Going Behind the Contract: Revenue may revalue assets to determine written down value when consideration is inflated.

Income-tax authorities may go behind the contract where asset values given as consideration are deliberately inflated to obtain tax advantage; bona fide company valuations are respected but do not preclude scrutiny where shares are effectively issued at an undue premium or to circumvent the prohibition on issuing shares at a discount. Applying that principle, authorities found vehicles transferred to the company had artificial book values and recalculated the written down value by reference to true vehicle values, resulting in disallowance for the assessee and a decision in favour of Revenue.

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Issues: Whether, in the circumstances of the case, the Income-tax authorities were justified in law in going behind the contract of sale in determining the written down value (i.e., the original cost to the assessee) for the purposes of making an allowance under clauses (vi) and (vii) of Section 10(2) of the Income-tax Act.

Analysis: Relevant legal framework includes the concept of written down value for allowance calculations under Section 10(2)(vi) and Section 10(2)(vii) of the Income-tax Act and the company law principle that shares should not be issued at discount as reflected in Section 105 of the Companies Act. Authorities are bound by bona fide valuations where the company honestly estimates adequacy of consideration, but are not precluded from examining transactions where there is deliberate inflation of asset values or an attempt to circumvent the prohibition on issuing shares at a discount. The facts include a finding of artificial or unduly inflated book value of vehicles transferred to the company in exchange for fully paid-up shares; the Income-tax Officer, Appellate Assistant Commissioner and the Appellate Tribunal reached consistent conclusions that the vehicle values were inflated and that the transaction was used to obtain tax advantage.

Conclusion: The Income-tax authorities were justified in going behind the contract and determining the written down value by reference to the true value of the vehicles; question answered in the affirmative and decision is against the assessee (in favour of Revenue).

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