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TMI Blog1981 (2) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... pear from the annexure to the assessment order which has been omitted from the paper books, but a copy of it has been supplied to us by the counsel for the assessee. That the company is entitled to a statutory deduction in respect of the above items of paid up capital and reserves is not in doubt. However, during the accounting year, namely, on 12th September, 1968, the assessee-company capitalized a part of the amounts standing to the credit of the general reserves account. The capitalization was to the extent of Rs. 13,77,850 by the allotment of 1,37,785 shares of Rs. 10 each to the company's shareholders. The company, relying on r. 3 of the Second Schedule to the 1964 Act, contended that in respect of this increase in the paid up capital of the company, it was entitled to the paid up capital and reserves calculated as on 1st January, 1968, being stepped up proportionately to the extent of Rs. 4,19,018. The ITO did not accept this plea but both the AAC and the Appellate Tribunal upheld the assessee's claim relying on a decision of the Bombay Bench of the Tribunal in the case of ITO v. Swan Mills Ltd., a case decided under the Super Profits Tax Act, 1963. At the instance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India ........" Reading the two rules together, the purport thereof is quite clear. company is charged to surtax in respect of its chargeable profit of the previous year in so far as they exceed the statutory deduction. The statutory deduction is a percentage of the capital of the company. The capital of the company is calculated in the first instance as it stood on the first day of the previous year. The capital of a company as computed under r. 1 includes the paid-up capital of the company, its development rebate reserve, its other reserves not allowed as deductions for income-tax purposes, the debentures issued by the company, if any, and the moneys borrowed by the company from certain sources indicated in cl. (v). It is possible that in the course of the previous year the capital of the company might have been increased as a result of the increase in the paid up capital or on account of the company raising more money by way of debentures or borrowings indicated in cl. (v). The Legislature, therefore, considered that in respect of such an increase in capital during the previous year, the assessee should also be, entitled to the statutory deduction being stepped up proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for capital computation purposes under r. 1. It would appear that r. 3 of the Second Schedule to the 1964 Act has been worded to get out of this situation in which the assessee could get a benefit twice over. The language of r. 3 is clearly different. It contemplates an increase in the capital computation only where there is an increase in the capital of a company as computed in accordance with the earlier rules, that is to say, an increase in the capital of the company as computed in accordance with r. 1. In a case, where the paid up capital is increased, but this is done by utilising a portion of the reserves which have been taken into account in the capital computation as on the first day of the previous year then it is clear that the capital of the company as computed in accordance with r.1 has not increased at all. That being so, the assessee cannot invoke the aid of r. 3 to increase the capital computation proportionately to the increase in the paid up capital. This indeed, appears to be very clear from the language of r. 3 and, as pointed out by the learned counsel for the revenue, it has been so held by the Bombay High Court in the case of CIT v. Century Spg. and Mfg. Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We agree with the learned counsel that unless there is an increase in the capital as already computed under r. 1, r. 3 will not come into operation. But we are unable to agree with the second step suggested by the learned counsel. The closing words of the rule make it clear that in any case where there is an increase in the capital as contemplated by the opening words, the increase available to the assessee will be a proportionate part of " that amount. The words " that amount " clearly refer to the words " any amount " referred to in the opening part of the rule. In other words, it is only to the extent of surplus or excess over the capital as computed at the beginning of the previous year that the assessee gets the relief as envisaged in r. 3. That it has already got in respect of the share issue on December 16, 1968. On a plain reading of r. 3, it is clear that the assessee cannot claim any stepping up of the capital computation in respect of an amount which is already included in the capital computation as on the first day of the previous year. Much emphasis was placed by the learned counsel on the middle portion of the rule in which reference is made to the increase in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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