TaxTMI 
TaxTMI 
1940 (3) TMI 8
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....Limited, the shareholder of which are mostly certain employees of the firm. Mr. A. Harvey and Mr. J.C. Harvey are brothers. The profits of the firm are divisible between the partners in the following proportions: Mr. A Harvey 63/128; Mr. J.C. Harvey 63/128 and the Tuticorin Company Limited 3/128. The capital of the Comorin lnvestment and Trading Company Limited is divided into 10,000 shares, of which Mr. A. Harvey and Mr. J.C. Harvey hold between them 9,999 shares. In April 1933 it was arranged that on incorporation the company should purchase for Rs. 15,00,000 the assets of a cotton ginning business owned by Messrs. A. and J.C. Harvey as individuals and not as members of the firm. The assets consisted of lands buildings, plant and machinery. Of the purchase consideration Rs. 4,71,383 was allocated to the lands and buildings, and Rs. 10,28,617 to the plant and machinery. For several years Messrs. A. and J.C. Harvey had ginned cotton for the Madura Mills. The rates charged for the years 1930, 1931 and 1932 averaged Rs. 12-8-0 per candy. Before the incorporation of the company negotiations took place between Messrs. A. and J.C. Harvey and the Madura Mills for the conclusion of an ....
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....of $ 5 each, of which ail the class A abates and 1,990 of class B shares bare been issued. Mrs. J.C. Harvey is the holder of the 1,990 class B shares. This company has authority to issue debentures to the amount of $ 500,000, Of these debentures $ 199,000 have been issued and $ 6,000 of them have been redeemed. The outstanding debentures are all held by Mrs. J.C. Harvey. Of the debentures issued by the Finchley Investments Limned the amount of $ 169,000 was issued on the 17th October 1933, and of those issued by the Kochadai Investments Limited a similar amount was issued on the 12th October 1933. On the passing of the resolution which I have just quoted, two cheques for Rs. 5,00,000 each were drawn by the firm in favour of the company, but it was not intended that they should be presented for payment. In the course of explanations given on behalf of the company in answer to questions pub by the Income-tax authorities it was stated that the two cheques were issued by the firm on behalf of the Canadian companies in pursuance of an oral arrangement between Messrs, A and J.C. Harvey on the one side and the agents of the Canadian companies on the other with a view to avoiding costly....
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....500 0 0 93,777 11 10 68,750 0 0 " Land " 5,000 0 0 (a) Total... 3,48,179 4 0 193,674 9 8 384,283 0 0 MACHINERY Virudupatti 1897 40,000 0 0 ... 61,343 0 0 Sattur Press. 1914 1,01,411 13 2 15,019 10 11 2,06,250 0 0 do. Gins. 1905 to 1915 1,05,683 14 2 6,572 1 8 2,06,250 0 0 Tuticorin Press & Gins. do. 1,13,904 10 6 5,723 6 2 80,775 0 0 Dindigul Press 1928 & 1929 84,944 13 10 67,955 14 2 2,06,250 0 0 do. Gins. do. 60,892 10 11 46,101 45 11 2,06,250 0 0 (b) Total... 5,06,837 14 7 141,373 0 10 9,67,117 0 0 Total of (a) and (b) 8,55,017 2 7 335,047 10 6 13,15,400 0 0 Sprinkler and Hydrant Installations. 66,566 5 0 58,147 12 9 61,500 0 0 (c) Total... 9,21,566 7 7 393,195 7 3 13,76,900 0 0 Add value of other buildings and lands as under:- Land. 71,373 6 1 61,382 7 4 71,400 0 0 Kodaikanal Bungalow 3,703 5 10 ....
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....profits of the year ended 31st March 1934 and that out of the total book profits amounting to Rs. 85,225 during the two years ended 31st March 1935 only Rs. 25,000 had been distributed by July 1935. The explanation given on behalf of the company was that the year 1933-34 was the first year of its working and that having regard to the world depression the directors had decided on the ground of prudence net to pay a dividend in respect of that year. Not being satisfied with thin explanation and being of the opinion that the real object of not distributing profits was to enable Messrs. A and J.C. Harvey to avoid a large amount of super tax, the Income-tax Officer asked the Assistant Commissioner to give his approval under Section 23A(2) of the Indian Income-tax Act, 1922 to an order being passed that the sum payable as income-tax by the company should not be determined and that the proportionable share of each member in the profits and gains should be included in the total income of the member for the purpose of assessment to tax.After giving the company an opportunity of being heard the Assistant Commissioner passed the order asked for by the Income- tax Officer. The Income-tax Offic....
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....ify their finding that the original cost of those assets to the petitioner company was not Rs. 15,00,000 and (b) if there was such material was there any material for their finding that the cost of the assets was Rs. 5,00,000? (3) Whether there was any material before the Income-tax authorities to justify their conclusion that the debenture loan of Rs. 10,00,000 was illusory and colourable and that the interest paid thereon is not therefore allowable as a deduction? (4) Whether the transaction of exchange of the Madura Mills shares with the shares of the petitioner company is an isolated transaction and of a capital nature? (5) Whether on the facts of the case the difference if any between the values of exchanged shares could be said to be profit in the hands of the petitioner assessable to tax? (6) Whether the Income-tax authorities were correct in adopting the market value in respect of the 20,000 Madura Mills shares allotted to the petitioners? (7) Whether there was any material before the Income-tax authorities to justify their finding that the difference in value between the 20,000 shares of the Madura Mills Ltd., received by the pe....
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....forced to go into liquidation. The question was whether the vendor as the holder of the debentures was entitled to preference over the other creditors of the company. Overruling the Court of Appeal, the House of Lords held that it was not contrary to the true intent and meaning of the Companies Act, 1862 for a trader to sell his business to a limited liability company consisting of himself and the members of his family, the business then being solvent, all the terms of sale being known to and approved by the shareholders, and all the requirements of the Act being complied with. There had been no fraud upon the creditors or shareholders and the liquidator was not entitled to rescission of the contract of purchase. In the present case the Court is not considering a situation analogous to the situation in Aron Salomon v. Salomon and Company Limited [1897] A.C. 22 and it is not considering the provisions of the Indian Companies Act, but the provisions of the Indian Income-tax Act. To accept the argument of the learned Advocate-General would mean that where an assessee had placed a fictitious value on his assets he would be entitled to the statutory allowance for depreciation on the ....
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....eat it as being a transaction of a capital nature the company must be allowed to treat it in the same way. I am un- able to accept either of these propositions. The main part of the consideration which the Madura Mills received for its 20,000 shares was the benefit to be derived from the ginning contract. For ten years the company has to mill (sic) cotton for the Madura Mills at a price far below the market price. I consider that the Income-tax authorities were justified in regarding the transaction of a capital nature only to the extent of Rs. 1,00,000 represented by the shares of the company allotted to the Madura Mills. The company in return for an immediate gain of Rs. 6,00,000 agreed to reduce its probable annual gains over a period of ten years. In other words, instead of getting a probable income of Rs. 6,00,000 spread over ten years it obtained a lump sum payment in one year. Nor do I regard the fact that this gain was not in money but in money's worth, namely shares, makes any difference. In my opinion the Income-tax authorities were also justified in taking the value of the 20,000 shares which the company received from the Madura Mills to be the market value at the....
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.... profits of the year 1921. In the case now before us there was no arrangement by which the payment was to be spread over a period of years. The contract was one under which the company got an immediate gain in consideration of its reducing its charges. It must be regarded as a contract entered into in the ordinary course of its ginning business and nothing else. Van den Berghs, Limited v. Clark [1935) A.C. 431; 3 I.T.R. (Eng. Cas.) 17 was a decision of the House of Lords. The facts are even further away from the facts in the present case but an observation of Lord Macmillan has application here, not in favour of, but against the argument of the learned Advocate General. An English Company carried on a large business in the manufacture of margarine and other substitute for butter. In 1908 the company entered into an agreement with a Dutch company of rival manufacture under which the two companies undertook to share profits and losses in the proportion which, on an average of five years, the profits of the rival tradings in margarine bore to each other. In 1913 there was an extension of the agreement which was to be prolonged till the end of 1940. The two companies carried on thei....
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....e and Company [1932] 59 I.A. 206 was quoted because the Privy Council there said that the word "income" connotes a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. It cannot be suggested that the allocation of the 20,000 shares of the Madura Mills was in the nature of a windfall. The contract fell within the scope of the memorandum of association of the company and it seems to me that the resulting benefit to the company must be classed as income. A decision which is far more in point is that of Rowlatt, J., in Commissioners of Inland Revenue v. The Northfleet Coal and Ballast Company Ltd [1927] 12 Tax Cas. 1102. A company owned a chalk quarry and contracted to supply a purchaser with a specified quantity of chalk yearly for ten years. The contract also included in its terms that the quarry company should build a wharf at which the purchaser's ships could load the chalk. As the result of the war of 1914 the....