COMMISSIONER OF INCOME TAX Vs. KRISHNARAM BALDEO BANK PRIVATE LIMITED
LAWS(MPH)-1980-5-4
HIGH COURT OF MADHYA PRADESH
Decided on May 03,1980

COMMISSIONER OF INCOME-TAX Appellant
VERSUS
KRISHNARAM BALDEO BANK (P.) LTD. Respondents


Referred Judgements :-

CIT V. SPUNPIPE AND CONSTRUCTION CO. LTD. [REFERRED TO]
BHARAT FIRE AND GENERAL INSURANCE LIMITED NEW DELHI VS. COMMISSIONER OF INCOME TAX NEW DELHI [REFERRED TO]
COMMISSIONER OF INCOME TAX CENTRAL CALCUTTA VS. STANDARD VACUUM OIL CO [REFERRED TO]


JUDGEMENT

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 representing the 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:
JUDGEMENT_600_ITR144_1983Html1.htm
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 : JUDGEMENT_600_ITR144_1983Html2.htm

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: JUDGEMENT_600_ITR144_1983Html3.htm

(3.)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.
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. [1965] 56 ITR 68, and the Supreme Court decision in CIT v. Standard Vacuum Oil Co. Ltd. [1966] 59 ITR 685, 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.



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