SUNDARAM CLAYTON LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) Civil Nos. 1360-61 of 1981 are directed against judgment dated 21/10/1981 passed by the division bench of the Madras High court in Tax Cases Nos. 743-744 of 1977 arising out of Reference Nos. 495-496 of 1977. Civil No. 1705 of 1980 is directed against judgment dated 12/11/1986 passed by the division bench of the Madras High court in Tax Case Petition No. 367 of 1986. It may be stated here that Tax Case Petition No. 367 of 1986 was disposed of by the High Court following its judgment passed by the Madras High court in the said Tax Cases Nos. 743-744 of 1977. It will, therefore, be appropriate to refer to the relevant facts relating to Tax Cases Nos. 743-744 of 1977 which were disposed of by the Madras High court on 21/10/1981.

(2.) Tax Cases Nos. 743-744 of 1977 arose out of the reference made under Section 256 (1 of the Income Tax Act, 1961. The reference before the High court raised a short question about the computation of capital under Rule 3 of Schedule II of the Companies (Profits) Surtax Act, 1964. The origin of the Companies (Profits) Surtax Act, 1964 may be traced back to the Surtax Act,1940, which was enacted for the purpose of mopping up unreasonable and extra profits earned in the business during the Second World War. Later on, Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964,were enacted for similar purpose. The rationale behind these Acts is that any profit over and above the reasonable profit expected in the commercial and productive activities would be taxed at a special rate.

(3.) It will be appropriate to note the relevant facts for the purpose of appreciating the rival contention made before the Madras High court and also at the hearing of these appeals. In the Assessment Year 1971-72, corresponding to previous year beginning from 1/8/1969 and ending on 31/7/1970, the appellant Company, M/s Sundaram Clayton Ltd. , issued 20,400 bonus shares of the face value of Rs. 100. 00 each. This bonus issue was brought about by capitalising part of the Company's general reserves. Accordingly, a sum of Rs. 20,40,000. 00 was converted into bonus shares. The assessee Company claimed that the said amount of Rs. 20,40,000. 00 which represented the bonus issue as on 23/2/1970 became the basis for increase in the capital determined at Rs. 1,43,39,462. 00 as on the first day of the previous year i. e. 1/8/1969. It was claimed by the Company that the bonus shares were in addition to the paid-up capital of the Company. Since any 'increase' in the paid-up capital of the Company was to be properly reckoned for the purpose of computation of capital under Rule 3 of Schedule II of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as Surtax Act, 1964, it was claimed that the proportionate amount which worked out to Rs. 8,84,237. 00, must be added to the capital as on 1/8/1969 for the purpose of capital computation.