C.I.T. vs. MAHENDRA AND CO.

ITR/60/1988HC RajasthanRJHC02005060198805 March 2009Author: GANDHI R C,MOHAMMAD RAFIQ16 pages
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What were the facts?

The Revenue is the Commissioner of Income-tax, Jaipur, and the Assessee is Mahindra & Co. Ltd., Jaipur. The assessment year in question is 1973-74. The Income Tax Officer (ITO) reopened the assessment under Section 148 of the Income-tax Act, 1961, issuing a notice on January 2, 1978. The Assessee had claimed a loss of Rs. 48,510/- on the sale of shares of M/s. Baranagore Jute Factory and M/s. Equitable Coal Co. These shares were acquired through the amalgamation of two companies with the Assessee. The ITO, however, determined a profit of Rs. 7,974/- on the sale of shares of M/s. Baranagore Jute Factory and a loss of Rs. 876/- on the sale of shares of M/s. Equitable Coal Co., resulting in a net allowed loss of Rs. 876/-. The Assessee's appeal to the CIT(Appeals) was allowed, and the Revenue's subsequent appeal to the ITAT was dismissed. The Revenue then sought a reference to the High Court.

What did the High Court hold?

The High Court held that the view taken by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal was erroneous in law. The Court found that the value of the shares of M/s. Baranagore Jute Factory before amalgamation was Rs. 54,550/-, and the entire assets were taken over for Rs. 1,39,330/-. The Assessee paid Rs. 33,333/- for the shares. The proportionate value of these 300 shares worked out to Rs. 13,076/-. When sold for Rs. 21,000/-, there was a profit of Rs. 7,974/-. Similarly, the book value of 500 shares of M/s. Equitable Coal Co. was Rs. 15,810/-. With a total net asset value of Rs. 8,23,546/- and a purchase consideration of Rs. 5,00,000/-, the proportionate value of these shares came to Rs. 9,600/-. When sold for Rs. 750/-, the loss was Rs. 8,850/-. The ITO correctly determined a net loss of Rs. 876/-. The Court reasoned that the principles laid down in CIT v. B.M. Kharwar and CIT v. Artex Manufacturing Co. were applicable, allowing the taxing authority to determine the true legal character of the transaction and attribute value to specific items. The Assessee's claim of a higher loss was thus disallowed. The question of law was answered in favour of the Revenue and against the Assessee.

What were the issues?

1. Whether the Tribunal was right in coming to the conclusion that the value of the assets taken over on amalgamation should be taken at book value as existing in the hands of the amalgamated company for working out the cost of shares for determining gains or loss thereon? (Question of law) Assessee's Contentions: - The Assessee argued that the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal were justified in allowing the loss. - The price of assets cannot be modified, and a modified cost cannot be adopted. - The market forces determine the price of shares, and the entry in the books of the amalgamated company does not necessarily represent its correct value. - Relied on CIT v. Mugneeram Bangur and Co., Premier Automobiles Ltd. v. Income-Tax Officer, and East India Electric Supply and Traction Co.Ltd. v. Commissioner of Income-Tax. Revenue's Contentions: - The Assessee cannot deny the value of assets calculated by it, as this calculation forms the basis for the purchase consideration. - The Assessee cannot adopt a lower value for purchase consideration and a higher value for showing loss. - The Supreme Court judgment in CIT v. Mugneeram Bangur and Co. is not applicable as it dealt with the difference between purchase consideration and asset value, whereas the present case concerns the subsequent sale of assets. - Relied on CIT, Gujarat v. Artex Manufacturing Co. and CIT, Gujarat II v. M/s. B.M. Kharwar, arguing that taxing authorities can determine the true legal character of a transaction but cannot displace its legal effect. - Argued that if a particular price is attributable to an item, the excess amount is chargeable to tax under Section 10(2)(vii) of the 1922 Act (Section 41(2) of the 1961 Act).

Which sections of the Income-tax Act were involved?

Section 256(1),Section 148,Section 147(a),Section 143(3),Section 10(2)(vii),Section 41(2)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. J U D G M E N T D.B. INCOME TAX REFERENCE NO.60/1988. Commissioner of Income-tax, Jaipur Vs. Mahindra & Co.Ltd., Jaipur. Date of Judgment:- March 5, 2009. P R E S E N T HON'BLE THE ACTING CHIEF SHRI R.C. GANDHI HON'BLE SHRI JUSTICE MOHAMMAD RAFIQ Shri J.K. Singhi and Shri Anuroop Singhi for the Revenue. Shri A.Kasliwal and Shri V.Kasliwal for the respondent-Assessee. ***** Reportable BY THE COURT (Per: Mohammad Rafiq J.): This Reference has been made by the Income Tax Appellate Tribunal at the instance of the Revenue under Section 256(1) of the Income Tax Act, 1961 pertaining to the assessment year 1973-74 seeking opinion of this Court on the following question of law:- “Whether the Tribunal was right in coming to the conclusion that the value of the assets taken over on amalgamation should be taken at book value as was existing in the hands of the amalgamated company for working out the cost of the shares for purposes of determining he gains or loss thereon?”

2) Reference has been made in relation to assessment of the year 1973-74 which was sought to be reopened by t

The order continues below.

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