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Bank of India Ltd. Vs. Commissioner of Income-tax, Bombay City Ii - Court Judgment

LegalCrystal Citation
SubjectCompany;Direct Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 89 of 1962
Judge
Reported in[1969]39CompCas238(Bom)
ActsFinance Acts, 1956 to 1958
AppellantBank of India Ltd.
RespondentCommissioner of Income-tax, Bombay City Ii
Appellant AdvocateN.A. Palkhivala, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - share premium account - finance acts, 1956 to 1958 and section 78 of companies act - true that under section 78 it is now incumbent on every company to maintain separate 'share premium account' - necessary in view of restrictions imposed by that section itself on limited use to which amount standing in share premium account can be put - payment of separate share premium account makes no difference to matter in view of fact that share premium account was ultimately closed and amount standing to its credit was thereafter transferred to reserve fund account - position finally obtained was same as case before calcutta high court - not necessary to resort in present case to principle of uniformity of judicial decisions of taxation. - maharashtra scheduled castes, scheduled.....vimadalal, j.1. this is an income-tax reference under section 66 of the indian income-tax act, 1922, at the instance of the applicant-bank, which raises an interesting question with regard to the construction of explanation (i) to paragraph d of part ii of the first schedule to the finance acts of 1956, 1957 and 1958. the reference relates to the income-tax assessments of the applicant-bank for the assessment years 1956-57, 1957-58 and 1958-59, the corresponding previous years being the english calendar years commencing on 1st january, 1955, 1st january 1956, and 1st january, 1957. the applicant-bank had received as premium on issue of shares in the years prior to the year 1955, an aggregate sum of rs. 2 crores which stood credited as part of an account called 'reserve fund and other.....
Judgment:

Vimadalal, J.

1. This is an income-tax reference under section 66 of the Indian Income-tax Act, 1922, at the instance of the applicant-bank, which raises an interesting question with regard to the construction of Explanation (i) to Paragraph D of Part II of the First Schedule to the Finance Acts of 1956, 1957 and 1958. The reference relates to the income-tax assessments of the applicant-bank for the assessment years 1956-57, 1957-58 and 1958-59, the corresponding previous years being the English calendar years commencing on 1st January, 1955, 1st January 1956, and 1st January, 1957. The applicant-bank had received as premium on issue of shares in the years prior to the year 1955, an aggregate sum of Rs. 2 crores which stood credited as part of an account called 'reserve fund and other reserves account'. In the year 1956, a sum of Rs. 50 lakhs was transferred from the said amount of Rs. 2 crores to the bonus shares account, as the applicant-bank had issued bonus shares in that year. Under the Finance Act, 1956, super-tax was levied at the rate of 6 annas and 9 pies in the rupee of the total income of every company. The said Act, however, gave a rebate in respect of super-tax to those companies which declared dividend which was not in excess of 6 per cent. of its paid-up capital. The said Act further provided a pro rata reduction in that rebate in respect of companies which paid dividend exceeding 6 per cent. of their paid-up capital per annum. Explanation (i) to Paragraph D of Part II of the First Schedule to the said Act defines the expression 'paid-up capital', and it is with the construction of the definition contained in that Explanation that the court is concerned in the present case. The said Explanation is in the following terms :

'Explanation. - For the purpose 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 the first day of the previous year relevant to the assessment for the year ending on the 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 aforesaid.......'

2. The reserve fund of the applicant-bank, as it stood on December 31, 1954, was Rs. 3,52,00,000 and its paid-up capital as at that date was Rs. 2,50,00,000; its reserve fund as well as paid-up capital as on December 31, 1955, remained precisely the same; but its reserve fund as on December 31, 1956, was reduced to the figure of Rs. 3,02,00,000, whereas its paid-up capital stock increased to Rs. 3 crores by reason of the transfer of Rs. 50 lakhs to the bonus share account, as already stated above. These figures are to be found in the balance-sheets of the applicant bank, showing its financial position as at those dates. It is, however, necessary to mention that whereas in the balance-sheet for the year ending 1954, the sum of Rs. 3,52,00,000 was shown as being the amount of the 'reserve fund', without there being any indication to show that it included the amount which the applicant-bank states it has received in respect of share premiums, the balance-sheets for the years ending 1955 and 1956 contained a parenthetical statement in the following terms :

'Includes Rs. 2,00,00,000 received as premiums on issue of shares in past years.'

3. In computing the super-tax rebate to be withdrawn on dividends declared in excess of 6 per cent. of the paid-up capital of the applicant-bank under Paragraph D of Part II of the First Schedule to the Finance Acts of 1956 and 1957, the Income-tax Officer had, for the assessment years 1956-57 and 1957-58, taken the paid-up capital of the bank to include the sum of Rs. 2 crores shown to have been received by it by way of premiums on shares which had been credited to its reserve fund as stated above. The Commissioner of Income-tax, exercising his powers of revision under section 33B of the Indian Income-tax Act, 1922, however, came to the conclusion that the Income-tax Officer was wrong in including the share premium as part of the paid-up capital of the bank, and held that, under Explanation (i) to the said Paragraph D of the relevant Finance Acts, such share premiums could not be included as paid-up capital of the bank. Following the orders of the Commissioner in respect of the said two assessment years, the Income-tax Officer, in making the assessment order for the assessment year 1958-59, excluded the sum of Rs. 1,50,00,000 representing the amount of share premiums lying in the reserve fund account, in computing the paid-up capital of the bank, on the ground that it was a condition of share premiums being considered as paid-up capital that there should be a separate share premium account as on the first day of the previous year. The bank took the matter in appeal before the Appellate Assistant Commissioner from the orders of the Income-tax Officer, but the Appellate Assistant Commissioner confirmed the same on 22nd July, 1959. Against the orders of the Commissioner and the order of the Appellate Assistant Commissioner, the bank preferred appeals to the Income-tax Appellate Tribunal which were disposed of by that Tribunal by a common order dated 30th June, 1961. The Tribunal came to the conclusion that, on a reading of section 17 of the Banking Companies Act of 1949, in the context of the facts of the present case concerning the gradual building up of its reserve fund, the share premium received by the bank in earlier years had been completely merged and had become part and parcel of the reserve fund of the bank. The Tribunal took the view that only such share premiums as may appear to the credit of a separate share premium account could be taken into consideration in enlarging the meaning of the words 'paid-up capital' for the purpose of granting rebate under the relevant Finance Acts, in view of the terms of Explanation (i) to Paragraph D of Part II of the First Schedule to those Acts. The Tribunal, therefore, dismissed the three appeals of the bank for the years in question and upheld the orders of the income-tax authorities. It is on the above facts that the following question of law has been referred to us under section 66 of the Indian Income-tax Act, 1922, namely :

'Whether, having regard to the facts and circumstances of the case, the assessee-bank is in law entitled to have the amounts of share premium, received by it on issue of its shares from time to time, included in its paid-up capital within the meaning of Explanation (i) to Paragraph D of Part II of the First Schedule to the Finance Acts of 1956, 1957 and 1958, for the purpose of calculating the amounts of excess dividends on which super-tax rebates were to be withdrawn for the assessment years 1956-57, 1957-58 and 1958-59 ?'

4. The contention of Mr. Palkhivala on behalf of the applicant bank is two-fold. He first contends that the words 'standing to the credit of the share premium account', which occur in the said Explanation, even if literally construed, do not enjoin that there should be a separate share premium account. The second and an alternative limb of Mr. Palkhivala's argument is that, in the event of the court taking the view that that cannot be the literal construction of the said words, a liberal construction should be given to those words in the light of the object of the said statutory provisions. He has urged that the said words must be construed in the context of the law as it prevailed on the first day of the accounting years in question, at any rate, as far as the assessments for the first two of the three years to which this reference relates are concerned. He has then proceeded to argue that, even as far as the third year is concerned, the construction of those words cannot be different in view of the fact that the Finance Act of 1958 has reproduced exactly the same words. It may be mentioned that Mr. Palkhivala has conceded in the course of his arguments that the applicant-bank has no separate share premium account, either in its balance-sheets or in its books of account, and that the share premiums which it has received have been included in the 'reserve fund and other reserves account'.

5. As against that argument of Mr. Palkhivala, Mr. Joshi has contended that the amount of the share premiums having been merged in the reserve fund account, and having become and integral part of the same, and having been treated as such for purposes of declaring dividends in accordance with section 17 of the Banking Companies Act, 1949, there was no share premium account in existence as far as the applicant-bank was concerned, and the applicant-bank was, therefore, not entitled to include the amounts received by it in the past years while computing its paid-up capital, by reason of the said Explanation (i).

6. Before we deal with those arguments, it would be convenient to discuss the principles of construction of statutes which would be applicable in the present case. The question raised on this reference has arisen in respect of the granting of 'rebate' in the rate of super-tax under the relevant Finance Acts, and, as a matter of plain language, the word 'rebate' means reduction (Shorter Oxford English Dictionary). What is, therefore, in question is the granting of reduction in the rate of super-tax, and we do not accept Mr. Palkhivala's argument that it is merely a question of determining the rate as which super-tax is payable by the applicant-bank. In our opinion, the question of granting of a rebate in the rate of super-tax stands of the same footing as a claim for deduction in tax, and would, therefore, be governed by the observations of a Division Bench of our High Court in the case of Commissioner of Income-tax v. Chugandas & Co. (Securities). It has been observed (at page 257) in the judgment of Tendolkar J. in that case as follows :

'Lastly, it was argued by Mr. Palkhivala that, since we are dealing with an exemption clause, if there was any doubt as to the true interpretation of the exemption clause, the exemption should be liberally construed provided no violence is done to the language employed in the section. This, no doubt, has been held to be the proper canon of construction by the Calcutta High Court in Commissioner of Agricultural Income-tax v. Raja Jagdish Chandra Deo and by the Patna High Court in Kameshwar Singh v. Commissioner of Income-tax, and we certainly accept that canon of construction.'

7. Though the judgment of Tendolkar J. was the dissenting judgment in that case, as far as the above rule of construction was concerned, the other two judges, who constituted the majority, expressed their agreement with the same (at pages 262 and 289-290). Mr. Joshi has relied on the decision of the Orissa High Court in the case of Ramachandra Mardaraj Deo. v. Collector of Commercial Taxes, Orissa, to the contrary, but we should not only follow the decision of our own High Court in the matter, but agree with the view expressed therein. In our opinion, when the question is of granting relief to the subject in the matter of taxation, there is no room for the application of the rule of strict construction, but, on the other hand, a liberal construction should be placed in favour of the subject on the relevant statutory provision. We also accept the argument of Mr. Palkhivala that the provisions of the relevant Finance Acts must be construed in the context of the law as it prevailed on the first day of the accounting years in question, and in the light of the object of the statutory provision contained therein. As observed by the Supreme Court in the case of Sheikh Gulfan v. Sanat Kumar, the words used in a statue have, no doubt, to be construed in their ordinary meaning, but in many cases judicial approach finds that the simple device of adopting the ordinary meaning of words does not meet the needs of a fair and reasonable construction. It was further observed in the judgment in the said case that exclusive reliance on the bare dictionary meaning of words may not necessarily assist a proper construction of the statutory provision in which the words occur, and that, often enough, in interpreting a statutory provision it becomes necessary to have resort to the subject-matter of the statute and the object which it was intended to achieve. It was then observed in the judgment in the said case that was why in deciding the true scope and effect of the relevant words in any statutory provision, the context in which the words occur, the subject of the statute in which the provision is included and the policy underlying the statute assume relevance and become material.

8. It is in the light of these principles of construction that we must now proceed to deal with the arguments advanced on this reference by either side. The main question that we must first consider is with regard to the construction of the words 'standing to the credit of the share premium account' which occur in the Explanation in question. There are three possible constructions that can be placed upon it : (1) that the amount of the share premiums should stand credited in a separate account specifically labeled as 'share premium account'; (2) that it should stand credited in a separate account, whatever be its label; and (3) that it may even be credited in another account in which other funds also stand credited, provided that the amount of share premium is capable of identification by an accountant as being in that account, and continues to stand credited in that account, or, in other words, that the said expression should be construed to mean an account into which moneys received in respect of share premiums have gone and to the credit of which they stand. It was sought to be contended by Mr. Palkhivala on behalf of the applicant-bank that the first two constructions mentioned above should be rejected in view of the provisions of section 29 of the Banking Companies Act of 1949 which make it incumbent on a banking company to prepare its balance-sheet in the form set out in the Third Schedule thereto, and that a banking company cannot have a separate share premium account shown in its balance-sheets because there is no such heading to be found in the statutory form of the balance-sheet of a banking company in the said schedule. We do not accept that argument of Mr. Palkhivala, for the simple reason that the provisions of section 29 of the Banking Companies Act only regulate the form of the balance-sheet and do not prevent a banking company from maintaining a separate share premium account in its books of account. We must, therefore, proceed to consider each one of the above three possible constructions of the phrase quoted by us.

9. The first construction, namely, that there should be a separate account in respect of share premium amounts, which should be specifically labeled as a 'share premium account', does not commend itself to us, as, in our opinion, it would be too technical to take such a view. We would prefer to look at the substance of the statutory provision contained in the Explanation in question rather than the mere form of it, and it is hard for us to reconcile ourselves to the view that, even if there be a separate account into which amounts of share premium collected by a company have gone, the company should not be entitled to claim the requisite rebate on super-tax if, for instance, through a purely clerical error, the account, instead of being headed 'share premium account' is headed 'share account' or 'premium account'. We have no hesitation in rejecting that construction.

10. The real question, therefore, is whether the second construction or the third construction of the phrase mentioned above should be accepted by us. In our opinion, the Explanation to the Finance Acts in question does not in terms state that the amount of share premiums should stand credited to a 'separate share premium account', but uses only the words 'standing to the credit of the share premium account'. Even on a literal construction of the language of that Explanation, therefore, there is nothing to lead us to the conclusion that the account to which the share premium amount should stand credited must be a separate account. The Explanation is silent on the point as to whether such an account should be a separate account, and, in those circumstances, it is certainly permissible for us to consider the object which was intended to be achieved by the provisions in regard to super-tax which are contained in the Finance Acts of 1956, 1957 and 1958, and the mischief that was sought to be prevented thereby for the purpose of meeting 'the needs of a fair and reasonable construction', as observed by the Supreme Court in Sheikh Gulfan's case cited above. It is particularly necessary to do so in view of the fact that in the case of a rebate, as in the case of an exemption, a liberal construction should be placed upon the language of the statute in question, so long as it does no violence to that language, as stated in the case of Commissioner of Income-tax v. Chugandas & Co., already cited above. The object of the legislation which we are considering was that, in order to avoid inflation, companies should not be encouraged to pay dividends in excess of 6 percent, on the shareholders' money, and the mischief which was sought to be prevented was that shareholders' money should not be used up in paying dividends. If one has regard to that object and to the mischief sought to be prevented as stated above, it is clear that it makes no difference whether the amounts of the share premium stand credited to a separate account, or whether they stand credited to the reserve fund account so long as they are in an identifiable form.

11. It is true that, under section 78 of the Companies Act, 1956, which came into force on the 1st of April, 1956, that is one the same day as the Finance Act, 1956, it is now incumbent on every company to maintain a separate 'share premium account'. That has become necessary in view of the restrictions imposed by that section itself on the limited use to which the amount standing in the share premium account can be put. The Finance Act of 1956 would, however, be applicable to the position of the applicant-bank as on the 31st of December, 1954, and the Finance Act of 1957 would be applicable to its position as on the 31st of December, 1955, since it is the amount standing credited in respect of share premium at the end of the years 1954 and 1955, which would be standing so credited on the 1st of January, 1955, and the 1st of January, 1956, respectively, which would be the first days of the previous years in question within the terms of the Explanation to the Finance Acts of 1956 and 1957. On the 31st of December, 1954, and the 31st of December, 1955, there was no provision of the Companies Act in force which required a separate share premium account, nor is there any provision in the Banking Companies Act, 1949, which calls for the maintenance of such a separate account. If, therefore, the words used in the Finance Acts of 1956 and 1957 are construed in the context of the law as it prevailed on the 1st of January, 1955, and the 1st of January, 1956, respectively, which are the first days of the previous years 1955 and 1956, within the terms of the Explanation to the said Finance Acts, there was no statutory provision in existence at the material time which required the applicant-bank to maintain a separate 'share premium account'. In that state of law, there would be no reason why the legislature should intend that the benefit of a rebate on super-tax should be made valuable to a company if it happens to have maintained a separate share premium account, though it was not bound to do so under the law as it then stood, but should deny that rebate to a company which has not maintained a separate share premium account, though the amounts collected by ways of share premium have been duly preserved and are identifiable as having gone into some other account in the books of that company. We, therefore, accept the last of the three possible constructions of the Explanation in the Finance Acts of 1956 and 1957 mentioned above. This conclusion at which we have arrived in regard to the construction of the relevant Explanation in the Finance Acts of 1956 and 1957 must be held to apply also to the construction of the Explanation in the Finance Act of 1958 which is in the same terms, for the simple reason that the construction of these statutory provisions which are identical in terms cannot change, merely because of the enactment of section 78 of the Companies Act, 1956, which, as stated above, came into force on the 1st of April, 1956. Since we have come to the conclusion that it was not necessary for the applicant-bank to maintain a separate share premium account for the purpose of availing itself of the rebate in regard to super-tax granted by the Finance Acts in question, it is not necessary for us to consider the contention of Mr. Palkhivala that section 78 of the Companies Act of 1956 applies only to published accounts which would include the balance-sheet and that, in view of the proviso to section 78 of the Companies Act, it was not necessary, even if that Act came into force on the 1st of April, 1956, to include the share premium account as a separate head in its balance-sheet, having regard particularly to the fact that the statutory form of the balance-sheet in the Third Schedule to the Banking Companies Act has not been amended after the Companies Act of 1956 came into force.

12. We must, however, deal with the argument which Mr. G. N. Joshi has strenuously urged against the construction which we have placed upon the Explanation in the Finance Acts in question. Mr. Joshi's argument was founded mainly on the provisions of section 17 of the Banking Companies Act of 1949 which, as it stood at the material time, read as follows :

'Every banking company incorporated in India shall maintain a reserve fund, and shall, out of the net profits of each year and before any dividend is declared, transfer a sum equivalent to not less than 230 per cent. of such profits to the reserve fund until the amount of the said fund is equal to the paid-up capital.'

13. It is the contention of Mr. Joshi that it is in order to prevent the mischief of a bank lumping up its reserve fund with the share premium amounts received by it, for the purpose of complying with the provisions of the said section 17, that the legislature has, by the Explanation to the Finance Acts of 1956, 1957 and 1958, required the maintenance of a separate share premium account. This argument of Mr. Joshi appeared attractive on first impression, but we are afraid it cannot stand scrutiny, because the provision so the Explanation in the said Finance Acts, which are applicable not only to banking companies but to other companies also, cannot be construed by reference to the provisions of section 17 of the Banking Companies Act which would be applicable to banking companies alone, and not to other companies. It was further contended by Mr. Joshi that the amounts of share premium have been received by the applicant-bank over a period of several years past, and that the bank has not only credited the same to the reserve fund and other reserves account, but has treated the amounts of share premium so received as an integral part of its reserve fund for the purpose of declaring dividends in compliance with section 17 of the Banking Companies Act quoted above. It is not disputed by Mr. Palkhivala that the applicant-bank has not taken 20 per cent, of its profits to the reserve fund, but has distributed the same as part of the dividends declared by it for the last several years by reason of the fact that its reserve fund, taken together with the amounts of the share premium which stood credited in the reserve fund account, was more than equal to its paid up capital, as required by the said section 17. Mr. Joshi has contended that there was, therefore, nothing like a share premium account, and the amounts of the share premiums received by the bank did not exist any longer. This argument of Mr. Joshi, however, runs counter to the finding of fact which cannot be disturbed on a reference, namely, that the amount of the share premium still stands credited in the reserve fund as stated in the note to the bank's balance-sheets for the years 1955 and 1956. Mr. Palkhivala has rightly pointed out that the correctness of the notes to each of those balance-sheets has not been disputed at any time. Moreover, as Mr. Palkhivala has contended, there is really no contradiction between a reserve and share premiums. Premiums received on shares are not strictly capital. As premiums received on shares cannot be said to be in the nature of capital, they are, in a sense, a reserve, and when the amounts of premiums are credited into a reserve fund account they do not lose their character as share premiums. We, therefore, reject this argument of Mr. Joshi. We hold that the expression 'standing to the credit of the share premium account 'in Explanation (i) of Paragraph D of Part II of the Finance Acts of 1956, 1957 and 1958 must be construed to mean 'standing credited on account of share premium', as has been contended by Mr. Palkhivala and Mr. Dastur on behalf of the applicant-bank.

14. Having considered the question referred to us, apart from authority, we must not proceed to deal with a decision of the Calcutta High Court on facts which were very similar to the facts of the present case. In the case of Commissioner of Income-tax v. Allahabad Bank Ltd. the facts were that the accounts of the assessee, which was also a banking company as in the present case, for the assessment year 1956-57, did not disclose a separate share premium account, but the receipts on account of share premium amounting to Rs. 45,50,000 were first entered in a separate 'share premium account', and later transferred to the 'reserve fund and other reserves account'. The Income-tax Officer did not aggregate the paid-up capital by the addition of the amount received on the issue of shares at a premium, and did not, therefore, allow rebate on super-tax on that amount. The Appellate Assistant Commissioner reversed the decision of the Income-tax Officer. On further appeal, the Tribunal confirmed the order of the Appellate Assistant Commissioner, as it found that there was cash received on account of premiums, that the premium receipts were standing to the credit of the shares account though there was no particular account of premiums, that the premium receipts were standing to the credit of the shares account though there was no particular account called the share premium account, and that those cash receipts remained as identifiable amounts within the reserves of the company. On a reference to the Calcutta High Court which was heard by a Division Bench, it was observed in the judgment that the real question for determination on that reference was whether or not section 78 of companies Act, 1956, was applicable to banking companies. After discussing the effect of the enactment of section 78 of the said Act, the learned judges held that the said section did apply to banking companies also. The court then observed that in the assessee-company having received the premiums upon the issue of shares, first entered the receipts under the head of share premium account and, at the end of the year, transferred it to the 'reserve fund or other reserves account', and that the amount of the receipts against the premium on shares was a known figure and was an identifiable part of the company's reserves, it must be held the Tribunal had come to a correct conclusion in the matter. The court, therefore, held that the amount of Rs. 45,50,000 representing the share premiums should be added to the paid-up capital of the assessee for the purpose of allowing rebate to the assessee under Paragraph D of Part II of the First Schedule to the Finance Act of 1955, and answered the question referred to then accordingly. Mr. Palkhivala has submitted that the decision of Calcutta High Court in the said case is correct and should be followed by us. Mr. Palkhivala has further urged that, whatever be our views on the question referred to us, we should follow the said decision of the Calcutta High Court, on the ground that it has been the general policy laid down by this court that in income-tax matters there should be uniformity of views amongst the High Courts, as observed by Chagla C. J. in the case of Commissioner of Income-tax v. Chimanlal J. Dalal & Co. Mr. Joshi has, on the other hand, submitted that the decision of the Calcutta High Court in the case of Commissioner of Income-tax v. Allahabad Bank Ltd. is distinguishable on the ground that, in that case, the amount of the share premium was, at any rate in the first instance, paid into a separate share premium account. In our opinion, however, that that makes no difference to the matter in view of the fact that the share premium account was ultimately closed and the amount standing to its credit was thereafter transferred to the reserve fund, account, with the result that the position as if finally obtained was the same as in the case before us. Mr. Joshi has, in the learned judges of the Calcutta High Court to commend their decision, and that we should, of the fact that we have come to the same conclusion as the learned judges of the Calcutta High Court in the said case, though for reasons of our own, it is not necessary for us to resort in the present case to the principle of uniformity of judicial decisions in regard to taxation law, as urged by Mr. Palkhiwala.

15. In the result, we answer the question referred to us in the affirmative. The respondent must pay the applicant-bank's costs of this reference.


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