1993 (3) TMI 59 - HC - Income Tax

Summary

Issues:
1. Interpretation of the Income-tax Act and Companies (Profits) Surtax Act regarding the inclusion of dividend declared after the first day of the 'previous year' in the assessee company's capital.
2. Determination of whether investment on shares should be included in the computation of the company's capital under the Companies (Profits) Surtax Act.
3. Assessment of whether bonus shares issued by the assessee company out of reserves can be considered part of its capital.
4. Application of rule 3 of the Second Schedule to the Companies (Profits) Surtax Act in the context of issuing bonus shares and capitalizing reserves.

Analysis:

The judgment involves a reference under section 256(1) of the Income-tax Act, 1961, and section 18 of the Companies (Profits) Surtax Act, 1964. The first issue concerns the direction to increase the assessee company's capital by the amount of dividend declared after the 'previous year.' The court held in line with the Supreme Court's decision that such inclusion is not permissible, ruling in favor of the Revenue on this matter.

Regarding the second issue, the court analyzed the inclusion of investment on shares in the company's capital under the Companies (Profits) Surtax Act. The court explained the relevant rules and provisions, ultimately concluding that the general reserves far exceeded the cost of investment, thus no reduction in capital was required.

The third issue pertained to bonus shares issued by the assessee company and whether they constitute part of its capital. The court examined the application of rule 3 of the Second Schedule to the Companies (Profits) Surtax Act in this context. The court referenced a previous Division Bench decision and held that the issue of bonus shares did not increase the company's capital under the Act, thus ruling in favor of the assessee on this matter.

Lastly, the judgment addressed the application of rule 3 in the case of issuing bonus shares and capitalizing reserves. The court determined that rule 3 was not applicable in this scenario, as the general reserves remained unaffected by the issuance of bonus shares. The court answered the questions raised by both the Revenue and the assessee accordingly, providing detailed reasoning for each issue.

In conclusion, the court's analysis delved into the intricacies of the Income-tax Act and the Companies (Profits) Surtax Act, providing a thorough examination of each issue raised in the reference. The judgment clarified the application of relevant rules and provisions, ultimately resolving the disputes between the parties involved in the case.