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
section K Kapur K K Jain Bishambar Lal Khanna and section Murthy for the appellant
CK Daphtary Attorney General R Ganapathy Iyer and RN 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 50787 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 section 26A 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 section 66A2 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 50787 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 section 26A 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 section 26A 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 section 78 of the  has placed this sum beyond the reach of the Revenue
Before adverting to the arguments addressed to us it is necessary to reproduce the relevant statutory provisions
Section 26A 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  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 50787 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 section 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 eg 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 Ltd1 and Drown vs Caumin British Picture Corporation2
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 LJ 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 LJ 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 case2 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 21937 Ch
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 Gregson1 which is strongly relied on behalf of the appellant and which we will advert to in detail later Jenkins LJ says at p 926 The share premiums would have been profits available for distribution see Drown vs 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 section 26Aa
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 section 26A 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 section 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 section 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 2 632 virtue of section 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 section 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 section 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 section 78 it remains so taxable
The case of Duff s Settlements1 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 vs Reids Trustees2 relied on by the learned counsel for the respondents
This case would be relevant if we were considering generally whether the receipt of Rs 50787 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 50787 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
11951 1 Ch


Summary:
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 50787 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 50787 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 50787 was a receipt of dividend and was taxable under the Indian Income tax Act 1922
It was well established before the  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
section 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 section 78 it remains so taxable
Re Hoare  Co Ltd  Drown vs Gaumint British Picture Corporation  re Duff s Settlements
National Provincial Bank Ltd vs Gregson  Land Revenue Commissioners vs Reids Trustees  referred to