JUDGMENT

1. 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 sum of Rs. 89,731 were sold for Rs. 53,650 in the following year. For the assessment year 1945-46, the assessee 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 vehicles, which were in business used and which, according to the company, was Rs. 5,73,211. Out of this sum Rs. 1,66,968 represents 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 assessee 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 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. 5,73,211. 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 assessee) for the purposes of making an allowance under clauses (vi) and (vii) of Section 10(2) of the Income-tax Act ?"

2. Learned counsel for the assessee company quotes some authorities, 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 and In re Wragg Ltd. 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