P L D 1954 Lahore 322 (PLP)

KAIKAUS. J.‑This is a reference under section 66 (1) of the Income‑Tax Act and arises in the circumstances that follow. In the year 1944, five business concerns which were carrying on the business of road transport were amalgamated and formed into. The Pindi Kashmir Transport Company Limited, (hereinafter called the assessee company) on account of nationalization scheme. At the time of the incorporation of this company the business concerns that were amalgamated handed over to the company their vehicles as well as their route permits. In lieu of these vehicles they were allotted fully‑paid‑up shares. Some of these vehicles, which had been purchased from the shareholders for a sum of Rs. 89,731 were sold for Rs. 53,650 in' the following year. For the assessment year 1945‑46, the assesses company claimed the benefit of this loss of Rs. 36,081 under section 10 (2) (vii) of the Income‑Tax Act. At the same time, it claimed depreciation on the cost of the vehicles, which were in business use and which, according to the company, was Rs. 5,73,

211. Out of this sum Rs. 1,66,968 rep resents the cost of vehicles purchased from outsiders while Rs. 4,06,243 represents the cost of vehicles purchased from the shareholders the payment having been made by allotting them fully‑paid‑up shares. This depreciation was claimed under section 10 (2) (vi) of the Income‑Tax Act. For the purposes of section 10 (2) (vi) or 10 (2) (vii) it is the written down value of the vehicles that is to be taken into consideration. On behalf of the assesses company it was pleaded that the written down value of the vehicles in case of the vehicles purchased from shareholders was the nominal value of the shares transferred to them in lieu of the vehicles. Written down value, it may be explained, means, in the present case, the actual cost to the assessee. The Income‑Tax authorities as well as the Appellate Tribunal refused to accept the above two contentions of the assessee company. They were of opinion that the value of the vehicles had been unduly inflated. They held that they were not bound to accept the nominal value of the shares transferred as the actual cost of the vehicles to the assessee company. They proceeded on the basis that it was the true cost of the vehicles that was to be taken into consideration. They, therefore, refused to give the assessee company the benefit of the loss of Rs. 36,081 which was claimed on account of the sale of vehicles and they, at the same time, refused to calculate depreciation on the basis that the actual cost of the vehicles to the assessee company was Rs. 6,73,

211. The Income- Tax Officer determined, by some method which we need not here critically examine, the true value of the vehicles and proceeded on that basis. The assessee company applied to the Income‑Tax Appellate Tribunal for referring the question of law arising in their case under section 66 (1) and the following is the question referred by the Appellate Tribunal:‑ "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 assessees) for the purposes of making an allowance under clauses (vi) and (vii) of section 10 (2) of the Income‑Tax Act ?" Learned counsel for the assessee company quotes some authori ties, in the first place, for the proposition that the company is a separate legal entity and not merely an alias for the shareholders. Reference may be made in this connection to Aron Salomon v A. Salomon & Company Limited (1897 A C 22.) and In re Wragg Ltd. (1897 Ch. D Vol. I p. 796.) The proposition put forward by the learned counsel for the assessee company is well‑settled and is not contested by the learned counsel appearing on behalf of the Commissioner of Income‑Tax. Whether it will have any effect on the decision of this case is a different matter, Learned counsel for the assessee company proceeds to contend that the Income‑Tax authorities are bound by the nominal value of the shares that were transferred in lieu of moveable property and cannot go into the question whether the property transferred was actually of the value of the shares transferred, He relies upon section 105 of the Companies Act according to which shares cannot, except in certain exceptional cases (with which we are not concerned) be issued' at discount. Learned counsel relies in this connection on In re Wragg Ltd. (supra) Crad. dock v. Zevo Finance Co. Ltd. ((1944) 1 All. E R 566,) and Osborne v. Steel Barrel Com pany Limited ((1942) 1 All. E R 634.). On a perusal of those authorities, however, it would be clear that they do not support the proposition in the unqualified form in which it is stated by learned counsel In the first cited case, it was held that so long as the company honestly regards the consideration for the transfer or allotment of shares as adequate its estimate cannot be critically examined. The second case Craddock v. Zevo Finance Co. Ltd. (supra) also contains words to a similar effect. In Osborne v Steel Barrel Co. Ltd. (supra) it is stated that the issue of shares at discount is illegal but it is pointed out that in law such issue must be based on an honest estimate of the value of the assets transferred by the person concerned. It cannot reasonably be argued that even if the persons in charge of the company do not act bona fide the Income‑Tax Authorities are bound by the transaction of transfer of shares. If this proposition were accepted the Income‑Tax Act could be very easily defeated. Any persons may form themselves into a company and may value assets belonging to them at a very exaggerated figure. They may then in the next year sell those assets and ask the Income‑Tax Authorities to give them the benefit of the loss that would apparently occur. If assets in fact of the value of Rs. 5,C00 are valued at Rs. 5,00,000 the company may avoid payment of any Income‑Tax although it earns a profit of about Rs. 5,00,000 because of the nominal loss that would be so occasioned. It seems to be well‑settled on authority, and it is reason] able on principle, that by a bona fide transaction of an assessee the Income‑Tax Department is bound. It is equally well settled that they are not bound if the value of the property for which the, shares were transferred is deliberately inflated. The company cannot issue shares at discount which means that whenever they are issuing shares it is their duty to see that what they are receiv ing in lieu of shares is really of the value of the shares. If on an honest estimate they reach the conclusion that what they are paying for the property is really only its worth no objection can be taken to the transaction. If, however, they deliberately transfer shares of larger value, that amounts to an issue of shares at discount. We may say that we should presume things to have been legally done but there is no bar to the Income‑Tax Depart ment showing that in fact the shares of a higher nominal value were deliberately transferred. If there be a positive finding to that effect, the Income‑Tax authorities can go behind the apparent transaction In that case they can only determine the written down value by coming to a conclusion as to the true value of the property transferred. In the present case, unluckily for the assessee‑company, there is a finding that the value of the vehicles has been inflated. In the statement of the case the words used are that there has been an "artificial inflation in the book value of the assets". Although these exact words are not used in the appellate order of the Tribunal by which the case was disposed of, the words 'unduly inflated' do appear therein. We assume these words to mean that there was a deliberate inflation. The Tribunal had agreed with the Appellate Assistant Commissioner and the Income‑Tax Officer. The Income‑Tax Officer had recorded in his order that there had been an attempt to circumvent the law which prohibits issue of shares at discount by transfer of vehicles in lieu of fully paid‑up shares of a higher value. The Appellate Assistant Commissioner seems to have agreed with this finding and so did the Appellate Tribunal. It was open to the Tribunal to have come to such a finding and in the face of this conclusion the order of the Tribunal is justified. We, therefore, answer the question referred to us in the affir mative. A. H. Reference answered.