1. In these second appeals the question is whether the Appellate Asstt.
Commissioner of Wealth-tax, Dehradun, whose orders dated 30th March, 1985 in respect of assessment year 1982-83 and of 14th August 1985 for the later two years are brought in appeal, rightly rejected the assessee and confirmed the assessments on the point that the assessee was not entitled to exemption under Section 5(1)(xxa) of the Wealth-tax Act, 1957 (hereinafter referred as the Act) in respect of value of shares of M/s. Narendra Explosives Ltd. (hereinafter referred as 'NEL').
2. The value of shareholdings in NEL was stated to be Rs. 7,75,400, Rs. 4,60,000 and Rs. 7,70,500 for the three years respectively but these are not in dispute neither they are relevant for adjudication of the question before us.
3. To understand the controversy and further as to whether the primary question which was necessary to adjudicate the issue were considered and decided, a brief history of NEL must be stated, which is that it was incorporated as a private company on 21st August, 1962 with an authorised capital of Rs. 5,00,000 divided into 500 equity shares of the face, value of Rs. 1,000 each. Up to 31st March, 1971 paid up capital amounted to Rs. 1 lac only. Between 1-4-1971 and 31-3-1972 a further capital of Rs. 50,000 was subscribed. In the next financial year there was no change. On 1st November, 1973 it was converted into a public limited company.
4. Sometime between November 1973 and 12-7-1974 a special resolution was passed altering the provision of its Memorandum of Association to enable it to manufacture and produce industrial explosives, an article specified in the list in IXth Schedule to the Income-tax Act, 1961 and such alterations were filed before the Hon'ble High Court of Judicature at Allahabad and confirmed on 12th July, 1974 under Section 18(1) of the Companies Act, 1956. A photocopy of the certificate dated 19-4-1976 issued by Asstt. Registrar of Companies, U.P., Kanpur is given to us at page 13 of the paper book.
5. There were further subscription of Rs. 1,48,400 and Rs. 1,51,600 in the financial years 1974-75 and 1975-76 respectively, which resulted into the entire authorised capital of Rs. 5 lacs being fully paid up.
6. While processing the assessee's return filed on 1st July, 1982' in which claim under Section 5(1)(xxa) of the Act in respect of shares of NEL worth Rs. 8 lacs was made, the assessing officer observed that to be entitled to exemption there were several conditions mentioned in the provision. The WTO denied exemption on the ground that the assessee was holding shares of NEL which was established much before 28-2-1975 and, therefore, necessarily issue of capital was before the date and consequently shareholdings could not be said to be forming part of initial issue of equity share capital. The WTO also referred to Section 81 of the Indian Companies Act reading as follows :- Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares....
7. The AAC confirmed the assessment only by referring to the question of initial issue of capital.
8. Before us Shri C.S. Aggarwal, Advocate though accepted that after the conversion on 1-11-1973 there were capital subscriptions but submitted that it was only on 19-4-1976 that the company amended its Articles of Association so as to be a company to which the provisions of sub-clause (d) of Section 45 became applicable read with IX Schedule of the Act and, therefore, unless there was a fresh resolution from the company for increase of the capital base, there could be no question of any initial issue of share capital for the purpose of Clause (xxa) of Section 5(1). The above submission is factually incorrect in view of para 4 above.
9. He further brought to our notice and contended that the allotment of shares worth Rs. 2 lacs for which the subscription admittedly came from the shareholders up to 1977 being not in pursuance to any resolution passed by the Board of Directors, could not be termed as any capital issue. Shri Aggarwal referred to the Madras High Court judgment in the 6ase of CWT v. V.S.SV. Meenakshi Achi [1984] 147 ITR 14 for the proposition that unless a resolution was passed by a company there could be no issue of any shares. We shall not be dealing with this judgment because it is not necessary for adjudicating the appeal.
10. However, a fact may be stated. On 11th October 1977 a resolution was passed for broadening the capital base from Rs. 7 lacs to Rs. 1.5 crores by a fresh issue to the public, which was done on 9-4-1980.
Confronted as to why as on 11-10-1977 the resolution mentioned capital base of Rs. 7 lacs against of Rs. 5 lacs, Mr. Aggarwal sought to argue that even if capital of Rs. 2 lacs had been subscribed, as was the factual position, but it could not be legally termed as initial issue of equity shares, there being no resolution to that effect.
11. For the Revenue Shri K.S. Yadav submitted that whatever may be the reasons given in the assessments and the learned AAC's orders, their decision denying exemption was correct.
12. We have in close view the relevant facts, which are that though the NBL was incorporated on 21-8-62 and converted from private to public limited company on 1-11-73, by which date the subscribed capital was Rs. 1.5 lacs and that on 31-3-1975 the subscribed capital increased to Rs. 3,48,400 and further that the Hon'ble High Court of Judicature at Allahabad on 12-7-74 confirmed the special resolution passed by NEL altering the provision of its Memorandum of Association with respect to its objects and wonder as to when between 1-4-75 to 31-3-76 as per assessee's own admission, the NEL subscribed further capital of Rs. 1,51,600, how could benefits of Clause (xxa) of Section 5(1) possibly be claimed and given, to further clarify we like to notice Clause (xxa) as also the provision of sec, 45(d) of the Act as follows :- (xxa) the value of any equity shares in any company of the type referred to in Clause (d) of Section 45 which is established with the main object of carrying on the business of manufacture or production of any one or more of the articles or things specified in the list in the Ninth Schedule to the Income-tax Act, where such shares form part of the initial issue of equity share capital made by the company after the 28th day of February, 1975, for a period of five successive assessment years commencing with the assessment years next following the date on which such shares were first issued ; 45. No tax shall-be levied under this Act in respect of the net wealth of:- (d) any company established with the object of carrying on an industrial undertaking in India in any case where the company is not formed by the splitting up, or the re-construction, of a business already in existence or by the transfer to a new business of any building, machinery or plant used in a business which was being previously carried on : 13. To come within the purview of Clause (xxa), the company (which in this case was NEL) should have satisfied the conditions of Section 45(d) read with Clause (xxa). The first of such conditions is that the company should be established with the main object of carrying on the business of manufacture or production of any one or more of the articles or things specified in the list in the Ninth Schedule to the Income-tax Act, 1961. Secondly, the company should not have been formed by the splitting up or the re-construction of a business already in existence or by the transfer to a new business of any building, machinery or plant used in the business which was being previously carried on. The use of the word "or" in Clause (d) is disjunctive and, therefore, existence of any of several conditions had the effect of nullifying the tax holiday of five years stipulated.
14. In the first place the NEL was not formed with the main object as mentioned in Clause (xxa). When we observe this we are conscious of Shri Aggarwal's argument, which is rejected because altering of Articles of Memorandum of Association for which the Hon'ble High Court gave its approval on 12-7-1974, could not mean to say that the company was formed on that day. Even assuming such was the case, as mentioned above, capital was subscribed between 1-4-1974 to. 31-3-1976 and, therefore, there could be no scope for any argument that initial issue of initial capital was after 28-2-1975.
15. In view of the above it is not even considered necessary to go into other restrictions, like transfer to a new business of any building, machinery or plant etc. which was being previously carried on, contained in Section 45(d).
16. We do not have to involve ourselves with any mental exercise that the facts and the related arguments in relation to Clause (xxa) could be only relevant if the prohibition constraints and hurdles of Section 45(d) were absent, vis-a-vis, NEL to enable it to come within the purview of Clause (xxa) but find that not only one or two but all the prohibitions were there, which did not even bring the said company (NEL) under exemption clause of (xxa).
17. Therefore, whatever may be the reasons recorded by the WTO and the AAC, both of them having mentioned the relevant provisions, the denial of exemption in respect of the appellant's shareholding in NEL under Clause (xxa) of Section 5 of the Act is held to be correct.
19. Before parting we like to state that we were addressed one set of arguments in respect of the captioned appeals and it was accepted by the parties that our order here shall constitute the necessary basis for deciding the appeals in the following cases also :- 1. Sh. Dinesh Jain (WTA Nos. 730 & 731 (Del)/86-Assessment Year 1983-84 & 1984-85.) 2. Smt. Anita Jain (WTA Nos. 732, 733 & 1682 (Del)/86-Asstt. Years 1983-84, 84-85 & 85-86.) 3. Sh. RajesK Jain (WTA Nos. 734 & 735 (Del)/86-Assessment Years 1983-84 & 84-85.) 4. Sh. N.K. Jain, Legal heir of Smt. Srikanta Jain (WTA Nos. 736 & 737 (Del)/86-Assessment years 1983-84 & 84-85).
5. Smt. Veena Sarkar (WTA Nos. 741, 742 & 1681 (Del)/86-Asstt. years 1983-84, 84-85 & 85-86.)