G.K.MITTER, J. - (1.) THE matter arises out of a reference under section 66(2) of the Indian Income-tax act r/w s. 19 of the Business Profits Tax Act. THE points of law involved are (1) whether an amount shown in the balance-sheet of the assessee company year after year at the same figure under the head "capital paid in surplus" represents premium realised from the issue of shares as contemplated by r. 3 of Schedule II of the Business Profits Tax Act, 1947, and (2) whether the several amounts appearing in the balance-sheets of the assessee company shown as "earned surplus" at the end of each year should be treated as reserves within the meaning of sub-rule (1) of r. 2 of Schedule II of the said Act. A further question also arises, namely, whether the "capital paid in surplus" can be treated as a "reserve" within the meaning of the Act.
(2.) THE Business Profits Tax Act (hereinafter referred to as the Act), which came into force on 11th April, 1947, had for its object the imposition of a special tax on income arising from business by reason of the abnormal profits made in consequence of the war. This tax was over and above the levy under the Indian IT Act, 1922. THE Act, however, was not made to apply to the whole of the profits made in a business and a part of it was allowed to be left out of account in the computation of profits for its purposes. This was done by providing "abatement", namely, a sum which bore to a sum equal to in the case of a company like the assessee, six per cent. of its capital on the first day of any "chargeable accounting period" computed in accordance with Schedule II or one lakh of rupees whichever was greater. THE capital, however, was not limited to the paid up capital but was also to include certain reserves and any premium realised by a company from the issue of any of its shares and retained in the business. THE life of the Act came to an end on 31st March, 1949. Under s. 2(4) of the Act "chargeable accounting period" means any "accounting period" which fell wholly within the term beginning on 1st April, 1946, and ending on 31st March, 1949, and where any "accounting period" fell partly within and partly without the said term such part of that accounting period as fell within the term. THE "accounting period" in relation to any business means any period which had been determined as the previous year for that business for the purpose of the Indian IT Act, 922. For our purposes "company" under the Act means a company as defined in the Indian Companies Act, 1913, ..... and includes any foreign association, whether incorporated or not, which the Central Board of Revenue may by general or special order declare to be a company for the purpose of the Act."Taxable profits" means the amount by which the profit during a chargeable accounting period exceeds the abatement in respect of that period. "Profits" under the Act means profits as determined in accordance with Schedule 1. Sec. 4 of the Act is the charging section under which tax is payable on the amount of the taxable profit during any chargeable accounting period calculated at a sum equal to 16 2/3 per cent. of the taxable profits. Schedule 1 contains rules for the computation of profits for purposes of the Act. Schedule II contains rules for computing the capital of a company and r. 1 of the said Schedule provides that for the purpose of ascertaining the "abatement' under the Act in respect of any chargeable accounting period the capital of a company shall be computed in accordance with rr. 2 to 4. So far as is relevant to this case r. 2 provides that "the capital of a company shall be the sum of the amounts of its paid up share capital and of its reserve in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian IT Act, 1922". Further under r. 3 "so much of the premium realised by a company from the issue of any of its shares as is retained in the business shall be recorded as forming part of its paid up capital for the purposes of r. 2". According to the assessee the "capital paid in surplus" represents premium which was realised at the time the assessee issued its shares. Alternatively, it is contended that the excess of the value of the assets taken over the paid up capital of the company has always been treated as a reserve and has never been allowed in computing the profits of the company for the purposes of the Indian IT Act and hence the same is to be taken into account for computing is capital. The chargeable accounting periods with which we are concerned in this case are five, they extend from : (1) 1-4-1946 to 30-11-1946 (2) 1-12-1946 to 31-3-1947 (3) 1-4-1947 to 31-12-1947 (4) 1-1-1948 to 31-12-1948 (5) 1-1-1949 to 31-3-1949.
(3.) FOR all these accounting periods the "capital paid in surplus" remained the same. The earned surplus has varied from time to time but it has always gone on increasing and is said to represent that part of the profits of the assessee which has been set apart after the distribution of dividends. The facts relating to the accounts of the company are as follows : The assessee is a non- resident company. It was incorporated in the State of Delaware in U. S. A. with a capital of $ 10,000,000 divided into 1,00,000 shares of the par value of $ 100 each. The object of incorporation was to take over all the assets and liabilities of two existing companies, namely, Soconey Vacuum Corporation and Standard Oil Company (New Jersey) in the Far East. The net assets of these two contributing companies in the Far East stood in their books on 1st Jan., 1934, at the following figures :;