LexM/S. SUNDARAM CLAYTON LTD. ETC. versus COMMISSIONER OF INCOME TAX
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M/S. SUNDARAM CLAYTON LTD. ETC.
v.
COMMISSIONER OF INCOME TAX
MAY 2, 1996
[G.N. RAY AND B.L. HANSARIA, JJ.]
Companies' (Profits) Surtax Act 1964-Schedule II, Rule 3---Computa-
tion of capital-Whether bonus issue of shares resulted in prop01tionate in-
crease in share capital-Held, no; issue of bonus shares only resulted in
conversion of resC1ves and did not add to the capital base which was 1101 there
on the first day of the previous year.
A
B
c
Companies (Profits) Surtax Act 1964, Schedule I{, Rules 1 (iv), (v J and
3---Computation of capital-Held, for assessee to benefit from second part of
Rule 3 capital base must have increased during previous year on accou11t of D
increase of paid-up share capital or issue of debentures or b01rowing of a11y
moneys.
Interpretation of Statutes--Super Profits Tax Act 1963 -Schedule II,
Rule 2-Held, bei11g differe11~ not genna/le for interpreting Rule 3 of Schedule
II of Compa11ies (Profits) Surtax Act 1964.
E
The reference before the High Court raised a short question about
the computation of capital under Rule 3 of the Schedule ll of the Com-
panies (Profits) Surtax Act, 1964 ('Surtax Act'). In the assessment year
1971-72, corresponding to previous year beginning from August 1, 1969
F
and ending on July 31, 1970, the appellant-Company, SCL, issued 20400
bonus shares of the face value of Rs. 100 each. SCL claimed that Rs.
20,40,000 Which represented the bonus issue as on February 23, 1970
became the basis for increase in the capital determined at Rs. 1,43,39,462
as on the first day of the previous year i.e. August 1, 1969. It was claimed G
that since the bonus shares were in addition to the paid up capital of the
company, and since any 'increase' in the paid up capital was to be properly
reckoned for the purpose of computation. of capital under Rule 3 of
Schedule II of the surtax Act, the proportionate amount, worked out to Rs.
6,84,237, must be added to the capital as on August 1, 1969 for the purpose
of capital computation.
H
253
A
B
254
SUPREME COURT REPORTS [1996] SUPP. 2S.C.R.
Although the Income Tax officer rejected SCL's contention, the
Income Tax Appellate Tribunal accepted its claim. A reference under
s.256(1) of the Income Tax Act, 1961 was then made by the department
before the Madras High Court for answering the question whether for the
computation of capital under the Surtax Act the share capital of SCL
should be proportionately increased on account of the issue of bonus
shares.
The Madras High Court, while answering the reference against the
assessee SCL, relied on the decision of the Bombay High Court in Com-
missioner of Income Tax v. Centwy Spinning and Manufactwing Company
C Ltd., 101 !TR 6 and noted the decision of the Delhi High Court in Com-
missioner of Swtax v. Food Specialities Ltd., 129 !TR 731. The High Court
did not agree with the decision of the Himachal Pradesh High Court in
Commissioner of lncome Tax v. Mohan Meakin Breweries Ltd., 93 !TR 586
on the ground that the said decision proceeded on the application of Rule
2 of Schedule II of the Super Profits Tax Act, 1963 which was not pari
D materia with Rule 3 of Schedule II of the Surtax Act
Before this court the assessee reiterated its reliance npon the
decision in Mohan Meakins Breweries and contended that Rule 2 of the
Super Profits Act, 1963 being similar to Rule 3 of the Surtax Act, a plain
E reading of the rules would result in the bonus issue qualifying for propor·
tionate inclusion in the capital base.
F
Dismissing the appeal, this Court
HELD : 1. By the issuance of 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. [263-D]
Commissioner of Income Tax v. Century Spinning and Manufacturing
Company Ltd., (Born) and Commissioner of Surtax v. Food Specialities Ltd.,
G (Del), approved.
Cape Brandy Syndicate v. Commissioners of Inland Revenue, (1921) 1
KB 64, referred to.
2. In order that Rule 3 could apply, the capital base of the company,
H as computed in accordance with Rule 1 of Schedule II of the Surtax Act
SUNDARAM CLAYTON LTD. v. C.I.T. [G.N. RAY.J.]
255
must have increased during the previous year and such increase should A
be on account of increase of paid-up share capital or issue of debentures
referred to in clause (iv) orExcerpt shown. Read the full judgment & AI analysis in Lexace.