Judgement

SHAH, J.: At the instance of the Commissioner of Income-tax (Central), Calcutta, the Income-tax Appellate Tribunal referred the following questions for the opinion of the High Court of Calcutta under S. 19 of the Business Profits Tax Act, 21 of 1947:

(1) Whether on the facts found the Tribunal was right in holding that the sum of s 117,000,000 appearing in the Balance Sheet of the assessee Company under the head Capital paid in Surplus and constituting the excess of the book value of the assets over the fact value of the shares represented premium realised from the issue of the shares as contemplated by R. 3 of Sch. II of the Business Profits Tax Act, 1947?

(2) Whether on facts and in the circumstances of the case the Tribunal was right in holding that the fact that the amount in question had been built up out of capital and not out of taxed profits would not prevent it from being reserve as contemplated by sub-r. (1) of R. of the Schedule II of the Business Profits Tax Act?

(3) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of S 29,000,000 odd. S 43,000,000 odd. S 56,000,000 odd. and S 73,000,000 odd. for the respective years appearing in the Balance Sheets of the assessee as Earned Surplus would be treated as a reserve within the meaning of sub-r. (1) of R. 2 of the Sch. I of the Business Profits Tax Act?

The High Court recorded answers in the affirmative on all the questions. The Commissioner of Income-tax has appealed to this Court with special leave.

2. The assessee Company is a nonresident. It was incorporated in the State of Delaware in the United States of America with the object of taking over the assets of two Companies-Socony Vacuum Oil Company and Standard Oil Company, (New Jersey). The capital of the assessee Company was s 10,000,000 divided into 100,000 shares of the value of s 100 each. On the date of acquisition the book values of the assets of two Companies as recorded in their books of account were:

Socony Vacuum Oil Company $ 97,715,701

Standard Oil Company (New Jersey $ 46,767,397).

In consideration of transfer of these assets, the assessee Company allotted to each Company 49,995 shares and to Socony Vacuum Oil Company serial bonds of the value of s 13,093,000. The remaining ten shares were divided equally between the two transferor Companies for cash at par value. The assessee Company entered in its books of account the book value of the assets taken over from the transferor Companies. The excess of the net value of the assets so transferred over the par value of the stock issued and the serial bonds was entered in the books in an account styled Capital paid in Surplus . The serial bonds issued to the Socony Vacuum Oil Company were later redeemed. By adjustment entries the Capital paid in Surplus account was reduced to s 117,561,317 and throughout the period of three years to which these appeals relate, in the balance sheets of the assessee Company, the Capital paid in Surplus stood unchanged at that figure. The net profits earned by the Company year after year, subject to certain appropriations were shown in the balance sheet under the caption Earned Surplus or Earnings reinvested . At the end of 1945, the balance of Earned Surplus was s 29,557,597 and by the end of 1948 the account stood at s 73,766,592.

3. The Income-tax Officer disallowed the claim of the assessee Company for inclusion of the account Capital paid in Surplus and Earned Surplus in the computation of taxable capital under Sch. II, R. 2 (1) of the Business Profits Tax Act, and the Appellate Assistant Commissioner agreed with him. But the Income-tax Appellate Tribunal held that the difference between the value of the assets taken over and the value of stock and serial bonds issued by the assessee Company was premium realized from the issue of its shares and retained in the business within the meaning of R. 3 of Sch. II and was in any event re