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Issues Involved:
1. Whether the amount shown in the share premium account, though not received in cash, is hit by Explanation 2 to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act. 2. Whether the amount credited in the share premium account arising from amalgamation constitutes "other reserve" under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be included in computing the capital for surtax purposes. Issue-wise Detailed Analysis: Issue 1: Explanation 2 to Rule 2 of the Second Schedule The Tribunal was tasked with determining if the amount in the share premium account, which was not received in cash, fell under the purview of Explanation 2 to rule 2 of the Second Schedule of the Companies (Profits) Surtax Act. The Surtax Officer initially rejected the inclusion of Rs. 44,84,866 in the capital computation, arguing that since the share premium was not received in cash, it was hit by Explanation 2. This Explanation mandates that only share premiums received in cash can be treated as part of the paid-up share capital. However, the Commissioner of Income-tax (Appeals) reversed this decision, stating that Explanation 2 is merely clarificatory and does not exclude share premiums not received in cash from being considered as reserves. The Tribunal upheld this view, citing the Supreme Court decision in CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685, which did not require reserves to be built out of profits alone. The Tribunal concluded that the share premium account, even if not received in cash, could be considered a reserve under rule 1(iii) of the Second Schedule. Issue 2: Inclusion as "Other Reserve" under Rule 1(iii) The second issue was whether the surplus arising from the amalgamation, credited to the share premium account, should be included in the capital computation as "other reserve" under rule 1(iii) of the Second Schedule. The Tribunal held that the share premium account was a reserve and not hit by Explanation 2 to rule 2. The Tribunal found that the facts of the case were similar to those in the Supreme Court decision in Standard Vacuum Oil Co., where the excess of the net value of assets over the par value of the stock issued was treated as a reserve. The Tribunal noted that the Supreme Court had established that such surpluses, even if not received in cash, could be treated as reserves. The Tribunal emphasized that the share premium account appears under "Reserves and Surplus" in the balance sheet, not under "Share Capital," thus supporting the inclusion of the surplus as a reserve. Conclusion: The High Court agreed with the Tribunal's interpretation, affirming that the share premium resulting from the amalgamation should be treated as a reserve under rule 1(iii) of the Second Schedule. The Court concluded that Explanation 2 to rule 2 did not preclude the inclusion of such premiums as reserves. Thus, both questions were answered in the affirmative, favoring the assessee, and there was no order as to costs.
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