TMI Blog1980 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 : ---------------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us of assets over liabilities taken over came to Rs. 67,48,098. A sum of Rs. 24,94,950 was credited to the share capital account of the Maharaja of Gwalior, representing the consideration under the indenture. The balance of Rs. 42,53,148 was credited to the various reserve accounts as under: Rs. Contingency reserve, being difference between the purchase 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 --------- Reserve for doubtful debts 80,239 Provision for gratuity 35,909 --------- 42,53,148 --------- The assessee adopted the calendar year as accounting year and the original assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of the assessee at the same value as in the books of the predecessor. There could not have been any inflation of the trading assets. No adjustment was made by the ITO in the closing stock. Though the paid up value of the shares allotted to the Maharaja of Gwalior was Rs. 50 its real value would be Rs. 127. The surplus received by the company has to be treated as a premium. The difference between the book value of the trading assets and the consideration paid therefor represented the premium which formed a capital reserve created on the valuation of the new business as at whole. The Tribunal upheld the order of the AAC holding that Rs. 42,53,148 were not income which could be taxed. In Addl. CIT v. Krishnaram Baldeo Bank P. Ltd. (Misc. Civil Case No. 103 of 1976, decided on 28-8-1979), this court was of the opinion that in view of the decision of the Supreme Court in CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685, the sum of Rs. 42,53,148 representing the difference between the book value of the trading assets and the price paid therefor to the predecessor was premium to the share capital and could not be treated as income. Our attention was drawn to a decision of the Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or distribution. In Bharat Fire and General Insurance Ltd.'s case [1964] 53 ITR 108 (SC), the question arose whether or not the dividend paid out of share premiums held in a reserve account by the declaring company could be subjected to income-tax. Two arguments were raised before the Supreme Court. Firstly, whether the amounts received as share premiums could appropriately be called profits and, secondly, by virtue of s. 78 of the Companies Act, 1956, the amounts paid out of the premium reserve could at all be subjected to income-tax inasmuch as they could not be distributed as dividends. We are here concerned with the first limb of the argument. Dividend " under section 2(6A) of the Indian Income-tax Act, 1922, "was distribution of accumulated Profits whether capitalised or not, when it entailed the release by the company to its shareholders of all or any part of the assets. Their Lordships of the Supreme Court considered the wider meaning of " profits " in which the term was used in s. 2(6A) and observed that it was recognised that company could distribute the premiums received on the issue of shares as dividends before the enactment of s. 78 of the Companies Act, 1956. passag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed as income because then it would not be revenue but capital. The difference between the value of the assets and the price paid by the bank would, therefore, be not treated as revenue profit of the assessee liable to be assessed to income-tax. The amount has been treated as capital by the assessee-bank. From the discussion in Bharat Fire and General Insurance's case 1964] 53 ITR 108 (SC), it is quite clear that the share premium would obviously be not trading profits. Though such amount could be distributed at one time as dividend and thus could be treated as profits in a wider sense they were not invested with the character of trading profits as would be exigible to income-tax on profits and gains. The wider connotation of profits would not be useful in determining the nature of exigibility of share premiums received by the company. It may also be observed that there is no dispute regarding the fact that the securities and the assets shown in the assessee's books of account were shown at the same value as was shown in the predecessor's account books. The assets were not shown as inflated. The Tribunal has found that the books of account of the assessee showed the value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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