COMMISSIONER OF INCOME TAX Vs. HARVEYS LIMITED

JUDGEMENT

(1.) THE assessee company is a private company having been incorporated in British India in May 1933. THE capital is Rs. 5,00,000 divided into 5,000 shares of Rs. 100 each and all the shares have been issued. THE shareholders and their holdings are as follows :-

(2.) 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 arrangement under which the Madura Mills should allot 20,000 shares to the company and as consideration the company should allot toe the Madura Mills 1,000 shares and enter into a contract under which the company should agree to gin cotton for the Madura Mills at a flat rate of Rs. 8 per candy for a period of ten years from 1st April 1933. An agreement was arrived at on this basis after the incorporation of the company and 1,000 of its shares were allotted to the Madura Mills on the 24th July 1933. The formal contract with the Madura Mills was executed on the 26th August 1933 and the allotment to the company of the 20,000 shares of the Madura Mills duly followed.

(3.) IT is not necessary to examine these figures in detail to show that Rs. 15,00,000 was out of all proportion to the real value of the assets. IT will be sufficient if attention is drawn to the machinery statement. The press at Sattur was purchased in 1914 for Rs. 1,01,411-13-2 and 19 years later was sold for Rs. 2,07,250. The gains at Sattur were purchased between 1905 and 1915 for Rs. 1,05,683-14-2 and were sold for Rs. 2,06,250. The press at Dindigul was acquired during the years 1928 and 1929 for Rs. 84,944-13-10 and was also sold for Rs. 2,06,250. The gains at the same place were purchased during these years for Rs. 60,892-10-11 and they were sold for Rs. 2,06,250. The total assets stood in the books firm at Rs. 5,00,000 and notwithstanding that there must have been considerable depreciation they were passed on to the company at the figure of Rs. 15,00,000. IT has not been suggested by the company that the value of the assets had increased owing to special circumstances. On the contrary, it had to be admitted to the Income-tax authorities that the value of ginning factories had been seriously affected by the depressions prevailing in the textile trade. Indication of the extent of the depression may be gathered from the fact that a factory built by another company at Sattur at a cost of over Rs. 2,00,000 was acquired by the company in 1934 for Rs. 40,000.