1979 (2) TMI 37 - HC - Income Tax

Summary

Issues Involved

1. Competence of the Income-tax Officer (ITO) to adopt different figures for the cost of assets for depreciation purposes.
2. Validity of the ITO's reduction of asset values based on missing vouchers and other discrepancies.
3. Evaluation of the Appellate Assistant Commissioner's (AAC) and Income-tax Appellate Tribunal's (Tribunal) decisions.
4. Legitimacy of the ITO's inquiry into the true cost of assets.
5. Determination of the true cost of assets for depreciation purposes.

Issue-wise Detailed Analysis

1. Competence of the Income-tax Officer (ITO) to adopt different figures for the cost of assets for depreciation purposes:

The primary question addressed was whether the ITO was competent to adopt different figures for the assessment years 1948-49, 1949-50, and 1950-51 as the cost of various assets for depreciation purposes. The ITO did not accept the consideration shown to have been paid by the assessee-company to the vendor as representing the true value of the assets, citing unreliable books of the vendor and missing vouchers. The Tribunal upheld the ITO's approach, stating that mere production of documentary evidence showing that a contract had been made for purchasing assets at a certain price did not conclusively establish the correctness of the claim made by the assessee.

2. Validity of the ITO's reduction of asset values based on missing vouchers and other discrepancies:

The ITO reduced the value of the assets due to several discrepancies, including missing vouchers, machinery not in possession, and other unverifiable expenses. The AAC and the Tribunal agreed with most of these reductions but made some modifications. The Tribunal emphasized that the ITO was justified in reducing the value of assets where necessary particulars were not available, and the items could not be properly co-related with the construction of the building or machinery.

3. Evaluation of the Appellate Assistant Commissioner's (AAC) and Income-tax Appellate Tribunal's (Tribunal) decisions:

The AAC modified the ITO's disallowances to some extent, accepting certain items as includible in the cost of machinery and enhancing supervisory charges. The Tribunal further evaluated these modifications and made additional adjustments, agreeing with the AAC's approach but providing further benefits to the assessee in specific instances. The Tribunal also rejected the fundamental objection that it was not permissible to reduce the value of assets as shown in the books of the assessee for the purpose of allowing depreciation.

4. Legitimacy of the ITO's inquiry into the true cost of assets:

The Tribunal and the High Court upheld the ITO's right to inquire into the true cost of the assets, citing precedents like CIT v. Harveys Ltd. and Guzdar Kajora Coal Mines Ltd. The courts concluded that the income-tax authorities are competent to go behind a contract or conveyance when circumstances justify such a course, especially when there are indications of fictitious pricing or collusion.

5. Determination of the true cost of assets for depreciation purposes:

The High Court agreed with the Tribunal that the ITO and AAC had provided convincing reasons for not accepting the figures shown in the assessee's balance-sheet. The High Court noted that the substantial involvement of Shirazali Hakim in both the vendor and the assessee-company suggested an inflationary element in the asset values. However, the High Court found that the reduction of Rs. 1,08,891 for machinery and plant due to missing vouchers was not justified, as the items were in possession of the company. The High Court directed that this amount should be added back to the cost of plant and machinery for depreciation purposes.

Conclusion

The High Court concluded that the ITO was competent to adopt different figures for the cost of assets for depreciation purposes and upheld most of the reductions made by the ITO and the Tribunal. However, it directed that the amount of Rs. 1,08,891, disallowed due to missing vouchers, should be added back to the cost of plant and machinery for depreciation purposes, along with the applicable supervisory charges. The assessee was ordered to pay the costs of the reference to the Commissioner.