Skip to content

India Foils Ltd. Vs. Income-tax Officer and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberMatter No. 155 of 1969
Reported in[1973]87ITR333(Cal)
ActsIncome Tax Act, 1961 - Section 154; ;Constitution of India - Articles 226
AppellantIndia Foils Ltd.
Respondentincome-tax Officer and anr.
Appellant AdvocateD. Pal, ;P.K. Pal and ;A.K. Chowdhury, Advs.
Respondent AdvocateS.C. Sen, Adv.
Cases ReferredVenkatachalam v. Bombay Dyeing
- .....such a transfer the transferee-company acquires assets which is in excess of the par value of the shares paid for such acquisition, then the excess is to be credited to the capital reserve account or share premium account. it could not be said that the assets have been acquired at only the par value of the shares. dr. pal referred me to the provisions in the english companies act as stated in palmer's company law, page 718. in commissioner of income-tax v. standard vacuum oil co., : [1966]59itr685(sc) the supreme court had to consider this question. in that case the assessee-company was incorporated in the u.s.a. with the object of taking over the assets of two other giant oil companies, viz.. the socony vacuum oil co. and the standard oil co. (new jersey). the assets of the.....

K.L. Roy, J.

1. Venesta Foils Ltd., a company incorporated in the U. K., manufactures and markets aluminium foils and allied products extensively in the U. K. and in other countries throughout the world. On the 17th March, 1939, another company called the Foil Centre Ltd. was incorporated under the English Companies Act with an authorised capital of 100 divided into 100 shares of 1 each of which only two shares were issued as fully paid-up and held by Venesta Foils Lfd. On the 20th April, 1961, at an extraordinary general meeting of Foil Centre, resolutions were passed changing the name of that company to India Foils Ltd. and also increasing the authorised capital by a further sum of 900 devided into 900 shares of 1 each. By an agreement dated the 30th November, 1961, Venesta agreed to transfer all its immovable properties, factories, plants, machinery and other movable and immovable assets in India to the petitioner, India Foils Ltd., the present petitioner, at the value shown in the books of Venesta while the petitioner undertook to meet all the liabilities of Venesta incurred on account of its Indian business including a loan of 204,328 due by Venesta to Messrs. Reynolds T. I. Aluminium Ltd. It was further agreed that after setting off the liabilities from the aforesaid book value of the assets the residue of the consideration for the said sale would be paid and satisfied by the issue to Venesta or its nominees of 998 shares of 1 each credited as fully paid in the petitioner-company. As a result Venesta held all the 1,000 shares constituting the authorised capital of the petitioner-company and the petitioner-company became a hundred per cent. subsidiary of Venesta. The petitioner closed its accounts for the first time on the 30th November, 1961, and filed its return for the assessment year 1962-63 (the accounting period being from 1st January, 1961, to 30th November, 1961) and in the said return claimed depreciation on the basis of the written down value of the fixed assets as determined in the previous assessment of Venesta. Subsequently, by a letter dated the 3rd December, 1962, Messrs. Price Waterhouse Peat & Co., the petitioner's accountants, furnished an amended statement of depreciation and development rebate on the basis of the actual cost of the fixed assets to the assessee, viz., the value of these assets as shown in the books of Venesta on the date of the sale. For the assessment year 1962-63, the Income-tax Officer making the assessment accepted the petitioner's contention after considering the terms of the aforesaid agreement dated 30th November, 1961, and determined the depreciation as per the assessee's computation at Rs. 10,96,630. For the subsequent assessment years 1963-64,1964-65 and 1965-66 different Income-tax Officers also accepted the assessee's contention as to the actual cost of these fixed assets in determining the depreciation allowance in each of these years. By a notice purported to be under Sections 154/155 of the Income-tax Act, 1961, dated the 11th March, 1969, the respondent-Income-tax Officer notified the petitioner that he intended to rectify a mistake apparent from the records of the assessment for the year 1962-63 and as such rectification would have the effect of enhancing the assessment the petitioner was asked to appear either in person or by an authorised representative if he wanted to be heard thereon. In the said notice the nature of the mistake proposed to be rectified was stated to be a 'mistake in allowing depreciation on certain assets'. The reason for the respondent-Income-tax Officer's issuing the notice under Section 154 is disclosed in paragraph 9 of the affidavit-in-opposition affirmed by the respondent-Income-tax Officer, in showing cause to the rule issued in this case which is to the following effect:

' I say that the assets acquired by the petitioner are far in excess of the consideration paid as the book value of the assets transferred is much more than the consideration paid. Therefore, assets for the acquisition of which no consideration has been paid by the petitioner are not entitled to depreciation as their cost of acquisition is nil. Inasmuch as the depreciation of assets of which cost of acquisition is nil has been allowed by mistake, there is a mistake apparent from the record.'

2. It is now well-settled that either under Section 35 of the Income-tax Act, 1922, or under Section 154 of the 1961 Act, the jurisdiction of the Income-tax Officer to rectify any mistake in any assessment order or refund order must be confined to a mistake which is apparent from the record. The courts in this country including the Supreme Court has had to consider what is meant by the expression ' apparent from the record ' as used in these sections and it is now well-settled that the mistake contemplated is not one which is to be discovered as a result of an argument or on which two 'opposite views might be possible. It must be an error which is apparent and in regard to which no argument is called for.

3. Dr. Pal for the petitioner submitted that when assets are acquired in exchange for fully paid up shares, what is the exact amount of the consideration paid for such acquisition is always a very difficult question for determination. The face or par value of the shares is not the only criterion to be taken into consideration. If as the result of such a transfer the transferee-company acquires assets which is in excess of the par value of the shares paid for such acquisition, then the excess is to be credited to the capital reserve account or share premium account. It could not be said that the assets have been acquired at only the par value of the shares. Dr. Pal referred me to the provisions in the English Companies Act as stated in Palmer's Company Law, page 718. In Commissioner of Income-tax v. Standard Vacuum Oil Co., : [1966]59ITR685(SC) the Supreme Court had to consider this question. In that case the assessee-company was incorporated in the U.S.A. with the object of taking over the assets of two other giant oil companies, viz.. the Socony Vacuum Oil Co. and the Standard Oil Co. (New Jersey). The assets of the transferor-companies were valued at astronomical figures in millions of dollars and were satisfied by allotment to each of the vendor-companies of shares in the petitioner-company together with certain serial bonds of the value of over 13 million dollars. The assessee-company entered in its books of accounts the book value of the assets taken over from the vendor-companies and the excess of the net value of the assets transferred over the par value of the stock issued was carried to an account styled ' capital paid in surplus '. The question arose whether the amount in the account ' capital paid in surplus ' was a reserve within the meaning of Rule 3 of Schedule II to the Business Profits Tax Act., The Supreme Court held that the difference between the book value of the assets transferred and the par value of capital stock issued was ' premium' realised from the issue of the scares. The court further observed that a share was not a sum of money: it represented an interest measured by a sum of money and made up of diverse rights contained in the contract evidenced by the articles of the company. In the absence of any restriction in the law against the issue of shares otherwise than for cash when shares were issued for consideration other than cash, the value of the assets transferred in excess of the par value of the shares issued would be regarded as premium for the purpose of our system of law. It is to be noticed that it was nowhere suggested in that case that by issuing shares whose par value was much below the value of the assets acquired the assessee-company was acquiring the assets not at the value declared in the instruments of transfer but at the par value of the shares. In any event Dr. Pal is certainly justified in his contention that the question when assets are transferred in consideration of fully paid-up shares the question whether the actual consideration paid would be only the par value of the shares is an intricate question which cannot be decided off-hand. Mr. S. C. Sen, the learned counsel for the department, contended that the question of ascertaining the actual cost was always a question of fact and the Income-tax Officer is entitled to determine such actual cost according to his own valuation and for this proposition he relied on a recent decision of this court in the case of Jogta Coal Co, Ltd. v. Commissioner of Income-tax., [1965] 55 I.T.R. 89 (Cal.). But, in that case what was held by this court was that the Income-tax Officer was not bound to accept the figure given in a contract or conveyance and if he is of opinion that a fictitious price has been put on such assets it was open to him to refuse to accept that price, go behind the contract and ascertain what the original cost was. I do not think that that case supports the contention of Mr. Sen that in any event the Income-tax Officer is entitled to determine the actual cost of the assets of the assessee irrespective of other considerations.

4. Recently, I have had occasion to consider this very question in Narsingdas Bangur v. Income-tax Officer, Central Circle I, Calcutta, : [1973]87ITR340(Cal) in Matter No. 739 of 1967. In that case the question was whether the tax credit given to a partnership firm which had been allowed to a partner in his individual assessment could be rectified under Section 154 by the Income-tax Officer when subsequently on appeal the firm was held to be entitled to exemption from tax. After considering the large number of cases cited by the learned counsel on either side, I made the following observations :

'Mr. D. K. Sen, the learned counsel for the respondent, did not dispute the proposition that where difficult questions of law or of fact are to be determined on which two different opinions are possible the procedure for rectification provided for under Section 154 could not be adopted. His submission was that that stage had not yet arrived. The impugned notice gave the petitioner an opportunity to be heard before the Income-tax Officer proposed to pass any orders under Section 154. At this stage no prejudice has been caused to the petitioner, and the petitioner is not entitled to come to this court and ask for a high prerogative writ prohibiting the respondent-Income-tax Officer from proceeding with the inquiry. Mr. Sen relied strongly on a very recent decision of B. C. Mitra J. in Pilani Investment Corporation Ltd. v. Income-tax Officer, ' A ' Ward , [1968] 69 I.T.R. 847 (Cal.)......

I am entirely unable to accept this contention. In the present case there is no question of any limitation. The challenge is a challenge to the jurisdiction of the Income-tax Officer to issue the notice under Section 154. It is contended that such jurisdiction depends on the presence of an error apparent on the record, and if there is no such error apparent on the record, the Income-tax Officer has no jurisdiction to issue any notice under that section. This is well-established by the various decisions cited by Dr. Pal...... The Income-tax Officer cannot assume jurisdiction to decide such a question in the guise of a procedure for rectification of a mistake apparent in his order.'

5. I would have rest content to rely on my aforesaid decision and made this rule absolute but for certain arguments advanced by Mr. S. C. Sen in furtherance of the argument of Mr. D. K. Sen as recorded in my aforesaid judgment. Mr. Sen pointed out that under Section 154(3) the Income-tax Officer is only required to give a notice to the assessee of his intention to rectify and/or amend an order which would have the effect of enhancing an assessment or reducing a refund. Such a notice is not a statutory notice but is merely intended to give the assessee an opportunity of being heard before any order is passed to his detriment. As the Income-tax Officer's jurisdiction does not depend on such a notice, no writ could be issued for quashing a notice under Section 154 and as such the present proceedings are, misconceived. In support of his contention Mr. Sen referred me to a decision of the Supreme Court in Maharana Mills (Private) Ltd. v. Income-tax Officer, Porbandar, : [1959]36ITR350(SC) . where in respect of an exactly similar provision in Section 35 of the Indian Income-tax Act, 1922, the following observations were made at page 355 :

'The object of the provision as to notice in the second sub-section of Section 35 is that no order should be passed to the detriment of an assessee without affording him an opportunity but it cannot be said that the rule is so rigid that if, as a matter of fact, the assessee knows of the proceedings and the matter has been discussed with him then an adverse order would be invalid merely because no notice under Section 63 was given. Of course this postulates that the reasonable opportunity has been given to show cause. Secondly, this provision is applicable only where the assessment is enhanced or refund is reduced.'

6. I agree with this contention of Mr. Sen that a notice under Section 154 is not the foundation of the jurisdiction of the Income-tax Officer to take proceedings for rectification of an order of assessment or an order of refund, but, undoubtedly, such a notice is one of the ' jurisdictional facts ' which must be established before the Income-tax Officer could assume such jurisdiction. Dr. Pal submitted that in any event if the petitioner was entitled to relief technical considerations should not prevent this court from giving such relief under article 226, and reliance was placed on the well-known decision of the Supreme Court in Chiranjilal Chaudhari v. Union of India., : [1950]1SCR869 This contention was also raised by Mr. D. K. Sen in Narsingdas Bangur's case and I observed as follows:

' An error apparent on the record is the jurisdictional fact which would invest the Income-tax Officer with jurisdiction to rectify an error under Section 154. By a wrong decision of that fact the Income-tax Officer cannot invest himself with such jurisdiction. Whether there is an error apparent on the record is certainly justiciable. It is not necessary to refer to the other cases cited by Dr. Pal in reply, viz., Calcutta Discount Company's case, : [1961]41ITR191(SC) .and East India. Commercial Company v. Collector of Customs, : 1983(13)ELT1342(SC)

7. I also observed that while reversing the decision of the Bombay High Court in Venkatachalam v. Bombay Dyeing & ., [1950] 34 I.T.R. 143 ; [1959] S.C.R. 703 (S.C.). in issuing a writ of prohibition on the ground that there was no mistake apparent from the record, the Supreme Court did not say that the High Court was in error in exercising its writ jurisdiction in the case of rectification of an error under Section 35. The point that is troubling me in this case is the way the prayers have been framed and the reliefs have been asked for in the petition. Prayers (a) and (b) are for writs in the nature of mandamus and certiorari for quashing and/or cancelling the notice under Section 154. Mere quashing or cancelling the notice may not be enough, but as Dr. Pal pointed out in prayer (c) there is a prayer for a writ of prohibition requiring the respondents to forbear from giving any effect to or taking any steps whatsoever in pursuance of the impugned notice under Section 154, and such a writ would be sufficient in this case. Considering all the circumstances I see no reason to change the opinion which I expressed in Narsingdas Bangur's case. I would, therefore, hold that the respondent-Income-tax Officer had no jurisdiction to issue the impugned notice under Section 154 purporting to correct an alleged error apparent on the records. The rule would, therefore, be made absolute and a writ of prohibition would issue commanding the respondents to forbear from proceeding any further with the impugned notice and with any proceedings connected therewith. There would be no order as to costs. The operation of the order would be stayed for six weeks.

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