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TMI Blog1963 (5) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale deed, and valued the plant and machinery at ₹ 3,50,000 and allocated a part of the consideration, namely, ₹ 7,50,000, towards goodwill, even though there was no mention of the sale of the goodwill in the sale deed itself. The Appellate Assistant Commissioner confirmed the estimate of the Income-tax Officer. The Appellate Tribunal, however, put its own value on the assets estimating the value with reference to the prevailing market conditions of plant and machinery at ₹ 6,00,000 and of goodwill at ₹ 4,00,000. Both the Appellate Tribunal and this court dismissed the applications of the applicant for a reference. Delivering the judgment of this court, Chakravartti C.J. observed as follows: "There appears to have been no contest at all between the parties at the hearing of the appeal as regards the heads between which the purchase price was to be distributed. The only contest appears to have been with regard to the sums to be allocated to each head. It is stated by the Appellate Tribunal in the order made on the application for a reference that the learned counsel for the assessee appearing before them at the hearing of the appeal, conceded that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears from the statement of the case that the assessee, i.e., the Jogta Coal Co. Ltd., was incorporated on September 14, 1945. Two brothers, E.C. Agabeg and A.A. Agabeg, were lessees of a coal mine situate in the village of Jogta, in the Jharia coalfield area, which belonged to the Raja of Jharia. The two brothers installed on the land leased to them plant and machinery and erected buildings and inclines and started working the coal mines. On April 10, 1935, the two brothers constituted themselves into a private limited company called Agabeg Brothers Ltd. On July 19, 1945, Agabeg Brothers Ltd. agreed to transfer to S.K. Bajpai all its right, title and interest in the leasehold property with other mokarari pottahs (perpetual leases) and a decree, which was passed in its favour, together with all appurtenances, including houses, huts and other erections belonging to the vendor, all machinery, plant, stores, furniture, etc., and "the benefit of the uncompleted balance of all orders and contracts for the supply of coal existing at the date of the completion of the sale." To this agreement were attached two schedules giving the list of the properties which were to be sold. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urniture ... 3,721 The Income-tax Officer further referred to the written down values as per the income-tax records and found as follows: Rs. (a) Building ... 2,659 (b) Machinery ... 19,056 Considering all these figures, the Income-tax Officer held that plant and machinery were very much inflated by the applicant. The Income-tax Officer further held that in the allocation, the assessee-company had entirely lost sight of the question of goodwill. He thereupon valued the goodwill by resorting to the method of taking the average profit of three to five years and made an estimate of goodwill at ₹ 7,50,000. Thereafter he allocated the balance sum of ₹ 15,50,000 as follows: Rs. (i) Land including shafts and inclines ... 10,00,000 (ii) Buildings ... 2,00,000 (iii) Plant and machinery ... 3,50,000 The applicant went in appeal to the Appellate Assistant Commissioner, who also accepted the estimate made by the Income-tax Officer and dismissed the appeal. The matter was then taken up to the Appellate Tribunal, and in its order the Tribunal revised the estimated values on the assets which were taken over by the assessee. The cost price of the various assets, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be impugned in the manner it was sought to be done. On the competence of the tax authorities to go behind a contract or a conveyance, a number of decisions may be referred to. In Commissioner of Income-tax v. Harveys Ltd. [1940] 8 I.T.R. 307, the assessee, Harveys Ltd., was a private company incorporated with a capital of ₹ 5 lakhs divided into five thousand shares out of which the firm of A. Harvey and his brother held 3,998 shares and 1,000 shares were issued to the Madura Mills Ltd. It was arranged on its incorporation that the assessee-company should purchase for ₹ 15 lakhs the assets of a cotton ginning business owned by the Harvey Brothers as individuals. These assets consisting of lands and buildings, and plant and machinery were accordingly purchased for ₹ 15 lakhs. The accounts, however, showed that the original cost of these assets to the Harvey Brothers was only ₹ 10? lakhs and this value had been written down in their accounts to ₹ 5 lakhs. Out of the consideration of ₹ 15 lakhs, a sum of ₹ 5 lakhs was satisfied by the issue of shares and the balance of ₹ 10 lakhs by the issue of debentures. These debentures wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully paid up shares in the company. The company sold some of the vehicles purchased from the shareholders and claimed to have incurred a loss. In computing the original cost to the company on the vehicles for the purpose of making an allowance for depreciation and loss under section 10(2)(vi) and (vii) of the Income-tax Act, 1922, the income-tax authorities held that they were not bound to accept the nominal value of the shares transferred as the actual cost of the vehicles to the company inasmuch as the value of the vehicles had been unduly inflated. They therefore determined by a certain method the actual cost of the vehicles to the company. It was held that, in the circumstances of the case, the income-tax authorities were justified in law in going behind the contract of sale in determining the original cost to the company for the purpose of making an allowance under clauses (vi) and (vii) of section 10(2) of the Income-tax Act. Coming back to the Madras High Court once again in G. Vijayaranga Mudaliar v. Commissioner of Income-tax [1963] 47 I.T.R. 853 the assessee, a transport operator, purchased ten buses plying on a particular route for ₹ 1,25,000. As the buses were of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,00,000. In paragraph 7 of its application for reference also, the assessee stated that it made in its books a sub-allocation of the said two sums of ₹ 13,00,000 and ₹ 10,00,000 on the recommendations of an expert, but his valuation notes had not been preserved. On the requisition of the Income-tax Officer, the applicant company caused a fresh valuation to be made by a qualified mining engineer and submitted the same to the Income-tax Officer (vide page 79 of the paper-book). The mining engineer, it appears, valued the land only at ₹ 9,20,000 and this figure has been accepted both by the Appellate Assistant Commissioner and the Appellate Tribunal (vide pages 66 and 74 of the paper-book). The tax authorities, however, did not agree to accept the assessee's allocation of ₹ 10,00,000 to machinery. They took into consideration the balance-sheet of the assessee's vendors as at December 31, 1944, the agreement for sale having been entered into on July 19, 1945. They also considered the written down values in the books of the assessee's vendors. In the balance-sheet, plant and machinery were shown to be worth only ₹ 69,222, and the written down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dwill of about ₹ 10,00,000 created in the books of the vendor related to the Jogta Colliery alone. It is not the case of the appellant-company taking the lease of a purely new mine which required to be dug and which would not bear fruit for a couple of years; it is also not the case of a company purchasing plant and machinery and other assets in an open market from a machinery dealer. In this case, the appellant-company purchased an existing mine which was in a flourishing condition and which yielded bumper profits of about ₹ 2,00,000 per annum even in pre-war years. In addition to the mine taken over as a running concern, the various assets were also taken over including the stock of coal amounting to 618 tons lying with the vendor. Thirdly, the benefit of the incomplete balance of all orders and contracts for the supply of coal existing at the date of the transfer of the coal mine was taken over by the appellant-company as stated in the indenture of transfer executed in November, 1945. Besides, at the time coal was under Government control and quotas were issued by Government. The quotas which were held by the vendors also passed on to the appellant company and this f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in a later decision in S.C. Cambatta & Co. Private Ltd. v. Commissioner of Excess Profits Tax [1961] 41 I.T.R. 500; [1961] 2 S.C.R. 805 again considered what "goodwill" was. After referring to various authorities at page 505, it is observed as follows: "It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality and the goodwill may be lost. At the same time, locality is not everything. The power to attract custom depends on one or more of the other factors as well." According to Lord Lindley in Inland Revenue Commissioners v. Muller and Company's Margarine Ltd. [1901] A.C. 217, "Goodwill regarded as property has no meaning in connection with trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introducti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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