1985 (3) TMI 48 - HC - Income Tax

Lump-sum compensation for compulsory acquisition of business cannot be apportioned; treating it as capital asset under s.45 may be impermissible

HC held that lump-sum compensation for compulsory acquisition of a business undertaking cannot reasonably be apportioned item-wise under the BCATU Act, so ... Nature of the 'undertaking' - cost of acquisition - cost of improvement of the undertaking - Capital Gains - accrued or arose to the assessee - payment of compensation for the compulsory acquisition of the business undertaking by the Government of India - transfer of capital asset as such so as to attract s. 45 - HELD THAT:- In the very nature of these kinds of properties comprising the business undertaking taken over by the Government of India, it is neither possible nor desirable to apportion the lump sum compensation of Rs. 3.6 crores on item-wise basis. The BCATU Act does not give any indication to that effect. It may be, as the Tribunal has observed, that Parliament did not fix the compensation in a completely arbitrary manner. But it would be hazardous to guess that out of the total compensation awarded, so much would be attributable to a particular asset of the undertaking. The cost of acquisition of the capital asset mentioned in the above section implies date of acquisition and the date of acquisition of the asset is, therefore, most relevant for determining the capital gain. Unless, one is able to determine the date of acquisition of the capital asset, the computation of the income derived by the transfer of such capital asset would be impossible. If the cost of acquisition of the business undertaking acquired by the Government of India under the BCATU Act cannot be ascertained, then the undertaking cannot be an ' asset ' within the meaning of s. 45. But, we express no opinion on this aspect of the matter since there is no finding by the Tribunal. This part of the question has to be examined by the Tribunal or at its instance by any other authority having regard to all the facts and circumstances of the case, in the light of the decisions to which we have called attention. We may, however, point out that if this aspect of the matter is found against the assessee then, the assessee may be afforded an opportunity to exercise the option contemplated under s. 55(2) of the I.T. Act, 1961. Issues Involved:1. Nature of the 'undertaking' acquired by the Government of India.2. Apportionment of lump sum compensation among various assets.3. Determination of capital gains and applicability of s. 45 of the I.T. Act, 1961.4. Validity of conditional option for substitution of market value u/s 55(2).5. Method of valuation and computation of cost of acquisition and improvement.Summary:1. Nature of the 'Undertaking' Acquired by the Government of India:The Tribunal was justified in holding that the undertaking of the assessee company was a capital asset on transfer of which capital gains would arise. The undertaking taken over by the Government of India under the BCATU Act was considered a 'capital asset' within the meaning of s. 2(14) of the I.T. Act, 1961, and the gains arising from the transfer of such a capital asset had to be computed after determining the cost of acquisition.2. Apportionment of Lump Sum Compensation Among Various Assets:The Tribunal's decision to apportion the compensation among various assets was challenged. The court noted that the compensation awarded to the assessee was for the entire business undertaking and it was not feasible to apportion it among individual assets. The court referred to the Supreme Court's decision in CIT v. Mugneeram Bangur & Co. (Land Department) [1965] 57 ITR 299, which held that in the case of a sale of a whole concern, the agreed price cannot be apportioned on capital assets in specie.3. Determination of Capital Gains and Applicability of s. 45 of the I.T. Act, 1961:The court examined whether the compulsory acquisition of the undertaking resulted in a transfer of a capital asset so as to attract s. 45 of the I.T. Act, 1961. It was argued that the cost of acquisition and the cost of improvement of the undertaking could not be ascertained, making it impossible to compute the capital gain. The court referred to the Supreme Court's decision in CIT v. Srinivasa Setty [1981] 128 ITR 294, which held that if the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be described as an 'asset' within the meaning of s. 45.4. Validity of Conditional Option for Substitution of Market Value u/s 55(2):The Tribunal directed the ITO to give the assessee an opportunity to exercise a clear option under s. 55(2) of the I.T. Act, 1961, and not a conditional option. The court agreed with this direction, stating that the option should be exercised unconditionally.5. Method of Valuation and Computation of Cost of Acquisition and Improvement:The Tribunal's method for apportioning the compensation amount among various assets and its directions regarding the computation of the cost of acquisition and improvement were questioned. The court held that the answers to these questions were premature and should be addressed as and when the option is exercised by the assessee. The ITO was directed to adopt any reasonable method for determining the market value of the assets as on January 1, 1954, without reference to the Tribunal's observations or findings.Conclusion:The court provided answers to the questions referred by the Tribunal, affirming the nature of the undertaking as a capital asset and declining to answer certain questions due to lack of findings by the Tribunal. The court emphasized the need for a clear option under s. 55(2) and directed the ITO to adopt a reasonable method for valuation.