JUDGEMENT
V.S.DESAI, J. -
(1.)THE short question with which we are concerned in the present reference relates to the proper
interpretation and meaning of the expression "any premium received in cash by the company on
the issue of its shares" in the Explanation to Paragraph D of Part II of the Indian Finance Act, 1956.
The question arises in the following manner : The Standard Mills Company Ltd., Bombay (hereafter
referred to as the Standard Mills) is a public company limited by shares and its business is
manufacturing of cotton textiles. Sometimes in the year 1950, the Standard Mills thought of
amalgamating with another company which was known as Indian Bleaching, Dyeing & Printing
Works Ltd. The managing agents of the Standard Mills accordingly issued a circular letter to its
shareholders on the 1st Feb., 1951, relating to the proposed amalgamation. In order to determine
the equitable basis of amalgamation, the accounts of the two companies up to 31st Aug., 1950,
were got audited, and their assets also got valued by experts. By a joint report of the auditors of
both the companies, the said auditors expressed their opinion that a fair and equitable basis of
amalgamation would be that two shares of the Standard Mills should be regarded as worth three
shares of the Indian Bleaching Dyeing & Printing Works Ltd. The method of amalgamation
contemplated was the absorption of the Indian Bleaching, Dyeing & Printing Works Ltd. in the
Standard Mills, by the Standard Mills taking over the entire assets of the other company and
issuing its own shares to the shareholders of the other company in lieu of the shares possessed by
them of the other company. The Standard Mills had a share capital of Rs. 60 lakhs divided into
60,000 shares of Rs. 100 each. Rs. 48 lakhs out of Rs. 60 lakhs was its equity capital, and the remaining Rs. 12 lakhs in preference shares. It decided to increase its equity capital by the creation
of 8,000 ordinary shares of Rs. 100 each for being allotted to the shareholders of the Indian
Bleaching, Dyeing & Printing Work Ltd. in accordance with the amalgamation scheme. These shares
were to be distributed amongst the shareholders of the Indian Bleaching, Dyeing & Printing Works
Ltd.; two shares for every three shares of the other company possessed by them and the shares
allotted were to be credited as fully paid. Now, under the Capital Issues (Continuance of Control)
Act, 1947 (hereinafter referred to as the Capital Issues Control Act), the company had to obtain
the consent of the Central Government for increasing its share capital.
(2.)THE application which was to be made for obtaining the said consent was required to be made to the Controller of Capital
Issues in conformity with the requirements laid down in the questionnaire specified in the Schedule
annexed to the Rules made under the said Act. Amongst the other particulars and information, the
company was required under the said questionnaire to state whether it was going to issue the
shares at premium and if that were so, the reasons therefor. The Central Government was
empowered to give its consent with such conditions as it may think fit, and when the company
acted in pursuance of the consent it had to comply with the terms and the conditions imposed. The
contravention of the provisions of the Capital Issues Control Act or any orders made thereunder
was made punishable with imprisonment for a term which might extend to one year or with fine or
both. The Standard Mills applied for the consent and the consent was obtained by it on the 8th
Nov., 1950. The consent granted by the Asstt. Controller of Capital Issues (who was the
appropriate authority appointed under S. 10 of the Act), was for the issue of 8,000 ordinary shares
of Rs. 100 each at par. After the said consent was obtained from the Asstt. Controller of Capital
Issues necessary resolutions were passed by both the companies and the High Court's sanction for
the amalgamation w.e.f. 1st Sept., 1950, was obtained on the 26th March, 1951. Under the
scheme of amalgamation, the Standard Mills were to take over assets and liabilities of the Indian
Bleaching, Deying & Printing Works Ltd. The said assets were valued at Rs. 28,48,312, and the
liabilities amounted to Rs. 4,60,061. Under the scheme, as consideration for the transfer of the
assets and liabilities, the shareholders of the transferor company were to receive in respect of
every three shares of the transferor company of Rs. 100 each held by them, two new ordinary
shares of the transferee company of Rs. 100 each credited as fully paid, and the transferee
company was to allot such shares to the shareholders of the transferor company without further
applications for allotment from them. The net assets of the Indian Bleaching, Deying & Printing
Works Ltd., received by the Standard Mills amounted to Rs. 24,87,251 (Rs. 28,48,312 minus Rs.
,61,061) and the new share capital issued by it was Rs. 8 lakhs of 8,000 ordinary shares of Rs. 100 each. The excess of the net assets received over the nominal value of the shares capital was therefore, Rs. 16,87,251, which the Standard Mills credited in an account which was called
"Premium of shares account." After this amalgamation with the Indian Bleaching, Dyeing & Printing
Works Ltd., the total share capital of the Standard Mills stood at Rs. 68 lakhs, out of which Rs. 56
lakhs were in equity capital and the balance in preference share capital.
3. In the year 1955, the Standard Mills decided to amalgamate with another company called New China Mills Ltd. The method of amalgamation contemplated was the same as was adopted on the
former occasion when it amalgamated with the Indian Bleaching, Dyeing & Printing Works Ltd. The
scheme proposed provided for the creation of 31,800 new ordinary shares of Rs. 100 each, for
allotment to the shareholders of the China Mills. For the increase of this share capital again, the
company had to obtain the consent of the Controller of Capital Issues under the Capital Issues
Control Act, 1947. Such a consent was obtained on the 27th July, 1955, and the consent granted
was that the company was permitted to issue 31,800 ordinary shares of Rs. 100 each at par
allotted as fully paid shares to the holders of the existing 31,800 shares in the New China Mills in
the proportion of one such share for every one share of the New China Mills, Ltd., held by them in
terms of the proposed scheme of amalgamation when sanctioned by the High Court of Bombay.
The High Court's sanction to the amalgamation scheme was duly obtained on the 14th Oct., 1955.
Under the said amalgamation scheme also, the assets and liabilities of the New China Mills Ltd.
were to be taken over by the Standard Mills, the assets totalling Rs. 1,56,34,784, and the liabilities
totalling Rs. 22,65,212. The net assets taken over therefore, amounted to Rs. 133,69,572. The
nominal value of the 31,800 new ordinary shares of Rs. 100 each which were allotted to the
shareholders of the New China Mills Ltd. was Rs. 31,80,000. There was thus an excess of Rs.
1,01,89,572 of the net assets over the nominal value of the new shares issued. This excess the company took to the share premium account in its books. As we have already seen, at the time of
the first amalgamation a sum of Rs. 16,87,251 was carried to this account and with the addition of
Rs. 1,01,89,572 on the second amalgamation the total credit balance in this account came to Rs.
1,18,76,823. It will also be seen that, after the second amalgamation the total share capital of the assessee -company stood at Rs. 99,80,000 of which Rs. 87,80,000 was in equity and the rest in
preference share capital.
(3.)IN the asst. year 1956 -57, for which the relevant previous year was the calendar year 1955, the total assessable income of the assessee was determined at Rs. 16,80,599. Super -tax was payable
by the company in respect of this company in accordance with Paragraph D of Part II of the Indian
Finance Act, 1956. Now, the rate provided for the levy of super -tax was at 6 annas 9 pies in the
rupee. But a certain rebate was allowed at specified rates in specified circumstances. The rate of
rebate was at 4 annas per rupee of the total income. On the total assessable income of Rs.
16,80,599, therefore, the rebate calculated at the said rate was Rs. 4,20,150. It was however, provided in the second proviso to Paragraph D that the rebate would be reduced by the aggregate
of certain amounts. According to the said proviso, where a company declared a dividend at a rate
less than or equal to 6 per cent of its paid up capital as on 1st Jan., 1955, there was to be no
reduction in the rebate ; where, however, the dividend declared exceeded 6 per cent but did not
exceed 10 per cent the rebate was to be reduced at the rate of 2 annas per rupee on the part of
the dividend exceeding 6 per cent and where the dividend exceeded 10 per cent of the paid up
capital, the reduction in the rebate was to be made at the rate of 3 annas per rupee on the excess
of the dividend over 10 per cent. Now, the dividend declared by the company on its ordinary
shares was Rs. 11,20,000. Its ordinary share capital was as we have been Rs. 87,80,000. The ITO
took the view that since the paid up capital for the purposes of Paragraph D was only Rs.
87,80,000 the dividend of Rs. 11,20,000, which the company had declared was more than 10 per cent of the paid up capital, and the rebate was, therefore, liable to be reduced at the rate of 3
annas per rupee on the excess of the dividend over 10 per cent of the paid up capital. According to
his calculations therefore, the rebate was required to be reduced by an amount of Rs. 89,275. The
company contended that its paid up capital for the purposes of Paragraph D was not only Rs.
87,80,000 but the said amount increased by a further sum of Rs. 1,18,76,823. According to the company, therefore, its paid up capital was a little over Rs. 2 crores and the dividend of Rs.
11,20,000 declared by it was therefore, less then 6 per cent of the paid up capital. The company, therefore, contended that the entire rebate of Rs. 4,20,150 must be allowed to it. The contention of
the assessee -company not having been accepted by the ITO the company took the matter to the
AAC in appeal. Having failed before the AAC also, it took a further appeal to the Tribunal. It was
contended by the assessee before the Tribunal that on each of the two occasions of amalgamation
the company had received premium on the issue of its shares, and the whole of it or, at any rate,
some part of it, was received by it in cash, and therefore constituted "premium received in cash by
the company on the issue of its shares" within the Explanation to Paragraph D of Part II of the
Indian Finance Act, 1956.