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Interpretation of rule 2 of the Second Schedule to the Super Profits Tax Act, 1963 regarding the entitlement to a proportional increase in capital due to the issue of bonus shares. Analysis: The case involved a question referred to the High Court by the Tribunal regarding the assessee's entitlement to a proportional increase of Rs. 2,14,795 in accordance with rule 2 of the Second Schedule to the Super Profits Tax Act, 1963. The dispute arose from the computation of the capital of the assessee-company, where the paid-up share capital was increased by issuing bonus shares from the general reserve. The Income-tax Officer initially rejected the claim for a proportional increase, stating that the full amount from the reserves had already been included in the capital computation under rule 1. Upon appeal, the Appellate Assistant Commissioner also denied the claim, asserting that rule 2 was intended to apply only when there was an increase in paid-up capital resulting in additional working capital. However, the Tribunal disagreed with this interpretation and ruled in favor of the assessee, emphasizing that rule 2 did not specify that amounts already included in the capital computation under rule 1 should not be considered for the proportional increase. The Tribunal highlighted that the rule applied whenever there was an increase in paid-up share capital, regardless of the source. In the High Court, the revenue contended that the objective of the legislation was to provide a reasonable return on the capital actually employed in the business, and therefore, the assessee should not be entitled to the proportional increase. However, the court analyzed the language of rule 2 and compared it to a similar rule under a different Act, noting a crucial difference in wording. The court held that under the specific language of rule 2, an increase in paid-up share capital, even from bonus shares, warranted a proportional increase. The court cited a decision by the Himachal Pradesh High Court supporting this interpretation, emphasizing that the issue of bonus shares inherently led to an increase in paid-up share capital. Ultimately, the High Court ruled in favor of the assessee, stating that the paid-up share capital should be considered as increased due to the issuance of bonus shares, entitling the assessee to the proportional increase as claimed under rule 2. The court answered the question in the affirmative, in favor of the assessee, and directed the department to bear the costs.
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