Skip to content


Commissioner of Income-tax, Gujarat Vs. Spunpipe and Construction Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 2/1962 with Civil Application No. 11/1962
Judge
Reported in[1965]55ITR68(Guj)
ActsIncome Tax Act, 1922 - Sections 66(2)
AppellantCommissioner of Income-tax, Gujarat
RespondentSpunpipe and Construction Co. Ltd.
Appellant Advocate J.M. Thakore, Advocate General
Respondent Advocate S.P. Mehta, Adv.
Cases ReferredOsborne v. Steel Barrel Co. Ltd.
Excerpt:
direct taxation - revenue profit - section 66 (2) of income tax act, 1922 - difference between book value of any part of assets acquired by assessee and price paid by assessee for same cannot be regarded as revenue profit derived by assessee - no profit is made from purchase of such assets - purchase at lesser amount does not represent profit of assessee. - - 6. after the reference was received in this court, the commissioner, in accordance with the rules of this court as they then existed, filed an objection to the statement of the case contending that the question as raised by the tribunal did not clearly bring out the point in issue in the reference and that the questions as framed by the commissioner, wanted the tribunal to raise and refer, brought out clearly the point is issued.....p.n. bhagwati, j. 1. this is a reference under section 66(1) of the income-tax act at the instance of the commissioner. the facts giving rise to this reference may be briefly stated as follows. the assessee is a limited company engaged in the manufacture and sale of spun pipes. the assessee has adopted the year ending 31st july for maintaining its accounts. on 30th july, 1954, the assessee purchased a factory at ahmedabad which was owned by another limited company called the spunpipe and construction company of india limited, bombay. the factory was purchased as a going concern for the price of rs. 2,00,000. there were two agreements made between the assessee and the vendor-company in regard to the purchase, both dated 30th july, 1954. one agreement related to fixed assets, machinery,.....
Judgment:

P.N. Bhagwati, J.

1. This is a reference under section 66(1) of the Income-tax Act at the instance of the Commissioner. The facts giving rise to this reference may be briefly stated as follows. The assessee is a limited company engaged in the manufacture and sale of spun pipes. The assessee has adopted the year ending 31st July for maintaining its accounts. On 30th July, 1954, the assessee purchased a factory at Ahmedabad which was owned by another limited company called the Spunpipe and Construction Company of India Limited, Bombay. The factory was purchased as a going concern for the price of Rs. 2,00,000. There were two agreements made between the assessee and the vendor-company in regard to the purchase, both dated 30th July, 1954. One agreement related to fixed assets, machinery, moulds, pumps, tools, motor-trucks, electric fittings, furniture general stores, pipes, stores and stocks and the price allocated to these items was Rs. 1,50,000. The other agreement related to sundry debts including work-in-progress and liabilities including loans and in respect of these items the price allocated was Rs. 50,000. Now in the books of the vendor company, the fixed assets were shown at Rs. 1,46,050 being the cost and there was deprecation reserve of Rs. 69,500; book value of the work-in-progress was Rs. 79,000; the liabilities amounted to Rs. 1,46,826 and the aggregate amount of advances, deposits and cash came to Rs. 1,38,882. There was also a reserve of Rs. 6,725 for doubtful debts. Since the book value of the items comprised in the first agreement was Rs. 1,78,024 against the price of Rs. 1,50,000 allocated to these items, there was a surplus of Rs. 21,057 arrived at by deducting the price of Rs. 50,000 from the book value of the item comprised in that agreement, namely, Rs. 71,057. When we use the word 'surplus', we mean the difference between the book value of the assets in question and the price allocated by the two agreements in respect of those assets. The total surplus amounting to Rs. 49,081 was transferred by the assessee to capital reserve account and was shown as such in the balance-sheet of the assessee for the year ending 31st July, 1954. The book value of stocks, stores and work-in-progress amounted to Rs. 1,87,197 made up of Rs. 1,08,197 being the book value of stocks and stores and Rs. 79,000 being the value of work in progress and it was this book value which was debited to the trading account as representing the value of stocks, stores and work-in-progress at the date when they were brought in the book of account of the assessee. We may point out here that, though the two agreements were made on 30th July, 1954, the purchase of the factory was made as from 1st August, 1953, and all the assets and liabilities were, therefore, brought in the books of accounts of the assessee as from 1st August, 1953, and it was at this point of time that the trading assets representing stocks, stores and work-in-progress were brought in at the book value of Rs. 1,87,197 and were also shown at that amount as part of the opening stock in arriving at the profit of the assessee for the year ending 31st July, 1954, which was the previous year for the assessment year 1955-56. The profit returned by the assessee for the assessment year 1955-56 was arrived at on the basis of the trading assets acquired by the assessee from the vendor-company being valued at Rs. 1,87,197 for the purpose of the opening stock.

2. The Income-tax Officer in the course of the assessment of the assessee for the assessment year 1955-56 objected to the trading assets being debited in the trading account at Rs. 1,87,197 and took the view that there was an excess debit to the trading account in respect of the value of the trading assets. The Income-tax Officer treated the two agreement as part and parcel of one single transaction under which the factory of the vendor-company was purchased as a going concern for the price of Rs. 2,00,000. He then took the book value of the fixed assets at Rs. 1,46,050 ignoring the depreciation reserve of Rs. 69,500 and adding to that the book value of the trading assets, namely, Rs. 1,87,197, arrived at the book value of the fixed and trading assets at Rs. 3,33,550. He then observed that the assessee had, as a result of the transaction of purchase, acquired advances, deposits and cash aggregating to Rs. 1,46,333 and the assessee had, therefore, in effect paid Rs. 7,451 (Rs. 1,46,333 less Rs. 1,38,882) in addition to Rs. 2,00,000 that is an aggregate sum of Rs. 2,07,451 for fixed and trading assets valued in the books of the vendor-company at Rs. 3,33,550, the value of the fixed assets being Rs. 1,46,050 and the value of the trading assets being Rs. 1,87,197. He, therefore, apportioned the sum of Rs. 2,07,451 proportionately between fixed assets and the trading assets in the ration of their book value and came to the conclusion that the price allocable to trading assets i.e., stocks, stores and work-in-progress was Rs. 1,17,451 and on payment of this price the assessee had acquired trading assets of the value of Rs. 1,87,197 and had thus made a revenue gain of Rs. 69,746. He, therefore, added Rs. 69,746 to the total income of the assessee.

3. The assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took into account the depreciation reserve and also the reserve for doubtful debts but adopted a different method for arriving at what he conceived to the true price allocable to stocks, stores and work-in-progress, being trading assets. The Appellate Assistant Commissioner took the book value of the fixed assets at Rs. 1,46,050 less Rs. 69,500 being depreciation resevere, i.e., Rs. 76,550, and after deduction reserve for doubtful debts calculated the amount of advances, deposits and cast at Rs. 1,32,157 (Rs. 1,38,882 less Rs. 6,725) and then arrived at the figure of Rs. 2,08,707 made up of Rs. 76,550 and Rs. 1,32,157. Since the liabilities of Rs. 1,46,333 were taken over by the assessee, the price paid by the assessee was taken by the Appellate Assistant Commissioner At Rs. 3,46,333 against the book value of fixed assets and advances, deposits and cash, computed at Rs. 2,08,707 and the book value of trading assets shown at Rs. 1,87,197 in the books of the vendor-company. The appellate Assistant Commissioner then, unlike the Income-tax Officer, who had apportioned the price on a proportionate basis, proceeded on the basis that so far as fixed assets and advances, deposits and case were concerned, the entire book value of Rs. 2,08,707 was paid by the assessee and formed part of the price and that only the balance of the price, namely, Rs. 1,37,126, was allocable in respect of trading assets so that price of Rs. 1,37,126 was paid by the assessee in respect of trading assets valued at Rs. 1,87,197. The assessee had thus according to the Appellate Assistant Commissioner, debited an excess price of Rs. 49,651 (Rs. 1,87,197 less Rs. 1,37,126) to the trading account. The appellate Assistant Commissioner accordingly disallowed a sum of Rs. 49,651 as excess price of trading assets debited in the trading account and held that the said amount should, therefore, be added to the total income of the assessee instead of the sum of Rs. 69,746 sought to be added by the Income-tax Officer.

4. Being aggrieved by this order, the assessee preferred an appeal to the Tribunal. Before the Tribunal the assessee objected to the addition of the Sum of Rs. 49,651 which had been treated by the Appellate Assistant Commissioner as excess value of trading assets in the trading account of the assessee contended that the two agreements dated 30th July, 1954, being the part and parcel of one single transaction under which the factory was purchased as a going concern by the assessee, no part of the surplus resulting from the purchase could be regarded as revenue profit and that the sum of Rs. 49,080 which according to the Appellate Assistant Commissioner represented the difference between the book value of trading assets and the price paid by the assessee for the same was, therefore, not liable to be added to the assessable income to the assessee. The assessee cited passages from certain books on the accountancy in support of this contention to show that the surplus arising from such purchase was always carried to the capital reserve account and no part of it could ever go into the profit and loss account. The Tribunal accepted this contention of the assessee and held that no part of the surplus resulting from the purchase could be regarded as revenue profit and that the revenue authorities had, therefore, no justification to make an artificial allocation of the price between fixed assets and trading assets, the entire surplus being capital profit. Having said this, the Tribunal directed 'that the sum of Rs. 49,651, which has been confirmed by the Appellate Assistant Commissioner to represent the difference between the excess of fictitious price of stock-in-trade and work-in-progress as debited to the trading account of the appellant-company, should be deleted from the assessment.' The Commissioner thereupon made an application to the Tribunal for referring to this court three questions of law which according to the Commissioner arose out of the order of the Tribunal those questions were as follows :

'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Officer is justified in making a fair and reasonable allocation of the coat of different assets for the purpose of ascertaining capital and revenue profit from the purchase transaction as per the two agreements dated July 31, 1954 (correct date is July 30, 1954)

(ii) If the answer to the above question is in the affirmative, whether the sum of Rs. 49,651 or any part thereof is chargeable to tax as revenue profit

(iii) Whether, on the facts and in the circumstances of the case, the business income shown by the assessee from the Ahmedabad factory for the year 1955-56 is liable to be increased by a sum of Rs. 49,651 being the excess of the book value of stock-in-trade and work-in-progress over the cost actually paid by the assessee from them ?'

5. The Tribunal took the view that the actual question of law which could be said to arise out of its order was as under : 'Whether, on the facts and in the circumstances of the case, the surplus arising in the hands of the assessee-company resulting from the purchase of the Ahmedabad factory as a running concern was assessable in whole or in part as revenue profits derived by it during the previous year relevant to the assessment year 1955-56 ?' and referred only that question to this court for opinion.

6. After the reference was received in this court, the Commissioner, in accordance with the rules of this court as they then existed, filed an objection to the statement of the case contending that the question as raised by the Tribunal did not clearly bring out the point in issue in the reference and that the questions as framed by the Commissioner, wanted the Tribunal to raise and refer, brought out clearly the point is issued and should, therefore, be raised in the form indicated by the Commissioner. Thereafter the rules of this court were amended and pursuant to the amended rules, an application was filed in this court on behalf of the Commissioner making the same request as was set out in the objection previously filed by the Commissioner.

7. At the hearing of the reference, the Learned Advocate-General argued that the Income-tax Officer and the Appellate Assistant Commissioner had taken the view that the trading assets acquired by the assessee from the vendor-company had, as forming part of the opening stock, been over-valued and that the value of Rs. 1,87,197 at which they were debited in the trading account was in excess of the price actually paid by the assessee to the vendor-company for the same and that such excess value was, therefore, liable to be disallowed resulting consequently in the increase of the profit of the assessee for the year ending 30th July, 1954. The learned Advocate-General pointed out that the Income-tax Officer had disallowed a sum of Rs. 69,746 as the excess value debited to the trading account in respect of trading assets whereas the Appellate Assistant Commissioner disallowed only a sum of Rs. 49,651 as such excess value but in both the orders what was sought to be done was not to tax the difference between the book value of trading assets and the price paid by the assessee for the same as profit directly arising from the purchase of trading assets but to arrive at the true profit of the assessee by eliminating the inflation of trading assets forming part of the opening stock and valuing trading assets at their cost to the assessee, namely, the price paid by the assessee for the same. The learned Advocate-General contended that, when the matter came before the Tribunal, the Tribunal proceeded on an entirely erroneous basis, namely, that what was sought to be done by the revenue authorities was to tax the difference between the book value of trading assets and the price paid by the assessee for the same as profit directly arising from the transaction of purchase and on that basis the tribunal held that such difference was not revenue profit and was not liable to be added to the assessable income of the assessee. This, argued the learned Advocate-General, was not the contention of the revenue at all. The real contention of the revenue, namely, that the trading assets forming part of the opening stock had been overvalued and that the excess value was, therefore, liable to be disallowed was not considered at all by the Tribunal though it was urged before the Tribunal. The learned Advocate-General, therefore, contented that the question to which we should address ourselves should be not whether the difference between the book value of trading assets and the price paid by the assessee for the same is or is not revenue profit liable to be added to the assessable income of the assessee but whether the trading assets forming part of the opening stock were over-valued and for that purpose whether the price of Rs. 2,00,000 paid by the assessee for the entire factory was liable to be apportioned so as to arrive at the price paid by the assessee for trading assets which alone would represent the amount at which the trading assets should be debited in the trading account for the purpose of arriving at the profit of the assessee. Now, the learned Advocate-General is certainly right when he says that the revenue is entitled to examine whether the opening stock is correctly valued and for that purpose to ascertain what is the cost to the assessee. The cost to the assessee would be arrived at by apportioning the price paid by the assessee for the entire factory between capital assets and trading assets. It may be that the price paid was a composite price for the factory which consisted of capital assets as well as trading assets but that cannot prevent the revenue from apportioning the price amongst capital assets and trading assets in any fair and reasonable manner permitted by law. The decision of the Court of Appeal in England in Osborne v. Steel Barrel Co. Ltd. clearly supports this proposition. If therefore, the question were as to whether the price should be apportioned between capital assets and trading assets for the purpose of arriving at the price paid by the assessee in respect of trading assets, which alone could be debited to the trading account, such question would certainly have to be answered in favour of the Commissioner and it would not be right to say that no such apportionment can be made and, therefore, the book value of trading assets as appearing in the books of the vendor-company must be taken as representing the cost of trading assets to the assessee. This position was not disputed by Mr. S. P. Mehta, learned advocate appearing on behalf of the assessee, but he contended that that was not the question referred to this court by the Tribunal and that it was, therefore, not open to us to consider that question at the instance of the Commissioner. According to Mr. S. P. Mehta, the only question argued and considered by the Tribunal was whether the difference between the book value of trading assets and the price paid by the assessee for the same was revenue profit liable to be taxed in the hands of the assessee and that question was answered against the Commissioner and it was only that question which was referred by the Tribunal. To this the learned Advocate-General rejoined by stating that it was clear from the orders of the Income-tax Officer and the Appellate Assistant Commissioner that the only question argued before them was whether there was any excess value of trading assets debited in the trading account and that was the only ground on which any amount was sought to be added to the assessable income of the assessee and it was inconceivable that this ground could have been abandoned by the Commissioner when the matter was argued before the Tribunal. The argument was that this ground was certainly urged before the Tribunal but the Tribunal had failed to deal with it and that the question which the Commissioner sought to argue before us was, therefore, a question which arose out of the order of the Tribunal and it could be entertained by us.

8. Now one thing is certain, though Mr. S. P. Mehta seriously disputed it, that the only ground on which the Income-tax Officer added the sum of Rs. 69,746 to the assessable income of the assessee was that it represented the excess value of trading assets debited to the trading account. Mr. S. P. Mehta contended that that could not be so for two reasons. The first reason was that the Income-tax Officer had himself observed that the sum of Rs. 69,746 was again on stock-in-trade and was, therefore, deemed to be taxable profit in the hands of the assessee. This reason cannot really prevail because if we look at the order of the Income-tax Officer as a whole, it is clear that what he was considering was the debit in the profit and loss account of an excess value in respect of trading assets and that is made very clear by the words 'Now while making up the accounts for the year under consideration the assessee-company has debited the profit and loss account with the full value of the current assets worth Rs. 1,87,197, though the actual purchase consideration paid for the same was Rs. 1,17,451.' The second reason on which Mr. S. P. Mehta relied was that if the Income-tax Officer was thinking of the debit of excess value in respect of trading assets and he was of the view that the value of trading assets as shown in the opening stock was liable to be adjusted, he would have applied his mind to the question whether consequent upon the adjustment in the figure of closing stock which he admittedly did not do and from this Mr. S. P. Mehta asked us to draw an inference that the Income-tax Officer was not considering this question at all but was merely seeking to tax the difference between the book value trading assets and the price paid for the same as profit directly assessable to tax. This circumstance, though of some validity, cannot be given undue weight by us, for it is quite possible that the Income-tax Officer erroneously failed to apply his mind to the question of adjustment of closing stock which would be necessary if an adjustment was made in the figure of opening stock. The words from the order of the Income-tax Office was dealing with the question of value of the trading assets forming part of the opening stock for the purpose of arriving at the true trading profit of the assessee and was not seeking to tax any alleged profit resulting from the difference between the book value of trading assets and the price paid for the same.

9. When we came to the order of the Appellate Assistant Commissioner, we find that this order is more explicit than the order of the Income-tax Officer and clearly shows that the question to which the Appellate Assistant Commissioner applied his mind was the question relating to disallowance of excess value in respect of trading assets shown in the trading account. The Appellate Assistant Commissioner in terms observed after working out the figures that 'the excess or fictitious value of the stock-in-trade and the work-in-progress debited in the assessee's books of accounts amounts to Rs. 49,651 and not Rs. 69,746 as determined by the Income-tax Officer.' The Appellate Assistant Commissioner thereafter proceeded to state that 'In my opinion, it is this sum of Rs. 49,651 as worked out above which must be treated as the excess value or the fictitious value of the stock-in-trade and work-in-progress included in the trading and manufacturing account of the assessee company of the accounting years. These passages from the order of the Appellate Assistant Commissioner clearly show that what he was seeking to do was not to tax any profit alleged to arise from the purchase of trading assets but to arrive at the true trading profit of the assessee by examining whether the valuation of trading assets forming part of the opening stock was correct. Here also Mr. S. P. Mehta levelled the same criticism which he urged against the order of the Income-tax Officer. He said that if what the Appellate Assistant Commissioner was considering was the valuation of the trading assets forming part of the opening stock for the purpose of arriving at the true trading profit of the assessee, he would have certainly considered whether any adjustment in the valuation of the closing stock was necessary. For the reasons we have given while rejecting a similar contention advanced in relation to the order of the Income-tax Officer, we also reject the present contention in relation to the order of the Appellate Assistant Commissioner.

10. It is, therefore, clear that the Appellate Assistant Commissioner treated the sum of Rs. 49,651 as the excess value of trading assets included in the trading account of the assessee and accordingly held that the said amount should be added back to the assessable income of the assessee. In the appeal before the Tribunal, the assessee objected to the addition of Rs. 49,651 in the assessment and since the addition was made on the ground that, in view of the Appellate Assistant Commissioner, the sum of Rs. 49,651 was the excess value of trading assets in the trading assets in the trading account, the objection to the addition carried with it challenge to the view of the Appellate Assistant Commissioner. The question which should, therefore, have been canvassed before the Tribunal was whether the Appellate Assistant Commissioner was right in treating the sum of Rs. 49,651 as the excess value of trading assets in the trading account. Now curiously enough the assessee completely ignored this question which was the only question which could arise before the Tribunal on the hypothesis that what was done by the revenue authorities was to tax the surplus resulting from the purchase of the trading assets, namely, the difference between the book value of trading assets and the price paid by the assessee for the same. On this hypothesis the assessee contended that the Appellate Assistant Commissioner had erred in allocating the price of Rs. 2,00,000 between fixed assets and trading assets and treating the surplus in respect of trading assets on the basis of such allocation as revenue profit. The assessee urged that since the entire factory was taken over by the assessee as a going concern for the price of Rs. 2,00,000 - and that was found by the Appellate Assistant Commissioner - no part of the profit made in such purchase could be regarded as revenue profit in the hands of the assessee. The contention was that the entire profit on such purchase was capital profit and, in support of the contention, reliance was placed on certain passages from three books on accountancy which are referred to in the order of the Tribunal to show that such surplus was always carried to capital reserve account and not to profit and loss account as revenue profit. Now this was clearly a misconception on the part of the assessee and the same misconception also overtook the Tribunal. From the statement of the case and particularly the following passages from the statement of the case :

'The Income-tax Officer, who made the assessment of the Spunpipe and Construction Co. Ltd., worked out the surplus or excess resulting from the purchase of the Ahmedabad factory at Rs. 69,746 and held that it was as good as profit taxable in the hand of the purchasing company.

The assessee appealed to the Appellate Assistant Commissioner who agreed with the Income-tax Officer in principle but recalculated the taxable profits, i.e., the surplus resulting from the purchase of the fixed and other assets, stocks and stores, and work-in-progress, less liabilities at Rs. 49,651.

At the second appellate stage before the Tribunal it was contended on behalf of the assessee-company that the surplus which arose in its hands as a result of purchasing the Ahmedabad factory as a running concern had been rightly credited to the capital reserve account following the accepted principles of accountancy and various authorities were quoted in support of such contention. The Tribunal after taking into account all such authorities as made available to it came to a finding that the department had no justification whatsoever for making an artificial allocation as between the values paid by the assessee-company for the fixed and the other assets less liabilities on the one side and for the stocks, stores and work-in-progress on the other hand, attributing the entire surplus to have arisen only in respect of stocks and work-in-progress, which alone could be treated as revenue profits according to the department',

11. It is clear that the Tribunal the Tribunal understood the case of the revenue to be that the surplus attributable to the purchase of trading assets was revenue profits and was, therefore, liable to be added to the assessable income of the assessee and also conceived that to be the basis of the orders of the Income-tax Officer and the Appellate Assistant Commissioner, merely the figures of such surplus being different according to the method of calculation an allocation adopted by the Income-tax Officer and the Appellate Assistant Commissioner. Now it does not appear from the order of the Tribunal that any attempt was made on behalf of the revenue to clear up this misconception by pointing out that what was sought to be done by the revenue authorities was not to tax the surplus arising from the purchase of trading assets but to disallow the inflation of the opening stock which inflation had the effect of reducing the assessable profits. There is also nothing in the order of the Tribunal from which we can say that a contention was advanced before the Tribunal that the price was sought to be apportioned between capital assets and trading assets for the purpose of arriving at the true cost of trading assets to the assessee in order to determine the true trading profit of the assessee for the year in question and that there was an excess value adopted in the trading account in respect of trading assets which had the effect of reducing the assessable profits. It is no doubt true, as pointed out by the learned Advocate-General, that the Tribunal was conscious of the fact that the sum of Rs. 49,651 had been treated by the Appellate Assistant Commissioner as the amount debited in excess on account of trading assets in the trading account, for that statement is to be found in the very first sentence in the beginning of the order and is also to be found at the end of paragraph 3 where the discussion in relation to this item is wound up. But the question whether the sum of Rs. 49,651 or any other amount was liable to be treated as excess amount debited in respect of trading assets in the trading account of the assessee so as to affect the trading profit of the assessee was not considered by the Tribunal and there is nothing in the order of the Tribunal on the basis of which we can hold that such question canvassed before the Tribunal and was yet not dealt with by the Tribunal. As a matter of fact it appears from the statement of the case and we are referring here to the following passage from the statement of the case, namely :

'The Tribunal after making into account all such authorities as made available to it came to a finding that the department had not justification whatsoever for making an artificial allocation as between the values paid by the assessee-company for the fixed and other assets less liabilities on the one side and for the stocks, stores and work-in-progress on the other and attributing the entire surplus to have arisen only in respect of stocks and work-in-progress, which alone could be treated as revenue profits according to the department.'

12. That the department contended that the entire surplus was in respect of trading assets and was, therefore, liable to be treated as revenue profits. The learned Advocate-General contended that this statement in the statement of case was not borne out by anything in the order of the Tribunal and should not, therefore, be relied upon. Now if the matter had rested merely at this, there would have been great force in the contention of the Learned Advocate-General, for we would not be bound to accept any statement in the statement of case if it was contrary to what was stated in the order itself. But we find that not only is this statement not contrary to anything stated in the order of the Tribunal, for the order of the Tribunal is silent on the point as to what were the contentions of the revenue, but the statement of case is an agreed statement and the revenue cannot, therefore, be permitted not to contend that this statement is incorrect or that it does not represent the contentions urged before the Tribunal.

13. The only ground on which the Learned Advocate-General contended before us that the question whether there was any inflation of trading assets forming part of the opening stock affecting the trading profit of the assessee was canvassed before the Tribunal was that that was the only ground on which the orders of the Income-tax Officer and the Appellate Assistant Commissioner were founded and that it was inconceivable that it could have been abandoned before the Tribunal. It is true, as we have pointed out, that the orders of the Income-tax Officers and the Appellate Assistant Commissioner are founded on this particular ground and that it is rather unusual that this ground should not have been urged before the Tribunal, but unfortunately for reasons which we have already set out above, we are unable to take the view that this ground was canvassed before the Tribunal and the Tribunal failed to deal with it. It is also significant to that when the Commissioner made an application to the Tribunal for referring to this court three question of law which according to him arose that this contention, though urged, was not considered by the Tribunal nor was any such complaint made in the objections filed by the Commissioner in answer to the statement of the case. No such grievance was also made in the application preferred by the Commissioner before us after the Rules were amended. If this contention had been urged and the Tribunal had failed to consider it, it is reasonable to assume that the Commissioner would have complained to the Tribunal in the reference application that this contention was urged but was not considered by the Tribunal. In this view of the matter, we cannot say that we are satisfied that any such contention was urged before the Tribunal and that the Tribunal failed to consider it.

14. But even if this contention were urged before the Tribunal and the Tribunal had failed to consider it, it cannot carry the case of the revenue any further. We have already referred to the question submitted for our opinion by the Tribunal and that question by its very terms relates only to the surplus arising in the hands of the assessee resulting from the purchase of the factory as a running concern and raises an inquiry as to whether it is assessable in whole or in part as revenue profit derived by the assessee. That question is very much different from the question as to whether there was any inflation of the value of trading assets forming part of the opening stock so that to the extent of such inflation the assessable profits of the assessee were liable to be increased. This latter question was not sought to be raised by the Commissioner even before the Tribunal. The learned Advocate-General of course relied on question Nos. 1 and 3 as suggested by the commissioner but they cannot held him. The first question refers only to the fair and reasonable allocation of the cost of different assets for the purpose of ascertaining capital and revenue profit from the purchase transaction and does not comprehend within its scope and ambit any such question which is now sought to be argued before us. Question No. 3 is a little more general in character but that also refers to the difference between the book value of trading assets and the cost actually paid by the assessee for the same and seeks to bring it in directly for the purpose of increasing the assessable income of the assessee. Neither of these two question can, therefore, avail the Commissioner. But even if we consider No. 3 as including the question as regards the inflation of the value of trading assets forming part of the opening stock so as to affect the trading profit of the assessee, we find that when this question was not raised and referred by the Tribunal, the Commissioner did not make any application to this court under section 66(2) for raising that question of law. The objection filed before us were manifestly for the purpose of reframing the question. They could not and admittedly did not constitute an application under section 66(2) for raising any question of law which the Tribunal had refused to raise and refer. If, therefore, there was no application made by the Commissioner under section 66(2) for requiring the Tribunal to refer and raise the question whether there was any inflation of trading assets forming part of the opening stock or whether the sum of Rs. 49,651 or any other amount represented any such inflation, we are afraid such question cannot be agitated before us on this reference. The learned Advocate-General relied upon the decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Company Ltd., which sets out the principles on which a question of law can be directed to be referred by the Tribunal under section 66(2). Of course it is clear having regard to this decision that if a question of law is raised before the Tribunal, but the tribunal fails to deal with it, it must be deemed to have been dealt with by the Tribunal and can, therefore, be said to be one arising out of its order and can validly from the subject-matter of an application under section 66(2), but, in the present case as we have pointed out above neither was the question which is now sought to be argued before us raised before the Tribunal, not has any application been made before us under section 66(2) for raising and referring such question.

15. That leaves for consideration question referred to us by the Tribunal. On the question as framed, it is clear that the difference between the book value of any part of the assets acquired by the assessee and the price paid by the assessee for the same cannot be regarded as revenue profit derived by the assessee. As a matter of fact it is not possible to say that any profit at all is made by the assessee from the purchase of any of the assets. At the highest, what can be said is that assets worth a particular amount are purchased by the assessee for a smaller amount but that does not represent the profit of the assessee. It is, therefore, not right to regard the difference between the value of the assets and the price paid for the same as revenue profit liable to be added to the assessable income of the assessee. The question as framed, however, does not really bring out the point decided by the Tribunal. The word 'surplus' is not a correct expression. What is referred to by the Tribunal as surplus is, as we have already pointed out, the difference between the book value of the assets and the price paid by the assessee for the same. We will, therefore, reframe the question as under :

'Whether, on the facts and in the circumstances of the case, the difference between the book value of the assets of the factory acquired by the assessee-company as a running concern and the price paid for the same was assessable in whole or in part as revenue profits derived by it during the previous year relevant to the assessment year 1955-56 ?'

16. Our answer to the question as reframed will be in the negative. The Commissioner will pay to the assessee the costs of the reference. There will be no order on the application.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //