1962 (1) TMI 82 - HC - Income Tax

Court rules 'capital paid in surplus' as premium from share issue, can be a reserve under tax law. Earned surplus as reserves.

The court determined that the 'capital paid in surplus' represented a premium realized from the issue of shares. Additionally, it concluded that the ... - Issues Involved:1. Whether 'capital paid in surplus' represents premium realized from the issue of shares as contemplated by Rule 3 of Schedule II of the Business Profits Tax Act, 1947.2. Whether the 'capital paid in surplus' can be treated as a 'reserve' within the meaning of the Act.3. Whether the amounts shown as 'earned surplus' in the balance sheets should be treated as reserves within the meaning of Rule 2(1) of Schedule II of the Business Profits Tax Act.Analysis:Issue 1: 'Capital Paid in Surplus' as PremiumThe first issue revolves around whether the amount shown as 'capital paid in surplus' represents a premium realized from the issue of shares. The court examined the historical context and accounting practices of the assessee company. The company was incorporated to take over the assets and liabilities of two existing companies, and the difference between the book value of the assets and the par value of the shares was credited as 'capital paid in surplus.'The court noted that the term 'premium' is not explicitly defined in the Act, and thus its ordinary meaning should be applied. It referenced the case of Ooregum Gold Mining Co. of India Ltd. v. Roper, which established that shares could be issued for consideration other than cash, and if the value of such consideration exceeds the face value of the shares, it can be considered a premium. The court concluded that the $117,561,317 shown as 'capital paid in surplus' was indeed a premium realized from the issue of shares.Issue 2: 'Capital Paid in Surplus' as ReserveThe second issue was whether the 'capital paid in surplus' could be treated as a reserve under the Business Profits Tax Act. The court examined the nature of reserves and concluded that a reserve is something kept for future use or stored up for some time or occasion. The court noted that the 'capital paid in surplus' had remained constant and undisturbed in the company's accounts for eleven years, functioning similarly to a reserve.The court also referenced Rule 2(1) of Schedule II, which excludes reserves allowed in computing the profits of the company for the purposes of the Indian Income-tax Act, 1922. Since the 'capital paid in surplus' was never allowed in the computation of profits under the Indian Income-tax Act, it fulfills the test laid down in Rule 2(1) and can be treated as a reserve.Issue 3: 'Earned Surplus' as ReserveThe third issue was whether the 'earned surplus' amounts should be treated as reserves. The court reviewed the findings of the Appellate Tribunal, which concluded that the 'earned surplus' represented profits set apart after the distribution of dividends and reinvested in the business for expansion. The Tribunal found that these amounts were retained in the business and thus constituted reserves.The court referenced the Supreme Court's judgment in the case of First National City Bank v. Commissioner of Income-tax, which held that undivided profits could be treated as reserves if they were part of the capital fund. The court agreed with the Tribunal's finding that the 'earned surplus' was used in the business in the same way as capital and was set apart for business expansion, thus qualifying as reserves under Rule 2(1) of Schedule II.Conclusion:The court answered all three questions in the affirmative:1. The 'capital paid in surplus' represents premium realized from the issue of shares.2. The 'capital paid in surplus' can be treated as a reserve within the meaning of the Act.3. The amounts shown as 'earned surplus' can be treated as reserves within the meaning of Rule 2(1) of Schedule II of the Business Profits Tax Act.The assessee was awarded the costs of the reference, and the judgment was certified for two counsel.