Capital receipt on takeover of trading assets was not taxable as revenue income where surplus reflected share premium and capital reserve.

Where trading assets are taken over as part of a going concern at the same values shown in the predecessor's books, the difference between those values and the consideration paid was treated as a capital receipt, not revenue profit. The court noted that there was no finding of any inflation of trading assets, and that the surplus on transfer of the banking business was credited to capital reserve and share premium rather than arising from trading operations. On that basis, the excess did not constitute income derived from trading activity and was not assessable to income-tax as revenue profit.

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Issues: Whether the difference between the book value of the trading assets taken over and the consideration paid to the predecessor was taxable as revenue profit in the assessee-company's hands.

Analysis: The assets acquired were entered in the assessee's books at the same values as in the predecessor's books, and there was no finding of inflation of trading assets. The surplus arising on transfer of the banking business as a going concern was treated as capital reserve and share premium. On the reasoning adopted in the comparable authorities relied upon, such difference did not represent profit derived from trading operations. The wider notion of profits for dividend purposes did not convert share premium into trading income liable to income-tax.

Conclusion: The amount of Rs. 42,53,148 was not assessable as revenue profit and the question was answered in the affirmative for the assessee.

Ratio Decidendi: Where trading assets are acquired as part of a going concern and the excess of asset value over purchase consideration is attributable to share premium or capital reserve rather than trading operations, the excess is a capital receipt and not taxable as revenue income.

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