George William Son (Assam) Ltd. vs. Commissioner of Income-tax (278 ITR 102 SC)

The assessee company acquired the Indian undertakings of several sterling tea companies registered in the UK and operating in India, in accordance with a scheme of arrangement Approved by the High Courts of Calcutta and Gauhati, under which all properties and liabilities of Sterling companies were transferred to and vested in the assessee. The Reserve Bank of India, the designated authority, granted approval permitting the assessee to pay the aggregate sum of rupees 490 lakhs at which the undertakings including the assets were to be taken over, specifically directing that there should not be any depletion in the net assets as on the actual date of transfer from that given in the Balance-sheets of the Sterling companies. As against the consideration of Rs. 490 lakhs permitted by the Reserve Bank the value of the net assets was Rs. 6,33,89,055/- and therefore the amount of Rs. 1,43,89,055/- was shown in the appellant’s balance sheet as a capital reserve. The Department did not include the sum of Rs. 1,43,89,055/- in the computation of capital for the purpose of surtax. The Appellate Tribunal held that the reserve was not brought into existence by creating or increasing the value of any book asset and did not fall within Explanation 1 to rule 2 of Schedule II to the Companies (Profits) Surtax Act, 1964, and that the amount had to be included in computing the capital. On appeal by the Department the High Court held that the amount of Rs. 1,43,89,055/- was covered by Explanation 1 to rule 2 of Schedule II and could not be taken into account in computing the capital.

The Supreme Court reversing the decision of the High Court held that the appellant did not create or increase in value any book asset. The assets which were taken over were real and intangible assets. It took over all the existing assets and liabilities of the Sterling tea companies and their book value and incorporated them in its books of account which necessitated the creation of capital reserve as the consideration fell short of the net worth of the business taken over by
Rs. 1,43,89,055/-. That amount had to be shown in the accounts as other capital reserve in accordance with normal accounting principles. Such capital reserve had to be treated as forming part of the capital under rule 1 (iii) of Schedule II and did not fall within Explanation 1 to rule 2.

The Supreme Court observed as under:

"As rightly pointed out by learned senior counsel for the appellant the judgment of Standard Vacuum Oil Company (1966 59 ITR 685 S.C.) was cited before the High Court, the Division Bench failed to appreciate the applicability of the said judgment to the case on hand. Likewise, the High Court has completely failed to appreciate the true meaning and real insight in law of Explanation 1 to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Division Bench, in our view, has grossly erred in stating that the appellant had obviously received benefits in the computation of income-tax on account of assets taken over by the appellant from other tea companies and that, therefore, the reserve in question could not be treated as a component of the capital for the purposes of surtax assessment. Such a new case was neither advanced by the Revenue before the High Court, nor could such a case at all be considered by the High Court inasmuch as it did not at all arise out of the order by the Appellate Tribunal. The provisions of The Business (Profits) Tax Act, 1947 which were interpreted by this court in Standard Vacuum Oil Co. [1966] 59 ITR 685 are virtually identical to the provisions of the Companies (Profits) Surtax Act, 1964, and since the said judgment directly and squarely covered the instant case, in our opinion, the High Court has committed a patent error in completely disregarding the judgment of this Court in Standard Vacuum Oil Company (1966 59 ITR 685) and in reversing the well considered order of the Appellate Tribunal which has decided the matter in favour of the appellant and as a consequence of the impugned order of the High Court, the huge tax liability was created on the appellant without any warrant or justification whatsoever."

Commissioner of Income-tax vs. Insilco Ltd. [278 ITR 1 (SC)].

The Appellate Tribunal had held that since, in the order of assessment for the assessment year 1991-92, the only direction of the Assessing Officer was to "charge interest" and there was no specific direction to charge interest under section 234B of the Income-tax Act, 1961, in view of the decision of the Supreme Court in CIT vs. Ranchi Club Ltd. [2001] 247 ITR 209, interest under section 234B could not be charged in the notice of demand under section 156. The High Court rejected the appeal by the Department under section 260A on the ground that in view of the authoritative pronouncement in Ranchi Club, no question of law arose.

On appeal to the Supreme Court, their Lordships held that the matter involved a question of law whether the law laid down in Ranchi Club had been changed by virtue of the decision in Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC), and as such the matter required consideration. Matter remanded back to the High Court after admitting the appeal.