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TMI Blog1963 (9) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... general stores, pipes, stores and stocks and the price allocated to these items was ₹ 1,50,000. The other agreement related to sundry debts including work-in-progress and liabilities including loans and in respect of these items the price allocated was ₹ 50,000. Now in the books of the vendor company, the fixed assets were shown at ₹ 1,46,050 being the cost and there was a depreciation reserve of ₹ 69,500; the book value of the stocks and stores was ₹ 1,08,197 and the book value of the work-in-progress was ₹ 79,000; the liabilities amounted to ₹ 1,46,826 and the aggregate amount of advances, deposits and cash came to ₹ 1,38,882. There was also a reserve of ₹ 6,725 for doubtful debts. Since the book value of the items comprised in the first agreement was ₹ 1,78,024 against the price of ₹ 1,50,000 allocated to these items, there was a surplus of ₹ 28,024 and similarly in respect of the second agreement there was a surplus of ₹ 21,057 arrived at by deducting the price of ₹ 50,000 from the book value of the items comprised in that agreement, namely, ₹ 71,057. When we use the word surplus , we me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and trading assets at ₹ 3,33,550. He then observed that the assessee had, as a result of the transaction of purchase, acquired advances, deposits and cash aggregating to ₹ 1,46,333 and the assessee had, therefore, in effect paid ₹ 7,451 (Rs. 1,46,333 less ₹ 1,38,882) in addition to ₹ 2,00,000, that is, an aggregate sum of ₹ 2,07,451 for fixed and trading assets valued in the books of the vendor-company at ₹ 3,33,550, the value of the fixed assets being ₹ 1,46,050 and the value of the trading assets being ₹ 1,87,197. He, therefore, apportioned the sum of ₹ 2,07,451 proportionately between fixed assets and the trading assets in the ratio of their book value and came to the conclusion that the price allocable to trading assets, i.e., stocks, stores and work-in-progress was ₹ 1,17,451 and on payment of this price the assessee had acquired trading assets of the value of ₹ 1,87,197 and had thus made a revenue gain of ₹ 69,746. He, therefore, added ₹ 69,746 to the total income of the assessee. The assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee and contended that the two agreements dated 30th July, 1954, being part and parcel of one single transaction under which the factory was purchased as a going concern by the assessee, no part of the surplus resulting from the purchase could be regarded as revenue profit and that the sum of ₹ 49,080 which according to the Appellate Assistant Commissioner represented the difference between the book value of trading assets and the price paid by the assessee for the same was, therefore, not liable to be added to the assessable income of the assessee. The assessee cited passages from certain books on accountancy in support of this contention to show that the surplus arising from such purchase was always carried to capital reserve account and no part of it could ever go into the profit and loss account. The Tribunal accepted this contention of the assessee and held that no part of the surplus resulting from the purchase could be regarded as revenue profit and that the revenue authorities had, therefore, no justification to make an artificial allocation of the price between fixed assets and trading assets, the entire surplus being capital profit. Having said this, the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in the form indicated by the Commissioner. Thereafter the rules of this court were amended and pursuant to the amended rules, an application was filed in this court on behalf of the Commissioner making the same request as was set out in the objection previously filed by the Commissioner. At the hearing of the reference, the learned Advocate-General argued that the Income-tax Officer and the Appellate Assistant Commissioner had taken the view that the trading assets acquired by the assessee from the vendor-company had, as forming part of the opening stock, been overvalued and that the value of ₹ 1,87,197 at which they were debited in the trading account was in excess of the price actually paid by the assessee to the vendor-company for the same and that such excess value was, therefore, liable to be disallowed resulting consequently in the increase of the profit of the assessee for the year ending 30th July, 1954. The learned Advocate- General pointed out that the Income-tax Officer had disallowed a sum of ₹ 69,746 as the excess value debited to the trading account in respect of trading assets whereas the Appellate Assistant Commissioner disallowed only a sum of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost to the assessee would be arrived at by apportioning the price paid by the assessee for the entire factory between capital assets and trading assets. It may be that the price paid was a composite price for the factory which consisted of capital assets as well as trading assets but that cannot prevent the revenue from apportioning the price amongst capital assets and trading assets in any fair and reasonable manner permitted by law. The decision of the Court of Appeal in England in Osborne v. Steel Barrel Co. Ltd. [1942] 24 Tax Cas. 293 clearly supports this proposition. If, therefore, the question were as to whether the price should be apportioned between capital assets and trading assets for the purpose of arriving at the price paid by the assessee in respect of trading assets, which alone could be debited to the trading account, such question would certainly have to be answered in favour of the Commissioner and it would not be right to say that no such apportionment can be made and, therefore, the book value of trading assets as appearing in the books of the vendor-company must be taken as representing the cost of trading assets to the assessee. This position was not disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile making up the accounts for the year under consideration the assessee-company has debited the profit and loss account with the full value of the current assets worth ₹ 1,87,197, though the actual purchase consideration paid for the same was ₹ 1,17,451 . The second reason on which Mr. S.P. Mehta relied was that if the Income-tax Officer was thinking of the debit of excess value in respect of trading assets and he was of the view that the value of trading assets as shown in the opening stock was liable to be adjusted, he would have applied his mind to the question whether consequent upon the adjustment in the figure of opening stock any adjustment was required to be made in the figure of closing stock which he admittedly did not do and from this Mr. S.P. Mehta asked us to draw an inference that the Income-tax Officer was not considering this question at all but was merely seeking to tax the difference between the book value of trading assets and the price paid for the same as profit directly assessable to tax. This circumstance, though of some validity, cannot be given undue weight by us, for it is quite possible that the Income- tax Officer erroneously failed to appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons we have given while rejecting a similar contention advanced in relation to the order of the Income-tax Officer, we also reject the present contention in relation to the order of the Appellate Assistant Commissioner. It is, therefore, clear that the Appellate Assistant Commissioner treated the sum of ₹ 49,651 as the excess value of trading assets included in the trading account of the assessee and accordingly held that the said amount should be added back to the assessable income of the assessee. In the appeal before the Tribunal, the assessee objected to the addition of ₹ 49,651 in the assessment and since the addition was made on the ground that, in view of the Appellate Assistant Commissioner, the sum of ₹ 49,651 was the excess value of trading assets in the trading account, the objection to the addition carried with it the challenge to the view of the Appellate Assistant Commissioner. The question which should, therefore, have been canvassed before the Tribunal was whether the Appellate Assistant Commissioner was right in treating the sum of ₹ 49,651 as the excess value of trading assets in the trading account. Now curiously enough the assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital reserve account following the accepted principles of accountancy and various authorities were quoted in support of such contention. The Tribunal after taking into account all such authorities as made available to it came to a finding that the department had no justification whatsoever for making an artificial allocation as between the values paid by the assessee-company for the fixed and other assets less liabilities on the one side and for the stocks, stores and work-in-progress on the other hand, attributing the entire surplus to have arisen only in respect of stocks and work-in-progress, which alone could be treated as revenue profits according to the department , it is clear that the Tribunal understood the case of the revenue to be that the surplus attributable to the purchase of trading assets was revenue profit and was, therefore, liable to be added to the assessable income of the assessee and also conceived that to be the basis of the orders of the Income- tax Officer and the Appellate Assistant Commissioner, merely the figures of such surplus being different according to the method of calculation and allocation adopted by the Income-tax Officer and the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... progress on the other and attributing the entire surplus to have arisen only in respect of stocks and work-in-progress, which alone could be treated as revenue profits according to the department. That the department contended that the entire surplus was in respect of trading assets and was, therefore, liable to be treated as revenue profits. The learned Advocate-General contended that this statement in the statement of case was not borne out by anything in the order of the Tribunal and should not, therefore, be relied upon. Now if the matter had rested merely at this, there would have been great force in the contention of the learned Advocate-General, for we would not be bound to accept any statement in the statement of case if it was contrary to what was stated in the order itself. But we find that not only is this statement not contrary to anything stated in the order of the Tribunal, for the order of the Tribunal is silent on the point as to what were the contentions of the revenue, but the statement of case is an agreed statement and the revenue cannot, therefore, be permitted now to contend that this statement is incorrect or that it does not represent the contentions urg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in part as revenue profit derived by the assessee. That question is very much different from the question as to whether there was any inflation of the value of trading assets forming part of the opening stock so that to the extent of such inflation the assessable profits of the assessee were liable to be increased. This latter question was not sought to be raised by the Commissioner even before the Tribunal. The learned Advocate-General of course relied on questions Nos. 1 and 3 as suggested by the Commissioner but they cannot help him. The first question refers only to the fair and reasonable allocation of the cost of different assets for the purpose of ascertaining capital and revenue profit from the purchase transaction and does not comprehend within its scope and ambit any such question which is now sought to be argued before us. Question No. 3 is a little more general in character but that also refers to the difference between the book value of trading assets and the cost actually paid by the assessee for the same and seeks to bring it in directly for the purpose of increasing the assessable income of the assessee. Neither of these two questions can, therefore, avail the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the purchase of any of the assets. At the highest, what can be said is that assets worth a particular amount are purchased by the assessee for a smaller amount but that does not represent the profit of the assessee. It is, therefore, not right to regard the difference between the value of the assets and the price paid for the same as revenue profit liable to be added to the assessable income of the assessee. The question as framed, however, does not really bring out the point decided by the Tribunal. The word surplus is not a correct expression. What is referred to by the Tribunal as surplus is, as we have already pointed out, the difference between the book value of the assets and the price paid by the assessee for the same. We will, therefore, reframe the question as under: Whether, on the facts and in the circumstances of the case, the difference between the book value of the assets of the factory acquired by the assessee-company as a running concern and the price paid for the same was assessable in whole or in part as revenue profits derived by it during the previous year relevant to the assessment year 1955-56? Our answer to the question as reframed will be in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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