Bombay High Court
Commissioner Of Income-Tax vs Indabrator Ltd. on 30 April, 1991
Equivalent citations: [1992]196ITR842(BOM)
JUDGMENT T.D. Sugla, J.
1. In this departmental reference relating to the assessee's surtax assessment for the assessment years 1967-68 to 1972-73, the Tribunal has referred to this court the following question of law for our opinion under section 256(1) of the Income-tax Act, 1961, as applied to surtax under section 18 of the Companies (Profits) Surtax Act, 1964 :
"Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that the amount of Rs. 1 lakh representing the value of shares allotted to the two foreign collaborators in consideration of supply of technical know-how was includible in the computation of capital under rule 1 of the Second Schedule to Companies (Profits) Surtax Act, 1964 ?"
2. Briefly stated the relevant facts are that the assessee had entered into an agreement dated April 15, 1964, with two foreign companies, namely, the Wheelabrator Corporation, Indiana, U. S. A. and Tilghman's Ltd., Cheshire, England, under which, in consideration of the said two companies' furnishing to the assessee, designs specified under respective sections of the agreement, the assessee undertook to issue shares to each of the foreign companies of the total par value of Rs. 50,000 free of all deductions on account of Indian income-tax or otherwise. The shares were, accordingly, allotted and the technical designs and know-how obtained by the assessee under the agreement were shown as part of the fixed assets of the assessee-company in its balance-sheet at the value of Rs. 1 lakh representing the par value of the shares allotted to the two companies. It is common ground that, in the income-tax assessment for the relevant years, the technical designs and know-how obtained by the assessee were treated as plant entitled to depreciation allowance and development rebate.
3. As stated earlier, this reference involves surtax assessment. For the purpose of making surtax assessment, it is, inter alia, necessary to compute the capital of the company only as on the first day of each previous year for the relevant assessment years. Sub-rule (1) of rule 1 of the Second Schedule, admittedly, provides that the capital of the company shall include its paid-up share capital.
4. Explanation 1 to rule 2, however, provides that paid-up share capital or reserve brought into existence by creating or increasing any book asset in not capital for computing the capital of a company for the purposes of this Act.
5. The Departmental authorities took the view that, in so far as the assessee had issued shares of the face value of Rs. 50,000 each to the aforesaid two companies, and had created an asset in the form of designs and drawings, the capital was brought into existence by creating a book asset and, therefore, to this extent, the share capital was required is to be reduced. The assessee's appeals were allowed by the Income-tax Appellate Tribunal, which, inter alia, held that, when an asset is purchased from a third party and, instead of paying consideration in cash, it is paid by way of issue of shares, the capital can never be said to have been brought into existence by creating any book asset.
6. Shri Jetley, learned counsel for the Department, fairly admits that there is no decision of any High Court or the Supreme Court on this issue and that the question will have to be decided on first principles. He, however, contended that the Tribunal failed to appreciate the scope of the Explanation which, according to him, was clear on its content. It provided that, whenever share capital was brought into existence by creating any book asset, that share capital will not be treated as capital for the purpose of capital computation. He reiterated that the shares in the aforesaid two companies of the face value of Rs. 50,000 each were issued without equal money being received from them and book assets only meant an asset reflected in the books. Drawings and designs, he further stated, are reflected in the assessee's books. Shri Mehta, learned counsel for the assessee, on the other hand, strongly, relied on the order of the Tribunal.
7. We have carefully considered the Explanation quoted by us above. The facts are not in dispute. The shares were issued by way of consideration for the drawings and designs received by the assessee in the 1964 agreement, from the aforesaid two companies, instead of paying cash to these companies as consideration for the designs and drawings and then accepting money for issuing shares. What the assessee has done in this case is that it has straightaway issued shares in consideration of the drawings and designs received. Thus, the Tribunal, in our judgment, is right when it has observed that, when an asset is actually purchased for consideration from a third party, the shares issued for that purpose do not fall within the mischief of the Explanation. It may not be out of place to mention that the Tribunal has made very wide observations in the case but we need not go that far. In our view, an asset actually purchased does not fall within the Explanation as in this case. It cannot be said that a book asset was created to bring capital into existence. Ordinarily, that would mean that an asset which is not in fact an asset is created to bring capital into existence. Accordingly, we are in agreement with the Tribunal and answer the question referred to us in the affirmative and in favour of the assessee.
8. No order as to costs.