1. The question in this case in whether the assessee is entitled to exemption from wealth-tax of the value of 4,799 equity shares of Rs. 100 each in a private company called Abhirami Cotton Mills Private Ltd., in her assessments for 1966-67 to 1970-71
2. The claim for exemption was made under s. 5(1)(xx) of the W.T. Act, 1957. It was urged that these shares formed part of the company's initial issue of the equity share capital and that initial issue was made by the company after March 31, 1964. It was accordingly urged that s. 5(1)(xx) applied.
3. Section 5(1)(xx) as it was in force during the relevant period, exempted from wealth-tax :
'The value of any equity shares held by the assessee in any company of the type referred to in clause (d) of section 45, where such shares form part of the initial issue of equity share capital made by the company after of March 31, 1964, for a period of five successive assessments years commencing with the assessment year next following the date on which such company commences the operations for which it has been established.'
4. The idea behind this exemption is to be found in the Central Government's policy to encourage capital formation in view industrial companies. The object was sought to be achieved by drawing a date-line at March 31, 1964, and granting the exemption to newly floated companies which issue capital after March 31, 1964. Shares which form part of the issued share capital prior to March 31, 1964, are not entitled to exemption. Besides, since the avowed purpose for the tax relief was to encourage new floatings and to help new corporate enterprises during their formative periods the exemption of shares from wealth-tax was strictly limited to the first five years of business launched under the new floatations.
5. The assessee's claim in the assessment proceedings was that her 4,799 shares were exempt from wealth-tax under s. 5(1)(xx) of the Act. The WTO disallowed the claim. The Tribunal disagreed with the WTO and granted the exemption. According to the Tribunal, the assessee's 4,799 shares formed part of the initial issue of share capital made by the company after March 31, 1964, in terms of s. 5(1)(xx).
6. The question in this reference is whether the Tribunal's decision is correct The answer to the question depends on the answer to two basic aspects of the question : (1) What is the meaning of the phrase, 'initial issue of share capital'; (2) Do the assessee's 4,799 shares form part of an initial issue of the share capital made by the company concerned The first aspect of the question raises a point of company law of practice. The second aspect of the question involves a proper understanding of the relevant board resolutions relating to the issue of share capital in this company.
7. The process of capital formation in a company consists of several stages of corporate decision making.
8. They are described succinctly in an English decision as under :
'There are three steps with regard to new capital : first it is created; till it is created the capital does not exist at all. When it is created it may remain unissued for years.... When it is issued it may be issued on such terms as appear for the moment expedient. Next comes allotment.'
9. (Per Farwell L. J. in Mosely v. Koffyfontein Mines Ltd.  1 Ch 73).
10. When the company is being formed the subscribes to the memorandum or the promoters decide how much is to be the nominal or authorised capital of the company. Then comes the decision as to how much is to be the issued share capital. As part of this determination it may be decided whether the whole, or only a part of the issued capital is to be paid up. The allotment or other process by which a company makes a person holder of shares is merely the implementation of the decision relating to the issue of share capital. We may even say that the issue of share capital is a decision in the gross, and the allotment of shares is the working out of the details. Allotment cannot be made before the capital issue is decided upon, whereas the issue of capital, as such, is complete as a corporate decision, before allotment begins. The distinction between the two processes of issue of capital and allotment of shares is brought out in the following passage in another English decision.
'What is an allotment of shares Broadly speaking, it is an appropriation by the directors or the meaning body of the company of shares to a particular person' (per Sterling, in Spitzed v. Chinese Corporation (1899) 80 LT 347).
11. Indian company law is not different. In our country too, the distinction is maintained between issue of share capital and allotment of shares. Only after the capital is issued the question can arise whether any one is a a holder of shares comprised in that issue. Before the issue of capital, the question does not arise. Vide Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. : 3SCR698 .
12. The language of the exemption in the W.T. Act does not in our judgment upset this distinction between the two processes, namely, the issue of share capital by way of declaration of the gross and the allotment of shares by way of appropriation to individual subscribers. Section 5(1)(xx) of the W.T. Act lays down the requirement that there must be an 'initial issue of share capital' and a further requirement that the assessee's shares must be 'part of' that initial issue of share capital. The expression 'part of' only means that the shares must relate to the initial issue. They may so relate in one of two ways according as the persons concerned are subscribers to the memorandum or they have applied for shares otherwise. Allotment is necessary only in the latter case. For those who have subscribed to the memorandum the mere act of issue of share capital would render them the holders of the shares for which they have signed the memorandum. In their case allotment is a mere formality and it would only serve to fix the distinctive share scrip numbers. For those who apply for subscription otherwise, there must be an act of allotment by the company in order to make them holders of the shares. Hence, in order to see whether any shares are 'part of the initial issue of share capital' we will have to find out if and when the company has resolved, for the first time, upon its issued share capital and then find out whether the particular shares in question emanate from that issue either by allotment or otherwise.
13. We may now turn to the relevant resolutions of the company in this case. The first resolution of the company was on November 7, 1962. It was as follows :
'Resolved that 24,500 equity shares of Rs. 100 each be issued and alloted in four stages to the subscribers an initial issue.'
14. The resolution itself marks the distinction between 'issue' and 'allotment'. It also announces that the issue is an 'initial issue'. This initial issue will put the company's issued capital, to start with, at the figures of Rs. 24,50,000. The further decision taken at this meeting relates to the follow-up action of allotting shares from out of this initial issue. In this particular regard, the decision was to carry out the allotment in four stages. As it happened, at this very meeting the company carried out the first stage in that it :
'further resolved that the following distinctive number of shares will be allotted to the signatories of the memorandum of association' (details omitted).
There were subsequent board meetings on March 16, 1963, May 21, 1964, and March 15, 1967, in which the company allotted the balance of the shares to various applicants. It is quite clear from the resolutions that so far as the initial issue of share capital was concerned, that question was taken and decided upon in the meeting of November 7, 1962. Only the details of allotment of shares which formed part of this initial issue went on till March 15, 1967. So far as the assessee was concerned, 8,000 shares were allotted to her from out of the 24,500 equity shares reserved as the initial issue under the board resolution dated November 7, 1962. The details of the allotments as found from the Tribunal's statement of the case are as under : ---------------------------------------------------------------------Date of boards Number of sharesresolution allotting allotted to thethe shares assessee----------------------------------------------------------------------7-11-1962 20116-3-1963 3,00031-5-1964 3,20115-3-1967 1,598---------8,000-------------------------------------------------------------------------------
15. The Tribunal thought that since the board resolution dated November 7, 1962, contemplated the initial issue to be allotted in four stages, the allotment at each such stage was itself an initial issue. On this basis, the Tribunal held that the first two allotments to the assessee namely, of 201 shares on November 7, 1962 and 3,000 shares of March 16, 1963, will not be exempt from wealth-tax under s. 5(1)(xx) since they were prior to March 31, 1964. The Tribunal, however, granted exemption for the rest of the shares of the assessee covered by the subsequent two allotments one on May 21, 1964, of 3,201 shares, and the other, on March 15, 1967 of 1,598 shares aggregating to 4,799 shares.
16. The Tribunal relied for their decision on the entries in the balance- sheet drawn up by the company subsequent to the board's resolution dated November 7, 1962. Although the resolution referred to Rs. 24,50,000 as the initial issue of share capital, the Tribunal pointed out that the company's balance-sheet desisted from depicting that entire figure as the issued share capital from that time onwards. On the contrary, what was shown on the liabilities side as the company's issued share capital was just the value of shares which stood actually allotted to the shareholders as on the relevant dates of the balance-sheets and no more. The Tribunal expressed the view that in applying a provision such as s. 5(1)(xx) of the W.T. Act, we should not swerve from the company's balance-sheets. The Tribunal relied for this position on CIT v. Gangadhar Banerjee and Co. P. Ltd. : 57ITR176(SC) , a decision of the Supreme Court.
17. We reject the Tribunal's order as erroneous in every respect. It proceeds on a mistaken view of what an issue of share capital is, both under the company law and under the fiscal law. We have earlier referred to decided cases and explained why the issue of share capital is a different phenomenon under company law and practice from the allotment of shares when it speaks of issue of share capital, the Tribunal clearly erred in holding that the third and fourth allotment of shares by the company must yet be treated as 'initial'. The Tribunal missed the elementary notion that what is initial is the first alone and the rest is nowhere.
18. As for the Tribunal's reference to the company's balance-sheets, we think they are out of placed in the present discussion. A balance-sheet drawn up by a company cannot be an aid to the construction of an Act of Parliament. What is depicted therein reflects or orientates the theory and practice of corporate accountants. It is one thing to say that we should go by the balance-sheet figures to understand the financial position of a company. It is quite another to say that we should accept without question the underlaying assumptions of a balance-sheet on questions of law and accountancy. The decision of for the proposition that courts of law should accept a book-keeper's or auditor's view of the law, event of company law for that matter.
19. Our conclusion, therefore, is that the Tribunal's order cannot be supported. It only remains for us to set down seriatim the questions of law referred to us by the Tribunal and indicate our answers against each.
20. Assessment years 1966-67 to 1969-70 :
'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to exemption to the tune of Rs. 4,79,900 under section 5(1)(xx) of the Wealth-tax Act, 1957 ?'
21. Our answer to this question is in the negative and in favour of the Department.
22. Assessment year : 1970-71 :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to exemption to the tune of Rs. 4,79,900 under section 5(1)(xx) of the Wealth-tax Act, 1957
2. Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in holding that the resolution dated November 7, 1962, only permitted the issue of 24,500 equity shares
3. Whether, on the facts and in circumstances of the case, the Appellate Tribunal was right in holding that the 4,799 shares (the value of which was Rs. 4,79,900 allotted to the assessee would form part of the initial issue of the company subsequent to March 31, 1964, as evidenced by the balance-sheet
4. Whether the Tribunal's interpretation of the resolution on the basis of the balance-sheet is sustainable in law and on the materials on record ?'
23. Our answers to all these questions are against the assessee and in the negative.
24. The reference are disposed of accordingly. The Department will have their costs in all the tax cases. Counsel's fee Rs. 500 (One set).