TaxTMI 
TaxTMI 
1980 (5) TMI 4
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.... business was obtained by the assessee from the Reserve Bank of India. The Company's paid up capital was Rs. 25,00,000 consisting of 50,000 shares with Rs. 50 paid up per share. 101 shares were taken up by 6 persons, namely: (1) H. H. Maharani Vijaya Raje Scindia, Gwalior. (2) Shri A. N. Raghavachar. (3) Shri Ram Babu Vaishya. (4) Shri Lalchand B. Sheth. (5) Shri D. P. Mandelia. (6) Shri Jall N. Broacha. and the rest of 49,899 partly paid up shares were allotted to the Maharaja of Gwalior, as consideration for business taken over from him. The above sale took place under an agreement of sale dated April 26, 1958. In due course, an indenture dated November 1, 1958, was executed and the assets of the former banking business of the Maharaja were transferred to the assessee-company. The consideration fixed for the transfer of business with all its assets and liabilities of a going concern under the indenture was 49,899 partly paid up shares of the company allotted to the Maharaja of Gwalior. These shares on the par value would amount to Rs. 24,94,950. The break-up of the allotment against the assets of the business taken over was as under : ---------------------....
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....bsp; 100 5,000 VI " Debts under pronotes, furniture, cash, etc. 11,000 5,50,000 --------- &....
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....bsp; ----------- Assets Rs. Land and building 9,38,714 Advance accounts 92,38,680 Investment account, i.e., Shares and....
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....se price and the value of business taken 10,00,000 Statutory reserve 25,00,000 Being amount taken over from K. B. Bank 6,37,000 --------- 41,37,000 &nb....
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....e ITO, however, treated the entire sum as business profit. The assessee went up in appeal before the AAC contending on the basis of the decision of the Gujarat High Court in CIT v. Spunpipe and Construction Co. Ltd. [1965] 55 ITR 68, and the Supreme Court decision in CIT v. Standard Vacuum Oil Co.Ltd. [1966] 59 ITR 685, when the surplus carried to the various reserve accounts was in the nature of share premium and not taxable in the hands of the assessee. The AAC held that no profit resulted on account of the valuation of stock-in-trade as it was nothing but premium realised on the issue of shares. He deleted the addition made by the ITO. The matter then came before the Income-tax Appellate Tribunal. The Revenue contended that the value of assets exceeded the value of the liabilities by Rs. 67,48,098, that this had been taken over for a consideration of Rs. 24,94,950, that this revenue profit had undoubtedly been transferred to reserve but that would not change the real character of the profit made, and that the surplus ought to be held as accrued on account of valuation of stock-in-trade. The assessee contended that no profit had accrued on the mere valuation of the assets on t....
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.... liable to be added to the assessable income of the assessee. " We respectfully agree with the above observations of the Gujarat High Court. Shri Jain, learned counsel for the Department, on the basis of Bharat Fire and General Insurance Ltd. v. CIT [1964] 53 ITR 108 (SC), contended that the share premiums being profits would be liable to income-tax. When dividend was paid out of the share premium account it was held to be taxable in the hands of the shareholders. In Bharat Fire and General Insurance Ltd.'s case, their Lordships of the Supreme Court did not decide the question as to whether or not the premiums received on the issue of shares were capital gains within the Expln. to s. 2(6A) of the Indian I.T. Act, 1922. The above Supreme Court case is distinguishable. The question raised was whether the amount received as dividend from Rohtas Industries Ltd. paid out of share premiums could be taxed. Rohtas Industries Ltd. has, in 1945, issued shares at a premium and the share premiums were kept separate under the head " Capital reserve ". The company declared a dividend out of the capital reserve. It was contended that the sum paid by Rohtas Industries Ltd. was not income wit....
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....though such profits cannot commonly be regarded as trading profits, yet for the distribution of dividend it would be permissible to treat them as profits. The English cases relied on by their Lordships of the Supreme Court indicated that share premiums would have been profits available for distribution of dividends. Their Lordships then clearly stated that they were not deciding the point whether tile share premiums received on the issue of shares were capital gains within the Expln. to s. 2(6A). The Explanation to s. 2(6A) provides that the expression " accumulated profits " wherever it occurs in the clause shall not include capital gains arising before the 1st day of April, 1946, or after the 31st day of March, 1948. On the basis of practice prevalent before the enactment of s. 78 of the Companies Act, 1956, it was permissible to distribute dividend out of the assets which did not represent profits. Therefore, Bharat Fire and General Insurance's case [1964] 53 ITR 108 (SC), would not be an authority for the proposition that the share premiums would be revenue as would be subjected to income-tax in the year of its accrual. We are of the opinion that the Bharat Fire and General Ins....