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TMI Blog1993 (3) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Officer to increase the assessee company's capital by the amount of the dividend declared in an annual general meeting held later than the first day of the 'previous year' ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the investment on shares shown by the assessee-company at Rs. 15,41,825 was includible in the computation of its capital and that no deduction could be made under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act ? 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in not deciding whether the amount of the bonus shares issued by the assessee-company out of its reserves was a free reserve, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayed for restoration of the Surtax Officer's own order ? 2. Whether the Tribunal erred in holding that in respect of the bonus shares issued by the applicant, the provisions of rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, were not applicable and that accordingly, the capital as computed in accordance with rule I of the said Schedule was not liable to be increased under the said rule 3?" The assessment years involved in this reference are 1971-72 to 1973-74 for which the previous years ended on October 31, 1970, October 31, 1971, and October 31, 1972, respectively. Questions Nos. 3 and 4 are at the instance of the Revenue and both the questions raised by the assessee, however, pertain only to the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in so far as such cost exceeds the aggregate of (i) moneys borrowed (other than those specified in the rule) and remaining outstanding, and (ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under rule 1. The amounts in question in the present case were by way of investment in shares in certain Indian companies. By virtue of rule 1(viii) of the First Schedule to the said Act, income by way of dividends from such shares is to be excluded while computing chargeable profits. Hence, under rule 2 of the Second Schedule, such investment is to be excluded from the capital base of the company. However, as per rule 2, such exclusion or diminution is confined to the extent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question No. 2, which is raised at the instance of the Revenue is answered in the affirmative and in favour of the assessee. As far as questions Nos. 3 and 4 raised at the instance of the Revenue and question No. 2 raised at the instance of the assessee are concerned, the relevant facts are as follows These questions pertain to the assessment year 1971-72 only. The accounting period of the assessee ended on October 31, 1970. On February 27, 1970, the assessee-company issued bonus shares of the value of Rs. 8 lakhs out of its general reserves, with the result that the paid-up share capital of the assessee-company increased by Rs. 8 lakhs with a corresponding reduction of Rs. 8 lakhs in its general reserves. Under rule 3 of the Second S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Tribunal, by its common judgment, held that rule 3 had no application to a situation such as the present one where capital in the form of general reserve was converted to company's shares. In such a situation, there was no increase or decrease in the capital of the company as computed under the Companies (Profits) Surtax Act, 1964. Hence, rule 3 was not attracted. As a result, the sum of Rs. 8 lakhs continues to form part of the general reserves on the first day of the relevant previous year while no addition is required to be made under rule 3. The findings of the Tribunal are now supported by a decision of the Division Bench of this court in the case of CIT v. Century Spg. and Mfg. Co. Ltd. [1978] 111 ITR 6. In the case before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment before the Tribunal. Secondly, it would not be correct to say that the question of application of rule 3 did not arise in the present case. Both the deduction of Rs. 8 lakhs from the general reserves and the addition of the proportionate value of bonus shares are inter connected and both are directly connected with the application of rule 3. The Tribunal has, in terms, dealt with the application of rule 3, because the question before the Tribunal related to the deduction of Rs. 8 lakhs from the value of the general reserves as also the addition of the proportionate value of the bonus shares issued during the course of the previous year. This is, therefore, not a case where the Tribunal has dealt with the interpretation of a sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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