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Interpretation of Sections 10(2)(vi) and 10(2)(vii) of the Income-tax Act in relation to the written down value of vehicles acquired through share transfer. Determining the written down value for depreciation and loss calculation based on the actual value of assets transferred in lieu of shares. Analysis: The judgment involves a reference under Section 66(1) of the Income-tax Act concerning the amalgamation of business concerns into a company. The company claimed a loss on the sale of vehicles and depreciation on the cost of vehicles purchased from shareholders. The dispute centered on the written down value of vehicles for depreciation calculation under Sections 10(2)(vi) and 10(2)(vii) of the Income-tax Act. The assessee company contended that the nominal value of shares transferred in exchange for vehicles should be considered as the written down value. However, the Income-tax authorities rejected this argument, asserting that the value of vehicles had been artificially inflated. The authorities held that they were not bound by the nominal value of shares and must determine the true value of the assets transferred to prevent abuse of tax laws. The judgment cited legal principles from cases like Aron Salomon v. A. Salomon & Company Limited and In re Wragg Ltd., emphasizing that a company is a separate legal entity from its shareholders. It highlighted that while shares cannot be issued at a discount, the actual value of assets transferred must be honestly estimated for share transactions. The Income-tax Department is bound by bona fide transactions but can challenge deliberate inflation of asset values. The Tribunal found that there was an artificial inflation in the book value of assets, indicating a deliberate attempt to circumvent tax laws. The Income-tax Officer and the Appellate Tribunal agreed that the value of vehicles had been unduly inflated, justifying their refusal to accept the nominal value of shares as the written down value. Consequently, the Tribunal upheld the decision to determine the written down value based on the true value of the assets transferred. In conclusion, the judgment affirmed that the Income-tax authorities were justified in going behind the apparent transaction to ascertain the true value of assets when there is evidence of deliberate inflation. The Tribunal's decision to reject the assessee company's claims and calculate depreciation based on the actual value of assets transferred was upheld, emphasizing the importance of preventing abuse of tax laws. Conclusion: The judgment clarifies the principles governing the determination of the written down value of assets for depreciation calculation under the Income-tax Act, emphasizing the need for honest estimation and preventing deliberate inflation of asset values to avoid tax evasion.
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