1976 (8) TMI 28 - HC - Income Tax

Bonus Shares Capital Of Company Computation Of Capital General Reserve Income Tax Act Total Income

Issues Involved:
1. Inclusion of Dividend Equalisation Reserve in capital computation.
2. Treatment of proposed dividend on preference shares as a liability.
3. Treatment of provision for taxation in excess and provision for gratuity as reserves.
4. Inclusion of bonus shares issued out of the general reserve in capital computation.
5. Applicability of rule 4 of the Second Schedule to the Surtax Act, 1964, concerning income not includible in total income.

Detailed Analysis:

1. Inclusion of Dividend Equalisation Reserve in Capital Computation:
The Tribunal had to decide whether the entire Dividend Equalisation Reserve amounting to Rs. 83,01,416 should be included in the capital computation without deducting the amount of dividend paid out of such reserve. On January 1, 1966, the dividend equalisation reserve stood at Rs. 46,89,816. An additional Rs. 36,11,600 was transferred to this reserve from the profits of the year ending December 31, 1965, making the total Rs. 83,01,416. Following the decision in Commissioner of Income-tax v. Geoffrey Manners & Co. Ltd., only Rs. 46,89,816 should be included in the capital computation. Thus, the answer to question No. 1 is that Rs. 46,89,816 out of the Dividend Equalisation Reserve should be included in the capital computation.

2. Treatment of Proposed Dividend on Preference Shares as a Liability:
The Tribunal had to determine if the proposed dividend on preference shares amounting to Rs. 12,85,500 should be excluded from the capital base for statutory deduction under the Companies (Profits) Surtax Act, 1964. Referring to the decision in Shree Ram Mills Ltd. v. Commissioner of Income-tax, the court held that the proposed dividend should not be included in the capital computation. Therefore, the answer to question No. 2 is in the negative, favoring the revenue.

3. Treatment of Provision for Taxation in Excess and Provision for Gratuity as Reserves:
The Tribunal had to decide if the provision for taxation in excess of the liability finally determined and the provision for gratuity of Rs. 99,294 should be treated as reserves for inclusion in the capital computation. The court affirmed that the provision for taxation in excess should be included in the capital computation. Similarly, the provision for gratuity should be treated as a reserve since there was no approved scheme or actuarial basis for it. Thus, the answer to question No. 3 is affirmative for both parts.

4. Inclusion of Bonus Shares Issued Out of the General Reserve in Capital Computation:
The Tribunal had to determine if the capital should be increased by the amount of bonus shares issued out of the general reserve. As of January 1, 1966, the general reserve was Rs. 3,08,06,716. The directors recommended capitalizing Rs. 25,49,100 from this reserve to issue bonus shares, increasing the paid-up equity capital. The Surtax Officer initially rejected the inclusion of this amount in the capital base, but the Appellate Assistant Commissioner and the Tribunal disagreed. The Tribunal held that rule 3 of the Second Schedule allows for a proportionate increase in capital computation without reducing the general reserve. However, the court concluded that capitalizing a part of the general reserve by issuing bonus shares does not increase the capital computed under rule 1. Therefore, the answer to question No. 4 is in the negative.

5. Applicability of Rule 4 of the Second Schedule to the Surtax Act, 1964:
The Tribunal had to decide if rule 4 applies to income not included in the total income due to deductions under section 84/80J of the Income-tax Act, 1961. The court clarified that rule 4 applies only to income not includible in total income under Chapter III of the Income-tax Act, not to deductions under Chapter VI-A. The assessee had obtained relief under section 84, which deals with income forming part of total income on which no tax is payable. Therefore, the provisions of rule 4 are not attracted. The answer to question No. 5, as modified, is in the affirmative, favoring the assessee.

Conclusion:
The court answered the questions as follows:
1. Rs. 46,89,816 out of the Dividend Equalisation Reserve should be included in the capital computation.
2. The proposed dividend on preference shares should not be included in the capital computation.
3. Provisions for taxation in excess and for gratuity should be treated as reserves for inclusion in the capital computation.
4. The capital should not be increased by the amount of bonus shares issued out of the general reserve.
5. Rule 4 applies only to income not includible in total income under Chapter III, not to deductions under section 84/80J.

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