Appeals Nos 701 and 702 of 1968
Appeals from the judgments and orders dated December 17 1963 and April 6 1965 of the Calcutta High Court in Income tax References Nos 87 of 1960 and 30 of 1962 respectively
ST Desai section C Manchanda and B D Sharma for the appellants in both the appeals
Sachin Chaudhuri Sukumar Mitra and D N Mukherjee
for the respondent in both the appeals
The Judgment of the Court was delivered by Shah J
The Allahabad Bank Ltd is a public limited com pany
The paid up share capital of the Company other than capital entitled to a dividend at a fixed rate was at the relevant time Rs 3050000 The Company had issued before January 1 1954 shares at premium and the premium received in cash aggregated to Rs 4550000
In each of the account years 1955 and 1956 the Company distributed Rs 549000 as dividend
In proceedings for assessment for each of the assessment years 1956 57 and 1957 58 the Income tax Officer reduced by Rs 61000 the rebate in super tax admissible under the Finance Acts 1956 on the view that the Company had distributed dividend exceeding 6 of its paid up capital
In reducing the rebate the Income tax Officer did not take into consideration share premium amounting to Rs 4550000 received by the Company
The Appellate Assistant Commissioner held that the Company s share premium was liable to be added to the capital of Rs 3050000 in computing the reduction in the rebate in super tax and directed modification of the order of assessment
The Appellate Tribunal agreed with the Appellate Assistant Commissioner
The Tribunal then submitted a statement of the case and sub mitted the following question in respect of the year 1956 57 to the High Court of Calcutta  Whether on the facts and in the circumstances of the case the amount of Rs 4550000 should be added to the paid up capital of the assessee as on 1st January 1955 for the purpose of allowing rebate to the ass under Paragraph D of Part III of the First Schedule to the Indian Finance Act 1956
 A similar question relating to the assessment year 1957 58 was also referred by the Tribunal
The High Court of Calcutta agreed 724 with the Tribunal and held that in determining the reduction in rebate in super tax admissible to the Company the share premium maintained by the Company within the reserves was liable to be included in the paid up capital
The Finance Act 1956 prescribed the rate of super tax in Part H Paragraph D in so far as it is relevant enacted In the case of every company Rate On the whole of total income Six annas and nine pies in the rupee
Provided that i a rebate at the rate of five annas per rupee of the total income shall be allowed in the case of any company which a in respect of its profits liable to tax under the Income tax Act for the year ending on the 31st day of March 1957 has made the prescribed arrangements for the declaration and payment within the territory of India of the dividends payable out of such profits and for the deduction of supertax from dividends in accordance with the provisions of subsection 3D of section 18 of that Act and b ii a rebate at the rate of four annas per rupee of the total income shall be allowed in the case of any Company which satisfied condition a but not condition b of the preceding clause Provided further that i the amount of the rebate under clause i or the preceding proviso shall be reduced by the sum if any equal to the amount or the aggregate of the amounts as the case may be computed as hereunder a b in addition in the case of a company referred to in clause ii of the preceding proviso which has distributed to its share holders during the previous year dividends in excess of six per cent of its paid up 725 capital not being dividends payable at a fixed rate on that part of the said dividends which exceeds 6 per cent but does not exceed 10 per cent of the paid up capital at the rate of two annas per rupee on that part of the said dividends which exceeds 10 per cent of the paid up capital at the rate of three annas per rupee ii Provided further that Explanation  For the Purposes of Paragraph D of this Part i the expression paid up capital means the paid up capital other than capital entitled to a dividend at a fixed rate of the Company as on first day of the previous year relevant to the assessment for the year ending on 31st day of March 1957 increased by any premiums received in cash by the company on the issue of its shares standing to the credit of the share premium account as on the first day of the previous year   In the Finance Act of 1957 also a similar scheme of granting rebate of super tax and reduction therein in the conditions set out in the Act was adopted
The reduction in rebate in super tax depended upon the proportion which the dividend distributed bore to the paid up capital
If the Company distributed dividends exceeding 6 of its paid up capital as defined in the explanation the rebate was liable to be reduced to the extent provided in the second proviso
In the relevant years of account the share premium formed an identifiable part of the reserves of the Company but was not shown in a separate share premium account apart from the reserves
The Commissioner contends 1 that the expression share premium account in the definition of paid up capital in the Explanation to Paragraph D of Part 11 of the Finance Acts 1956 and 1957 means an account apart from the reserves main tained by the Company and 2 that in any event since the enactment of the share premium not maintainable as a separate account cannot be taken into consideration 726 in dealing with the claim for rebate in the payment of super tax and reduction in the rate thereof
Counsel for the Commissioner relied upon section 783 read with section 781 of the 1 of 1956 and submitted that the Company was bound to maintain a separate share premium account outside the reserves and transfer into that account the share premium and since the Company failed to do so in determining the paid up capital within the meaning of the Explanation to Paragraph D of the Finance Acts 1956 and 1957 the share premium within the reserve could not be taken into account
The relevant clauses of section 78 of the 1 of 1956 provide  1 Where a company issues shares at a premium whether for cash or otherwise a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account to be called the share premium account and the provisions of this Act relating to the reduction of the share capital of a company shall except as provided in this section apply as if the share premium account were paid up share capital of the Company
2 3 Where a company has passed a resolution authorising the issue of any shares at a premium this section shall apply as if the shares had been issued after the commencement of this Act  Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company s reserves within the meaning of Schedule VI shall be disregarded in determining the sum to be included in the share premium account
 Clause 1 is in terms prospective  it requires a Company to transfer premiums received in cash or otherwise on shares to the share premium  account
By clause 3 any premium received prior to the coming into force of the less that part of the premium which had been so applied so that it did not at the commencement of the Act form an identifiable part of the Company s reserves had also to be transferred to the hare premium account as if the shares had been issued after the commencement of the Act
Section 78 was apparently borrowed from section 56 of the English Companies 1948 11  12 Geo
38 Before the of 1956 there was provision in the Indian Com 727 panies Act 1913 which required a Company to maintain a separate share premium account
After the coming into force of the 1 of 1956 a share premium account had to be maintained and the share premium could not be used otherwise than for the specific purposes mentioned in section 78 2
The plea raised by the Commissioner that the Company failed to comply with the statutory injunction contained in Cl
1 of section 78 and on that account the premium received were not standing to the credit of the share premium accounts within the meaning of the Explanation to Paragraph D in the Finance Act 1956 may be rejected on a simple ground
In the assessment year 1956 57 the Company was being asses sed to tax in respect of the previous year of the Company ending on December 31 1955
In the calendar year 1955 the company was governed by the Indian 7 of 1913 which contained no provision analogous to section 78 of the 1 of 1956
The was before the Parliament during the year 1955 but the Company was on that account not obliged to transfer to a separate share premium account independent of the reserve the premiums received prior to January 1 1955
The came into force on April 1 1956  it had no retrospective operation
Since there was no obligation upon the Company to maintain a separate share premium account in the previous year corresponding to the assessment year 1956 57 the share premium account maintained as an identifiable account within the reserves qualified for being included in the paid up capital within the meaning of this expression in the Explanation to Paragraph D of the Finance Act 1956
For the assessment year 1956 57 therefore rebate in uper tax was liable to be reduced if the Company had distributed dividend exceeding six per cent of the paid up capital inclusive of share premiums maintained as an identifiable account
The contention raised by the Commissioner must therefore fail in respect of the assessment year 1956 57
Counsel for the Commissioner contends that in any event in the Finance Act 2 of 1957 the expression share premium account has only the meaning ascribed thereto in the  and in respect of the assessment year 1957 58 reduction in the rebate must be computed without taking into account the share premium which was maintained by the Company in the year of account 1956 within the reserve
Under the Finance Act 2 of 1957 rebate in super tax is liable to be reduced in the case of Companies which have inter alia distributed to the shareholders in the previous year dividends in excess of 6 per cent of the paid up capital not being dividend payable at 728 a fixed rate
The expression paid up capital is also defined in substantially the same terms as under the Finance Act 1956
For the assessment year 1957 58 the Tribunal found that the share premium was liable to be included in the paid up capital because it was an identifiable part of the reserves
In our judgment the Tribunal was right in so holding
The Explanation to Paragraph D Part H of the Finance Act 1957 does not require that the share premium account must be maintained as an account outside the reserves
Under the 1 of 1956 there was an express provision that the share premium account shall be maintained in a separate account
It is true that in the balance sheet in Sch
VI of the Act the share premium has to be shown under the head Liabilities as part of the share capital and not of reserves
But it cannot be assumed on that account that if the share premium is maintained as a separate account within the reserves reduction in the rebate in super tax is liable to be computed after excluding share premium
The Explanation requires that in determining the paid up capital for the purpose of rebate in super tax share premium standing to the credit of a share premium account shall be excluded it does not make maintenance of an account outside the reserve acondition of its inclusion in the paid up capital
Again if under the Finance Act 1956 the expression standing to the credit of the share premium account did not mean that the share premiums shall be maintained in a separate account apart from the reserve is there any reason why under an identical scheme of reducing rebate in super tax in the year 1957 58 it should have a different meaning  In the absence of any compelling grounds we would not be justified in holding that the Parliament attributed to the expression standing to the credit of the share premium account as used in the Explanation to Paragraph D Part 11 of the Finance Act 2 of 1957 a meaning different from the one which it had under the Finance Act 1956
The object of the Parliament in enacting Paragraph D of the Finance Act was that profits earned by a Company should be available for being ploughed back into the business and should not be distributed to the shareholders by way of dividend in excess of the rate prescribed
To secure that object the Parliament gave an incentive to the Company of substantial rebate in payment of super tax which would be liable to be forfeited if part of dividend exceeding 6 per cent was distributed to the share holders
Share premium account is accordingly liable to be included in the paid up capital for the purpose of computing rebate if it is maintained as a separate account
The Explanation does not contemplate that the account must be kept apart from the reserves
If within the reserves it is an identifiable separate account the 729 share premium will qualify for inclusion in the paid up capital
in computing the reduction in rebate of super tax
The appeals fail and are dismissed with costs
One hearing fee


Summary:
In proceedings for assessment to tax for each of the assessment years 1956 57 and 1957 58 the Income Tax Officer reduced the rebate in supertax admissible to the respondent under the Finance Acts of 1956 and 1957 on the view that the respondent bank which was a public limited company had distributed dividends exceeding 6 of its paid up capital
In reducing the rebate the Income Tax Officer excluded an amount representing share premium received by the company
The Appellate Assistant Commissioner held that the company s share premium was liable to be added to its capital in computing the reduction in the rebate in super tax and directed modification of the order of assessment
The Appellate Tribunal in appeal as well as the High Court on a reference agreed with this view
In the appeal to this Court it was contended on behalf of the appellant that the amount representing share premium was not to be added to the share capital because 1 the expression share premium account in the definition of paid up capital in the Explanation to Paragraph D of Part II of the Finance Acts of 1956 and 1957 means an account apart from the reserves maintained by the company and 2 in view of the provisions of section 78 3 read with section 781 of the  the respondent company was bound to maintain a separate share premium account outside the reserves and to transfer the share premium into that account which the respondent company had failed to do
HELD  A share premium account is liable to be included in the paid up capital for the purpose of computing rebate if it is maintained as a separate account
But the Explanation to paragraph D of of the Finance Acts of 1956 and 1957 does not contemplate that the account must be kept apart from the reserves
if within the reserves it is an identifiable separate account the share premium will qualify for inclusion in the paid up capital
728 H Although under the 1 of 1956 there was an express provision that the share premium account shall be maintained in a separate account and by virtue of Sch
VI of the Act the share premium has to be shown in the balance sheet under the head Liabilities as part of the share capital and not of reserves on that account it cannot be assumed that if the share premium is maintained as a separate account within the reserves reduction in the rebate in super tax is liable to be computed after excluding share premium
728 C In any event with respect to the assessment year 1956 57 the company was being assessed to tax for the previous year of the company ending on 723 December 1955 when the of 1956 was not in force
During that period the company was governed by Act 7 of 1913 which contained no provision analogous to section 78 of the C D