COMMISSIONER OF INCOME TAX Vs. RYDAK SYNDICATE LTD

JUDGEMENT

(1.) As directed by this court under Section 256(2) of the Income-tax Act, 1961, the following two questions have been referred by the Tribunal at the instance of the Revenue for our opinion :

(2.) The facts found and/or admitted in this case are that the assessee-company follows the calendar year as its accounting year and the assessment years involved are 1975-76 to 1978-79. In the wake of an amalgamation of some other tea companies with the assessee-company with effect from the close of the business on December 31, 1968, with the approval of the High Court at Calcutta, a surplus of Rs. 44,84,866, representing the difference between the book value of the assets transferred and the par value of the capital stock issued, arose out of such amalgamation. The assessee treated the surplus as a reserve of the company. The Surtax Officer negatived the assessee-company's claim that the said sum of Rs. 44,84,866 should be treated as reserve for inclusion in the computation of the capital in accordance with Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Before him, the assessee relied or. the decision of the Supreme Court in CIT v. Standard Vacuum Oil Co. But the Surtax Officer took the view that the share premium not having been received in cash, it was hit by Explanation 2 to Rule 2 of the Second Schedule. The assessee's contention that the amount standing in the share premium account should be treated as a reserve was also rejected by him on the ground that the acceptance of such a plea would render Explanation 2 as aforesaid redundant. The Surtax Officer, therefore, did not include the amount standing in the share premium account in the capital computable under the Second Schedule by invoking Explanation 2 to Rule 2 of the Second Schedule.

(3.) On appeal, the Commissioner of Income-tax (Appeals) observed that Explanation 2, on the face of it, was merely explanatory or clarificatory of the position as to when the share premium account would be treated as forming part of the paid-up share capital. According to him, what Explanation 2 clarifies is that the share premium received in cash on the issue of shares would form part of the paid-up share capital. But, it does not imply that the share premium not received in cash could not otherwise be taken into account for the capital computation as a reserve. Therefore, according to him, the surplus arising on amalgamation as share premium may not constitute share capital but would very well be a reserve and form part of the capital of the company. It would be a reserve under Rule l(iii) of the Second Schedule though not share capital under Rule 2. He accordingly reversed the order of the Surtax Officer and directed him to include the amount credited to the share premium account in the computation of capital, impliedly not as paid-up share capital but as other "reserve".