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TMI Blog2005 (9) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with a scheme of arrangement under sections 391 and 394 of the Companies Act. The said scheme of arrangement was granted approval by the High Courts of Calcutta and Gauhati. As per the scheme of arrangement, all the properties, rights and powers and all liabilities of the sterling companies were transferred to and vested in the appellant company. The Reserve Bank of India was the designated authority for granting approval for the price at which the undertakings including the assets were to be taken over by the appellant. The Reserve Bank of India, by its letter No. EC.CO.FCS.3517/T-117(Activity)/79 dated June 26, 1979 accorded the aforesaid approval whereunder it permitted the appellant to pay the aggregate lumpsum consideration at Rs. 490 lakhs. Para. 2 of the said letter reads thus: "2. We are agreeable to your acquiring the entire business and undertakings in India of (i) Attaree-khat Tea Company Attaree-khat Company Ltd., (ii) Bargang Tea Co. Ltd., (iii) Boroi Tea Co. Ltd., (iv) Corramore Tea Co. Ltd., (v) Koomsong Tea Co. Ltd., (vi) Moabund Tea Co. Ltd., (vii) Rajmai Tea Co. Ltd., (viii) Itakhooli Tea Co. Ltd., (ix) Tingri Tea Co. Ltd., (x) Bargang Tea Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h provides for the rules for computing the capital of a company for the purposes of surtax, the capital of a company is the aggregate of the following as on the first day of the previous year relevant to the assessment year- 1. Paid up share capital. 2. Reserves created in accordance with the provisions of the Indian Income-tax Act, 1922 and the Income-tax Act, 1961. 3. Other reserves (as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 or the Income-tax Act, 1961. Explanation 1 to rule 2 of the Second Schedule to the said Act reads as under: "Explanation 1.- A paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act." The Revenue treated the impugned reserve as being covered under the said Explanation 1. This contention is rejected by the Appellate Tribunal. However, the stand of the Revenue has been upheld by the High Court. It was submitted by Mr. S. Ganesh, learned senior counsel for the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 964, and has held that the assessee company, in the instant case, acted on the net value of its assets as appearing in the books of sterling tea companies resulting in difference between the book value and the consideration paid and by this exercise on the part of the assessee, the reserve equivalent to the shortfall was brought into existence by the assessee. Arguing further, learned senior counsel submitted that the assets were valued by the Reserve Bank of India at a lower price considering the real status of the assets which was the price fixed by the Reserve Bank of India and that the difference in the actual value of the assets as determined by the Reserve Bank of India and book value is nothing but a reserve came into existence due to the valuation process which can be termed as revaluation of assets. According to learned senior counsel, the judgment of Standard Vacuum Oil Co. [1966] 59 ITR 685 (SC) is not identical with the assessee's case as observed by the Assessing Officer. Concluding his argument, he submitted that the High Court has correctly observed that the difference between the book value of assets and consideration paid shown as other reserve could not be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Companies (Profits) Surtax Act, 1964. This court was deciding the issue vis-a-vis the Explanation to rule 2 of Schedule II to the said Act of 1947 which read as under: "Explanation.- A reserve or paid-up share capital brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for the purposes of ascertaining the abatement under this Act in respect of any chargeable accounting period." It is to be noted that the provisions of the aforesaid Explanation and Explanation I of the Second Schedule to the Act of 1964 are in pari materia and the relevant portions are identical. This court, in the above case, held at page 694 as follows: "The Explanation to rule 2 has no relevance in the present case. The difference between the assets received by the company and the par value of the shares issued cannot be called a book asset 'brought into existence by creating or increasing (by revaluation or otherwise)'. The assets received by the assessee-company are real and tangible assets ..." In this context, it is beneficial to refer to the specific finding of the Commissioner of Income-tax (Appeals) which reads as under: "Explanation 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave heard both the parties at length and gone through tine materials available on record including the order of both the High Courts and the amalgamation scheme. From the record it appears that the Reserve Bank of India has allowed the consideration perhaps on ad hoc basis as no basis has appeared from the letter of the Reserve Bank of India dated June 28, 1979. The Reserve Bank of India in its approval mentioned at para. 3 (i) that: 'There shall not be any depletion in the net assets as on the actual date of transfer of business from what was given in the balance-sheets of the twelve sterling tea companies as on December 31, 1976, and an auditor's certificate of this effect shall be submitted to us after the formalities for transfer of business are completed.' On query from the Bench, we were told that the actual take over was on December 31,1977, i.e., after one year of the amalgamation scheme. 10. From the records the issue is whether the reserve of Rs. 1,43,89,055 is a reserve brought into existence by creating or increasing any book asset or not. At the cost of repetition it may be mentioned that the assets which were taken over were real and tangible assets and there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration." As rightly pointed out by learned senior counsel for the appellant the judgment of Standard Vacuum Oil Co. [1966] 59 ITR 685 (SC) was cited before the High Court, the Division Bench failed to appreciate the applicability of the said judgment to the case on hand. Likewise, the High Court has completely failed to appreciate the true meaning and real effect in law of Explanation 1 to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Division Bench, in our view, has grossly erred in stating that the appellant had obviously received benefits in the computation of income-tax on account of assets taken over by the appellant from other tea companies and that, therefore, the reserve in question could not be treated as a component of the capital for the purposes of surtax assessment. Such a new case was neither advanced by the Revenue before the High Court, nor could such a case at all be considered by the High Court inasmuch as it did not at all arise out of the order by the Appellate Tribunal. The provisions of the Business (Profits) Tax Act, 1947 which were interpreted by this court in Standard Vacuum Oil Co. [1966] 59 ITR 685 are virtually identi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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