1969 (2) TMI 5 - SC - Income Tax

Share premium account is liable to be included in the paid-up capital for the purpose of computing rebate if it is maintained as a separate account - Revenue appeal dismissed

Summary

Issues:
1. Interpretation of the term "share premium account" in the context of determining paid-up capital for rebate in super-tax under the Finance Acts of 1956 and 1957.
2. Compliance with the provisions of section 78 of the Companies Act, 1956 regarding the maintenance of a separate share premium account.
3. Applicability of the Companies Act, 1956 provisions on share premium account to the assessment years 1956-57 and 1957-58.

Analysis:

The judgment by the Supreme Court involved a case concerning the interpretation of the term "share premium account" in the context of calculating the paid-up capital for determining the rebate in super-tax under the Finance Acts of 1956 and 1957. The case revolved around whether the share premium maintained within the reserves should be included in the paid-up capital for the purpose of computing the reduction in rebate in super-tax. The Commissioner contended that the company failed to comply with the statutory requirement of maintaining a separate share premium account outside the reserves, as per section 78 of the Companies Act, 1956. However, the Court rejected this argument, emphasizing that the obligation to maintain a separate share premium account did not exist under the Indian Companies Act, 1913, which was applicable during the relevant assessment year of 1956-57.

Moreover, the Court highlighted that the Companies Act, 1956, which introduced the requirement for a separate share premium account, came into force after the relevant assessment year. Therefore, the share premium maintained as an identifiable part of the reserves qualified for inclusion in the paid-up capital as defined in the Explanation to Paragraph D of the Finance Act, 1956. Consequently, for the assessment year 1956-57, the rebate in super-tax was deemed liable to be reduced if the company distributed dividends exceeding six per cent of the paid-up capital, inclusive of share premiums maintained as an identifiable account.

In the subsequent assessment year of 1957-58, the Court reiterated that the share premium should be included in the paid-up capital for calculating the reduction in rebate in super-tax, as long as it was an identifiable part of the reserves. The Court emphasized that the Finance Act, 1957, did not mandate the maintenance of a separate share premium account outside the reserves for inclusion in the paid-up capital calculation. The Court reasoned that the objective of Parliament in enacting rebate provisions was to encourage companies to reinvest profits and not distribute excessive dividends to shareholders.

Therefore, the Court concluded that the share premium account, if maintained as an identifiable separate account within the reserves, should be included in the paid-up capital for computing the reduction in rebate of super-tax. The appeals were dismissed, affirming the inclusion of share premium in the paid-up capital calculation for rebate purposes under the Finance Acts of 1956 and 1957.