P.K. Badiani Vs. The Commissioner of
Income Tax, Bombay [1976] INSC 225 (21 September 1976)
UNTWALIA, N.L.
UNTWALIA, N.L.
KHANNA, HANS RAJ SINGH, JASWANT
CITATION: 1977 AIR 560 1977 SCR (1) 638 1976
SCC (4) 562
ACT:
Income tax Act (11 of 1922), ss. 2(6A)(e) and
10(2)(vi-b)--Development rebate treated as accumulated profits--Withdrawal of
amount by shareholder from Company's account--If withdrawal can be treated as
dividend since amount withdrawn is within accumulated profits.
HEADNOTE:
Under s. 2(6A)(e), Income Tax Act, 1922,
dividend includes any payment by a company, not being a company in which the
public are substantially interested within the meaning of s. 23A, of any sum by
way of advance to a shareholder to the extent to which the company possesses
accumulated profits.
The appellant-assessee was a shareholder in a
company in which the public were not substantially interested within the
meaning of s. 23A. He had withdrawn some amounts from the company's account.
The company had been allowed development rebate under s. 10(2)(vi-b) and that
amount was debited in the profit and loss account of the company for the
accounting year leaving a small balance of profit in the profit and loss
account. The Appellate Assistant Commissioner treated the entire sum, that is,
the amount allowed as development rebate and the amount of balance in the
profit and loss account, as the amount of accumulated profits possessed by the
company. Treating the withdrawals by the appellant as advances by the company to
him and finding the highest amount of advance to the assessee to be within the
total figure of accumulated profits as arrived at by him, he directed the
addition of the advance to the assessee's income as dividend under s. 2(6A)(e)
of the Act. The Tribunal held that the development rebate was not liable to be
treated as accumulated profits; but, on reference. the High Court substantially
confirmed the order of the Appellate Assistant Commissioner.
On the question whether the development
rebate could be treated as accumulated profits in the hands of the company
under s. 2(6A)(e), the appellant contended that the development rebate, being
identical with initial depreciation is in the nature of depreciation allowance,
and since it is deductible from the assessable profits of the company, it is
also a type of outgoing expenditure or out-of-pocket cost, and was therefore,
deductible from the company's commercial profits.
Dismissing the appeal,
HELD: The development rebate reserve created
by the company, although it does not form part of the assessable profits,
undoubtedly forms part of the commercial profits and hence constituted
accumulated profits of the company..
within the meaning of s. 2(6A)(e). [648D] (1)
The term 'profits' in taxation law varies in its meaning according to the
context. The expression 'accumulated profits' occurring in s. 2(6A) means
profits in the commercial sense that is profits in the real and true sense of
the term and not assessable or taxable profits. [642E] E.D. Sassoon &
Company Ltd. and Others v. Commissioner of Income-tax, Bombay City 26 ITR 27 at
page 46, Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai. & Co.,
Bombay 18 ITR 472 at 502, Commissioner of Income-tax. Bombay City v.
Bipinchandra Maganlal & Co. Ltd. 41 ITR 290 and Gobaid Motor Service (P)
Ltd. v. Commissioner of Income-tax, Madras 60 ITR 417 followed.
(2) Although they are not identical and
differ in some material particulars, initial depreciation and development
rebate are similar in nature as both are by 639 way of incentive for
installation of new machinery or plant.
But the initial depreciation or the
development rebate is not a recurring allowance for the subsequent years like
the normal depreciation allowance provided in s. 10(2)(vi) or the additional
depreciation provided in s. 10(2)(vi-a). The normal depreciation and the
additional depreciation are permitted to be deducted from the written down
value. But the amount of the initial depreciation is not deductible in
determining the written down value. [644D-E] (3) Normal depreciation reserve of
the company may not form part of the accumulated past profits as held in Commissioner
of Income-tax, Bombay v. Viramgam .Mills Co. Ltd. (43 ITR 270). But since the
initial depreciation or the development rebate cannot be equated with normal
depreciation, it is not a deductible item of cost or expenditure in. arriving
at the commercial profits. The initial depreciation or the development rebate
is not allowed as an extra deductible allowance of business expenses for
meeting the costs of replacement in future years, but they are meant merely to
reduce the tax liability of the assessee for the year of installation only, in
order to give him an incentive to install new machinery or plant [645D-F] (4)
The purpose of s. 2(6A) is to include within the term 'dividend', for the
purpose of taxation, certain distributions or payments as deemed dividend.
Section 2(6A)(c) provides that 'dividend' includes any distribution to the
shareholders liquidation to the extent to which the distribution is
attributable to accumulated profits. In Tea Estate India Pvt. Ltd. v. C.I.T.,
W. Bengal (103 ITR 785) it was held that accumulated profits in cl. (c) include
development Tebate. If for the purpose of distribution the amount of
development rebate could form part of the accumulated profits of the company, a
fortiori, it would be so far the purpose of cl. (e) also. [646B; 645G] (5) The
use of the expression 'whether capitalised or not', as qualifying the
expression 'accumulated profits' in cls. (a) to (d), but not in cl. (e), shows
that the legislature does not intend to rope in capitalised profits in el.
(e). That is, to the extent the profits have
been capitalised in accordance with the law and its Articles of Association, a
company cannot be said to possess any accumulated profits. But in the present
case, the accumulated profits of the company were never capitalised. Merely
transferring the sum to the development reserve account by debiting it to the
profit and loss account did not amount to capitalisation of profits. The nature
of the assets did not change out continued to remain as profits. [646E-G;
647A-B] Ann Bouch and William Bouch v. William Bouch Sprou (12 Appeal Cases,
385 applied.
Commissioner of Income-tax, Madras v.K.
Srinivasan and others 50 ITR 786 approved.
Sheth Haridas Achratlal v. Commissioner of
Income tax, Bombay North, Kutch and Saurashtra, Baroda 27 ITR 684 referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1695 of 1971.
From the Judgment and Order dated 2-2-1970 of
the Bombay High Court in I.T. Reference No. 54/63) V. Rajagopal and A.G.
Pudissery for the Appellant.
S.T. Desai, B.B.Ahuja and R.N. Sachthey for
the Respondent.
UNTWALIA, J. This is an appeal by an assessee
on grant of a certificate of fitness by the Bombay High Court under section 66A
(2) of the Income-tax Act, 1922-hereinafter referred to as the 1922 Act. The
assessee is an individual.
We are concerned in this case with his
assessment for the assessment year 1958-59-corresponding accounting year being
1st April, 1957 to 31st March, 1958. The Income tax Tribunal made a composite
order disposing of the assessee's 640 appeals in respect of two assessment
years i.e. 1958-59 and 1959-60. The decision of the Tribunal was partly in
favour of the assessee and partly in favour of the Revenue. In respect of the
assessment year 1958-59, a reference under section 66(1) of the 1922 Act was
made by the Tribunal to the High Court. Four questions were referred-one at the
instance of the Commissioner of Income-tax and three at the instance of the
assessee. The High Court by' its judgment under appeal which is reported in
Commissioner of Income-tax (Central), Bombay v. P.K. Badiani(1) has answered
almost all the questions. against the assessee. Hence this appeal.
Mr. V. Rajgopal who had argued the case of
the assessee before the High Court appeared before us in support of the appeal
also. He could not and did not attack the decision of the High Court as
respects questions 2, 3 and 4. But he strenuously urged before us for reversal
of the High Court judgment in regard to question No. 1 which was referred at
the instance of the Commissioner. If the assessee could succeed before us in
getting an answer in his favour to the said question, then, substantially he
would have succeeded in getting the whole of the relief.
The first and the only question which falls
for our examination in' this appeal was referred by the Tribunal to the High
Court in the following terms:
"(1) Whether the development rebate
reserve created by the company by duly charging the amount to the profit and
loss account and being allowable under the Act constituted 'accumulated
profits' of the company within the meaning of section 2(6A)(e) of the
Act?" We proceed to state the necessary facts for determination of the
above question only.
The assessee was a major shareholder
(although at the relevant time being a major or minor shareholder did not make
any difference in law) in the Sadhana Textile Mills Pvt. Ltd. which was
indisputably a Company in which the public were not substantially interested
within the meaning of Section 23A of the 1922-Act. The assessee was also the
Managing Director of the said Private Limited Company. He had a mutual open and
current account in the books of the Company--the accounting year of which was
the calendar year i.e. commencing from January and ending in December. The
assessee in his accounting year 1957-58 had withdrawn considerable amounts of
money from the Company's account.
The Income-tax Officer' treated the
withdrawals made by the assessee as advances or loans given by the Company to
him and taxed the amount as dividend under section 2(6A)(e) of the 1922 Act.
The Appellate Assistant Commissioner modified the figure of the deemed dividend
calculated by the Income-tax Officer and took the highest amount of advance
made (I) 76 I.T.R. 369.
641 to the assessee by the Company at a
particular point of time in the year in question as the amount of dividend
taxable in the hands of the assessee. The said amount was within the total
figure of accumulated profits in the hands of the Company at the relevant time,
i.e. 31st December, 1956. It may just be stated here that according to the 1922
Act only the accumulated profits possessed by the company at the. end of the
corresponding previous year had to be taken into account unlike the
corresponding provision engrafted in section 2(22) of the Income-tax Act,
1961--hereinafter referred to as the 1961 Act, read with Explanation II
thereto. It was found that the aggregate amount of development rebate allowed
to the Company under section 10(2)(vi-b) was Rs. 2,36,470/-. The said amount
had been debited in the profit and loss account of the Company for the accounting
year 1966 leaving a balance of Rs. 6,641/only in the profit and loss account.
The Appellate Assistant Commissioner of Income-tax treated the entire sum of
Rs.
2,43,111/as the amount of accumulated profits
possessed by the Company. Finding the highest amount of advance to the assessee.
at a particular ;point of time to be aggregating to Rs. 1,83,493.70 he directed
the addition of the said amount in the assessee's income under section 2(6A)(e)
of the 1922-Act. The High Court has directed some modification in the
calculation of the said amount while answering the other questions referred to
it at the instance of the assessee and we need not go into their details.
The main question for our determination in
this appeal is whether the aggregate of the development rebates allowed to the
Company under section 10(2)(vi-b) of the 1'922-Act could be treated as
accumulated profits in the hands of the Company under section 2(6A)(e).
The Income-tax Acts have undergone numerous
changes from time to time and various amendments have been made both in the
1922Act as also in the 1961-Act. We shall do well to quote all the subclauses
(a) to (e) of section 2(6A) of the 1922-Act. They read as follows:
"2(6A) "dividend" includes-(a)
any distribution by a company of accumulated profits whether capitalised or
not, if such distribution entails the release by the company to its
shareholders of all or any part of the assets of the company;
(b) any distribution by a company of debentures,
debenture-stock or deposit certificates in any form, whether with or without
interest, to the extent to, which the company possesses accumulated profits,
whether capitalised or not;
(c) any distribution made to the shareholders
of a company on its liquidation, to the extent to which the distribution is
attributable to the accumulated profits of the company immediately before its
liquidation, whether capitalised or not;
642 (d) any distribution by a company on the
reduction of its capital to the extent to which the company possesses
accumulated profits which arose after the end of the previous year ending next
before the 1st day of April, 1933, whether such accumulated profits have been
capitalised or not;
(e) any payment by a company, not being a
company in which the public are substantially interested within the meaning of
section 23A, of any sum (whether as representing a part of the assets of the
company or otherwise) by way of advance or loan to a shareholder or any payment
by any such company On behalf or for the individual benefit of a shareholder,
to the extent to which the company in either case possesses accumulated
profits;
Explanation--The expression "accumulated
profits," wherever it occurs in this clause, shall not include capital
gains arising before the 1st day of April, 1946, or after the 31st day of
March, 1948 and before the 1st day of April, 1956." The expression
"accumulated profits" occurring in clause (e) of section 6A, or as a
matter of that in any of the other clauses, undoubtedly means profits in the
commercial sense and not assessable or taxable profits liable to tax as income
under the.1922 Act. It is a well known concept of the taxation law that the
term 'profits' in the various sections of the Income-tax Acts have not got the
same meaning. In the context --sometimes it means the assessable profits and
sometimes it means the commercial profits. In Palmer's Company Law, Twenty
First Edition at page 662 the distinction between profits, divisible profits
and profits available for dividend has been pointed out. At the said page
occurs an oft quoted classical passage from the judgment of Fletcher Moulton,
L.J., in Re Spanish Prospecting Co. Ltd.
(1) which runs thus:
"'Profits' implies a comparison between
the state of a business at two specific dates usually separated by an interval
of a year. The fundamental meaning is the amount of gain made by the business
during the year. This can only be ascertained by a comparison of the assets of
the business at the two dates ...... If the total assets of the business at the
two dates be compared, the increase which they show at the later date as
compared with the earlier date (due allowance of course being made for any
capital introduced into or taken out of the business in the meanwhile)
represents in strictness the profits of the business during the period in
question." Bhagwati, J. has quoted the above passage with approval in the
case of E.D. Sassoon & Company Ltd. and others v. Commissioner of
Income-tax, Bombay City.('2) Almost to the same effect ,was the view (1) [1911]
1 Ch. 92, 98. (2) 26 I.T.R. 27 at page 46.
643 expressed by Mahajan, J. as he then was,
in the case of Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai &
Co., Bombay(1) In Commissioner of Income-tax, Bombay City v. Bipinchandra
Maganlal & Co. Ltd.('2) Shah, J., as he then was, delivering the judgment
on behalf of the Court while interpreting the expression "smallness of
profits" occurring in section 23A of the 1922 Act said at page 296:
"A company normally distributes
dividends out of its business profits and not out of its assessable income.
There is no definable relation between the assessable income and the profits of
a business concerned in a commercial sense. Computation of income for purposes
of assessment of income-tax is based on a variety of artificial rules and takes
into account several fictional receipts, deductions and allowances
.............. Smallness of the profit in section 23A has to be adjudged in the
light of commercial principles and not in the light of total receipts, actual
or fictional." The same view has been expressed by this Court in Gobald
Motor Service (P) Ltd. v. Commissioner of Income-tax, Madras(3). We think that
the term "profits" occurring in section 2(6A)(e) of the 1922 Act
means profits in the commercial sense-that is to say the profits made by the
Company in the real and true sense of the term. ,We may just give one example.
Suppose the assessable profit of a company is Rs. 1,00,000/out of which the
Company had to pay a tax under the Income-tax Act--say to the extent of Rs.
30,000/-. .Although payment of tax is not a
sum deductible from the assessable profits of the Company, in the commercial
sense the Company would be left with a sum of Rs.
70,000/only as profits. We may add that Mr.
Rajgopal could not and did not seriously dispute this proposition of law.
The gravamen of the argument of the assessee
has been that development rebate deductible from the assessable profits of the
Company is also. a type of outgoing expenditure or out-of-pocket cost which is
deductible while ascertaining the profits of the Company in the commercial
sense. Counsel submitted that it is in the nature of a depreciation allowance
and is identical with initial depreciation; it should, therefore, be deducted
from the commercial profits of the Company as held by the Gujarat High Court in
the case of Commissioner of Income-tax, Bombay North v. Viramgam Mills Co. Ltd.
(4). This argument found favour with the Tribunal but was repelled by the High
Court.
The point is res integra and we have to
examine the correctness of the view expressed by the High Court.
Depreciation allowance has been allowed to be
deducted from the assessable .profits of an assessee under section 10(2) (vi)
of the 1922 Act corresponding to section 32 of the 1961 Act. It would appear
from the report of the Taxation Enquiry Commission 1953-54 Vol. II as to what
is the nature of the depreciation allowance; vide Chapter V, page 74. The
normal depreciation provided in clause (vi) and the additional depreciation
mentioned in clause (vi-a) of section 10(2) of (1) 18 I.T.R. 472 at 502. (2) 41
I.T.R.
290.
(3) 60 I.T.R. 417. (4) 43 I.T.R.
270.
644 the 1922 Act is permitted to be deducted
from the 'written downvalue'. By and large, the cost of replacements is allowed
as deductions in lieu of depreciation in respect of certain assets. By the
amendments made by the Income-tax Amendment Act, 1946., the Finance Act, 1955
and the Finance Act, 1956 certain initial depreciation was allowed in respect
of buildings newly erected or the machinery and plant newly installed.
Obviously, it was by way of an incentive for the new structures or the new
installations. The amount of initial depreciation was not deductible in determining
the 'written down value' although under proviso (c) it was to be taken into
account in the aggregate of all allowances so as not to permit them to exceed
the maximum limit provided therein. Development rebate was provided in clause
(vi-b) with effect from 1st April, 1955 by the Finance Act of 1955. There was
an over-lapping period of about two years in relation to the allowance of
initial depreciation or the development rebate. But as provided for in clause
(vi) an assessee could not have' had both even in regard to that period.
Although initial depreciation and development rebate were not identical as they
differed in some material particulars, they were similar in nature as both were
by way of incentive for installation of new machinery or plant. The initial
depreciation or the development rebate was to be allowed, as the case may be;
at a certain percentage of the actual cost of the machinery or the plant for
the year of installation only. It was not a recurring allowance for the
subsequent years like; the allowance of the normal depreciation or the additional
depreciation.The Taxation Enquiry Commission in its report aforesaid had
recommended in Chapter VII, page 98 of Vol. II for assisting the expansion and
development of :productive enterprise by allowing them a proportion of new
investment in fixed assets to be charged to current costs of production thereby
permitting the taxable profits to be brought down to that extent. In the
Finance Act of 1955 a provision was made to allow a development rebate of 25%
of the cost of all new plant and machinery installed for business purposes
instead of the then existing initial depreciation allowance of 20%. It would
thus be seen that by way of an incentive for installation of new machinery and
plants initial depreciation allowance of 20% was replaced by a development'rebate
of 25%. But it was, like grant of export rebate by way of incentive to make
more exports, in the nature of an incentive for setting up new machineries and
plants. We do not find any warrant for accepting the contention of Mr. Rajgopal
that the initial depreciation or the development rebate was allowed as 'an
extra deductible allowance of business expenses in the year of installation of
new machinery for meeting the ever increasing costs of its replacement in
future years. In our opinion it was meant merely to reduce the tax liability of
the assessee in order to give him an incentive to instal new machineries or
plants.
The Gujarat High Court in the case of
Viramgam Mills Co. Ltd. (supra) was concerned with the question as to whether
the normal depreciation reserve of .'the Company could be taken to be the
accumulations of past profits within the meaning of the proviso to section 23A
of the 1922 Act as it stood at the relevant time. It held that it could not
form part of the accumulated past profits as in the words of Wixon (vide
Wixon's Accounts Hand Book) it was "the estimated 645 expiration of asset
value" or as observed by Paton in his Accountants' Hand Book, Third
edition it is an out-of-pocket cost as any other cost. Says the learned author
in the above book at p. 746 thus:
"There is still widespread
misapprehension as to the precise significance of the depreciation charge. It
is often deemed a more or less imaginary and hypothetical :element, and is
sharply contrasted with the regular "out-of-pocket" operating costs.
As a matter of fact there is nothing at all imaginary about depreciation as a
cost of business operation and at bottom it is just as much 'an out-of-pocket
cost as any other. The depreciation charge is merely the periodic operating
aspect of fixed-asset costs, and there is no doubt as to the reality of such
costs. Far from being a non-out-of pocket charge depreciation represents the
extreme example of prepayment." Mr. S.T. Desai, learned counsel for the
Revenue drew our attention to the decision of the Calcutta High Court in
Commissioner of Income tax. Calcutta v. Sri Bibhuti Bhusan Dutt(1) and
submitted that it has taken a view different from the one taken by the Gujarat
High Court even in regard to the nature of normal 'depreciation allowance. The
Calcutta case seems to be one of a property-holding company, the profits of
which were assessable under section 9 wherein the question of depreciation was
not relevant. It is not necessary for us to examine in this case the exact
nature of the normal depreciation allowance and whether it is deductible from
the profits of a person while determining his commercial profits. The view
expressed by the Gujarat High Court seems to be reasonably plausible and
correct and for the purposes of this case we shall assume it to be so. Yet, we
do not feel persuaded to accept the argument of the assessee and equate the
initial depreciation or the development rebate with the normal depreciation. In
our opinion such an allowance is in no sense a deductible item of cost or
expenditure in the process of settlement of the commercial profits. Although it
does not form part of the assessable profits, undoubtedly it does form part of
the commercial profits.
Tea Estate India Pvt. Ltd. v. Commissioner of
Income-tax, West Bengal 11 (and vice versa)(2) one of us (Khanna, J.)
delivering the judgment on behalf of the Court has interpreted the, expression
"accumulated profits" occurring in clause (c) of section '2(6A) of
the 1922 Act to include the amount of development rebate in the commercial
sense. It has been stated at page 794:
"The acceptance of the contention would
necessarily postulate reading in section 2(6A)(c) the words "accumulated
profits as are liable to be taxed under the Act". The words "as are
liable to be taxed under the Act" are not there in the definition and it
would not, in our opinion, be permissible to so construe the clause as if those
words were a part of that clause. There is also nothing in the language (1) 48
I.T.R. 233. (2) 103 I.T.R. 785.
646 Or Context of that clause as would
warrant such a construction. Accumulated profits would retain their character
as such even though a part of them were not taxed as profits under the
Act." The purpose of section 2 (6A) of the 1922 Act corresponding to
section 2(22) of the 1961 Act is to include within the term
"dividend" for the purpose of taxation certain distributions or
payments of certain items of money or the like as deemed dividend for the
purpose of taxation. Under clause (e) an advance or loan or money to a
shareholder by a private Company has been directed to be treated as dividend to
the extent to which the Company possessed accumulated profits. The advance or
the loan, by a legal fiction, is to resemble the actual dividend. For the
purpose of distribution of the dividend the amount of development rebate could
form part of the profits of the Company; a fortiori, it would be so far the
purposes of clause (e) also.
During the course of the arguments of this
appeal, our attention was directed to a new facet of the question under
consideration and that is this. In clauses (a) to (d) of section 2(6A) of the
1922-Act so also in the corresponding clauses of section 2(22) of the 1961-Act
the expression "accumulated profits" is qualified by the expression
"whether capitalised or not". But the latter phrase is conspicuously
absent in clause (e). What is the purpose of this difference in the phraseology
of the various clauses of sub-section (6A) ? The reason is -not far to seek and
yet not helpful to the assessee in this case.
The profits of a Company can be capitalised
in accordance with the Articles of Association and the law. On the
capitalisation of the profits they cease to be profits in the hands of the
Company. The nature of the asset is changed although it does not make any
difference in the total assets of the Company. But profits stand transmuted and
transformed into capital. The most common example of capitalisation of profits
is by issuance of bonus shares to the shareholders. Clause (a) to (d) were
intended by the Legislature to cover the cases of accumulated profits even
though they may be capitalised. But the Legislature did not intend to rope in
the capitalised profits in clause (e). We may add that though under clause (b)
distribution by a Company of debentures, debenture stock or deposit certificates
in any form in lieu of capitalised profits is to be deemed dividend within the
meaning of sub-section (6A), mere distribution of bonus shares after capitalising
the accumulated profits, unless the distribution entails the release by the
Company to its shareholders of any part of the assets of the Company is not to
be a deemed dividend. Even under the 1961 Act distribution of bonus shares to
the equity shareholders after capitalising the profits in accordance with law
is not to be a deemed dividend although distribution of such shares to
preference shareholders is. It is thus clear that if money is paid to a
shareholder of a private company by way of advance or loan after the accumulated
profits have been capitalised in accordance with the law and the Articles of
Association then such payment, although it may represent a part of the assets
of the Company or otherwise, cannot be co-related to the capitalised profits of
the Company. To the extent the profits have been capitalised the Company cannot
be said to possess any accumulated profits.
647 But the Obvious difficulty in the way of
the appellant is that the accumulated profits of the Company in the year in
question were never capitalised. Mere transferring the sum of Rs. 2,36,470/by
debiting it to the profit and loss account to the development reserve account
did not amount to the capitalisation of profits. The nature of the assets in
the hands of the Company did not change. It remained profits in the hands of
the Company.
According to the Dictionary of English Law by
Earl' Jowitt, Vol. 1 "capitalisation" means "the conversion of
profits or income into. capital, e.g., by resolution of a company". Buckley
on the Companies Acts, thirteenth edition, has pointed out at page 907
"Profits carried to reserve do not cease to be profits unless and until
they are effectually capitalised". Says the learned author at page 912
after referring to Article 128 corresponding to Regulation 96 of Table
"A" of the Indian Companies Act:
"A company may, if its constitution so
allows, capitalize profits, instead of dividing them, by applying them in
paying up unissued shares, or debentures or other securities, and issuing such
shares or securities as fully paid to its members, thereby transferring the sum
capitalized from profit and loss or reserve account to share or loan capital
account." To the same effect is the statement of the law to be found in
Palmer's Company Law, twenty-first edition page 673. The "capitalisation
of profits". says the learned author, means "that profits which
otherwise are available for distribution among the shareholders are not divided
among them in cash, but that the shareholders are allotted further shares--or
debentures--which are paid up wholly or in part out of' those profits. The
amount paid by the company out of its divisible profits on account of these
newly issued shares is known as the bonus, and the shares are referred to as bonus
shares." Lord Herscheil in the case of Ann Bouch and William Bouch v.
William Bouch Sprou(1) was considering as to what was the nature and substance
of the transaction in question in that case. The learned and the noble Lord
said at page 398: "I think we must look both at the 'substance and form of
the transaction ........ And it was obviously contemplated, and was, I think,
certain that no money would, in fact, pass from the company to the
shareholders, but that the entire sum would remain in their hands as paid-up
capital." And finally 'it was said at page 399: "I cannot, therefore,
avoid the conclusion that the substance of the whole transaction was, and was
intended to be, to convert the undivided profits into paid-up capital upon
newly-created shares." The Madras High Court has pointed out in
Commissioner Income-tax, Madras v.K. Srinivasan and others(2), to quote the
placitum only:
"For the purposes of section 2(6A)(e) of
the Income tax Act, 1922, "accumulated profits" include general
reserves.
(1) 12 Appeal Cases, 385.
(2) 50 I.T.R. 788.
648 Unless the profit is capitalised in some
form or other mere transfer of the profits to any reserve account will not take
away from profits the character of accumulated profits." In Sheth Haridas
Achratlal v. Commissioner of Income-tax, Bombay North, Kutch and Saurashtra,
Baroda(1)--Chief Justice Chagla delivering the judgment on behalf of the Bench
of the Bombay High Court said at page 690:
"But when we compare the language used
by the Legislature in sub-clauses (a), (b) and (d) and when we note the
omission of the qualifying words in sub-clause (c) then it is clear that the
Legislature advisedly did not intend to subject to tax those accumulated
profits which had been capitalised." It appears that the expression
"capitalised or not": was added in clause (c) after this decision.
For the reasons stated above, we hold that
the development rebate reserve created by the Company by duly charging the
amount of profit and loss account although liable as a deduction under the
1922Act, constituted accumulated profits of the Company Within the meaning of
section 2(6A)(e). We accordingly affirm the decision of the High Court and dismiss
this appeal but in the circumstances make no orders as to costs.
V.P.S. Appeal dismissed.
(2) 27 I.T.R. 684.
Back