1984 (10) TMI 89 - AT - Income Tax

Tax Tribunal Rules No Taxable Profit: Compensation Timing Key

The High Court upheld the Tribunal's decision that the takeover constituted a sale under Section 41(2) of the Income-tax Act. However, it was later ... Balancing Charge Issues Involved:1. Applicability of Section 41(2) of the Income-tax Act, 1961.2. Substitution of the market value of the undertaking as on 1-1-1954 for the purpose of computation of capital gains.Issue-wise Detailed Analysis:1. Applicability of Section 41(2) of the Income-tax Act, 1961:The primary issue was whether the provisions of Section 41(2) of the Income-tax Act, 1961, were applicable to the case where the Punjab State Electricity Board took over the assessee's undertaking. The Income Tax Officer (ITO) initially determined the profit under Section 41(2) at Rs. 3,76,835, but the Appellate Assistant Commissioner (AAC) held that no profit was taxable under Section 41(2) as no sale deed had been executed. The Tribunal reversed the AAC's decision, and the High Court upheld the Tribunal's decision that the takeover constituted a sale within the meaning of Section 41(2).However, the AAC later held that no profit under Section 41(2) or capital gains under Section 45 arose because the compensation was not finalized in the relevant assessment year. The Tribunal directed the ITO to compute the profits and capital gains once the compensation was finalized. The ITO computed the profit under Section 41(2) at Rs. 1,82,173. The Commissioner (Appeals) accepted the assessee's contention that no taxable profit under Section 41(2) accrued, as the undertaking was taken over as a whole for a slump price without itemization of assets.The Tribunal confirmed the Commissioner (Appeals)'s finding that Section 41(2) was not applicable, relying on the Gujarat High Court decision in Artex Mfg. Co. v. CIT and the Supreme Court decisions in CIT v. Mugneeram Bangur & Co. and CIT v. West Coast Chemicals & Industries Ltd. These decisions held that no assessable profit under Section 41(2) arises when an entire business undertaking is transferred for a lump sum price without itemization of assets.2. Substitution of the Market Value of the Undertaking as on 1-1-1954 for the Purpose of Computation of Capital Gains:The assessee contended that for the computation of capital gains, the market value of the undertaking as on 1-1-1954 should be substituted under Section 55(2) of the Income-tax Act. The Commissioner (Appeals) did not accept this contention, but the Tribunal found that the assessee was entitled to this substitution.The Tribunal noted that the undertaking was taken over as a whole, including all assets and liabilities, without itemization. Therefore, it was impossible to determine the written down value of individual assets. The Tribunal relied on the Supreme Court decision in Rustom Cavasjee Cooper v. Union of India, which held that an undertaking as a whole is an asset, and the Gujarat High Court decision in Artex Mfg. Co.'s case, which allowed for the substitution of the market value as on 1-1-1954 for the purpose of capital gains computation.The Tribunal directed the ITO to allow the assessee to substitute the market value of the undertaking as on 1-1-1954 and to recompute the capital gains accordingly.Conclusion:The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, confirming that no profit under Section 41(2) was assessable and that the assessee was entitled to substitute the market value of the undertaking as on 1-1-1954 for the computation of capital gains.