Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal ('the Tribunal') has referred the following questions of law to this court for opinion :
At the instance of the assessee :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Tribunal ought to have held that the dividend declared from general reserve after the first day of the purpose of the Companies (Profits) Surtax Act, 1964
At the instance of the Revenue :
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provision for taxation in excess of the liability finally determined is to be treated as a 'reserve' for the purpose of computing the assessee's capital in terms of the rules contained in the Second Schedule to the Companies (Profits) Surtax Act, 1964
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is not applicable in respect of the deductions allowed under Chapter VI-A of the Income-tax Act, 1961 (under sections 80J and 80N) in computing the total income under the Act
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that while computing the chargeable profits in terms of the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross amount of dividends and not the net income by way of dividends has to be excluded under rule 1(viii) of that Schedule
5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 36,84,371 termed as 'Share premium account' in the books of account is includible while computing the assessee's capital in terms of the rules contained in the Second Schedule to the Companies (Profits) Surtax Act, 1964 '
2. The questions have been numbered consecutively for the sake of convenience:
The first question, which is referred at the instance of the assessee, is covered by the decision of the Supreme Court in Indian Tube Co. P. Ltd. v. CIT : [1992]194ITR102(SC) . Following the same, it is answered in the negative and in favour of the Revenue.
3. The controversy on the second question is covered by the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) . Following the same, question No. 2 is answered in the affirmative and in favour of the assessee.
4.Question No. 3 is also covered by the decision of the Supreme Court in the case of Second ITO v. Stumpp, Schuele and Somappa P. Ltd. : [1991]187ITR108(SC) . Hence, it is answered in the affirmative and in favour of the assessee.
5. Question No. 4 is covered in favour of the Revenue by the decision of this court in the case of CIT v. Voltas Ltd. : [1994]205ITR569(Bom) . Following the same, it is answered in the negative and in favour of the Revenue.
6. The only controversy that survives for our consideration is the one raised by question No. 5 which is referred at the instance of the Revenue. The-relevant facts pertaining to this question are as follows :
The assessee is a company. The controversy relates to the assessment of the assessee under section 6(2) of the Companies (Profits) Surtax Act, 1964 ('the Surtax Act') for the assessment year 1973-74, the corresponding previous year being the accounting year ended on March 31, 1973. During this year, in computing the capital of the assessee-company for the purpose of surtax, the assessee included, inter alia, a sum of Rs. 36,84,371 standing in its account to the credit of the 'share premium account'. The Income-tax Officer did not accept the inclusion of the above amount on the ground that for inclusion in the capital, the share premium should be received in cash. As the amount standing to the credit of the said account was not received by the assessee-company in cash by way of premium on shares, the claim of the assessee was disallowed by the Income-tax Officer. The assessee appealed to the Commissioner of income-tax (Appeals) who agreed with the Income-tax Officer and dismissed the appeal of the assessee on this point. The assessee went in further appeal to the Income-tax Appellate Tribunal ('the Tribunal'). The Tribunal observed that the amount in question did not represent any premium received for issue of shares. According to the Tribunal this amount was, in effect, in the nature of a capital reserve which was includible in the computation of the capital for the purpose of surtax under the Surtax Act. The Tribunal, therefore, allowed the appeal of the assessee. Aggrieved by the above decision of the Tribunal, the Revenue is before us by way of this reference.
7. Before we venture to answer the question referred to us, it may be expedient to set out the relevant facts of the case to appreciate the real nature of the disputed amount of Rs. 36,84,371 standing to the credit of the share premium account in the books of the assessee.
8. A company named 'Canara Bank Limited', which was doing banking business, was amalgamated with the assessee-company. The agreement to that effect was made on July 21, 1971. As per this agreement which came into effect from October 1, 1971, after obtaining the approval of the Karnataka High Court, all the debts, liabilities, duties and obligations of the Canara Bank Limited stood transferred to the assessee-company pursuant to the provisions of section 394 of the Companies Act, 1956. Similarly, all the assets of the said company also stood transferred to the assessee-company. All proceedings against the bank were also transferred to the assessee-company.
9.The Canara Bank had 28,000 5 per cent. cumulative preference shares of Rs. 5O each and 3,22,000 equity shares of Rs. 50 each. It was agreed that the Canara Bank shall pay fully to the shareholders of the cumulative preference shares before the date of transfer of the assets and liabilities. The scheme of amalgamation visualised direct payment by the assessee-company to the remaining shareholders of the Canara Bank, of certain shares and bonds in the assessee-company by way of compensation. The value of the shares and bonds in terms of the above agreement amounted to Rs. 2,71,44,760. The net worth of the assets and liabilities of the Canara Bank when taken over by the assessee-company was Rs. 36,84,371 more than the value of the equity shares and bonds issued to the shareholders of the Canara Bank. This amount was credited to the 'share premium account' in the books of account of the assessee-company. The assessee claimed that this amount should be treated as a part of the capital under the Second Schedule to the Companies (Profits) Surtax Act. The Income-tax Officer did not accept this claim as, according to him, amounts standing to the credit of share premium account which do not represent the premium received by the assessee in cash on issue of share capital cannot he included in the capital under Explanation 2 to rule 2 of the Second Schedule. On appeal, the Commissioner of Income-tax (Appeals) agreed with this finding of the Income-tax Officer. On further appeal by the assessee, the Tribunal carefully considered the factual situation set out above and observed that the amount of Rs. 36,84,371 appearing in the said premium account in the books of account of assessee actually represented the accumulated profits of the Canara Bank which remained unadjusted after the allotment of the shares to the shareholders. This amount, according to the Tribunal, was a part of the capital reserve, which had to be treated as capital under the Second Schedule. The Tribunal observed that the whole confusion had arisen in this case because of the misnomer of the account as share premium account. The Tribunal came to a categorical finding that this amount did not represent any premium received by the assessee on the issue of shares. The Tribunal, therefore, held that it was includible in the computation of the capital of the company for the purpose of surtax.
10. We have carefully perused the order of the Tribunal. In our opinion, the Tribunal was correct in its finding that the amount in question, though shown in the accounts of the company as 'share premium account', in fact, did not represent any premium received by the assessee on the issue of shares in cash or otherwise. In reality, it represented the excess value of the net assets of the Canara Bank, which was amalgamated with the assessee-company, over and above the amount paid to the shareholders of the Canara Bank in the form of shares and bonds. Such amount is usually credited to a 'capital reserve fund'. But in the present case, it was credited to the 'share premium account'. The question that arises for consideration is whether, in such a situation, the nomenclature of the account in the assessee's books would have any relevance in deciding the true nature of the amount or the account. The answer to this question, in our opinion, in clear terms is in the negative. It is well-settled that it is the true nature of the amount of the account that is determinative and decisive and not the nomenclature given by the assessee to it. There is no controversy about the fact that if the amount in question is held to be a reserve, it will be included in the capital of the company for computing the capital for the purpose of surtax under rule 1 of the Second Schedule to that Act which provides that the capital of a company shall be the aggregate of the amounts specified therein which includes reserves as reduced by the amounts credited to such reserves as has been allowed as a deduction in computing the income of the company for the purpose of the Income-tax Act. There is no controversy in this case that no deduction has been claimed by the assessee in the computation of its income in respect of the amount of Rs. 36,84,371 credited to the so-called 'share premium account'. Situated thus, in our opinion, the Tribunal was justified in holding that the amount of Rs. 36,84,371 was includible in computing the capital of the assessee-company for the purposes of surtax under the provisions of the Companies (Profits) Surtax Act, 1964.
11. We, therefore, answer question No. 5 referred to us in the affirmative and in favour of the assessee.
12. Under the facts and circumstances of the case, there shall be no order as to costs.