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PETITIONER: BHARAT FIRE AND GENERAL INSURANCE CO.  LTD. NEW DELHI

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, NEW DELHI

DATE OF JUDGMENT: 02/04/1964

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1964 AIR 1800            1964 SCR  (7) 626

ACT: Income  Tax--Dividend  declared out of  premiums  on  shares received  by a company-Amount whether receipt  of  dividend- Whether taxable-What is dividend-Effect of s. 78.  Companies Act, 1956-Indian Income-tax Act, 1922, s. 2(6A).

HEADNOTE: The  Rohtas Industries Ltd. issued in 1945 shares at a  pre- mium and the share premiums so received were, kept  separate under the head Capital Reserve.  In the calendar year ending December 31, 1953, the company paid a sum of Rs. 50,787/- as dividend  to the appellant company.  For the  year  1954-55, this sum was taxed in the hands of appellant as dividend  by the    Income-tax   Officer.    The   Appellate    Assistant Commissioner set aside the order of the Income-tax  Officer, but  the  same  was restored  by  the  Income-tax  Appellate Tribunal.   The Tribunal referred to the Punjab  High  Court the  question whether on "he facts and in the  circumstances of  the case, the receipt of Rs. 50,787/- was a  receipt  of dividend  and was taxable under the Indian  Income-tax  Act. The  High Court answered the question against the  appellant and  the  latter  appealed this Court  with  special  leave. Dismissing the appeal. Held:     The  receipt  of  Rs. 50,787/- was  a  receipt  of dividend  :and was taxable under the Indian Income-tax  Act, 1922.   It  was well-established before the  Companies  Act, 1956,  that  premiums received on the issue of  shares  were profits available for distribution and the word "profits" in Regulation  97  of Table A of Companies Act 1913  should  be understood  to  include share premiums also.  S. 78  of  the Companies  Act does not in any way change the taxability  of dividends  declared out of premiums on shares received by  a Company  before the Act of 1956 came into force.  If it  was taxable, apart from s. 78, it remains so taxable. Re  Hoare  & Co. Ltd., (1904) 2 Ch. 208; Drown  v.  Gaumint- British  Picture  Corporation,  (1937) Ch.  402;  re  Duff’s Settlements.   National Provincial Bank Ltd., vs.   Gregson, (1961)  1  Ch.  923; Land  Revenue  Commissioners  v.  Reids Trustees, (1949) 1 All E.R. 354, referred to.

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JUDGMENT: CIVIL  APPELLATE JURISDICTION: Civil Appeal No.  613/  1963. Appeal by special leave from the judgment dated December 12, 1960, of the Punjab High Court in Income-tax Reference No. 2 of 1958. S.   K. Kapur, K. K. Jain, Bishambar Lal Khanna and S. Murthy, for the appellant. C.K. Daphtary, Attorney-General, R. Ganapathy Iyer and  R.N. Sachthey, for the respondent. 627 April 2, 1964.  The Judgment of the Court was delivered by SIKRI,  J.-The  appellant is a Joint  Stock  Company,  here- inafter  referred to as the assessee, having its  registered office  in  Delhi.  It held 11950 ’B’ Preference  shares  in another  company,  called  Rohtas Industries  Ltd.,  in  the previous year (calendar year ending December 31, 1953).  The latter company paid a sum of Rs. 50,787/- as dividend on the said  Preference  Shares  to  the  assessee,  and  for   the assessment  year 1954-55 this sum was taxed in the hands  of the  assessee  as dividend, within s. 2(6A)  of  the  Indian Income  Tax  Act,  1922, by the  Income  Tax  Officer.   The Appellate Assistant Commissioner, on appeal by the assessee, held  it  not  to  be taxable.   The  Income  Tax  Appellate Tribunal,  on an appeal by the Department,  however,  agreed with the Income Tax Officer and allowed the appeal.  On  the application of the assessee, the Appellate Tribunal stated a case  for  the opinion of the Punjab High Court.   The  High Court  upheld the contention of the Department and  answered the  question  referred  to it against  the  assessee.   The assessee, after failing to get a certificate under s. 66A(2) of  the  Income Tax Act, obtained special  leave  from  this Court and now the appeal is before us for disposal. The question referred to the High Court is as follows:--               "Whether on the facts and in the circumstances               of the case, the receipt of Rs. 50,787/- was a               receipt  of dividend and is taxable under  the               Indian Income Tax Act." The facts and circumstances referred to in the question  are as  follows.  Rohtas Industries Ltd.,  hereinafter  referred to,  as the declaring company, had in the year  1946  issued shares at a premium and the share premiums so received by it were  kept separate under the head ’Capital  Reserve’.   The declaring  company declared a dividend in the previous  year of the assessee out of the above capital reserve. The learned counsel for the assessee contends before us that the sum received by the assessee is not dividend within  the definition  of the word in s. 2(6A) of the Income  Tax  Act. He says that the share premiums were not profits capable  of being distributed as profits within Regulation 97 of Table A Of  Companies Act of 1913 which lays down that "no  dividend shall be paid otherwise than out of the profits of the  year or any other undistributed profits." He argues further  that it was a capital gain in the hands of the declaring  company and capital gains are expressly excluded from the definition of ’dividend’ by the explanation to s. 2(6A) which  provides that ’the 628 expression "accumulated profits" wherever it occurs in  this clause  shall not include capital gains arising  before  the 1st  day    of April, 1946, or after the 31st day  of March, 1948’.   Lastly,  he urges that in any event, s. 78  of  the Companies Act, 1956, has placed this sum beyond the reach of the Revenue. Before  adverting  to the arguments addressed to us,  it  is

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necessary  to reproduce the relevant  statutory  provisions. Section  2(6A) of the Income Tax Act defines  ’dividend’  as follows: --               (6A) ’dividend’ includes-               (a)   any   distribution  by  a   company   of               accumulated  profits, whether  capitalised  or               not, if such distribution entails the  release               by  the company to its shareholders of all  or               any part of the assets of the company;               (b)................               (c)................               Provided that               (d)................               Provided that               Provided    further   that   the    expression               "accumulated  profits", wherever it occurs  in               this  clause, shall not include capital  gains               arising before the 1st day of April, 1946,  or               after the 31st day of March, 1948."               Section  78,  of  the  Companies  Act,   1956,               reads:-               "78.  (1) Where a company issues shares  at  a               premium, whether for cash or otherwise, a  sum               equal to the aggregate amount or value of  the               premiums on those shares shall be  transferred               to an account, to be called "the share premium               account";  and  the  provisions  of  this  Act               relating to the reduction of the share capital               of a company shall, except as provided in this               section, apply as if the share premium account               were paid-up share capital of the company.               (2)   The    share   premium   account    may,               notwithstanding  anything in sub-section  (1),               be applied by the company-               (a)   in  paying  up unissued  shares  of  the               company to be issued to members of the company               as fully paid bonus shares;               (b)   in writing off the preliminary  expenses               of the company;               629               (c)   in  writing off the expenses of, or  the               commission  paid or discount allowed  on,  any               issue of shares or debentures of the  company;               or               (d)   in providing for the premium payable  on               the  redemption of any  redeemable  preference               shares or of any debentures of the company               (3)   Where   a   company  has,   before   the               commencement of this Act, issued any shares at               a premium, this section shall apply as if  the               shares had been issued after the  commencement               of this Act:               Provided  that any part of the premiums  which               has  been so applied that it does not  at  the               commencement of this Act from an  identifiable               part  of  the company’s  reserves  within  the               meaning  of Schedule VI, shall be  disregarded               in  determining the sum to be included in  the               share premium account." It  is  evident from the definition of the  word  ’dividend’ that  if  a  distribution of  accumulated  profits,  whether capitalised  or not, entails the release by the  company  to its  shareholder  of all or any part of its  assets,  it  is dividend.   It is not disputed that the distribution of  Rs. 50,787/- entails the release of the assets of the  declaring

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company.  But it is contended that there was no distribution of accumulated profits, because by virtue of Regulation  97, Table  A  of the Companies Act, 1913, no dividend  could  be paid  otherwise than out of the profits of the year  or  any other  undistributed profits.  It is said that the  premiums received  by the declaring company were not  profits  within Regulation 97.  We are unable to accede to this  contention. Previous  to the enactment of s. 78 of the Companies Act  of 1956, and the corresponding section in the English Companies Act,  it  was recognised that a  company  ,could  distribute premiums received on the issue of shares as dividends  (vide Palmer’s  Company Law, Twentieth Edition).  At page 637,  it is stated:               legally   permissible  for  the   company   to               distribute dividend out of assets which do not               represent  profits made as the result  of  its               trading  or  business.   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  includes,               e.g., reserves accumulated from past  profits,               from  realised capital profits indeed,  before               the requirement of a share premium account  by               the   1947-48   legislation,   from   premiums               obtained on issue of               630               new  shares,  whereas none of these  items  is               regarded-and rightly so-by the businessman  or               accountant as trading profits." Palmer  relies  on two cases: Re Hoare &  Co.  Ltd.,(1)  and Drown  v.  Caumin-British  Picture  Corporation(2).   In  Re Hoare’s (1) case the company had created a reserve fund con- sisting  partly  of  premiums  received  on  the  issue   of preference: shares.  It having incurred a loss arising  from the depreciation in the value of the public houses below the amount  stated in the company’s balance sheet,  applied  for sanction  of the Court to a scheme for reduction of  capital whereby the company, while retaining a small portion of  the reserve,  attributed to, the reserve more than its  rateable proportion  and  to capital account less than  that  of  its rateable  proportion Buckley J. apparently held  that  these premiums  were  not ’profits’ in the strict sense;  and,  on appeal,  the  counsel for the company contended  before  the Court of Appeal that this was wrong.  Romer, L.J.,  disposed of this contention in the following words";               "The surplus which was carried to the  reserve               fund  represented that which might  have  been               properly  applied at the time, if the  company               had   so  thought  fit,  in   paying   further               dividends to shareholders and no person  could               have complained if they had done so" Thus,  Romer,  L.J., thought that there was  nothing  objec- tionable  in  utilising premiums received on  the  issue  of shares for the purpose of declaring dividend. in Drown’s case(2), a company proposed to pay a dividend  on its preference shares and utilise in part premiums  received by  the  company on the issue of shares, which had  in  fact been  invested in the assets of the company.  The  plaintiff asked for an injunction to restrain the company from  paying the dividend.  Clauson, J., held that part of a reserve fund consisting  of  moneys paid by way of  premiums  on  shares, unless  set  aside in some particular fund  which  has  been wholly  spent, is available for dividend purposes.   We  are not  concerned with other points that arose in the case  and we have only set out the facts and findings relevant to  the

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question before us.  We may here set out Article 129 of  the Gauniont-British Picture Corporation Ltd.  Article 129 reads thus:-               "The  Directors  may, with the sanction  of  a               general  meeting,  from time to  time  declare               dividends  or  bonuses, but no  such  dividend               shall (except as by                             (2)[1937] Ch. 402.               631               the statutes expressly authorised) be  payable               otherwise  than  out  of the  profits  of  the               company.................." . Mr. Kapur, learned counsel for the appellant, had  contended that  the  English Law was different inasmuch  as  what  was prohibited  in English Law was payment of dividends  out  of capital  and  that  it  did  not  enjoin  directors  to  pay dividends  out  of profits.  This case refutes  Mr.  Kapur’s contention.   In re Duff’s Settlements, National  Provincial Bank  Ltd.,  vs.  Gregson,(1) which is  strongly  relied  on behalf  of  the appellant, and which we will  advert  to  in detail later, Jenkins, L.J., says at p. 926: -- "The  share premiums would have been profits  available  for distribution   (see   Drown   v.   Gamnont-British   Picture Corporation) " (2). It was thus well-established before the Act of 1956 and  the corresponding  English  Act that premiums  received  on  the issue of shares were profits available for distribution.  We are  of  the  opinion that the same  connotation  should  be attached to the word ’Profits’ in Regulation 97 of Table  A. In this view of the matter, it is not necessary to pronounce on  the  question whether even if these  premiums  were  not profits within Regulation 97, would this necessarily exclude them from coming with the words ’accumulated profits’ within s. 2(6A)(a). This  takes up to the next point raised before us:  Are  the premiums  received  on  the issue of  shares  capital  gains within  the  explanation to s. 2(6A)?  This  point  was  not urged before the High Court or the Appellate Tribunal and we did not allow it to be developed. The last point may now be dealt with.  In this connection it is  necessary to appreciate the scheme of s. 78 of the  Com- panies  Act, 1956.  Sub-section (1) enjoins a company,  when it  issues shares at a premium, to transfer the premiums  to an  account called ’the Share Premium Account’ and  it  then applies the provisions of the Act relating to the  reduction of  the share capital of a company as if the  share  premium account  were paid-up capital of the  company.   Sub-section (2)  then  provides  how the share premium  account  may  be applied.   It  is said that it impliedly  provides  that  it cannot  be used for the purpose of paying  dividends.   Sub- section (3) then deals with the issue of shares at a premium before the commencement of this Act.  It deems them to  have been  issued after the commencement of the Act  and  applies the  provisions of s. 78.  The effect of this would be  that company  which  has issued shares at a  premium  before  the commencement of the Act would by (1) [1937] Ch. 402 (2) [1951] 1 Ch. 923. 632 virtue  of s. 78, have to open a share premium  account  and transfer  to it the premium so received.  What is to  happen if  before  the  commencement of the  Act  the  company  has already dealt with the premiums in such a way that they  had ceased  to remain as an identifiable part of  the  company’s reserves?   The  sub-section  says that in  that  event  the

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premiums  so dealt with shall be disregarded in  determining the  sum  to be included in the share premium  account.   If such premiums are to be disregarded for the creation of  the share  premium account, it means that they fall outside  the purview  of s. 78.  It has no application to them.  If  this is  so, it is difficult to appreciate bow the appellant  can utilise  this  section for the purpose of showing  that  the premiums which have already been distributed became invested with   the  character  of  capital  in  the  bands  of   the distributing company.  We do not say that for the purpose of income  tax any future application of the share premium  ac- count  in one of the ways mentioned in sub-section (2)  will be  treated  as distribution of capital.  No  such  question arises  for our determination in this case.  But we do  hold that  s. 78 of the Companies Act does not in any way  change the  taxability  of dividends declared out  of  premiums  on shares  received  by a Company before the Act of  1956  came into force.  If it was taxable, apart from s. 78; it remains so taxable. The  case  of Duff’s Settlements(1) referred  to  above,  on which  the learned counsel strongly relied, might  or  might not help him if the declaration of dividend had taken  place after the Act of 1956.  We are of the opinion that what  was decided  in this case has no relevance to the facts of  this appeal. Before concluding, we may refer to the decision of the House of Lords in Land Revenue Commissioners v. Reids Trustees(2), relied on by the learned counsel for the respondents.   This case  would  be relevant if we  were  considering  generally whether the receipt of Rs. 50,787/- was income or capital in the hands of the assessee.  The question, however,  referred to  the  High  Court is limited, and  that  is  whether  the receipt  of  Rs.  50,787/- was a  receipt  of  dividend  and taxable.   It is, therefore, unnecessary to say  more  about this case. In the result, we agree with the High Court that the  answer to  question  referred  to it is in  the  affirmative.   The appeal fails and is dismissed with cost. Appeal dismissed. (1)[1951] 1 Ch. 923.       (2) [1949] 1 All E.R. 354. 633