India Foils Ltd. v. Commissioner Of Income Tax — 1990 DIGILAW 24 (CAL)

Judgment Sen, J. 1. THE Tribunal has referred the following question of law to this Court under s. 256(1) of the IT Act, 1961 ('the Act') r/w s. 18 of the Companies (Profits) Surtax Act, 1964:- "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding that increase in the paid up share capital of the company took place on 15th Nov., 1977 and not on 1st Sept., 1977 ?" 2. THE assessment year involved is 1978-79 and the previous year commenced on 1st Jan., 1977 and ended on 31st Dec., 1977. The facts found by the Tribunal as stated in the statement of case is as under :- As on 1st Jan., 1977 its paid up capital consisted of Rs. 200 only. Some time prior to 30th Aug., 1977 it made an offer to India Foils Ltd., a company incorporated in U.K. to take over its Indian business as a going-concern on certain terms and conditions. There were negotiations between the parties wherein the terms of the offer were discussed. The terms of offer, which were accepted by the U.K. company, included, inter alia, the following :- (1) The purchaser would discharge all the liabilities of the vendor relating to the Indian business subsisting as at 31st Aug.,1977 including the liability for the remittance of past profit and head office charges of the Indian business accruing from the 1st Jan, 1977 to 31st Aug., 1977. So long as the said profit was not remitted with the permission of the Reserve Bank of India, it was provided that it was provided that the unremitted part will be held by the purchaser as interest- free loan from the vendor to the purchaser in connection with the Indian business of the vendor; (2) The purchaser-company agreed to discharge the liability to the extent of Rs.6,47,000 in connection with the demand for surtax assessment being raised on the vendor for the asst. yr. 1964-65. It was further agreed that in case the said sum of Rs. yr. 1964-65. It was further agreed that in case the said sum of Rs. 6,47,000 or any part thereof was not required for the payment and discharge of the said surtax liability it would be treated as an interest-free loan due to the vendor by the purchaser; (3) the purchaser agreed to continue the Indian business and to continue in employment all employees in India of the Vendor and accord to them the same service terms in all respects as they enjoyed with the Vendor. (4) All income or loss on account of the Indian business from the 1st Sept., 1977 was to accrue to or be borne by the purchaser. It was specifically made clear that 'any agreement resulting from acceptance by the Vendor of the offer of the purchaser to purchase the Indian business will be conditional upon all necessary, or appropriate consents, permissions and authorities being obtained from amongst others Government of India or any other relevant authorities. (5) In addition to the above, it was provided that the Indian company would issue and allot to the Vendor, i.e., the U.K. company or its nominee or nominees 14,00,000 equity shares of Rs. 10 each at par in the capital of the purchaser, credited as fully paid up. 3. IN accordance with the aforesaid agreement, a letter was written by the assessee-company to the Controller of capital issues on 29th Aug., 1977 seeking his permission to issue 19 lakhs equity shares of Rs. 10 each. The Controller of Capital Issues conveyed his sanction to issue the shares vide his letter dt. 15th Sept., 1977 in the following terms :-- 19 lakhs equity shares of Rs. 10 each out of which shares worth Rs.140 lakhs will be issued and allotted for consideration other than cash to the U.K. company for the acquisition of the assets and liabilities of their Indian branch and the balance of Rs. 50 lakhs for cash at par to the general public by a prospectus. Out of the public issue, 25,000 shares will be reserved for firm allotment to the employees and 50,000 shares to the director of the company, their relatives, friends (all individuals) and individuals or bodies corporate having or likely to have business connection with the company in such a manner that no individual gets more than 200 shares. Out of the public issue, 25,000 shares will be reserved for firm allotment to the employees and 50,000 shares to the director of the company, their relatives, friends (all individuals) and individuals or bodies corporate having or likely to have business connection with the company in such a manner that no individual gets more than 200 shares. IN the event of the under-subscription in any of these two groups, there can be a transfer of the excess to the other group. Shares not taken up by these persons will be added to the public quota. Shares allotted to these persons will not be transferable for a period of atleast two years from the date they are made fully paid-up. 4. THE following conditions, inter alia, were further attached to the aforesaid permission :-- (j) THE company shall ensure that the prospectus for issue of capital consented to herein shall print the following condition :-- An application should submit only one application (and not more than one) for the total number of shares required. Applications may made in single or joint names (not more than three) Two or more applications in single and / or joint names will be deemed to be multiple applications if the sole and / or the first applicant is one and the same. THE Board of Directors reserves the right to reject in its absolute discretion all or any multiple applications. (k) THE prospectus should clearly mention the name(s) of the Stock Exchange where the shares are proposed to be listed. THE entire public issued shall be got under written by the Financial Institutions/ Stock Brokers of repute. THE company shall list its share with the regional stock exchange nearest to its Registered Office. (l) THE share capital consented to herein shall be made fully paid-up within the validity of this order as in (b)(i) above. (m) THE shares in settlement of purchase consideration will be so issued to the U.K. Company that at no stage the non-resident interest in the enlarged share capital of the Indian company exceeds 74 per cent. (n) So long as the non-resident interest remains at a level higher then 74 per cent the company should not declare any dividend". (m) THE shares in settlement of purchase consideration will be so issued to the U.K. Company that at no stage the non-resident interest in the enlarged share capital of the Indian company exceeds 74 per cent. (n) So long as the non-resident interest remains at a level higher then 74 per cent the company should not declare any dividend". Steps were also taken to obtain the permission of the RBI for the issue of shares to the non- resident and for carrying on the business in terms of the aforesaid s. 29 of the Foreign Exchange Regulation Act, 1973. The assessee has placed on record copy of letter, dt. 18th Nov., 1977 granting permission to the assessee-company in terms of s. 29(1)(a) of the Act. The letter granting permission for allotment of shares to the non-resident has not been placed on record, but, in the context of course of events indicated above, it would be fair to presume that such permission was obtained sometime after 1st Sept., 1977. 5. ONCE the aforesaid formalities were over, the company entered into an agreement with the non-resident on 15th Nov., 1977 and one of the clause of the said agreement, being cl. 5, read as follows :-- "The purchaser will issue and lot to the Vendor and /or its nominee or nominees immediately after the transfer and sale by the Vendor to the purchaser to the Indian business in one or more lots as may be mutually agreed between the parties hereto 14,00,000. Equity Shares of Rs. 10 each at par of the nominal value of Rs. 140 lakhs (Rupees one crore forty lakhs) in the capital of the purchaser, credited as fully paid-up. The said shares shall rank for dividend as from the transfer date. ('Transfer date' has been defined in the agreement to mean 1st Sep., 1977). 6. IT is common ground that in pursuance of the aforesaid agreement 14 lakhs shares were allotted by the assessee-company to the non-resident on 15th Nov., 1977. The ITO accordingly treated the date of increase of the capital of the company on account of increase in paid up share capital as 15th Nov., 1977 and worked out the proportionate increase in capital of the company in terms of r. 3 of taking the period 15th Nov., 1977 to 31st Dec., 1977 as the one during which the increase in capital continued. The assessee went up on appeal before the CIT (A) against the order of assessment. The CIT (A), however, rejected the appeal on the point in dispute. A further appeal was preferred to the Tribunal. The Tribunal held as follows :-- "The analysis of r. 3 of Second Schedule clearly indicates that it is not any increase in capital of the company, which has to be taken note of for purposes of r. 3. The increase in capital has to be on account of increase of paid-up share capital and, as such, the period during which the increase remained effective would have to be the period during which the increase on account of paid-up share capital remained effective. In the present case, it was not possible to issue any additional share capital by the assessee-company without obtaining prior consent of the Controller of Capital Issues. Such consent, as has been noted above, was given on 15th Sept., 1977. As we have been above, the Controller of capital Issues could have refused permission in terms of sub-s. (5) of s. 3 of the Capital Issues (Control) Act, 1947. Obtaining of the aforesaid permission was, thus, not a mere idle formality, for the issue of share capital, it was an essential pre-requisite. It would take some time for making arrangements for offering share capital to the various persons in terms of the order of the Controller of Capital Issues as noted above, and it is only after such offer has been made and subscription in cash has been received from them with regard to 5 lakhs shares, which were to be issued in cash, that the stage for allotment of shares would reach. Amounts received up to his stage may be on account of contribution to share capital of the company, but the said amount could not be classified as paid-up share capital unless specific allotment of shares was done and appropriation out of previously unappropriated capital was made in the form of certain number of shares to the persons concerned. Such appropriation took place only on 15th Nov., 1977. On this date alone, therefore, it could be said that the shares had been allotted and increase in paid-up capital took place. This being so, we are unable to find any fault in the order of the learned CIT (A). Such appropriation took place only on 15th Nov., 1977. On this date alone, therefore, it could be said that the shares had been allotted and increase in paid-up capital took place. This being so, we are unable to find any fault in the order of the learned CIT (A). Their Lordships of the Supreme Court had pointed out in Indian Bank Ltd. (56 ITR 77) that 'In construing a several clauses of the section we must adhere closely to the language of the Act'. This principle of interpretation of the statute is universally recognised and so long as the language of rule is unambiguous it would not be proper for us to make a departure from the said law on the ground that the equity of the case demanded a different interpretation. May be it is possible to invoke the principle of equity in a case where the language of the rule was not clear and explicit. So long as the language is plain, the intendment of the Parliament has to be inferred from the language itself and any other meaning than the intendment would not be proper'." 7. DR. Pal appearing on behalf of the assessee has contended that this is not a case of a public issue of shares by a limited company. The shares that have been issued were in consideration of certain assets of the vendor company being transferred to the purchaser company. It is the purchaser company who is the assessee. The purchaser company received the assets even before the actual allotment of the shares. These assets which are the consideration for the shares must be treated as a part of issued capital of the company on and from the date the assets were handed over to the purchaser company. DR. Pal has argued that both the companies had agreed that the shares that were to be allotted would be entitled to dividend pari passu with the other already allotted shares. There is no reason why these shares should not be treated as effectively issued from 1st Sept., 1977, or at the very test, w.e.f. 15th Sept., 1977, the date on which the Controller of Capital Issues gave permission to issue these shares. It has further been argued on the strength of Life Insurance Corpn. There is no reason why these shares should not be treated as effectively issued from 1st Sept., 1977, or at the very test, w.e.f. 15th Sept., 1977, the date on which the Controller of Capital Issues gave permission to issue these shares. It has further been argued on the strength of Life Insurance Corpn. vs. Escorts India Ltd. 1986 SC 1370 that the permission of the RBI was not a condition precedent to the allotment of shares. The permission could be given even after the shares were actually allotted. Lastly, we were referred to a judgment of the Karnataka High Court in the case of Addl. CIT vs. Bangalore Soft Drinks (P) Ltd. (1980) 18 CTR (Kar) 376 : (1980) 126 ITR 38 (Kar) where it was held that the amounts paid for specified purposes of allotment of shares could not be treated as loan. The sum could not be treated as borrowed money or debt due by the assessee-company within the meaning of r. 19A(3) of the IT Rules, 1962 and could not be excluded from the computation of capital for the purpose of relief under s. 80J of the Act. It was argued on the strength of this decision that if any money or asset is taken in advance for allotment of shares such money must be treated as a part of the capital of the company. In this connection reference was made to s. 2(32) of the Companies Act, 1956 whereby it is defined that 'capital paid up' to include the capital credited as paid up. 8. THEREFORE, Dr. Pal has argued that in this case the capital that was acquired by the assessee- company was by virtue of an agreement to allot share the assets were in effective possession of the company, but the allottee of the share did not pay for the shares in money. The payment was made in kind by handing over the assets. The assessee-company was entitled to credit the value of its assets as part of issued share capital of the company as from the date of handing over the assets by the vendors to the assessee-company. I am unable to uphold this contention for a number of reasons. The Surtax Act imposes, a tax on so much of the chargeable profits of the previous years of a company as exceeds the statutory deduction. I am unable to uphold this contention for a number of reasons. The Surtax Act imposes, a tax on so much of the chargeable profits of the previous years of a company as exceeds the statutory deduction. There are three schedules attached to the said Act. The First Schedule deals with computation of the chargeable profits. The Second Schedule lays down the rule for computing the capital of company for the purpose of Surtax. The Third Schedule provides the rates of surtax. 9. THE Second Schedule lays down the rules for computation of capital of the company 'as on the first day of the previous year relevant to the assessment year'. In this computation under r. 1 various categories of assets of a company has to be included. Paid up capital, certain specified reserves and debentures and also certain specified types of borrowed money are to be included in the capital. It has been specifically stated that amounts standing to the credit of item Nos. 5,6 and 7 under the heading 'Capital reserves and surplus of the balance sheet of a company' are not to be included as reserve in computation of capital. In other words, in specifying what are to be included in capital and what are not to be included in capital the legislature was mindful of the provisions of the Companies Act and the form of the balance sheet set out in the Companies Act. 10. THE paid up share capital of a company as on the first day of the relevant previous year is to be included in the capital under r. 1(i) of the Second Schedule of the Companies (Profits) Surtax Act. Rule 3 provides as under :-- "3. Where after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the foregoing rules of this Schedule is increased by any amount during that previous year on account of increase of paid up share capital or issue of debentures or borrowing of any moneys referred to in cl. (v) of r. 1 or is reduced by any amount on account of reduction of paid up share capital or redemption of any debentures or repayment of any such moneys, such capital shall be increased or reduced, as the case may be, by a sum which bears to that amount the same proportion as the number of days of the previous year during which the increase or the reduction remained effective bears to the total number of days in that previous year." In order to get advantage of r. 3, the assessee will have to establish that during the previous year there has been an increase in the paid up share capital; the assessee will also have to establish the number of days of the previous year during which such increase in paid up share capital remained effective. 11. THEREFORE, the enquiry must be a to the day on which the paid up share capital was increased. There cannot be a question of any increase of share capital before the shares have been actually issued or allotted. Every company limited by shares and having a share capital is required to have a nominal capital with which it is registered. This is one of the essential features of the company's constitution and must be stated in the Memorandum of Association. The nature of issued capital has been stated in Palmer's Company Law, Vol. I, 22nd Edn., page 300 as under :-- "The nominal capital in its original or altered form sets the limit of capital available for issue, and accordingly the issued capital is, strictly speaking, not "Capital" at all since, as we have seen, it is only an authority by the shareholders to the directors to create new capital by the issue of shares. The issued capital, on the other hand, represents the shares which have actually been taken up by the shareholders who have agreed to give consideration in cash or kind bonus shares; the issued capital is thus a reality and not merely an authority." 12. THE question therefore is, has the share capital been actually increased. Issuance of shares cannot be equated with the paid up share capital. In fact, in this case shares could not be issued because the permission of the Controller of Capital Issue had not been obtained. That permission was given on 15th Sept., 1977. THE question therefore is, has the share capital been actually increased. Issuance of shares cannot be equated with the paid up share capital. In fact, in this case shares could not be issued because the permission of the Controller of Capital Issue had not been obtained. That permission was given on 15th Sept., 1977. There was a further requirement of the permission of the RBI which was not given earlier than 18th Nov., 1977. Sec. 19 of the Foreign Exchange Regulation Act imposes a bar on any person to take or send any security to a place outside India. There is a bar of transferring any security or issue of security, whether in India or elsewhere, which is registered or to be registered in India to a person resident outside India. THE language of s. 19(1) of the Foreign Exchange Regulation Act is that "Not withstanding anything contained in s. 81 of the Companies Act, 1956 (1 of 1956), no person shall, except with the general or special permission of the Reserve Bank. (d) issue, whether in India or elsewhere, any security which is registered or to be registered in India, to a person resident outside India;" Therefore, there is a complete bar to issue shares to a person resident outside India without the permission of the RBI. The assessee-company could not issue shares without the permission of the RBI. The decision of the Supreme Court in the case of Escorts Ltd. (supra) does not lay down that an Indian company can issue shares to a foreign person or resident outside India without the permission of the RBI or such permission could be obtained even after allotment of the shares. The case of the Life Insurance Corpn. of India related to transfer of shares from a share-holder to a purchaser. It was not allotment of shares to a purchaser by a company at all. What came up for consideration in that case were ss. 29 and 76 of the Foreign Exchange Regulation Act. In that case s. 19 did not come for interpretation by the Supreme Court at all. 13. THE other case cited was of Bangalore soft Drinks (P) Ltd. (supra) where the Court dealt with the provisions of s. 80J of the IT Act. 29 and 76 of the Foreign Exchange Regulation Act. In that case s. 19 did not come for interpretation by the Supreme Court at all. 13. THE other case cited was of Bangalore soft Drinks (P) Ltd. (supra) where the Court dealt with the provisions of s. 80J of the IT Act. There also the question of computation of capital in the manner laid down in the Second Schedule of the Surtax Act, 1964 did not arise. 14. IN our view, the Tribunal has taken a correct decision on the controversy. Paid up share capital of a company has been defined in s. 93 of the Companies Act to mean "the amount paid-up on each share". There cannot be any paid up share capital without issue of shares. IN fact, in the column relating to issue or paid up capital of the shareholders of a going company represent the shares which have been issued and in respect of which money has been received. Full details have to be given therein. If any money is received on account of shares which have not been issued by a company, then such amount has to be separately shown in some accounts as advance. The money can be kept till the allotment of shares in suspense amount. Moreover, in the agreement itself was for allotment of shares to vendor or its nominee. Therefore, the issuance of shares is an automatic process after the decision has been taken and permission has been obtained for allotment. The vendors will have to examine whether the shares will have to be issued in the name of the vendor or its nominee. Particulars of the nominees will have also to be furnished for this purpose. 15. THE Tribunal has noted specifically that it is common ground that the shares were allotted by the assessee-company to the non-residents on 15th Nov., 1977. If that be the position then it cannot be said that the issued share capital had increased even before the shares were actually issued. There is no scope for making any equitable construction in the language of the section. 16. IN that view of the matter, the question is answered in the affirmative and in favour of the Revenue.