Law: Income Tax Act, 1961

Section: 256

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…

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