9911796707
TMI Blog1979 (2) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... the company as oft 30th September, 1947, showed the relevant assets at the figures shown below : Land : Rs. Payments on account of building construction including materials on hand 25,79,990. Payments on account of laboratory, machinery, equipment, air-conditioning plant, etc. 20,01,502. Depredation was claimed by the company on the said values in its assessment for the assessment years under appeal. The ITO, however, did not allow the assessee-company's claim for depreciation in full. He found that the assets had been taken,over,by the assessee-company on the basis of a trial balance as on 9th December, 1946, prepared by M/s. S. R. Parikh Co., chartered accountants, from the books of account of Shri Shirazali Hakim, the vendor. The net consideration determined as payable to the vendor in respect of the assets was Rs. 42,97,237. For the reasons mentioned by him in his order the ITO did not accept the consideration shown to have been paid by the assessee-company to the vendor as representing the true value of the assets. The books of account of the vendor were found to be unreliable and wanting in many respects as according to the ITO, the cost of the assets t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as revealed by the books of the vendor were disallowed by the ITO, viz., (1) expenses on account of interest, insurance, brokerage, etc. Rs. 4,28,919, and (2) certain items out of miscellaneous purchases and other items of account disallowed on estimate as not proved-Rs. 1,51,082. Excluding the disallowed items the ITO came to the figure of Rs. 20,00,000, on which he allo wed on account of supervisory and other sundry charges at 2 1/2% ; it was this figure of Rs. 20,50,000 on which the ITO considered depreciation. Being aggrieved by the order of the ITO,the assessee-company carried the matter in appeal to the AAC. The AAC agreed with the view of the ITO, holding that merely because there was an agreement between the vendor, Shirazali Hakim, and the company and the expenditure was shown to have been recorded in the document and in the books of the parties it could not be held that it represented the cost of the assets to the assessee-company on which depreciation was allowable. In the circumstances of the case, it was held that the ITO was competent to go into the question of the, cost of the assets. However, the AAC went into these details for himself and allowed certain modific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculars were not available and which could not be co-related properly with the construction of the building, the Tribunal agreed in toto with the AAC. The Tribunal, however, was called upon to decide one fundamental objection to the approach of the revenue. It was contended before the Tribunal by the learned counsel on behalf of the company that it was not permissible to reduce the value of assets as 'shown in the books Of the assessee for the purpose of allowing depreciation. This argument was rejected by the Tribunal in para. 17 of its appellate order. According to the Tribunal, mere production of documentary evidence, showing that the contract had been made for purchasing assets at a certain price did not conclusively establish the correctness of the claim made by the assessee that the original cost is the amount shown in the document. According to the Tribunal, further, if the circumstances warrant the conclusion that the assessee had arranged to put an entirely fictitious price on its assets, it was open to the I.T. authorities to refuse to accept that price and to ascertain what the true value of the assets was. It is from this order of the Tribunal that the reference has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Madras High Court had purchased certain assets at Rs. 15 lakhs on which depreciation was claimed. In connection with such a claim, which was resisted by the revenue, Leach C.J. has observed (at pages 330, 331 of the report) as follows : 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." It is this decision which the Tribunal has applied and which the learned counsel for the company has tried to distinguish. In his submission it could not be said on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court that the original cost to the assessee of a particular asset is a question of fact which has to be determined on the evidence or material placed before or available to the income-tax authorities. Any document or formal deed mentioning the consideration or the cost paid for the purchase of an asset by the assessee would be a piece of evidence and prima facie the statements or figures given therein would show how much the cost of the asset to the assessee is. But it was further held, if circumstances exist showing that a fictitious Price has been put on the asset or there is fraud or collusion between the vendor and the assessee and there has been inflation or deflation of value for ulterior purposes, it is open to the income-tax authorities to refuse to accept the price mentioned or allocation given in the deed or alleged by the assessee and to ascertain what the actual cost was or to determine the allocation between depreciable and non-depreciable assets. This is now the law as laid down by the Supreme Court and once the above principles are applied, as they are required to be, the instant case presents little difficulty. The ITO and subsequently the AAC have in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord by the ITO in his order and sub-sequently by the AAC to suggest this. It is not necessary for us to recapitulate these several items in our judgment. The crucial, perhaps the clinching, fact from which the inference must necessarily follow that the assessee-company was aware of the element of inflation in the value of the assets, is that it was Shirazali Hakim who as the vendor was selling these assets to the company which he had promoted, of which he was a shareholder, of which he was one of the founder directors and of which, last but most important, he was the sole managing agent. It is true that the agreement of purchase is signed by the directors, but judicial notice can be taken of the commercial reality of the situation. Bearing in mind the role played by managing agents in those days of the near past when the system was legally permissible, it is clear that Shirazali Hakim, the vendor, also must have played a dominant role as far as the purchase was concerned ; and if that conclusion is warranted in the circumstances on record, the further conclusion, viz., that the company must be deemed to be aware of the inflationary element in the price of the assets is inescapable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry in this case, at any rate, to take a very narrow view of the question referred to us. We are of opinion that it was permissible for the ITO to go behind the value of the assets shown by the assessee and seek to ascertain what their true worth or cost was and we can review what has ultimately been allowed by the Tribunal. In this connection we will pay attention only to three major items by which the amounts as shown in the balance-sheet have been reduced. The arguments before us have also been restricted to these item. The first of these three items was the item of Rs. 1,08,891 in respect of machinery and plant (being item No.1 in the order of the ITO) for which, according to the ITO and the AAC, no vouchers were available. Hence, in their opinion, the value of machinery was required to be reduced by that amount. Now, as far a this item is concerned, the Tribunal has further observed in para. 10 of its appellate order that, in addition to the fact that vouchers could not be produced, the Tribunal was unable to identify the item of machinery from the list of machinery inspected and surveyed by Shri Narvekar who was required to survey the same at the instance of the assessee on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 752) and Rs. 4,28,919 (out of the amount shown as cost for the building). The Tribunal has dealt with these amounts in para. 15 of its order. It has upheld the decision of the ITO that it is not possible to accept in the absence of necessary details that these items which represent expenses on travelling, advertisement, interest, brokerage, etc., pertained to the assets acquired by the assessee-company, and according to the Tribunal there was no warrant for holding that the capitalization of the same was in order. On the facts no other conclusion is possible. If it is not possible to understand how such expenses could be co-related with the two types of assets which are under consideration, then it must follow that to that extent there is inflation of the cost. In this view of the matter, the Tribunal's view to be found in para. 15 of its order that the entire amount must be disallowed and not taken into account for the purpose of depreciation, will be required to be upheld. It may be pointed out that we have gone into this question of ascertainment of the true cost of the assets in a broad sense only and it is not permissible to go into minute details, which is the function of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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