SANKAR PRASAD MITRA J. - This case has been referred to us pursuant to a judgement of the Supreme Court, Jogta Coal Co. Ltd. v. Commissioner of Income-tax. The Appellate before the Supreme Court (the applicant before us), purchased the entire right, title and interest in the leasehold property in a coal mine from the lessee for the price of Rs. 23,00,000, out of which Rs. 13,00,000 were to be deemed to be paid in respect of the underground and surface rights and other appurtenances and benefit of the assignment of uncompleted orders and contracts, and Rs. 10,00,000 as the value of the machinery, stores, furniture, stocks, etc. In the Income-tax and business profits tax assessments of the applicant the income-tax Officer did not accept the allocations as mentioned in the sale deed, and valued the plant and machinery at Rs. 3,50,000 and allocated a part of the consideration, namely, Rs. 7,50,000, towards goodwill, even though there was no mention of the sale of the goodwill in the sale deed itself. The Appellate Tribunal, however, put it own value on the assets estimating the value with reference to the prevailing market conditions of plant and machinery at Rs. 6,00,000 and of goodwill at Rs. 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 content 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. That is disputed. But whether or not any express concession was made, there is no trace in the order of the Appellate Tribunal that there was any contest or that any of the seven questions proposed for reference to this court was raised or debated in any shape or form. That being so, the case does not come under section 66(2) of the act and consequently, it is not a case where we can or ought to direct the Tribunal to make a reference.'
The applicant preferred an appeal to the Supreme Court. The Supreme Court was of the view that the questions : (1) Whether on the interpretation of the sale deed it could be said that any goodwill was purchased by the appellant; and(2) Whether the Income-tax Officer was competent to go behind the sale deed and adopt his own value of the assets, were questions of law which arose out of the order of the Appellate Tribunal. Kapur J., delivering the judgment of the Supreme Court in Jogta Coal Co. Ltd. v. Commissioner of Income-tax, has been pleased to observe as follows :
'... we think that the following two questions of law arise out of the order of the Appellate Tribunal and a reference should have been made to the High Court. These two questions were sought to be raised by the appellant under section 66(1) of the Act, and again before the High Court under section 66(2) of the Act :
(i) Whether on the interpretation of the sale deed it can be said that any goodwill was purchased by the assessee ...
(7) Whether in view of the said proviso to section 10(5) (a), the Income-tax Officer, on the facts and circumstances arising out of this case, was competent to go behind the conveyance and fix a valuation of his own in the way he has done ?
Question No. (1) was not allowed by us to be argued because the matter was not taken in the statement of case on behalf of the appellant, and the only question which survives for consideration is second one, i.e., No. 7, and this question, as it is, or with modifications, should have been referred to the High Court.
We, therefore, direct that the question with the necessary modification if any, be referred and the case stated in accordance with section 66(1) of the Income-tax Act...'
In view of the above directions of the Supreme Court, the Appellate Tribunal has stated the case. It appears from the statement of the case that the assessee, i.e., the Jogta Coal Ltd., was incorporated on September 14, 1945. The 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 are, which belonged to the Raja of Jharia. The two brothers installed on the land leased to them plant and machinery and erected building 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. agreeed 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 pass 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 to schedules giving the list of the properties which were to be sold. A sum of Rs. 1,00,000 was to be paid as earnest money and the balance was to be paid at the time of the sale. Out of the sum of Rs. 23,00,000, the sum of Rs. 13,00,000 was to be paid in respect of the price of the underground and surface rights and other appurtenances and the benefit of the assignment of the balance of uncompleted order and contracts, and the sum of Rs. 10,00,000 as the price of the machinery, stores, furniture, stocks, etc. Another clause of the contract was that Agabeg Brothers Ltd. was to go into voluntary liquidation to give effect to the agreement for sale. There were certain leasehold right in favour of third parties. Under clause 12 of the agreement, those third parties were to attorn to the purchaser on the completion of the sale.
On October 15, 1945, Agabeg Brothers Ltd. Went into voluntary liquidation, and two liquidators were appointed. On December 28, 1945, and indenture evidencing the sale in favour of the applicant before us was executed to which the parties were, the liquidators, the debenture-trustees, Bajpai and the Jogta Coal Company. The balance of the sale price, i.e., Rs. 22,00,000 which was remaining due, was paid to the vendor in accordance with the terms of the agreement and acknowledged in the sale deed.
The accounting years were the two years the two years ending December 31, 1946, and December 31, 1947, and the assessment year were 1947-1948 and 1948-1949. According to the Appellate Tribunal, the point in controversy is the amount on which the appellant was entitled to calculate the deduction allowance for purposes of depreciation under section 10(2) (vi) of the Indian Income-tax Act.
The appellate Tribunal states that the allocation of the consolidated sale price was furnished to the Income-tax Officer as Rs. 23,00,000. Broadly speaking this was made up as under :
Property was further analysed as under :
(b) Shafts and inclines.
The Income-tax Officer made a reference to the balance-sheet as on December 31, 1944, of the vendor-company. In the vendor-companys books the assets were as follows :
(i) Land, inclusive of shafts and inclines.
(ii) Plant and machinery.
The Income-tax Officer further referred to the written down values as per the income-tax records and found as follows :
Considering all these figures, the Income-tax Officer held that plant and machinery were very much inflated by the applicant. The Income-tax Officer further held that in the allocation, the assessee-company had entirely lost sight of the question of goodwill. He thereupon valued the goodwill by resorting to the method of taking the average profit of three to five years and made an estimate of goodwill at Rs. 7,50,000. Thereafter he allocated the balance sum of Rs. 15,50,000 as follows :
(i) Land including shafts and inclines.
(iii) Plant and machinery.
The applicant went in appeal to the Appellate Assistant Commissioner, who also accepted the estimate made by the Income-tax Officer and dismissed the appeal. The matter was then taken up to the Appellant Tribunal, and in its order the Tribunal revise the estimated values on the assets which were taken over by the assessee. The cost price of the various assets, it held in the circumstances, has necessarily to be estimated with reference to the prevailing market conditions. The estimates were as under :
(a) Land and building
(b) Shafts and inclines
(d) Plant and Machinery
The appellate Tribunal directed the Income-tax Officer to calculate the depreciation in accordance with the said estimates.
The Supreme court in it is judgment gave liberty to the Appellate Tribunal to refer question No. 7 aforesaid with necessary modifications, if any. The proviso referred to in the said question No. 7 was not in existence during the relevant assessment years. That is why the Appellate Tribunal, from the facts and circumstances stated above, has referred the following question to us : 'Whether, in view of section 10(5) (a), the Income-tax Officer, on the facts and circumstances arising out of this case, was competent 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 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 distributed 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 device or a sham transaction. There is no evidence that the transaction was colourable, fraudulent of fictitious in any manner whatsoever. The contract was between two parties having no relationship with each other and its validity could not be impugned in the manner it was sought to be done.
On the competence of the tax authorities to go behind a contract or a conveyance a number of decisions may be referred to. In Commissioner of Income-tax v. Harveys Ltd., the assessee, Harveys Ltd., was a private company incorporated with a capital of Rs. 5 lakhs divided into five thousand shares out of which the firm of A. Harvey and his brother and his brother held 3,998 shares and 1,000 shares were issued to the Madura Mills Ltd. It was arranged on its incorporation that the assessee-company should purchase for Rs. 15 lakhs the assets of a cotton ginning business owned by the Harvey Brothers as individuals. These assets consisting of lands and buildings, and plant and machinery were accordingly purchased for Rs. 15 lakhs. The accounts, however, showed that the original cost of these assets to the Harvey Brothers was only Rs. 10 1/2 lakhs and this value had been written down in their accounts to Rs. 5 lakhs. Out of the consideration of Rs. 15 lakhs, a sum of Rs. 5 lakhs was satisfied by the issue of shares and the balance of Rs. 10 lakhs by the issue of debentures. These debentures were issued to two Canadian companies controlled by the Harvey Brothers and these companies in turn issued their own debentures for Rs. 10 lakhs to the wives of the two brothers. The assessee had further received in the year of account 20,000 shares of the of the Madura Mills Ltd. in return for the allotment of 1,000 shares in the assessee-company as stated above and an agreement to gin cotton for the Madura Mills Ltd. at a flat rate of Rs. 8 per candy for ten years though the market rate was Rs. 12-8-0 per candy. The market value of the 20,000 shares was Rs. 7 lakhs while that of 1,000 shares was only Rs. 1 lakh. The income-tax authorities, when the facts relating to these transaction came to their notice, held that the value of the assets purchased had been purposely inflated to Rs. 15 lakhs and, accordingly, allowed depreciation on the basis that the original cost was only Rs. 5 lakhs. Secondly, they declined to allow interest paid on the debentures holding that the issue of debentures was an illusory transaction. Thirdly, they treated the sum of Rs. 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 a 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 is decision of the High Court of Lahore in Pakistan. Here certain business concerns carrying on the business of road transport were amalgamated and formed into a private limited company which took over from them their vehicles and road permits in consideration of allotting to them fully paid up shares in the company. The company sold some of the vehicles purchased from the shareholders and claimed to have incurred a loss. In computing the original cost to the company on the vehicles for the purpose of making an allowance for depreciation and loss under section 10(2) (vi) and (vii) of the Income-tax Act, 1922, the income-tax authorities held that they were not bound to accept the nominal value of the shares transferred as the actual cost of the vehicles to the company inasmuch as the value of the vehicles had been unduly inflated. They therefore determined by a certain method the actual cost of the vehicles to the company. It was held that, in the circumstances of the case, the income-tax authorities were justified in law in going behind the contract of saled in determining the original cost to the company for the purpose of making an allowance under clauses (vi) and (vii) of section 10(2) of the Income-tax Act.
Coming back to the Madras High Court once again in G. Vijayaranga Mudaliar v. Commissioner of Income-tax the assessee, a transport operator, purchased ten buses plying on a particular route for Rs. 1,25,000. As the buses were of an old model, the Income-tax Officer was of opinion that some part of the amount represented the value of plying buses on the route in respect of which they had permits. He, accordingly, estimated the value of the route rights at Rs. 40,000 and the value of the vehicles at Rs. 85,000 and allowed depreciation on the sum of Rs. 85,000. When the assessee went in appeal before the Appellate Tribunal, it estimated the route value at Rs. 60,000 and directed modification of the assessment. On an application of the assessee, however, the Tribunal later rectified the figure and brought it down to Rs. 40,000. On a reference to the Madras High Court, it was held, inter alia, that there was material on record on which the department could fix the value of the route rights at Rs. 40,000 and allowed depreciation only on the sum of Rs. 85,000, as representing the value of the vehicles.
Lastly, we may refer to the decision of the House of Lords in Craddock v. Zero Finance Co. Ltd. The learned law lord came to the conclusion that the Crown had failed to establish that the value of the investments was less that the nominal value of 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 proposition. In the instant case, the allocation of the sum of Rs. 23,00,000 was furnished by the assessee, and a depreciation of Rs. 1,56,841 was claimed (vide page 57 of the paper-book). The cost of the machinery was stated to be Rs. 10,00,000. In paragraph 7 of its application for reference also, the assessee stated that it made in its books a sub-allocation of the said two sums of Rs. 13,00,000 and Rs. 10,00,000 on the recommendations of an expert, but his valuation notes had not been preserved. On the requisition of the Income-tax Officer, the applicant company caused a fresh valuation to be made by a qualified mining engineer and submitted the same to the Income-tax Officer (vide page 79 of the paper-book). The mining engineer, it appears, valued the land only at Rs. 9,20,000 and this figure has been accepted both by the appellate assistant Commissioner and the Appellate Tribunal (vide pages 66 and 74 of the paper-book). The authorities, however, did not agree to accept the assessees allocation of Rs. 10,00,000 to machinery. They took into consideration the balance-sheet of the assessees vendors as at December 31, 1944, the agreement for sale having been entered into on July 19, 1945. They also considered the written down values in the books of the assessee vendors. In the balance-sheet, plant and machinery were shown to be worth only Rs. 69,222, and the written down value from the income-tax records of the assessees vendors was only Rs. 19,056. The tax authorities called upon the assessee to produce evidence in support of the market value of the plant and machinery. The assessee, by its letter dated July 12, 1949, stated it absolute inability to produce any evidence in support of the market price of any of the items of the plant and machinery amounting to Rs. 10,00,000 in all (vide pages 58 and 59 of the paper-book). In this state of affairs, they wanted to go behind the conveyance and ascertain the cost price of the various assets of the assessee on the basis of estimates with reference to the prevailing market conditions. They came to the conclusion that the goodwill of the assessees vendors was purchased by the assessee, and, according to the Tribunal, the cost of this goodwill was Rs. 4,00,000 which should be deducted from the sum of Rs. 10,00,000 shown as the cost of plant and machinery.
The reason why the '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 Agabag 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 sold to Rai Saheb B. L. Gutgutia of Dhanbad for a sum of Rs. 85,000 in 1943. Subsequently, the partnership firm of Agabeg Bros. was converter 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 Rs. 10,00,000 appear to have been issued to the old partnership and at that time a goodwill account of about Rs. 9,46,714 was created in the books Agabeg Bros. Ltd. Even after Jorekur Colliery was sold in 1943, the goodwill account remained at the same figure in the books of the vendors. Therefore, it was evident that there was no goodwill for this colliery which was a sort of dead asset to the vendors and it was sold for a paltry sum of Rs. 85,000 in 1943. Therefore, the goodwill of about Rs. 10,00,000 created in the books of the vendor related to the Jogta colliery alone. It is not the case of the appellant-company taking the lease of purely new mine which required to be dug and which would not bear fruit for a couple of years; it is also not the case of a company purchasing plant and machinery and the other assets in an open market from a machinery dealer. In this case, the appellant-company purchased an existing mine which was in a flourishing condition and which yielded bumper profits of about Rs. 2,00,000 per annum even in pre-war years. In addition to the mine taken over as a running concern, the various assets were also taken over including the stock of coal amounting to 618 tons lying with the vendor. Thirdly, the benefit of the incomplete balance of all orders and contracts for the supply of coal existing at the date of the transfer the coal mine was taken over by the appellant-company as stated in the indenture of the transfer executed in November, 1945. Besides, at the time coal was under Government control and quotas were issued by Government. The quotas which were held by the vendors also passed on to the appellant company and this fact is not denied by Mr. Mukherjee (the assessees pleader). Had it been a new mine, the appellant-company would have considerable difficulty in securing the quotas and it is evident that a new concern would not obtain quotas to the same extent as an existing concern. This mine is existing since 1899. Also the agreement with the superior landlord shows that the last agreement was made in 1937 with the vendor which was to run for a period of 25 year and accordingly, this agreement would expire somewhere in 1962. The Appellant company also got the benefit of this agreement. Considering all these facts, the value of goodwill should be considered in the purchase consideration of Rs. 23,00,000.'
The Appellate Assistant Commissioner affirmed the decision of the Income-tax Officer that the goodwill should be assessed at Rs. 7,50,000. The Appellate Tribunal accepted the findings of the Income-tax Officer and the Appellate Assistant commissioner except that the cost of goodwill was reduced to Rs. 4,00,000.
It was contended on behalf of the assessee that three 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, 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 our and to represent himself to former customers as the successor to that business.'
Mr. Mitra, learned counsel for the assessee, has argued on the basis of the above observation of the Supreme Court that on the facts found by the Appellate Assistant Commissioner the applicant did not purchase the goodwill of the vendors.
The Supreme Court in a later decision in S. C. Cambatta & Co. Private Ltd. v. Commissioner of Excess Profits Tax again consider what 'goodwill' was. After referring to various authorities at page 505, it is observed as follows :
'It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it and the lack of competition and many other factors go individually or together to make up the goodwill may be lost. At the same time, locality is no everything. The power to attract custom depends on one or more of the other factors as well.'
According to Lord Lindley in Inland revenue Commissioner v. Muller and Companys Margarine Ltd., 'Goodwill regarded as property has no meaning in connection with trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers and agreed absence from competition or any of these things, and there may be others which do not occur to me.' The full bench of the High Court of Australia in Box v. Commissioner of Taxes observed that, 'Goodwill includes whatever adds value to a business, and different business derive their value from different consideration. The goodwill of some businesses is derived almost entirely from place where they are carried on. Some goodwills are purely personal, and some goodwills derived their value partly from the locality where business is carried on, partly from the reputation built up around the name of the individual or firm or company under which it was previously being carried on.'
It is manifest, therefore, that the term 'goodwill' must be understood in a much broader sense that what was suggested by learned counsel for the assessee.
On the materials available the tax authorities, which I have indicated above, I am of opinion that they were justified in going behind the conveyance and fixing the valuation in the way they have done. The answer to the question referred to us shall, therefore, be in the affirmative. The applicant will pay to the respondent the cost of this application. Certified for counsel.
SEN J. - I agree.
Question answered in the affirmative.