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HIGH COURT OF CALCUTTA
G. K. MITTER, A.N. RAY, JJ.
Commissioner Of Income Tax - Appellant
Versus
Standard Vacuum Oil Co. - Respondent
IT Ref. No. 18 of 1955
Decided on : Jan 29, 1962
BUSINESS PROFITS TAX ACT - Computation of capital - Premium on issue of shares - Reserves - Interpretation of rules.
Fact of the Case:
The assessee, a non-resident company, was incorporated in the State of Delaware, U.S.A., with a capital of $10,000,000 divided into 100,000 shares of the par value of $100 each. The object of incorporation was to take over all the assets and liabilities of two existing companies, namely, Soconey Vacuum Corporation and Standard Oil Company (New Jersey) in the Far East. The net assets of these two contributing companies in the Far East stood in their books on 1st Jan., 1934, at the following figures: Soconey Vacuum Corporation $97,715,701 Standard Oil Co. (New Jersey) $46,767,397. As consideration for the transfer the said two companies were each allotted 49,995 shares in the new company, the Soconey Vacuum Corporation being allotted in addition serial bonds of the face value of $13,093,000. Five shares of the new company were allotted to each of the old companies for payment in cash. The allotment of these bonds of an amount less than the difference between the net book value of the assets contributed by the two companies was said to be due to the circumstances that the contribution of the Standard Oil Company (New Jersey) was considered to carry with it considerable intangible values (such as oil wells) not reflected in he book values. The new company, the assessee before us, after taking over the assets from the said two companies, entered in its books of account the exact value of the assets taken over and the difference between the book value of the assets and the actual purchase consideration on the basis of par value of the shares was credited in an account under the head "capital paid in surplus". In the books of the vendor companies the transactions were recorded as follows: Soconey Vacuum Corporation Share of account Standard Vacuum Oil Company 5 shares purchased for cash $500 49,995 shares purchased (for consideration other than cash) (value of new asset taken over) $97,715,702 Standard Oil Company (New Jersey) 5 shares purchased for cash $500 49,995 shares purchased for consideration other than cash (Value of net asset) $46,767,397 Less face value of fully paid serial bonds, 13,093,000 $84,622,702.
Finding of the Court:
1. The amount shown in the balance-sheet of the assessee company year after year at the same figure under the head "capital paid in surplus" represents premium realised from the issue of shares as contemplated by r. 3 of Schedule II of the Business Profits Tax Act, 1947. 2. The several amounts appearing in the balance-sheets of the assessee company shown as "earned surplus" at the end of each year should be treated as reserves within the meaning of sub-rule (1) of r. 2 of Schedule II of the said Act. 3. The "capital paid in surplus" can be treated as a "reserve" within the meaning of the Act.
Issues: 1. Whether an amount shown in the balance-sheet of the assessee company year after year at the same figure under the head "capital paid in surplus" represents premium realised from the issue of shares as contemplated by r. 3 of Schedule II of the Business Profits Tax Act, 1947? 2. Whether the several amounts appearing in the balance-sheets of the assessee company shown as "earned surplus" at the end of each year should be treated as reserves within the meaning of sub-rule (1) of r. 2 of Schedule II of the said Act? 3. Whether the "capital paid in surplus" can be treated as a "reserve" within the meaning of the Act?
Ratio Decidendi: 1. The word "premium" as used in r. 3 of Schedule II to the Business Profits Tax Act, 1947, is not restricted to a transaction in cash. Shares can be issued at a premium for consideration other than cash, and the difference between the face value of the shares and the monetary value of the consideration received can be treated as premium. 2. The term "reserve" in r. 2(1) of Schedule II to the Business Profits Tax Act, 1947, includes reserves created out of taxed profits as well as reserves created before the commencement of the Act or out of profits not subjected to taxation. 3. The "earned surplus" of the assessee company, which represented profits retained in the business after the declaration of dividends, constituted reserves within the meaning of r. 2(1) of Schedule II to the Business Profits Tax Act, 1947.
Final Decision: The questions referred to this Court are answered as follows: Question 1 in the affirmative. Question 2 in the affirmative. Question 3 in the affirmative.
G.K. MITTER, J.
1. THE matter arises out of a reference under section 66(2) of the Indian Income-tax act r/w s. 19 of the Business Profits Tax Act. The points of law involved are (1) whether an amount shown in the balance-sheet of the assessee company year after year at the same figure under the head "capital paid in surplus" represents premium realised from the issue of shares as contemplated by r. 3 of Schedule II of the Business Profits Tax Act, 1947, and (2) whether the several amounts appearing in the balance-sheets of the assessee company shown as "earned surplus" at the end of each year should be treated as reserves within the meaning of sub-rule (1) of r. 2 of Schedule II of the said Act. A further question also arises, namely, whether the "capital paid in surplus" can be treated as a "reserve" within the meaning of the Act.
2. THE Business Profits Tax Act (hereinafter referred to as the Act), which came into force on 11th April, 1947, had for its object the imposition of a special tax on income arising from business by reason of the abnormal profits made in consequence of the war. This tax was over and above the levy under the Indian IT Act, 1922. The Act, however, was not made to apply to the whole of the profits made in a business and a part of it was allowed to be left out of account in the computation of profits for its purposes. This was done by providing "abatement", namely, a sum which bore to a sum equal to in the case of a company like the assessee, six per cent of its capital on the first day of any "chargeable accounting period" computed in accordance with Schedule II or one lakh of rupees whichever was greater. The capital, however, was not limited to the paid up capital but was also to include certain reserves and any premium realised by a company from the issue of any of its shares and retained in the business. The life of the Act came to an end on 31st March, 1949. Under s. 2(4) of the Act "chargeable accounting period" means any "accounting period" which fell wholly within the term beginning on 1st April, 1946, and ending on 31st March, 1949, and where any "accounting period" fell partly within and partly without the said term such part of that accounting period as fell within the term. The "accounting period" in relation to any business means any period which had been determined as the previous year for that business for the purpose of the Indian IT Act, 922. For our purposes "company" under the Act means a company as defined in the Indian Companies Act, 1913, ..... and includes any foreign association, whether incorporated or not, which the Central Board of Revenue may by general or special order declare to be a company for the purpose of the Act. "Taxable profits" means the amount by which the profit during a chargeable accounting period exceeds the abatement in respect of that period. "Profits" under the Act means profits as determined in accordance with Schedule 1. Sec. 4 of the Act is the charging section under which tax is payable on the amount of the taxable profit during any chargeable accounting period calculated at a sum equal to 16 2/3 per cent. of the taxable profits. Schedule 1 contains rules for the computation of profits for purposes of the Act. Schedule II contains rules for computing the capital of a company and r. 1 of the said Schedule provides that for the purpose of ascertaining the "abatement' under the Act in respect of any chargeable accounting period the capital of a company shall be computed in accordance with rr. 2 to 4. So far as is relevant to this case r. 2 provides that "the capital of a company shall be the sum of the amounts of its paid up share capital and of its reserve in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian IT Act, 1922". Further under r. 3 "so much of the premium realised by a company from the issue of any of its shares as is retained in the business shall be recorded as forming part of
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