TMI Blog1976 (8) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... as right in holding that, (i) provision for taxation in excess of the liability finally determined, and (ii) provision for gratuity of Rs. 99,294 should be treated as reserve for inclusion in the capital computation for the purpose of surtax assessments ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the capital should be increased to the extent of bonus shares issued out of the general reserve even though the entire amount utilised for issue of bonus shares out of the general reserve has already been included in the capital ? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that rule 4 of the Second Schedule to the Surtax Act, 1964, is applicable only to a case where a part of the income of a company is not includible in its total income by virtue of the provisions contained in Chapter III of the Income-tax Act, 1961, and not a case where a part of the income of the company is not included in its total income by virtue of that part of the income being allowed as deduction under section 84/80J of the Income-tax Act, 1961 ? " These questions relate to the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital computation for the purposes of the surtax assessment. Thus, our answer to the first part of question No. 3 is in the affirmative. The same is our answer to the latter part of question No. 3 relating to provision for gratuity of Rs. 99,294, because there was no approved scheme as a result of which the amount was allocated towards the gratuity reserve, nor was any actuarial basis adopted for the same. Thus, the provision for gratuity of Rs. 99,294 should be treated as reserve for inclusion in the capital computation for the purpose of surtax assessments. So far as question No. 4 is concerned, the relevant facts are as under : As on January 1, 1966, the amount standing to the credit of the general reserve was Rs. 3,08,06,716. The directors in their report in respect of the balance-sheet and the profit and loss account for the period ending December 31, 1965, recommended that subject to the approval of the share-holders a sum of Rs. 25,49,100 out of the general reserve should be capitalised and 25,491 bonus equity shares should be issued and they should be distributed on the basis of one such bonus share for every 10 equity shares held by a shareholder registered on June 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st day of the previous year. The Tribunal, following the decision of the Himachal Pradesh High Court in the case of Commissioner of Income-tax v. Mohan Meakin Breweries Ltd. [1974] 95 ITR 586 (HP), took the view that the expression " paid up capital " occurring in the Act would include even such reserve as has been capitalised without corresponding decrease in the reserve as computed with reference to the first day of the previous year. The Tribunal accepted the contention of the assessee and question No. 4 is raised by the revenue against this finding of the Tribunal. Mr. Joshi on behalf of revenue contended that the provisions of rule 3 will only be attracted when after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the provisions of rules 1 and 2 of the Second Schedule will be increased by any amount during the previous year on account of increase of paid-up share capital or by issue of debentures or by borrowing of money referred to in clause (v) of rule 1 and when such is the case the capital has to be increased in the manner indicated in rule 3. He submitted that in the present case after the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2 has to be adjusted by reason of such reduction of the amount standing to the credit of the general reserve. He submitted that whenever there is increase in the paid up capital either by issue of right shares or bonus shares the provisions of rule 3 will be attracted and the proportionate increase in the capital employed has to be made as provided therein. Section 4 of the Act is the charging section and under that section subject to the provisions contained in the Act there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in the Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. The expression " chargeable profits " has been defined in section 2(5) while the expression " statutory deduction " is defined in section 2(8). Under the said definition, unless the context otherwise requires, "statutory deduction" means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id rule runs thus : " 3. Where after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the foregoing rules of this Schedule is increased by any amount during that previous year on account of increase of paid-up share capital or issue of debentures or borrowing of any moneys referred to in clause (v) of rule 1 or is reduced by any amount on account of reduction of paid-up share capital or redemption of any debentures or repayment of any such moneys, such capital shall be increased or reduced, as the case may be, by a sum which bears to that amount the same, proportion as the number of days of the previous year during which the increase or the reduction remained effective bears to the total number of days in that previous year. " Before we deal with the true construction of the provisions of rule 3 it will not be out of place if the cardinal principles of interpretation of a taxing statute which are well-settled are noted. In Elphinstone Spinning and Weaving Mills Co. Ltd. v. Commissioner of Income-tax [1955] 28 ITR 811, 816 (Bom), Chagla C.J. observed: " The Advocate-General says we should avoid giving a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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. When these conditions are fulfilled then the capital has to be increased in the manner indicated by the operative part of the rule. We are concerned in the present case with increase of paid-up share capital. It cannot be disputed that after the first day of the previous year relevant to the assessment year the paid-up capital of the company had been increased by a sum of Rs. 25,49,100 by issue of 25,491 free bonus shares of Rs. 100 each as a result of capitalisation of a part of the amount standing to the credit of the general reserve. The question is whether merely because during the previous year there was an increase of paid-up share capital, the provisions of rule 3 will be automatically attracted. Mr. Mehta, on behalf of the assessee, has submitted that when after the first day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount whatsoever. That such is the result when bonus shares are issued is clearly borne out by a passage in Palmer's Company Law, twenty-first edition, page 673 : " Technically the transaction of bonus shares is carried out in the following manner : the bonus is provided out of the credit balance of the profit and loss account or out of reserves-both being items appearing on the liabilities side of the balance-sheet, so that the balance-sheet thenceforward shows the profit and loss account or reserves at a reduced figure and the issued capital at a correspondingly increased figure. As far as the balance-sheet is concerned, the only effect of the transaction is that one item on the liabilities side of the balance-sheet and in the company's books becomes replaced (in whole or in part) by another : the assets side of the balance-sheet is unaffected. " Thus, it is quite clear and apparent that when bonus shares are issued as fully paid up shares by capitalisation of a part of the amount standing to the credit of general reserve the capital as computed in the manner provided by rule 1 of the Second Schedule is not increased in any manner whatsoever. The Tribunal accepted the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit and even if an apparent double benefit is being given, the inference is that such double benefit was intended to give the tax relief. Therefore, the expression " paid-up capital " occurring in the Super Profits Tax Act does include therein even such reserve as has been capitalised without corresponding decrease in the reserve as computed with reference to the first day of the previous year. Therefore, the chargeable profits, in the present case, should be reduced by Rs. 1,13,447. This was the view taken by the Himachal Pradesh High Court upon proper interpretation of the provisions of rule 2 of the Second Schedule to the Super Profits Tax Act, 1963. Rule 2 which came up for construction before that High Court was in the following terms : " 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not to any part of the income, profits and gains which under the provisions of, the Income-tax Act had earned tax reliefs. Accordingly, the Tribunal took the view that the profits and gains of a company not includible in its total income are only those coming under Chapter III of the Income-tax Act, 1961, and would not take in any of the reliefs granted under the provisions of Chapter VI-A of that Act. The Tribunal took the view that rule 4 of the Second Schedule to the Act relates to income, profits and gains which are not includible by virtue of the various provisions contained in Chapter III of the Income-tax Act and has no application in respect of the deductions to be made in computing the total income under Chapter VI-A. It is from this view taken by the Tribunal that, at the instance of the revenue, question No. 5 has been referred for our determination. In respect of the income-tax assessment, relief was obtained by the assessee-company under section 84 contained in Chapter VII of the Income-tax Act, 1961, to the extent of Rs. 24,63,318 and decision of the question referred depends upon the interpretation of rule 4 of the Second Schedule to the Act. The provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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