1980 (5) TMI 4 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Department was justified in taxing the sum of Rs. 42,53,148 as revenue profit.
2. The nature of the difference between the book value of trading assets and the price paid.
3. The applicability of share premiums as taxable income.

Summary:

Issue 1: Taxation of Rs. 42,53,148 as Revenue Profit
The primary question was whether the Department was justified in taxing Rs. 42,53,148, representing the difference between the book value of the trading assets and the price paid to the predecessor, as revenue profit in the hands of the assessee-company for the assessment year 1959-60. The Income-tax Appellate Tribunal found that the book value of the assets was not inflated and the surplus received by the company was treated as a premium, forming a capital reserve. The Tribunal upheld the order of the AAC, holding that Rs. 42,53,148 were not income that could be taxed.

Issue 2: Nature of the Difference Between Book Value and Price Paid
The assessee contended that the sum of Rs. 42,53,148 represented capital and could not be treated as income since there was no sale of any stock-in-trade. The Tribunal found that the assets were shown in the books of the assessee at the same value as in the books of the predecessor, indicating no inflation of trading assets. The difference was treated as a premium, which is a capital reserve created on the valuation of the new business as a whole.

Issue 3: Applicability of Share Premiums as Taxable Income
The Department argued that share premiums being profits would be liable to income-tax, citing Bharat Fire and General Insurance Ltd. v. CIT [1964] 53 ITR 108 (SC). However, the court distinguished this case, noting that the Supreme Court did not decide whether premiums received on the issue of shares were capital gains. The court agreed with the Gujarat High Court's observation in CIT v. Spunpipe and Construction Co. Ltd. [1965] 55 ITR 68, that the difference between the book value of assets and the price paid could not be regarded as revenue profit. The court concluded that the share premiums were not trading profits and thus not taxable as income.

Conclusion:
The court answered the question in favor of the assessee, holding that the Department was not justified in taxing the sum of Rs. 42,53,148 as revenue profits for the assessment year 1959-60. The difference between the book value of the trading assets and the price paid was treated as share premiums, which are capital in nature and not liable to income-tax.