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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

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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

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             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

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             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

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             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.

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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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