TMI Blog1964 (4) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... 7, respectively. The present assessee is a limited company which was formed from the then existing registered firm consisting of nine partners. There were in fact altogether fourteen shareholders by reason of the partition in the family of one G. Venkatesam Chetty and also due to transfer of some shares by Srinivasalu Chetty to his son. The shareholders of the new private limited company are no other than the old partners and their nominees. On the formation of the new private limited company, the shares also were allotted in the same proportion as the shares held by them in the partnership firm. Thus the present status of private limited company is only a change-over from that of the old partnership firm. At the time of the change-over as a private limited company the assessee valued the assets such as building and machinery received from the firm mentioned supra at ₹ 63,000 and ₹ 87,000 respectively, but the written down value as per the books of the firm then was only of ₹ 3,994 and ₹ 13,210 respectively. At the time of purchase, the valuation was placed also on goodwill and it was determined at ₹ 64,000. The assessee had to incur the necessary expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of tax liability by claiming depreciation with reference to enhanced costs and hence the first proviso to section 10(5)(a) applied. However, the Tribunal fixed the value of the assets transferred at ₹ 25,000 in excess of the written down value of the two items as determined by the Income-tax Officer. On the requisition of the assessee the Tribunal has referred the question of law for decision to this court. Learned counsel on behalf of the assessee contends that the assessee being a private limited company, as a distinct entity from the previous partnership firm, was entitled to depreciation allowance having regard to the actual cost of assets to him and not to the written down value of the assets in the hands of the previous partnership firm, that the proviso to section 10 (5)(a) had no application in that the conversion of the firm and the transfer of assets were motivated by considerations of efficient management of the business and due protection of the private properties of the partners, and that reduction of taxation liability is but an incident of change-over in status. It was also contended that the value of the assets shown in the sale deeds is the actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section; 'plant' includes vehicles, books, scientific apparatus and surgical equipment purchased for the purposes of the business, profession or vocation; and 'written down value' means-- (a) in the case of assets acquired in the previous year, the actual cost to the assessee: Provided that where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of business and the Income-tax Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly, to the assessee was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Income-tax Officer may, with the previous approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case. It is clear from section 10(2)(vi) that allowance on depreciation of buildings and machinery has to be worked out having regard to their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow 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 thus clear even in cases beyond the reach of the proviso to section 10(5)(a) the amount entered in the contract is not necessarily the last word and the Income-tax Officer in certain circumstances can go behind the contract. But when the above proviso applies, the statute says in terms explicit that the actual cost shall be the amount determined by the Income-tax Officer with the previous approval of the Inspecting Assistant Commissioner. This proviso was introduced by an amendment Act which came into force from April 1, 1959. No doubt it is alleged that conversion into a private limited company was in contemplation ever since 1943, but it was actually implemented in the year 1949, with the result that the matter will be governed by the proviso if it comes within its scope. Admittedly, the assets were used before the date of acquisition by a partnership firm for the purpose of its business and the newly formed company is a distinct entity in the eye of law. That being the case the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers. If they were the only guiding motives, there is no reason why the same assets were given a higher value even when in fact though not in law they did not change hands. It is this consideration that weighed with the income-tax authorities. The increase in the value, it may be noted, is substantial and out of all proportion to the written down value in the hands of the previous assessees. The reduction of liability to income-tax, if that figure be taken into consideration, is indeed not inconsiderable. In these circumstances, it admits of little doubt that the main purpose of the transfer of assets directly or indirectly to the assessee was a reduction of liability to income-tax by claiming depreciation with reference to an enhanced cost. That being the case, the proviso to section 10(5)(a) is inevitably attracted. In these circumstances, the Income-tax Officer had power to go behind the agreement and sale deeds, etc., and make his own estimate having regard to all the circumstances of the case, subject of course to the previous approval of the Inspecting Assistant Commissioner. That is what has been done by him. That is how in further appeal the Tribunal has determined the actu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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