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TMI Blog1940 (3) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... . Harvey and Mr. J.C. Harvey are brothers. The profits of the firm are divisible between the partners in the following proportions: Mr. A Harvey 63/128; Mr. J.C. Harvey 63/128 and the Tuticorin Company Limited 3/128. The capital of the Comorin lnvestment and Trading Company Limited is divided into 10,000 shares, of which Mr. A. Harvey and Mr. J.C. Harvey hold between them 9,999 shares. In April 1933 it was arranged that on incorporation the company should purchase for ₹ 15,00,000 the assets of a cotton ginning business owned by Messrs. A. and J.C. Harvey as individuals and not as members of the firm. The assets consisted of lands buildings, plant and machinery. Of the purchase consideration ₹ 4,71,383 was allocated to the lands and buildings, and ₹ 10,28,617 to the plant and machinery. For several years Messrs. A. and J.C. Harvey had ginned cotton for the Madura Mills. The rates charged for the years 1930, 1931 and 1932 averaged ₹ 12-8-0 per candy. Before the incorporation of the company negotiations took place between Messrs. A. and J.C. Harvey and the Madura Mills for the conclusion of an arrangement under which the Madura Mills should allot 20,000 shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes and 1,990 of class B shares bare been issued. Mrs. J.C. Harvey is the holder of the 1,990 class B shares. This company has authority to issue debentures to the amount of $ 500,000, Of these debentures $ 199,000 have been issued and $ 6,000 of them have been redeemed. The outstanding debentures are all held by Mrs. J.C. Harvey. Of the debentures issued by the Finchley Investments Limned the amount of $ 169,000 was issued on the 17th October 1933, and of those issued by the Kochadai Investments Limited a similar amount was issued on the 12th October 1933. On the passing of the resolution which I have just quoted, two cheques for ₹ 5,00,000 each were drawn by the firm in favour of the company, but it was not intended that they should be presented for payment. In the course of explanations given on behalf of the company in answer to questions pub by the Income-tax authorities it was stated that the two cheques were issued by the firm on behalf of the Canadian companies in pursuance of an oral arrangement between Messrs, A and J.C. Harvey on the one side and the agents of the Canadian companies on the other with a view to avoiding costly cross remittance. It was also stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 amp; 1931 49,150 7 2 15,353 14 1 68,750 0 0 Tuticorin Press. Gins. 1905 to 1915 59,489 7 10 14,809 2 0 26,925 0 0 Dindigul Press 1928 1928 26,500 0 0 28,178 6 10 68,750 0 0 quot; Land quot; 5,000 0 0 quot; Gins. quot; 1,01,500 0 0 93,777 11 10 68,750 0 0 quot; Land quot; 5,000 0 0 (a) Total... 3,48,179 4 0 193,674 9 8 384,283 0 0 MACHINERY Virudupatti 1897 40,000 0 0 ... 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e figures in detail to show that ₹ 15,00,000 was out of all proportion to the real value of the assets. It will be sufficient if attention is drawn to the machinery statement. The press at Sattur was purchased in 1914 for ₹ 1,01,411-13-2 and 19 years later was sold for ₹ 2,07,250. The gins at Sattur were purchased between 1905 and 1915 for ₹ 1,05,683-14-2 and were sold for ₹ 2,06,250. The press at Dindigul was acquired during the years 1928 and 1929 for ₹ 84,944-13-10 and was also sold for ₹ 2,06,250. The gins at the same place were purchased during these years for ₹ 60,892-10-11 and they were sold for ₹ 2,06,250. The total assets stood in the books of firm at ₹ 5,00,000 and notwithstanding that there must have been considerable depreciation they were passed on to the company at the figure of ₹ 15,00,000. It has not been suggested by the company that the value of the assets had increased owing to special circumstances. On the contrary, it had to be admitted to the Income-tax authorities that the value of ginning factories had been seriously affected by the depressions prevailing in the textile trade. Indication of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bentures allowed in the original assessment. (c) ₹ 6,00,000 advance received on account of ginning charges. The Income-tax Officer regarded the transaction between the company and the Madura Mills as involving a payment on account of ginning charges of ₹ 6,00,000. This figure was arrived at after allowing the company to treat the allotment of 1,000 of its shares to the Madura Mills as a capital transaction. The market value of the 20,000 shares of the Madura Mills which the company acquired was ₹ 7,00,000. The 1,000 shares of the assessee which the Madura Mills received in exchange in consequence of the arrangement had no market value, but the Income-tax Officer took the nominal value of ₹ 1,00,000 to be their true value. The difference between the ₹ 7,00,000 and the ₹ 1,00,000 represented the payment by the Madura Mills to the company on account of ginning charges for the period of ten years. The company appealed to the Assistant Commissioner against this new computation of income and objected to the inclusion of the three items (a), (b) and (c) in the total income. The Assistant Commissioner accepted the Income-tax Officer's comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ildings, machinery or furniture which belong to him and are used for the purposes of his business. The Commissioner rightly observes that the original cost of any particular asset is entirely a question of fact, and like any other question of fact depends upon the evidence produced to prove it. The mere production of documentary evidence showing that a contract has been made for purchasing assets at a certain price does not conclusively establish the correctness of a claim made by an assessee that for the purpose of Section 10 (2)(vi) the original cost is the amount shown in the document. I also agree with the statement of the Commissioner that where the circumstances show that an assessee has arranged to put an entirely fictitious price on his assets it is open to the Income-tax authorities to refuse to accept that price and to ascertain what the true value is. On behalf of the company the learned Advocate General has contended that the Court cannot go behind the contract and in support of this argument has quoted the decision of the House of Lords in Aron Salomon v. Salomon and Company Limited, [1897] A.C. 22 but I fail to see what bearing that case has here. A leather merchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... my answer to the first question is in the affirmative. Question No. 2.-I have shown the basis on which the company says that the figure of ₹ 15,00,000 is arrived at and I am of the opinion that there was material to justify the finding of the Income-tax authorities that the original cost of the assets acquired was not ₹ 15,00,000. The purchase consideration was the allotment of shares of the face value of ₹ 5,00,000 and debentures of the nominal value of ₹ 10,00,000 but the shares and the debentures had no value beyond the value of the assets acquired. The company adduced no evidence of the value of the assets. It relied entirely on the figure stated in the contract of sale. In these circumstances the Income-tax authorities took the true value to be the figure at which the assets stood in the books and as this was the only evidence before them I consider that they were justified in their conclusion, especially in view of the age of most of the assets. If the company had placed before the Income-tax authorities evidence to show that the assets stood in the books of the firm at a lower figure than their true value the position would have been different. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended to be put on the market. In support of his argument that the answers to these four questions should be in favour of the company the learned Advocate General has quoted to us Hawley v. Commissioners of Inland Revenue [1925] 9 Tax Cas. 331, Van den Berghs Ltd., v. Clark [1935] A.C. 431, Short Brothers Ltd., v. Commissioners of Inland Revenue [1926] 12 Tax Cas. 955, and Commissioner of In- come-tax v. Shaw Wallace and Company#, but I can find no support for him in these judgments. In Hawley v. Commissioners of Inland Revenue [1932] 59 I.A. 206 the facts were these. In consideration of an advance of ? 7,000 made by the assessee to a company in 1905, he received debentures of the nominal value of ? 7,000, repayable after December, 1914, by half yearly instalments of ? 500, and from a director 5,600 ? 1 ordinary shares of which he was to transfer 400 shares on receiving each payment of ? 500 in respect of the debentures. He was also to receive one-fifth of the profits each year up to December 1914, and thereafter a share of the profits corresponding, in effect, to the proportion of the deben- tures remaining unpaid from time to time. The assessee received no share of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading in the year 1914 and later years should be ascertained by accountants on each side and that any dispute arising under the agreements should be settled by arbitration. Disputes did arise and there was a submission to arbitration. The arbitration proceedings were, however, settled on terms by which the agreements were rescinded and the Dutch company paid the English company a sum of ? 450,000 as damages. The question was whether the ? 450,000 was in the nature of a capital asset or a receipt of income to be included in the profits of the English company. It was held that the payment was in the nature of a capital asset. The passage in the judgment of Lord Macmillan which has bearing in the present case is this: Now what were the appellants (the English company) giving up? They gave up their whole rights under the agreements for thirteen years ahead. These agreements are called in the stated case 'pooling agreements', but that is a very inadequate description of them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down the aggregate of profits which they would otherwise have rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r should be relieved of his liability under the contract. Subsequently, the quarry company accepted a lump sum payment of ? 3,000 in lieu of the four annual payments of ? 900 and the ? 3,000 was applied by the quarry company in writing down the cost of the wharf. It was held that the ? 3,000 was chargeable to excess profits duty as a trading profit of the quarry company and therefore must be included in the profits of the year in which it was agreed to be paid. Rowlatt, J. refused to graft a distinction upon the decision of the Court of Appeal in Short's case [1926] 12 Tax Cas. 955. He considered that if a sum representEd profits in a new form then that was income and income in the year in which it was received. The answers which I would give to the four questions are these:- No. 4. The arrangement by which a proportion of the shares of the Madura Mills was issued to the company in respect of the ginning contract is not a transaction of a capital nature and the benefit received by the company represents profits received in the year of payment. No. 5. On the facts of the case the difference between the values of the exchanged shares must be allocated to the ginning cont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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