Commissioner of Income Tax vs Atlas Capco (India) Ltd.

T.D. Sugla, J.—Two questions of law have been referred to this court by the Tribunal at the instance of the Department. The questions are :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 14,46,000 being dividend recommended by the directors out of the general reserve after first day of the accounting year and declared and paid in the next year should not be excluded from the general reserve in computing the capital ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the general reserve should not be reduced by the sum of Rs. 28,24,000 being the value of bonus shares issued after the first day of the previous year, even though the capital had been increased proportionately in view of rule 3 of the Second Schedule ?"

According to Dr. Balasubramanian, learned counsel for the Department, the first question is covered by the Supreme Court decision in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, and this question must be answered in the negative and against the assessee. According to him, the second question also is covered by this court''s decision in the case Commissioner of Income Tax, Bombay City III Vs. Century Spg. and Mfg. Co. Ltd., and requires to the answered in the negative and in favour of the Revenue.

Shri Irani, learned counsel for the assessee, stated that the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, was not applicable to the facts of this case at all. Referring to paragraph 3 of the statement of the case, Shri Irani pointed out that the dividend of Rs. 14,46,000 proposed was to be distributed in the following accounting year ending on December 31, 1971, and not for the year ending December 31, 1970. He stated that the assessment year involved in this case is 1972-73. The capital for the purpose of surtax assessment is to be computed as on January 1, 1971, i.e., on the basis of the balance-sheet as on December 31, 1970, and not the balance-sheet as on December 31, 1971. In response to a query from the Bench, Shri Irani placed before us the balance-sheet of the assessee-company as on December 31, 1971, which is marked exhibit "A", which vindicated the case of the assessee. On going through the balance-sheet, Dr. Balasubramanian also fairly conceded that the amount of Rs. 14,46,000 proposed as dividend was, perhaps, considered while computing capital for the assessment year involved due to mistake. We are in agreement with Shri Irani. Accordingly, we hold that the Tribunal was justified in not excluding the amount of Rs. 14,46,000 out of the general reserve for the year. The Supreme Court decision in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, has, of course, no application in the facts of the case. The first question is, accordingly, answered in the affirmative and in favour of the assessee.

As regards the second question also, Shri Irani stated that this court''s judgment in Commissioner of Income Tax, Bombay City III Vs. Century Spg. and Mfg. Co. Ltd., had no application to the facts of the case. The question in that case was whether the increase of capital on account of the issue of bonus shares out of the general reserve was justified and this court held that when the bonus shares are issued as fully paid up shares by capitalisation of a part of the amount standing to the credit of the general reserves, the capital is not increased in any manner whatsoever and, therefore, increase of capital on account of issue of bonus shares was not justified. Shri Irani submits that he has no quarrel with this principle but the question in this case is entirely different. The pertinent question herein is whether the general reserve should be reduced by the value of bonus shares issued after the first day of the previous year. According to Shri Irani, a subsequent decision of this court in Commissioner of Income Tax, Bombay City-I, Bombay Vs. New Swadeshi Sugar Mills Ltd., would be relevant. It was held in that decision (headnote) :

"...it is well settled in law that when the directors declare their decision to issue bonus shares, no liability is incurred by the company at least till a resolution for the issue of bonus shares is passed at an extraordinary general meeting of the shareholders. Hence, in the instant case, till the resolution was passed on October 30, 1966, it could not be said that the amount of the general reserves stood reduced by the amount intended to be capitalised for the issue of bonus shares."

The question whether the proportionate amount of bonus shares issued during the previous year out of the general reserve should be added to the capital for the purpose of surtax is not before us. It was not the issue either before the Tribunal. The Appellate Assistant Commissioner had decided the issue in favour of the assessee and the Department had accepted the decision and not carried the dispute further in appeal before the Tribunal. Thus, the only dispute before the Tribunal was whether reducing the general reserves by the sum of Rs. 28,24,000 being the value of bonus shares issued after the first day of the previous year was proper. The Tribunal addressed itself only to this question and that is the only question referred to us.

Following this court''s decision in Commissioner of Income Tax, Bombay City-I, Bombay Vs. New Swadeshi Sugar Mills Ltd., , we must hold that the general reserve could not have been reduced by the amount of bonus shares issued after the first day of the previous year and that the Tribunal was justified in its conclusion.

The second question is, accordingly, answered in the affirmative and in favour of the assessee.

No order as to costs.