1969 (3) TMI 17 - HC - Income Tax

Whether there are any materials on the record on which a sum of Rs. 50,000 was included in the total income of the applicant on account of the alleged understated production of yarn and soft waste - Held, no

Issues Involved:
1. Determination of the original cost of plant, machinery, and buildings for depreciation purposes.
2. Inclusion of Rs. 50,000 in total income due to alleged understated production of yarn and soft waste.
3. Admissibility of expenses for preparing returns and representation before tax authorities in computing the income of the assessee.

Issue-Wise Detailed Analysis:

1. Determination of the Original Cost of Plant, Machinery, and Buildings:
The primary issue was whether the Income-tax authorities could go behind the purchase agreement dated October 14, 1945, to ascertain the original cost of the plant, machinery, and buildings. The assessee, a registered firm, claimed depreciation based on the values specified in the purchase agreement. The Income-tax Officer, however, fixed lower values based on other considerations, including fire insurance policies and market conditions. The Appellate Assistant Commissioner and the Tribunal upheld the Income-tax Officer's valuation, questioning the valuations provided by experts Mr. Vaze and Mr. Belcham.

The court held that the authorities were precluded from going behind the purchase agreement as there was no allegation or evidence of fraud, collusion, or inflation of values for ulterior purposes. The court emphasized that the cost to the assessee should be the actual amount paid, as determined by the agreement and supported by expert valuations. The court relied on the Supreme Court's decision in Kalooram Govindram v. Commissioner of Income-tax, which stated that barring fraud or collusion, the cost of an asset to a divided member must be its cost at the time of partition.

Conclusion: The court answered in favor of the assessee, stating that the Tribunal and income-tax authorities were precluded from going behind the purchase agreement to ascertain the original cost of the plant, machinery, and buildings.

2. Inclusion of Rs. 50,000 in Total Income Due to Alleged Understated Production of Yarn and Soft Waste:
The second issue pertained to the assessment year 1949-50, where the Income-tax Officer added Rs. 100,000 to the assessee's income, suspecting understated production of yarn and soft waste due to an increased percentage of dead loss. The Appellate Assistant Commissioner reduced this addition to Rs. 50,000, considering the use of inferior cotton. The Tribunal upheld this decision.

The court noted that the assessee maintained regular accounts and that the increased percentage of dead loss was explained by the use of inferior cotton. The court found no material evidence to justify the addition and emphasized that the method of accounting was not defective. The court referred to several decisions, including Arumugaswami Nadar v. Commissioner of Income-tax and Pandit Bros. v. Commissioner of Income-tax, which supported the assessee's contention that regular accounts should be accepted unless proven otherwise.

Conclusion: The court answered in favor of the assessee, stating that there were no materials on record to justify the inclusion of Rs. 50,000 in the total income.

3. Admissibility of Expenses for Preparing Returns and Representation Before Tax Authorities:
The third issue was whether expenses incurred for preparing returns and representation before the Income-tax Officer and Tribunal were admissible in computing the income of the assessee. The court noted that various High Courts had taken different views on this matter, and the Supreme Court had allowed certain litigation expenses indirectly connected with the business.

The court referred to several decisions, including Commissioner of Income-tax v. Royal Calcutta Turf Club and Sree Meenakshi Mills, Ltd. v. Commissioner of Income-tax, which allowed expenses incurred for protecting the business. The court observed that the matter required consideration by a larger Bench due to differing views.

Conclusion: The court directed that the question be considered by a larger Bench, taking into account subsequent pronouncements by different High Courts and the Supreme Court.

Final Disposition: The court answered the first and second questions in favor of the assessee and directed further assessment proceedings in light of these answers. The third question was referred to a larger Bench for consideration. The assessee was entitled to costs in all cases.

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