# BHARAT FIRE AND GENERAL INSURANCE CO. LTD. NEW DELHI v. THE COMMISSIONER OF INCOME TAX, NEW DELHI

- **Citation:** [1964] 7 S.C.R. 626
- **Court:** Supreme Court of India
- **Decided:** 1964-04-02
- **Bench:** K. Subba Rao, J.C. Shah, S.M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/bharat-fire-and-general-insurance-co-ltd-new-delhi-v-the-commissioner-of-income-3083
- **Pages:** 7

## Headnote

Inco-rne Tax-Dividend declared out o.f premitl1ns on shares
receii;ed hu a company--Amount vJhether receipt o.f dividendWhether tuxab!e-What is dividend-Effect of s. 78. Companie•
Act, 1956-Indian Income-tax Act. 1922, s. 2(6A).
The Rohtas Industries Ltd. i'5ued 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
Decemb2r 31, 1953, the company peid a sum of Rs. 50,787/-
as
dividend to the apn2llant company, For the year 1954-55, th's
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 the
facts and in the circumstances of the case, the receipt cf
Rs. 50,787 /- was a receipt of dividend and was taxable under the
Indian Income-tax Act. The High Court answered the question
against tho appellant and the latter appealed this Court with
special leave. Dismissing the appeal.
Heid: The receipt of Rs. 50,787 /- was a receipt of dividend
and "'as 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. GaumintBritish 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.

## Text

J964
..4.pril 2
626
SUPREME COURT REPORTS
(1964]
BHARAT FIRE AND GENERAL INSURANCE CO. LTD.
NEW DELHI
v.
THE COMMISSIONER OF INCOME TAX, NEW DELHI
[K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.J
Inco-rne Tax-Dividend declared out o.f premitl1ns on shares
receii;ed hu a company--Amount vJhether receipt o.f dividendWhether tuxab!e-What is dividend-Effect of s. 78. Companie•
Act, 1956-Indian Income-tax Act. 1922, s. 2(6A).
The Rohtas Industries Ltd. i'5ued 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
Decemb2r 31, 1953, the company peid a sum of Rs. 50,787/-
as
dividend to the apn2llant company, For the year 1954-55, th's
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 the
facts and in the circumstances of the case, the receipt cf
Rs. 50,787 /- was a receipt of dividend and was taxable under the
Indian Income-tax Act. The High Court answered the question
against tho appellant and the latter appealed this Court with
special leave. Dismissing the appeal.
Heid: The receipt of Rs. 50,787 /- was a receipt of dividend
and "'as 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. GaumintBritish 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 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.
7 S.C.R.
SUPREME COURT REPORTS
627
April 2, 1964. The Judgment of the Court was delivered
1964
~
~-~~
General Insurance
SIKRJ, J.-The appellant is a Joint Stock Company, hereco. Ltd .•
inafter referred to as the assessee, having its registered office in
New Del/ii
Delhi. It held 11950 'B' Preference shares in another com-The oom~·;.,,;on.,
pany, called Rohtas Industries Ltd., in the previous year of l;icome Ta•,
(calendar year ending December 31, 1953). The latter coml.cu•Ddhi
pany paid a sum of Rs. 50,787 /- as dividend on the said PreSikri, J.
ference Shares to the assessee, and for the assessment year
1954-55. this sum was taxed in the hands of the <issessee 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 dis- ·
posal.
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 questicn
are as follows. Rohtas Industries Ltd .. hereim1ft·~r 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 a;.
sessee out of the above capita 1 reserve.
The learned counsel for the assessee contends before us
that the sum received by the assessee is not dividend witliin
the definition of the word in s. 2(6A) of the Income Tax Act.
H~ 'Says. th~t the share premi~m~ were not profits capable of
bemg distributed as profits w1thm 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 capi!al gain in the hands of the dccla~ing company and capital gams are expressly excluded from the definition of 'dividend' by the explanation to s. 2(6A) which provides that 'the
1904
Bharat Fire and
General I nmrance
Co. Ltd.,
..1.Yew Delhi
v.
The Commi.s.siontr
of lnco11u.Ta'e,
ll~ew Delhi
Sil:ri, J.
628
.SUPREME COURT REPORTS
(1964]
expression "accumulated profits" wherever it occurs in this
clause shall not include capital gains arising before the l st 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
necessary to reproduce the relevant statutory provisions. Section 2(6A) of the Income Tax Act defines· 'dividend' as follows:~
"(6A) 'di~idend' includesfa) any distrib4tion by a company of accumulated profits, whether capitalised or not. if such distribu·
tion 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 !st day of
April, 1946, or after the 31st day of March, 1948."
Section '78~ of the Companies Act, 1956, reads:-
"78; (I) 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 pre·
mium account were paid-up share capital of the
company.
(2) The share premium account may, notwithstandi11g
anything in sub-section (!), be applied by the com·
pany-
(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 com·
pany;
7S.C.R.
SUPREME COURT REPORTS
629
1961
(c) in writing off the expenses of, or the commission
paid 1lr discount allowed on, any issue of shares
or debentures of the company: or
Bharat Fire and
General J nsurance
Co. Ltd.,
(d) in providing for the premium payable on the re·
Xew Del/Ii
demption of any redeemable preference shares or The 00,!;.;.,.wner
of any debentures of the compJ
of Inwm.-Ta ,
•
bT ew lJeT.ki
l) 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 capita·
lised 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
dividend~ (vide Palmer's Company Law, Twentieth Edition).
At page 637, it is stated:
"It is evident from the preceding observations that it is
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 194 7-48
legislation, from premiums obtained on issue of
Sikri, J.
1964
Bharat Fire and
Gene.ral lns?.1rar.:;,,
l'o. Ltd.,
.Yen' .Delhi
v.
Tlie Gonunissioner
of lru:ome-11a.r,
,Yen' Del/ii
Si!.·1i, J.
630
SUPREME COURT REPORTS
[1964]
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.,(') and
Drown
v.
Caumin-Britislz Picture Corporation('). In Re
Hoare'.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, en appeal, the counsel for the company contended befort' the Court of Appeal that this was wrong.
Romer, L.J., disposed of this contention in the following
\.vords";
"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('), a company proposed to pay a dividend on its preference s:iares 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 Gaumont-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 shaU (except as by
--------,-----=---::-:~-
--
(') [1904] 2 Ch. 208.
. (') (1937] Ch. 402.
•
7 S.C.R.
SUPREME COURT REPORTS
631
the statutes expressly authorised) be payable
1964
otherwise than out of the profits of the company m,""" Fi" awl
"
•••• , , , , , •• , • • • • • •
,
()\·nr·r11l ft1J>urance
Mr. Kapur, learned counsel for the app~llant, had cong;•;,, 1fl~ii,;
tended that the English Law was different inasmuch as what
v.
was prohibited in English Law was payment of dividends out
1
'~1 ?:::;,:,~':~:;:-;:'
of capital and that it <lid not enjoin directors to pay dividends
New Delhi
'
out of profits. This case refutes Mr. Kapur's contention. In
re Duff's Sett/eme11ts, National Provincial Bank Ltd .. vs. Gregson,(') 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 Druwn v. Gaumo11t-Britislz
Picrure Corporation)"(').
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 distrib~tion. 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 (!) 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 I~
said that it impliedly provides that it cannot be used for the
purpose of p:.ying 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 cf 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
(') [1937] Ch. 402.
(') [1951] 1 Ch. 923.
1':1ikri, .].
632
SUPREl\IE COURT REPORTS
[1964J
1964
Bharat Fire ancl
General lnsurawe
Go. Ltcl..
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 tire 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 premiu.ms so dealt with
New Del/ti
v.
P!tt Com11tissionr·r
of Incmne-1'a:v,
New Ddhi
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 ap-
·plication to them. If this is so, it is difficult to appreciate how
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 hands 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(') 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 Con11nissio11ers v. Reids
Trustees('). relied on by the learned counsel for the respondents. This case would be relevant if we were considering
generally whether the receipt of Rs. 50,781 !- 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.
l'l [1951] 1 Ch. 923.
Appeal dismissed ..
(') [1949] 1 All E.R. 354.