TMI Blog1989 (12) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... r, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the income exempt under Chapter VI-A of the Income-tax Act, 1961, should be reduced in computing the capital base for the purposes of surtax assessment ?" The first question has been referred for our opinion at the instance of the assessee while the second question has been referred at the instance of the Revenue. The facts leading to the reference of the first question are as follows: For the assessment year 1972-73, the assessee filed the return showing chargeable profit of Rs. 1,23,917. A revised statement was subsequently filed on March 22, 1974 and, according to the statement, the chargeable profit is only Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, proportionate increase should be made in the capital invested in the business by reference to rule 3 of the Second Schedule to the Act, because, as a consequence of issue of bonus shares, though out of reserves, the share capital was increased to that extent. It is the submission of learned counsel that what is contemplated under rule 3 is the increase of the capital on account of increase of paid-up share capital without reference to the increase or decrease in the reserves and, therefore, what is to be looked at in interpreting or construing rule 3 is only increase or decrease in the paid-up capital and, for that purpose, any other element referred to in rule which goes to make up the capital is irrelevant. Learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rule 3. The provisions of rule 3 will be attracted so far as increase in the computation of capital employed in a business is concerned only if the following conditions are fulfilled: 1. There must be an increase in the capital of the company as computed in accordance with rules 1 and 2 of the Second Schedule after the 1st day of the previous year relevant to the assessment year. 2. There should be an increase by any amount during the previous year in the capital computed in accordance with rules 1 and 2 of the Second Schedule. 3. Such increase by any amount may be brought about by (a) on account of increase of paid-up share capital, or (b) issue of debentures, or (c) borrowing of any moneys referred to in clause (v) of rule 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter as appeared to the Calcutta High Court, in our view, the alternative view can only be taken by misreading the rules. To similar effect, the Madras High Court also stated the law on the point in CIT v. Sundaram Clayton Ltd. [1983] 140 ITR 235, 240, as follows : "Whatever might be the interpretation of that rule, so far as the language of rule 3 of the Second Schedule to the Surtax Act is concerned, both as a matter of first impression and on the authorities we have earlier referred to, we have no doubt whatever that a mere capitalisation of the reserves and the issue of fully paid up bonus shares, subsequent to the first day of the previous year, cannot come within the ambit of the said rule, so as to enable the assessee to obtain an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the interpretation of rule 2 of the Second Schedule of the Super Profits Tax Act, 1963. That rule reads as follows (at p. 592) : "Rule 2 : Where, after the first day of the previous year relevant to the assessment year, the paid-up share capital of a company is increased or reduced by any amount during that previous year, the capital computed in accordance with rule 1 shall be increased or decreased, as the case may be, by a portion of that amount which is proportional to the portion of the previous year during which the increase or the reduction of the paid-up share capital remained effective." Learned counsel for the assessee contended that there is hardly any difference between rule 2 of the Second, Schedule of the Super Profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offrey Manners and Co. Ltd. [1978] 112 ITR 334, the Bombay High Court merely followed the decision in CIT v. Mohan Meakin Breweries Ltd. [1974] 95 ITR 586 (HP). Therefore, neither of the decisions relied on by the assessee can have any bearing or relevance for the purpose of interpretation of the rule on hand. In the circumstances, we have got to answer question No. 1 referred for our opinion in the affirmative and against the assessee. The second question can be answered without much difficulty in as much as it has been covered by a direct authority concluded in the case of Stumpp, Schuele and Somappa P. Ltd. [1977] 106 ITR 399 (Kar). Following the said decision, for the reasons stated above, we answer the second question referred for ou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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