JUDGMENT
UNTWALLIA J. – The Income-tax Appellate Tribunal, Patna, Bench, has stated this case under section 66(1) of the Indian Income-tax Act, 1922, and has formulated and referred for answer by the High Court the following question of law :
“Whether on the facts the circumstances of the case and upon a construction of the agreement of 2nd August, 1956, the Tribunal was justified in holding that the sum of Rs. 33,000 forms part of the assessable profits of the assessee-company ?”
The assessee, Indian Machinery Stores (Private) Ltd., is a private limited company having its registered office in Patna and was incorporated with t he object of taking over the business carried on by a partnership firm called “Indian Machinery and Mills Stores”. By an agreement in writing executed on the 2nd August, 1956, by the assessee-company and the said firm, the former agreed to purchase and the latter agreed to sell and transfer the running business carried on by the partnership firm with all its assets and liabilities including the goodwill as also the book debts and other claims of the firm. The consideration fixed for the sale and transfer was Rs. 2,60,000 to be paid up by issue of shares to the nominees of the vendor-firm. The fourth clause of the agreement provided :
“That all assets of the vendors in respect of all its businesses shall be taken over at the book value standing in the books of accounts of the vendors as on the 1st August one thousand nine hundred and fifty-six”.
The schedule annexed to the said agreement showed the value of the stock-in-trade taken over to be Rs. 2,10,285.87 nP. A copy of the said agreement has been annexed by the Tribunal as annexure “A” to the statement of the case. The further facts stated by the Tribunal are that in the course of the assessment of the assessee-company for the year 1958-59, which was the first year of its assessment, the Income-tax Officer found that in the books of the vendor firm, the value of the stock-in-trade was shown at Rs. 1,77,285 as on the 31st July, 1956, while in the books of the assessee-company the value of the said stock-in-trade was shown at Rs. 2,10,285, as being the value of the opening stock, which had been purchased by the assessee-company from the partnership firm. The latter value being in conflict with clause 4 of the agreement and being in excess of it to the tune of Rs. 33,000, the said sum was added back to the profits of the assessee-company as being an inflation in the value of the opening stock. The Appellate Assistant Commissioner and the Appellate Tribunal maintained the addition in the appeals filed by the assessee-company.
The first clause of the agreement provides :
“That the vendors shall sell and the company shall purchase as and on the 1st day of August one thousand nine hundred and fifty-six, FIRSTLY, the goodwill of the said business, trade marks, agencies, concessions, licences, commissions, leases, privileges and titles thereof; SECONDLY, all structures, outhouses, workshopes, sheds and other properties specified in the scheduled hereto; THIRDLY, all the plants and machineries, furnitures, patents, vehicles, automobiles, tractors, jeeps, furnishings, tools, implements, stock in trade, etc., to which the vendors are entitled to in connection with the said business; FOURTHLY, all the book debts and other debtors and chose-in-action due to the vendors in connection with the aid business with full benefit of all securities for such debts; FIFTHLY, all bills, documents and notes of the vendors in connection with the said business, SIXTHLY, the full benefit of all pending contracts and agreements which the vendors are or may be entitled to in connection with the said business and, LASTLY, all other properties to which the vendors are entitled to in connection with the said business”.
In the second clause, the parties agreed :
“That in consideration of such sale and transfer of the aforesaid business with assets and liabilities to the company by the vendors, the company shall allot to the vendors or their nominees or their creditors 260 fully paid up shares in the capital of the company of the nominal value of Rs. 2,60,000…….”
In the schedule of assets and liabilities taken over, as against the assets the to talk value mentioned was Rs. 3,41,811.04 nP. including the amount of Rs. 2,10,285.87 nP. as the value of the stocks taken over from the three branches, namely, Patna, Mazaffarpur and Purnea, of the partnership firm. The value of the other assets was of furniture, typewriters, land and building advance, advance to staff, sundry debtors, etc. The liabilities of the company were shown in the s aid schedule to the tune of Rs. 81,811.04 nP. Thus, the total purchase consideration was shown at Rs. 2,60,000. On reading the agreement as a whole, it is obvious that the total consideration of Rs. 2,60,000 was paid not only on account of value of the assets mentioned in the schedule minus the liabilities mentioned therein, but also on account of the various other properties mentioned in paragraph No. 1 of the agreement quoted above including the goodwill, etc., for which no separate value was shown in the schedule appended to the agreement. is not doubt true that the sum of Rs. 2,60,000 was paid by the purchasing company to the vendor-firm. The fact that the said amount was paid by issuing share in favour of the nominees of the vendors makes no difference. It does not seem to be the case the department, nor any finding t that effect has been recorded in any of the three orders of the Income-tax Officer, Appellate Assistant Commissioner or of the Appellate Tribunal that the said sum of Rs. 2,60,000 was not paid and a lesser sum was actually paid or will be deemed to have been paid. But the reason for t he addition of the extra sum of Rs. 33,000 to the profits of the company is that instead of showing the sum of Rs. 1,77,285 as the value of the stocks purchased, an inflated sum has been shown as the value of the stocks, although, as a matter of fact, the sum of Rs. 33,000 was not the value of the stocks as it abundantly clear from the fourth clause of the agreement.
Mr. S. N. Dutta, appearing for the assessee, submitted that the said value of Rs. 1,77,285 was found in the books of the firm entered on the 31st of July, 1956. It did not necessarily follow that the same value was entered in the books of the firm on the 1st of August, 1956, and, therefore, counsel submitted that the finding of the Tribunal and the department as to the inflation shown in the value of the stocks with reference to the fourth clause of the agreement is erroneous in law as it is based upon no material. I am unable to accept this argument. The fifth clause of the agreement provided that the sale and transfer was to take effect from the 1st day of August, 1956, although the agreement in point of fact was executed on the 2nd August, 1956. In that view of the matter, the mention of the book value standing in the accounts of the vendor as one the 1st August, 1956, in the fourth clause of the agreement must mean the book value mentioned on the beginning of that date, that is to say, on the close of the business on the 31st of July, 1956. Moreover, it was not the assessees case at any stage that there were any figures entered in the books of the vendor-firm on the 1st of August, 1956, different from those entered on the 31st July, 1956.
The next submission made on behalf of the assessee was that when in the schedules the value of the stock was shown as Rs. 2,10,285.87 nP., it ought to have been taken that the said amount was paid as the value of the stock, and even if it was apparently in conflict with what was provided in clause 4 of the agreement, the specific and definite value of the stock mentioned in the schedule ought to have been given more weight and ought to have prevailed upon the provisions of the fourth clause of the agreement. I find no substance in this point either. As I have already stated, as a matter of fact, the total sum of Rs. 2,60,000 was paid not only for the assets minus the liabilities as shown in the schedule appended to the agreement, but also for some more properties as mentioned in the first clause of the agreement. That being so, it is manifest that the assessee was actually not losing any thing any paying any more price by inflating the value of the stocks in the schedule appended to the agreement; but it did so in order to inflate the value of the opening stock and to minimise its profits. In that view of the matter, the Tribunal is justified in saying in its appellate order;
“Reading the agreement as a whole, we are satisfied that the stock-in-trade should be valued in the books of the assessee company at the same value of the closing stock in the books of the predecessor firm as on July 31, 1956.”
They were, therefore, justified in upholding the addition of Rs. 33,000 on that ground.
In the result, therefore, I answer the question of law referred the High Court in the affirmative and against the assessee and hold that on the facts and circumstances of the case and upon a construction of the agreement, the Tribunal was justified in holding that the sum of Rs. 33,000 formed part of the assessable profits of the assessee-company. The assessee must pay the costs of this reference; hearing fee Rs. 250 (rupees two hundred and fifty).
G. N. PRASAD J. – I agree.