Case Law Companies Act Commissioner of Income Tax West Bengal Vs Allahabad Bank Ltd

PETITIONER:
COMMISSIONER OF INCOME-TAX, WEST BENGAL

Vs.

RESPONDENT:
ALLAHABAD BANK LIMITED

DATE OF JUDGMENT:
14/02/1969

BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
RAMASWAMI, V.
GROVER, A.N.

CITATION:
1969 AIR 1058 1969 SCR (3) 722
1969 SCC (2) 148
ACT:
Finance Acts, 1956 and 1957-Explanation to Paragraph D of
Part II-Definition of ‘share premium account’ whether such
account liable to be included in the paid-up-capital for
computing rebate of super tax–It to qualify for inclusion
It is sufficient if it is an identifiable separate account
within the reserves–Companies Act, 1956, s. 78 (3) r.w.s.
78(1)–Effect of.

 

HEADNOTE:
In proceedings for assessment to tax for each of the
assessment years 1956-57 and 1957-58, the Income Tax Officer
reduced the rebate in supertax admissible to the respondent
under the Finance Acts of 1956 and 1957 on the view that the
respondent bank, which was a public limited company, had
distributed dividends exceeding 6% of its paid-up-capital.
In reducing the rebate the Income Tax Officer excluded an
amount representing share premium received by the company.
The Appellate Assistant Commissioner held that the company’s
share premium was liable to be added to its capital in
computing the reduction in the rebate in super-tax and
directed modification of the order of assessment. The
Appellate Tribunal in appeal, as well as the High Court, on
a reference, agreed with this view.
In the appeal to this Court, it was contended on behalf of
the appellant that the amount representing share premium was
not to be added to the share capital because (1) the
expression “share premium account” in the definition of
“paid-up capital” in the Explanation to Paragraph D of Part
II of the Finance Acts of 1956 and 1957 means an account
apart from the reserves maintained by the company; and (2)
in view of the provisions of s. 78 (3) read with s. 78(1) of
the Companies Act, 1956, the respondent company was bound to
maintain a separate share premium account outside the
reserves and to transfer the share premium into that account
which the respondent company had failed to do.
HELD : A 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. But the Explanation
to paragraph D of Part 11 of the Finance Acts of 1956 and
1957 does not contemplate that the account must be kept
apart from the reserves. if within the reserves it is an
identifiable separate account, the share premium will
qualify for inclusion in the paid-up capital. [728-H]
Although under the Companies Act 1 of 1956 there was an
express provision that the share premium account shall be
maintained in a separate account and by virtue of Sch. VI
of the Act the share premium has to be shown in the balance
sheet under the head “Liabilities” as part of the share
capital and not of reserves, on that account it cannot be
assumed that if the share premium is maintained as a
separate account within the reserves, reduction in the
rebate in super-tax is liable to be computed after excluding
share premium. [728 C]
In any event with respect to the assessment year 1956-57 the
company was being assessed to tax for the previous year of
the company ending on
723
December, 1955, when the Companies Act of 1956 was not in
force. During that period the company was governed by Act 7
of 1913 which contained no provision analogous to s. 78 of
the 1956 Act. 1727 C-D]

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 701 and 702
of 1968.
Appeals from the judgments and orders dated December 17,
1963 and April 6, 1965 of the Calcutta High Court in Income-
tax References Nos. 87 of 1960 and 30 of 1962 respectively.
S.T. Desai, S. C. Manchanda and B. D. Sharma, for the
appellants (in both the appeals).
Sachin Chaudhuri, Sukumar Mitra and D. N. Mukherjee,. for
the respondent (in both the appeals).
The Judgment of the Court was delivered by
Shah, J. The Allahabad Bank Ltd. is a public limited com-
pany. The paid-up share capital of the Company other than
capital entitled to a dividend at a fixed rate was at the
relevant time Rs. 30,50,000 The Company had issued before
January 1, 1954, shares at premium and the premium received
in cash aggregated to Rs. 45,50,000. In each of the account
years 1955 and 1956 the Company distributed Rs. 5,49,000 as
dividend.
In proceedings for assessment for each of the assessment
years 1956-57 and 1957-58 the Income-tax Officer reduced by
Rs. 61,000 the rebate in super-tax admissible under the
Finance Acts 1956 on the view that the Company had
distributed dividend exceeding 6% of its paid-up capital.
In reducing the rebate the Income-tax Officer did not take
into consideration share premium amounting to Rs. 45,50,000
received by the Company.
The Appellate Assistant Commissioner held that the Company’s
share premium was liable to be added to the capital of Rs.
30,50,000 in computing the reduction in the rebate in super-
tax, and directed modification of the order of assessment.
The Appellate Tribunal agreed with the Appellate Assistant
Commissioner.
The Tribunal then submitted a statement of the case and sub-
mitted the following question in respect of the year 1956-57
to the High Court of Calcutta :
“Whether on the facts and in the circumstances
of the case, the amount of Rs. 45,50,000
should be added to the paid-up capital of the
assessee as on 1st January, 1955, for the
purpose of allowing rebate to the ass under
Paragraph D of Part III of the First Schedule
to the Indian Finance Act, 1956.”
A similar question relating to the assessment year 1957-58
was, also referred by the Tribunal. The High Court of
Calcutta agreed
724
with the Tribunal and held that in determining the reduction
in rebate in super-tax admissible to the Company the share
premium maintained by the Company within the reserves was
liable to be included in the paid-up capital.
The Finance Act, 1956 prescribed the rate of super-tax in
Part H. Paragraph D (in so far as it is relevant) enacted:
“In the case of every company-
Rate
On the whole of total income Six annas and
nine pies in the rupee.
Provided that
(i) a rebate at the rate of five annas per
rupee of the total income shall be allowed in
the case of any company which-
(a) in respect of its profits liable to tax
under the Income-tax Act for the year ending
on the 31st day of March, 1957, has made the
prescribed arrangements for the declaration
and payment within the territory of India of
the dividends payable out of such profits and
for the deduction of supertax from dividends
in accordance with the provisions of
subsection (3D) of section 18 of that Act, and
(b)
(ii) a rebate at the rate of four annas per
rupee of the total income shall be allowed in
the case of any Company which satisfied
condition (a.) but not condition (b) of the
preceding clause;
Provided further that-
(i) the amount of the rebate under clause
(i) or the preceding proviso shall be reduced
by the sum, if any, equal to the amount or the
aggregate of the amounts as the case may be,
computed as hereunder
(a)
(b) in addition, in the case of a company
referred to in clause (ii) of the preceding
proviso which has distributed to its share-
holders during the previous year “dividends in
excess of six per cent of its paid-up
725
capital, not being dividends payable at a
fixed rate-
on that part of the said dividends which
exceeds 6 per cent but does not exceed 10 per
cent of the paid-up capital;
at the rate of two annas per rupee
on that part of the said dividends which
exceeds 10 per cent of the paid-up capital;
at the rate of three annas per rupee;
(ii)
Provided further that
Explanation :-For the Purposes of Paragraph D
of this Part-
(i) the expression “paid-up capital” means
the paid-up capital (other than capital
entitled to a dividend at a fixed rate) of the
Company as on first day of the previous year
relevant to the assessment for the year ending
on 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………”
In the Finance Act of 1957 also a similar
scheme of granting rebate of super-tax and
reduction therein in the conditions set out in
the Act, was adopted.
The reduction in rebate in super-tax depended
upon the proportion which the dividend
distributed bore to the paid-up capital. If
the Company distributed dividends exceeding 6%
of its paid-up capital as defined in the
explanation, the rebate was liable to be
reduced to the extent provided in the second
proviso. In the relevant years of account,
the share premium formed an identifiable part
of the reserves of the Company but was not
shown in a separate share premium account
apart from the reserves.
The Commissioner contends
(1) that the expression “share premium
account” in the definition of “paid-up
capital” in the Explanation to Paragraph D of
Part 11 of the Finance Acts 1956 and 1957
means an account apart from the reserves main-
tained by the Company; and
(2) that in any event since the enactment of
the Companies Act, 1956 “share premium” not
maintainable as a separate account cannot be
taken into consideration
726
in dealing with the claim for rebate in the
payment of super-tax and reduction in the
rate thereof.
Counsel for the Commissioner relied upon s.
78(3) read with s. 78(1) of the Companies Act
1 of 1956, and submitted that the Company was
bound to maintain a separate share premium
account outside the reserves and transfer into
that account the share premium and since the
Company failed to do so, in determining the
paid-up capital within the meaning of the
Explanation to Paragraph D of the Finance Acts
1956 and 1957 the share premium within the
reserve could not be taken into account. The
relevant clauses of s. 78 of the Companies Act
1 of 1956 provide :-
“(1) Where a company issues shares at a
premium, whether for cash or otherwise, a sum
equal to the aggregate amount or value of the
premiums on those shares shall be transferred
to an account, to be called “the share premium
account”; and the provisions of this Act
relating to the reduction of the share capital
of a company shall, except as provided in this
section, apply as if the share premium account
were paid-up share capital of the Company. (2)
(3) Where a company has passed a resolution
authorising the issue of any shares at a
premium, this section shall apply as if the,
shares had been issued after the commencement
of this Act :
Provided that any part of the premiums which
has been so applied that it does not at the
commencement of this Act form an identifiable
part of the company’s reserves within the
meaning of Schedule VI, shall be disregarded
in determining the sum to be included in the
share premium account.”
Clause (1) is in terms prospective : it requires a Company
to transfer premiums received in cash or otherwise on shares
to the share premium’ account. By clause (3) any premium
received prior to the coming into force of the Companies
Act, 1956 less ‘that part of the premium which had been so
applied so that it did not, at the commencement of the Act,
form an identifiable part of the Company’s reserves, had
also to be transferred to the .hare premium account as if
the shares had been issued after the commencement of the
Act. Section 78 was apparently borrowed from s. 56 of the
English Companies 1948 (11 & 12 Geo. 6 ch. 38.) Before the
Companies Act of 1956 there was provision in the Indian Com-
727
panies Act 1913 which required a Company to maintain a
separate share premium account. After the coming into force
of the Companies Act 1 of 1956 a share premium account had
to be maintained and the share premium could not be used
otherwise than for the specific purposes mentioned in s. 78
(2).
The plea raised by the Commissioner that the Company failed
to comply with the statutory injunction contained in Cl.
(1) of s. 78 and on that account the premium received were
not “standing to the credit of the share premium accounts
within the meaning of the Explanation to Paragraph D in the
Finance Act 1956 may be rejected on a simple ground.
In the assessment year 1956-57 the Company was being asses-
sed to tax in respect of the previous year of the Company
ending on December 31, 1955. In the calendar year 1955, the
company was governed by the Indian Companies Act 7 of 1913
which contained no provision analogous to s. 78 of the
Companies Act 1 of 1956. The Companies Act was before the
Parliament during the year 1955, but the Company was on that
account not obliged to transfer to a separate share premium
account independent of the reserve the premiums received
prior to January 1, 1955. The Companies Act came into force
on April 1, 1956 : it had no retrospective operation. Since
there was no obligation upon the Company to maintain a
separate share premium account in the previous year
corresponding to the assessment year 1956-57 the share
premium account maintained as an identifiable account within
the reserves qualified for being included in the paid up
capital within the meaning of this expression in the
Explanation to Paragraph D Part II of the Finance Act, 1956.
For the assessment year 1956-57, therefore rebate in uper-
tax was liable to be reduced, if the Company had distributed
dividend exceeding six per cent of the paid-up capital
inclusive of share premiums maintained as an identifiable
account. The contention raised by the Commissioner must
therefore fail in respect of the assessment year 1956-57.
Counsel for the Commissioner contends that in any event in
the Finance Act 2 of 1957 the expression “share premium
account has only the meaning ascribed thereto in the
Companies Act, 1956, and in respect of the assessment year
1957-58, reduction in the rebate must be computed without
taking into account the share premium which was maintained
by the Company in the year of account 1956 within the
reserve.
Under the Finance Act 2 of 1957 rebate in super-tax is
liable to be reduced in the case of Companies which have,
inter alia, distributed to the shareholders in the previous
year dividends in excess of 6 per cent of the paid-up
capital not being dividend payable at
728
a fixed rate. The expression “paid-up capital” is also
defined in substantially the same terms as under the Finance
Act, 1956.
For the assessment year 1957-58 the Tribunal found that the
share premium was liable to be included in the paid-up
capital, because it was an identifiable part of the
reserves. In our judgment the Tribunal was right in so
holding. The Explanation to Paragraph D Part H of the
Finance Act, 1957, does not require that the share premium
account must be maintained as an account outside the
reserves. Under the Companies Act 1 of 1956 there was an
express provision that the share premium account shall be
maintained in a separate account. It is true that in the
balance-sheet in Sch. VI of the Act the share premium has
to be shown under the head “Liabilities” as part of the
share capital and not of reserves. But it cannot be assumed
on that account that if the share premium is maintained as
a separate account within the reserves, reduction in the
rebate in super-tax is liable to be computed after excluding
share premium. The Explanation requires that in determining
the paid-up capital for the purpose of rebate in super-tax,
share premium standing to the credit of a share premium
account shall be excluded it does not make maintenance of an
account outside the reserve acondition of its inclusion in
the paid-up capital.
Again if under the Finance Act, 1956, the expression
“standing to the credit of the share premium account” did
not mean that the share premiums shall be maintained in a
separate account apart from the reserve, is there any
reason why, under an identical scheme of reducing rebate in
super-tax in the year 1957-58, it should have a different
meaning ? In the absence of any compelling grounds, we would
not be justified in holding that the Parliament attributed
to the expression “standing to the credit of the share
premium account” as used in the Explanation to Paragraph D
Part 11 of the Finance Act 2 of 1957, a meaning different
from the one which it had under the Finance Act, 1956. The
object of the Parliament in enacting Paragraph D of the
Finance Act was that profits earned by a Company should be
available for being ploughed back into the business and
should not be distributed to the shareholders by way of
dividend in excess of the rate prescribed. To secure that
object the Parliament gave an incentive to ‘the Company of
substantial rebate in payment of super-tax which would be
liable to be forfeited, if part of dividend exceeding 6 per
cent was distributed to the share-holders.
Share premium account is accordingly liable to be included
in the paid-up capital for the purpose of computing rebate
if it is maintained as a separate account. The Explanation
does not contemplate that the account must be kept apart
from the reserves. If within the reserves it is an
identifiable separate account, the
729
share premium will qualify for inclusion in the paid-up
capital. in computing the reduction in rebate of super-tax.
The appeals fail and are dismissed with costs. One hearing
fee.
R.K.P.S. Appeals dismissed..
730

 

 

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