1965 (12) TMI 3 - HC - Income Tax

Assessable profits of the assessee-company - inflation in the value of the opening stock - in the books of the vendor firm, the value of the stock-in-trade was shown at Rs. 1,77,285 as on the 31st July, 1956, while in the books of the assessee-company the value of the said stock-in-trade was shown at Rs. 2,10,285 - additions made by AO

Summary

Issues:
Interpretation of agreement for sale and transfer of business assets, valuation of stock-in-trade, assessable profits determination.

Analysis:
The case involved a dispute regarding the assessable profits of an assessee-company, arising from the valuation of stock-in-trade in the context of an agreement for the sale and transfer of business assets. The agreement, executed on 2nd August, 1956, between the assessee-company and a partnership firm, detailed the purchase and sale of the running business, assets, and liabilities, including goodwill and book debts. The consideration for the sale was fixed at Rs. 2,60,000, to be paid through the issue of shares to the vendor-firm's nominees. The core issue revolved around the valuation of stock-in-trade, with variance in values recorded in the books of the vendor firm and the assessee-company. The disagreement led to the addition of Rs. 33,000 to the profits of the assessee-company, representing the alleged inflation in the value of the opening stock.

The High Court analyzed the clauses of the agreement, emphasizing that the total consideration of Rs. 2,60,000 encompassed not only the assets' value but also other properties, including goodwill, as specified in the agreement. The Court noted that the inflated value of the stock-in-trade was an attempt to minimize profits rather than an actual loss to the assessee. The Court rejected the argument that the value of stock on 31st July, 1956, could differ from that on 1st August, 1956, as the agreement's effective date was the latter. Therefore, the Court upheld the Tribunal's decision that the stock-in-trade should be valued at the closing stock value of the predecessor firm on 31st July, 1956, justifying the addition of Rs. 33,000 to the assessable profits.

In conclusion, the High Court affirmed that, based on the agreement's construction and the factual circumstances, the Tribunal was justified in treating the sum of Rs. 33,000 as part of the assessee-company's assessable profits. The Court ruled in favor of the revenue authorities, holding the assessee liable to pay the costs of the reference. The concurring judgment by Justice G. N. Prasad supported the decision rendered by Justice N. L. Untwalia, further solidifying the outcome of the case.