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TMI Blog1983 (9) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... and its partners transferred certain assets to the purchasers for the respective agreed prices on the terms and conditions mentioned therein but the distribution of the total price over the assets was not in accordance with the commercial principles ? 2. Whether, on the facts and in the circumstances and on a true and proper interpretation of the agreement dated August 20, 1963, the Appellate Tribunal was legally justified in restricting the allowance of loss claimed by the assessee at Rs. 4,27,898 to Rs. 1,50,000 ? " The assessee is a registered firm doing business in timber. The assessment year in question is the year 1964-65 and the corresponding previous year is the year ended September 30, 1963. The point in dispute giving rise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by the purchaser. In the event of failure to pay the instalments, the bank was required to hand over the cover containing share certificates together with the relevant transfer deeds and, in that event, the assessee was entitled to sell the said shares in the manner prescribed, in the agreement. The assessee firm was to transfer the debt against the company in favour of the purchaser for a sum of Rs. 5 lakhs and this amount of Rs. 5 lakhs was also to be paid by instalments. This arrangement was carried out by the assessee on its part to an extent in the year of account and as a consequence it scaled down its debt against the company which had risen to Rs. 9,35,839 to Rs. 5,00,000. It wrote off an amount of Rs. 4,27,898 being the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal stage according to recognised accounting principles the company was bound to capitalise the loss, that this did not in any manner reduce the value of the shares of the company, that even otherwise the payment for the shares was to be made in instalments and that accordingly some allowance had to be made for the discount. It was contended that the agreement was valid and the two parties had independently come to that agreement as commercially expedient. The Tribunal agreed with the stand of the assessee " that it was not possible in the circumstances of the case to reject the agreement as invalid or bogus The Tribunal further held that " there is nothing to suggest that the parties were not dealing with each other at arms' length and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that assets worth Rs. 30 lakhs were transferred for a sum of Rs. 25 lakhs so that there was a depreciation to the extent of 16% both in respect of the shares and in respect of the debt. On that footing, the loss in respect of the debt was in a round sum Rs. 1,50,000 in place of Rs. 4,27,898 claimed on behalf of the assessee. The main question arising in this reference is whether the distribution of the total price of Rs. 25 lakhs as agreed to between the parties to the contract dated August 20, 1963, could be re-written by the income-tax authorities. The Act does not clothe the taxing authority with any power or jurisdiction to re-write the terms of the agreement entered into, particularly in view of the finding of the Tribunal tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th of January of each subsequent year, namely, January, 7, 1968, January 7, 1969, January 7, 1970, and January 7, 1971, respectively. Thus the payment of the consideration was deferred for a considerable length of time. The agreement further provided that in the event of Kohli failing to pay the sum of Rs. 4 lakhs up to the date of the expiry of the period, the share certificates together with relative transfer deeds deposited with the bank could be received by the sellers and auctioned in the open market at the risk and cost of Kobli. In case of short fall, the amount was recoverable from Shri Kohli. There are several other factors which may come into consideration in fixing the price of the shares by two contracting parties. It is not unc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss incidental to business The question at the time of the agreement was of the chances of the recovery of the debt from the company after the sale of the controlling shares in the company by the partners of the assessee firm and their family members. The assessee may have assessed that the chances of the recovery of the debt after transfer of the shares was limited and thus preferred to have realised the amount of Rs. 5 lakhs to be paid in instalments. The recovery of the debt depends on several uncertain factors which may fluctuate from time to time. The debt of the company may have gone down in value, but it was for the two contracting parties to assess it. We are of the opinion that the valuation of the shares and the valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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