1993-VIL-171-ITAT-

Equivalent Citation: ITD 049, 355,

Income Tax Appellate Tribunal CALCUTTA

Date: 15.09.1993

ASIATIC OXYGEN LIMITED.

Vs

DEPUTY COMMISSIONER OF INCOME TAX.

BENCH

Member(s)  : V. DONGZATHANG., R. V. EASWAR.

JUDGMENT

Per Shri R. V. Easwar, J.M. --- This appeal by the assessee relates to the assessment year 1984-85 and is directed against the order of the CIT(A) dated 18-5-1989.

2. The assessee is a public limited company. During the relevant accounting year it received a sum of R. 3,96,961 representing interest on account of delay in payment of the call money from the shareholders. The amount was claimed not taxable by the assessee. The ITO as well as the CIT (A) brought the amount to tax. In the further appeal before us we find that the issue has been decided against the assessee by the order of the Tribunal dated 2-4-1983 in the assessee's own case for the assessment years 1968-69 and 1969-70 in ITA Nos. 2461 and 2462 (Cal.) of 1981. Respectfully following the aforesaid order, we dismiss the first ground.

3. The second and the third grounds are as under:

"2. The Ld. Commissioner of Income-tax (Appeals) erred in confirming the inclusion in the total income of the sum of Rs. 1,83,000 being the sum forfeited from the shareholders in default of payment of call money.

3. The Ld. Commissioner of Income-tax (Appeals) erred in confirming the inclusion in the total income of Rs. 1,48,000 being premium received on re-issue of forfeited shares."

4. In the course of the assessment proceedings, the assessee claimed that the amount of Rs. 1.83 lakhs being the amount forfeited by the assessee for default in payment of call monies was a capital receipt and exempt from tax. Similar exemption was claimed in respect of premium of Rs. 1.48 lakhs received by the assessee on re-issue of the forfeited shares. The amount forfeited was credited by the assessee to the "capital reserve" account. The premium received was credited to the "share premium account" and exhibited accordingly in the balance sheet. Both the Assessing Officer and the CIT (A) have taken the view that the aforesaid two amounts are not exempt from tax. We are of the view that their decision cannot be upheld.

5. Under the Company Law, if any shareholder fails to pay any call money on the day appointed for payment thereof, the Board of Directors may serve a notice on the shareholder requiring payment of the call money together with interest, if any. This power is conferred by Article 29 of Table A to the Schedule I to the Companies Act, 1956. Articles 30 to 35 also deal with the forfeiture of shares. Under Article 31 if the shareholder fails to comply with the notice issued by the Board of Directors, his shares may be forfeited by a resolution of the Board to that effect. Article 32 gives power to the Board to re-issue or otherwise dispose of the forfeited shares. The effect of forfeiture, as stated by Article 33, is that the shareholder whose shares have been forfeited ceases to be a member in respect of the forfeited shares but the liability to pay the arrears of call money will continue. The liability will cease only if the payment is made. The provisions of the Companies Act, as contained in the Table A of Schedule I, indicate that forfeiture of shares is not a business or trading activity of the Company. The forfeiture of shares is an act of the company in respect of its capital structure. Any profit which arises on the forfeiture of the shares cannot, therefore, be treated as the company's normal trading transaction giving rise to any income liable to tax under the Income-tax Act. The Lahore High Court has held in Multan Electric Supply Co. Ltd., In re. [1945] 13 ITR 457, at page 463 that any profit which arises on the forfeiture of shares "is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company and as such a capital asset". The Schedule VI - Part I of the Companies Act which contains the form in which the balance-sheet is to be prepared by the company indicates that all capital reserves of the company should be disclosed under the heading 'Reserves and surplus" in the liability side of the balance-sheet. The assessee has credited the amount in respect of the forfeited shares under the head 'Capital reserve". Thus the Companies Act itself treats the profit on forfeiture of shares as a capital reserve not available for distribution as dividend. It is, therefore, not possible to uphold the conclusion of the departmental authorities that the profit arising to the company on forfeiture of shares is a trading or business profit assessable in the hands of the company.

6. The share premium received by the assessee on re-issue of the forfeited shares stands on the same footing. In Durga Das Khanna v. CIT [1969] 72 ITR 796 it was held by the Supreme Court that prima facie premium is not income and it is for the income-tax authorities to show that existence of facts which would make it a revenue receipt. In Lowry (Inspector of Taxes) v. Consolidated African Selection Trust Ltd. [1940] 8 ITR (Suppl.) 88 the House of Lords in England was dealing with somewhat similar contention. There the market value of the shares was at a premium. But the company issued its shares to its employees at par. The company claimed that it was done to further the business interest and to secure a benefit to the company and that the sum representing, the difference between the par value and the market value was a sum foregone by the assessee for the purposes of their business and was consequently deductible. While dealing with this contention, it was held by Viscount Caldecote (Lord Chancellor), at page 96 as under:---

"In my opinion this appeal largely turns on the nature of the right of a company to issue it shares at any price and on any conditions it thinks fit, provided that it does so in good faith for the benefit of the company and does not issue them at a discount: See Helder v. Dexter. Upon an issue of shares the assets of the company are increased by the amounts obtained from the subscribers. These amounts are obviously not profits or gains of the trade, and they are not liable to be brought into the accounts for income-tax. It may be said that these amounts are of the nature of capital, but I prefer for the present purpose to say that beyond all doubt they are not profits and gains arising or accruing from a trade, for that does directly to the question which arises under Schedule D. What I have said is equally true whether the shares are allotted at par or at a premium. The sum of Rs. 11,625 which in this case the company might hypothetically have received for premiums was not an item in its profits and gains. In the ordinary course such a sum would be carried to a reserve account in the balance sheet; but carrying it to some account in the profit and loss account would not have affected the matter. It would not be an item of profit of the trade. Indeed the issue of shares by a limited company is not a trading transaction at all. The corporate entity becomes protanto larger; but the receipts of the trade on the one hand and the amount of the costs and expenditure necessary for earning these receipts on the other remain unaltered; and it is the difference between these two sums which is taxable under Schedule D. It is well settled that profits and gains must be ascertained on ordinary commercial principles, and this fact must not be forgotten."

7. The above decision is authority for the proposition that the issue of shares is not a regular trading or business transaction and the premium cannot be regarded as the profits assessable to tax.

8. In India, the Mysore High Court in Pangal Nayak Bank Ltd. v. CIT [1964] 52 ITR 915 had occasion to deal with the case of an assessee who collected entrance fee in respect of the new shares issued by it. The contention was that the entrance fee was a capital receipt. The Mysore High Court upheld the contention. After referring to the celebrated decision of the Judicial Committee of the Privy Council in CIT v. Shaw Wallace & Co. AIR 1932 PC 138, and the judgment of the Supreme Court in Hoshiarpur Electric Supply Co. v. CIT [1961] 41 ITR 608, the Court held that the entrance fee received by the assessee on the issue of shares was a capital receipt, not being the result of any banking activity of the assessee. It was held that floating shares were not a part of the banking activity of the assessee and the shares were floated with a view to strengthening the capital structure.

9. The Companies Act contains provisions relating to the share premium. Section 78 is the relevant provision. Section 78(1) shows that when shares are issued at a premium the amount of premium should be transferred to an account called the "share premium account". Sub-section (2) provides for the manner in which the amount of share premium may be applied. The amount may be applied in any of the following:---

(1) paying up unissued shares of the company to be issued as bonus shares;

(2) in writing off preliminary expenses;

(3) in writing off share issue expenditure or discount or commission on issue of shares;

(4) in paying monies payable on the redemption of any redeemable preference shares or any debenture of the company. At page 299 of A. Ramaiya's Guide to the Companies Act, Eleventh Edition, 1988 it is stated after a reference to certain English decisions that the effect of section 78 is to create a new class of capital of a company which is not share capital but not distributable as income any more than any other capital asset. It is further stated that on the winding up of the company, the share premium account will be returned to the shareholders as capital. So long as the company is a going concern, the share premium cannot be returned to the shareholders, since such Act would result in the reduction of capital. It is further stated by the author that distribution of the share premium amount as dividend to the shareholders is not permitted and that the share premium is taken out of the category of divisible profits. The share premium amount can only be utilised in any one of the modes specified in section 78(2).

10. The Delhi High Court had occasion to deal with the question whether the premium on issue of shares is capital or income in the hands of the company. After referring to section 78 of the Companies Act and after analysing the provisions of the Company Law, it was held by the Court that share premium cannot be brought to tax as revenue receipt or trading receipt but was exempt as capital receipt in the hands of the company Addl. CIT v. Om Oils & Oil Seeds Exchange Ltd. [1985] 152 ITR 552 (Delhi).

11. The Surtax Act, 1964 gives a clue to the nature of the share premium account. The 2nd Schedule to the said Act contains rules for computing the capital of a company for the purposes of surtax. The capital of the company under the said rules consists of the paid-up share capital and the reserves of the company. Explanation 2 to rule 2 is as under:

"Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid-up share capital."

It is clear from the above that the Surtax Act also regards the share premium account as forming part of the paid-up share capital of the company. Schedule VI to the Companies Act which contains the form of balance sheet in Part I thereof also indicates that the share premium account has to be shown as reserve under the head "Reserves and surplus" in the liability side of the balance sheet.

12. Having regard to the aforesaid legal position, we are of the view that the share premium amount cannot be treated as income of the assessee. It does not arise out of any trading transaction of the company. It relates to the capital structure of the company and has to, therefore, be treated as a capital receipt not liable to tax.

13. For the aforesaid reasons we allow ground Nos. 2 and 3 and hold that the amounts of Rs. 1,83,000 and Rs. 1,48,000 should be excluded from the total income of the assessee-company.

14. In the result, the appeal is partly allowed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.