TMI Blog2005 (9) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... se, in our opinion, the High Court has committed a patent error in completely disregarding the judgment of this court in Standard Vacuum Oil Co. and in reversing the well considered order of the Appellate Tribunal which has decided the matter in favour of the appellant and as a consequence of the impugned order of the High Court, the huge tax liability was created on the appellant without any warrant or justification whatsoever. In favour of assessee. No hesitation to set aside the order passed by the High Court impugned in these appeals and restore the order passed by the Tribunal. - - - - - Dated:- 19-9-2005 - Judge(s) : DR. A. R. LAKSHMANAN., P. P. NAOLEKAR JUDGMENT The judgment of the court was delivered by Dr. AR. Lakshmanan J.- The above appeals were filed against the judgment and order dated July 17, 2003, passed by the Division Bench of the Gauhati High Court whereby the Division Bench allowed the appeal filed by the Commissioner of Income-tax being I.T. Appeal No. 6 of 2000 and reversed the order of the Appellate Tribunal dated April 4, 2000. The present case involves an important question of law with regard to the interpretation of Explanation 1 to rule 2 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets as on the actual date of transfer of business from what was given in the balance-sheets of the twelve sterling tea companies as on December 31, 1976. Para. 3(i) reads as follows: "There shall not be any depletion in the net assets as on the actual date of transfer of business from what was given in the balance-sheets of the twelve sterling tea companies as on December 31, 1976 and an auditor's certificate to this effect shall be submitted to us after the formalities for transfer of business are completed." As against the consideration of Rs. 4,90,00,000 permitted by the Reserve Bank of India to be paid by the appellant, the value of the net assets which was to be maintained by the appellant as per the aforesaid requirement of the Reserve Bank of India was Rs. 6,33,89,055 i.e., higher by Rs. 1,43,89,055 which was disclosed in the appellant company's balance sheet as a capital reserve as part of "other reserve". In the assessment of the appellant company under the provisions of the Companies (Profits) Surtax Act, 1964, the question arose as to whether the said capital reserve was to be included while computing the capital of the appellant company. For the relevant years und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook asset. However, the High Court in its judgment and order completely overlooked this specific and categorical finding of the Tribunal and has come to the conclusion that the said reserve is hit by the provision of Explanation 1 to rule 2. Mr. S. Ganesh, learned senior counsel for the appellant invited our attention to the judgment of this court in CIT v. Standard Vacuum Oil Co. reported in [1966] 59 ITR 685 which, according to him, directly and squarely covered in favour of the appellant and that the said judgment was followed by the Tribunal in deciding the case in favour of the appellant. However, even though strongly relied upon by the appellant before the High Court, the High Court has not dealt with the said judgment of this court in its impugned judgment whereby the High Court has reversed the order of the Tribunal and allowed the appeal of the Revenue. He also drew our attention to the findings of the Commissioner of Income-tax and also of the Income-tax Appellate Tribunal. Mr. Harish Chandra, learned senior counsel for the respondent submitted that the Reserve Bank of India permitted the assessee company to pay a lump sum consideration of Rs. 4,90,00,000 as against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said case of Standard Vacuum Oil Co. [1966] 59 ITR 685. In that case, the assessee was a company incorporated with the object of taking over the assets of certain other companies Socony Vacuum Oil Co. and Standard Oil Co. On the date of acquisition of the assets of these two companies, the book value thereof as recorded in their books of account was Socony Vacuum Oil Co. $ 97,715,701 Standard Oil Co. $ 46,767,397. In consideration of transfer of these, the assessee company allotted to each company 49,995 shares and to Socony Vacuum serial bonds of the value of $ 13,093,300. The remaining 10 shares were divided equally between the two transferor companies for cash at par. The assessee company entered in its books of account the book value of the assets so transferred over the par value of the stock issued and the serial bonds were entered in the books under an account styled "Capital paid in surplus". After some adjustments, the "Capital paid in surplus" account was reduced to $ 117,561,317 and thereafter stood unchanged at that figure. The question which arose for consideration by this court was whether the said sum appearing in the balance-sheet of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated the creation of capital reserve as the consideration received fell short of the net worth of the businesses taken over by a consideration of Rs. 1,43,89,055. In my view the Assessing Officer erred in holding that the capital reserve of Rs. 1,43,89,055 was not includible in the appellant's capital for surtax purposes by virtue of Explanation 1 of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. With the aforesaid observation, I accordingly direct the Assessing Officer to include the said sum in the appellant's capital for the purpose of its surtax assessments for the years 1980-81, 1981-82 and 1982-83 respectively." Likewise, the Income-tax Appellate Tribunal while placing reliance on the judgment of Standard Vacuum Oil Co. [1966] 59 ITR 685 (SC) in paras. 8-12 has observed as under: "8 To support his argument, he relied on the ratio of the hon'ble Supreme Court in the case of CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685 where the hon'ble Supreme Court discussed the Indian Income-tax Act, 1922 and also the similar Explanation. The hon'ble Supreme Court observed that the Explanation to rule 2 has no relevance as the difference between the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness would not have tallied and the difference has created this legal dispute. 12. Therefore, such capital reserve has to be treated as forming a part of the capital under rule 1 (iii) of the Second Schedule Surtax Act, 1964. None the less, it may be mentioned that the words, "brought into existence" were read in isolation without reading the subsequent words "by creating or increasing (by valuation or otherwise) any book assets". By considering the totality of the facts and circumstances of the case, we are of the view that the assessee had neither created nor increased any book asset in the instant case. At the time of taking over no exercise was taken place to tally the assets and the Reserve Bank of India has allowed the lump sum consideration. We are also of the view that the assets received by the company are real and tangible assets as evidenced by the extracts of the balance-sheet. In the absence of any additional materials/evidence, we are of the view that the capital reserve of Rs. 1,43,055 representing the difference between the value of assets taken over and consideration allowed by the Reserve Bank of India was rightly included by the assessee company for computing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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