Facts of the case:

Punjab National Bank Ltd. was set up in 1895 in an area which now falls in Pakistan. It was nationalized as Punjab National Bank (PNB) by Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. On 19.7.1969 PNB Ltd. on nationalization vested in Punjab National Bank. PNB Finance Ltd. is the appellant herein. On nationalization it received compensation of Rs. 10.20 cr. This compensation was calculated on the basis of capitalization of last 5 years profits. The said compensation was received during the accounting year ending 31.12.1969 corresponding to the assessment year 1970-71.

During the assessment year 1970-71, appellant had to compute capital gains under Section 48 by deducting from the sale consideration the cost of acquisition as increased by the cost of improvement and expenses incurred in connection with the transfer. Under the law then prevailing, assessee could index the cost of acquisition by applying cost inflation index which became indexed cost of acquisition.

 In this matter, honorable Delhi High Court held that:

"At this stage, it may be noted that on the request of the assessee the Tribunal referred the matter to the High Court under Section 256(1) of the 1961 Act in which the impugned judgment had been given by Delhi High Court. In the impugned judgment, the High Court relied upon the decision of this Court in CIT v. Artex Manufacturing Co. reported in (1997) 227 ITR 260 to hold that "in the case of a slump transaction when the business is sold as a going concern, it is not impossible to determine the actual cost, namely, the cost of acquisition, even though, in a given case, it may be a self-generated asset."

Honorable Supreme Court reversing the judgment of HC held that:

"For the aforestated reasons, we hold that on the facts and circumstances of this case, 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 addition to the old provisions, honorable Apex court discussed the provisions of newly inserted Section 50B is respect of slump sale. In case of slump sale, after 1.4.2000 cost of acquisition is notionally fixed in case of slump sale. However, no such formula existed during assessment year 1970-71.

(For full text of judgment - visit 2008 -TMI - 31364 - SUPREME COURT)

Capital gains on slump sale: notional cost rules absent for the assessment year, so compensation not taxable as capital gains. Whether transfer of a banking undertaking generated taxable capital gains for AY 1970-71 where compensation was received on nationalisation; the Supreme Court found that on the facts and circumstances it was not possible to compute capital gains and the compensation was not taxable as capital gains under the law then prevailing, and noted that a statutory notional cost mechanism for slump sales was introduced only after the relevant assessment year.