Case Note & Summary
The dispute arose from depreciation allowance claimed by M/s Guzdar Kajora Coal-Mines Ltd. under the Income Tax Act, 1922. The assessee company was incorporated on July 4, 1945, and took over the business of Guzdar Kajora Colliery Co. Ltd. by a deed of conveyance executed by the liquidators, with sale effective from July 1, 1945. The total consideration was Rs.6 lakhs, allocated in the sale deed among machinery, plants, stores, buildings, structures, and other properties. For the assessment years 1946-47 to 1951-52, the Income Tax Officer allowed depreciation on the basis of the written down value of the assets as per the vendor company's assessment records. For the assessment years 1952-53 and 1953-54, the assessee claimed depreciation on the basis of the balance-sheet valuation of assets as per audited accounts. The Appellate Assistant Commissioner rejected this claim. On appeal, the Income Tax Appellate Tribunal remanded the matter to the Income Tax Officer for inquiry. The Income Tax Officer, after examining evidence including reports of experts and examining a valuer under Section 37, found that some directors and shareholders of the two companies were common, that the valuation of depreciable assets had been written up while non-depreciable assets were written down, and that no provision had been made for goodwill despite good profits. He reallocated the Rs.6 lakhs as follows: goodwill Rs.2,56,960; mines and development Rs.2,48,323; stores and stock Rs.60,744; and other depreciable assets Rs.33,973. The Tribunal accepted this report, holding that when a settled practice was sought to be reopened, the Income Tax Officer had a right to see whether there was justification for the departure. It found the break-up in the sale deed arbitrary and that goodwill was not provided for. The High Court, on reference, affirmed the competence of the Income Tax Officer to go beyond the conveyance and refix the valuation, noting that the method of valuing goodwill by taking the profits of the four preceding years was not challenged. The Supreme Court dismissed the assessee's appeals by certificate. It held that under Section 10(5) of the Income Tax Act, 1922, the original actual cost to the assessee of an asset must be ascertained for computing written down value. A sale deed is prima facie evidence of cost, but if circumstances show fictitious price, fraud, collusion, or inflation/deflation of value for ulterior purposes, the Income Tax authorities may refuse to accept the price and determine the actual original cost. Even if goodwill is not expressly mentioned, it can be shown and ascertained by evidence. Therefore, the Income Tax authorities were competent to go behind the valuation and allocation in the deed of conveyance and determine afresh the value of depreciable and non-depreciable assets. The Court referred to several precedents including Commissioner of Income Tax, Madras v. Buckingham & Carnatic Co. Ltd., Jogta Coal Co. Ltd. v. Commissioner of Income Tax, West Bengal, Pindi Kashmir Transport Co. Ltd. v. Commissioner of Income Tax, Lahore, and Kalooram Govindram v. Commissioner of Income Tax, Madhya Pradesh. The final decision favored the revenue.
Headnote
A) Income Tax - Depreciation Allowance - Original Cost to Assessee - Income Tax Act, 1922, Sections 10(2)(vi), 10(5) - For assets other than ocean-going ships, written down value must be computed from original actual cost to the assessee who owns the asset and is being assessed, not merely vendor's written down value. The original cost is a question of fact to be determined on evidence or material before authorities. Held that any formal deed mentioning consideration is prima facie evidence but not conclusive; authorities may ascertain actual original cost where deed price is fictitious or collusive. B) Income Tax - Depreciation Allowance - Power of Revenue Authorities to Go Behind Valuation and Allocation - Income Tax Act, 1922, Sections 10(2)(vi), 10(5) - If circumstances show fictitious price, fraud, collusion, or inflation/deflation of value for ulterior purposes, the Income Tax authorities may refuse to accept the price mentioned in deed or alleged by assessee and determine actual original cost. In the present case, common directors/shareholders, arbitrary break-up of Rs.6 lakhs, and absence of provision for goodwill justified going behind conveyance. Held that the Income Tax Officer was competent to refix valuation and allocation. C) Income Tax - Depreciation Allowance - Goodwill Valuation - Income Tax Act, 1922, Sections 10(2)(vi), 10(5) - Even if not expressly mentioned, sale of goodwill can be shown by evidence; the Income Tax Officer could value goodwill by accepted method of capitalizing preceding four years' profits. Held that the valuation of goodwill at Rs.2,56,960 was supported by evidence and not challenged by assessee. D) Income Tax - Depreciation Allowance - Reopening Settled Practice - Income Tax Act, 1922, Sections 10(2)(vi), 10(5) - When assessee sought to depart from settled depreciation basis, the Income Tax Officer had right to examine justification. The Tribunal's finding that valuation in sale deed was arbitrary and goodwill not provided for was upheld. Held that the High Court correctly answered the referred question in affirmative.
Issue of Consideration
Whether the Income Tax Officer was competent to go beyond the conveyance and fix a valuation of the assets on his own under Sections 10(2)(vi) and 10(5) of Income Tax Act, 1922, particularly regarding original cost to the assessee and inclusion of goodwill.
Final Decision
Supreme Court dismissed the appeals by certificate and affirmed the High Court's answer that the Income Tax Officer was competent to go beyond the conveyance and fix a valuation of the assets on his own. The Court held that under Section 10(5) of Income Tax Act, 1922, the original actual cost to assessee must be ascertained; a sale deed is prima facie evidence but revenue authorities may refuse to accept the stated price and determine actual original cost if there is fictitious price, fraud, collusion, or inflation/deflation of value for ulterior purposes; goodwill can be established by evidence even if not expressly mentioned. Therefore, the Income Tax authorities were competent to go behind the valuation and allocation in the deed of conveyance and determine afresh valuation and allocation between depreciable and non-depreciable assets.
Law Points
- Original actual cost to assessee must be ascertained under Section 10(5) of Income Tax Act
- 1922
- sale deed is prima facie evidence but not conclusive
- revenue authorities may go behind valuation and allocation if fictitious price
- fraud
- collusion
- or ulterior purpose exists
- goodwill can be established by evidence even if not expressly mentioned
- written down value requires original cost to assessee
