TMI Blog1969 (3) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and the statement of the case are as follows : "We are required by the High Court of Judicature at Bombay by its order under section 66(2) of the Indian Income-tax Act, dated 7th July 1959, in I.T. Application No. 54 of 1957, to refer to it the following question arising out of the order of the Tribunal in I.T.A. Nos. 3856 and 3857 and E.P.T.A. Nos. 983 and 984 of, 1948-49 : 'Whether, in the circumstances of this case, the Tribunal or other income-tax authorities were precluded in law from going behind the agreement of purchase dated the fourteenth day of October one thousand nine hundred and forty-five in order to ascertain the original cost of the plant, machinery and buildings to the applicant by reason of the fact that such cost had been specifically set out under separate heads in the schedule to the said agreement and also the fact that the mill and other buildings were valued by Mr. Vaze and the plant and machinery were valued by Mr. Belcham prior to the date of the said agreement as stated in their respective reports dated the tenth day of April one thousand nine hundred and forty-five and the twentieth day of March one thousand nine hundred and forty-five?' The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, 1945, along with the schedule, is made a part of the case and is marked annexure "A". The valuation reports of M/s Vaze and Belcham are marked annexures "A- 1" and "A-2" respectively, and form part of the case. The partnership deed dated October 24, 1945, is made a part, of the case and is marked annexure "B". The assessee-firm claimed before the Income-tax Officer that it should be given depreciation on machinery and buildings on the basis of their original cost as determined in the schedule to the agreement referred to the earlier paragraph, For the assessment year, 1946-47, the Income-tax Officer rejected the claim of the assessee and fixed the value of the buildings at Rs. 5,30,000 and of the textile machinery at Rs. 15,10,000. His order for the year 1946-47 is made a part of the case and is marked annexure "C". For the assessment year 1947-48, he has followed the same basis for determining the depreciation on machinery and buildings and his order for the year 1947-48 is not made a part of the case because there is no discussion in that order on the point in dispute in this reference. The assessee appealed to the Appellate Assistant Commissioner, who confirmed the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nning and Weaving Mills" and the said partnership was dissolved, by mutual consent, on 18th October, 1944. It also recites that, as a part of the agreement to dissolve the partnership, it was also agreed between the two partners that the said two business including the goodwill, trade marks, etc., connected therewith will be purchased from the partnership along with the asets by one of the partners, namely, Seth Narsingdas Dage. After the dissolution and acquisition of the partnership assets along with the two businesses, by the family of Seth Narsingdas Daga, there was a simultaneous disruption of the said Hindu undivided family of Seth Narsingdas Daga and the business acquired was decided to be carried on by a new partnership consisting of members of the disrupted family of Seth Narasingdas Daga excluding Narsingdas Daga himself. The actual agreement of purchase of the assets, etc., however, was incorporated in a document dated 14th October, 1945, and, according to the recitals of this deed, the total price that was payable by the purchaser was fixed at Rs. 50,00,000. The break up of Rs. 50,00,000 is shown in annexure "A", that is, the agreement of purchase, in full details. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be paid to Ramnath Daga, he capitalised a sum of Rs. 8,000 as forming part of the capitalised value of the assets. When the matter went before the Appellate Assistant Commissioner, so for as the Income-tax Officer had disallowed a part of the interest paid to Seth Ramnath Daga, the assessee's contention was accepted and deduction of Rs. 8,000 out of the interest paid was deleted. With regard to the valuation of the depreciable assets, the Appellate Assistant Commissioner has dealt with it as ground No. 7. The appellate authority has pointed out that the Hindu undivided family of R. B. Narsingdas Daga also disrupted on that, date on which there was a dissolution of the firm of Seth Narsingdas Daga and Ramnath Daga and the ownership of the concern vested in a firm which consisted of all the members of the family except R. B. Narsingdas Daga. The Appellate Assistant Commissioner also observed that it was a fact that the firm of the two partners was dissolved on Diwali of 1944 and the running concern was taken over by the other partner. The price was fixed after mutual agreement and after taking into consideration the market conditions. The Appellate Assistant Commissioner also accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport. Such a remand report was submitted by the Income-tax Officer and in this further report the Income-tax Officer estimated the price of the goodwill at Rs. 16,00,000 of the machinery and plant at Rs. 6,19,650 and of the buildings at Rs. 4,70,000 plus Rs. 30,000. On receipt of this report, it does not appear that the Income-tax Appellate Tribunal was much impressed by the findings of the Income-tax Officer on remand. With regard to the remand report, the Appellate Tribunal in its final order observed that they did not consider necessary to decide whether the value given by the Income-tax Officer to goodwill in his remand report is proper. They only observed that the valuation of Rs. 10,000 given by the assessee was low. Ultimately the Appellate Tribunal confirmed the valuation made by the Appellate Assistant Commissioner. With regard to the report regarding the valuation of the machinery made by the consulting engineer, Mr. Belcham, the Tribunal observed that Mr. Belcham may be a good manager of the mill, but a proper person to give evidence in regard to the value of the Machinery would be a dealer in machinery and also pointed out that Mr. Belcham's valuation was in round figu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machine, yarn, cloth, cotton-seeds, other materials, rolling stocks, etc,, had to be invented. These details had naturally involved considerable time. They had employed services of two independent experts, one for valuation of the buildings and another for valuation of the machinery and it was on the basis of the valuation made by these experts that the final amount and valuation of different parts of the machinery, buildings, structures and other materials was valued and determined between the parties. It has naturally taken time and the actual valuation report in respect of the building was made by Mr. Vaze, dated 10th April, 1945, and the valuation regarding the machinery was made by Mr. Belcham on 20th March, 1945. It was after receipt of these detailed reports that the final agreement was possible. If it is not disputed, as it does not appear to be disputed, that the purchaser in fact actually paid a sum of Rs. 50,00,000 though half of the price represented the share of the purchasing partner himself, it was not possible without any finding to that effect for the departmental authorities to look with suspicion in respect of the price of the machinery and the buildings of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment was made by cash payment. The question arose whether G who had purchased the factory at Rs. 34,00,000 was entitled to depreciation on the factory under section 10(2)(vi) of the Indian Income-tax Act, 1922, on the amount of Rs. 34,00,000 depreciation not having been allowed for and earlier period. The Appellate Tribunal held that, as regards the 10/16th share of the purchaser, the cost to the appellant was the original cost to the larger family, and, as regards the 6/16th share, the original cost was 6/16 of the purchase price of Rs, 34,00,000, namely, Rs. 12,75,000. On a reference at the instance of the assessee, the High Court held that depreciation ought to be computed on the basis of the original cost to the larger family and not on the basis of the valuation on which the appellant took over the assets. On appeal before the Supreme Court, the majority view was that division by metes and bounds, whether it involves transfer or not within the meaning of the Transfer of Property Act, does confer on a divided member an absolute title to a specified property and barring the cases of fraud, collusion and inflation and deflation of values for ulterior purposes, the cost of an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been agreed between the parties at the time of the agreement of purchase, If it were possible for us to accept this interpretation of the agreement in annexure "A" there could be something in favour of the view taken by the department ; but we are unable to hold that on the date of dissolution and at the time when it was agreed that the assets and the businesses should be purchased as going concerns by one of the partner, there was any agreement to purchase them at Rs. 50,00,000. There is no evidence to that effect before us, or on the record of the case. On the other hand, the interpretation put on the agreement by the learned counsel appearing for the assessee seems more reasonable and probable. According to the assessee what was agreed at the time of the dissolution of the previous partnership and purchase of the assets and the businesses as going concerns, was an agreement to the effect that Seth Narsingdas Daga should purchase the property at a price to be fixed after proper calculation and valuation. At that stage, that is on the date of the dissolution and agreement of purchase on 18th October, 1944, it was not possible for the contracting parties to know definitely what wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. In this connection, a reference was made to a decision in Jogta Coal Co. Ltd. v. Commissioner of Income-tax, on behalf of the department. The case related to the purchase of a lease-hold interest in a coal mine and it was found that the appellant-assessee had failed to produce any evidence in support of the market price of any of the items of plant and machinery and the calculation of coal was found to be inordinately low. On a parity of reasoning it is suggested that in this case also calculation of goodwill at. Rs. 10,000 in respect of a textile mill and two businesses purchased for, Rs. 50,00,000 is unduly low and has been beflated in order to keep a margin foa inflating the value of the depreciable assets. The valuation of goodwill and trade marks at Rs. 10,000 is explained on behalf of the assessee by pointing out that those were the days of the complete control on textile, production and that very little turned on either the trade mark or the goodwill of a particular producer, there being an acute shortage and scarcity of textile goods. Under the provisions of the Textile Control Order then in operation, at every stage there was a check on production and distributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question No. 1 to the effect that, in the circumstances of this case, the Tribunal or the income-tax authorities were precluded, in law, from going behind the agreement of purchase dated 14th October, 1945, in order to ascertain the original cost of the plant, machinery and buildings to the assessee by reason of the fact that such cost had been specifically set out under separate heads in the schedule to the said agreement and also the fact that the mill and other buildings were valued by Mr. Vaze and the plant and machinery were valued by Mr. Belcham prior to the date of the said agreement as stated in their respective reports. It is common ground that the consequential calculation of tax or the profit tax in all the subsequent years will be affected primarily by the answer to the first question which is common in all these references. In view of this answer, the other references in which such question does not (sic) arise will be disposed of accordingly. This takes us to the second question which arises only in Income-tax Reference No. 66 of 1963. The reference is again at the instance of this court being required to be made by the Income-tax Appellate Tribunal. The quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also no justification for the increased percentage of dead loss as shown by the assessee. Giving consideration for the increased loss from the use of different types of cotton, he estimated the value of unaccounted stock at Rs. 50,000 in place of Rs. 1 lakh. His order is made a part of the case and is marked annexure 'I'. The assessee thereupon appealed to the Tribunal who confirmed the addition sustained by the Appellate Assistant Commissioner on grounds detailed by the Appellate Assistant Commissioner. The order of the Tribunal is made a part of the case and is already marked annexure 'F'. This case is stated as required by the Hon'ble High Court by reference to the two questions of law which have been stated in paragraph 1 above. The statement is agreed to by the parties." We are concerned in this case only with respect to the assessment year 1949-50, corresponding to the account year ending Diwali 1948. The question arose whether the dead loss shown by the assessee in the year in question was properly assessed and whether on account of the inflation of the loss there was consequential suppression of production of yarn. The Income-tax Officer has described the various st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cotton from Khamgaon and other Berar markets which had much more impurities, which impurities, according to the assessee, could not be separated in the blowing room operations and continued to affect the total quantity of weight of cotton which was available for being turned into the yarn. In other words, the assessee's case is that the increase in the percentage of dead loss as well as the overall loss was due to the inferior cotton. The Income-tax Officer called upon the assessee to prove the actual loss in each section of the spinning department, that is, in section from the blowing section such as carding, slubbing, inter, roving, ringframe and reeling sections. The assessee was unable to produce these figures because no quantitative account could be maintained either for carding or subsequent stages through which cotton went before it ultimately came out in the shape of yarn. It does not seem to be disputed that once the cotton is fed in the carding section, it is a continuous process till it comes out as yarn and there is no break. It is on that account that the assessee claimed that it was not possible to have a quantitative record of the cotton in each section, as it pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead loss. The losses actually suffered in the blowing room pointed really towards a better result as compared to last year. I would, therefore, make a lump sum addition of Rs. 1,00,000 to-cover for the loss of production of yarn and soft waste (in closing stock 1,44 000 lbs. of yarn are valued at Rs. 2,10,062). The addition roughly takes the percentage, figures of production and dead loss of assessment year 1948-49 as a base. though the actual figures of losses in the blowing room point towards more production during the relevant assessment year." Against this addition, the assessee preferred an appeal, among other grounds, before the appellate authority. The Appellate Assistant Commissioner dealt with the contention in respect of this addition in paragraph 8 as contention No. 7. The Appellate Assistant Commissioner has observed that the Income-tax Officer found that the accounts were defective in that no sectional registers were maintained showing the losses in the various, stages or departments of spinning and that therefore the overall losses claimed by the assessee could not be accepted as proved. The Appellate Assistant Commissioner has also referred to the view taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the blowing room and carding section, but it was pointed out by him that once the cotton was mixed up and processed into laps for slubbing, which operations stop with the blowing room and carding section, the loss percentage thereafter will be negligible from the mechanical processes. On this view of the matter, the Appellate Assistant Commissioner estimated the excessive and unproved loss at 1.7 per cent. and the value of the unaccounted stock at Rs. 50,000 on the basis of the controlled rates of yarn. He, therefore, gave reduction of' Rs. 50,000 in the addition made for the Income-tax Officer. When the matter went up before the Tribunal, the Tribunal does not seem to have applied its mind independently but seemed to accept what was stated by the Appellate Assistant Commissioner and confirmed his findings. They have reproduced the relevant portion from the order of the Appellate Assistant Commissioner and held that the Appellate Assistant Commissioner has carefully considered the explanation of the assessee and has given such reduction as was found to be rightly due to the assessee. In other words, they did not feel called upon to interfere with the order of the Appellate As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner in interpreting the statement of the spinning master about the percentage of overall losses. The contention of the assessee is that the statement of the representative filed before the Appellate Assistant Commissioner referred to the overall loss and not loss in respect of a particular section. What was attempted to be proved was that even according to the estimate made on the basis of technological reports the percentage of overall loss was 1.4 per cent., whereas according to the actual account and figures maintained in the books of the assessee, the difference between the previous year's overall loss and the, overall loss in the year in question only came to 1.7 per cent. In the very nature of things, it is urged, it not being possible to record the loss, in particular the dead loss, once the cotton leaves, in the form of laps, the blowing room section, the assessee could not be penalised by an estimated addition in the yarn produced while accepting the figures of weight of cotton fed in the blowing room and also accepting the weight of yarn produced at the end of the spinning process. It is also pointed out that there is a certain confusion in mixing up the statement r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Appellate Tribunal, the maintenance of a daily mixture account could not possibly help in the correlation of the issue of chlorate with the manufacture of matches. Such a maintenance of record was not insisted by the department at any earlier stage and the High Court held that the conclusion that the book results were not reliable could not be reached for want of maintenance of this record. In this case, the petitioner-assessee, on a parity of reasoning, says that it not having been practicable or possible to maintain quantitative record of losses, that is, dead losses, once the cotton leaves the blowing room section, the book figures of losses according to the method possible to be adopted could not be lightly ignored or rejected. It is also urged that the other public authorities such as the Textile Commissioner and the excise authorities are required periodically to inspect the records and keep a watch at different stages of production to ensure that there is no infraction of the liability for excise duties or other provisions of the Textile Control Order. In none of these reports there is any suggestion that there was a suppression of production of yarn or deviation the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant. According to the learned counsel, the statement made by the representative of the assessee and the spinning master was the material on which the income-tax authorities have come to certain conclusions. If that is the material which could be relied upon to come to that conclusion, then it cannot be said that there was no material on which the conclusion could not be reached. Once the department is able to show that there was such material, this court will not go into the question whether the amount that has been added has been properly added or not because that was the question which was referred In our opinion, the material which is pointed out and to which reference is made in the order of the Appellate Assistant Commissioner in paragraph 8 of his order cannot be considered de hors the context. The difficulty that seems to have arisen in this case is that by the very nature of the spinning process the cotton being required to pass through different sections in a continuous process, it cannot be predicted what would be the percentage of losses at stages subsequent to the blowing room section. Merely by comparison of the percentage of losses in a particular year, we do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in this case. The asseseee has followed a regular method of keeping account of the cotton consumed in the whole of the spinning process. It is not shown that there is any other or better method of keeping account of such consumption. In fact, it does not appear to be disputed that the quantity of cotton shown to be consumed is not more than what has been found from the figures in the assessee's books. The ultimate conclusion is reached only on the basis of the alleged exaggeration in the percentage of dead losses. If there is no material on which it could be established that the increase in the percentage was attributable to any suppression of weight or any suppression of production, then we fail to see how the right under the proviso could be availed of by the Income-tax Officer in making an estimate. The very condition for making use of the right under the proviso arises after the finding is recorded as to the non-acceptability of the method and irregularity of the accounts kept. It does not appear that there is such a finding recorded by the authorities in this case ; in the absence of such a finding the book result could not be ignord or brushed aside. The mere fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lting in acquittal has been accepted by the Patna High Court in Rohtas Industries Ltd. v. Commissioner of Income-tax. Another decision of the Calcutta High Court in Birla Cotton Spinning and Weaving Mills Ltd. v. Commissioner of Income-tax, allows lawyer's expenses for making representation before the Income-tax Investigation Commission. In yet another decision in Sree Meenakshi Mills, Ltd. v. Commissioner of Income-tax, the Supreme Court observes at page 213 as follows : "Under section 10(2)(xv) of the Indian Income-tax Act, as amended by Act 7 of 1939, expenditure even though not directly related to the earning of income may still be admissible as a deduction. Expenditure on civil litigation commenced or carried on by an assessee for protecting the business is admissible as expenditure under section 10(2)(xv) provided other conditions are fulfiled, even though the expenditure does not directly relate to the earning of income. Expenditure incurred not with a view to the direct and immediate benefit for purposes of commercial expediency and in order indirectly to facilitate the carrying on of the business is therefore expenditure laid out wholly and exclusively for the purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt on advice, or engaging services of an expert or prosecuting an appeal or proceeding under the Income-tax Act is necessarily an expenditure which cannot be allowed in all cases. In our opinion, therefore, this is a question which should better be considered by a larger Bench in the context of the subsequent pronouncements made by different High Courts and also by the Supreme Court. So far as this question is concerned, therefore, we direct that the papers may be placed before Lord the Chief Justice for suitable orders. So far as the question No. 1 is concerned, it is answered in favour of the assessee. There does not appear to be any impediment in the assessment proceedings being further taken in hand in the light of this decision in all the years. So far as the question No. 2 is concerned, it relates only to one year and that is also finally answered so far as this court is concerned. So far as the third question is concerned, which arises in one case, in view of the fact that it may be considered by a larger Bench, we need not hold up action being taken in pursuance of the answers to the other two questions. The said questions are answered accordingly. The assessee will be en ..... X X X X Extracts X X X X X X X X Extracts X X X X
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