TaxTMI 
TaxTMI 
2003 (11) TMI 303
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....961 for manufacture and sale of fertilisers. It set up a cement unit in 1984. The said cement unit was sold as per an agreement executed on 9th June, 1990 between the assessee-company and a Madras based company, the India Cements Ltd., for a consideration of Rs. 105,69,54,104 and this consideration comprised of Rs. 105.30 crores for fixed assets and Rs. 39,54,104 for net current assets. It is this transaction of sale which has given rise to the above mentioned cross-appeals. 3. The question arising in these cross-appeals is whether the sale of the cement unit in question is a slump sale or an itemised sale and, in either case, what are the tax consequences, thereof. 4. The case of the Department is that it is an itemised sale. The case of the assessee is that it is a slump sale. The case of the Department is that, as it is an itemised sale, tax under the head 'short-term capital gains' on the transfer of depreciable assets is leviable in terms of s. 50 of the IT Act. The case of the assessee is that, as it is a slump sale, the provisions of s. 50 are not attracted. Assuming it is a slump sale, and that the capital asset transferred is that undertaking itself, and not ....
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....ssessee's letter dt. 25th March, 1994 that they have worked out the surplus at Rs. 36,29,54,491. This figure has been arrived at after claiming several deductions which are not admissible for computation of capital gains under the provisions of s. 45. I am, therefore, obliged to allow those deductions which are permissible under s. 45 of the IT Act. The following deductions are being allowed Total sale consideration 105,69,54,104 Less 64,82,98,196 40,86,55,988 Less 2,47,58,188 38,38,97,728 Only two deductions are admissible out of the deductions claimed by the assessee and no other deduction is possible as the assets are depreciable assets. Therefore, net capital gain works out to Rs. 38,38,97,728, which ought to have been included in the total income of the assessee." 7. Even though the AO computed the profit under the head capital gains, as mentioned above at Rs. 38,38,97,728, he did not levy any tax on this amount. On the other hand, he proceeded to compute the capital gains under the head 'short-term capital gains' leviable under the provisions of s. 50 of the Act. He noticed that the assessee had executed a se....
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.... 50 are not attracted. He further held that the asset sold being the entire undertaking, namely, the cement unit, the capital gains tax on the sale of the undertaking, which is a capital asset, is leviable, and he also gave certain directions for working out the said capital gains. He gave directions for the working out of the cost of acquisition and cost of improvement of the undertaking for the purpose of ascertaining the quantum of capital gains that can be brought to tax on the sale of the undertaking in terms of s. 45 of the Act. 11. As already mentioned, the Department is aggrieved by the finding of the CIT(A) that the sale was a slump sale and not an itemised sale; and so, tax under s. 50 of the Act is not leviable. The assessee's appeal is on the issue that, even assuming that it is a slump sale, there can be no capital gain on the sale of the undertaking. ITA No. 253/Hyd/1995 filed by the Revenue : 12. The grounds taken by the Revenue read as under : "(i) The CIT(A) should have held that even if it is used as a transit accommodation, it is still a guest house and that the expenditure relating thereto is not allowable within the meaning of s. 37(4) of ....
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....be seen at pp. 43 to 49 of the Department's paper book No. 2. The relevant portion of the terms and conditions accompanying the invitation extended to the assessee-company reads as under : "Terms and conditions for offer to purchase the undertaking comprising the cement division of Coromandel Fertilisers Ltd. 1.0 Offers for purchase of the undertaking comprising the cement division of Coromandel Fertilisers Ltd. (hereinafter referred to as "CFL") shall be subject to the terms and conditions set out below. 2.0 It is agreed and understood that the undertaking comprises the operations and activities of the cement division of CFL as a going concern. This includes, inter alia the cement plant with all and together with buildings, structures, housing colony thereon, monies and mining leases, all plant, machinery, equipment, capital work-in-progress, vehicles, furniture, fixtures therein at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh, and plant and machinery, office equipment, furniture fixtures at the divisional office at Secunderabad, at the marketing offices at Secunderabad, Madras, Bangalore and Ernakulam and at warehouses in the ....
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....ved and services rendered whether on capital or revenue account, actionable claims subsisting on the date of transfer as of the undertaking and arising in respect of or in relation to the operations and activities of the undertaking. Such current liabilities and provisions shall be taken over by the prospective buyer and the value thereof shall be adjusted against the value of the current assets. The value of the current liabilities and provisions shall be as per CFL's books of accounts duly verified by M/s A.F. Ferguson & Co. and the value so determined shall be final and binding. However, liabilities in respect of statutory levies such as sales-tax, excise, customs, octroi, mineral rights tax, and liabilities appertaining to pending legal cases upto the date of transfer of the undertaking shall be and remain the liability of CFL. Similarly, any benefits or credits relating to the aforesaid statutory levies which accrue after the date of transfer of the undertaking and which relate to the period upto the date of transfer of the undertaking shall belong solely to CFL. Any possible or potential liability arising out of orders made under the Jute Packaging Materials (Com....
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....er shall within 30 days of the date of receipt by it of acceptance of the offer by CFL (time in this respect being of the essence) enter into an agreement for sale with CFL which will set out the terms and conditions of sale and purchase as of the undertaking including those mentioned above and such other terms and conditions applicable to a transaction of this nature. The prospective buyer shall, on or before the execution of the said agreement for sale, pay to CFL 10 (Ten) per cent of the agreed price for purchase of the undertaking excluding the price determined as aforesaid to be payable for net current assets as and by way of earnest money. Interest will not accrue on the earnest money so paid. 9.0 In the event of the prospective buyer failing or neglecting for any reason to comply with the terms of paragraph 8.0 above, CFL shall be entitled without prejudice to its other rights or remedies at law, to revoke and cancel its acceptance of the offer of the prospective buyer by notice in writing to the prospective buyer and upon such revocation and cancellation, CFL shall stand discharged and released from any obligation to sell or transfer the undertaking to the prospect....
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.... Gujarat Ambuja Cements Ltd. The initial offer made by India Cements Ltd. dt. 23rd April, 1990 may be seen at pp. 68 to 74 of the Department's paper book No. 2 and it reads as under : "............ 23^RD April 1990 Dear Sir, Offer for purchase of the undertaking comprising the cement division of Coromandel Fertilisers Ltd. 1. We refer to your letter dt. 2nd April, 1990 inviting our offer for the purchase of the undertaking comprising the cement division of CFL. 2. We are pleased to make our offer as hereunder subject to the terms and conditions stipulated herein: 3.1 Our offer is for the purchase of the undertaking as going concern comprising the cement division and its activities which includes, inter alia, the cement plant with all land together with buildings, structures, housing colony thereon, mines and mining leases, all plant machinery, equipment, capital work-in-progress, vehicles, furniture, fixtures therein at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh and plant and machinery, office equipment, furniture, fixtures at the divisional office at Secunderabad, at the marketing offices at Secunde....
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....ration of the balance sheet and P&L a/c of CFL insofar as such principles are generally accepted accounting practices and are consistent. The defective, obsolete or otherwise unusable inventory shall be treated as scrap. The value so determined jointly shall be the purchase price for the inventories. (d) The fees of M/s A.F. Ferguson & Co. shall be borne by CFL and that of ICL's auditors by ICL. (e) As regards book debts, loans and advances deposits and the like, their value as of the date of transfer of the undertaking shall be as verified and determined by M/s A.F. Ferguson & Co. and ICL's auditors and as adjusted for any bad or doubtful debts/advances/debit balances : 6.1 The scope of current liabilities as mentioned in para 4.2 of your letter cited is acceptable. However, the value of the current liabilities and provisions as on the date of transfer of the undertaking shall be duly verified by ICL's auditors along with M/s A.F. Ferguson & Co. and the value so jointly determined shall be the value of the current liabilities and provisions to be taken over by ICL. The value so determined shall be deducted from the value of the current assets....
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....rtaking shall be determined by actuarial valuation by Life Insurance Corporation of India and the liabilities so determined shall be that of CFL. 7.4 The liability of ICL for pension/gratuity in respect of the employees taken over shall, therefore, commence only from the date of transfer of the undertaking. 8. We note that all taxes and levies including stamp duty, registration charges, sales-tax and any other levies whatsoever assessed or payable in relation to the transfer of the undertaking or any part thereof shall be payable by ICL. 9. This offer is subject to the approval of the financial institutions and it is also subject to the requisite approvals from the shareholders/Governmental authorities under the Companies Act/MRTP Act and/or any other law. 10. The purchase price for the fixed assets mentioned in para 3.3 above will be paid by ICL by taking over the liability of CFL to the financial institutions in respect of various secured loans as on the date of the transfer of the undertaking. This amount as of 30th Sept., 1989 was Rs. 78.13 crores. 11.1 ICL is willing within 30 days of the date of receipt by it of acceptance of the o....
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....he above offer is also subject to the various terms and conditions mentioned in the enclosure to this offer. Should you require any clarifications, we will be too pleased to furnish. We are also willing to participate in any negotiation you may hold. Thanking you, Yours faithfully, Sd/- N. Srinivasan Managing Director'." 18. It may be seen that M/s India Cements Ltd. has initially offered only a consideration of Rs. 94.50 crores and, at this stage, the assessee-company recorded the fact of the bids received in the minutes of the meeting of the committee of directors on 3rd May, 1990, and it may be seen at p. 53 of the Department's paper book No. 2. The said minutes read as under : "Minutes of the meeting of the committee of directors held on 3rd May, 1990 at 8.30 a.m. at Secunderabad. Present Mr. P. McCrea Mr. T.R. Bailek Mr. M.V. Subbaiah Mr. N.C. Roy Present : Mr. N.C. Roy The committee discussed in detail the terms and conditions of the purchase price offered by the two highest bidders namely, the India Cements Ltd. and Gujarat Amb....
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.... of the two bidders'Mr. Swaminathan for India Cements Ltd. and Mr. R. Shankaran for Gujarat Ambuja Cements Ltd. On opening of the bids the two representatives were informed that the following were the final bids for the undertaking exclusive of current assets which were to be determined on the basis of the terms outlined: The India Cements Ltd. Rs. 105.30 crores Gujarat Ambuja Cements Ltd. Unchanged from the previous offer of Rs. 91.25 crores The two representatives were informed that the committee would make a detailed evaluation of the two bids in terms of the purchase price offered and the detailed terms and conditions and submit its recommendations to the board at its meeting to be held at 11.00 a.m. the same day. The two representatives were requested to keep this information confidential until the commencement of the board meeting at 11.00 a.m. on 5th May, 1990, which they agreed to do. The committee then evaluated the terms and conditions of the final two revised bids and submitted its recommendation to the board that the highest bid of India Cements Ltd. should be accepted." 20. The terms of the sale were reduced into an agreement dt. 9t....
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....land, hereditaments and premises are more particularly described in the first schedule hereto; (ii) the mines and mining leases on or in respect of the said land, hereditaments and premises relating or pertaining to the operations and activities of the vendor's cement division; (iii) all plant, machinery, equipment, capital, work-in-progress, vehicles, furniture, fixtures being or lying on the said land, hereditaments and premises and/or the building or structures constructed thereon relating or pertaining to the operations and activities of the vendor's cement division; (iv) all plant, machinery, office equipment, furniture, fixtures and vehicles at the vendor's divisional office at Secunderabad and at the vendor's marketing offices at Secunderabad, Madras, Bangalore and Ernakulam and at the vendor's warehouses in the States of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala (but excluding the vendor's office premises at Secunderabad) all relating or pertaining to the operations and activities of the vendor's cement division; (v) Net current assets of the vendor as hereinafter defined relating or pertaining to the op....
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....Bank p. l.c. (ANZ GB); and 'Punjab National Bank (PNB) (h) "Secured loans" mean loans granted by public financial institutions and banks to the vendor and debentures privately placed by the vendor with UTI in respect of the undertaking aggregating to about Rs. 7896.44 lakhs as of 9th June, 1990, which are secured by a charge over the assets of the undertaking and are more particularly described in the third schedule hereto. (i) "Transfer date" means the date on which the deed of transfer in respect of the undertaking is executed by the vendor and the purchaser as hereinafter provided. 2. The vendor shall sell and transfer and the purchaser shall purchase and acquire from the vendor the undertaking with effect from and including the transfer date at or for (a) the sum of Rs. 105.30 crores (Rupees one hundred and five crores and thirty lakhs only) excluding the value of the net current assets which shall be determined in the manner hereinafter provided, and (b) such sum being the value of the net current assets which is determined in the manner hereinafter provided. 3. The purchaser has on or before the execution of this agreement (a) paid t....
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....taking as have been delivered in the purchaser on the transfer date and as in the possession of the purchaser on the expiration of 7 days after the said auditors have made the determination referred to in sub-cl. (B) above for the amount, if any, determined to be payable by the purchaser to the vendor under or pursuant to sub-cl. (B) above so long as the same remains unpaid. (D) The vendor shall, on or prior to the transfer date, deliver to the purchaser a guarantee from a bank acceptable to the purchaser guaranteeing to pay the amount, if any, determined to be payable by the vendor to the purchaser under or pursuant to sub-cl. (B) above in the event of the vendor failing to make such payment to the purchaser as therein provided, the liability of the guarantor in no event to exceed Rs. 1 crore (Rupees one crore only). 5. (A) The vendor has notified the purchaser that : (i) There is a subsisting mortgage by deposit of title deeds in favour of the public financial institutions and banks on or in respect of the said freehold land. hereditaments and premises at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh and buildings and structures th....
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....rtakes to take possession of the aforesaid and to pay to the Government of the State of Andhra Pradesh the aforesaid consideration on or prior to the transfer date. (B) Save as stated in sub-cl. (A) above, the vendor declares that the said freehold land, hereditaments and premises and buildings and structures thereon more particularly described in the first schedule hereto are free from encumbrances and that the vendor has marketable title thereto. 6. Save as provided in cl. 5 above, the undertaking shall be sold and transferred by the vendor to the purchaser free from all encumbrances. 7. The vendor shall transfer or cause to be transferred as of the transfer date the mining leases to or in favour of the purchaser for the then unexpired residue of the terms reserved thereunder respectively. The vendor shall endeavour to transfer, or cause the mining leases to be transferred to the purchaser as aforesaid on the same terms and conditions as applicable to the vendor immediately prior to the transfer date. 8. The vendor represents and warrants that consequent upon the withdrawal by the Government of India effective 1st March, 1987 of the obligation ....
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....nt to sub-cl. (C) above. Likewise, any benefits or credits relating to the aforesaid statutory levies which accrue or arise after the transfer date and which relate to the period preceding the transfer date shall belong exclusively to the vendor and shall not be transferred to the purchaser under or pursuant to this agreement. (F) Any possible or potential liability arising out of or pursuant to orders made under the Jute Packaging Materials (Compulsory Use in Packing Commodities) Act, 1987 and/or the Rules framed thereunder upto the transfer date shall be the sole liability of the purchaser and the value thereof shall not be adjusted against the value of the current assets. (G) Save as provided in this agreement, any contingent liability relating to the activities of the undertaking agreed to be sold and transferred under or pursuant to this agreement upto and including the transfer date, whether or not the same, has been identified on or before the transfer date, shall be that of the vendor and the vendor shall indemnify the purchaser against the same provided that the purchaser shall not be entitled to claim from the vendor any such contingent liability after t....
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....e. (c) The purchaser shall continue to engage as from the transfer date all contract labour engaged by the vendor at the cement plant forming part of the undertaking as on the date immediately preceding the transfer date upon terms and conditions not in any way less favourable than those applicable to them during their engagement by the vendor immediately preceding the transfer date. 11. The purchaser shall, save as herein expressly provided, bear and pay all assessments, rents, rates, taxes, outgoings and impositions of whatsoever nature relating or pertaining to the operations and activities of the undertaking after the transfer date and save as provided in cl. 9(F) herein, if any such payments relate to the period upto and including the transfer date, the same shall be apportioned between the purchaser and the vendor. The purchaser shall be liable and responsible for all obligations or liabilities arising from or in respect of the operations and activities of the undertaking after the transfer date. The purchaser shall indemnify and at all times keep the vendor fully indemnified from and against all claims, demands, actions, proceedings, costs, charges, expense....
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....idence in any such legal proceedings at the purchaser's cost. Save as aforesaid, the vendor shall give possession of all other books, papers, documents and records relating to the undertaking to the purchaser and the purchaser shall permit the vendor and its authorised representatives to inspect the same and make copies thereof at all reasonable times on any working day and permit and allow the vendor to produce, exhibit and tender such books, papers documents and records in any legal proceedings, as and when required by the vendor and shall permit all employees of the purchaser to appear on behalf of the vendor as and when required to do so, to prove such books, papers, documents and records and give evidence in such legal proceedings at the vendor's cost. 14. The sale and transfer of the undertaking by the vendor to the purchaser under or pursuant to this agreement shall be complete and effective upon the parties hereto executing the deed of transfer as hereinafter provided and upon the purchaser paying to the vendor in full, on or before the execution thereof, the amounts stated in cl. 4 hereinabove. 15........." 21. The above sale agreement was appr....
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.... The Dy. CIT(Assessments)-Special Range-I, Posnett Bhavan, Hyderabad. Sir, I request that a certificate under sub-s. (1) of s. 230A of the IT Act, 1961, be granted to me. I give below the necessary particulars. 1 to 13........... :............ 14. Name and address of the transferee, assignee, etc. India Cements Ltd., 827, Anna Salai, Madras-600 002 15. (i) Full value of the consideration for which the property or the right, title or interest to or in the property is purported to be transferred. The sale is of the entire cement undertaking, as a going concern, on an as-is-where-is basis and no separate price/value has been agreed for the parties covered by s. 230A of the IT Act. (ii) If the transfer is to be without consideration, the value for the purposes of stamp duty In view of (i), the value determined by a Government approved valuer engaged by the purchaser incorporated in the subject deed of sale and transfer for the purposes of registration pursuant to the provisions of the Registration Act, 1908 is Rs. 20.07 crores. 16 to 18''.. :..... I declare that to the best of my knowledge and belief, t....
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.... engaged in the manufacture and sale of cement at its plants situate at Sankaridurg, Salem District and Sankarnagar, Nellai Kattabomman District in the State of Tamil Nadu; 3. (a) the Government of Andhra Pradesh has acquired under the provisions of the Land Acquisition Act, 1894 for the purpose of the vendor's cement factory land admeasuring about 2058.23 acres situate at Chilamkur village, Cuddapah District in the State of Andhra Pradesh, more particularly described in part 'A' of the schedule hereunder written and the vendor has been put in possession of the same; (b) the Government of Andhra Pradesh has put the vendor in possession of certain poramboke land admeasuring about 141.91 acres situate at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh, more particularly described in part 'B' of the schedule hereunder written; (c) the Government of Andhra Pradesh has put the vendor in possession of certain further poramboke land admeasuring about 2.02 acres situate at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh, more particularly described in part 'C' of the schedule hereunder written; ....
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....e public financial institutions/banks as defined in the said agreement, Unit Trust of India (UTI) as the debenture holder and the Industrial Credit and Investment Corporation of India Ltd. (ICICI) as the debenture trustees and the shareholders of the vendor to the sale land transfer of the said undertaking to the purchaser; (8) pursuant to the said agreement, the purchaser has, on or prior to its execution, paid to the vendor the sum of Rs. 5.27 crores and also furnished to the vendor the guarantee dt. 9th June, 1990 of Citi Bank N.A. for Rs. 5.26 crores in the form agreed by the vendor, as and by way of earnest money, which sum and bank guarantee, the vendor admits and acknowledges having received; 9. prior to the execution of these presents, the purchaser has, pursuant to the said agreement, assumed and taken over all the vendor's liabilities in respect of the secured loans as defined in the said agreement outstanding as on the transfer date as defined therein, free from encumbrances; 10. all movable assets and properties comprised in the said undertaking and capable of passing by delivery of possession, namely, plant, machinery, equipment, vehicles....
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....colony together with the dwelling units and other houses, outhouses, edifices, buildings, courts, yards, compounds, factory and other buildings, structures, erections and other civil constructions erected, constructed or standing or being on the said land or any part or parts thereof (hereinafter collectively called "the said buildings" more particularly described in Part 'E' of the schedule hereunder written); (all of which said land and the said buildings are hereinafter collectively called "the said immovable properties") And all the estate, right, title, interest, property, claim and demand whatsoever at law and equity of the vendor in, to, out of or upon the said immovable properties or any part or parts thereof to have and to hold the said immovable properties unto and to the use of the purchaser forever free from all encumbrances whatsoever together with all deeds, documents, writings, vouchers and other evidences of title exclusively relating thereto or any part thereof and together with all and singular the trees, shrubs, ways, path, passages, sewers, drains, ditches, fences, yards, wells, waters, water courses, rights, liberties, easements, advan....
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.... paper book. It reads as under : "The India Cements Ltd. ''............... "Receipt Received from Coromandel Fertilisers Ltd. delivery and possession of all the movable assets and properties forming part of the undertaking (as defined in the agreement dt. 9th June, 1990 executed between us), including the items detailed in the enclosure. Dated this twenty ninth day of November, 1990. For and on behalf of The India Cements Ltd. Sd/- (N. Swaminathan) Vice President (Finance) & Director Witness : 1. Sd/- 2. Sd/- ''...." Details of the machinery handed over in terms of the above receipt may be seen at pp. 150(1) to 150(349) of the Department's paper book No. II. 27. We have obtained the aggregate values of the machinery conveyed as per the said receipt and this comes to about Rs. 47.15 crores. 28. Subsequent to assessment, and actually subsequent to the order of the CIT(A), Department recorded a statement on the sale in question from Shri B.M. Mohan, general manager, corporate finance of the India Cements on 8th March, 1999 and the relevant portion of the said de....
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.... there any agreement with those financial institutions? Ans. We have taken over these loans from various institutions and banks and a copy of the multi partite agreement is being furnished for your reference. The institution/bank wise loans taken over is furnished in this agreement. 9. You have stated that the value of Rs. 105.30 crores arrived at is exclusive of net current assets value. Please give the details and the mode how you have valued the net current assets? Ans. The basis of valuation of net current assets is detailed in the agreement to purchase the plant executed in June, 1990, a copy of which is furnished. The valuation done on this basis is furnished herewith. 10. You have stated that out of the total consideration, the loans taken over is Rs. 75.85 crores and the balance amount is Rs. 29.45 crores has been paid by you. Please tell me the mode of payment and the source of that payment. Ans. We have paid the sum of Rs. 29.45 crores by demand drafts to the seller from the India Cements Ltd.'s account, which are reflected in the books of accounts for the financial year 1990-91. A copy of the same is submitted herewith. We....
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....re your offer of Rs. 105.30 crores? Ans. No item wise valuation of assets was done by our technical people. Only a business valuation was done. The technical personnel have assessed the working condition and potential of the plant and machinery and not the item wise value. 16. Do you have physical inventory of plant and machinery of the cement division of Coromandel Fertilisers Ltd. If so please give the list. Ans. There must be a physical inventory of plant and machinery. 17. Is there a special report before submission of bid or after acquisition of the plant? If so please give the details. Ans. As indicated in item 15, a team from the India Cements Ltd. visited the plant and submitted a report. Copy enclosed. 18. Is cost auditing done for the financial year 1990-91? If so give a copy of the report. Ans. Yes. Extracts of the report as desired are enclosed. 19. Is there expert valuation fees for inspection of plant? If so, give the details. Ans. No. The officials who inspected the plant are all employees and they have not been paid any expert valuation fee. However, after acquisition of the plant, for ....
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....ommittee, the board at its meeting held on 10th Feb., 1990, after reviewing all the aspects relating to the cement division from the time since its commissioning, decided that it would be in the best interest of the company that the sale of the cement division be explored. The board, thereafter, appointed a committee of directors to identify and negotiate with prospective buyers for the cement division and submit their recommendations to the board. Copy of the above documents are filed before you. The committee sent the invitation for offer for purchase of the undertaking of cement division of CFL vide their letter dt. 2nd April, 1990 to various parties. The invitation also contained the terms and conditions for offer to purchase the undertaking. A copy of the letter dt. 2nd April, 1990 addressed to India Cements Ltd. (ICL) is filed before you now. Identical invitations were sent to other parties also. Thereafter, the parties concerned visited the cement plant, held discussions with CFL's representatives and submitted their offers. These offers were received by the committee of the board and discussions were held with the representatives of the partie....
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....ny other bidder at any time in the dealings related to the above transaction? Ans. I was in the service of CFL as controller-finance and accounts and I was assisting the president and managing director of the company in the above transaction. To the best of my knowledge no technical or engineering person of the company was involved in the process of negotiation with ICL. Q. 3 Please produce the cash book and ledger of CFL for the years 1989-90 & 1990-91 for verification? Ans. CFL has a decentralised set up since beginning. All the records relating to the cement division were maintained at Chilamkur/cement marketing office at Secunderabad. When ICL took over the cement division, they took all the records as per the agreement of sale. At present here we are maintaining only the records of corporate office of CFL. Q. 4 Was there any valuation done before the invitation for offer was made or during the process of negotiations by CFL in respect of the value of the cement division? Was there any information submitted to banks and financial institutions in respect of the valuation of the assets of the cement division while seeking permission for sale or....
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.... to the message so it is presumed that they are not interested. An approach has been received from the Standard Chartered Bank, merchant banking division, that they should be retained to handle the matter on our behalf. It was noted that they had been advised that in case they were representing any clients who were interested then they should let us have particulars, but it was not our intention to appoint merchant bankers to handle the sale from our side. The committee noted that discussions had been held with M/s Craford Bayley & Co., and Mrs. R.C. Khanna regarding legal land taxation aspects involved. Based on this, opinion from counsel was being sought on aspects such as stamp duty, sales-tax, income-tax implications of sale, etc. While a valuation of assets by an approved valuer would be necessary, in view of the high cost involved it was decided that this should be taken up at a later stage. Sd/- N.C. Roy Circulated to : Mr. P. McCrea Mr. T.R. Bailek Mr. M.V. Subbaiah ....." While the proposal was for getting the cement unit valued, it was actually the fertiliser unit that was g....
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....suppression of material facts by the assessee. In this context, he also pleaded that it is a case where the ratio of the decision of the apex Court in the case of McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) is applicable. 31.2. The learned standing counsel further referred to the application given by the assessee for obtaining the certificate under s. 230A and also the computation of the tentative liability for short-term capital gains, which we have extracted hereinabove in para 23 of this order. It is argued that the assessee could not have worked out the capital gain at a specific figure of Rs. 54.82 crores, unless there was an itemised sale of asset. In the same vein, he also referred to the receipt obtained by the assessee, extracted hereinabove, for the various movable assets delivered to the India Cements, and pleaded that the valuation given in the schedule to the said receipt showed that the plant and machinery were valued separately and the sale of the unit is not a slump sale. He further mentioned that a legal document like the sale deed dt. 29th Nov., 1990 relating to the sale of the cement unit, which we hav....
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....ises six months after sale and in terms of cl. 9(f), levy obligations as on the date of transfer of undertaking shall be the liability of the assessee-company. Pointing out to these aspects of the agreement governing the valuation of the different types of assets, and the provisions for different types of assets and liabilities coupled with the separate sale of land, and buildings, and separate valuation of plant and machinery, as mentioned hereinabove, the learned standing counsel argued that the cement unit was not sold for a lumpsum consideration, but its various assets were separately valued and sold at specific rates. So, it is pleaded that the sale in question is not a slump sale at all. 31.5. The learned standing counsel further pointed out that the so-called cement unit consists of land, building, plant and machinery, furniture and fittings, but the value of furniture and fittings is negligible as land and building have been separately valued at Rs. 20 crores. The balance of about Rs. 85 crores out of the total sale consideration of Rs. 105 crores is allocable almost exclusively to plant and machinery. In this context, he invited our attention to the written down v....
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.... slump sale, there should be no piecemeal or itemised sale of assets and it should be sale of an undertaking as a whole lock, stock and barrel. According to the learned standing counsel, the ideal example of the slump sale is the one considered by the Hon'ble Karnataka High Court in the case of Syndicate Bank Ltd. vs. Addl. CIT (1985) 45 CTR (Kar) 68 : (1985) 155 ITR 681 (Kar) where the assessee-company had international franchise besides branches in remote areas and also had secret reserves. It is pointed out that, in the instant case, there is absolutely no material brought on record by the assessee to say that the cement unit was intended to be disposed of, as a going concern. On the other hand, the various clauses of the agreement dt. 9th June, 1990 indicate that the said sale was an itemised sale, where the parties provided for different modes of valuation for different assets like land, buildings, plant and machinery, current assets, obsolete items and similarly, for different kinds of liabilities like statutory liabilities and contingent liabilities. In other words, according to the learned standing counsel for the Revenue, it is the best illustration....
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....apex Court in the case of Kharwar (supra), which are as under: "The High Court observed that it was not possible to say that the entire business carried on by the firm at Surat, namely, the manufacturing of art silk cloth and sale thereof, was not taken over by the company. We do not propose to express any opinion on the correctness of that view, for, in our judgment, by virtue of the amendment made in s. 10(2)(vii), proviso (ii), of the Indian IT Act, 1922, by s. 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 67 of 1949, even under a realisation sale, excess over written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax." 31.11. In the light of the above observations, the learned standing counsel observed that, even when there is a realisation sale, excess over the written down value to the specified extent has to be brought to tax in terms of second proviso to s. 10(2)(vii) of the Indian IT Act, 1922 which is analogous to the provisions of s. 41(2) of the 1961 Act, as it stood before its deletion. It is claimed that the ratio of this decision would be applicable fo....
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....capital gains given in the context of application for certificate under s. 230A. 31.14. Apart from relying on the decision of the apex Court in the case of Kharwar (supra) and Artex Manufacturing Co. (supra), Shri Ashok also relied on the decision of the Tribunal in the case of Premier Automobiles Ltd. vs. Dy. CIT (2003) 79 TTJ (Mum) (TM) 850 : (2003) 84 ITD 169 (Mum) (TM) to which one of us, viz. Judicial Member, was a party. 32. The learned counsel for the assessee, Shri S.E. Dastur, countered the above arguments of the learned standing counsel for the Revenue. He has also filed detailed written submissions. The main plank of his contention is that what is transferred by the assessee is the entire undertaking, i.e. the cement unit and the entire undertaking was sold for a consideration of Rs. 105.3 crores plus the value of the current assets and in the fixation of the said sale consideration, there is no allocation of any amount to the depreciable assets or to land and buildings. 32.1. It is pleaded that what is transferred in the present case is the entire undertaking, and it is also pointed out that it is a settled principle that an unde....
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....ued. He took us through the statement of Shri Nagarajan, Vice President (Finance) of the assessee-company, also which we have extracted hereinabove and pleaded that even Shri Nagarajan confirmed the same position. He further pleaded that the estimate of short-term capital gains assessable under s. 50, which was given by the assessee before the AO in the context of his application under s. 230A was only an estimate, and it was given only at the instance of the AO to indicate its liability to tax in the worst case scenario. It is pleaded that it does not mean that the assessee has in fact, admitted its liability at that figure. 32.4. The learned counsel further invited our attention to the definition of the term 'slump sale' given by the apex Court in the case of CIT vs. Artex Mfg. Co. (supra) at p. 269 of the report, which reads as under: "While dealing with the question as to whether s. 41(2) would be attracted where there is a slump sale in the sense that the entire business is transferred for a lumpsum amount, it would be useful to take note of the decision of the Judicial committee of the Privy Council in Doughty vs. Commissioner of Taxes (1927) AC 327"....
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....71, 78 and 79 of the said decision. He further explained that this principle is now recognised in Expln. (2) to s. 2(42C), which reads as under : "(2)'' (42C) "Slump sale" means the transfer of one or more undertakings as a result of the sale for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sales. Expln. 1''. Expln. 2 - For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities;" 32.8. He further explained that the transferee-company had to allocate some portion of the sale consideration to the depreciable assets for the purposes of claiming depreciation and in this context, he invited our attention to s. 211 of the Companies Act, r/w Part I of Schedule VI thereof. It is pleaded that what the transferee does in its books has no bearing on the question whether the transaction in question is a slump sale or not. 32.9. Referring to th....
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....eration. 32.12. The learned counsel for the assessee, Shri Dastur invited our attention to the report of the valuer, Shri B. Jagannadha Rao and associates dt. 6th Nov., 1990 and mentioned that the said report was sent to India Cements Ltd. and not to the assessee-company because the properties were got valued by the former company only for the purposes of payment of stamp duty. 32.12A. Referring to the contention of the learned standing counsel that the liability for capital gains tax in terms of s. 50 is attracted even in a slump sale on the basis of the decision of the apex Court in B.M. Kharwar (supra), Shri Dastur explained that a realisation sale is not the same as a slump sale. A realisation sale may be a slump sale or may not be a slump sale. All sales as a going concern are realisation sales but the converse is not true. The assets of a unit may be sold separately, and so, simply because it is a realisation sale, it is not sale as a going concern. In the present case, it is stated that the entire unit was sold as a going concern and the assets had not been sold separately. So, it is pleaded that the lump price realised in the said sale which is a slump sal....
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....written down value of some of the tangible assets reflected in the balance sheet is low. 32.16. It is further pleaded that, if the Revenue seeks to assert that the transaction is contrary to that evidenced by the terms of the agreement of sale, it is for the Revenue to establish that, in fact, there is an itemised sale of assets, with different values ascribed to each asset that is transferred, and that the values were so ascribed on the date when the agreement was arrived at. It is pleaded that the consideration of Rs. 105.30 crores was arrived at, in the present case, as early as on 5th May, 1990, as is evident from the minutes of the meeting of committee of directors held of the same date, which may be seen at p. 54 of the Department's paper book No. 2. It is pointed out that there is no material whatsoever brought on record by the Revenue to establish that the parties in arriving at the lumpsum price of Rs. 105.30 crores placed some values on individual assets, and such values were aggregated. It is further pleaded that it is not fair on the part of the Revenue to harp upon what must have been the case or what ought to have been the case instead of looking at what ....
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....artners of the firm had the same interest as they had in the assets and property of the partner. It was contended that as the firm and the company were in substance one entity only, there could be no liability to tax under the second proviso to s. 10(2)(vii) of the 1922 Act. Two contentions were raised before the Supreme Court. The first was that as the transfer had taken place between two entities, which were in substance the same, no liability to a balancing charge arose. The Supreme Court dealt with this argument at p. 608 of the report and held that the company was a legal entity distinct from partnership under general law. The legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company and as the transaction resulted in excess realisation over the written down value of the machinery to the firm there would be a liability to tax under s. 10(2)(vii). The second contention that was urged was that as the transfer was effected with a view to close down the business no taxable profit arose because the transfer was not in the course of business of the assessee. This contention was also rejected by the Supreme Court having reg....
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.... 1949 only removed one of the conditions for the exigibility of the balancing charge to tax, viz., that the asset should have been sold when the business was carried on. Therefore, all that B.M. Kharwar's case lays down is that after the Amendment Act, 1949 referred to earlier even if plant and machinery is sold as a part of a realisation sale the provisions of the second proviso to s. 10(2)(vii) would be attracted. It proceeds on the assumption that the sale price for the transfer of the assets is known. A slump sale undoubtedly would be a realisation sale but all realisation sales may not necessarily be slump sale as parties may after closing down the business transfer the assets individually. The said decision is in no way contrary to or inconsistent with the earlier decision in Mugneeram Bangur (supra). They both operate in different fields. The first decision lays down the tests to be adopted in determining what would be a slump sale, the subsequent decision lays down the consequences that flow if it is a sale of itemised assets. The question of there being any assessment under the second proviso to s. 10(2)(vii) did not arise in Mugneeram Bangur's case and hence, ther....
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....ould have no relevance unless the lumpsum consideration has been determined on the basis of such itemised values." 32.21. It is also pointed out that the subsequent decisions in the case of Artex Manufacturing Co. (supra) and Electric Control Gear Manufacturing Co. (supra) are in no way contrary to the principles laid down in the case of B.M. Kharwar (supra). It is further pointed out that both the cases of Artex Manufacturing (supra) and Electric Control Gear Manufacturing (supra) which involved similar issues also lay down the same ratio, even though, on facts, the conclusions drawn were different. 32.22. Referring to the provisions of s. 50 of the IT Act, it is mentioned that s. 50 comes into operation only when the following three conditions on the transfer of depreciable assets are cumulatively fulfilled: (a) The asset that is transferred forms part of a block of assets; (b) Depreciation has been allowed either under the Indian IT Act, 1922 or under the IT Act, 1961; (c) The full value of the consideration accruing or arising as a result of the transfer of such asset, can be ascertained. 32.23. It is pointed out that, in th....
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.... the present form by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1st April, 1988, the excess of the sale consideration received over the written down value is brought to tax exclusively under the head 'short-term capital gains', and no portion of such excess is brought to tax under the head 'business', but the pre-condition for attracting both s. 50 and s. 41(2) is that a part of the sale consideration has to be relatable to the transfer of a depreciable asset. Otherwise, neither s. 41(2) nor s. 50 is attracted. As, in a slump sale, no portion of the sale consideration is relatable to the transfer of a specific asset, it is pleaded that the ratio of the decision of the apex Court in the case of Artex Manufacturing Co. (supra) and Electric Control Gear Manufacturing Co. (supra), which are given in the context of s. 41(2) of the IT Act, apply with equal force to s. 50. In other words, before s. 50 is invoked, it has to be seen whether the sale consideration is relatable to the transfer of depreciable assets. It is also mentioned that no portion of the sale price can be attributed to or ascribed to the transfer of depreciable assets, sim....
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....se of the provisions of s. 50B which came into effect from 1st April, 2000, and as s. 50 and s. 50B are mutually exclusive. But there would be liability under s. 41(2) or s. 50 in the intervening period, i.e. from asst. yr. 1989-90 to asst. yr. 1999-2000. It is pleaded that there is no warrant for accepting such a plea which leads to an odd interpretation. 33. The learned standing counsel for the Revenue, Shri Ashok assisted by Shri Jayashankar, CIT, in his rejoinder, pointed out that, as per the earlier decision of the Tribunal in India Cements Ltd., some of the so-called intangible assets like goodwill, brand name, trade marks, mining rights were held to be nil. He pointed out that that leaves only licences and work force. He pointed out that the work force is more a liability than an asset as is evident from the report of the technical personnel of the India Cements Ltd., a copy of which may be seen at p. 95 of the Department's paper book. He reiterated that the concept of slump sale does not survive the decision of the apex Court in the case of Kharwar (supra). It is pleaded that the assessee cannot hold back the benefit of excess depreciation on depreciable assets, and ....
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....ssessee is free to furnish their values if they have any, and a suitable deduction for such intangible assets can be given and the remaining sale consideration has to be regarded as allocable to plant and machinery which is the main asset. If the assessee does not co-operate and give such value, it is stressed that the Tribunal is free to resort to a suitable estimate. He pointed out that, whatever is the method of sale the assessee adopts, it is the obligation of the assessee to pay capital gains under s. 50 r/w s. 43(6)(c) of the IT Act. 33.4. Shri Ashok also pointed out that an assessee cannot be allowed to get away with such ruses. Hypothetically, an assessee owning two buses on which depreciation was allowed cannot combine the two buses into a trailer and sell the trailer and claim that s. 50 is not attracted because depreciation was not allowed on a trailer. Nomenclature of an asset may change as well as physical condition and additions and deletions may be there, but can the assessee be allowed by such changes to avoid liability under s. 50 by such means?, he questioned. Even if the consideration is a composite figure, it has to be assigned to different categories o....
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..... Financial liabilities are taken over. What is to be seen is whether the cement unit as a functional productive unit has been transferred for a lumpsum price. We are of the view that it was so transferred. 35. In the case of Premier Automobiles vs. CIT (supra), the Hon'ble Bombay High Court, while considering the sale of an undertaking where sizeable chunk of the business was not involved in the sale observed that one has to adopt commercial principles for interpreting such transactions and held that the sale was a slump sale. We are of the view that the case of the assessee is on a far better footing than the case considered and decided by the Hon'ble Bombay High Court. 36. The learned standing counsel rhetorically mentioned that it is not merely the fanciful car of the managing director, which has been excluded from the scope of the sale. Actually, there are no exclusions. At any rate, no such exclusions have been brought to our notice. The entire cement unit as an undertaking has been sold, though special procedures have been laid down for the valuation of a few items. It is true that for the purposes of claiming interest on borrowed capital, the assessee pleaded ....
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....were attracted. The said decision in no way overrules the decision of the apex Court in the case of Mugneeram Bangur, as explained by the learned counsel for the assessee. The decision of the apex Court in the case of B.M. Kharwar (supra) operates in a different field, whereas the other three decisions of the apex Court, i.e. Mugneeram Bangur (supra), Artex Manufacturing Co. (supra) and Electric Control Gears Manufacturing (supra) are concerned with the transfer of an undertaking as a going concern. The ratio of all the three decisions is more or less the same, even though Artex Manufacturing Co. (supra) went against the assessee and the decisions in the other two cases went in favour of the assessee. The conclusions in these three cases were different because of the different factual matrix of the respective cases, even though the ratio is the same. 40. As stated by the learned counsel for the assessee, the provisions of s. 50 are attracted, only when there is an itemised sale. We agree that the three conditions mentioned by the learned counsel for the assessee are to be satisfied before the provisions of s. 50 can be attracted. In a slump sale none of these three conditions ar....
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....ld that lumpsum compensation received for the entire undertaking cannot be cut up and attributed to the cost of various individual assets. In the light of the explicit comments of the Hon'ble High Court in this case on this issue, we are of the view that the lumpsum consideration received in a slump sale, as the present one, cannot be cut up and allocated to depreciable assets. Similar are the observations of the Hon'ble Karnataka High Court in the case of Syndicate Bank vs. Addl. CIT (supra) in which the Hon'ble High Court was considering the question of capital gains on the transferred entire undertaking being a banking concern. The relevant portion of head note reads as under: "If there is a transfer of a whole concern and no part of the agreed price is indicated against different and definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets in specie. What is sold in such a case is not individual items of property forming part of the aggregate, but the capital asset consisting of business of the whole concern or undertaking. What arises for consideration from the point of view of taxation i....
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.... if it had any doubt in mind. At any rate, at least, it was for the AO to have raised this issue, if he doubted the validity of the transfer. The Revenue cannot have it both ways. They cannot compute the liability to tax under s. 50 on the assumption of a valid transfer, and, at the same time, question that there was no valid transfer. If there is no valid transfer, there should be no liability under s. 50. Having determined the liability under s. 50, we are of the view that it is too late in the day for the Revenue to raise the question of validity of the transfer for the first time before the Tribunal. 45. Further, if there is any suppression of materials, it is for the Revenue to establish the same. They have conducted a survey on the premises of both the assessee and the vendee company. They did not find anything adverse to dispute the claim of the assessee that it was a slump sale. On the other hand, both the functionaries of the contracting parties, viz., Shri Nagarajan and Shri B.M. Mohan, whom the Department found fit to examine during the survey proceedings, confirmed the stand of the assessee that it was a slump sale, and that there was no separate valuation of the ass....
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....n which it was entered into is a sham transaction which is not done. In this context, it is also necessary to bear in mind the remarks of the apex Court in the case of Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC), in which as per the relevant portion of the head-note, it has been observed at pp. 758-759 as under : "We may in this connection usefully refer to the judgment of the Madras High Court in M.V. Valliappan vs. ITO (1988) 67 CTR (Mad) 289 : (1988) 170 ITR 238 (Mad) which has rightly concluded that the decision in McDowell (supra) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC vs. Challenge Corporation Ltd. (1987) 2 WLR 24, and did not have the benefit of the House of Lord's pronouncement in Craven's case (1988) 3 All ER 495 (HL) : (1990) 183 ....
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....ssessee before the AO, or located during the survey by the Department on the premises of the contracting parties. In the circumstances, we are driven to the conclusion that the sale in question is a slump sale. We are also fortified in our conclusion by the unreported decision of the Bombay High Court in the case of Premier Automobiles (supra); and the decisions of the apex Court in the case of Mugneeram Bangur (supra) and even Artex Manufacturing (supra). Lots of other decisions were cited by both the parties. As it is the admitted position of both the parties that the applicable law in the context of slump sale has to be ascertained from the four decisions of the apex Court mentioned above, we do not find it necessary to deal with the other decisions cited by the parties. 52. In the light of the above, we do not find any error in the order of the CIT(A) in holding that the entire cement unit should be treated as a capital asset. As, admittedly, the unit was established in 1984, we do not see why it cannot be treated as a long-term capital asset. As we have held that s. 50 is not applicable in a slump sale, we do not find any merit in Ground Nos. 2, 3 and 4 taken by the Revenue....
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.... indeterminate the computational machinery provided in s. 48 of the Act fails rendering the section inoperative even if it be possible to take the view that the cost of acquisition of the undertaking is the sum total of the cost of each of the assets transferred as a part of the undertaking. Ground No. 3 (a) Without prejudice to ground Nos. (1) and (2) above, having held that the sale is of the cement undertaking, a distinct capital asset, the CIT(A) erred in directing the Dy. CIT to consider the written down values of the assets which have been allowed depreciation in determining the cost of acquisition of the part of the cement undertaking having failed to appreciate that s. 50 of the Act has application only where capital gains has to be determined on the sale of assets and the actual cost of assets comprising the cement undertaking alone could be relevant to a computation of the cost of the undertaking as a whole. (b) Without prejudice to ground 3(a) above, the CIT(A) failed to appreciate that the present scheme of the IT Act, 1961, does not provide for determination of written down values of assets but only of block of assets and as such there are no....
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....therefore, the net amount taxable would be the difference between the excess and the shortages aforesaid to be treated as long-term capital gains. Ground No. 5 The learned CIT erred in enhancing the quantum of capital gains which would arise on the basis set out in his order as against the amount adopted by the learned Dy. CIT having failed to appreciate that an opportunity of being heard on such an enhancement should have been provided to the appellant before directing an increase in the quantum of capital gains so determined. Ground No. 6 (a) The CIT(A) erred in directing the Dy. CIT to allow investment allowance of Rs. 5,02,16,945 relating to the fertiliser unit under s. 32A(3)(II) of the Act only in case there is a surplus income under the head "income from business" on the basis of the fresh computations to be made for giving effect to this order, having failed to appreciate that s. 32A(3)(ii) permits setting off of the unabsorbed investment allowance carried from earlier year to reduce the total income of the assessee to nil and not his only the business income as erroneously directed by the CIT(A). The total income includes income under th....
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....nd interest is deductible under s. 36(1)(iii) of the Act. Ground No. 9 Your appellants submit that the learned CIT(A) having held there is no sale or transfer of any individual asset or a block of assets ought to have held that the learned Dy. CIT erred in not allowing depreciation having failed to appreciate that under the new scheme of the Act a block of assets continues to be entitled to such depreciation irrespective of whether the assets continue to exist or not, now that there was no credit to be given to any block on a transfer of the undertaking. Your appellants crave leave to add to, alter or amend the aforesaid grounds of appeal or any of them as they may be advised from, time to time." 58. At the outset, we may note that the learned counsel for the assessee, at the time of hearing on this appeal, has not pressed grounds Nos. 5, 6 and 8. They are accordingly rejected. 59. In the course of hearing before us, the learned counsel for the assessee has summarised the main issues that arise in this appeal into three and they are as under : (1) Whether the transfer of the business of cement unit as a going concern, being a capital asset,....
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....ble, and so, the computational provisions of s. 48 fail and so, there can be no question of levy of tax under the head 'capital gains' under s. 45. In this context, the learned counsel has relied on a number of decisions, some of which are as under : (1) CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) (2) Evans Fraser & Co. Ltd. (In Liquidation) vs. CIT (1981) 25 CTR (Bom) 128 : (1982) 137 ITR 493 (Bom) (3) Addl. CIT vs. Ganapathi Raju Jegi, Sanyasi Raju (1979) 119 ITR 715 (AP) (4) Addl. CIT vs. Ganpathi Raju Jogi (1993) 200 ITR 612 (SC) (5) Bawa Shiv Charan Singh vs. CIT (1985) 47 CTR (Del) 12 : (1984) 149 ITR 29 (Del) (6) CIT vs. Markapakula Agamma (1987) 63 CTR (AP) 108 : (1987) 165 ITR 386 (AP) (7) CIT vs. Clive Mills Co. Ltd. (In Liquidation) (1983) 36 CTR (Cal) 300 : (1984) 148 ITR 14 (Cal) (8) CIT vs. Suman Tea & Plywood Industries (P) Ltd. (1997) 140 CTR (Cal) 454 : (1997) 226 ITR 34 (Cal) (9) Srikrishna Dairy & Agricul....
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....the head 'capital gains' is chargeable on their transfer in terms of s. 45, but only because their cost of acquisition and their cost of improvement in terms of s. 48 was not ascertainable in respect of these assets, no capital gains tax was chargeable on the transfer of these assets. An artificial definition deeming the cost of acquisition to be nil had been provided for in respect of the above assets by the legislature by successive amendments noted above. It is further pleaded that when the cost of acquisition and the cost of improvement of such assets which are relatively simple in nature had been held by the Courts to be unascertainable, there is all the more reason to hold that the cost of acquisition and the cost of improvement of an industrial undertaking like the cement unit in question, which comprises so many such assets is also unascertainable. 65. It is further pleaded that it is because of this lacuna in respect of the levy of capital gains under s. 45 on the slump sale of an industrial undertaking like the cement unit in question that the legislature has w. e. f. asst. yr. 2000-2001 inserted s. 50B to make a provision for the assessment of capital gain on ....
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....tion of an undertaking cannot be ascertained, he relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Industrial Machinery Associates (supra), and also decision of the Madras High Court in the case of CIT vs. P.V.K. Shaikh Mohammed Rowther & Co. (1985) tax LR 675). 69. It is further pleaded that if the cost of acquisition of the undertaking is held to be ascertainable, then question of the modus of its ascertainment would arise. The CIT(A) held that the cost of acquisition of the undertaking has to be determined with reference to the various assets reflected in the balance sheet, and he held that the depreciable assets should be taken at their written down value. It is pleaded that the written down value is not the same as cost. Relying on the dictionary meaning of the term 'cost' as "what is laid out or suffered to obtain anything", he pleaded that it is what the assessee has, in fact, expended and laid out for the purposes of acquiring the asset, that has to be regarded as the cost of acquisition thereof. In this context, he placed reliance on the decision of the Hon'ble Bombay High Court in the case of Habib Hussain vs. CIT (1963) 48....
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....the learned counsel for the assessee in the written submissions, separately filed in the context of assessee's appeal, mentioned as under : "Ground No. 9 It is submitted that having regard to the finding given by CIT(A) that what was transferred was the cement undertaking as a going concern and there as no identifiable consideration relatable to the various assets that were transferred, the CIT(A) ought to have directed the AO to allow depreciation on the written down value of the assets of Rs. 46,47,65,108. Under s. 32 depreciation is allowed on the written down value of the block of assets. The term "written down value" is defined in s. 43(6). It is submitted that having regard to the said definition written down value can only be reduced by the money payable in respect of the asset that was transferred by way of sale or exchange. If, therefore, an asset is transferred by a sale or exchange and an identifiable price is determined for such transfer, only then can an adjustment as contemplated by s. 43(6)(c)(i)(B) be made. As admittedly there is no price paid by India Cements Ltd. for acquiring the individual assets of the assessee the adjustment contemplated ....
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.... Sec. 32(1)'. (2) Where in the assessment of the assessee full effect cannot be given to any allowance under cl. (ii) of sub-s. (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance) as the case may be : (i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (ii) if the unabsorbed depreciation allowance cannot be wholly set off under R cl. (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under cl. (i) and cl. (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and' (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable....
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....the assessee in (1989) 29 ITD 455 (Hyd) (supra) for the asst. yr. 1982-83 and 1983-84 in which it was held that the cement and fertiliser units represented one and the same business, and so, the interest on the capital borrowed for setting up the cement unit was deductible under s. 36(1)(iii) of the IT Act as revenue expenditure, without its being capitalised. 77. On the various issues elaborately raised in ground No. 4, the learned counsel for the assessee in the above written submissions mentioned as under : "Ground No. 4 ........................It is submitted that the CIT(A) has directed that the legal fees, consultancy fees etc., if actually incurred, can form part of the business expenditure and a provision in respect thereof is not allowable. It is submitted that this expenditure was incurred in connection with the transfer of the cement undertaking and therefore, would be allowable under s. 48(i) as expenditure incurred wholly and exclusively in connection with the transfer. Even assuming that the amount has to be allowed as a deduction in computing the business income as the assessee admittedly follows the mercantile method of accounting, the....
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.... and as such the same were rejected at the very outset. 79. As for ground No. 7, it is mentioned that the Tribunal has been holding that, at least, 25 per cent of the entertainment expenditure (claimed at 50 per cent in the grounds) has to be treated as relatable to the employees and hence, allowable as business expenditure. 80. The learned standing counsel for the Revenue, argued, firstly, that it is futile to argue that the cost of acquisition of an undertaking cannot be computed. For any undertaking, cost can be computed, as it is reflected in the books of account. Further, in the case of the assessee, it is stressed that it is a simple affair to calculate its cost, as it has no intangible assets. He invited our attention to the order of the Madras Bench of the Tribunal in the case of India Cements Ltd. wherein it was held that there was no goodwill for the assessee-company and so the consideration paid by the India Cements could be allocated to depreciable assets for the purposes of grant of depreciation without reducing it by the cost of the goodwill. It is pleaded that the finding given by the Tribunal in the case of the vendee company is also applicable, if not binding....
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....s tax is exigible on the transfer of even an undertaking. 83. Shri Ashok invited our attention to the provisions of s. 55, as per which the cost of acquisition of the assets like goodwill has to be taken as nil. It is pleaded that the provision of s. 55(2)(a) can be relied upon and held that the cost of acquisition of such intangibles is nil. It is further pleaded that prior to insertion of s. 50B, it is not as though the slump sale was exempt from tax under the head capital gains. It is pleaded that the said provision is clarificatory. It is also pleaded that the said provision is retro-active though not retrospective. When asked to explain the distinction, the learned standing counsel said that the said provision can be invoked in pending proceedings, even though it cannot be invoked to unsettle the completed assessments. He further explained that it is analogous to the provisions of r. 1BB of the WT Act, relating to the valuation of residential properties, which has been held by the various Courts as being procedural, and so applicable for pending proceedings of even earlier years. 84. It is further pleaded that, as the case of the assessee is that he has sold the entire u....
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....the cost cannot be computed from the books of account and other records. Regarding the applicability of provisions of s. 50(2) or even s. 45, it is argued that, if liquor is taxable, the subject cannot escape tax simply because the assessee puts it in a tub and sells it. The plea taken is that as clearly capital gains is leviable on the sale of plant and machinery, the same would still be leviable even if the machinery is not sold piece meal, and the entire undertaking including the machinery is sold. 88. Referring to the decision of the Hon'ble Madras High Court in the case of P.V.K. Shaikh Mohammed Rowther & Co. (supra), the learned standing counsel pleaded that the decision was rendered in the light of a concession given by the learned counsel who appeared before it that the matter should be decided against the Department because of the decision of the Supreme Court in CIT vs. Sreenivasa Setty's case (supra). So, it is more an order than a judgment. So, it is pleaded that it need not be preferred to the decisions of the other High Courts like that of the Bombay High Court in the case of Premier Automobiles referred to above. 89. On the question of grant of deprecia....
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....hat there are no intangibles in the books of account, but he did not say that the company did not have any intangibles. He pleaded that in long gestation projects, there would be losses in the initial years and profits in subsequent years, but irrespective of the profit or loss of the year, the undertaking can have goodwill. 92. Referring to the decision of the Calcutta High Court in the case of Saharanpur Light Railway Co. vs. CIT (supra) it is mentioned that the said decision is distinguishable. In that case, what was involved was the valuation of a particular machinery. It could not be valued because it was transferred, and the Valuation Officer could not inspect it for the purpose of valuation. It is pleaded that simply because of a particular difficulty, the cost could not be ascertained in that case. Unlike the present one, that is not a case where the cost is inherently unascertainable irrespective of facilities available for such ascertainment. Shri Dastur also took cudgels with the proposition that s. 50B is only a procedural provision and is retro-active. He mentioned that s. 50B is a charging section and not a procedural section. The language of s. 50B is identical wi....
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....ransfer. On the question of the liability arising because of the exchange value fluctuations on the multi-currency loans, it is mentioned that the Department has allowed the claim upto 31st March, 1990, and so, there is no reason why they should not allow the claim upto November, 1990, i.e., the date of transfer. Regarding the obsolete items written off, it is mentioned that the Department can be given an opportunity to verify whether they are capital items or not and if they are not capital items, they should be allowed, if not as part of the cost of the undertaking in the computation of capital gains, at least, as normal revenue expenditure. 98. On the question of Rs. 12,70,672 claimed as deduction, it is mentioned that, as the Department has taken the amount of Rs. 25,25,604 being the excess of the value at which certain assets were transferred, over their book value as part of sale consideration, the assessee must also get a deduction for Rs. 12,70,672, being the deficit in respect of other assets. In other words, the sale consideration can be increased only by the difference of Rs. 12,54,932. 99. It is also pointed that it is quite erroneous to think that any of the High....
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.... be ascertained or not was neither raised by the parties nor decided upon by the Hon'ble High Court. In the case of Indian Bank Ltd. vs. CIT (supra) decided by the Hon'ble Madras High Court, a banking company was nationalised and it was paid a lumpsum consideration for the entire undertaking of Rs. 2,30,00,000. The only argument that was raised was whether the written down value of the assets could be the basis for determining the cost of the undertaking. The Court decided that the cost of acquisition of the undertaking could be determined by applying the provisions of s. 55(2) r/w ss. 48, 49 and 50, as they stood during the relevant period. 102. Sec. 50 during the relevant period stood as under' "Sec. 50. Special provision for computing cost of acquisition in the case of depreciable assets - Where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under this Act or under the Indian IT Act, 1922 (XI of 1922) or any Act repealed by that Act, or under executive orders issued when the Indian IT Act, 1886 (II of 1886), was in force, the provisions of ss. 48 and 49....
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....set and capital gains on the transfer of such an undertaking are assessable to tax under the head 'capital gains'. There are a number of decisions, which hold that an undertaking is a capital asset like the following : (a) CIT vs. Narkeshari Prakash Ltd. (supra) (b) CIT vs. F.X. Periera & Sons (Travancore) (P) Ltd. (1991) 94 CTR (Ker) 176 : (1990) 184 ITR 461 (Ker). (c) CIT vs. Hindustan Co-operative Insurance Society (1992) 107 CTR (Cal) 323 : (1994) 72 Taxman 259 (Cal). 105. We have also referred to some of these decisions in the context of Department's appeal in ITA No. 253/Hyd/1995 hereinabove. The learned counsel for the assessee has not denied that the undertaking is a capital asset and that, in principle, capital gains tax is chargeable on the transfer of an undertaking in terms of s. 45 of the IT Act. The only plea is that the computational provisions of s. 48 fail, and so, on the transfer, levy of capital gains tax has to fail. In other words, the situation is the same as on the transfer of goodwill or other self-generated assets like route permits, tenancy rights, import entitlements. This i....
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....der s. 12B(I) there must be a sale of the capital assets as such and not a sale of the capital assets involved in the transfer of a business as a whole. The third question, therefore, also has to be answered against the assessee and our answer at the said question is, therefore, in the affirmative." It may be observed that in this decision, the question whether the cost of an undertaking is ascertainable was not argued. The assessee opted for the market value of the asset as on 1st Jan., 1939, as he was entitled to in terms of third proviso to s. 12B(2) of the 1922 Act as it stood during the relevant time. So, the question before the Tribunal was as to how the market value as on 1st Jan., 1939 was to be ascertained. The other question as to whether the cost of the acquisition of the undertaking could be ascertained at all was neither raised nor considered. It requires to be remembered that the assessee is entitled to substitute the market value of the asset as on 1st Jan., 1939 in the place of the cost of acquisition. 107. If the cost of acquisition is not ascertainable, no capital gains tax could be levied even if the market value of the separate asset or of the undertaking ....
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.... 1961." It may be observed that the Hon'ble High Court did not express any opinion as to whether the cost of acquisition of an undertaking is ascertainable or not. It left the matter to the Tribunal to decide it. 111. Similar is the position with the direction given by the Hon'ble Bombay High Court in the case of Premier Automobiles (supra). The final comments and the directions of the Hon'ble High Court in that case are as under : "Accordingly, we set aside the order of the Tribunal. We make it clear that s. 45 of the IT Act applies in this case. This is on the footing that Kalyan Unit constituted the capital asset which has been transferred to PPL and on that basis the AO will have to apply the parameters under ss. 45, 48 etc., and decide on remand whether any capital gains tax liability arises, and, if so, what is the amount thereof." The above directions show conclusively that the matter is left open in this case also and the High Court did not give any finding that the cost of acquisition of an undertaking is ascertainable. 112. We may also mention that no case has been brought to our notice by the Department, where it has been held by any High....
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.... acquisition and cost of improvement as well as date of acquisition for working out the capital gains. In the case of sale of a going concern, these essential ingredients are not ascertainable and, therefore, computation provisions would be incapable of computing the capital gains. The charging section and the computation provisions together constitute an integrated fiscal code. In the present case, computation provisions contained under s. 48 fail and, therefore, slump sale is not intended to fall within the purview of charging section. Sec. 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by s. 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the IT Act where under each head of income the charging ....
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....on as per the provisions of s. 48. Balance sheet of the business undertaking as on the date of transfer viz. 31st Dec., 1992 reflects the book value of tangible assets and tangible liabilities which includes, inter alia, WDV of depreciable assets. Such computation of cost of acquisition would obviously be contrary to the computation provisions contained under ss. 48 and 49. Regarding date of acquisition, this essential fact is truly unascertainable and understandably no attempt has been made by AO to identify the same. The AO has sought to overcome the difficulty by treating the surplus realisation as attributable to stock-in-trade and treating the same as short-term asset. The entire approach of the AOP is contrary to computation provisions contained under ss. 48 and 49 and amply demonstrate the inherently unworkable nature of these provisions in relation to slump sale. What has been sold is the entire business undertaking as a going concern. Cost of acquisition, cost of improvement as well as date of acquisition of the going concern are not capable of determination. Hence computation provisions fail and no capital gain would be chargeable under s. 45. If the law fails to bring th....
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.... on maintenance, the expenses on which are all written off year after year by debiting to the P&L a/c. We are of the view that an undertaking and goodwill of a business are both capital assets having the same fluctuating features. In the context of the taxability to capital gains on the transfer of goodwill, Bombay High Court in the case of Evans Fraser & Co. Ltd. (supra), observed, as per the relevant portion of the head note, as under : "Goodwill is a property or asset of a business. It is a capital asset. But merely because it is a capital asset, gains arising on its transfer would not automatically be liable to tax. Even if the moment of acquisition of goodwill and its cost of acquisition can be pinpointed, its cost of improvement cannot be precisely ascertained in terms of money. It differs from a tangible asset such as an immovable property of a share in a joint stock company which retains its shape and form but of which the market value fluctuates. The market value of goodwill also fluctuates but it fluctuates because of its fluid nature. Goodwill built up over the years can be destroyed in a matter of days. Merely because the goodwill of a business, which had been ....
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....er : "The following questions are referred for the decision of this Court : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in deleting the sum of Rs. 4,75,000 assessed under the head 'capital gains' in respect of the transfer of the assessee's concern to the limited company? "2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty of Rs. 4,75,000 levied under s. 271(1)(c) of the Act for asst. yr. 1972-73?" 3. The Tribunal following the ratio laid down by this Court in CIT vs. K. Rathnam Nadar (supra), found that the assessment to capital gains on the facts of the case was not justified and accordingly, deleted the addition of Rs. 4,75,000. It is now fairly stated that the judgment of this Court in (1969) 71 ITR 433 (supra) was subsequently confirmed by the Supreme Court in CIT vs. B.C. Srinivasa Setty (supra). In view of the admitted position, we answer the first question referred to us in the affirmative and against the Revenue. Consequently, the second question is also answered against the Revenue. No costs. Reference a....
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....For computing the net worth, the aggregate value of total assets shall be' (a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-cl. (c) of cl. (6) of s. 43; and (b) in the case of other assets, the book value of such assets." 120. It may be observed that in terms of the above section, net worth of the undertaking on the date of transfer is deemed to be its cost of acquisition. The question now to be considered is whether this section has a retrospective or retroactive operation, as claimed by the learned standing counsel. The learned counsel for the assessee argued, as already mentioned, that language of this provision is as close as possible to s. 45, and so, it is a charging section. If the section is construed as a charging section, we are of the view that there would be some anomaly. High Courts like the Hon'ble Karnataka High Court in the case of Syndicate Bank (supra) and the Hon'ble Bombay High Court in the case of Premier Automobiles (supra) have held that tax under the head 'capital gains' is leviable, in princip....
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.... So, r. 1BB has been held to be procedural. In the context of s. 50B or s. 55(2)(a), such is not the position. It is not one of the recognised methods of valuation, which is stipulated to arrive at the cost of either the assets mentioned in s. 55(2)(a) or the undertakings referred to in s. 50B. So far as s. 50B is concerned, cost of acquisition cannot be equated to the 'net worth' of the undertaking as on the date of transfer in terms of any recognised modes of ascertainment of cost. So, s. 50B cannot, to our mind, be regarded as a procedural section. While it is not a charging section, it is also not a procedural section. It may have to be regarded only as a substantive provision. So, it has only prospective operation, as held in the cases referred to above. 123. In view of our above findings, the computational requirements of s. 48 are not satisfied, and so, no tax is leviable in terms of s. 45 on the transfer of the cement unit in question. In this context, we also refer to the judgment of the apex Court in the case of CIT vs. Ajax Products Ltd. (supra), in which it was held that the subject is not to be taxed unless the charging provision clearly imposes the obligati....
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....e for such computation has no bearing on the issue. The format of the return cannot override the specific statutory provisions of s. 70. 125. Under normal circumstances it may make no difference if the income before the grant of depreciation from all the sources is first computed and, from such aggregated income, a deduction is granted for eligible depreciation of all the businesses. Such a procedure, even if it is normal practice and even if it has no particular consequence in normal circumstances, cannot be regarded as the correct procedure conforming to the requirements of law. 126. In the present case, the AO presumably treated both the fertiliser and cement business as one unit and so, while computing the short-term capital gains under s. 50, he gave deduction for the WDV of the blocks of both the fertiliser unit and of the cement unit. As we have held in the context of departmental appeals hereinabove that the lumpsum consideration is not allowable to the depreciable assets and so the provisions of s. 50 are not attracted in this case, it makes no difference whether both the units are treated as the same business or they are treated as separate units or businesses. 1....
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....into the question whether the depreciation has to be granted in respect of each unit/business or not, we are of the view that the assessee has to fail on this issue for a different reason. The learned counsel for the assessee has argued that the ownership and user in business under s. 32 are relevant only in the year in which the particular asset enters the block and in subsequent years they lose their relevance in view of the provisions of s. 43(6)(c) which reads as under: "43. In ss. 28 to 41 and in this section, unless the context otherwise requires' (1) to (5) ................................................... (6) "written down value" means' (a) and (b) .......... (c) In the case of any block of assets,' (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,' (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and (B) by the reduct....
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.... ceased to exist and they are no longer owned by the assessee or used by the assessee. This is on the assumption that the fertiliser and cement units are one business and as the AO himself has treated it as one business as mentioned hereinabove, it is not correct for the Tribunal to treat both the units as separate. As already mentioned, in view of the decision of the AP High Court, we have to treat both the units as separate and not as one business, notwithstanding the fact that the AO himself treated it as one business. Even otherwise, s. 43(6)(c)(ii) covers a case where money is receivable on the sale of an asset. It does not cover a situation where, as in the present case, money in lumpsum is received and no part of it is allocable for the depreciable assets. Similarly, if the asset is gifted, no amount is receivable but the asset has ceased to exist and we are of the view that in such a situation also s. 43(6)(c)(ii) is not attracted. We may mention that, to be fair to him, the learned counsel for the assessee himself has given this example of gift even though he did not concede the ground explicitly. As in the case of the assessee the conditions under s. 43(6)(c)(ii) are not ....