TMI Blog1993 (6) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... sthan Industries Ltd. (hereinafter referred to as "the new company") came into existence with a share capital of 36,300 ordinary shares of Rs. 10 each, out of which 36,266 shares were acquired by the said Rajasthan Trading Co. Ltd. by paying Rs. 100 per share towards premium. In March, 1949, the said Rajasthan Trading Co. Ltd. (hereinafter referred to as "the defunct company") went into liquidation. On the liquidation of the said Rajasthan Trading Co. Ltd., the petitioner received 4,820 ordinary shares of the said new company which was duly disclosed in the balance-sheet of the petitioner as on March 31, 1950. By a resolution passed at the meeting of the shareholders of the new company held on March 18, 1959, it was, inter alia, resolved that a sum of Rs. 32,67,000 standing to the credit of the share premium account be capitalised and the same be applied in paying up 36,300 ordinary unissued shares of Rs. 90 each and the said shares be issued to the members as fully paid bonus shares to rank pari passu in all respects with the existing ordinary shares and the said shares be allowed to the holder of 36,300 shares in the capital of the company in proportion to one ordinary share of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend received in specie from Messrs. Pilani Investment Corporation Ltd. in the form of 7,963 ordinary shares of Rs. 10 each of Gwalior Rayon and Silk Manufacturing Company Limited and 253 shares of Rs. 125 each of Hind Cycles Ltd. Being aggrieved by the said order of assessment, the petitioner preferred an appeal before the Appellate Assistant Commissioner of Income-tax, Indore Range, Indore, Camp Gwalior, who by an appeal order dated December 29, 1960, dismissed the said appeal. The petitioner preferred a further appeal before the Income-tax Appellate Tribunal who by its appeal order dated August 20, 1962, dismissed the said appeal. Upon an application made by the petitioner under section 66(1) of the old Act, the Income-tax Appellate Tribunal drew up a statement of case dated January 31, 1966, and referred the following question of law arising out of its said appellate order, to the High Court of Madhya Pradesh: Question of law "Whether, on the facts and in the circumstances of the case, the dividend income of the assessee-company should be taken to be :- (i) The value of the shares received as dividend as fixed in the resolution declaring the dividend, or (ii) the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as aforesaid, by the petitioner from the defunct company on its liquidation might represent any part of the accumulated profit of the defunct company, the same should not form the subject-matter of assessment for the assessment year 1959-60 but could have been considered only in the year in which the said 4,840 original shares were received by the petitioner, as aforesaid. The petitioner denied and disputed that there was any accumlated profit of the defunct company as alleged. The assumption that the bonus shares represented the accumulated profits of the defunct company was wrong and was without any basis and material whatsoever. Moreover, merely because one company acquires shares in another company at a premium, the amounts of premium cannot be said to represent the accumulated profits of the company acquiring the shares And it could not be said that the accumulated profits were transferred to the company whose shares are acquired. The accumulated profit, if any, of the defunct company could not be treated as the accumulated profit of the new company and the issue of the bonus shares by the new company, as aforesaid, could not, both on facts and in law, be held to be distributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as dividend under section 2(6A)(c) of the old Act as the said bonus shares were not received by the petitioner on the liquidation of the said new company nor did the account relating to the said bonus shares represent any accumulated profits of the new company. From the contents of the notice it appears that in March, 1949, the writ petitioner held 40,000 equity shares of Rajasthan Trading Co. Ltd. and also in March, 1949, Rajasthan Trading Co. Ltd. acquired 36,266 equity shares of Rs. 10 each of Rajasthan Industries Ltd. at a premium of Rs. 100 each (total cost Rs. 110 each) and Rajasthan Trading Co. Ltd. went into liquidation. On the liquidation of Rajasthan Trading Co. Ltd., the writ petitioner, in March, 1950, was allotted 4,920 ordinary shares of Rajasthan Industries Ltd. of Rs. 10 each. For the accounting year relevant to the assessment year 1958-59, the balance-sheet on March 31, 1958, showed the said shares of Rajasthan Industries Ltd. at a face value of Rs. 10 each. On March 18, 1959, a resolution of Rajasthan Industries Ltd. was passed to capitalise the share premium amount to issue 36,300 shares of Rs. 90 each. On March 31, 1959, the balance-sheet f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when Messrs. Rajasthan Industries Ltd. capitalised the premium at the rate of Rs. 90 per share. The question for consideration is whether the bonus of Rs. 90 per share received in March, 1959, by the shareholders of the new company represented dividend under section 2(6A)(c). For invoking the provisions of section 2(6A)(c) it is necessary that- (i) The company should go into liquidation. (ii) The company should have accumulated profits. (iii) The accumulated profits should be distributed amongst its shareholders. In the instant case, there is no dispute that the first condition is fulfilled inasmuch as the defunct company went into liquidation. As regards the second condition, there is evidence to show that the defunct company had substantial accumulated profits which alone could have been utilised in paying the share premium of Rs. 36,26,600. As regards the third condition, it will be seen that the shareholders of the defunct company received only Rs. 3,62,660 against the total value of the assets of the defunct company amounting to about Rs. 40 lakhs. The balance consisting partly of share capital and partly of accumulated profits, instead of being returned to its sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see remained the same and the attendant circumstances under which the face value of the shares was enhanced was nowhere disclosed. The balance-sheet throws no light on the fact that the ten rupee share of the new company has been converted into a hundred rupee share ; nor did the assessee disclose at the time of the assessment proceedings any particulars about the aforesaid conversion far less how that conversion came to happen. The material facts were not disclosed by the assessee at the time of assessment and were obtained after completion of the assessment from information received. In view of the above reasons, I believe that the dividend income of the assessee within the meaning of section 2(6A)(c) of the Indian Income-tax Act, 1922, for the assessment year 1959-60, escaped assessment by reason of the failure or omission on the part of the assessee to disclose fully and truly all the material facts necessary for its assessment for the assessment year 1959-60." The facts of the case are somewhat involved. A short resume is necessary for appreciation as to whether there could be, firstly, reasons for a belief as to any failure on the part of the assessee to disclose material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. and further that the company in liquidation, i.e., Rajasthan Trading Company Ltd., should be taken to have accumulated profits equivalent to the value of the bonus shares assigned to the assessee in the distribution of its assets. This is in short the case of the Revenue on the factual plane. The first thing that the bonus shares are generation of the original 4,840 shares of Rajasthan Industries Ltd. received from the defunct company Rajasthan Trading Company Ltd. on its winding up is a fact that was plainly on the records of the Assessing Officer. The reasons recorded show that the Assessing Officer has not brought any particulars to show that the defunct company, Rajasthan Trading Company Ltd., had accumulated profits on the date of liquidation or to show the extent thereof. It appears that he has inferred that when the premium is transformed into additional share capital against which bonus shares are issued, the investment in purchase of the shares on premium money represents accumulated profits and the return of the share premium money by way of bonus shares would be return of the premium. In the present case, since the purchaser company is no more in existence, its assign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the truth of them. The cumulative effect of such primary facts leads to inferential facts for the purpose of making the assessment. On the basis of the primary facts what inferences ultimately are drawn by the Income-tax Officer are inferential facts. The primary facts thus may lead to inference of further facts or may lead to inference purely on the legal plane as to the effect of the primary facts. The assessee's duty is restricted only to disclosing before the Officer all such primary facts. Thus, the assessee will be liable to state all primary facts including particular entries, any portion of documents and other evidence which could have been discovered by the assessing authority from the documents and other evidence produced before him. In other words, it is not open to the assessee just to produce the accounts and tell the Assessing Officer "examine them and find out facts necessary for your purpose. My duty is in disclosing the account books or the documents". The decision of the Supreme Court makes it clear that the assessee has no duty beyond making full and truthful disclosure of all primary facts. In this connection, this passage from the judgment of Das Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) of the Indian Income-tax Act, 1922, corresponding to section 2(22)(d) of the Income-tax Act, 1961. The reasons recorded by the Assessing Officer, which have been extracted earlier, do not indicate that the defunct company indeed had accumulated profits and the share premium had been paid by the defunct company, while acquiring the shares, out of such accumulated profit so that the conversion of the investment of the accumulated profit by way of shares and the share premium into bonus shares could be assessable in the hands of the assessee as income by way of deemed dividend, the issue of bonus shares being further distribution made to the shareholders of a company on its liquidation out of the accumulated profits of the company immediately before its liquidation. The reasons contained no particulars as to whether the share premium paid was attributable to accumulated profits of the company before its liquidation. The Assessing Officer, as the reasons clearly show, has gone on the presumption that the share premium was paid out of accumulated profits. The very basis of the belief that the provisions of section 2(22)(c) are attracted in the case is an axiom that the share premium ..... X X X X Extracts X X X X X X X X Extracts X X X X
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