Case: Commissioner Of Income-Tax, West Bengal Vs. Allahabad Bank Limited

Companies Act, 1948 (11 and 12 Geo. 6 ch. 38). Before the Companies Act of 1956 there was no provision in the Indian Companies Act 1913 which required a Company to maintain a separate share premium account. After the coming into force of the Companies Act 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).9. The plea raised by the Commissioner that the Company failed to comply with the statutory injunction contained in Clause (1) of Section 78 and on that account the premiums received were not "standing to the credit of the share premium account" within the meaning of the Explanation to Paragraph D in the Finance Act 1956 may be rejected on a simple ground.10. In the assessment year 1956-57 the Company was being assessed 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 Companies Act 7 of 1913 which contained no provision analogous to Section 78 of the Companies Act of 1956. The Companies Act 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 Companies Act 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 part II of the Finance Act, 1956,11. For the assessment year 1956-57, therefore rebate in super-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 1956-57.12. 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 Companies Act, 1956, 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.13. 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 share-holders in the previous year dividends in excess of 6 per cent of the paid-up capital not being dividend payable at a fixed rate. The expression "paid-up capital" is also defied in substantially the same terms as under the Finance Act, 1956.14. 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 II of the Finance Act, 1957, does not require that the share premium account must be maintained as an account outside the reserves. Under the Companies Act of 1956 there was an express provisions 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 Exp1aliation requires that in determining the paid-up capital for the purpose of rebate in super-tax, share premium as standing to the credit of a share premium account shall be excluded: it does not make maintenance of an account outside the reserve a condition of its inclusion in the paid-up capital.15. 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 II 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 shareholders.16. Share Premium account is accordingly liable to be included in the paidup 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 share premium will qualify for inclusion in the paid-up capital in computing the reduction in rebate of super-tax.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]6. The reduction in rebate in supertax depended upon the proportion which the dividend distributed bore to the paidup 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 (sic) 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.e plea raised by the Commissioner that the Company failed to comply with the statutory injunction contained in Clause (1) of Section 78 and on that account the premiums received were not "standing to the credit of the share premium account" within the meaning of the Explanation to Paragraph D in the Finance Act 1956may be rejected on a simple ground.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 II of the Finance Act, 1957, does not require that the share premium account must be maintained as an account outside the reserves. Under the Companies Act of 1956 there was an express provisions 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 Exp1aliation requires that in determining the paid-up capital for the purpose of rebate in super-tax, share premium as standing to the credit of a share premium account shall be excluded: it does not make maintenance of an account outside the reserve a condition of its inclusion in the paid-up capital.15. 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 II of the Finance Act 2 of 1957, a meaning different from the one which it had under the Finance Act, 1956.Share Premium account is accordingly liable to be included in the paidup 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 share premium will qualify for inclusion in the paid-up capital in computing the reduction in rebate of super-tax.In the assessment yearthe Company was being assessed 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 Companies Act 7 of 1913 which contained no provision analogous to Section 78 of the Companies Act of 1956. The Companies Act 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 Companies Act 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 yearthe 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 part II of the Finance Act, 1956,11. For the assessment yeare rebate inwas liable to be reduced, if the Company had distributed dividend exceeding six per cent of thel inclusive of share premiums maintained as an identifiable account. The contention raised by the Commissioner must therefore fail in respect of the assessment year