1987 (7) TMI 179 - AT - Income Tax

Tribunal adjusts relief under Section 54E, upholds Section 41(2) for individual asset sale.

The Tribunal partly allowed the appeal, directing the ITO to re-compute the relief under Section 54E by deducting secured debts from the net consideration ... Actual Cost, Assessment Year, Balancing Charge, Capital Gains, Interest In Property, Previous Year, Transfer Of Property, Written Down Value Issues Involved:1. Computation of capital gains on the transfer of property.2. Applicability of Section 41(2) regarding profit from the sale of depreciable assets.3. Relief under Section 54E concerning the reinvestment of sale proceeds.4. Consideration of debts discharged from sale proceeds in computing net consideration.5. Treatment of amounts paid to secured and unsecured creditors.Issue-wise Detailed Analysis:1. Computation of Capital Gains on the Transfer of Property:The appellant, an individual who ran a hotel, sold his business due to health complications. The sale included immovable property and movables like furniture and fittings. The sale deed indicated a consideration of Rs. 13,25,000 for the immovable property and Rs. 2,00,000 for movables. The assessee computed his income for the assessment year 1979-80, including profits under Section 41(2), and claimed relief under Section 54E for reinvestment of Rs. 5,20,000 in fixed deposits.2. Applicability of Section 41(2) Regarding Profit from the Sale of Depreciable Assets:The assessee contended that the business was transferred as a running concern, and hence, Section 41(2) should not apply. The Income-tax Officer (ITO) and Commissioner of Income-tax (Appeals) (CIT(A)) disagreed, stating that the transfer was not a lump sum sale and individual assets were sold. The Tribunal upheld this view, noting that the documents did not indicate an intention to sell the business as a going concern. Therefore, Section 41(2) was applicable to the sale of individual assets.3. Relief Under Section 54E Concerning the Reinvestment of Sale Proceeds:The assessee claimed full relief under Section 54E, arguing that the net consideration should exclude amounts paid to discharge debts. The ITO restricted relief to 34.3%, considering the full consideration without deductions for debt repayments. The Tribunal found that the amounts paid directly to secured creditors, like the State Bank of India, should not be considered part of the consideration received by the assessee, as these payments were made due to an overriding title of the creditors.4. Consideration of Debts Discharged from Sale Proceeds in Computing Net Consideration:The Tribunal examined whether amounts paid to discharge debts could be deducted from the sale consideration. It held that payments to secured creditors, whose interests were tied to the property, should be deducted in computing net consideration. However, payments to unsecured creditors were not deductible unless they created encumbrances on the property.5. Treatment of Amounts Paid to Secured and Unsecured Creditors:The Tribunal directed the ITO to deduct amounts paid to secured creditors, like the Rs. 3,68,000 paid to the State Bank of India, from the sale consideration in computing net consideration for Section 54E relief. The assessee was allowed to produce evidence for any further secured debts. Payments to unsecured creditors were not deductible due to lack of evidence of encumbrances tied to the property.Conclusion:The Tribunal partly allowed the appeal, directing the ITO to re-compute the relief under Section 54E by deducting secured debts from the net consideration and re-compute the net income assessable. The Tribunal upheld the applicability of Section 41(2) for the sale of individual assets, rejecting the assessee's claim of a lump sum sale of the business as a going concern.