2008 (11) TMI 7 - SC - Income Tax

Section 41(2) held inapplicable; Section 45 conceptual but capital gains not taxable due to inability to apportion lump-sum consideration

The SC held that Section 41(2) did not apply and, although Section 45 (capital gains) conceptually applied, the computation provisions could not be ... Determine the cost of acquisition and cost of improvement under the provisions of Section 48 of the 1961 Act - Whether transfer of Banking Undertaking gave rise to taxable capital gains u/s 45 - HELD THAT:- In the case of Artex Manufacturing Co.[1997 (7) TMI 7 - SUPREME COURT] this Court found, that a valuer was appointed, that valuer submitted his valuation report in which itemized valuation was carried out and on that basis the consideration was fixed at Rs. 11,50,400.00. Therefore, the sale consideration had been arrived at after taking into account the value of plant, machinery and dead stock as computed by the valuer and, consequently, it was held that the surplus arising on the sale was taxable under Section 41(2) of the Act and not as capital gains. As stated, this Court has clarified its judgment in Artex Manufacturing Co. (supra) in its judgment in the case of Electric Control Gear Manufacturing Co. [1997 (7) TMI 8 - SUPREME COURT], held that whether the business of the assessee stood transferred as a going concern for slump sale price, in the absence of evidence on record as to how the slump price stood arrived at, Section 41(2) had no application. Therefore, Section 41(2) has no application to the facts of the present case. As regards applicability of Section 45 is concerned, three tests are required to be applied. In this case, Section 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated Code. Therefore, where the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is Section 45. That section contemplates that any surplus accruing on transfer of capital assets is chargeable to tax in the previous year in which transfer took place. In this case, transfer took place on 18.7.1969. The second test which needs to be applied is the test of allocation/attribution. We hold that, which concerns assessment year 1970-71, it was not possible to compute capital gains and, therefore, the said amount of Rs. 10.20 cr. was not taxable under Section 45 of the 1961 Act. Accordingly, the impugned judgment is set aside. In the present case, the Banking Undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On facts, we find that item-wise earmarking was not possible. On facts, we find that the compensation (sale consideration) of Rs. 10.20 cr. was not allocable item- wise as was the case in Artex Manufacturing Co. (supra). Issues Involved:1. Taxability of capital gains under Section 45 of the Income Tax Act, 1961.2. Applicability of Section 41(2) of the Income Tax Act, 1961.3. Computation of capital gains and the applicability of Section 55(2) of the Income Tax Act, 1961.Detailed Analysis:1. Taxability of Capital Gains under Section 45:The primary issue was whether the transfer of the Banking Undertaking resulted in taxable capital gains under Section 45 of the Income Tax Act, 1961. The appellant, PNB Finance Ltd., received compensation of Rs. 10.20 crores upon nationalization of Punjab National Bank. The appellant argued that the cost of acquisition was not computable, and thus, capital gains could not be calculated. The AO, however, computed capital gains based on the capitalization of the last five years' profits, resulting in a figure of Rs. 1,65,34,709. The Supreme Court held that the computation provisions and the charging section are inextricably linked, and since the computation provisions could not apply, Section 45 was not applicable. The Court concluded that it was not possible to compute capital gains for the assessment year 1970-71, and thus, the amount of Rs. 10.20 crores was not taxable under Section 45.2. Applicability of Section 41(2):The Delhi High Court had relied on the judgment in CIT v. Artex Manufacturing Co. to hold that the surplus arising from the transfer was taxable under Section 41(2). However, the Supreme Court clarified that Section 41(2) applies only to the sale of depreciable assets where the amount received exceeds the written down value. The Court noted that Section 41(2) and Section 45 operate in different fields, and in this case, Section 41(2) was not applicable as the transaction involved a slump sale without item-wise earmarking of consideration. The Court emphasized that the judgment in Artex Manufacturing Co. was not applicable, and instead, referred to CIT v. Electric Control Gear Manufacturing Co., which held that Section 41(2) does not apply in the absence of evidence on how the slump price was arrived at.3. Computation of Capital Gains and Applicability of Section 55(2):Section 55(2) allows for the substitution of the fair market value as of 1.1.1954 for the cost of acquisition. The appellant had exercised this option but argued that the cost of acquisition was not computable. The Supreme Court noted that Section 55(2) did not operationalize in this case because both the 'cost of acquisition' and the 'fair market value as on 1.1.1954' were not ascertainable. The letter dated 30.9.1970 from the assessee did not indicate a clear choice, and the AO's computation based on the last five years' profits provided the Enterprise Value rather than the cost of acquisition. Consequently, Section 55(2) was not applicable.Conclusion:The Supreme Court set aside the impugned judgment of the Delhi High Court, holding that it was not possible to compute capital gains for the assessment year 1970-71. Therefore, the compensation amount of Rs. 10.20 crores received by the appellant was not taxable under Section 45 of the Income Tax Act, 1961. The civil appeal filed by the assessee was allowed with no order as to costs.