TaxTMI 
TaxTMI 
2004 (9) TMI 366
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....; Rs. in lakhs -------------------------------------------------------- Goodwill 3.00 Technical know-how 5.00 Excise Refunds & Export Incentives 50.00 Import Licence 35.00 &n....
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....set aside the entire assessment order and directed the Assessing Officer to pass a fresh assessment order and consider the taxability of Excise Duty Refund of Rs. 23.21 lakhs as income under section 41(1) of the Income-tax Act and Cash Assistance and Excise Duty Drawback of Rs. 18.21 lakhs and Rs. 3.14 lakhs respectively under section 28(iiib) and 28(iiic) of the Act. 6. During the course of proceedings in pursuant to the order of the CIT(A) under section 263, before the Assessing Officer it was submitted by the assessee that the character of the above receipts of Rs. 44.57 lakhs in the assessee company's hands was in the nature of realisation of assets viz. claims. Hence, the receipt of the above claims was not in the nature of revenue receipts, but was in the nature of realisation of assets taken over as part of going concern. It was further submitted that in view of the decision of the Hon'ble Supreme Court in the case of Saraswati Syndicate Ltd. v. OT [1990] 186 ITR 278, Excise Duty refunds of Rs. 23,21,247 received by the assessee-company in the capacity of successor-in-business cannot be taxed under section 41(1) of the Act. 7. The Assessing Officer accepted the fact th....
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....he assessee's contention that section 28(iiib) and 28(iiic) were not applicable to the above receipts, as the above receipts were in the nature of capital receipts. Further, as the amount received was lesser than the amount apportioned by the assessee-company towards the above claims, hence, there was no taxable net surplus. 12. Shri A.M. Muntode, the learned D.R. relied on the order of the Assessing Officer. He argued that in the Agreement for transfer of business by B.H. Teli to HYT Engineering Co. (P.) Ltd. there is no apportionment of consideration paid towards the various assets taken over including actionable claims. He further argued that apportionment of Rs. 50 lakhs was towards "Export Incentives" and not Cash Assistance etc. When the Bench pointed out that Cash Assistance etc. were Export Incentives, the learned D.R. stated that he had no objection if that be the case. 13. Shri S.N. Inamdar, the learned counsel for the assessee, submitted that Mr. B.H. Teli had been carrying on a proprietary business of manufacture and sale of import substitute Special Purpose Machine Tools since 1977 under the name and style of HYT Engineering Corporation (HEC) in a profitable mann....
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....all be payable within a period of six months from the effective date in such suitable instalments as may be mutually agreed by the parties herein." According to the learned counsel, Mr. B.H. Teli offered the entire sum of Rs. 93 lakhs to tax under the head "income from capital gains" on slump sale of proprietary concern and the capital gain was computed after allowing the exemptions allowable as per the provisions of the Income-tax Act. 15. In the hands of the assessee-company, the sale consideration of Rs. 93 lakhs had to be bifurcated over the various assets taken over by the company. For the above purpose, the company appointed M/s. R.M. Khadilkar & Co. Chartered Accountants to apportion the consideration over the various assets taken over. As per the report of M/s. R.M. Khadilkar & Co. (copy placed at pages 17 to 23 of the compilation), the consideration was apportioned as under in the books of the company: -------------------------------------------------------- &n....
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....t the amount of Rs. 50 lakhs was mentioned towards Export Incentives and Excise Duty refunds, the ld. counsel submitted that the business was sold for lump-sum consideration and it was a slump sale and, therefore, no separate break up could be mentioned in the Agreement as such. He stated that the company (i.e., the transferee) was aware of the amounts receivable for Export Incentives and that the amount of Rs. 93 lakhs was fixed keeping in mind the Export Incentives & Excise refunds receivable. 19. As regards the query of the Bench whether Mr. B.H. Teli was a shareholder holding atleast 25 per cent of stake in the assessee-company, the ld. counsel replied that B.H. Teli was a shareholder and his exact stake details were placed before this Bench, and according to the information supplied the percentage of share holding of Mr. B.H. Teli in the Company is around 54 per cent to the query from the Bench as to whether the above transaction is collusive in nature, the learned counsel submitted that: (a) The above case has been already discussed in detail in the original order under section 143(3) by the CIT in the order under section 263, by the subsequent Assessing Officer in orde....
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....ear that the assessee had agreed to purchase the "entire running business with all the rights, privileges, benefits, actionable claims, loans, liabilities, pending orders etc. with effect from 10-10-1989". The receipts in question were received by the assessee in the process of realisation of assets, i.e. actionable claims and realisation of actionable claim is capital realisation and not revenue realisation. In CIT v. Minerals & Metals Trading Corpn. of India, MMTC took over the business and trade in mineral ores, concentrated metals and allied commodities from 1-10-1983 which was formerly carried on by State Trading Corporation. MMTC paid a sum of Rs. 2 crores as consideration for transfer and there was a stipulation in the Scheme/Agreement for transfer that the excess of transferred assets less the total value of liabilities and Rs. 2 crores would be treated as loan under the account "Bifurcation Suspense Account". Now, there arose a surplus due to MMTC having to pay lesser amount for settlement of liabilities. The Assessing Officer assessed this surplus in the hands of MMTC. When the case reached the High Court, the High Court held that assuming that the excess/surplus in the B....
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....but he receives it by virtue of the assignment. His title to the income arises, not by reason of the fact that he has earned it, but by reason of the fact that there is an assignment in his favour. This principle applies to the present case also. The assessee is a successor of the firm of New Cawnpore Flour Mills. It has received the refund of the sales-tax by virtue of the fact that it has taken over the business of the former and not because it is its own income. Section 20 cannot, therefore, be attracted to such an income. A similar view was taken by the Delhi High Court in a recent case of CIT v. Minerals and Metals Trading Corpn. of India Ltd. [1985] 23 Taxman 143. In this case, the decision of the Supreme Court in Hukumchand Mohan Lal's case was relied on." 25. Further even in the case of Trackpart of India Ltd. (a case on exactly similar facts), the assessee-company took over the business carried on by a firm for a consideration discharged by issue of shares. In this case, the said company received certain amounts from foreign supplier towards damages and shortages in articles originally indented by the firm. The Tribunal held that the company had fixed and paid the consi....
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....ioned the lumpsum consideration after taking over the business of erstwhile concern as under: -------------------------------------------------------- Rs. In lakhs -------------------------------------------------------- Goodwill 3.00 Technical know-how 5.00 Excise refunds and export incentive 50.00 Import License  ....
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.... the Cash Assistance of Rs. 18,21,510 and Duty Drawback of Rs. 3,14,279 as business income in view of section 28(iiib) and 28(iiic) of the Act against which the assessee preferred an appeal before the learned CIT(A). 34. It was submitted before the first appellate authority that the assessee-company had apportioned a sum of Rs. 50 lakhs towards the various Excise refunds and Export Incentives claims receivable which constitute an asset being actionable claims. Hence the receipt of Cash Assistance and Duty Drawback is in the nature of realization of the above actionable claims and is not in the nature of revenue receipts in the hands of the assessee-company. The assessee relied upon the decision of the Delhi High Court in the case of CIT v. Minerals & Metals Trading Corpn. of India Ltd. [1986] 157 ITR 371 and of the Allahabad Bench of the Tribunal in the case of Trackpart of India Ltd. v. IAC [1983] 3 ITD 489 and it was submitted that the sums in question (CCS Rs. 18.21 lakhs and Duty Drawback Rs. 3.14 lakhs) were received by the assessee only in the nature of realization of assets of going concern taken over by the assessee. The above receipts were not in the nature of income in....
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....ch is taxable under section 28(iiib) and 28(iiic) are taxable in the hands of the assessee and the learned CIT(A) is unjustified in treating this amount either as capital receipt or taking it out of the ambit of taxation. So far as the case law relied upon by the learned CIT(A) is concerned, the same is distinguishable and not applicable to the facts of the case. 37. The learned Counsel for the assessee submitted that Mr. B.H. Teli had been carrying on a proprietary business of manufacture and sale of import substitute Special Purpose Machine Tools since 1977 under the name and style of HYT Engineering Corporation (HEC) in a profitable manner. When Mr. B.H. Teli approached Bank of Baroda, Pune, for renewal and revision of the borrowing limits in 1988, the Bank stipulated a condition in its sanction letter that M/s. HEC shall be converted into a Private Ltd. Company within a short time and that the revision in borrowing limits will be sanctioned only upon Mr. B.H. Teli agreeing to this condition. 38. In view of the aforesaid condition stipulated by the Bank of Baroda, Mr. B.H. Teli decided and disposed off his existing running business known as "M/s. HYT Engineering Corporatio....
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.... Rs. 93 lakhs had to be bifurcated over the various assets taken over by the company. For the above purpose, the company appointed M/s. R.M. Khadilkar and Co., Chartered Accountants to apportion the consideration over the various assets taken over. As per the report of M/s. R.M. Khadilkar and Co. (copy placed at pages 17 to 23 of the compilation), the consideration was apportioned as under in the books of the Company: -------------------------------------------------------- Rs. In lakhs -------------------------------------------------------- Goodwill 3.00 Technical know-how &nb....
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.... a lumpsum consideration of Rs. 93.00 lakhs and that the said sole proprietorship business of Mr. B.H. Teli was discontinued and came to an end. The assessee-company, which is an independent taxable entity and is a juristic person, after buying the running concern, succeeded the business which is now being run and owned by the assessee-company with effect from 10-10-1989 and Mr. B.H. Teli in his individual capacity has got nothing to do with the said business and for him the business has discontinued. The assessee-company during the year under consideration has received the duty draw back of Rs. 3,14,379 and cash assistance of Rs. 18,21,510 aggregating to Rs. 21,35,789 with respect to exports conducted by Mr. B.H. Teli as a proprietor of the erstwhile concern, when he was running the business as the sole proprietor. Had such discontinuance of the said business by erstwhile proprietor not been done, these amounts would have specifically been taxable under section 28(iiib) and 28(iiic) of the Income-tax Act, 1961, in the hands of Mr. B.H. Teli as the sole proprietor. In order to take care of such type of situation, section 176(3A) of the Act was brought on the statute book with effec....
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....cruing to him, therefrom has to be deemed to be profits and gains of the assessee and chargeable to income tax as his income of the assessment year under consideration. Section 176(3A) provides that any sum received after discontinuance of a business is to be treated as income of the recipient in the year of receipt, if it would have been included in the total income of the person who carried on the business had it been received before such discontinuance. 45. The Bombay High Court held in CIT v. Star Andheri Estate [1994] 208 ITR 573 (Bom.) that the business of the assessee firm was discontinued from 31-3-1975, when the firm was disallowed. A sum of Rs. 9,80,000 in connection with a transaction for purchase of land entered into during the existence of the firm was received after the discontinuance of the business. The recipient was, however, the assessee firm itself. That is so because by virtue of section 189, the firm continued for the purpose of assessment despite its dissolution. There is no dispute that the income from the above receipts would have been included in the income of the firm had the income been received before discontinuance. The only objection to its chargeab....
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.... to be charged to tax as income in the year of receipt. It is to be so assessed if the sum received by the assessee would have been included in the total income had such sum been received before the discontinuance. The statutory provision in subsection (3A) is clear, that the income so received should be charged to tax accordingly in the year of receipt. The words "charged to tax accordingly", are indicative of the head of income under which the receipt is to be charged to tax. In other words, the income should by deemed to be income falling under the head "profits and gains of business or profession". When it is specifically provided that the sum received after the discontinuance of the business should be deemed to be the income of the recipient and charged to tax accordingly, it can only mean that the said amount received should be treated as income from business and should be taxed accordingly. This is made more clear by the latter half of sub-section (3A), which states that the sum received should be charged to tax, if such sum would have been included in the total income of the person who carried on the business had such sum been received before discontinuance. 47. In anoth....
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....so received should be charged to tax accordingly in the year of receipt. The words "charged to tax accordingly", according to us, are indicate of the head of income under which the receipt is to be charged to tax. In other words, the income should be deemed to be income falling under the head "Profits and gains of business or profession", i.e. head 'D' coming under section 14 of the Act. When it is specifically provided that the sum received after the discontinuance of the business should be deemed to be the income of the recipient and charged to tax accordingly, it can only mean that the said amount received should be treated as income from business and should be taxed accordingly. This is made clearer by the latter half of sub-section (3A). The latter half of sub-section (3A) states that the sum received should be charged to tax, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. It means that the said income shall be charged to tax in the year of receipt if such sum would have been included in the total income of the person had it been received before the discontinuance. "Total....
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....nue is allowed. Order under section 255(4) of the Income-tax Act, 1961 Per Chhibber, A.M. - As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire: "Whether on the facts and in the circumstances of the case, receipts of Duty Drawback of Rs. 3,14,279 and cash assistance of Rs. 18,21,510 are in the nature of realisation of actionable claims and hence in the nature of capital receipts, in the hands of the assessee?" Order under section 255(4) of the Income-tax Act, 1961 Per U.B.S. Bedi, J.M. - As there is a difference of opinion between the Members on the Bench, following point of difference is being referred to Hon'ble President for hearing on such point/s or for nominating the Third Member or to pass such orders as the Hon'ble President may deem fit and proper: "Whether on the facts and in the circumstances of the case, receipts of Cash Assistance of Rs. 18,21,510 and Duty Drawback of Rs. 3,14,279 are includible in the income....
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....sp; 5.00 Excise Refunds and Export Incentive 50.00 Import Licences 35.00 -------- Total 93.00 -------------------------------------------------------- 3. Indisputably, at the time of assignment of the business, specific price to specific asset was not being allotted. Now the slump sale is defined u....
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....g it on as the result of the transfer or assignment of that business to another person who thereafter carries it on. In the case of CIT v. A.W. Figgies & Co. [1953] 24 ITR 405 (SC) it was held that mere change in the Constitution of a partnership does not necessarily bring into existence a new assessable unit or a distinct assessable entity and in such a case there is no devaluation of the business as a whole. In the case of CIT v. Merwanji Kola & Co. [1968] 68 ITR 66: (Bom.) it was held that the requirement for granting relief under sub section (3) of section 25 of the Indian Income-tax Act, 1922, is that the business should be discontinued and not that the proprietor of the business or the proprietary body which owns the business must b discontinued. 8. It is palpable from the perusal of the records that the proprietor of the firm did offer the entire amount for capital gains. Clauses 1 and 3 of the agreement refers to actionable claims and incentive claims for which the assessee did pay consideration. It appears that the learned Judicial Member assumed that the business was discontinued by the proprietor, while factual and legal position is that the business was not discontin....
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....ct from 1st April, 1993. This case relates to the assessment year 1990-91. Under the provisions of section 41(1) of the Act, where an assessee who was allowed deduction in respect of any loss, expenditure or trading liability in any year obtains any amount in respect of such loss or expenditure or any benefit in respect of trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him was deemed to be the profits and gains of business or profession. However, it was held in the case of Saraswati Industrial Syndicate Ltd., that such an amount or benefit can be charged to tax only if the assessee who receives the amount or benefit is the same person who was allowed the deduction earlier: - 12. With a view to ensuring that there is no loss of revenue and undue enrichment, sub-section (1) of section 41 was substituted by the Finance Act, 1922, so as to bring to tax the amount or benefit, as the case may be. 13. In this case I find that there is no undue enrichment to the assessee. The person who sold the business did pay capital gains tax. Besides, the year in question is governed by the law laid down by the Apex Cour....