Case: M/S. George Williamson (Assam) Ltd Vs. Commnr. Of Income Tax, Guwahati

3. The Appellant company was formed mainly for the purpose of taking over the Indian undertakings of several sterling tea companies operating in India. These sterling tea companies were registered in UK and were operating in India. The acquisition of the Indian undertakings of the sterling tea companies was done in accordance with a Scheme of Arrangement under Sections 391 and 394 of the Companies Act. The said Scheme of Arrangement was granted approval by the High Courts of Calcutta and Gauhati. As per the Scheme of Arrangement, all the properties, rights and powers and all liabilities of the sterling companies were transferred to and vested in the appellant Company. The Reserve Bank of India was the designated authority for granting approval for the price at which the undertakings including the assets were to be taken over by the appellant4. The Reserve Bank of India, by its letter No. EC.CO.FCS.3517/T-117 (Activity)/79 dated June 26, 1979 accorded the aforesaid approval whereunder it permitted the appellant to pay the aggregate lumpsum consideration at Rs. 490 lakhs. Para 2 of the said letter reads thus:We are agreeable to your acquiring the entire business and undertakings in India of (i) Attaree-khat Tea Company Attaree-khat Company Ltd., (ii) Bargang Tea Co. Ltd., (iii) Boroi Tea Co. Ltd., (iv) Corramore Tea Co. Ltd., (v) Koomsong Tea Co. Ltd., (vi) Moabund Tea Co. Ltd., (vii) Rajmai Tea Co. Ltd., (viii) Itakhooli Tea Co., Ltd., (ix) Tingri Tea Co. Ltd., (x) Bargang Tea Co. Ltd., (xi) Borelli Tea Co. Ltd. and (xii) Rupajuli Tea Co. Ltd. (hereinafter referred to as twelve sterling tea companies) with effect from the close of business as at 31st December, 1977 for a total consideration of Rs. 490 lakhs (Rupees Four Hundred Ninety lakhs only). You also have our permission under section 19(1)(d) of the Foreign Exchange Regulation Act, 1973 to issue at par 21,61,000 and 2,89,000 equity shares of Rs. 10/- each of your company to Williamson Tea Holdings Ltd., U.K. and Borelli Tea Holdings Ltd., U.K. respectively, in part settlement of the consideration for the business and not assets in India of the said twelve sterling tea companies to be taken over by you under the scheme of Indianisation5. As per paragraph 3(i) of the said letter, the Reserve Bank of India specifically directed the appellant that there shall not be any depletion in the net assets as on the actual date of transfer of business from what was given in the balance sheets of the twelve sterling tea companies as on 31.12.1976. Para 3(i) reads as follows:shall not be any depletion in the net assets as on the actual date of transfer of business from what was given in the balance sheets of the twelve sterling tea companies as on 31st December, 1976 and an auditors certificate to this effect shall be submitted to us after the formalities for transfer of business are completed.6. As against the consideration of Rs. 4,90,00,000/- permitted by RBI to be paid by the appellant, the value of the net assets which was to be maintained by the appellant as per the aforesaid requirement of RBI was Rs. 6,3389,055/- i.e. higher by Rs. 1,43,89,055/- which was disclosed in the appellant companys balance sheet as a Capital Reserve as part of7. In the assessment of the appellant company under the provisions of the Companies (Profits) Surtax Act, 1964, the question arose as to whether the said capital reserves was to be included while computing the capital of the appellant company. For the relevant years under appeal, Surtax was leviable under the said Act on chargeable profits of a year that exceeded the statutory deduction. Statutory deduction was defined to mean an amount equal to 15% of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 2,00,000/- whichever is greater. Under the Second Schedule to the Act which provides for the rules for computing the capital of a company for the purposes of Surtax, the capital of a company is the aggregate of the following as on the first day of the previous year relevant to the assessment year -1. Paid up Share Capital2. Reserves created in accordance with the provisions of the Indian Income Tax Act, 1922 and Income Tax Act, 19613. Other Reserves (as reduced by amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Income Tax Act, 1922 or the Income Tax Act, 1961Explanation 1 to Rule 2 of the Second Schedule to the said Act reads as under:1 - A paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital of a company for the purposes of this Act.The Revenue treated the impugned reserve as being covered under the said Explanation 1. This contention is rejected by the Appellate Tribunal. However, the stand of the Revenue has been upheld by the High Court.

Reasoning: 13. We have perused the said case of Standard Vacuum Oil Co. (supra). In that case, the assessee was a company incorporated with the object of taking over the assets of certain other companies - Secony Vacuum Oil Co. and Standard Oil Co. On the date of acquisition of the assets of these two companies, the book value thereof as recorded in their books of accounts was Secony Vacuum Oil Co. $97,715,701/- Standard Oil Co. $46,767,397/-19. As rightly pointed out by learned senior counsel for the appellant the judgment of Standard Vacuum Oil Co. (supra) was cited before the High Court, the Division Bench failed to appreciate the applicability of the said judgment to the case on hand. Likewise, the High Court has completely failed to appreciate the true meaning and real effect in law of Explanation 1 to Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Division Bench, in our view, has grossly erred in stating that the appellant had obviously received benefits in computation of income tax on account of assets taken over by the appellant from other tea companies and that, therefore, the reserve in question could not be treated as a component of the capital for the purposes of surtax assessment. Such a new case was neither at all advanced by the Revenue before the High Court, not could such a case at all be considered by the High Court inasmuch as it did not at all arise out of the order by the Appellate Tribunal. The provisions of the Business (Profits) Tax Act, 1947 which were interpreted by this Court in Standard Vacuum Oil Co. (supra). are virtually identical to the provisions of the Companies (Profits) Surtax Act, 1964 and since the said judgment directly and squarely covered the instant case. In our opinion, the High Court has committed a patent error in completely dis-regarding the judgment of this Court in Standard Vacuum Oil Co. (supra), and in reversing the well-considered order of the Appellate Tribunal which has decided the matter in favour of the appellant and as a consequence of the impugned order of the High Court, the huge tax liability was created on the appellant without any warrant or justification whatsoever