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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

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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

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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 744 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

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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

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             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

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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

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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