COMMISSIONER OF INCOME TAX, MADRAS Vs. MESSRSHARVEYS LTD

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 :- (i) The firm of A & F Harvey, 3,998 shares; (ii) The Madura Mills Company Limited, 1,000 shares and the Comorin Investment and Trading Company Limited, 2 shares. For the sake of brevity I will refer to the assessee company as the company, to the firm of A & F Harvey as the firm and to the Madura Mills Company Limited as the Madura Mills. The firm consists of three partners, namely, Mr. A. Harvey; Mr. J. C. Harvey and the Tuticorin Company Limited, the shareholders 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 2/128. The capital of the Comorin Investment 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.

(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 1 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 24 July 1933. The formal contract with the Madura Mills was executed on the 26 August 1933 and the allotment to the company of the 20,000 shares of the Madura Mills duly followed.

(3.) The company paid no cash for the assets which it had acquired from Messrs. A. and J. C. Harvey. Of the Rs. 15,00,000 stated to be consideration Rs. 5,00,000 was satisfied by the issue of shares and the balance of Rs. 10,00,000 by the issue of debentures. On the 2 June, 1933 the company passed the following resolution : Resolved unanimously that the sum of Rs. 10,00,000 be raised by the issue of 2 debentures for Rs. 5,00,000 each bearing interest at 7 per cent. per annum charged upon its undertaking and all its property whatsoever and wheresoever both present and future including its uncalled capital if any an goodwill in the form now submitted to the Meeting and that in consideration of the Finchley Investments Limited, and the Kochadai Investments Limited, having each paid to the company the sum of Rs. 5,00,000 that the above mentioned two debentures be sealed and issued to the above companies.