1978 (11) TMI 2 - SC - Income Tax

Whether the sum of Rs. 74,448.20 being the actual value of raw material received from German collaborators free of cost represented revenue receipt - Whether the amount of Rs. 74,448 being the actual value of raw material received free of cost from German collaborators was rightly debited at that value to the revenue account - dismiss the appeal and answer the questions referred by the Tribunal in favour of the assessee and against the revenue

Summary

Issues:
Assessment of income-tax on M/s. Groz-Beckert Saboo Ltd. for the assessment year 1962-63 based on the treatment of raw materials and semi-finished needles received as gifts from West German collaborators.

Analysis:
The appeal in question pertains to the assessment of income-tax on M/s. Groz-Beckert Saboo Ltd. for the year 1962-63. The company collaborated with West German partners to establish a factory for manufacturing hosiery needles. The dispute arose when the company received machinery and goods free of cost from the collaborators. The Customs authorities raised concerns, leading to separate invoices detailing the value of the goods. The company accounted for these goods in its books on 30th September, 1961, transferring them to the stock. The Income Tax Officer (ITO) contended that the value of these goods should not have been debited in the trading account as no money was spent to acquire them. The Assessing Officer (AO) and the Appellate Tribunal upheld this view, prompting the matter to be referred to the High Court.

The High Court misunderstood the crux of the issue, assuming that the goods were considered revenue receipts subject to taxation. However, the Tribunal had ruled that since the goods were received as gifts, they were not taxable income under the Income Tax Act, 1961. The High Court sided with the assessee, leading to the revenue's appeal in the Supreme Court.

The Supreme Court, after reviewing the facts, established that the raw materials and semi-finished needles were indeed received as gifts and were subsequently incorporated into the company's stock. Referring to established legal precedents, the Court determined that the market value of these assets at the time of inclusion in the stock should be considered as the cost to the business. Therefore, the value of the goods received should be deducted from the sale proceeds to calculate the business's profit. The Court emphasized that the method of entry in the accounts did not alter the substance of the transaction, and the goods' real value should be accounted for. Consequently, the Court dismissed the appeal, ruling in favor of the assessee and directing the revenue to bear the appeal costs.

In conclusion, the judgment clarified that the value of goods received as gifts should be treated as part of the business's stock at their market value, impacting the calculation of profits. The Court's decision highlighted the importance of accurately reflecting the value of assets in business accounts for tax assessment purposes.