Tulzapurkar, J.:— The question that has been referred to this court by the Tribunal for our opinion in this reference runs thus:
“Whether, on the facts and in the circumstances of the case, the assessee was entitled to the proportional increase of Rs. 2,14,795 in terms of rule 2 of the Second Schedule to the Super Profits Tax Act, 1963?”
2. The aforesaid question under the Super Profits Tax Act, 1963, arises in these circumstances. The assessee (Messrs. Geoffrey Manners & Co. Ltd.), is a public limited company and the question relates to the assessment year 1963-64, the previous year in relation to which is the year which ended on 31st October, 1962. Under section 4 of the Super Profits Tax Act, 1963, the levy of super profits tax is only on the excess of the chargeable profits of the previous year over the standard deduction. Under section 2(9), “standard deduction” means an amount equal to six per cent, of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of Rs. 50,000, whichever is greater. The capital of the assessee-company was thus required to be computed by the Income-tax Officer in accordance with the rules contained in the Second Schedule to the Super Profits Tax Act, 1963. The Second Schedule contained only three rules for computing the capital. In the first place, the capital was required to be computed under rule 1 and after it was so computed, rule 2 under which the question that has been referred to us has arisen, came into operation. That rule ran thus:
“2. Where after the first day of the previous year relevant to the assessment year, the paid up share capital of a company is increased or reduced by any amount during that previous year, the capital computed in accordance with rule 1 shall be increased or decreased, as the case may be, by a portion of that amount which is proportional to the portion of the previous year during which the increase or the reduction of the paid up share capital remained effective.”
3. It will thus appear clear that capital computed in accordance with rule 1 was liable to be increased or decreased proportionately in terms of the aforesaid rule 2. The Income-tax Officer initially computed the capital of the assessee-company in accordance with rule 1 about which there is no dispute. The assessee, however, claimed a proportional increase to such capital in terms of rule 2 and in connection with that claim it was pointed out on behalf of the assessee-company that out of the general reserve as referred to in rule 1, a sum of Rs. 16,00,000 had been capitalised by the issue of bonus shares on September 12, 1962, and the proportional increase in the paid-up capital that was claimed by the assessee by reason of the aforesaid issue of bonus shares was in the amount of Rs. 2,14,795. The Income-tax Officer, however, rejected this claim on the ground that as the full amount of Rs. 20,00,000, being the general reserve, had already been included in the computation of capital under rule 1, a second addition on account of the issue of bonus shares out of the said general reserve could not be allowed. While rejecting the claim of the assessee-company, the Income-tax Officer observed as follows:
“This amount (Rs. 2,14,795) has actually come out of the reserves at the beginning of the year which were capitalised by issuing bonus shares to the extent of Rs. 16 lakhs. As the full amount out of which the proportional increase in capital has come, has already been included in the capital and reserves employed in the business, the second addition on account of the same cannot be allowed.”
4. When the matter was carried in appeal, it was contended on behalf of the assessee that whatever may be the manner in which the paid-up share capital had been increased, rule 2 made it obligatory for the proportional increase to be made and the rule was not restricted to cases of increase in capital by issue of fresh shares for cash. This contention was negatived by the Appellate Assistant Commissioner on the ground that the intention of the legislature in giving a certain abatement based on the capital employed in the business was to provide for reasonable return on the “capital employed” in determining the “super profits “earned by a business and levying super profits tax on the same that rule 2 provided for additional relief where there had been increase in the paid-up capital during the accounting year resulting in overall increase in the working capital, and that in the instant case as no fresh capital had come in during the course of the year, there had practically been no material change in the capital computed under rule 1 during the course of the year. In other words, the Appellate Assistant Commissioner took the view that by capitalising a part of the reserves, no additional working capital was created and that rule 2 was intended to apply only to cases where additional capital was introduced in the business by the issue of fresh shares for cash. The assessee carried the matter in further appeal to the Tribunal. The self-same contentions were urged on behalf of the assessee, while on behalf of the revenue it was contended that if the interpretation of rule 2, as contended for by the assessee was accepted, anomalous result not intended by the legislature would follow. The Tribunal after considering the rival contentions accepted the view that was canvassed on behalf of the assessee and rejected the submissions made on behalf of the revenue. It took the view that rule 2 was in absolute terms and that on a plain reading of the language employed in that rule, it was clear that the paid-up share capital must be regarded as having been increased by issue of bonus shares and as such the assessee was entitled to claim the proportional increase in terms of rule 2. It was pointed out by the Tribunal that rule 2 did not say that any amount already taken into account under the computation in rule 1 should not feature in working out rule 2 and, consequently, rule 2 was not restricted to the increase of paid-up share capital by issue of fresh shares for cash and for giving effect to rule 2 all that was necessary to be seen was whether the paid-up share capital had been increased or not and that in the instant case there could be no dispute that there had been an increase in the paid-up share capital. As regards the anomalous position to which a reference was made during the course of arguments by the departmental representative, the Tribunal pointed out that the anomaly such as was feared by the departmental representative could not altogether be avoided so as to disentitle the assessee from the proportional increase as was claimed in the case. The Tribunal pointed out that if instead of capitalising the reserves to the extent of Rs. 16,00,000 the company had distributed the same and received the money from the shareholders immediately for paying up the increase in capital, then even according to the revenue the proportional increase would have had to be allowed and in this view of the matter the Tribunal allowed the appeal of the assessee. At the instance of the revenue the question set out at the commencement of the judgment has been referred to us for our opinion.
5. Mr. Joshi appearing for the revenue has contended before us that the real object and the purpose for which rules for computing the capital of a company for the purpose of the Super Profits Tax Act had been framed ought to be borne in mind while interpreting the relevant rule, being rule 2 in the instant case. He contended that the real intention of the legislature in giving a certain abatement based on the capital employed in the business was to provide for reasonable return on the capital actually employed in the working of the company in determining the super profits earned by the business and levying super profits tax on the same. He urged that if this object was kept in mind, it would be clear that in the capital computation that would be made in accordance with rule 1, if from one of the items which constitutes such capital computation, viz., general reserves, certain amount was transferred or utilised for the purpose of issuance of bonus shares, though technically the paid-up capital could be said to have been increased, no additional amount by way of cash could be said to have come in which could be employed in the business of the company and, therefore, if rule 2 was interpreted by keeping the objective of the legislature in mind the court should take the view that there was really no increase in the capital of the company—capital which could be said to have been actually employed in the working of the company in the relevant previous year. He invited our attention to the position arising under the Companies (Profits) Surtax Act, 1964, and the rules contained in the Second Schedule framed for the purpose of computing the capital of a company for the purpose of surtax, and he pointed out that in Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd., [1978] 111 ITR 6 (Bom), which was decided by this court under the 1964 Act and the rules contained in the Second Schedule thereto, this court has taken the view that if a part of general reserves was capitalised by issuing bonus shares, the assessee would not be entitled to the proportional increase in terms of the relevant rule 3 of the Second Schedule to the 1964 Act, and he emphasised that this was obviously in keeping with the legislative intent. He, therefore, urged that so far as the position arising under the 1963 Act, and the rules framed under the Second Schedule thereto is concerned, a similar interpretation should be put on rule 2 and it should be held that the assessee in the instant case would not be entitled to the proportional increase in terms of rule 2 of the Second Schedule to the 1963 Act.
6. It is not possible to accept this contention of Mr. Joshi for the reasons which we would presently indicate. It is true as has been pointed out by Mr. Joshi that the intention of the legislature in giving a certain abatement based on the capital employed in the business was to provide for reasonable return on the capital actually employed in determining the “super profits’ earned by the business but the question is what the relevant rule, being rule 2 really provides for, and the intention of the legislature will have to be gathered from the plain language employed in the concerned rule. It may be pointed out that in Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd., [1978] 111 ITR 6 (Bom) this court has pointed out the difference in the language that was employed in the relevant rule 3 appearing in the Second Schedule to the 1964 Act and that employed in the relevant rule 2 of the Second Schedule to the 1963 Act. Rule 2 of the Second Schedule to the 1963 Act with which we are concerned in the instant case, so far as is material, runs thus:
“2. Where after the first day of the previous year relevant to the assessment year, the paid up share capital of a company is increased or reduced by any amount during that previous year……”
7. In other words it uses the expression” the paid up share capital of a company is increased by any amount”. Rule 3 contained in the Second Schedule to the 1964 Act, so far as is material, runs thus:
“Where after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the foregoing rules of this Schedule is increased by any amount……”
8. There is considerable difference between the language employed in the relevant rule 2 with which we are concerned and the language employed in rule 3 contained in the Second Schedule to the 1964 Act. In the case of a company which has used a part of its general reserves for capitalization and for issuance of bonus shares, if the question is to be considered in the light of the language employed by rule 2 contained in the Second Schedule to the 1963 Act, it will appear clear that by reason of the issuance of such bonus shares the “paid up share capital” of a company could be said to have been increased but under rule 3 of the 1964 Act it is difficult to say in such a case that “the capital of a company as computed in accordance with the foregoing rules of this Schedule is increased by any amount”. In the latter case when a part of the general reserve which is one of the constituents that has gone in the capital computation under rule 1 is utilised for issuance of bonus shares, the total computation as made in accordance with rule 1 can never be said to have been increased by any amount. When the court is concerned with interpreting rule 2 contained in the Second Schedule to the 1963 Act, the simple question which the court is called upon to decide is whether the paid up share capital of a company is increased by any amount or not, and it can never be disputed that by issuance of bonus shares the paid up capital of a company is increased. It was because of this difference in language that this court in Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd., [1978] 111 ITR 6, on the proper construction of the relevant rule 3 contained in the Second Schedule to the 1964 Act took the view that the assessee in that case was not entitled to the proportional increase in terms of rule 3. The language in the instant case being different and the answer to the question raised being that the paid-up share capital must be taken to have been increased, the assessee would be entitled to the proportional increase in terms of rule 2. In the view which we are taking of the interpretation of rule 2 contained in the Second Schedule to the 1963 Act, we are supported by a decision of the Himachal Pradesh High Court in the case of Commissioner of Income-tax v. Mohan Meakin Breweries Ltd., [1974] 95 ITR 586, where that court has observed in no uncertain terms that the issue of bonus shares necessarily leads to addition in the paid-up share capital and following the strict rule of interpretation, especially when the language is plain and is amenable to only one meaning, the reserve could not be reduced to the extent of its capitalised value and the paid-up capital was to be boosted up so as to increase the capital base. In this view of the matter, the question referred to us is answered in the affirmative and in favour of the assessee.
9. The department will pay the costs of the assessee.