1978 (7) TMI 103 - HC - Income Tax

Capital For Purposes, Capital For Surtax, Capital Of Company, Companies Profits Surtax, Computation Of Capital, Surtax Assessment

Summary

Issues:
Interpretation of statutory provisions regarding capital base for levy of surtax under the Companies (Profits) Surtax Act, 1964 based on funds received by a company from the Government for expansion.

Analysis:
The judgment by the High Court of Kerala involved a limited company owned by the Government of Kerala seeking financial assistance for capacity expansion. The Government of Kerala allocated funds under "Capital Outlay" and "Loans and Advances" in the budget for the years 1969-70 and 1970-71. The company requested disbursement of funds, which was sanctioned with the condition of paying interest towards share capital till allotment of shares. The issue revolved around treating the received funds as part of the share capital for surtax calculation purposes.

The Tribunal held that the funds received were not a loan but were advanced for share allotment, thus not qualifying as paid-up or borrowed capital. The Court agreed with the Tribunal's decision, emphasizing that the funds were for share allotment without an obligation to repay or pay interest. The statutory provisions of the Companies (Profits) Surtax Act, 1964 were considered, particularly Section 4 charging tax on chargeable profits exceeding the statutory deduction. The statutory deduction included a percentage of the company's capital, as defined in the Second Schedule.

Additionally, the Court referred to sub-rule (v) of rule I of Schedule II, which defined the capital of a company to include borrowed moneys for creating a capital asset with a repayment period of at least seven years. The Court noted that the funds in question were used for share allotment by the company within the stipulated period. The question of law posed was whether the funds constituted borrowed monies under the Act. The Court upheld the Tribunal's decision, ruling in favor of the revenue authority and against the assessee, concluding that the funds did not qualify as borrowed capital under the Act.

In conclusion, the High Court's judgment clarified the treatment of funds received from the Government for share allotment in the context of surtax calculation. The decision underscored the distinction between borrowed capital and funds advanced for share allotment, aligning with the statutory provisions of the Companies (Profits) Surtax Act, 1964. The judgment provided a detailed analysis of the regulatory framework and factual circumstances, ultimately upholding the revenue authority's position on the issue.