PETITIONER: M/S GUZDAR KAJORA COAL-MINES LTD. CALCUTTA Vs. RESPONDENT: THE COMMISSIONER OF INCOME TAX, CALCUTTA DATE OF JUDGMENT31/07/1972 BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S. PALEKAR, D.G. CITATION: 1972 AIR 2373 1973 SCR (1) 742 1972 SCC (2) 436 ACT: Income Tax Act (11 of 1922), ss. 10(2) (vi) and 10(5)- 'Original cost to assessee', meaning of-Power of Revenue Authorities to go behind the valuation and allocation in sale deed. HEADNOTE: The appellant purchased on July 1, 1945, the property of a colliery company and the consideration of Rs. 6 lacs was allocated in the sale deed in a certain manner among the various items purchased. From the assessment year 1946-47 to the assessment year 1952-53, the appellant claimed depreciation on the basis of the written down value of the assets as per the. assessment record of the vendor-company, and the Income-tax officer allowed depreciation on that basis. For the assessment year 1952-53, however, the appellant contended that the depreciation should have been worked out on the basis of balance-sheet valuation of the assets as per the audited accounts submitted by the appellant and as claimed in their return. The Appellate Assistant Commissioner held against the appellant. On appeal, the appellate Tribunal remanded the matter to the Income-tax Officer, and the income-tax Officer, after inquiry, held that some of the directors of the vendor company and the appellant were the same, that the valuation of the depreciable assets had been written up while that of the non-depreciable assets was written down and that no provision was made for the goodwill of the vendor company even though it was making good profits. He made the allocation of Rs. 6 lacs in a different manner, and included the goodwill of the vendor also as having been sold to the appellant, and made provision for it from out of the Rs. 6 lacs. The Tribunal accepted the report of the Income-tax Officer and held that when the settled practice was sought to be reopened by the appellant the Income-tax Officer had a right to see whether there was any justification ,for the departure, that the break up of the valuation in the sale deed was in fact arbitrary and that it was unlikely that the goodwill was provided for in the break up of the valuation in the sale deed. On reference, the High Court also held that the Income-tax Officer was competent to go beyond the conveyance and refix the valuation and that he bad correctly worked out the valuation of the goodwill after examining all the relevant facts and reports of experts and that the method adopted was not challenged by the appellant. Dismissing the appeal to this Court, HELD : In the case of an asset, other than ocean-going ships, with regard to which depreciation allowance is claimed under's. 10(2)(vi) of the Income-tax Act, 1922, in view of s. 10(5), the original actual cost to an assessee of the asset has to be ascertained for the purpose of finding out its written down value. For the purpose of getting the benefit of cl. (c) of the proviso to s. 10(2) (vi) also the original cost to the assessee,that is- theperson who owns the asset and who is being assessed,has to be ascertained. [748F-H] 743 The original cost of a particular asset is a question of fact which has to to determined on the evidence or on the material produced before or available to the Income-tax authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by an assessee would be a piece of evidence and prima facie the statements or figures given therein show how much the cost of the asset to the assessee is. But if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purposes it is open to the Income-tax authorities to refuse to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual original cost was. [749C-E] Even if it is not expressly mentioned that goodwill has been sold it can be shown and ascertained by evidence whether it has been purchased or not by the assessee. [749F-G] Commissioner of income Tax, Madras v. The Buckingham & Carnatic Co. Ltd. Madras, [935] I.T.R. 384; Jogta Coal Co. Ltd. V. Commissioner of Income Tax, West Bengal 36 I.T.R. 521; Pindi Kashmir Transport Co. Ltd. v. Commissioner of Income Tax, Lahore 26 I.T.R. 595; and Kalooram Govindranm v. Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara, 57 I.T.R. 335, referred to. tax Therefore, in the circumstances of this case it was open to the Incomeauthorities to go behind the valuation as also the allocation given in the deed of conveyance and to determine afresh the valuation as well as the allocation between the depreciable and non-depreciable assets. [749G-H] JUDGMENT:
CIVIL APPELLATE JURISDICTION: C.A. Nos. 2132 and 2133 of
1970.
Appeal by certificate from the judgment and order dated June
22, 1965 of the Calcutta High Court in I.T. Reference No. 36
of 1961.
Sukumar Mitra J. L. Hathi, T. A. Ramachandran, K. L. Hathi
and P. C. Kapur, for the appellant.
V. S. Desai, R. N. Sachthey and B. D. Sharma, for the res-
pondent.
The Judgment of the Court was delivered by-
Grover, J. These appeals have been brought by certificate
from a judgment of the Calcutta High Court in two Income tax
References.
It is most unfortunate that the statement of the case
contains certain omissions and errors and does not appear to
have been drafted with the usual care with which such
statements are drawn.
The assesses Guzdar Kajora Coal Mines Ltd. which was
incorporated on July 4, 1945 purchased by a deed of convey-
ance dated April 3, 1966 executed by the liquidators of
Guzdar
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Kajora Colliery Co. Ltd. all the colliery lands,
hereditaments and premises, mines, minerals, powers and
privileges and all ,other hereditaments together with the
machinery thereon belonging to the latter company. It was
stipulated in the deed of ,conveyance that the sale was to
be effective from July 1, 1945. The consideration for the
transfer was Rs. 6 lacs and was allocated as follows :-
“(a) the value of the machinery plants stores
including stock of goods grains coals at the
pithead and other movable properties
appertaining to the said colliery the property
in which is capable of passing by delivery
being …. Rs. 3,50,000/-.
(b) the value of the buildings and
structures be longing to the said colliery
being Rs. 1,50,000/-.
(c) the value of the rest of the properties
appertaining, to the said colliery not capable
of being passed by delivery being Rs.
1,00,000/-”
Soon after the assessee company came into existence it took
over the business from the vendor company and claimed depre-
ciation for the assessment year 1946-47 on the basis of, the
figures the comparative statement of which is given in the
statement of the case. This statement contains the written
down value as per the assessment record of the vendor
company the valuation of the assets as per the balance sheet
of the vendor company and the valuation by the assessee
company as per balance sheet as on December 30, 1945. The
Income tax Officer ‘allowed depreciation on the basis of
those figures. This state of affairs continued till the
assessment year 1952-53 when the Income tax Officer again
allowed depreciation on the old basis. Before, the
Appellate Assistant Commissioner the assessee raised a
ground ,that the Income tax Officer should. have worked ,out
the depreciation figures on the basis of balance sheet
valuation of the assets as per the audited accounts
submitted by the assessee and as claimed in the return.
With regard to the assessment year 1953-54 the same position
was taken up. The assessee appealed to the Income tax
Appellate Tribunal, having failed in its contentions before
the Appellate Assistant Commissioner.
It was contended before the Appellate Tribunal by the
assessee that although it had paid a sum of Rs. 6 lacs as
consideration for the transfer of the mines the value taken
by the department for the purpose of determining
depreciation Was much lower. It was pointed out that the
purchase had been made after obtaining, the
745
opinion of an expert and the assessee was being subjected to
great hardship depreciation being determined only on the
old written down value of the assets and not on the basis of
the original cost of acquisition. The Appellate Tribunal
was of the view that substantial injustice would result to
the assessee if the depreciation continued to be allowed on
the old basis if the case of the assessee had any substance.
It was felt that a proper investigation as to the value paid
by the assessee in taking over the old company was
necessary. The matter was remanded to the Income-tax
Officer to hold an inquiry after giving an opportunity to
the assessee to place all the available material in support
of its claim. With regard to the assessment year 1953-54
also the case was remanded with similar directions.
The Income-tax Officer made a report on July 6, 1960.
According to his findings some of the Directors and
Shareholders of the two companies were the same and they
were connected in many ways. Furthermore the valuation of
the depreciable assets and the consumable stores had been
written up whereas the valuation of the non-depreciable
assets like mines etc. had been written down. As regards
the report of the expert A. N. Mitter dated September 1,
1945 he was unable to contact him in spite of making an
effort to do so. The report made by the second expert S. N.
Mullick dated October 19, 1955 and January 30, 1957 together
with the clarification made by him on November 20, 1959 were
considered by him. He also examined 8. N. Mullick under S.
37 of the Indian Income-tax Act, 1922, hereinafter called
the ‘Act’. He came to the conclusion that the vendor had
been making good profits but no provision had been made for
the goodwill of the company in the business and if such a
provision had been made it would have worked out at Rs.
2,56,960/- having regard to the profits made for the
preceding four years. He made an allocation of Rs. 6 lacs
as follows
“(1) Good-will Rs. 2,56,960/-
(2) Mines and development as per balance-sheet of M/s.
Guzdar Gajore Colliery Co. Ltd. as at
30-6-45. Rs.2,48,323/-
(3) Stores and stock Rs.60,744/- and worked out the value of other depreciable assets at Rs. 33,973/-"
Before the Appellate Tribunal the remand report of the
Income-tax Officer was assailed on behalf of the assessee on
various grounds. The Tribunal observed that when the
assessments for the years 1946-47 and 1947-48 were made the
assessee
13-Ll52SupCI/73
746
chose to give the valuation in its balance-sheet on a
certain basis which was accepted and no appeal was taken to
the higher authorities and although the rule of estoppel
could not be applied but “acquiscence of the assessee shows
which way the wind blew”. When a settled thing was sought
to be reopened the Income-tax Officer had a right to see
whether there was any Justification for the “radical
departure from the settled practice”. It was held that the
Income-tax Officer was to go behind the valuation. As
regards the goodwill the contention raised on behalf of the
assessee was that the same was included in the item of one
lakh mentioned in the sale deed. According to the report of
Mr. Mullick it was included in the item of Rs. 3,50,006.
This is what the Tribunal proceeded to observe:
“It seems to us, the simple truth of the
matter is that the figure of Rs. 3,50,000/-,
Rs. 1,50,000/- and Rs. 1,00,000/- were
arbitrarily put. and there was no clear cut or
understandable break up of valuation (?)
clause 3 of the break up in the deed of 3rd
April 1946, which talks of the value of the
rest of the properties appertaining to the
said colliery not capable of being passed by
delivery being valued at Rs. 1,00,000/shows
that these properties which had I not been in
clause 1 and 2 were comprised in this and it
seems too much to say that good-will is
included in this. it would be more true to say
that good-will was thought of or conceived of
but not provided for in the break up of
valuation”.
The appeals were consequently dismissed.
The, assessee moved the Tribunal for referring certain
questions of law to the Tribunal. The following question
was framed by the Tribunal and referred to the High Court :
“Whether on the facts and in the circumstances
of the case the Income-tax Officer was
competent to go beyond the conveyance and fix
a valuation of the assets on his own ?”
The High Court was of the view that the Income-tax Officer
was competent to make a fresh computation as to the value of
the assets of the assessee if the facts and circumstances of
a particular case justified following such a course. Even
on the question of valuation of the good-will it was
observed
” Further, it should be remembered that
although the Income-tax Officer has made the
valuation of the goodwill by working out the
normally accepted method of taking the profits
of the four preceding years, this
747
method of calculation or this normal practice
has not been challenged by the assessee. The
revenue has. examined all the relevant facts
of the case including the reports of Mr.
Mitter and Mr. Mullick and the Tribunal has
agreed with those findings of facts and we do
not think that we can interfere with those
findings”.
The answer to the question referred was given in the
affirmative.
Learned counsel for the assessee has assailed the decision
of the High Court on a number of grounds. It has been urged
inter alia that the High Court had not kept in view the
general and well established principle that the statement
with regard to valuation contained in a formal document
should be prima facie accepted as cornet. There can be no
justification, it has been pointed out, for any court or
Tribunal “to rip up a transaction not impeached as dishonest
and not proved to be such, merely because the company may
have paid an extravagant price for their property”. A great
deal of emphasis has been laid on behalf of the assessee on
the report submitted by the experts justifying the valuation
given in the deed of conveyance. In the absence of fraud,
collusion, inflation or false transaction made with an
ulterior purpose the Income tax authorities, it is said,
were precluded from going behind the agreement of purchase
in determining the purchase price fixing their own
valuation. The other point canvassed on behalf of the
assessee is that good-will was not included in the valuation
given in the deed of conveyance nor was it ever intended
that any good-will of the business should be sold by the
vendor company. This contention, however, appears to run
counter to What was argued before the High Court and the
Tribunal nor can it be said to be covered by the question
which was referred. On the case as put before the Appellate
Tribunal and the. High Court and the question referred with
regard to the two assessment years in question we are unable
to see any such error or infirmity that would Justify
interference by us in these appeals._
It has been strenuously urged on behalf of the assessee that
since the decision of the Tribunal or the High Court could
not operate as res judicata for other assessment years with
regard to which assessments are still pending, the assessee
would be entitled to raise all the points which are relevant
with regard to the question of valuation for the purpose of
determining depreciation. We have been pressed to indicate
broadly the principles for future guidance as it will be
open to the assessee to raise all the points relevant for
the purpose of determination of the amount of depreciation
allowance in the assessments which are still pending and
have not been finally disposed of.
748
Section 10(2) (vi) of the Act, to the extent it is material
is as follows
“(2) Such profits or gains shall be computed
after making the following allowances,
namely:-
(vi) in respect of depreciation of such
buildings machinery, plant or furniture being
the property of the assessee, a sum
equivalent, where the assets are ships other
than ships ordinarily plying on inland waters,
to such percentage on the original cost
thereof to the assessce as may in any case or
class of cases be prescribed and in any other
case, to such percentage on the written down
value thereof as may in any case ,or class of
cases be prescribed;————–
Provided that–
(a)……….
(b)……….
(c) The aggregate of all allowances in res-
pect of depreciation made under this clause
and clause (vi-a) or under any Act repealed
hereby, or under the Indian Income-tax Act,
1886 (II of 1886), shall, in no case exceed
the original cost to the assessee of the
buildings, machinery, plant or furniture, as
the case may be;”
Keeping in view sub-s. (5) of S. 10 of the Act, the original
actual cost to the assessee of the asset with regard to
which depreciation allowance is claimed has to be
ascertained for the purpose inter-alia of finding out the
written down value in case of assets other than ocean going
ships. For the purpose of getting the benefit of clause (c)
of the proviso to sub-section (2)(vi) also the original cost
has also to be ascertained. The Privy Council laid down in
Commissioner of Income tax, Madras v. The Buckingham and
Carnatic Co., Ltd. Madras(1), that the word “assessee” in
s. 10(2)(vi) of the Act refers to the person who owns the
assets and who is being assessed and depreciation allowance
has to be based on the original cost of such property to
such person. This principle was laid down in a case where
the assessee had acquired the business of another assessee
and it was emphasised that the original cost to be consi-
dered was the original cost to the person who was being
actually assessed and not the original cost of those assets
to the previous
(1) [1935] I.T.R. 33
749
owner of the business. Reference was made to the above
decision of the Privy Council in the judgment of this Court
in Jogta Coal Co. Ltd. v. Commissioner of Income tax West
Bengal(1) and it was observed
“We do not think that there is any doubt on
the wording of the section or on the
interpretation that has been put upon those
words that the cost to be calculated for the
purpose of depreciation allowance is the cost
to the assessee and not to the person who
makes the sale……….
Now the original cost of a particular asset is a question of
fact which has to be determined on the evidence or the
material produced before or available to the Income tax
authorities. Any document or formal deed mentioning the
consideration or the cost paid for the purchase of an asset
by an assessee would be a piece if evidence and prima facie
the statements or figures given therein would show how much
the cost of the asset to the assessee is. But if
circumstances exist showing that a fictitious price has been
put on the asset or there is fraud or collusion between the
vendor and the vendee and there has been inflation or
deflation-of-value for ulterior purposes it is open to the
Income tax authorities to refuse to accept the price
mentioned in the deed or alleged by the assessee and to
ascertain what the actual cost was: See Pindi Kashmir
Transport Co. Ltd. v. Commissioner of Income-tax Lahore (2 )
and Kalooram Govindram v. Commissioner of Income tax Madhya
Pradesh, Nagpur and Bhandara(3). In this view’ of the
matter it is open to the Income tax authorities to determine
and to the assessee to show. whether the good-will of the
business is or is not included in the consideration or the
price paid for the acquisition of the asset. In other words
even if it is not expressly mentioned that goodwill has been
sold it can be shown and ascertained by evidence whether the
same has been purchased or not by the assessee. The
expression “good-will” has been considered and explained by
this Court in S. C. Cambatta & Co. P. Ltd. v. Commissioner
Excess Profits Tax, Bombay(4) and nothing more need be said
about it. The principles stated by us are by no means
exhaustive and are mainly illustrative.
Keeping in view the facts of the present case we may make it
clear that if circumstances exist for going behind the
valuation as ‘also the allocation given in the deed of
conveyance it was and is open to the Income tax authorities
to determine the valuation as well as the allocation between
depreciable and non-depreciable assets.
(1) 36 I.T.R. 521 (2) 26 I.T.R. 595
(3) 57 I.T.R. 335 (4) 41 I.T.R. 500
750
The present appeals, however, must fail for the reasons
stated earlier and are hereby dismissed. We make no order
as to costs in this Court.
V.P.S. Appeal dismissed.
751
