1963 (9) TMI 58 - HC - Income Tax

Factory Purchase Surplus: Capital, Not Revenue Profit. Tax Exemption Granted. Commissioner to Cover Legal Costs.

COMMISSIONER OF INCOME-TAX, GUJARAT Versus SPUNPIPE AND CONSTRUCTION CO. LTD.

The court held that the surplus resulting from the purchase of the factory was capital profit and not revenue profit, thus not chargeable to tax. The ... - Issues Involved:1. Allocation of cost for different assets.2. Chargeability of surplus as revenue profit.3. Valuation of trading assets and its impact on business income.Detailed Analysis:1. Allocation of Cost for Different Assets:The primary issue was whether the Income-tax Officer was justified in making a fair and reasonable allocation of the cost of different assets for the purpose of ascertaining capital and revenue profit from the purchase transaction. The assessee, a limited company, purchased a factory as a going concern for Rs. 2,00,000, which was divided into two agreements: one for fixed assets and the other for sundry debts and liabilities. The Income-tax Officer treated the two agreements as a single transaction and allocated the total purchase price proportionately between fixed and trading assets based on their book values. This allocation was challenged by the assessee, who argued that the entire surplus resulting from the purchase should be regarded as capital profit, not revenue profit.2. Chargeability of Surplus as Revenue Profit:The second issue was whether the surplus resulting from the purchase of the factory could be considered revenue profit and thus chargeable to tax. The Tribunal accepted the assessee's contention that the surplus was capital profit and should be carried to the capital reserve account, not treated as revenue profit. The Tribunal held that no part of the surplus could be regarded as revenue profit, and therefore, the revenue authorities had no justification for making an artificial allocation of the price between fixed and trading assets.3. Valuation of Trading Assets and Its Impact on Business Income:The third issue was whether the business income shown by the assessee from the Ahmedabad factory for the year 1955-56 should be increased by the excess of the book value of stock-in-trade and work-in-progress over the cost actually paid by the assessee for them. The Income-tax Officer and the Appellate Assistant Commissioner both disallowed portions of the value debited to the trading account, arguing that the trading assets forming part of the opening stock had been overvalued. The Tribunal, however, did not consider this aspect and focused instead on whether the surplus was revenue profit.Judgment Summary:The court concluded that the revenue was entitled to examine whether the opening stock was correctly valued and could apportion the price paid for the factory between capital assets and trading assets. However, the Tribunal had not considered this issue, and the question referred to the court was limited to whether the surplus was assessable as revenue profit. The court reframed the question to clarify that the difference between the book value of the assets and the price paid could not be regarded as revenue profit. The court's answer to the reframed question was in the negative, meaning that the difference was not assessable as revenue profit. The Commissioner was ordered to pay the costs of the reference to the assessee.