V.S. Desai, J.
1. The short question with which we are concerned in the present reference relates to the proper interpretation and meaning of the expression 'any premium received in cash by the company on the issue of its shares' in the Explanation to Paragraph D of Part II of the Indian Finance Act, 1956.
2. The question arises in the following manner : The Standard Mills Company Limited, Bombay (hereafter referred to as the Standard Mills) is a public company limited by shares and its business is manufacturing of cotton textiles. Sometimes in the year 1950, the Standard Mills thought of amalgamating with another company which was known as Indian Bleaching, Dyeing and Printing Works Ltd. The managing agents of the Standard Mills accordingly issued a circular letter to its shareholders on the 1st February, 1951, relating to the proposed amalgamation. In order to determine the equitable basis of amalgamation, the accounts of the two companies up to 31st August, 1950, were got audited, and their assets also got valued by experts. By a joint report of the auditors of both the companies, the said auditors expressed their opinion that a fair and equitable basis of amalgamation would be that two shares of the Standard Mills should be regarded as worth three shares of the Indian Bleaching Dyeing and Printing Works Ltd. The method of amalgamation contemplated was the absorption of the Indian Bleaching, Dyeing and Printing Works Limited in the Standard Mills, by the Standard Mills taking over the entire assets of the other company and issuing its own shares to the shareholders of the other company in lieu of the shares possessed by them of the other company. The Standard Mills had a share capital of Rs. 60 lakhs divided into 60,000 shares of Rs. 100 each. Rs. 48 lakhs out of Rs. 60 lakhs was its equity capital, and the remaining Rs. 12 lakhs in preference shares. It decided to increase its equity capital by the creation of 8,000 ordinary shares of Rs. 100 each for being allotted to the shareholders of the Indian Bleaching, Dyeing and Printing Work Ltd. in accordance with the amalgamation scheme. These shares were to be distributed amongst the shareholders of the Indian Bleaching, Dyeing and Printing Works Ltd.; two shares for every three shares of the other company possessed by them and the shares allotted were to be credited as fully paid. Now, under the Capital Issues (Continuance of Control) Act, 1947 (hereinafter referred to as the Capital Issues Control Act), the company had to obtain the consent of the Central Government for increasing its share capital. The application which was to be made for obtaining the said consent was required to be made to the Controller of Capital Issues in conformity with the requirements laid down in the questionnaire specified in the Schedule annexed to the Rules made under the said Act. Amongst the other particulars and information, the company was required under the said questionnaire to state whether it was going to issue the shares at premium and if that were so, the reasons therefor. The Central Government was empowered to give its consent with such conditions as it may think fit, and when the company acted in pursuance of the consent it had to comply with the terms and the conditions imposed. The contravention of the provisions of the Capital Issues Control Act or any orders made thereunder was made punishable with imprisonment for a term which might extend to one year or with fine or both. The Standard Mills applied for the consent and the consent was obtained by it on the 8th November, 1950. The consent granted by the Assistant Controller of Capital Issues (who was the appropriate authority appointed under section 10 of the Act), was for the issue of 8,000 ordinary shares of Rs. 100 each at par. After the said consent was obtained from the Assistant Controller of Capital Issues necessary resolutions were passed by both the companies and the High Court's sanction for the amalgamation with effect from 1st September, 1950, was obtained on the 26th March, 1951. Under the scheme of amalgamation, the Standard Mills were to take over assets and liabilities of the Indian Bleaching, Dyeing and Printing Works Ltd. The said assets were valued at Rs. 28,48,312, and the liabilities amounted to Rs. 4,60,061. Under the scheme, as consideration for the transfer of the assets and liabilities, the shareholders of the transferor company were to receive in respect of every three shares of the transferor company of Rs. 100 each held by them, two new ordinary shares of the transferee company of Rs. 100 each credited as fully paid, and the transferee company was to allot such shares to the shareholders of the transferor company without further applications for allotment from them. The net assets of the Indian Bleaching, Dyeing and Printing Works Ltd., received by the Standard Mills amounted to Rs. 24,87,251 (Rs. 28,48,312 minus Rs. 3,61,061) and the new share capital share capital issued by it was Rs. 8 lakhs of 8,000 ordinary shares of Rs. 100 each. The excess of the net assets received over the nominal value of the shares capital was therefore, Rs. 16,87,251, which the Standard Mills credited in an account which was called 'Premium of shares account.' After this amalgamation with the Indian Bleaching, Dyeing and Printing Works Ltd., the total share capital of the Standard Mills stood at Rs. 68 lakhs, out of which Rs. 56 lakhs were in equity capital and the balance in preference share capital.
3. In the year 1955, the Standard Mills decided to amalgamate with another company called New China Mills Ltd. The method of amalgamation contemplated was the same as was adopted on the former occasion when it amalgamated with the Indian Bleaching, Dyeing and Printing Works Ltd. The scheme proposed provided for the creation of 31,800 new ordinary shares of Rs. 100 each, for allotment to the shareholders of the China Mills. For the increase of this share capital again, the company had to obtain the consent of the Controller of Capital Issues under the Capital Issues Control Act, 1947. Such a consent was obtained on the 27th July, 1955, and the consent granted was that the company was permitted to issue 31,800 ordinary shares of Rs. 100 each at par allotted as fully paid shares to the holders of the existing 31,800 shares in the New China Mills in the proportion of one such share for every one share of the New China Mills, Ltd., held by them in terms of the proposed scheme of amalgamation when sanctioned by the High Court of Bombay. The High Court's sanction to the amalgamation scheme was duly obtained on the 14th October, 1955. Under the said amalgamation scheme also, the assets and liabilities of the New China Mills Ltd. were to be taken over by the Standard Mills, the assets totalling Rs. 1,56,34,784, and the liabilities totalling Rs. 22,65,212. The net assets taken over therefore, amounted to Rs. 133,69,572. The nominal value of the 31,800 new ordinary shares of Rs. 100 each which were allotted to the shareholders of the New China Mills Ltd. was Rs. 31,80,000. There was thus an excess of Rs. 1,01,89,572 of the net assets over the nominal value of the new shares issued. This excess the company took to the share premium account in its books. As we have already seen, at the time of the first amalgamation a sum of Rs. 16,87,251 was carried to this account and with the addition of Rs. 1,01,89,572 on the second amalgamation the total credit balance in this account came to Rs. 1,18,76,823. It will also be seen that, after the second amalgamation the total share capital of the assessee company stood at Rs. 99,80,000 of which Rs. 87,80,000 was in equity and the rest in preference share capital.
4. In the assessment year 1956-57, for which the relevant previous year was the calendar year 1955, the total assessable income of the assessee was determined at Rs. 16,80,599. Super-tax was payable by the company in respect of this company in accordance with Paragraph D of Part II of the Indian Finance Act, 1956. Now, the rate provided for the levy of super-tax was at 6 annas 9 pies in the rupee. But a certain rebate was allowed at specified rates in specified circumstances. The rate of rebate was at 4 annas per rupee of the total income. On the total assessable income of Rs. 16,80,599, therefore, the rebate calculated at the said rate was Rs. 4,20,150. It was however, provided in the second proviso to Paragraph D that the rebate would be reduced by the aggregate of certain amounts. According to the said proviso, where a company declared a dividend at a rate less than or equal to 6 per cent. of its paid up capital as on 1st January, 1955, there was to be dividend declared exceeded 6 per cent. but did not exceed 10 per cent. the rebate was to be reduced at the rate of 2 annas per rupee on the part of the dividend exceeding 6 per cent. and where the dividend exceeded 10 per cent. of the paid up capital the reduction in the rebate was to be made at the rate of 3 annas per rupee on the excess of the dividend over 10 per cent. Now, the dividend declared by the company on its ordinary shares was Rs. 11,20,000. Its ordinary share capital was as we have been Rs. 87,80,000. The Income-tax Officer took the view that since the paid up capital for the purposes of Paragraph D was only Rs. 87,80,000 the dividend of Rs. 11,20,000, which the company had declared was more than 10 per cent. of the paid up capital, and the rebate was, therefore, liable to be reduced at the rate of 3 annas per rupee on the excess of the dividend over 10 per cent of the paid up capital. According to his calculations therefore, the rebate was required to be reduced by an amount of Rs. 89,275. The company contended that its paid up capital for the purposes of Paragraph D was not only Rs. 87,80,000 but the said amount increased by a further sum of Rs. 1,18,76,823. According to the company, therefore, its paid up capital was a little over Rs. 2 crores and the dividend of Rs. 11,20,000 declared by it was therefore, less then 6 per cent. of the paid up capital. The company, therefore, contended that the entire rebate of Rs. 4,20,150 must be allowed to it. The contention of the assessee company not having been accepted by the Income-tax Officer the company took the matter to the Appellate Assistant Commissioner in appeal. Having failed before the Appellate Assistant Commissioner also, it took a further appeal to the Appellate Tribunal. It was contended by the assessee before the Tribunal that on each of the two occasions of amalgamation the company had received premium on the issue of its shares, and the whole of it or, at any rate, some part of its, was received by it in cash, and therefore constituted 'premium received in cash by the company on the issue of its shares' within the Explanation to Paragraph D of Part II of the Indian Finance Act, 1956. Under the said Explanation, therefore, the amount of premium was to be included in the expression 'paid up capital' for the purposes of Paragraph D of Part II of the Indian Finance Act, 1956. The Tribunal took the view that since under the Capital Issues Control Act, 1947, the assessee could increase its share capital only in accordance with and on the conditions of the consent granted by the Controller was on conditions that the shares should be issued at par, the new shares issued by the company on either occasion were shares issued at par, and not at premium. The company could not therefore be regarded to have received any premium on the issue of its share on either of the two occasions, and no amount was, therefore, liable to be added to the paid up capital for the purposes of the Explanation to Paragraph D of Part II of the Indian Finance Act. In view of this conclusion, the Tribunal did not think it necessary to consider further the question as to whether, if any premium was received by the assessee whether whole of it or any part of its, was in cash so as to constitute an amount which could be added to the paid up capital for the purposes of Paragraph D of Part II of the Indian Finance Act, 1956, in view of the Explanation to the said paragraph. Thereafter, at the instance of the assessee, it drew up the statement of the case and referred the following question to this court :
'Whether the sums of Rs. 16,87,251 and Rs. 1,01,89,572 can be considered as 'premium' received by the assessee company within the meaning of Explanation to Paragraph D of Part II of the Indian Finance Act, 1956, when it allotted 8,000 shares and 31,800 shares to the shareholders of the ' Dyeing Works' and of the 'China Mills' respectively on the occasion of their respective amalgamation in 1950 and 1955 ?'
5. The main question which, in our opinion, is required to be decided in the present case is what if the true meaning of the expression 'premium received in cash by the company on the issue of its shares' in the Explanation to Paragraph D of Part II of the Finance Act, 1956. What is sought to be contended by the assessee is that premium means anything which the company receives in excess of the nominal clue of the shares on the issue company received in excess of the nominal value of the shares. Thus, where the assets of another company are taken over by the company, and in consideration thereof, its own shares as fully paid up are offered to the company or to it shareholders directly, the excess of the assets over the nominal value of the shares is premium received by the company on the issue of shares. The excess so received is also premium received in cash, because, the assets, though they may not consist of cash, are capable of being converted into cash. Therefore, according to the assessee, the entire excess of the assets over the nominal value of the shares is 'premium received in cash on the issue of shares' within the Explanation. At any rate, the assessee contends, such part of the excess as is in cash without being required to be converted into cash, is premium received in cash, and therefore, comes within the Explanation to Paragraph D. In support of the contention of the assessee that the excess of the assets received over the nominal value of the shares issued constitutes premium, Mr. Kaka, learned counsel for the assessee has invited our attention to a passage from Palmer's Company Law, 12th edition at page 194. He has also invited our attention to the provisions of section 78 of the Companies Act, 1956, and to the decision of an English case in Henry Head & Co. Ltd. v. Ropner Holdings Ltd. Mr. Kaka has also further argued that when its assets are transferred by one company to another on amalgamation, the conveyance is a conveyance of sale. If the transfer of assets is in consideration of the issue of shares and if the transaction has the nature of a sale, the assets transferred must correspond to the price of the shares. The price so determined of the shares in excess and its nominal value will therefore, represent the premium on shares received by the company on the issue of shares.
6. In our opinion we are not so much concerned with what the word 'premium' may include in its connotation. The premium in relation to the value of shares and securities' (see the Dictionary of English Law, Earl Jowitt, at page 1390). The excess value however, may not be premium in cash, but it may be premium otherwise. What we are concerned with is that is premium in cash, and in what meaning is the said expression used in the Explanation to Paragraph D. Now, in the English case, to which Mr. Kaka has made a reference in support of his submission that whatever is received in excess of the nominal value of the shares constitutes premium, we find some observations relating to the meaning of the expression 'issue of shares at premium' and 'premium in cash'. What had happened in that case was that a company was formed for the purposes of amalgamating two other companies. The shares of the two companies which were to be amalgamated were of the nominal value of pounds 1 each. The newly formed company took over the assets of the two other companies and issued its own shares of pounds 1 each in lieu of the shares of the other companies to the shareholders of the said companies - one share of the new company for one share of the old company possessed by them. The aggregate of the nominal value of the new shares issued was pounds 1,759,606 while the total assets of the two companies taken over were over pounds 7,000,000. The excess of the assets over the nominal value of the shares, the new company took to its account called 'Capital Reserve, share premium account (less formation expenses).' A shareholder complained that the carrying over the excess amount to the share premium account was undesirable because it imposed rigidity on the structure of the company having regard to the fact that a payment out of the account kept under the name could only be effected by means of a transaction analogous to a reduction of capital. The company contended that it was bound to do so under section 56 of the Companies Act, 1948, which was a provision similar to the provision of section 78 of the Companies Act, 1956, requiring the company, when it issues shares at a premium whether in cash or otherwise, to transfer to the share premium account a sum equal to the aggregate amount or value of the premium on those shares. The question which the court had to consider therefore, was whether the excess received was premium whether in cash or otherwise within the meaning of the provision of section 56 of the Companies Act. It was contended before the court on behalf of the shareholder, that the transaction of the nature that had taken place in the amalgamation could not be regarded as issuance of shares at a premium. It was urged that nobody in the commercial world would dream of so describing it. It was argued that what is meant by the issue of shares at premium is what happens when a company if in a strong trading position wants further capital and puts forward its shares for subscription by the public at such a price as the market in those shares justifies. The amount of the price above the nominal value of the share in such circumstances is the premium on the issue of shares. Harman J. in dealing with the said contention observed that would be the premium in cash, which means the offer of shares at a price higher than the nominal value. The learned judge then came to the conclusion that the excess was premium otherwise received by the company, and therefore, was liable to be set apart in the share premium account under the provisions of section 56. The case no doubt helps Mr. Kaka for his submission that the word 'premium' may include any excess which the company has received over the nominal value of the shares for the issue of its shares, but the observations in the case to which we have already made reference would suggest that all such excess will not come within the expression 'premium in cash' that expression being confined in its meaning only to excess price over the nominal value at which the share is offered. In our opinion the expression 'premium in cash' used in the Explanation to paragraph D is used in the sense in which the expression is understood in the ordinary commercial world and in commercial language, as pointed out by Harman J. In the present case, the shares were not issued in that sense. The consent obtained of the Controller of Capital Issues was to issue them at par and not at premium. No price in excess of the nominal value of the shares being required to be paid by the holder of the share for his obtaining the share no premium in cash could be said to have been received by the company on the issue of shares. It may be that the premium otherwise within the meaning of the section 78 of the Indian Companies Act might have been received by the company which under the company law, it may be required to take to a separate account and deal with in the manner provided in the said statute. We are, however, not concerned with the said account of premium but only with the premium in cash. That, as we have pointed out, would mean such excess price asked for the shares over and above its nominal value.
7. In our opinion, therefore, the amount of Rs. 16,87,251 and Rs. 1,01,89,572 could not be considered as premium received in cash by the assessee company within the meaning of the Explanation to Paragraph D of Part II of the Indian Finance Act, 1956, when it allotted 8,000 and 31,800 shares to the shareholders of the ' Dyeing Works' and of the 'the China Mills' respectively, on occasion of their respective amalgamations in 1950 and 1955. We accordingly answer the question in the negative. The assessee will pay the costs of the department in the reference.
8. No order on the notice of motion. No order as to costs.
9. Question answered in the negative.