Jogta Coal Co. Ltd. vs Commissioner Of Income-Tax, West Bengal

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 2 March, 1959

Coram: B.P. Sinha, J.L. Kapur, M. Hidayatullah

In this case the Supreme Court of India, constituted by Justices B.P. Sinha, J.L. Kapur and M. Hidayatullah, delivered a judgment authored by Justice Kapur. The judgment concerned five appeals filed under special leave that were directed against an order of the Income‑Tax Appellate Tribunal. The Tribunal had disposed of five separate appeals; two of those appeals related to income‑tax assessments for the years 1947‑48 and 1948‑49, while the remaining three appealed business‑profits‑tax assessments that covered the same accounting periods. The Income‑Tax Officer and the Appellate Assistant Commissioner had decided the matter in the income‑tax assessment appeal for the year of assessment 1947‑48. The question that was common to all of the appeals was the method of computing depreciation under section 10(2)(vi) of the Income‑Tax Act, hereinafter referred to as the Act.

The appellant before the Court was Jogta Coal Co. Ltd., a company that had been incorporated on 14 September 1945. The respondent was the Commissioner of Income‑Tax for West Bengal. The factual backdrop began with two brothers, E.C. Agabeg and A.A. Agabeg, who were lessees of a coal mine situated in the village of Jogta in the Jharia coal‑field area, land that originally belonged to the Raja of Jharia. The brothers installed plant and machinery on the leased land, erected buildings and inclines, and commenced mining operations. On 10 April 1935 the brothers formed a private limited company called Agabeg Brothers Ltd.

On 19 July 1945 Agabeg Brothers Ltd. entered into an agreement to transfer to S.K. Bajpai all of its right, title and interest in the leasehold property together with other perpetual leases known as mokarari Pottahs, and a decree that had been passed in its favour. The transfer also comprised all appurtenances, including houses, huts and other structures belonging to the vendor, all machinery, plant, stores, furniture 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.” Two schedules attached to the agreement listed the properties that were to be sold. An earnest‑money payment of Rs 1,00,000 was made, with the balance to be paid at the time of sale.

The purchase price stipulated in the agreement was Rs 23,00,000. The allocation of this amount was split into two parts: Rs 13,00,000 was deemed to be paid for the underground and surface rights, other appurtenances and the benefit of the assignment of the uncompleted orders and contracts; the remaining Rs 10,00,000 was attributed to the value of the machinery, stores, furniture, stocks and similar items. Another clause of the contract required the selling company to go into voluntary liquidation in order to give effect to the sale agreement. The agreement also recognized certain leasehold rights held by third parties, and under clause 12 of the agreement those third‑party rights were to be transferred to the appellant upon completion of the sale.

After the agreement for the sale of the colliery, the company known as Agabeg Brothers Ltd. entered voluntary liquidation on 15 October, and two liquidators were appointed to oversee the winding‑up. On 28 December 1945 the parties executed an indenture that recorded the sale of the assets in favour of the appellant, Jogta Coal Company. The parties to that indenture consisted of the appointed liquidators, the debenture trustees, a person identified as Baj‑pai, and the appellant itself. By virtue of the sale deed all of the properties that had been listed for transfer in the earlier agreement dated 19 July were conveyed to the appellant. The balance of the purchase price, amounting to Rs 22,00,000, which remained unpaid at the time of execution, was subsequently paid to the vendors in accordance with the terms set out in the agreement and this payment was acknowledged in the deed of sale.

The accounting periods relevant to the dispute were the two fiscal years ending on 31 December 1946 and 31 December 1947, and the corresponding income‑tax assessment years were 1947‑48 and 1948‑49. The matter that came before the Court concerned the quantum on which the appellant could claim a deduction allowance for depreciation under section 10(2)(vi) of the Indian Income‑Tax Act. The Income‑Tax Officer observed that the appellant had paid the total consideration stated in the sale deed, namely Rs 23,00,000. However, the Officer held that the allocation of that amount among the various assets as reflected in the deed was improper because a portion of the consideration should be treated as payment for goodwill. In his order the Officer explained that the colliery was a well‑established operation with an existing clientele that the assessee could secure without substantial effort, and therefore it was necessary to apportion part of the purchase price to goodwill.

The Officer estimated the goodwill to be worth Rs 7,50,000 and allocated the remaining Rs 15,50,000 to other assets as follows: land including shafts and inclines valued at Rs 80,000; buildings valued at Rs 10,00,000; and plant and machinery valued at Rs 2,00,000 and Rs 3,50,000 respectively. The appellant appealed this assessment to the Appellate Assistant Commissioner, who accepted the Officer’s valuation and dismissed the appeal. The appellant then approached the Appellate Tribunal. In a brief order the Tribunal affirmed that the total consideration paid was Rs 23,00,000, but the Tribunal assigned its own market‑based valuations to the acquired assets. The Tribunal’s estimate was: land and buildings at Rs 9,20,000; shafts and inclines at Rs 80,000; buildings at Rs 3,00,000; plant and machinery at Rs 6,00,000; and goodwill at Rs 4,00,000.

Subsequently, the appellant sought a reference to the High Court under section 66(1) of the Income‑Tax Act, asserting that a legal question arose. The Tribunal, however, held that no question of law was involved and dismissed the application. The appellant then filed an application under section 66(2) of the Act, presenting seven questions of law to the High Court. The High Court examined the application and concluded that the facts of the case did not fall within the scope of section 66(2) of the Income‑Tax Act.

The Court observed that the High Court had held the matter did not fall within the scope of section 66(2) of the Income‑Tax Act, and consequently the Tribunal could not be compelled to make a reference under that provision. Accordingly, the reference was dismissed and the rule was discharged. The Court further noted that the Tribunal had resolved every appeal raised by the appellant in a single order. Because five separate appeals have now been instituted before this Court by way of special leave, the central issue common to all of them is the determination of the amount on which depreciation under section 10(2)(vi) of the Act must be calculated.

Counsel for the appellant argued that the Tribunal, having accepted that the aggregate value of the land, buildings, shafts and inclines amounted to Rs 13 lakhs and that the appellant had actually paid Rs 23 lakhs, could not lawfully vary the amount paid by the appellant as the price of plant and machinery to the extent of including Rs 10 lakhs as the price of some other asset. While conceding that the Tribunal was entitled to find that the figure stated as having been paid might be fictitious and that, in fact, a sum less than Rs 23 lakhs could have been paid, the appellant maintained that the Tribunal did not possess jurisdiction to hold that, although the sum was actually paid, it did not represent the price of the assets purchased by the appellant but also covered an additional asset. The appellant’s counsel pointed out that neither the contract of sale nor the final sale deed made any reference to the sale of goodwill. The contract of sale listed Rs 10 lakhs as the value of machinery, stores, furniture, fittings and similar items. The sale deed was explicit that Rs 13 lakhs were deemed to be payable for underground and surface rights, other appurtenances and the assignment of the balance of uncompleted orders and contracts, while Rs 10 lakhs were deemed to represent the value of the machinery and related items. No mention of goodwill appeared in the deed itself. Goodwill was described in the record 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 out’ and to represent himself to former customers as the successor to that business.” The respondent’s counsel, however, submitted that a resolution passed by Agabeg Brothers Ltd. on 15 October 1945, in the course of its liquidation, referred to the “sale of Jogta Colliery for Rs 23 lakhs,” thereby implying that goodwill was among the assets transferred in the transaction.

In the sale deed under consideration there is no explicit reference to the transfer of goodwill. The term goodwill, however, was described in the accompanying documentation 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 out’ and to represent himself to former customers as the successor to that business.” Counsel for the respondent argued that, although the deed itself omitted any specific mention of goodwill, the resolution for liquidation passed by Agabeg Brothers Ltd. on 15 October 1945 did refer to the sale of Jogta Colliery and thereby implied that the goodwill was among the assets transferred. The resolution read: “That the sale of Jogta Colliery for Rs. 23 lakhs be and the same is hereby approved.” From this the respondent contended that the appellant obtained, in addition to the tangible assets, the intangible asset of goodwill. The discussion therefore raised two distinct questions. First, whether the sum of ten lakhs rupees paid by the appellant was solely the consideration for the asset expressly identified in the sale deed, or whether it also encompassed the value of the goodwill. Second, whether the Tribunal was empowered to disregard the actual price paid for the identified assets and to hold that the amount represented payment for some other asset as well.

The appellant’s counsel maintained that the issue was a matter of law, specifically whether the Tribunal possessed jurisdiction to examine the price actually paid and to conclude that the consideration did not pertain exclusively to the identified asset but also covered another asset. In other words, the appellant argued that the Tribunal could not conjecture about what the cost of the asset should have been for the assessee. The statutory provision at the heart of the dispute was section 10(2)(vi) of the Income‑Tax Act, which provides: “Such profits or gains shall be computed after making the following allowances, namely – (vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying inland waters to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed.” The words that required interpretation were “on the original cost thereof to the assessee.” The Privy Council, in Commissioner of Income‑Tax v. Buckingham & Carnatic Co. Ltd., held that the term “assessee” refers to the person who presently owns the property and is being assessed, not to the predecessor who originally owned the property. The Council further explained that the depreciation allowance must be based on the original cost to the current assessee, rather than on the written‑down value retained by the predecessor. The Court in the present case expressed no doubt about the plain language of the statutory provision nor about the correctness of the Privy Council’s interpretation, concluding that the cost to be taken into account for depreciation purposes is the original cost incurred by the purchaser‑assessee.

The Court observed that the cost relevant for depreciation is the cost incurred by the assessee and not the amount paid by the seller. Nevertheless, a question remained as to whether the Appellate Tribunal possessed the authority to declare that the amount the appellant had actually recorded as the price of a specific asset was not the true market price of that asset, and that the amount paid also incorporated the value of some other asset that had been acquired together with it. The appellant’s counsel referred to the decision in Craddock v. Zevo Finance Co. Ltd., in which it was held that, for the purpose of computing a company’s profits, the appropriate figure for the cost of an investment is not the prevailing market value of the goods but the actual amount paid by the company. The Revenue had taken that matter to the House of Lords, but the appeal was dismissed; the report does not disclose the reasons for that dismissal. The case is cited for reference. In the twelfth edition of Konstam’s Income Tax, paragraph 126, the proposition is expressed that when a finance company purchases securities, the initial amount to be entered for profit calculation is the purchase cost rather than any estimated market value at a later date.

The Commissioner’s counsel relied upon the judgment of the Lahore High Court in Pindi Kashmir Transport Co. Ltd. v. Commissioner of Income‑Tax. In that case several road‑transport enterprises were amalgamated to form a private limited company, which in exchange for fully paid‑up shares received the predecessor’s vehicles and route permits. The newly formed company later sold some of those vehicles and claimed a loss on the transaction. While computing the original cost of the vehicles for the purpose of allowing depreciation, the tax authorities held that they were not obliged to accept the nominal value of the shares allotted as the true cost of the vehicles, because the declared share value had been unduly inflated. The Court noted that it was not required to pass a judgment on whether that decision was correct. The Lahore High Court judgment sought to distinguish itself from English decisions such as Re Wragg Ltd. (1897 1 Ch 796) and (1944 1 All ER 566), but those English authorities held that when a purchaser honestly regards the consideration paid as proper, the consideration cannot be subject to critical scrutiny and the transfer is therefore unimpeachable. The Supreme Court concluded that it was unnecessary to resolve whether the law applicable should follow the English precedents or the Lahore High Court rulings, because two specific questions of law arose from the Appellate Tribunal’s order and required reference to a higher court.

In this matter, the two questions that had been referred to the High Court were originally raised by the appellant under section 66(1) of the Income‑Tax Act and were later presented again before the High Court under section 66(2) of the same Act. The first question, as quoted in the record, asked: “(1) Whether on the interpretation of the sale deed it can be said that any good‑will was purchased by the assessee?” The second question, also quoted, inquired: “(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?” The Court observed that the first question could not be entertained because it had not been included in the statement of case filed on behalf of the appellant. Consequently, the only issue remaining for determination was the second question, identified as question number 7, and the Court noted that this issue, either in its present form or with any necessary alterations, ought to have been referred to the High Court. Accordingly, the Court directed that the question, after incorporating any required modification, be referred and that the case be stated in accordance with section 66(1) of the Income‑Tax Act. Regarding costs, the Court held that if the appellant succeeded on the merits, it would be entitled to recover the costs it had incurred in this Court; however, if the appeal failed in the High Court, the appellant would be required to pay the costs incurred by the Commissioner in this Court. Finally, the Court remitted the case with the instruction that the Tribunal should proceed in accordance with law and comply with the directions set out above.