1968 (1) TMI 20 - HC - Income Tax

Assessee-bank - share premium received - inclusion in its paid-up capital within the meaning of Expln. (i) to Paragraph D of Part II of the First Schedule to the Finance Acts of 1956 1957 and 1958 for the purpose of calculating the amounts of excess dividends on which super-tax rebates were to be withdrawn

Issues Involved:
1. Construction of Explanation (i) to Paragraph D of Part II of the First Schedule to the Finance Acts of 1956, 1957, and 1958.
2. Inclusion of share premiums in the paid-up capital for super-tax rebate purposes.
3. Interpretation of statutory provisions in the context of taxation law.

Issue-Wise Detailed Analysis:

1. Construction of Explanation (i) to Paragraph D of Part II of the First Schedule to the Finance Acts of 1956, 1957, and 1958:
The court was tasked with interpreting the definition of "paid-up capital" as provided in Explanation (i) to Paragraph D of Part II of the First Schedule to the Finance Acts of 1956, 1957, and 1958. This definition includes "the paid-up capital (other than capital entitled to a dividend at a fixed rate) of the company as on the first day of the previous year relevant to the assessment for the year ending on the 31st day of March, 1957, increased by any premiums received in cash by the company on the issue of its shares, standing to the credit of the share premium account as on the first day of the previous year aforesaid."

The court examined three possible interpretations of the phrase "standing to the credit of the share premium account":
1. The share premiums should be credited to a specifically labeled "share premium account."
2. The share premiums should be credited to a separate account, regardless of its label.
3. The share premiums may be credited to any account, provided they are identifiable and remain credited in that account.

The court rejected the first interpretation as too technical and preferred a more substantive approach. The court also dismissed the argument that section 29 of the Banking Companies Act of 1949 prevented the maintenance of a separate share premium account in the books of account, even if not shown in the balance-sheet.

2. Inclusion of Share Premiums in the Paid-Up Capital for Super-Tax Rebate Purposes:
The applicant-bank argued that the share premiums, although not credited to a separate share premium account, should still be included in the paid-up capital for the purpose of calculating super-tax rebates. The Commissioner of Income-tax and the Income-tax Appellate Tribunal had previously ruled against this inclusion, stating that the share premiums had merged into the reserve fund and lost their separate identity.

The court, however, accepted the third interpretation of the phrase "standing to the credit of the share premium account," which allowed for the inclusion of share premiums in the paid-up capital as long as they were identifiable within another account. The court emphasized that the statutory provision's object was to prevent companies from using shareholders' money to pay excessive dividends, and this objective would be met as long as the share premiums were identifiable, regardless of the specific account label.

3. Interpretation of Statutory Provisions in the Context of Taxation Law:
The court discussed the principles of statutory interpretation applicable to taxation laws, particularly the granting of rebates and exemptions. It cited the principle that a liberal construction should be applied in favor of the taxpayer when interpreting provisions related to tax relief, as long as it does not do violence to the statutory language.

The court referenced the Supreme Court's judgment in Sheikh Gulfan v. Sanat Kumar, which emphasized that statutory words should be construed in their ordinary meaning but also in the context of the statute's subject matter and policy. The court further supported its interpretation by referring to the decision of the Calcutta High Court in Commissioner of Income-tax v. Allahabad Bank Ltd., which had similar facts and reached a conclusion favoring the inclusion of share premiums in the paid-up capital for super-tax rebate purposes.

Conclusion:
The court concluded that the applicant-bank was entitled to include the amounts of share premiums in its paid-up capital for calculating super-tax rebates under the Finance Acts of 1956, 1957, and 1958. The court answered the reference question in the affirmative and awarded costs to the applicant-bank.

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