1. The Madras Income-tax Appellate Tribunal has referred the following question under section 66(1) of the Indian Income-tax Act, 192 :
'Whether the sum of Rs. 10,000 is income assessable under any of the provisions of the Income-tax Act?'
2. The learned judge set out the statement of facts which ran as follow :
The assessee is a public company carrying on the business of banking. Its authorised, subscribed and paid-up share capital as on December 31, 1956, are as follow : Authorised ... Rs. 2,00,000.Subscribed ... Rs. 2,00,000.Paid-up ... Rs. 2,00,000.
3. In the year 1957, its share capital was raised from Rs. 2 lakhs to Rs. 3,98,000. On the new shares issued, it collected Rs. 10,000 as entrance fees by charging at the rate of annas eight for the every share under the authority of article 17 which is as follow :
'No person shall be considered as a shareholder until he has paid the prescribed entrance fee and premiums, if any, fixed per share, and the whole of the share value or the amount of call made if any, on allotment of the share. On payment of the share value, he shall be supplied with a share certificate as hereafter provided.'
4. In its accounts of the aforesaid year 1957, the 'previous' year for assessment year 1958-59, it included the aforesaid sum of Rs. 10,000 in its profit and loss account, which, with that, showed a net profit of Rs. 45,092 available for dividend declaration. The accounts of the year were duly approved by the shareholders.
5. On the basis of the return the assessee made, based on the aforesaid profit and loss account including therein the aforesaid sum of Rs. 10,000, the assessment was completed by the Income-tax Officer by his order dated 30th July, 1958. In this assessment, the Income-tax Officer added back Rs. 5,000 being his estimate of postage stamps, power of attorney expenses and other expenses incidental to the increase of capital.
6. The assessee appealed to the Appellate Assistant Commissioner raising, inter alia, the following ground :
'2. The mere fact that the collection of entrance fees has been credited to the profit and loss account does not alter the nature of receipt from 'capital' receipt to 'revenue' receipt. As the said sum Rs. 10,000 represents collection of entrance fees, it will be only a capital receipt.
3. The expenditure incurred by the appellant that has been disallowed by the learned officer are items of expenses that are incidental to the business carried on by the appellant and hence allowable.'
7. The Appellate Assistant Commissioner dealt with these contentions in the following words reproduced from his order :
'......... it has to be stated at the outset that the appellant had itself treated the entrance fees collected on new shares as revenue receipts in its books and it was also declared in the return as part of its business income. The appellant it not a company which was newly formed in the year 1957. The entrance fee was collected on the new shares issued as a result of increasing the share capital. The sum of Rs. 10,000 realised as entrance fees can by no means represent a capital receipt. It is a receipt in the course of the appellant's business and was rightly subjected to tax as a revenue receipt......
.........When a new company is formed it has to incur certain initial expenditure before the business is started. Such preliminary expenses include registration charges, fees and stamp duty on documents filed with the Registrar, cost of preparing preliminary agreements, valuer's fees when assets are acquired, cost of preparing and printing share certificates, letters of allotment, debenture, trust deed, etc. As such expenditure is a non-recurring nature it is not charged to the first year's revenue account but is distributed over a reasonable number of years. But expenses incurred on account of printing and stationary etc., for the purpose of raising the share capital does not, in my opinion, represent expenditure of a non-recurring nature. It would be proper to treat it as exclusively revenue expenditure and charge it to the profit and loss account. The addition of Rs. 5,000 made by the Income-tax Officer is therefore deleted.'
8. The assessee thereupon appealed to the Tribunal raising the following ground :
'1. The learned Appellate Assistant Commissioner has erred in holding that entrance fees collected by the appellant while issuing new shares is a revenue receipt and hence taxable.
2. No doubt the appellant has treated the item of Rs. 10,000 as a revenue receipt, but on the facts of the case, the appellant is entitled to a deduction of the said amount from its business income for purpose of income-tax assessments. The entries in the books of account are not the criterion for finding the nature of the receipt for purpose of assessments.'
9. The respondent too appealed against the allowance of Rs. 5,000 aforesaid.
10. In the above cross-appeals, the Tribunal upheld the assessment of Rs. 10,000 as also the disallowance of Rs. 5,000 aforesaid in the following word :
'2.... It was argued that it was not a business income at all, liable to be brought to tax. It is certainly income in that, this sum of Rs. 10,000 came to the coffers of the assessee bank. All income is liable to be taxed under the Indian Income-tax Act unless otherwise exempt. The assessee's learned counsel was not able to point out any such exemption. Apart from it, by its own conduct, the assessee has treated the entrance fees as revenue receipt in its books.....
5. In our opinion, the Income-tax Officer is perfectly justified in treating the sum as capital expenditure. The expenses in question have been incurred for the purpose of raising capital and as such, would only be capital expenditure. We, therefore, set aside the order of the Appellate Assistant Commissioner on this contention and restore that of the Income-tax Officer.'
11. The material facts are fully set out above. The amount of Rs. 10,000 collected as entrance fees cannot in any manner be said to be the result of any trading activity. In truth, it is only an addition to the capital assets of the company. The nature of the collection is similar to any collection that may be made by means of issuing shares on premium. Even if we had come to the conclusion that the collection in question is not a capital receipt, we would have still held that the same, being casual income, is exempt under section 4(3)(vii) of the Indian Income-tax Act, which provision say :
'Any receipts not being capital gains chargeable according to the provisions of section 12 and not being receipts arising from business or the exercise of a profession, vocation or occupation which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of an employee.'
12. The learned counsel for the revenue does not dispute the fact that the additional share capital raised is only an addition to the capital assets of the company. The entrance fee levied must also partake the same character. It is an additional price fixed for the share. At any rate, it has nothing to do with the banking activities of the assessee. This fee is said to have been levied for meeting the incidental expenses incurred in connection with the issue of fresh shares. It may be that after meeting the incidental expenses, a residue is left. That residue in the ordinary course should have been credited to the reserve fund of the company. It must go to augment the reserve.
13. The word 'income' is not defined in the Income-tax Act. As to the true meaning of that word, there is considerable controversy. As early as in 1932, the meaning of that word came up for consideration before the judicial Committee of the Privy Council in Commissioner of Income-tax v. Shaw Wallace and Company. Sir George Lowndes, who delivered the judgment, opined that the central idea underlying such section 2(4), 10, and 18 of the Indian Income-tax Act in the continuous exercise of activity signifying that what is taxable is the profit earned by process of production, and not any receipt of any kind. Dealing with the meaning of the word 'income' this is what this Lordship stated (page 140 of the report :
'The object of the Indian Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income, profits, and gains', but the expansion is more a matter of words than of substance. Income, their Lordship think, in this Act connotes a periodical monetary return 'coming in' with some sort of the regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as 'capital'. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production.'
14. The definition given by Sir George Lowndes has provoked a great deal of controversy. We get a glimpse of that controversy from the decision of the Supreme Court in Commissioner of Income-tax v. Vazir Sultan and Sons. It is not necessary for us to go into this controversy in the present case. Suffice it to say that the receipt with which we are dealing in this case is a capital receipt. Quite clearly it was not the result of any banking activity of the assessee. Floating shares was not a part of the banking activity of the assessee. Shares are floated with a view to strengthen the capital structure.
15. Sri Bhat, the learned counsel for the assessee, tried to take support from the decision of the Supreme Court in Hoshiarpur Electric Supply Company v. Commissioner of Income-tax. Therein the assessee, which had installed machinery for generation of electricity and had laid mains and distributing lines for supplying it to its customers, charged contributions at certain rates from consumers, for the laying of service lines from its distributing mains to the consumer's premises. The charge consisted of the cost of materials and labour and supervision charges. In the year of account the assessee received the sum of Rs. 12,530 as contribution from consumers towards laying service lines, which exceeded its actual cost and the excess was sought to be taxed in the hands of the assessee. The Supreme Court hel :
'The amount contributed by the consumers was in direct recoupment of the expenditure for bringing into existence an asset of lasting character enabling the assessee to conduct its business of supplying electrical energy. The amount was, therefore, essentially reimbursement of capital expenditure and the excess that remained after expending the cost of installation of service lines was part of a capital receipt in the hands of the assessee and was not converted into trading profit because the assessee was engaged in the business of distribution of electrical energy, with which the receipt was connected. The excess over the costs of installation was not trading profit and was not taxable income in the hands of the assessee.'
16. The ratio of the above decision undoubtedly supports the contention of the assessee in this case.
17. The learned counsel for the revenue invited our attention to the decision of the Supreme Court in Commissioner of Income-tax v. Calcutta Stock Exchange Association Ltd., in support of his contention that the receipt in question is a revenue receipt. There, in consideration of putting the names of certain companies on the quotation list, a sum of Rs. 16,000 was realised by the assessee. The contention of the assessee was that Rs. 16,000 realised for putting those names on the quotation list was not a trading profit; on the other hand, it was a capital receipt. The Supreme Court repelled that contention. On the fact that case, their Lordship held that the assessee had three sources of income, namely (i) subscription realised from the members; (2) subscription levied for the introduction of assistants; and (3) fees levied for agreeing to put the names of certain companies to on the quotation list. Their Lordship came to the conclusion that the income realised from all these sources was realised during the course of the trading activities of the assessee. In our judgment, that decision does not support the contention advanced on behalf of the revenue.
18. For the reasons mentioned above, we are of opinion, that the receipt with which we are concerned in this case is a capital receipt. At any rate, it is a casual receipt as contemplated in section 4(3)(vii).
19. Hence, our answer to the points submitted to us is that the sum of Rs. 10,000 referred to above is not income assessable under any of the provisions of the Income-tax Act. The revenue shall pay the costs of this reference. Advocate's fee Rs. 200.