K.K. Dube, J.
1. The Income-tax Appellate Tribunal has referred the following question of law for our determination :
' Whether, on the facts and in the circumstances of the case, the Department, was justified in taxing the sum of Rs. 42,53,148 representingthe difference between the book value of the trading assets and the price paid therefor to the predecessor, as revenue profit in the hands of the assessee-company for the assessment year 1959-60?'
2. The brief facts relevant for knowing why the amount of Rs. 42,53,148 was sought to be taxed are these : On January 4, 1958, the assessee-bank was incorporated as a private limited company. It was established with the sole object of taking over the banking business carried on by the erstwhile Maharaja of Gwalior. A licence to carry on such banking 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 Jail 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:
Partly paid upvalue in
Land and building
Debts against propertiesmortgaged
Shares and debentures
Debts against pledge ofgold, etc.
Debts under pronotes,furniture, cash, etc.
3. In the books of the assessee-company, the following entries were made on April 17, 1958, representing the assets and liabilities of the business taken over :
Central Bank, Bombay
Land and building
Investment account, i.e.,
Shares and securities
Cash bankers a/c call loans tobankers,
bills purchased, local billsdiscounted,
stationery in stock, etc.
4. The surplus 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:
Contingency reserve,being difference
between the purchase price andthe
value of business taken
Being amount talten.over
from K. B. Bank
Reserve for doubtfuldebts
Provision for gratuity
5. The assessee adopted the calendar year as accounting year and the original assessment for the year 1959-60 was made on March 16, 1960, when only an income of Rs. 3,30,261 was considered for taxing purposes. Later on, the assessment was reopened under Section 147(b) on the ground that the assessee-company had been under assessed by Rs. 42,53,148 which amount represented the difference between the book value of the trading assets taken over and the consideration paid therefor. It appears the reassessment proceeding had started when the Maharaja of Gwalior claimed a capital loss of Rs. 39,00,000 on the sale of the banking business in question under the indenture dated November 1, 1958. The assessee contended that the sum of Rs. 42,53,148 merely represented the capital and it could not be treated as income as there was no sale of any stock-in-trade made by the assessee-company. The ITO, however, treated the entire sum as business profit.
6. 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.  56 ITR 68, and the Supreme Court decision in CIT v. Standard Vacuum Oil Co. Ltd. : 59ITR685(SC) , 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 the date of incorporation of the company and the company could have made no profit on that date. There was no evidence to show that there was any inflation of the trading assets and the excess received on the issue of shares was in the nature of premium.
7. The Tribunal found that the book value of the assets in question were not inflated in the assessee's books. The assets were shown in the books of 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 a whole. The Tribunal upheld the order of the AAC holding that Rs. 42,53,148 were not income which could be taxed.
8. In Addl. CIT v. Krishna-ram Baldeo Bank P. Ltd. (Misc. Civil Case No. 103 of 1976, decided on 28-8-1979) (reported as Appendix--see p. 608 infra), this court was of the opinion that in view of the decision of the Supreme Court in CIT v. Standard Vacuum Oil Co. : 59ITR685(SC) , 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 Gujarat High Court in CIT v. Spunpipe and Construction Co. Ltd : 55ITR68(Guj) , where in somewhat similar situation it was observed (headnote):
'...the difference between the book value of any part of the assets acquired by the assessee and the price paid by the assessee for the same cannot be regarded as revenue profit derived by the assessee. As a matter of fact it is not possible to say that any profit at all is made by the assessee from the purchase of any of the assets. At the highest, what can be said is that assets worth a particular amount are purchased by the assessee for a small amount but that does not represent the profit of the assessee. It is, therefore, not right to regard the difference between the value of the assets and the price paid for the same as revenue profit liable to be added to the assessable income of the assessee. '
9. We respectfully agree with the above observations of the Gujarat High Court.
10. Shri Jain, learned counsel for the Department, on the basis of Bharat Fire and General Insurance Ltd. v. CIT : 53ITR108(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 Section 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 within the definition of the word ' income ' in Section 2(6A). The Explanation to Section 2(6A) provided 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 31st day of March, 1948. Their Lordships of the Supreme Court referred to English authorities where premiums received on issue of shares were available for distribution.
11. In Bharat Fire and General Insurance Ltd.'s case : 53ITR108(SC) , the question arose whether or not the dividend paid out of sharepremiums 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 Section 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 Section 2(6A) and observed that it was recognised that a company could distribute the premiums received on the issue of shares as dividends before the enactment of Section 78 of the Companies Act, 1956. A passage in Palmer's Company Law was quoted where it was stated that it was legally permissible for the company to distribute dividend out of assets which did not represent profits made as a result of its trading or business. The premiums obtained on issue of new shares were not regarded by the businessman as trading profits. It was pointed out that the connotation of divisible profits or profits in the legal sense is much wider than that of profits in the business sense. The former term included reserves accumulated from past profits, from realised capital profits and from premiums on the issue of new shares. It would be seen from the passage from the Palmer's Company Law that for the purposes of dividend the share premiums could be treated as profits though it included capital gains. Althoough 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 the share premiums received on the issue of shares were capital gains within the Expln. to Section 2(6A). The Explanation to Section 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 Section 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 : 53ITR108(SC) , would not be an authority for the proposition that the share premiums would be revenue as would be subjected to income-tax in theyear of its accrual. We are of the opinion that the Bharat Fire and General Insurance's case (supra), relied on by the counsel for the Department is distinguishable. What we have to determine in this case is whether the difference between the book value of trading assets and the price paid by the assessee for the same could be regarded as revenue directly arising from the purchase of the trading assets. If this difference is to be regarded as share premiums then obviously it could not be taxed 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.
12. From the discussion in Bharat Fire and General Insurance's case : 53ITR108(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 assets to be the same as was shown by the predecessor. Therefore, on the day when the banking business was transferred the difference between the value of the assets and the value of the shares allotted to the Maharaja has been appropriately treated as share premiums following the Standard Vacuum's case : 59ITR685(SC) . We do not think that, on the basis of Bharat Fire and General Insurance's case : 53ITR108(SC) , the share premium could be held to be revenue liable to be taxed in the year of their accrual.
13. No other point has been urged. The main contention of the learned counsel for the Department has been that such accruals are profits on the basis of Bharat Fire and General Insurance's case (supra). We do not agree with such contention.
14. We would, therefore, answer this question in favour of the assessee holding that the Department was not justified in taxing the sum of Rs. 42,53,148 as revenue profits in the hands of the assessee-companyfor the assessment year 1959-60. There shall be no order as to costs of this reference.