1940 (3) TMI 8 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Income-tax authorities were justified in going behind the contract for the sale of assets.
2. Validity of the cost of assets as Rs. 15,00,000 and the finding that the cost was Rs. 5,00,000.
3. Whether the debenture loan of Rs. 10,00,000 was illusory and colourable, and if the interest paid thereon is allowable as a deduction.
4. Nature of the transaction of exchange of shares with the Madura Mills.
5. Whether the difference in values of exchanged shares could be considered profit and assessable to tax.
6. Adoption of market value for the 20,000 Madura Mills shares allotted to the petitioner.
7. Justification of the finding that the difference in value between the 20,000 shares of Madura Mills and the 1,000 shares of the petitioner amounted to Rs. 6,00,000.

Issue-wise Detailed Analysis:

1. Justification in Going Behind the Contract for Sale of Assets:
The court held that the Income-tax authorities have the right to look behind the contract of sale to ascertain the true value of the assets. The mere production of documentary evidence showing a contract for purchasing assets at a certain price does not conclusively establish the correctness of the claimed original cost for depreciation purposes under Section 10(2)(vi) of the Indian Income-tax Act, 1922. The authorities can refuse to accept a fictitious price and determine the true value. Thus, the answer to this question was in the affirmative.

2. Validity of Cost of Assets as Rs. 15,00,000 and Finding of Rs. 5,00,000:
The court found material justifying the Income-tax authorities' conclusion that the original cost of the assets was not Rs. 15,00,000. The purchase consideration included shares and debentures, which had no value beyond the assets acquired. The company did not provide evidence of the assets' value, relying solely on the contract figure. Given the age of the assets and lack of contrary evidence, the authorities were justified in using the book value of Rs. 5,00,000. Both parts of this question were answered in the affirmative.

3. Debenture Loan of Rs. 10,00,000 as Illusory and Colourable:
The court agreed with the Income-tax authorities that the debenture loan of Rs. 10,00,000 was illusory and colourable. The facts supported this conclusion, and thus, the interest paid on these debentures was not allowable as a deduction.

4. Nature of the Transaction of Exchange of Shares with Madura Mills:
The court determined that the transaction was not entirely of a capital nature. The primary consideration for the Madura Mills' 20,000 shares was the benefit from the ginning contract. The company received an immediate gain of Rs. 6,00,000, agreeing to reduce its probable annual gains over ten years. This immediate gain, even though in shares, was considered income. The transaction was thus not of a capital nature, and the benefit represented profits received in the year of payment.

5. Difference in Values of Exchanged Shares as Profit:
The court held that the difference between the values of the exchanged shares must be allocated to the ginning contract and considered profit in the hands of the company, assessable to tax.

6. Adoption of Market Value for 20,000 Madura Mills Shares:
The court found that the Income-tax authorities were justified in adopting the market value for the 20,000 Madura Mills shares allotted to the company. The argument that placing a large block of shares on the market would depress the price was not applicable as the shares were not intended to be put on the market.

7. Justification of Rs. 6,00,000 Value Difference:
The court concluded that there was material before the Income-tax authorities to justify their finding that the difference between the 20,000 shares received and the 1,000 shares allotted amounted to Rs. 6,00,000.

Conclusion:
The court answered all questions in favor of the Income-tax authorities. The authorities' actions were justified, and they succeeded on all points raised, with costs fixed at Rs. 250.