THE COMMISSIONER OF INCOME TAX (CENTRAL) CALCUTTA versus STANDARD VACUUM OIL COMPANY

Citation: [1966] 2 S.C.R. 367 · Decided: 26-10-1965 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Dismissed

Cited by 1 judgment(s) · cites 1 · see the full citation network in Lexace

Judgment (excerpt)

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t 
' 
.. • 
A 
THE COMMISSIONER OF INCOME TAX (CENTRAL) 
CALCUTTA 
v. 
B 
STANDARD VACUUM OIL COMPANY 
October 26, 1965 
c 
D 
E 
F 
G 
[K. SUBBA RAo, J. C. SHAH AND S. M. S!KRI, JJ.J 
Business Pro.fits Tax Act, 1947- Schedule 1/, rules 2(1) and (3)-
"Premium" and "reserv,es" in conzputation of capital under r. 2(1)-
Whether cover accounts described as "capital paid in surplus" and "Earned 
Surplus'' according 10 American accounting practice. 
The assessee company was incorporated in the State of Delaware in 
the United States of America with the object of taking over the assets of 
two other American companies in return for stock in the assessce. company. 
Upon the acquisition, although the book value of the assets taken over 
from each of the two transferor companies was different, the two com-
panies were allotted an equal number of shares in ·the assessee company. 
Part of this difference was covered by issuing serial bonds .to one of the 
companies which were ]ate redeemed. 
As the total 
book-value of the 
assets taken over by the assessee company was in excess of the par value 
of the slock issued to the two transferor companies, 
this 
excess, in 
accordance with e:stablished accounting practice in the United States of 
America, was entered in the books of the 
asses-see 
C'01npany 
in 
an 
account styled "Capital paid in Surplus". 
The net p1ofits earned by the assessec company from year to year, 
after certain appropriations, were also in Jine with American accounting 
practice, 5hown in the balance sheet under the caption "f...1rncd s11rplils" 
or "Earnings reinves.ted". 
In proceedings for asse:ssment under s. 4 of the Business Profits Tax 
Act, 1947. the Income Tax Officer disallowed the claim of thei asscssee 
company for the. inclusion of the accounts "Capital paid in Surplus" and 
"Earned Surplus" in the computation of taxable capital under Schedule II 
r. 2(1) of the Act and the Appellate Assistant Commissioner agreed with 
him. 
But the Tribunal, in appeal, held that the difference between the 
value of the assets taken over· and the value of stock issued by the asscssee 
company was premium realised from the issue of its shares and retained 
in the business within the meaning pf rule 3 of Sch. II and was in any 
event reserve not alloW'Cd in computing profits within the meaning of 
r. 2(1). The Tribunal also held that the "Earned Surplus" represented 
reserves liable to be taken into account in assessing business profits tax. 
Upon a reference, the High Court agreed with the views of the Tribunal. 
It was contended on behalf of the Revenue, inter alia, (i) that shares 
may be said to Jbe issued at a premium only when they were issued for 
cash in excess of par value and not otherwise; (ii) that the amount of 
"Capital paid. in Surplus" could not be regarded as· "reser'i1cs.'' as the re-
serves contemplated by r. 2(1) are only those which are built out of pm-
.fits processed for the purpose of taxation under the Indian Income-tax 
H 
Act and that where a reserve is brought into existence by creating or 
increasing, by revaluation or otherwise a book asset, it cannot be included 
in the computation of capital by virtue. of the Explanatiop to r. 2; (iii) 
that the "Earned Surplus" in the balance sheets of the assessce company 
L2Sup. CI/66-10 
368 
SUPREME COURT REPORTS 
[1966] 2 s.c.R. 
were not reserves, as accumulated profits could only be deemed reserves 
within the meaning or r. 2(1) if they were 
specifically 
allocated to 
reserves and not otherwise. 
HELD : (i) The High Court was right in holding that the difference 
between the book value of the assets transforred and the par value 
of 
capital stock was premium. [376 E] 
In the absence of any restriction in the law of Delaware against the 
issue of shares otherwise than for cash, when shares were issued for con-
sideration other than cash, the value of assets transferred in exoess of the 
par value of shares issued would be regarded as "premium' under the 
Indian system of law. [374 F] 
When shares are issued at a premium. ordinarily premium at a uni-
form rate would be charged from all applicants for shares; but on princi-
ple there is no objection to the charging of varying rates of premium for 
shares issued under a single resolution, if all the parties concerned agree. 
In the present case although the book value of the assets transferred by 
the transferor companies was larger than that of the assets transferred 
by the other company

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