TaxTMI 
TaxTMI 
1996 (5) TMI 83
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....e [1983] 140 ITR 235). Tax Cases Nos. 743-744 of 1977 arose out of the reference made under section 256(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 to the Companies (Profits) Surtax Act, 1964. The origin of the Companies (Profits) Surtax Act, 1964, may be traced back to the Excess Profits Tax Act, 1940, which was enacted for the purpose of mopping up unreasonable and extra profits earned in the business during the Second World War. Later on, the Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964, were enacted for a 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 n o te the relevant facts for the purpose of appreciating the rival contentions made before the Madras High Court and also at the hearing of these appeals in the assessment year 1971-72, corresponding to the previous year beginning from August 1, 1969, and ending on July 31, 1970, the appellant-company, Sundaram Clayt....
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....e High Court that what rule 3 of Schedule II to the Surtax Act, 1964, contemplated was that the capital, as on the first day of the previous year, got increased by way of an addition to any part of the capital so computed, whether the increase, be to the paid-up capital or to the reserves or to any other items figuring on the liabilities side of the balance-sheet. In other words, there must be a fresh influx of capital in order to attract rule 3 of Schedule II to the Surtax Act, 1964. The High Court indicated that the mere act of capitalising a part of the reserve and issuing bonus shares did not mean that there was any influx of additional capital into the company over and 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 put forward by the assessee must be rejected as untenable. The High Court placed reliance on a decision of the Bombay High Court in CIT v. Century Spinning and Manufacturing Co....
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....ade by the Income-tax Appellate Tribunal that by issue of bonus shares in the assessment year in question had resulted in increase in the capital base of the company within the meaning of rule 3 of Schedule II to 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 Court is under challenge. Mrs. Janaki Ramachandran, learned counsel appearing for the appellant-company, has referred to rule 2 of Schedule II to the Super Profits Tax Act, 1963, and rule 3 of the Surtax , 1964, and contended that both the rules being essentially similar have the same legal incidence and the High Court erred in proceeding on the footing that the incidence of rule 2 of the Super Profits Tax Act, 1963, and rule 3 of Schedule II to the Surtax Act, 1964, was different by placing reliance on the said decisions of the Bombay and Delhi High Courts. It will be appropriate at this stage to refer to rule 2 of Schedule II to the Super Profits Tax Act, 1963, and rule 3 of Schedule II to the Surtax Act, 1964. Rule 2 of the Second Schedule to the Super Profits Tax Act, 1963 : " Where after the first day o....
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....ould be reduced and/or (2) the capital base could be increased will work out to the advantage of the taxpayer. She has urged that on a plain reading of the rules of the Second Schedule, the amount represented by the bonus shares issued by the appellant-company will straightaway qualify 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 v. IRC [1921] 1 KB 64. She has submitted that this court has also followed the view taken in Cape Brandy's case [1921] 1 KB 64 in the case reported in CIT v.....
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..... 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 the expression "reserve" is not defined, since it occurs in a taking statute 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 interested in or dealing with the companies. Therefore, the meanings attached to the words "reserves" and "provisions" 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 gross 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 ap....
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....nefit under the rule can be pressed into service by the assessee-company, it must be shown that the capital base for the said 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 and the Madras, Bombay and Gujarat High Courts had no difficulty in taking the same view in interpreting rule 3 of Schedule II to the 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 costs. 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 been 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 Indust....