9911796707
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Issues Involved:
1. Nature of "Capital paid in Surplus" and its classification as premium. 2. Classification of "Capital paid in Surplus" as reserves under Rule 2(1) of Schedule II of the Business Profits Tax Act. 3. Classification of "Earned Surplus" as reserves within the meaning of Rule 2(1) of Schedule II of the Business Profits Tax Act. Detailed Analysis: 1. Nature of "Capital paid in Surplus" and its Classification as Premium: The primary issue was whether the amount of $117,000,000 listed under "Capital paid in Surplus" in the assessee company's balance sheet could be considered as premium realized from the issue of shares under Rule 3 of Schedule II of the Business Profits Tax Act, 1947. The court noted that in the United States, it is common practice to issue shares of total par value less than the true value of the assets transferred to reduce issuance taxes and fees. The excess of the net value of the assets over the par value of the stock issued was entered as "Capital paid in Surplus." The court held that this excess could indeed be regarded as premium realized from the issue of shares, as there was no statutory restriction against issuing shares for a consideration exceeding their par value in the relevant jurisdictions. The court affirmed that this amount retained in the business was premium within the meaning of Rule 3. 2. Classification of "Capital paid in Surplus" as Reserves under Rule 2(1): The second issue was whether the "Capital paid in Surplus" could be classified as reserves under Rule 2(1) of Schedule II of the Business Profits Tax Act. The court held that reserves under Rule 2(1) are not limited to those built out of taxed profits. The explanation to Rule 2(1) excludes reserves created by revaluation of assets, but this was not applicable in this case since the assets received were real and tangible. The court concluded that "Capital paid in Surplus" could be considered as reserves not allowed in computing the profits of the company for the purposes of the Indian Income-tax Act. 3. Classification of "Earned Surplus" as Reserves within the Meaning of Rule 2(1): The third issue was whether the amounts listed as "Earned Surplus" in the balance sheets of the assessee company could be treated as reserves under Rule 2(1) of Schedule II. The court noted that under the American system of accounting, the balance of net profits after allocations is entered as "Earned Surplus," which is intended for business use. This practice is akin to creating a general reserve in Indian accounting. The court found that the "Earned Surplus" was a specific allocation intended for business purposes and thus could be regarded as reserves. The court distinguished this case from the Century Spinning & Manufacturing Company case, where unallocated profits were not considered reserves, by emphasizing the specific allocation and retention of identity of the "Earned Surplus" account in the assessee company's balance sheets. Conclusion: The court affirmed the High Court's decision on all three issues, holding that the amounts listed as "Capital paid in Surplus" and "Earned Surplus" in the assessee company's balance sheets could be treated as premium and reserves, respectively, under the relevant provisions of the Business Profits Tax Act. The appeals were dismissed with costs.
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