Paid-up share capital increase includes bonus shares issued from reserves for rule 2 computation under the Super Profits Tax Act

Rule 2 of the Second Schedule to the Super Profits Tax Act, 1963 applies where a company's paid-up share capital is actually increased during the previous year. The controlling test is the increase in paid-up share capital itself, not whether the increase came from fresh cash or from capitalisation of reserves. On that basis, bonus shares issued out of reserves were treated as an increase in paid-up share capital, and the proportional increase under rule 2 was available.

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Issues: Whether the assessee was entitled to a proportional increase in capital under rule 2 of the Second Schedule to the Super Profits Tax Act, 1963, when the paid-up share capital was increased by capitalisation of reserves through issue of bonus shares.

Analysis: Rule 2 of the Second Schedule applied where the paid-up share capital of a company was increased during the previous year, and the Court held that the statutory language was plain and unqualified. The decisive test under the 1963 Act was whether the paid-up share capital had been increased, not whether fresh cash had been introduced into the business. The Court distinguished the language of the later 1964 surtax provisions, where the computation formula was materially different, and held that the issue of bonus shares out of reserves did result in an increase in paid-up share capital for the purposes of rule 2.

Conclusion: The assessee was entitled to the proportional increase claimed under rule 2, and the question referred was answered in the affirmative, in favour of the assessee.

Final Conclusion: The reference was decided by holding that capitalisation of reserves through bonus shares attracted rule 2 of the Second Schedule to the Super Profits Tax Act, 1963, so long as paid-up share capital stood increased during the relevant previous year.

Ratio Decidendi: For rule 2 of the Second Schedule to the Super Profits Tax Act, 1963, the controlling criterion is the actual increase in paid-up share capital during the previous year, irrespective of whether the increase is effected by issue of bonus shares or by infusion of fresh cash.

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