TMI Blog1963 (5) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... ery 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 question reduced itself to one of estimates. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. A sum of ₹ 1,00,000 was to be paid as earnest mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... 3,00,000 Total ... 13,00,000 The Income-tax Officer made a reference to the balance-sheet as on December 31, 1944, of the vendor-company. In the vendor-company's books the assets were as follows: Rs. (i) Land, inclusive of shafts and inclines ... 1,31,451 (ii) Plant and machinery ... 69,222 (iii) Buildings ... 12,064 (iv) Furniture ... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to go behind the conveyance and fix a valuation of his own in the way he has done. Mr. Sukumar Mitra, learned counsel for the applicant, has contended before us that when an assessee purchases plant and machinery from another party and the price is stated in the sale deed, which is in the form of a conveyance, the price stated in the deed is conclusive and it is not open to the Income-tax Officer to go behind the deed, and replace by a notional cost the cost incurred by the assessee as stated in the deed. According to learned counsel, if the first proviso to section 10(5)(a) was there during the relevant assessment years, it might have enabled the Income- tax Officer to go behind the conveyance. But since the proviso was not there, he should have accepted the figures stated in the conveyance. The Income-tax Officer is to determine the cost of plant, machinery, etc., and the cost is to be found in the document. Mr. Mitra conceded, however, that the figures given in the conveyance could be disturbed if the Income- tax Officer came to the conclusion that it was a fictitious document. Learned counsel has strongly urged that, in the instant case, there is no evidence of any devi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the debentures holding that the issue of debentures was an illusory transaction. Thirdly, they treated the sum of ₹ 6 lakhs (the difference between the market value of the 20,000 Madura Mills shares and 1,000 Harvey Ltd. shares) as income earned by the assessee by way of ginning charges. The Madras High Court was of the view that the original cost of a particular asset was entirely a question of fact and like any other question of fact depended upon the evidence produced to prove it. Mere production of documentary evidence showing that a contract has been made for purchasing assets at a certain price did not conclusively establish the correctness of a claim made by an assessee that, for the purpose of section 10(2)(vi) of the Indian Income-tax Act, the original cost was the amount shown in the document; and, if circumstances showed that an assessee had arranged to put an entirely fictitious price on its assets, it was open to the income-tax authorities to refuse to accept that price and to ascertain what the true value was. The case of Pindi Kashmir Transport Co. Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R. 595 is a decision of the High Court of Lahore in Pak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouse of Lords in Craddock v. Zevo Finance Co. Ltd. [1946] 27 Tax Cas. 267 The learned Law Lords came to the conclusion that the Crown had failed to establish that the value of the investments was less than the nominal value of the consideration for which the respondent-company had acquired them, namely, the liability to discharge the debentures and interest thereon and the allotment of the share capital as fully paid. But it was clearly laid down that the tax authorities had the right to question the price stated by the assessee when it appeared to them that the transaction was not a straight-forward one or was illusory or colourable or fraudulent. There is no doubt, therefore, that the income-tax authorities are competent to go behind a contract or a conveyance, when the circumstances justify such a course being taken. The original cost of any particular asset is entirely a question of fact, and if the circumstances show that an assessee has arranged to put a fictitious price on his assets, it is open to the income- tax authorities to refuse to accept that price, and to ascertain what the original cost was. Learned counsel for the applicant did not ultimately dispute this propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery. The reason why goodwill was a part of the consideration paid by the assessee has been explained by the Appellate Assistant Commissioner (vide pages 67 and 68 of the paper-book) as follows: It is stated that no goodwill was sold and no valuation of goodwill can form any part of the consideration. It is seen that the vendors were a partnership concern assessed in the name of Agabeg Bros. up to the assessment year 1935-1936, and that partnership had lease of two collieries known as Jogta Colliery and the Jorekur Colliery. The latter colliery was always working at a loss and it was really a dead asset. This colliery was sold to Rai Saheb B.L. Gutgutia of Dhanbad for a sum of ₹ 85,000 in 1943. Subsequently, the partnership firm of Agabeg Bros. was converted into a private limited company and it was assessed as such since the assessment year 1936-37. When the limited company was formed debentures of ₹ 10,00,000 appear to have been issued to the old partnership and at that time a goodwill account of about ₹ 9,46,714 was created in the books of Agabeg Bros. Ltd. Even after Jorekur Colliery was sold in 1943, the goodwill account remained at the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept that the cost of goodwill was reduced to ₹ 4,00,000. It was contended on behalf of the assessee that there was no question of goodwill being a part of the consideration in the instant case. Agabeg Brothers went into voluntary liquidation before the sale took place, and its business was never transferred to the applicant. Reliance was placed on certain observations of Kapur J. in Jogta Coal Co. Ltd. v. Commissioner of Income-tax [1959] 36 I.T.R. 521 (S.C.), at page 524, which run thus: Goodwill has been described as: 'The benefit arising from connection and reputation which includes the probability of the old customers going to the new firm which has acquired the business but this last phrase is not of itself adequate. 'That which the purchaser of a goodwill actually acquires, as between himself and his vendor, is the right to carry on the same business under the old name, with such addition or qualification, if any, as may be necessary for the protection of the vendor from liability or exposure to litigation under the doctrine of 'holding out' and to represent himself to former customers as the successor to that business. Mr. Mitra, learned ..... 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