M/s Guzdar Kajora Coal-Mines Ltd. Calcutta v. Ilie Commissioner of Income Tax, Calcutta

Judgment

CIVIL APPELLATE JURISDICTION: C.A. Nos. 2132 and 213·3 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 196 t. Sukumar Mitra J. L. Hathi, T. A. Ramachandran, K. L. Halhi and P. C. Kapur, for the appellant. V. S. Desai, R. N. Sachthey and B. D. Sharma, for 1the respondent. 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 1!he statement of the case contains certain omissions and errors and does not appear to have been drafted with the usual care with which such stwtemen~s are drawn. The assessee Guzdar Kajora Coal Mines Ltd. which was incorporated on July 4, 1945 purchased by a deed of conveyance dated April 3, 1966 executed by the liquidators of Guzdar (1973] l S.C.R. Kaiora Colliery Co. lJtd. all° the colliery lands, hereditaments and premises, mi{les, nfinerals, 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 I, 1945. The consideration for the transfer was Rs. 6 iacs and was allocated as folloWs :- "(a) the value of the machinery plants stores inclu- • ding stock of goods grains coals at the pitheali and other movable properties appertaining to the s~id colliery the property in which is capable of passing by delivery being . . . . Rs. 3,50,000/-. (b) the value of the buildings longing to the said Rs. 1,50,000/ •. and structures be· colliery being- ( c) the value of the rest of the properties appertaining to the said collk:ry -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 ~he vendor company and claimed depreciation for the assessment year 1946-47 on the basis rif the figures the comparative statement of which is given in the sta~ ment of the case.

This statement contains the written down value as per the assessment record of the vendo.r company tlr~ valuation of the assets as per the balance sheet of the "endor 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 t1'e assessee raised a ground :that the Income tax Officer should have w6rked out the depreciation figures on the basis of balance sheet valuation of the assets as per . the audited accounts submitted by the lliiC&iee anci as claimed in the return. With regard to the asse~s­ mcot year 1953-54 the same position was taken up. The asses;- aee appea~ to tne Income tax Appellate Tribunal, havin~ failoo ia its contentions before the Appellate Assistant CommissiGncr.

It was contended before the Appellate Tribunal by ihe asseiSee that although it had paid a slllll 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 poiated out that the purchase had been made after obtaining the 1l GUZDAR COAL MINES LTD. v. C.I. T. (Grover, J.) 7 4 5 opinion of an experi,and th;e assessee was being subjected to great , hardship bly 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 injll6tice would result to the assessee if the depreciation continued ~o 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 ola company was necessary.

The matter was remanded to the Income-tax Officer to hold an inquiry aiter giving an opportunity to the assessee to place air 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, 19"60. According to his findings some of the Directors and Shareholders of the two companies were the same and they were connected in many \\iays. Furthermore the valuation of the depreciable assets and the consumable stores had been wiitten ilp 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 macle by the second expert S. N. Mullick dated October 19, 1955 and January 30, 1957 together with the clarifica.iion made by him on November 20, 1959 were considered by him.

He also examined s·. N. Mullick under s. 37 oJ' the Indian Income-tax Act, 1922, hereinafter called the 'Act'. He c~me 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 (2) Mines and development as per balance-sheet of M/s. Guzdar Gajore Colliery Co. Ltd. as at 30-6-45. (3) Stores and stock and worked out the value of other depreciable assets at Rs. 2,56,960/- Rs. 2,48,323/- Rs. 60, 744/· Rs. 33,973/-" Before the Appellate TribiUnal the remand report of the Im::ome-tax Officer· was assailed on behalf of the assessee on various groµnds.

The Tribunal observed that when the iissessments for the years 1946-47 and 1947-48 were made the assessee 13--L t 52SupCI/73 SUPJ.BME COURT REPORTS [1973) l S.C.R 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 ;:ule 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 good-will the contention raised on behalf of the assessee was that the same was included in the it>~m of one lakh mentioned in lhe sale deed. According to the report of Mr. Mullick it was included in the item ol Rs. 3,50,000. 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 valueJ at Rs. 1,00,000/- shows that these properties which had not been in clause l 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 yaluation". The appeals were consequently dismissed. The assessee moved the Tribunal for referring certa'jn 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 circumstance: 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 tallowing such a course. Even on the question of vahrntion of the good-will it was observed : "Further, it s.hould be remembered that although the Income-tax Officer bas made the valuation of the goodwill by· working out the normally accepted method of taking the profits of the four preceding years, this 8 GUZDAll COAL MINES LTD. v. c.I.T. (Grover, /.) method of calculation or this normal practice has aot 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 Rot 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 deciiio11 of the High Court on a number of grounds. It has been urged inter aliiJ tilat the Hi~ 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 correot. Tbere can be no justifiction, it has been poiared. out, for any court or Tn\mnal "to rip up a transaction not impeached as dishonest and not proved to be such, merely becauie the company may have paid an extravagant price for itheir f)roperty". A great deal of emphasis has been laid on behalf of the assessee on the report submitted by the experts julltifying the valuation given in the deed of conveyance.

In the absence of fraud, collusion, inflation or false transaction made with an ulterior purpo~e the Income tax authorities, it is said, were precluded from going behind the agreement of purchase in deicrmining the pµrchase price fixing their own valua:tion. 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 businelis should be sold by the vendor company. This contention, llowever, 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 ques'"'n which was referred. On the case as put before the Appellate Tribunal and the Him Court and the question ret'erred with rerard to the two assessment years in question we are uuable to see any such error or infirmity that would justify interference by us ii ·· .-,. appeals.

It has. been strenuously urj\ed on behalf of the assessee th.at since the decision of the Tribunal or the High Court could not operate as res judicafa 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 d~pre­ ciation~ We h.ave 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 depri::ciation allowance in the assessments whieh are still pendin~ and have not been finally disposed of. 74S :)IJ~'REl\lE COURT REPORTS (1973) l '>.CR Section JO ( 2) (vi J of the Act, to the exten1 it is material " as follows "(2)

Such profits ~r gains shall be computed ·after ma~in.~: the foilowing allownnces. namely :- (vi) in rewect of depreciation of such buildings mac)1in.!ry. pl:.nt or furniture bein.g •the proper:v of the ass·~ssee. a sum equivalent, where the assets are ships other than ships ordinarily µlyinl? on inland waters,. to such percentage on tht original cost ~hereof to the assessee as may in any ca'se 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 coses be 1'rescribed'; Provided that- ( a) ........ .. (b) ......... . ( c) The aggregate of all allowances in respect of depreciation made under 1his clause and clause (vi-a) or under any Act· repealed hereby, o under the Indian Income-tax Act, 1886 (1I of 1886), shall, in no case exceed the original cost to the assess·~e of the buildings, machinery, plant or furniture, as the case may be;" 0 Keeping in view sub-s. · (5) of s.

10 of the Act the Qriginal actual cost 1to the assessee of the asset with regard to which depreciation allowance· is claimed has to be ascertained for the · ~· purpose inter·g_lia of finding out ·the writ.en down value in case of as~ts other than ocean going ships. For the purpose of l!;etting the benefit of clause ( c) of the proviso to sub-section (2 )(vi) also 1he 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" ins. 10(2)(vi) of the Act refers to the person who owns ithe assets and who is being assessed and depreciation allowance has to be based on the original cost of such property to such p~rson.

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 conidered was the original cost to the person who was being actually assessed and not the. origin~! cost of those assets to the previous (I) [1935] f.T.'l. H ~ GUZDAR COAL MINES LTD. I". C.I.T. (Gro\'er, .l.J owner of the business. Reference was made to the above <leci· sion of the Privy Council in the judgment of this Court in Jogta Coal Co. Ltd. v. Commissioner of fllcome tax West BengctH 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 n 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 authori1ties. Any document or formal deed . mentioning the consideration or the cost paid for the purchase of an as~et by an assessee would te a piecl! of 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 fiotitious price has been put on the asset or there is fraud or coilusion between the vendor and the vendee and thet>J has been inflation or deflati<;>n 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 Transpqrt Co. Ltd. v. Commissioner of Income-tax Lahore(') and Kalooram Govindram v. Commissioner of lncome tax Madhya ·Pradesh, Nagpur and Bhandara(3 ).

In this view of the matter it is open to the Income tax au'thorities to determine and to the assessee to show whether the good-will of the business is or is not included in the con·sideration or the price paid for the acquisition of the asset. rn other word, even if i't is not expressly mentioned that goodwill has been sold H can be shown and ascertain•Jd by evidence whether the same has be.en purchased or not by the assessee. The expression "good-will" has been considered and explained lw this Court in S. C. Cambatta & Co. P. Ltd. v. Commissioner Excess Profits ·Tax, Bombay( 4 j 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 •.vas and is open to the Income tax authorities to determine the valuation. as well as the allocation between depreciable and nnn-depreciable assets. (I) 36 l.T.R. 521 ()J 57 T.T.R. JJ5 (2) 26 l.T.R. 595 (4) 41 T.T.R. 500 [1973) I S C.R. 1lie present appeals, however, must fail for the reasons slated earlier and are hereby dismissed. We make no order as to costs in this Court. V.P.S. Appeal dismissed