1981 (2) TMI 80 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of Rule 3 of the Second Schedule of the Companies (Profits) Surtax Act, 1964.
2. Whether the capital of the company as computed in accordance with Rule 1 of the Second Schedule could be increased by the increase in paid-up capital which took place during the previous year.

Detailed Analysis:

1. Interpretation of Rule 3 of the Second Schedule of the Companies (Profits) Surtax Act, 1964
The case revolves around the interpretation of Rule 3 of the Second Schedule of the Companies (Profits) Surtax Act, 1964. The rule states that if the capital of a company, as computed in accordance with the preceding rules, is increased during the previous year due to an increase in paid-up share capital, issue of debentures, or borrowing of money, the capital shall be increased proportionately for the number of days the increase was effective.

The court also examined Rule 1 of the Second Schedule, which defines the capital of a company as the aggregate of its paid-up share capital, reserves, debentures, and certain borrowings as of the first day of the previous year.

The court noted that the purpose of Rule 3 is to allow the statutory deduction to be stepped up proportionately if the capital increases during the previous year. However, the court emphasized that Rule 3 applies only if there is an actual increase in the capital as computed under Rule 1.

2. Whether the capital of the company as computed in accordance with Rule 1 of the Second Schedule could be increased by the increase in paid-up capital which took place during the previous year
The court examined whether the increase in paid-up capital on September 12, 1968, could be considered for increasing the capital computation under Rule 1. The assessee argued that the capitalization of reserves by issuing bonus shares should lead to an increase in the capital computation under Rule 1.

However, the court held that Rule 3 does not apply if the increase in paid-up capital is achieved by utilizing reserves already included in the capital computation under Rule 1. The court clarified that Rule 3 is intended to apply only when there is an actual increase in the capital as computed under Rule 1, not when reserves are merely reallocated to paid-up capital.

The court also considered a similar provision under the Super Profits Tax Act, 1963, and noted that Rule 2 of the Second Schedule to that Act was different from Rule 3 of the 1964 Act. The court pointed out that Rule 3 of the 1964 Act was specifically worded to prevent double benefits from the same reserves.

The assessee's counsel argued that the issuance of equity shares on December 16, 1968, should be considered an increase in capital under Rule 1, which would then allow the capitalization of reserves to be included under Rule 3. However, the court rejected this argument, stating that the increase in capital computation should be based on the actual increase in capital as computed under Rule 1, not on reallocations within the capital.

The court concluded that the Tribunal was incorrect in holding that the capital of the company as computed under Rule 1 could be increased by the proportionate amount of the increase in paid-up share capital that took place on September 12, 1968. The court emphasized that the relief available under Rule 3 is limited to the actual increase in capital as computed under Rule 1.

Conclusion:
The court answered the question in the negative, stating that the Tribunal was not correct in holding that the capital of the company as computed under Rule 1 could be increased by the increase in paid-up share capital which took place on September 12, 1968. The Commissioner of Surtax succeeded in the reference and was entitled to the costs of the reference.