# COMMISSIONER OF INCOME-TAX, WEST BENGAL v. ALLAHABAD BANK LIMITED

- **Citation:** [1969] 3 S.C.R. 722
- **Court:** Supreme Court of India
- **Decided:** 1969-02-14
- **Bench:** J.C. Shah, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-west-bengal-v-allahabad-bank-limited-4633
- **Pages:** 8

## Headnote

B
Finance Acts, 1956 ant( 1951-Explanation to Paragraph D of Part
JI-Definition 'of 'share prtmium account'; whether such account liable
to be included in the paid-up-capital for computing rebate of super taxi! to qualify for inclusion it is sufficient if ii is an identifiable separate
account within the reserves--Companies Act, 1956, •· 78 (3) r.w.s. 78(1)
-Effect of.
In proceedings for assessment to tax for each of the assessment years
1956-57 and 1957-58, the Income Tax Officer reduced the rebate in supertax admissible to the respondent under the Finance Acts of 1956 and
1957 on the view that the respondent bank, which was a public limited
company, had distributed dividends exceeding 6% of its paid-up-capital.
In reducing the rebate the Income Tax Officer excluded an amount representing share premium received by
the
company.
The Appellate
Assistant Commissioner held that the company's share premium was liable
to be added to its capital in computing the reduction in the rebate in
super-tax and directed modification of the order of assessment
The
Appellate Tribunal in appeal, as well as the High Court, on a reference,
agreed with this view.
In the appeal to this Court, it was contended on behalf of the appellant
that the amount representing share premium was not to be added to the
share caJ)ital because ( 1) the expression "share premium account" in the
definition of ''paid-up capital" in the Explanation to Paragraph D of Part
II of the Finance Acts of 1956 and 1957 means an account apart from
the rP.Sel'ves maintained by the company; and ( 2) in view of the proVisions of s. 78 (3) read withs. 78(1) of the Companies Act, 1956, the
respondent company was bound to maintain a separate share premium
account outside the reserves and to transfer the share premium into that
accow1t which the -respondent company had failed to do.
HEW : A share premium account is liable to bti included in the
pai<1-u1> capital for the purpose of computing rebate if it is maintained
as a separate account.
But the Explanation to paragraph D of Part II
of the Finance Acts of 1956 and 1957 does not contemplate that the
account must be kept apart from the reserves. If within the reserves it is
an identifiable separate account, the share
premium will
qualify for
inclusion in the paid-up capital. [~28 HJ
Although Uhder the Companies Act 1 of 1956 there was an express
provision that the share p'remium a¢ount shall be maintained· in a separate account and by virtue of Sch. VI of the Act the share premium has
to be shown in the balance sheet under the head "Liabilities" as part of
the share capital and not of reserves, on that account it cannot be assum·
ed t.hat if the share premium is maint.ained as a separate account within
.the reserves, reduction in the rebate in super-tax is liable to be computed
after excluding share premium. [728 CJ
In any event with respect to tbe assessment year 1956-57 the .<:ompany
was being assessed to tax for the previous year of the company ending on
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C,I.T. v. ALLAHABAD BANI: (Shah. I.)
723
December, 1955, when the Companies Act of 1956 was not in for~.
During that period the eompany was governed by Act 7 of 1913 which
contained no provision analogous to s. 78. of the 1956 Act. (727 C-DJ
C1v1L APPELLATE JURISDICTION:
Civil Appeals Nos. 701
and 702 of 1968.
Appeals from the · judgments and orders dated
December
I 7, 1963 and April 6, 1965 of the Calcutta High Court in. Incometax References Nos. 87 of 1960 and 30 of 1962 respecuvely.
S. T. Desai, S. C. Manchanda and B. D. Sharma,
for the
appellants (in both the appeals).
Sachin Chaudhuri, Sukumar Mitra
and D. N, Mukherjee,
for the respondent (in both the appeals) .

## Text

722
COMMISSIONER OF INCOME-TAX, WEST BENGAL
v.
ALLAHABAD BANK LIMITED
February 14, 1969
[J.C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.]
B
Finance Acts, 1956 ant( 1951-Explanation to Paragraph D of Part
JI-Definition 'of 'share prtmium account'; whether such account liable
to be included in the paid-up-capital for computing rebate of super taxi! to qualify for inclusion it is sufficient if ii is an identifiable separate
account within the reserves--Companies Act, 1956, •· 78 (3) r.w.s. 78(1)
-Effect of.
In proceedings for assessment to tax for each of the assessment years
1956-57 and 1957-58, the Income Tax Officer reduced the rebate in supertax admissible to the respondent under the Finance Acts of 1956 and
1957 on the view that the respondent bank, which was a public limited
company, had distributed dividends exceeding 6% of its paid-up-capital.
In reducing the rebate the Income Tax Officer excluded an amount representing share premium received by
the
company.
The Appellate
Assistant Commissioner held that the company's share premium was liable
to be added to its capital in computing the reduction in the rebate in
super-tax and directed modification of the order of assessment
The
Appellate Tribunal in appeal, as well as the High Court, on a reference,
agreed with this view.
In the appeal to this Court, it was contended on behalf of the appellant
that the amount representing share premium was not to be added to the
share caJ)ital because ( 1) the expression "share premium account" in the
definition of ''paid-up capital" in the Explanation to Paragraph D of Part
II of the Finance Acts of 1956 and 1957 means an account apart from
the rP.Sel'ves maintained by the company; and ( 2) in view of the proVisions of s. 78 (3) read withs. 78(1) of the Companies Act, 1956, the
respondent company was bound to maintain a separate share premium
account outside the reserves and to transfer the share premium into that
accow1t which the -respondent company had failed to do.
HEW : A share premium account is liable to bti included in the
pai<1-u1> capital for the purpose of computing rebate if it is maintained
as a separate account.
But the Explanation to paragraph D of Part II
of the Finance Acts of 1956 and 1957 does not contemplate that the
account must be kept apart from the reserves. If within the reserves it is
an identifiable separate account, the share
premium will
qualify for
inclusion in the paid-up capital. [~28 HJ
Although Uhder the Companies Act 1 of 1956 there was an express
provision that the share p'remium a¢ount shall be maintained· in a separate account and by virtue of Sch. VI of the Act the share premium has
to be shown in the balance sheet under the head "Liabilities" as part of
the share capital and not of reserves, on that account it cannot be assum·
ed t.hat if the share premium is maint.ained as a separate account within
.the reserves, reduction in the rebate in super-tax is liable to be computed
after excluding share premium. [728 CJ
In any event with respect to tbe assessment year 1956-57 the .<:ompany
was being assessed to tax for the previous year of the company ending on
c I
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E
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G
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A
B
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D
E
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0
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C,I.T. v. ALLAHABAD BANI: (Shah. I.)
723
December, 1955, when the Companies Act of 1956 was not in for~.
During that period the eompany was governed by Act 7 of 1913 which
contained no provision analogous to s. 78. of the 1956 Act. (727 C-DJ
C1v1L APPELLATE JURISDICTION:
Civil Appeals Nos. 701
and 702 of 1968.
Appeals from the · judgments and orders dated
December
I 7, 1963 and April 6, 1965 of the Calcutta High Court in. Incometax References Nos. 87 of 1960 and 30 of 1962 respecuvely.
S. T. Desai, S. C. Manchanda and B. D. Sharma,
for the
appellants (in both the appeals).
Sachin Chaudhuri, Sukumar Mitra
and D. N, Mukherjee,
for the respondent (in both the appeals) .
The Judgment of the Court was delivered by
Shah, J. The Allahabad Bank Ltd. is a public limited company. The paid-up share capital of the Company other than
capital entitled to a dividend at .t fixed rate was at the relevant
time Rs. 30,50,00U The Company had issued· before January l,
1954, shares at premium and the premium received in cash aggregated to Rs. 45,5(\000. In each of the account years 1955
and 1956 the Company distributed Rs. 5,49,000 as dividend.
In proceedings for assessment for each of the assessment years
1956-57 and 1957-:i8 the
Incom~-tax Officer reduced by
Rs. 61,000 the rebate in super-tax admissible under the Finance
Acts 1956 on the view that the Company had distributed dividend
exceeding 6% of its paid-up capital. In reducing the rebate the
Income-tax Officer did not take into consideration share premium
amounting to Rs. 45,50,000 received by the Company.
The Appellate Assistant Commiss10ner held that the Company's share premium was liable to be added to the capital of
Rs. 30,50,000 in computin~ the reduction in the rebate in supertax, and directed modification of the order of assessment. The
Appellate Tribunal agreed
with the Appellate Assistant Commissioner.
The Tribunal then submitted a statement of the case and submitted the following question in respect of the year 1956-57 to
the High Court of Calcutta :
"Whether on the facts and in the circumstances of
the case, the ainount of Rs. 4S,50,000 should be added
to the paid-up capital of the assessee as on 1st January,
1955, for the purpose of allowing rebate to the assessee
under Paragraph D of Part II of the First Schedule to
the Indian Finance Act, 1956."
A similar question relating to the assessment year 1957-58 was
also referred by the Tribunal. The High Court of Ca1·•1tta agreed
724
[1969] 3 S.C.\l.
with the. Tribunal and held that in determining the reduction in
rebate in super-tax admissible to the Company the share premium
maintained by the ·Company within the reserves was liable to be
included in the paid-up capital.
The Finance Act, 1956 prescribed the rate of super-tax in
Part II. Paragraph D (in so far as it is relevant) enacted :
"In the case of every companyOn the whole of total income
Provided thatRate
Six annas and nine
pies in the rupee.
( i) a rebate at the rate of five annas per rupee of the
total income shall be allowed in the case of any
company which-
( a) in respect of its profits liable to tax under
the Income-tax Act for the year ending on
the 31st day of March,, 1957, has made
the prescribed arrangements for the declaration and payment within the territory
of India of the dividends payable out of
such profits and for the deduction of supertax from dividends in accordance with the
provisions of sub-section ( 3D) of section
18 of that Act, and
(b}
(ii) a rebate at the rate of four annas per rupee of
the total income shall be allowed in the case of
any Company which
satisfied condition
(a)
A
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D
E
but not condition (b) of the preceding clause;
F
Provided further that-
( i) the amount of the rebate under clause ( i) or
~
.
.
.
.
.
.
.
of the preceding
proviso shall be reduced by the sum, if any,
equal_ to the amount or the aggregate of the
G
amounts as the case may be, computed as hereunder:-
(a) .
(b) in addition, in the case of a company referred to in clause (ii) of the preceding proviso which has distributed to its
shareholders during the previous year "dividends
in excess of six per cent of its paid-up
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C.1.T. v. ALLAHABA.D BANK (Shah, J.)
capital, not being dividends payable at a
fixed rateon that part of the said dividends which
exceeds 6 per cent but does not exceed
10 per cent of the paid-up capital;
on that part of the said dividends which
exceeds 10 per cent of the paid-up
capital;
(ii) .
Provided further that
at the rate of
two annas per
rupee
at the rate of
three annas per
rupee;
725
Explanation :-For the Purposes of Paragraph D
Partof this
( i) the expression "paid-up capital" means the paidup capital (other than capital entitled to a dividend at a fixed rate) of the Company as on the
first day of the previous year relevant to the
assessment for the year ending on 31st day of
March, 1957, increased by any premiums received in cash by the company on the issue of its
shares, standing to the credit of the share premium account as on the first day of the prevmus
year
"
In the Finance Act of 1957 also a similar scheme of granting rebate
of super-tax and reduction therein in the conditions set out in the
Act, was adopted.
The reduction in rebate in super-tax depended upon the proportion which the dividend distributed bore to the paid-up capital.
If the Company distributed dividends exceeding 6% of its paid-up
capital as defined in the explanation, the rebate was liable to be
reduced to the extcmt provided in the second proviso. In the relevant years of account, the share premium formed an identifiable
part of the reserves of the Company but was not shown in a separate
share premium account apart from the reserves.
The Commissioner contends :
( 1 ) that the expression "share premium account" in the
definition of "paid-up capital" in the Explanation to
Paragraph D of Part II of the Finance Acts 1956 and
1957 means an account apart from the reserves maintained by the Company; and
(2) that in any event since the enactment of the Companies
Act, 1956 "share premium" not maintainable as a
separate account cannot be taken into consideration
726
SUPREMIE COURT. REPORTS
(1969) 3 S.C.R.
in dealing with the claim for rebate in the payment of
super-tax and reduction in the rate thereof.
Counsel for the Commissioner relied upon s. 7 8 ( 3) read with
s. 78(1) of the Companies Act l of 1956, and submitted that the
Company was bound to maintain a separate share premium account
outside the reserves and transfer into that account the share premium and since the Company failed to do so, in determining the
paid-up capital within the meaning of the Expianation to Paragraph
D of the Finance Acts 1956 and 1957 the share premium within
the reserve could not be taken into account. The relevant clauses
of s. 78 of the Companies Act I of 1956 provide:-
"(1)
(2)
(3)
Where a company issues shares at a premium,
whether for cash or otherwise, a sum equal to
the aggregate amount or value of the premiums
on those shares shall be transferred to an account,
to be called "the share premium account"; and
the provisions of this Act relating to the reduction of the share capital of a company shall,
except as provided in this section, apply as if the
share premium account were paid-up share
capital of the Company.
Where a company has passed a resolution authorising the issue of any shares at a premium, this
section shall apply as if the shares had been
issued after the commencement of this Act :
Provided that any pari of the premiums which
has been so aoolied that it does not at the commencement of· this Act form an identifiable part
of the company's reserves within the meaning of
Schedule VI, shall be disregarded in determining
the sum to be included in the share premium
account."
Clause (1 ) is in terms prospective : it requires a Company to
transfer premiums received in cash or otherwise on shares to the
share premium account.
By clause (3) any premium received
prLor to the coming into force of the Companies Act, 1956 less that
part of the premium which had been so applied so that it did not,
at the commencement of the Act, form an identifiable part of the
Company's reserves, had also to be transferred to the share jlremium
account as if the shares had been issued after the commencement of
the Act. Section 78 was apparently borrowed from s. 56 of the
English Companies 1948 (11 & 12 Geo. 6 ch. 38.) Before the
Companies Act of 1956 there was provision in the Indian ComE
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C.I.T. V. ALLAHABAD BANI: (Shah, J.)
727
panies Act 1913 which required a Company to maintain a separate
share premium account. After the coming into force of the Companies Act 1 of 1956 a share premium account had to be maintained
and the share premium could not be used otherwise than for the
specific purposes mentioned in s. 7 8 ( 2) .
The plea raised by the Commissioner that the Company failed
to comply with the statutory injunction contained in Cl. ( 1) of
s. 78 and on that account the premium received were not "standing
to the credit of the share premium accounts within the meaning of
the Explanation to Paragraph D in the Finance Act 1956 may be
rejected on a simple ground.
In the assessment year 1956-57 the Company was being assessed to tax in respect of the previous year of the Company ending
on December 31, 1955. In the calendar year 1955, the company
was governed by the Indian Companies Act 7 of 1913 which contained no provision analogous to s. 78 of the Companies Act I of
1956. The Companies Act was before the Parliament during the
year 1955, but the Company was on that account not obliged to
transfer to a separate share premium account independent of the
reserve the premiums received prior to January I,
1955. The
Companies Act came into force on April 1, 1956 : it had no retrospective operation. Since there was no obligation upon the Company to maintain a separate share premium account in the previous year corresponding to the assessment year 1956-57, the share
premium account maintained as an identifiable account within the
reserves qualified for being included in the paid up capital within the
meaning of this expression in the Explanation to Paragraph D
Part II of the Finance Act. 1956.
For the assessment year 1956-57, therefore rebate in ,uper-tax
was liable to be reduced, if the Company had distributed dividend
exceeding six per cent of the paid-up capital inclusive of share premiums maintained as an identifiable account.
The contention
raised by the Commissioner must therefore fail in respect of theassessment year 1956-57.
Counsel for the Commissioner contends that in any event in the
Finance Act 2 of 1957 the expression "share premium account"
has only the meaning ascribed thereto in the Companies Act, !956,
and in respect of the assessment year 1957-58, reduction in the
rebate must be computed without talcing into account the share
premium which was maintained by the Company in the year of
1ccount 1956 within the reserve.
Under the Finance Act 2 of 1957 rebate in super-tax is liable
to be reduced in the case of Companies which have, inter a/ia, distributed to the shareholders in the previous year dividends in excess
of 6 per ceint of the paid-up capital not being dividend payable at
728
SUPRBM~ COURT REPORTS
(1969] 3 S.C.R.
. a fixed rate.
The expression "paid-up capital" is also defined in
substantially the same terms as under the Finance Act, 1956.
For the assessment year 1957-58 the Tribunal tound that the
share premium was liable to be included in the paid-up capital,
because it was an identifiable part of the reserves. In our judgment
the Tribunal was right in so holding. The Explanation to Paragraph D Part II of the Finance Act, 1957, does not require that the
share premium account must be maintained as an account outside
the reserves.
Under the Companies Act 1 of 1956 there was an
express provision that the share premium account shall be maintained in a separate account. It is true that in the balance-sheet in
Sch. VI of the Act the share premium has to be shown under the
head "Liabilities" as part of the share capital and not of reserves.
But it cannot be assumed on that account that if the share premium
is maintained as a separate account within the reserves, reduction
in the rebate in super-tax is liable to be computed after excluding
share premium. The Explanation requires that in determining the
paid-up capital for the purpose of rebate in super-tax, share premium sta.nding to the credit of a share premium account shall be
excluded : it does not make maintenance of an account outside the
reserve a condition of its inclusion in the paid-up capital.
Again if under the Finance Act, 1956, the expression "standing
to the credit of the share premium account" did not mean that the
share premiums shall be maintained in a separate account apart
from the reserve, is there any reason why, under an identical
scheme of reducing rebate in super-tax in the year 1957-58, it
s)lould have a different meaning ? In the absence of any compelling
grounds, we would not be justified in holding that the Parliament
attributed to the expression "standing to the credit of the share
premium account" as used in the Explanation to Paragraph D Part
II of the Finance Act 2 of 1957, a meaning different from the one
which it had under the Finance Act, 1956. The object of the Parliament in enacting Paragraph D of the Finance Act was that profits earned by a Company should be available for being ploughed
back into the business and should not be distributed to the shareholders by way of dividend in excess of the rate prescribed. To
secure that object the Parliament gave an incentive to the Company
of substantial rebate in payment of super-tax which would be liable
to be forfeited, if part of dividend exceeding 6 per cent was distri-
.buted to the share-holders.
Share premium account is accordingly liable to be included in
the paid-up capital for the purpose of computing rebate if it is
maintained as a separate account. The Explanation does not contemplate that the account must be kept apart from the reserves.
If within the reserves it is an identifiable separate account, the
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C.I.T, V, ALLAHABAD BANK (Shah, /,)
729•
A
share premium will qualify for inclusion in the paid-up capital
in computing the reduction in rebate of super-tax.
The appeals fail and are dismissed with costs, One hearing fee..
B R.K.P.S.
Appeals dismissed ..