The reserve fund created could subsequently be dealt with by the company as per the provisions of its memorandum and articles either by utilising it by equalising dividends or making good lost capital, or any other purpose as the company may think fit within its objects. Such reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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