Bharat Fire and General Insurance Co.
Ltd. New Delhi Vs. The Commissioner of Income Tax, New Delhi  INSC 109 (2
02/04/1964 SIKRI, S.M.
CITATION: 1964 AIR 1800 1964 SCR (7) 626
Income Tax--Dividend declared out of premiums
on shares received by a company-Amount whether receipt of dividendWhether
taxable-What is dividend-Effect of s. 78. Companies Act, 1956-Indian Income-tax
Act, 1922, s. 2(6A).
The Rohtas Industries Ltd. issued in 1945
shares at a premium 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
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.
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
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, hereinafter
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
Before adverting to the arguments addressed
to us, it is 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;
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
(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 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 consisting 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
"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 objectionable 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 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) Ch. 402.
631 the statutes expressly authorised) be
payable otherwise than out of the profits of the
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 Companies
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. Subsection (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)
 Ch. 402 (2)  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 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 account 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.
(1) 1 Ch. 923. (2)  1 All E.R.