Law:

Section:

Section 4 of the Income-tax Act, 1961 - Income - Chargeable as - Assessment years 1961-62 to 1965-66 and 1968-69 and 1969-70 - Assessee, a banking company, took over banking business of Maharaja of Gwalior - In lieu of same, assessee issued shares to Maharaja at their face value which was less than that of net assets which belonged to Maharaja - Excess of book value of assets over face value of shares was appropriated as reserves - Included in capital, thus, transferred by Maharaja to assessee, it received securities - Said securities were sold by assessee-bank in subsequent years - Income arising from sale of such securities, according to assessee, was sale price minus book value at which securities had been purchased - However, ITO held that since assets of Maharaja had been transferred at a low price, a saving was made at that stage and thus added that saving to sale price of securities - Whether surplus of assets over per value of shares allotted to Maharaja was to be regarded as premium and not as saving and, therefore, same should not be treated as income - Held, yes FACTS The assessee, a banking company, took over the banking business of Maharaja of Gwalior from 14-4-1958. At that time, the capital of Maharaja in the business worked out to Rs. 67,48,098. The Maharaja was allotted 48,899 shares of Rs. 50 each in lieu of the business transferred to the company. The excess of the book value of the assets over the face value of the shares which came to Rs. 42,53,148 was appropriated as reserves. Included in the capital, thus transferred to the assessee-bank, it received securities which the assessee-bank sold in subsequent years. The securities were given a book value at the time of transfer. When the securities were sold year after year, an income was made by the assessee bank and this income according to the assessee, was the sale price minus the book value at which the securities had been purchased. The ITO did not agree with this contention. He held that since the assets of the Maharaja were transferred at a low price and a saving was made at that stage, this saving should be proportionately added to the sale price of the securities. On a rough estimate,…

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