SIEMENS INDIA LIMITED VS COMMISSIONER OF INCOME-TAX
1995 P T D 277
[206 I T R 83]
[Bombay High Court (India)]
Before Dr. B. P. Saraf and U. T. Shah, JJ
SIEMENS INDIA LIMITED
Versus
COMMISSIONER OF INCOME-TAX
Income tax Reference No. 387 of 1979, decided on 07/04/1993.
Income-tax----
----Company ---Surtax ---Computation of Capital---Reserves---Dividends declared ---Deductible from reserves---Amounts received as interest-free loan from another company---Amount utilized subsequently for issue of shares to creditor company---Amount could not be considered to be paid-up share capital before allotment of shares to creditor company---Amount could not be included in reserves---Indian Companies (Profits) Surtax Act, 1964, Sch. II.
Though the word "reserve" is not defined since it occurs in taxing statutes applicable to companies only and to no other assessees, it has to be understood in its popular sense, that is to say the sense or meaning attributed to it by men of business, trade or commerce and by persons interested in or dealing with companies. Amounts advanced to a company by another company by way of interest-free loans cannot, by any stretch of imagination, be held to be a "reserve". A loan remains a loan, irrespective of its object till it is appropriated for a particular purpose. It is only after appropriation for such purpose that it will shed its character of loan and partake of a different character on the basis of its utilization or appropriation.
Two amounts advanced as loans to the assessee-company by Siemens Asia Investment were held it is as interest-free loans till such time as shares sere issued. The Reserve Bank of India accorded its sanction for the allotment of six lakhs equity shares of the face value of Rs. 10 each to Siemens Asia Investments on January 15, 1971. Thereafter, six lakh shares of the value of rupees sixty lakh were allotted to Siemens Asia Investments in May, 1971, with effect from March 25, 1971. The value of these shares was adjusted against the loan of Rs.61,21,000 which had been received by the assessee earlier in July, 1976, and September, 1969. Till those shares were allotted to Siemens Asia Investment, the said sum of Rs.61,21.000 was reflected in the balance-sheet of the assessee company as on October 1, 1970, which was the first day of the previous year of the assessee corresponding to the assessment year 1972-73 as "capital suspense" under the head "share capital". On the basis of the description in the balance sheet, it was contended by the assessee that this amount was includible in the computation of capital of the company for the purpose of surtax under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Income Tax Officer did not accept this contention. The Appellate Assistant Commissioner did not accept the contention of the assessee that it should be treated as "paid-up share capital" within the meaning of rule 1(i) or "reserve" within the meaning of the Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. He, however, permitted pro rata capital adjustment on account of increase in capital under rule 3 of the Second Schedule to the Surtax Act with effect from March 26, 1971, that is the day subsequent to date the allotment of the said shares became effective in favour of Siemens Asia Investments. The Revenue did not challenge the latter part of the order permitting pro rata capital adjustment. The assessee, however, went in appeal before the Tribunal against the order of the Appellate Assistant Commissioner in so far as it related to the rejection of its other two contentions. The Tribunal, after hearing the parties, upheld the view taken by the Appellate Assistant Commissioner and rejected the appeal of the assessee. On a reference:
Held, that the Tribunal was right in holding that the sum of Rs.76,68,177 standing to the credit of "General reserve" as on October 1, 1970, was required to be reduced by Rs.9,60,000 being the dividend declared from the general reserve at the annual meeting of the company held on March 19, 1971, in computing the capital of the assessee-company for the purpose of surtax as on October 1, 1970.
Indian Tube Co. P ,td. v. CIT (1992) 194 1TR 102 (SC) fol.
(ii) that the admitted position was that the application for allotment of shares by Siemens Asia Investment was received by the assessee on March 15, 1971. The allotment of shares was made with effect from March 25, 1971. Hence, even the approval to raise the share capital had not been received on the relevant date that is October 1, 1970. The amount received by the assessee as interest free loan could not, in any event, partake of the character of paid-up share capital on any date or at any point of time anterior to the date of allotment of shares by the assessee to Siemens Asia Investment which was March 25, 1971. That being so, rule 1 of the Second Schedule was not attracted. The amount changed its character on that date from 'loan' to "share capital" and it was only on that date that it became a part of the "paid-up share capital" of the assessee within the meaning of rule 1(i) of the Second Schedule to the Surtax Act and this fact had already been recognized by the Appellate Assistant Commissioner and he had given due relief to the assessee on the basis thereof. The amount did also not constitute reserves. It was not included in computing capital for purposes of the Companies (Profits) Surtax Act. A & C Vazir Sultan Tabacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC) ref.
P. J. Pardiwala for the Assessee.
Dr. V. Balasubramaniam with J. P. Deodhar for the Commissioner
JUDGMENT
DR. B.P. SARAF, J.---By this reference under section 256 (i) of the Income Tax Act, 1961, read with section 18 of the Companies (Profits) Surtax Act, 1964, the Income-tax Appellate Tribunal ("the Tribunal") has referred the following three questions of law at the instance of the assessee:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs.76,68,177 standing to the credit of general reserve' as on October 1, 1970, was required to be reduced by Rs.9,60,000 being the dividend declared from the general reserve at the annual meeting of the company held on March 19, 1971 in computing the capital of the assessee-company for the purpose of surtax as on October 1, 1970?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the sum of Rs. 60,00,000 contributed by Siemens Asia Investment A.-G. before October 1, 1970, was to be regarded as a part- of the paid-up capital of the assessee as on October 1, 1970?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the sum of Rs. 61,20,000 standing to the credit of the capital suspense account or in any event Rs. 60,00,000 thereof was includible in computing the capital of the assessee as on October 1, 1970, for the purpose of surtax either as "paid up capital" or as a reserve?"
So far as the first question is concerned, it is stated by counsel for the parties that the issue involved in the said question is covered by the decision of the Supreme Court in Indian Tube Co. P. Ltd. v. CIT (1992) 194 ITR 102. In that view of the matter, following the above decision of the Supreme Court, we answer the first question referred to us in the affirmative that is against the assessee and in favour of the Revenue. We are now left with the remaining two questions and we shall, therefore, set out only those facts which are relevant for determination of these two questions.
The assessee, Messrs Siemens India Ltd., is a limited company. In the year 1967, Messrs Siemens Asia Investments, Switzerland, held 51 per cent. of the shares of the assessee-company. The said company had advanced to the assessee two loans of Rs.30,52,360 and Rs.30;67,640 on July 28, 1967, and September 23, 1969, respectively. It may be mentioned herein that some time in the year 1961, a proposal was also mooted by the assessee-company to increase its share capital from Rs.1.20 crore to Rs.1.80 crore with a view to improve its debt-equity ratio. Preliminary discussions were held with the Controller of Capital Issues in this regard and the Reserve Band of India was also informed about the same. In case the proposed increase in the share capital had taken place, Messrs Siemens Asia Investments would have contributed 51 per cent. thereof. The said proposal, however, did not materialize on account of certain difficulties including the incurring of losses by the assessee in the years preceding the year under consideration. Finally, the assessee, on July 1, 1970, made the requisite application to the Controller of Capital Issues for permitting it to raise its capital from Rs.1.20 crore to Rs.2.40 crore. In the said application, the assessee had outlined the circumstances under which its original move in the year 1967 for issue of share capital to improve the debt-equity ratio was postponed. It was also mentioned therein that the aforesaid two amounts advanced as loan to the assessee-company by Messrs Siemens Asia Investment were held by it as interest-free loans till such time as shares were issued. Admittedly, the sanction sought for by the assessee to raise its share capital was accorded by the Controller of Capital Issues on January 15, 1971. The Reserve Bank of India also accorded its sanction for the allotment of six lakh equity shares of the face value of Rs.10 each to Messrs Siemens Asia Investments on January 15, 1971. Thereafter, six lakh shares of the value of rupees sixty lakh were allotted to Messrs Siemens Asia Investments in May, 1971, with effect from March 25, 1971. The value of these shares was adjusted against the loan of Rs.61,21.000 which had been received by the assessee earlier in July, 1967, and September, 1969. Till those shares were allotted to Messrs Siemens Asia Investments, the said sum of Rs.61,21,000 was reflected in the balance-sheet of the assessee-company as on October 1, 1970, which was the first day of the previous year of the assessee corresponding to the assessment year 1972-73 as "capital suspense" under the head "share capital". On the basis of this description in the balance-sheet, it was contended by the assessee that this amount was includable in the computation of capital of the company for the purpose of surtax under the Second Schedule to the Companies (Profits) Surtax Act, 1964, as according to the assessee, it should be treated as its "paid-up share capital" on October 1, 1970, within the meaning of rule 1(i) or within the meaning of rule 1(ii) or reserve within the meaning of rule 1(iii) of the Second Schedule. The Income-tax Officer did not include the above amounts for the purpose of computing the capital of the company for the purpose of surtax under the Second Schedule to the Act. However, there is no discussion in the order of the Income-tax Officer in this regard.
The assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner did not accept the contention of the assessee that it should be treated as "paid-up share capital" within the meaning of rule 1(i) or "reserve" within the meaning of rube 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ("the Surtax Act"). He, however, permitted pro rata capital adjustments on account of increase in capital under rule 3 of the Second Schedule to the Surtax Act with effect from March 26, 1971, that is the day subsequent to the date on which the allotment of the said shares became effective in favour of Messrs Siemens Asia Investments. The Revenue did not challenge the latter part of the order permitting pro rata capital adjustment. It has, therefore, become final. The assessee, however, went in appeal before the Tribunal against the order of the Appellate Assistant Commissioner in so far as it relates to the rejection of its other two contentions.
The Tribunal, after hearing the parties, upheld the view taken by the Appellate Assistant Commissioner and rejected the appeal of the assessee. It was observed that a person becomes a shareholder only when the shares are allotted to it. On perusal of the facts of the instant case, it was founts by the Tribunal that Messrs Siemens Asia Investments were not share-holders on October 1, 1970. The amounts received by the assessee from the said company were lying with it in the shape of interest-free loans. That amount could not be said to be a part of the share capital as on October 1, 1970. It became a part of share capital only when the said six lakh shares were allotted by the assessee to that company with effect from March 25, 1971, and the said amount of Rs.61,21.000 was adjusted against the shares allotted. The assessee applied for reference of the questions of law arising out of the above order and the Tribunal has referred the questions under consideration to this Court. Hence, this reference at the instance of the assessee.
The real controversy that falls for determination thus relates to the point of time when the amount advanced by Messrs Siemens Asia Investments, Switzerland to the assessee-company in the years 1967 and 1969, which had been lying with it as loan, partook of the character of paid-up share capital of the assessee-company in order to attract rule 1(i) of the Second Schedule to the Surtax Act. Can it be said to have formed a part of the paid-up share capital of the company on October 1, 1970, the same having been shown in the balance sheet as "capital suspense" under share capital or will it become share capital only on allotment of shares? There is no factual controversy m this case. The admitted position is that the application for allotment of shares by Siemens Asia Investments was received by the assessee on March 15, 1971. The allotment of shares was made with effect from March 25, 1971 There is also no dispute about the fact that even the sanction to raise the share capital of the assessee company which is the first step in the direction of issue of shares was accorded by the Controller of Capital Issues on January 15, 1971, i.e. after the material date which is October 1, 1970, and the sanction of the Reserve Bank for allotment of the shares to Messrs Siemens Asia Investments, Switzerland, was accorded by the Reserve Bank of India on November 27, 1971. Thus, not to speak of allotment of the shares by the assessee to Messrs Siemens Asia Investments, even the approval to raise the share capital had not been received on the relevant date, that is, October 1, 1970.
Learned counsel for the assessee submits that the amount was held by the assessee as loan only to be utilized against the issue of shares and that being so, it should be treated as share capital right from the date of loan. This submission, in our opinion, is not tenable. The amount received by the assessee as an interest-free loan cannot, in any event, partake of the character of paid-up share capital on any date or at any point of time anterior to the date of allotment of shares by the assessee to Messrs, Siemens Asia Investments which, m the instant case, is March 25, 1971. That being so, rule 1(i) of the Second Schedule is not attracted.
We also do not find any force in the alternate contention of the assessee that, if the amount in question is not treated as paid-up share capital, it may be treated as a "reserve" within the meaning of rule 1 (iii) of the Second Schedule. The expression "reserve"' as used in the Surtax Act came up for interpretation before the Supreme Court in Vazir Sultan Tobacce Co. Ltd. v. CIT (1981) 132 ITR 559 the Supreme Court observed that though "reserve" is not defined, since it occurs in taxing statutes applicable to companies only, and to no other assessable entities, it has to be understood in its popular sense, that is to say, the sense or meaning attributed to it by men of business, trade or commerce and by persons interested in or dealing with companies. Applying the above test laid down by the Supreme Court, the amounts advanced to the assessee by another company by way of interest-free loans cannot, by any stretch of imagination, be held to be a "reserve". These amounts are simple liabilities of the company. It must be remembered that a loan remains a loan, irrespective of its object till it is appropriated for a particular purpose. It is only after appropriation for such purpose that it will shed its character of loan and partake of a different character on the basis of its utilization or appropriation. In the instant case, as stated above, it is on March 25, 1971, when six lakh shares of Rs.10 each were allotted by the assessee to the above company and a part of the amount of the loan to the extent of the value of the shares was appropriated by the assessee to itself that the amount changed its character from "loan" to "share capital" and it is only on that date that it became a part of the "paid-up share capital" of the assessee within the meaning of rule 1(i) of the Second Schedule to the Surtax Act and this fact has already been recognized by the Appellate Assistant Commissioner and he has given due relief to the assessees on the basis thereof.
In the light of the foregoing discussion, we answer both the questions, viz., questions Nos. 2 and 3 in the negative that is against the assessee and in favour of the Revenue. Under the facts and circumstances of the case, we make no order as to costs.
M.BA./577/FReference answered.