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Addl. Commissioner of Income-tax Vs. Krishnaram Baldeo Bank (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case Nos. 18 of 1974 and 103 to 109 of 1976
Judge
Reported in[1983]144ITR608(MP)
AppellantAddl. Commissioner of Income-tax
RespondentKrishnaram Baldeo Bank (P.) Ltd.
Excerpt:
.....taking over the assets and since the bad debts written off were less than 22% of the value of the debts taken over, the assessee was not entitled to any deduction. 1,27,628 as bad debt for the first year. the income-tax appellate tribunal endorsed the view taken by the aac and held thatthe assessee-company had not effected any saving in acquiring the assets as alleged by the ito and the cost of the assets must be taken to be the cost as recorded in the books of the business, first when it was owned by the maharaja, and later when it was transferred to the assessee-company......bonds were redeemable and had been redeemed subsequently. the net profits earned by the assessee-company year after year subject to certain appropriations were shown in the balance-sheet under the caption 'earned surplus' or 'earnings reinvested'. the ito disallowed the claim of the assessee-company for an inclusion of the account capital paid in surplus and earned surplus, in the computation of the taxable capital under schedule ii, rule 2(1), of the business profits tax act. the excess of the net value of the assets so transferred over the par value of stock issued and the serial bonds were entered in the books in the account styled 'capital paid in surplus'. the income-tax appellate tribunal held that the difference between the value of the assets taken over and the value of stock.....
Judgment:

K.K. Dube, J.

1. This and the other six applications are made at the instance of the Additional Commissioner of Income-tax seeking a direction of this court to direct the Income-tax Appellate Tribunal to state the case and refer questions of law arising out of the orders of the Tribunal in I.T.As. Nos. 1531, 1532 and 1533 of 1969-70, 454 and 3735 of 1970-71 and 580 and 581 of 1971-72. The order in this case shall also govern the disposal of Misc. Civil Cases Nos. 104/76, 105/76, 106/76, 107/76, 108/76 and 109/76.

2. Though the seven cases relate to different periods, the controversy arising out of them is common. The parties are the same and the facts are also similar. The Income-tax Appellate Tribunal refused to draw up the statement of the case and hence the above applications.

3. The assessment years in question are 1961-62, 1962-63, 1963-64, 1964-65, 1965-66, 1968-69 and 1969-70 and the corresponding previous years are calendar years 1960, 1961, 1962, 1963, 1964, 1967 and 1968. The brief facts necessary for appreciating the controversy in the above cases are these : The erstwhile Maharaja of Gwalior was carrying on the business of banking in the name and style of Krishnaram Baldeo Bank. Theassessee-company was incorporated on January 4, 1958, to take over the banking business of the Maharaja. The banking business of the Maharaja was taken over with effect from April 17, 1958. At the time of taking over the business, the assets were valued at Rs. 2,21,69,441 while the liabilities were determined at Rs. 1,54,21,343. The capital of the Maharaja in the business, therefore, worked out to Rs. 67,48,098. The transfer of the banking business to the assessee, private limited company, was in consultation with the Reserve Bank of India and in accordance with the scheme which had its approval. The assessee-company was accepted as a scheduled bank by the Reserve Bank. The paid up capital of the assessee-bank was Rs. 25,00,000 divided into 50,000 ordinary shares of Rs. 50 each. The Maharaja was allotted 49,899 shares of Rs. 50 each in lieu of the business transferred to the company. The excess of the book value of the assets over the face value of the shares which came to Rs. 42,53,148 was appropriated as reserves, on the date when the business was transferred to the assessee-company. The reserve fund included Rs. 10,00,000 as contingency reserve, Rs. 25,00,000 as statutory reserve, Rs. 80,239 as reserve for doubtful debts and Rs. 35,909 as provision for gratuity. Included in the capital, thus transferred to the assessee-bank, it received securities which the assessee-bank sold in subsequent years. The securities were given a book value at the time of transfer and the ITO as also the AAC and the Income-tax Appellate Tribunal found that the book value thus shown was not inflated and was shown correctly. When the securities were sold year after year, an income was made by the assessee-bank and this income, according to the assessee, was the sale price minus the book value at which the securities had been purchased. The Department does not agree with this contention. According to the Department, since the assets of the Maharaja were transferred at a low price and a saving was made at that stage, this saving should be proportionately added to the sale price of the securities.

4. The assessee made the following sales of the securities :

Rs.

For the 1st year

31,26,413

For the 2nd year

5,68,137

For the 3rd year

4,41,290

For the 4th year

5,76.261

For the 5th year

13,20,234

For the 6th year

4,04,100

For the 7th year

3,00,000

5. The book value of the securities was as shown below :--

For the 1st year

27,81,976

For the 2nd year

5,50,532

For the 3rd year

4,35,772

For the 4th year

5,40,059

For the 5th year

12,98,459

For the 6th year

3,99,655

For the 7th year

2,95,860

6. According to the assessee, the surplus on account of these sales was:

For the 1st year

3,34,437

For the 2nd year

17,605

For the 3rd year

5,517

For the 4th year

36,202

For the 5th year

33,935

For the 6th year

4,445

For the 7th year

4,140

7. The ITO, as already stated, took the view that when the assessee-company started, it had taken over net assets worth Rs. 67,48,098 from the Maharaja, by allotting to him shares of the face value of Rs. 24,94,950. The difference between the two amounts represented the saving which the assessee had effected in taking over the assets of the business which belonged to the Maharaja. On a rough estimate, he determined the saving at 22% and on that footing, arrived at the profit realised on the sale of securities for each of the years thus:

Rs

For the 1st year

9,50,203

For the 2nd year

1,38,732

For the 3rd year

84,140

For the 4th year

1,33,590

For the 5th yar

50,428

For the 6th year

39,842

For the 7th year

23,324

8. Similarly, for the first year in question the assessee had written off bad debts amounting to Rs. 1,55,728. This included three debts, namely, Rs. 1,51,942 in the account of Rai Bahadur Seth Dunichand and others, Rs. 3,498 in the account of Shri Kamal Narain and Rs. 288 in sundry accounts. The ITO did not dispute the claim that the debts were trade debts. He, however, disallowed the amount on the ground that the assessee had made a saving of 22% while taking over the assets and since the bad debts written off were less than 22% of the value of the debts taken over, the assessee was not entitled to any deduction.

9. The AAC in appeal took the view that the real value of the shares of the assessee-company allotted to the Maharaja was not the face value at Rs. 24,94,950 but Rs. 67,48,098, which was the value of the net assets taken over by the assessee-company. He, therefore, deleted the addition made by the ITO on account of the profit on sale of securities and he also allowed Rs. 1,27,628 as bad debt for the first year. The Income-tax Appellate Tribunal endorsed the view taken by the AAC and held thatthe assessee-company had not effected any saving in acquiring the assets as alleged by the ITO and the cost of the assets must be taken to be the cost as recorded in the books of the business, first when it was owned by the Maharaja, and later when it was transferred to the assessee-company. The Tribunal found that though the face value of each of the share allotted to the Maharaja in the assessee-company was Rs. 50, in actual fact it was worth Rs. 127 and the excess represented the premium paid on the shares. There was no dispute regarding the valuation of the property. The book value was not shown in any manner to be inflated or manipulated. There was also no dispute even about the valuation of the liability to the outsider. Since there was no dispute as regards the valuation of the property, no question of law arose for being referred to the High Court.

10. The Addl. Commissioner contends that a question of law arises as to whether the Tribunal was justified, in the circumstances of the case, to hold that the company had not effected any saving in acquiring the assets and that the cost of the assets must be taken to be the cost as recorded in the book of the business, first when it was owned by the Maharaja of Gwalior, and later when it was transferred to the company.

11. Shri N.C. Jain, learned counsel appearing on behalf of the Department, contends that the value of securities sold by the assessee-company were, in effect, acquired by the assessee-company at a cheaper rate. The saving of 22% of the book value of the securities must, therefore, be added as income of the assessee.

12. It was permissible in law to allot shares for considerations other than cash. There was nothing wrong in transferring the assets worth Rs. 67,48,098 for 49,899 shares of Rs. 50 each. The Tribunal had found that there was no manipulation of the accounts and the value of the assets and liabilities represented at the time of transfer is the correct value of the assets and liabilities. In CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) , the Supreme Court examined the question whether or not the excess of the net value of assets so transferred over the par value of the shares issued could be considered as income. The Supreme Court laid down that the difference between the value of assets taken over and the value of shares issued by the assessee-company was premium realised from the issue of shares. The Supreme Court observed as under :

'Therefore, where stock is issued in consideration of transfer of assets, the par value of stock is not necessarily equal to the value of assets transferred. Where the value of assets transferred exceeds the par value, the difference may appropriately be regarded as 'premium' according to the nomenclature used in India.'

13. We think that Standard Vacuum Oil Co.'s case (supra) squarely covers the controversy here. In the Supreme Court case, the assessee-company was formed to take over the business of Socony Vacuum Oil Company and Standard Oil Company (New Jersey), the assets of which were $ 97,715,701 and $ 46,767,397 respectively. The transferor companies were allotted 49,995 shares each. The remaining 10 shares were also divided equally between the two companies for cash at par. The Socony Vacuum Oil Company was allotted bonds of the value of $ 13,093,000. The bonds were redeemable and had been redeemed subsequently. The net profits earned by the assessee-company year after year subject to certain appropriations were shown in the balance-sheet under the caption 'earned surplus' or 'earnings reinvested'. The ITO disallowed the claim of the assessee-company for an inclusion of the account capital paid in surplus and earned surplus, in the computation of the taxable capital under Schedule II, Rule 2(1), of the Business Profits Tax Act. The excess of the net value of the assets so transferred over the par value of stock issued and the serial bonds were entered in the books in the account styled 'Capital paid in surplus'. The Income-tax Appellate Tribunal held that the difference between the value of the assets taken over and the value of stock and serial bonds issued by the assessee-company was premium realized from the issue of its shares and retained in the business within the meaning of Rule 3 of Schedule II and was in any event reserve not allowed in computing profits within the meaning of Rule 2(1). The Supreme Court held that the surplus over the par value of the shares issued was premium realised from the issue of shares and in that view the same could not be taxed as income.

14. In view of the decision of the Supreme Court, the surplus of the assets over the par value of the shares allotted to the Maharaja could not be considered as saving to the assessee-company. It has appropriately to be regarded as premium as pointed out by the Supreme Court. Once the concept of capital which includes premium on capital is understood, it would become clear that it is not income within the meaning of the I.T. Act. Similarly, when the reserve was to be treated as capital, in the circumstances of the case, it could not be treated as income. Since the question stands concluded and no other question arises we reject these applications. In the circumstances of the case, there shall be no order as to costs.


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