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PETITIONER: M/S. SUNDARAM CLAYTON LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT:       02/05/1996

BENCH: RAY, G.N. (J) BENCH: RAY, G.N. (J) HANSARIA B.L. (J)

CITATION:  JT 1996 (5)   348        1996 SCALE  (4)246

ACT:

HEADNOTE:

JUDGMENT:               (With Civil Appeal No. 1705/88)                       J U D G M E N T G.N. Ray, J.      Civil Appeal  Nos. 1360-61 of 1981 are directed against judgment dated October 21, 1981 passed by the Division Bench of Madras  High Court  in Tax  Case  Nos.  743-744  of  1977 arising out  of Reference Nos. 495-496 of 1977. Civil Appeal No. 1705 of 1980 is directed against judgment dated November 12, 1986  passed by  the Division Bench of Madras High Court in Tax  Case Petition No. 367 of 1986. It may be stated here that the  Tax Case  Petition No. 367 of 1986 was disposed of by the  High Court  following its  judgment  passed  by  the Madras High Court in the said Tax Case Nos. 743-744 of 1977. It will,  therefore, be appropriate to refer to the relevant facts relating  to Tax  Case Nos. 743-744 of 1977 which were disposed of by the Madras High court on October 21, 1981.      Tax  Case  Nos.  743-744  of  1977  arose  out  of  the reference made  under Section 286 (1) of the Income Tax Act, 1961. The  reference before  the High  Court raised  a short question about  the computation  of capital  under Rule 3 of the Schedule II of the Companies (Profits) Surtax Act, 1964. The origin  of the  Companies (Profits) Surtax Act, 1964 may be traced  back to  the Surtax  Act, 1940, which was enacted for the  purpose of moping up unreasonable and extra profits earned in  the business  during the  second world war. Later on, Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act,  1964, were  enacted for  similar  purpose.  The rationale behind  these Acts  is that  any profit  over  and above the  reasonable profit  expected in the commercial and productive activities would be taxed at a special rate.      It will  be appropriate  to note the relevant facts for the purpose of appreciating the rival contention made before the Madras  High Court  and  also  at  the  hearing  of  the appeals. In  the assessment  year 1971-72,  corresponding to previous year  beginning from  August 1,  1996 and ending on July 31,  1970, the appellant-Company, M/s. Sundaram Clayton

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Ltd., issued  20400 bonus  shares of  the face  value of Rs. 100/-  each.   This  bonus   issue  was   brought  about  by capitalizing  part   of  the  Company  a  general  reserves. Accordingly, a  sum of  Rs. 20,40,000/-  was converted  into bonus shares.  The assessee-Company  claimed that  the  said amount of  Rs. 20,40,000/- which represented the bonus issue as on  February 23, 1970 became the basis for increase n the capital determined  at Rs. 1,43,462/- as on the first day of the previous year i.e. August 1, 1969. It was claimed by the Company that  the bonus  shares were in addition to the paid up capital  of the Company. Since any "increase" in the paid up capital  of the  Company was  to be properly reckoned for the purpose  of computation  of  capital  under  Rule  3  of Schedule II  of the  Companies (Profits)  Surtax  Act,  1964 (hereinafter referred  to  as  Surtax  Act,  1964),  it  was claimed that  the proportionate  amount, worked  out to  Rs. 8,84,237/-, must  be added  to the  capital as  on August 1, 1969 for the purpose of capital computation.      The Income  Tax Officer rejected the said contention of the assessee-Company,  out the Income Tax Appellate Tribunal accepted the  assessee a  case. A  reference was made by the taxing department  under Section  256(1) of  the Income  Tax Act, 1961  before the Madras High Court for answering, inter alia, the following question :-      "Whether on  the facts  and in  the      circumstances  of   the  case   and      having regard to Rule 3 of Schedule      II  of   the  Companies   (Profits)      Surtax Act,  1964 the share capital      of the  Company should be increased      proportionately on  account of  the      issue  of   bonus  shares  for  the      purpose of  computation of  capital      under   the   Companies   (Profits)      Surtax Act, 1964?"      The Madras  High Court held that when bonus shares were issued, the paid up capital of the Company increased, but so far as the column of liabilities in the balance sheet of the Company was  concerned, a sum equivalent to the value of the bonus shares  was curved out from the amount of reserves and placed in  the column  of paid  up capital of the Company on the side of liabilities in the balance sheet. The High Court held that  the process  of conversion of reserves into bonus shares did neither reduce the overall capital of the Company nor increase it. The overall capital of the Company remained the same  as in  the beginning of the financial year. It was held by  the High  Court that  what Rule 3 of Schedule II of the Surtax Act, 1964 contemplated was that the capital, a on the first  day of the previous year, get increased by way of an addition  to any part of the capital so computed, whether the increase  be t the paid up capital or to the reserves or to any  other items  figuring on the liabilities side of the balance sheet.  In order to attract Rule 3 of Schedule II of the Surtax Act, 1964.      The  High   Court  indicated   that  the  mere  act  of capitalizing a  part of the reserve and issuing bonus shares did not mean that there was any influx of additional capital into the  Company over the above what figured as the opening capital in  the  liabilities  side  of  the  balance  sheet, consisting of  the paid  up capital  and the reserves, among other things.  The High  Court, therefore,  held that  on  a commonsense understanding  of the  said rule and on a proper reading of  the various  entries in  the  Company’s  balance sheet, the  contention but  forward by  the assessee must be rejected as  untenable. The  High Court placed reliance on a

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decision of  the Bombay High Court in Commissioner of Income Tax Vs. Century Spinning and manufacturing Company Ltd. (101 ITR 6).  The High Court also noted the decision of the Delhi High Court  in Commissioner  of Surtax Vs. Food Specialities Ltd. (129  ITR 731)  which held that similar view. The Delhi High Court  in  the  said  decision  also  referred  to  the decision of the Bombay High Court in Century Spinning Mill’s case (supra).      On behalf of the assessee, however, reliance was placed on  a  decision  of  the  Himachal  Pradesh  High  Court  in Commissioner of  Income Tax  Vs. Mohan Meakin Breweries Ltd. (95 ITR  556). In  the said case interpretation of Rule 2 of Schedule  II   of  Super  Profits  Act,  1963  came  up  for consideration. It  was held  in the  said decision  that  an increase in  the paid  up capital  by the  simple process of capitalizing a  part of the existing reserves, would entitle the assessed  to claim for an increase in the computation of the capital under Rule 2 of Schedule II of the Super Profits Tax Act,  1963.  The  Madras  High  Court  in  the  impugned decision did  not agree  with the view taken by the Himachal Pradesh High  Court. The  Madras High  Court also  indicated that the  decision of  the Himachal  Pradesh High  Court was rendered on  a construction  and application  of Rule  2  of Schedule II  of  a  different  statute,  namely,  the  Super Profits Tax  Act, 1963. The Madras High Court indicated that eh language  of Rule  2 of  Super Profits  Tax Act, 1963 and Rule 3  of the  Surtax Act,  1964 was  not pari materia. The High Court  also indicated  that the  Bombay High  Court  in Century Spinning  Mill’s case (supra) noted that there was a distinction between  Rule 2 and Rule 3 of the said Acts, and such difference had a bearing on the computation of capital.      It may  be stated  here that  two other  questions were also referred to before the High Court in Tax case Nos. 743- 744 of  1977, and  the same were answered by indicating that these stood  answered by  the decisions  of  that  Court  in Southern Roadways  Vs. Commissioner  of Income  Tax (130 ITR 545) and  in  Additional  Commissioner  of  Income  Tax  Vs. Bimetal Bearings  Ltd. (110  ITR 131).  For the  purpose  of disposal of the appeals these questions answered by the High Court are not required to be considered and hence we are not doing so.      The question  as to  the computation  of the  income on account of  the issue  of bonus  shares was  answered by the High Court  in favour  of revenue  and against the assessee- Company by  holding that  the finding made by the Income Tax Appellate Tribunal  that by  issue of  bonus shares  in  the assessment year  in question  had resulted  in  increase  in capital asset of the Company within the meaning of Rule 3 of Schedule II  of the Surtax Act, 1964 was erroneous and could not be  sustained on  a correct  interpretation of  the said Rule. In  these appeals  such decision  of the  Madras  High Courts is under challenge.      Mrs. Janki  Ramachandran, the learned counsel appearing for  the  appellant-Company,  has  referred  to  Rule  2  of Schedule II of the Super Profits Tax Act, 1963 and Rule 3 of the Surtax  Act, 1964 and contended that both the rule being essentially similar  have same  legal incidence and the High Court erred  in proceeding on the footing that the incidence of Rule  2 of Super Profits Act, 1963 and Rule 3 of Schedule II of  Surtax Act, 1964 was different by placing reliance on the said  decisions of Bombay and Delhi High Courts. It will be appropriate  at this stage to refer to Rule 2 of Schedule II of Super Profits Tax Act, 1963 and Rule 3 of the Schedule II of the Surtax Act, 1964.      Rule 2 of Second Schedule of Super

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           Profits Tax Act, 1963           Where after  the first  day of      the previous  year relevant  to the      assessment  year,   the   paid   up      capital of  a company  is increased      or reduced by any amount during the      previous year, the capital computed      in accordance  with rule I shall be      increased or decreased, as the case      may be, by a portion of that amount      which  is   proportional   to   the      portion of the previous year during      which the  increase or the reductio      of  the   paid  up   share  capital      remained effective.       Rule 3 of the Second Schedule of      the Companies (Profits) Surtax Act,                     1964           Where after  the first  day of      the previous  year relevant  to the      assessment year  the capital  of  a      company as  computed in  accordance      with the  foregoing rules  of  this      Schedule is increased by any amount      during the previous year on account      of  increase   of  paid   up  share      capital or  issue of  debentures or      borrowing of any moneys referred to      in clause  (v)  of  rule  1  or  is      reduced by any amount on account of      reduction of  paid up share capital      or redemption  of any debentures or      repayment  of   such  moneys,  such      capital shall  be increased  by any      amount during  the previous year on      account  of  increase  of  paid  up      share   capital    or   issue    of      debentures  or   borrowing  of  any      moneys referred to in clause (v) of      rule 1  or is reduced by any amount      on  account  of  reduction  of  any      debentures  or  repayment  of  such      moneys,  such   capital  shall   be      increased or  reduced, as  the case      may be,  by a  sum which  bears  to      that amount  the same production as      the number  of days of the previous      year during  which the  increase or      the  reduction  remained  effective      bears to  the total  number of days      in that previous year.                      [Emphasis supplied]      The learned  counsel for  the appellant  has  contended that in  the Schedules under Super Profits Tax Act, 1963 and Surtax Act,  1964 provisions  have been made for calculating capital invested  and the profits. The capital gains, though subject  to   normal  income   tax,  was   not  taken   into consideration for  arriving at  chargeable  income  for  the purpose for  Super Profits Tax Act, 1963 and the Surtax Act, 1964.  Mrs.   Ramachandran  has   submitted  that  from  the chargeable  profits   as  arrived  in  accordance  with  the provisions of  the First  Schedule, a  specified  percentage (six per  cent in  the case of the Super Profits Tax Act and ten per  cent in  the case of the Surtax Act) of the capital as computed  in accordance with the provisions in the Second

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Schedule was  to be deducted. This is known, as the standard deduction  or   statutory  deduction.   This  deduction   is considered to  be a fair or reasonable return on the capital invested in  the business.  Any balance  remaining was to be subjected to  surtax. She  had contended  that any method of which (1) the chargeable profits could be reduced and/or (2) the capital  base could  be increased  will work  out to  he advantage of  the taxpayer.  She had  urged that  on a plain reading of  the rule  of the  Second  Schedule,  the  amount represented by  the bonus  shares issued  by the  appellant- company  will   straightaway   quality   for   proportionate inclusion  in  the  capital  base.  There  is  nothing  said anywhere either  in the Schedules or in the main body of the Act  that   the  increase  in  the  share  capital  must  be accompanied by  a corresponding  inflow  of  cash.  She  has submitted  that   in  a  taxing  statute,  clear  words  are necessary to  tax the  subject.  In  interpreting  a  taxing statute, one  is to  look simply  at what  is clearly  said. There is  no room for intendment; there is no equity about a tax. There  is no presumption as to a tax; nothing should be read into  the Act:  nothing should  be implied;  one should fairly look  at what  is said  and what  is clearly said. In support of  this contention,  Mrs. Ramachandran has referred to a  decision of the English Court in Cape Brandy Syndicate Vs. Commissioners  of Inland  Revenue (1921 (1) kind a Bench 64). She had submitted that this Court has also followed the view taken  in  Cape  Brandy’s  case  (supra)  in  the  case reported in  60  ITR  392  by  deserving  to  the  following effect:-      "In a  taking Act  one has  to look      merely at  what is  clearly stated,      and in  a case  of reasonable doubt      the construction most beneficial to      the subject  is to  be adopted. But      even so,  the fundamental  rule  of      construction is  the same  for  all      the  statutes,  whether  fiscal  or      otherwise. The underlying principle      is that  the meaning  and intention      of a statute must be collected from      the   planing    and    unambiguous      expression used therein rather than      any notions  as to  what is just or      expedient. The  expressed intention      must guide the Court."          Mrs.Ramachandram has submitted that the Bombay High Court in  Century Spinning Mill’s case (supra) did not spell out as to why Rule 2 of Super Profits Tax Act, 1963 and Rule 3 of Surtax Act, 1964 was different. The Delhi High Court in Food Specialities  case (supra)  also did  not state now the said rules were different. The learned counsel has submitted that it was only by a process of reasoning that the decision was arrived  at by  the  Delhi  High  Court  by  attributing motives to  the legislature  which are  not borne out by the plain woros  of the  stature. Hence,  the Madras  High Court should not  have placed  reliance on  the decisions  of  the Bombay and  Delhi High  Courts. The interpretation of Rule 3 of Schedule II of the Surtax Act. 1964 as made by the Madras High Court  is erroneous  and against  plain reading  of the provisions of  Rule 3. She has therefore, submitted that the appeal should  be allowed by accepting the view taken by the Income Tax appellate Tribunal in favour of the assessee.      Mr. G.C.  Sharma, the learned Senior advocate appearing for  the   respondent,  disputed  the  contentions  of  Mrs. Ramchandran. He  has submitted that Rule 2 of Schedule II of

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Super Profits  Tax Act,  1963 and Rule 3 of surtax Act, 1964 are not  similarly worded  .  In  this  connection,  he  has referred to  the decision  of  the  Gujarat  High  Court  in Commissioner of  surtax Vs.  New India  Industries Ltd. (202 ITR 619) which has explained the legal incidence of both the said Rules clearly by indicating cogent reasons. It has been held by  the Gujarat  High  Court  in  that  case  that  the expression "reserves"  has not  been defined  in  the  Super Profits Tax  Act, 1963  or   the Companies  (profits) Surtax Act. 1964.  The dictionaries  do not  make  any  distinction between the  two concepts  "reserve" and  "provision"  while giving their  primary meanings,  whereas in  the context  of those Acts,  a clear distinction between the two is implied. Though he  expression "reserve"  is not  defined,  since  it occurs in  a taxing  statue applicable to companies only and to no  other assessable  entities, the expression has  to be understood in  its  popular  sense,  namely,  the  sense  or meaning that  is attributed  to it by men of business, trade and  commerce   and  by   persons  dealing  with  companies. Therefore. the  meaning attached to the words " reserve" and provision" in  the Companies  Act, 1956,  dealing  with  the preparation of  the balance  sheet and  the profit  and loss account would  govern their construction for the purposes of the two enactments. The broad distinction between the two is that whereas  a "provision"  is a charge against the profits to be  taken into  account against  grass  receipts  in  the profit and  loss account, a "reserve" is an appropriation of profits, the  asset or  assets by  which it  is  represented being retained  to form  part of the capital employed in the business, if  any retention or appropriation of a sum is not a  "provision",   i.  e.   it  is   not  designed   to  meed depreciation, renewals  or diminution in the value of assets or any  know  liability,  the  same  is  not  necessarily  a "reserve".  The   question  whether  the  concerned  amounts constitute "reserve"  or not  will have  to  be  decided  by having regard  to the  true nature and character of the sums to   be    appropriated   depending   on   the   surrounding circumstances, particularly  the intention  with which,  and the purpose  for which,  such appropriations  had been made. The true  nature and  character of the appropriation must be determined with reference to the substance of the matter.      Mr. Sharma  has further  submitted that  a mere look at Rule 3  of Schedule II of the Super Profits Tax Act, 1963 as contrasted with  Rule 3  of Schedule  II of  the Surtax Act, 1964 will  show that  Rule 2  of Super Profits Tax Act, 1963 visualized mere  increase in  the  paid  up  share  capital, without reference  to any  increase in  capital base, enough for computation of capital; but before Rule 3 of Schedule II of Surtax  Act, 1964  may apply,  an increase in the capital base as  computed under rule 1 has to be shown to have taken place counsel  has submitted  that the Gujarat High Court in New  India   Industries  case  (supra)  has  very  correctly indicated that  Rule 3  will apply  if (1)  capital  of  the company as computed in accordance with rule 1 of Schedule II of the  Surtax Act.  1964 has increased by any amount during that previous  Year; and  (2) such  increase  should  be  on account of  increase of  paid up  share capital  or issue of depentures referred  to in  clause (iv)  or borrowing of any moneys referred  to in  clause  (v)  of  rule  1.  If  these conditions are satisfied, then and then and then only, there will be  an occasion  for the company to get the benefit has contemplated by the second part of rule 3 to the effect that such capital,  computed as  per rule 1, will be permitted to be increased  by sum  which bears  to  the  amount  of  such increase of paid up share capital, or issue of debentures or

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borrowings, the same proportion as the number of days of the previous year during which the increase in the paid up share capital, or  issue of debentures or borrowings of any money, as the case may be bears to the total number of days in that previous year.  It has been also submitted that under Rule 3 of Schedule  II of Surtax Act, 1964 before banefit under the rule can be pressed into service by the assessee company, as on the  first day  of the  previous  year  relevant  to  the assessment year  as per rule 1 has in fact undergone a hike. If the  said basic condition is not satisfied, Rule 3 is not attracted at all Such interpretation of Rule 3 being clearly discernible, no  other interpretation  should be accepted an the Madras, Bombay and Gujarat High Courts had no difficulty in taking same vies in interpreting Rule 3 of Schedule II of Surtax Act,  1964. He  has submitted  that in  the aforesaid facts no  interference by  this Court  is called for and the appeals should be dismissed with cost.      After giving our careful consideration of the facts and circumstances of  the case  and the  contentions made by the respective counsel  for the parties it appears to us that by issuing the  bonus shares in the assessment year in question there had  only be  a conversion  of the reserves into fully paid bonus  shares, which  conversion did  not add up to the capital or reserve base which was not there on the first day of the  previous year.  The Gujarat  High Court in New India Industries case  (supra) has  very succinctly  explained the difference in  incidence of  Rule 2  of Schedule II of Super Profits Tax  Act, 1963  and Rule of the Surtax Act, 1964. We feel no  hesitation in approving the view taken therein that before Rule  3 of surtax Act 1964 can be made applicable, an increase in the capital base as computed under rule 1 has to be shown  to have  taken place.  In order  that Rule 3 could apply the  capital base  of  the  company,  as  computed  in accordance with  rule 1  of Schedule II of Surtax Act, 1964. must have  increased  during  the  previous  year  and  such increase should  be on  account of increase of paid up share capital or  issue of depentures referred to in clause (i) or borrowing of any moneys referred to in clause (v) of rule 1. Unless these  conditions are  satisfied there   would  be no occasion   for   the   assessee-company   to   get   benefit contemplated by  the second part of rule 3 of Schedule II of surtax Act, 1964.      The Bombay, Madras and Delhi High Court have also taken the same  view without, however, elaborating the implication of  implication of Rule 3 of Schedule II of Surtax Act, 1964 as has been done by the Gujarat High Court, The incidence of Rule 2  of Schedule  II of super profits Tax Act, 1963 being different, the  interpretation  of  the  said  rule  by  the Himachal Pradesh  High Court is not germane for interpreting rule 3  of Schedule  II of  Surtax Act,  1964, The aforesaid interpretation  is   quite   reasonable   and   is   clearly discernible in Rule 3 The decision cited by Mrs, Ramchandran relating  to  the  principle  of  interpretation  of  taxing statute do not call for any change in the view we have taken on the language of the Rule.      We, therefore,  find no  reason to  interfere with  the impugned decisions  of the  madras High  Court and  all  the appeals are dismissed, without any order as to costs.