Written down value can be based on real cost, not inflated share allotment, when asset valuation appears artificial.

Income-tax authorities may look behind the form of a sale and share-allotment transaction when determining the written down value of assets for depreciation and balancing charge purposes. The actual cost to the assessee is the relevant basis, and while a bona fide transaction will ordinarily be accepted at its apparent consideration, an inflated or artificial valuation permits the authorities to ascertain the real value of the transferred vehicles. Because an excessive allotment of fully paid-up shares could not control the computation of taxable allowances, the inflated book value was disregarded and the true cost determined in favour of the Revenue.

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Issues: Whether the income-tax authorities were justified in going behind the apparent contract of sale and allotment of shares to determine the true written down value of the vehicles for allowance under clauses (vi) and (vii) of Section 10(2) of the Income-tax Act.

Analysis: The written down value for depreciation and balancing charge purposes is the actual cost to the assessee. Where assets are transferred in exchange for fully paid-up shares, the tax authorities are not bound in every case by the nominal value of the shares or by the form of the transaction. If the transaction is bona fide, the apparent consideration must ordinarily be accepted; but where the value of the property is deliberately or artificially inflated, the authorities may look behind the transfer and ascertain the real value of the assets. The prohibition against issuing shares at a discount supports this approach, because an inflated valuation used to justify an excessive allotment of shares cannot control the computation of taxable allowances.

Conclusion: The authorities were entitled to disregard the inflated book value and determine the true cost of the vehicles for purposes of Section 10(2)(vi) and Section 10(2)(vii); the answer to the reference was in the affirmative, in favour of the Revenue.

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