TaxTMI 
TaxTMI 
2009 (9) TMI 690
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....eld that the facts are distinguishable in the case of the appellant as compared to the ratio of decisions in case of AR Krishnamurthy v. CIT 176 ITR 417 (SC) and that of Artex Engineering reported in 227 ITR 260 (SC) relied upon by the taxing authorities below, and they do not cover the issues prevailing in the case of the appellant and are distinguishable on facts. The income so assessed by the taxing authorities below be held as not taxable. The income so taxed be deleted. The appellant be granted just and proper relief in this respect. (2) On facts and circumstance prevailing in the case and as per provisions of law, it be held that the bifurcation made by the taxing authorities below of the consideration realized on transfer of the business is beyond the jurisdiction of the Assessing Officer and erroneous and perverse. There is no scope for making any bifurcation of the consideration realized on account of the transfer of the business. It further be held that the case of the appellant is covered inter alia by the ratio of decisions of Syndicate Bank Ltd. 155 ITR 681 B.C. Shrinivasa Shetty 128 ITR 294 (SC), Mugneeram Bangur & Co. 57 ITR 299 (SC). It further be held that no part....
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....y the assessee on sale of total concern along with plant and machinery to a sister concern, viz., Jagdish Electronics (I) Pvt. Ltd. For this proposition, Assessing Officer placed reliance on the following decisions : (i) A.R. Krishnamurthy v. CIT [1989] 176 ITR 417 (SC). (ii) CIT v. Artex Engineering Co. [1997] 227 ITR 260 (SC). 5. In compliance, the assessee has submitted the following explanation: "(i)The price for transfer is arrived at by capitalization of profits method. The weighted average of net profits for 3 preceding years has been capitalized and the consideration is arrived at on the basis of 5 times of such weighted average. The working of the consideration arrived at is as under : F.Y. Net Profit before tax Weightage Weightage value 1993-94 50,69,100 1 50,69,100 1994-95 1,07,08,500 2 2,14,17,000 1995-96 1,37,63,100 3 4,12,89,300 Total 6 6,77,75,400 Weighted average Rs. 6,77,75,400 = Rs. 1,12,95,900 6 Capitalisation at 20 per cent Rs. 5,64,79,900 (ii)The total sum of Rs. 5,64,79,500 has been received by the firm as per details hereunde....
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....ese assets could not be more than the revalued amount of Rs. 1,71,85,000. In his view, the rest balance, i.e., of Rs. 3,92,94,500 was nothing but 'good-will', paid by the transferee to the assessee. Accordingly, under two heads, i.e., (i ) value of assets under short-term capital gain (ii) value of goodwill under long-term capital gain, it was taxed as per the following calculation : "(a)Total consideration received by the assessee firm for P&M of Rs. 1,71,85,000 as reduced by WDV of P&M as on 31-3-1996 of Rs. 16,00,634 i.e., Rs. 1, 55,84,366 is taxed as short-term capital gain. (b)The remaining part of consideration value of Rs. 3,92,94,500 (5,64,79,500 - 1,71,85,000) is taxed as long-term capital gain as goodwill under sub-section (2ii) of section 55 of the Income-tax Act." 7. Those additions were challenged. 8. The first appellate authority has primarily relied upon the decision in the case of Artex Engg. Co. (supra) and thereafter given the finding as follows: "In view of the above, there is no scope left for any different view to be held. In the first place, since the assets included in the agreement to assign are categorically depreciable assets, provisions of section 50....
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....CIT [2002] 81 ITD 482 (Ahd.). 10. From the side of the revenue, ld. DR has supported the orders of the authorities below and also argued that the true effect of a transaction can be gathered from the terms embodied and the surrounding circumstances of the transaction carried out thus cited Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178. It was also pleaded that a taxpayer cannot escape the consequence of law merely by choosing a particular term though in substance it gives a different meaning, decision cited CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66 (SC). Ld. D.R. Mr. Bains has also cited Mahindra Sintered Product Ltd. v. CIT [1989] 177 ITR 111 (Mum.) for the preposition that where price had been fixed before hand of identifiable assets of an undertaking, then such transfer would not constitute a slump sale. 11. Heard the submission of both the sides at length. Due cognizance was given to the material facts; evidences and case laws cited. Undisputed facts, in short, were that the assessee-firm as a going concern was transferred as a whole as per the term of an agreement placed before us dated 8-4-1996 agreed to be effective from 1-5-1996. It was....
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....age of net profit of the immediately past three financial years financial years 1993-94 to 1995-96, was capitalized. Thus, the figure has arrived at Rs. 6,77,75,400 which was divided by the figure of 6 so the weighted average came at Rs. 1,12,95,900. That average profit was thereafter capitalized at 20 per cent; so as to arrive at the figure of Rs. 5,64,79,900. This was made basis to fix the price of the said Industrial Unit for the purpose of affixing the consideration of the impugned transfer and it was not a case of assets and liabilities valuation method. 14. The above two impugned factors, first, the contents of the agreement and second, the method adopted for determination of the lump sum consideration, are the primary evidences which are helpful for answering the question posed to us. An another important material fact has also been placed on record in support of the plea that this was the case of a 'going concern' in form of the availability of the list of products being manufac-tured by the assessee as listed in the attached Schedule 3 of the impugned agreement. So as to arrive at a conclusion we are required to examine the entire arrangement; which consisted of agreement....
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....urniture, fixture, licenses, registration benefits of incentive schemes, goodwill, etc. (o)The price so fixed i.e., the total consideration was such that it could not be apportioned among the various assets constituting the undertaking. 15. A case law study has revealed an interesting feature that the Hon'ble Supreme Court has passed two decisions on the same date, i.e., on 8-7-1997. Simultaneously of Artex Engg. Co.'s case (supra) and CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 . However, themselves made a distinction that in the case of Artex Engg. Co. (supra) section 41(2) was applicable since price was attributable to the plant, machinery, and dead stock which were transferred but in the case of Electric Control Gear Mfg. Co. (supra), there was nothing to indicate that the price was attributable to assets like machinery, plant, building in the lump sum consideration. 16. In view of foregoing discussion in a nut shell, we hereby hold that since the impugned transfer was not a transfer consisting of itemized sale of assets but a transfer of the entire business unit as a whole, it is out of the ambit of the provisions of section 50. At the cost of repetition we her....
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....held by the Hon'ble jurisdiction of High Court on identical terms, we hereby remand this issue to the Assessing Officer to compute the quantum of capital gain and for that purpose the Assessing Officer will have to decide the cost of the undertaking for the purpose of computing capital gain, if any, that may arise on transfer. The court has further held that the Assessing Officer will also be required to decide its value under section 55 of the Act and will be required to decide on what basis indexation should be allowed in computing the capital gains. The Assessing Officer's venture of treating the balance amount as "goodwill", ignoring one of the clause of the agreement and thereupon invoking section 55 has to be re-examined in the light of the aforesaid direction of the Hon'ble High Court. In short, we hereby state that the Assessing Officer shall follow all those directions as made by the Hon'ble Court in the case of Primer Automobiles (supra) to arrive at the figure of capital gain, if any, to be taxed in the hands of the assessee. 18. In the result, the appeal may be treated as partly allowed. Ahmad Fareed, Accountant Member. - I have gone through the order proposed by my l....
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.... under section 143(3) dated 29-2-2000, he assessed the total income at Rs. 5,51,00,070 as under : Particulars Amount (Rs.) Amount (Rs.) 1. Income from Business: Income as per computation 39,534 Add: Depreciation 1,81,670 2,21,204 II. Income from Capital Gain: Short-Term Capital Gain 1,55,84,366 Long-Term Capital Gain 3,92,94,500 5,48,78,866 Total Income 5,51,00,070 3. The appeal filed against the order of the Assessing Officer was dismissed by the CIT(A) and his order has been challenged by the assessee in the present appeal. 4. In my considered opinion, the impugned transaction between the assessee-firm and its sister - company M/s. Jagdish Electronics (I) Private Limited, was not a 'slump sale' for the reasons discussed in the following paragraphs. 5. It has to be kept in mind that the transferor - firm and the transferee -company were sister concerns. 5.1 The subject-matter of the impugned transaction was the 'industrial unit' which was described in detail in the clauses (1)(a) and (1)(b) of the Agreement dated 8-4-1996 as under : "1.In this agreement Industrial....
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....00 5.7 The profit of Rs. 3,90,75,996, credited to the profit and loss account, was arrived at after deducting the 'Net Book Value of Rs. 1,74,03,504 from the total price of Rs. 5,64,79,500. The Profit and loss account for the year ended 31-3-1997 looked as under: Particulars Schedule No. Amount (Rs.) Income Excess Amount realised over Net Book Value 3,90,75,996.50 Interest on loans 2,58,125.00 Interest on Fixed Deposits 452.00 Labour Charges 15,000.00 Miscellaneous Receipts 397.66 3,93,49,971.16 Expenses 2,33,286.00 Profit for the year 3,91,16,685.16 Less: Provision for Income-tax 1,13,00,000.00 2,78,16,685.16 Particulars Schedule No. Amount (Rs.) Add: Income-tax Adjustment 82,111.00 Profit allocated to 2,78,98,796.16 Partners Mr. Dinesh B. Chheda 15% 41,84,819.42 Mr. Vijay J. Chheda 18% 50,21,783.31 Mrs. Rashmi J. Chheda 17% 47,42,795.35 Mrs. Manju V. Chheda 25% 69,74,699.04 Mrs. Pallavi N. Shah 25% 69,74,699.04 5.8 The current/accounts of the partners....
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.... the assessee not only made a provision for income-tax of Rs. 1,13,00,000 but paid advance tax of Rs. 1,13,00,000. It appears that at a later stage the assessee had an afterthought, and made the above claim of 'slump sale'. The so-called Valuation Report dated 4-4-1996 was a sequel to this afterthought, and it has to be treated only as an eyewash. 6. The contents of the agreement dated 8-4-1996, and the books of account comprising of the profit and loss account, the balance sheet, and the capital account, as reproduced in the above paragraphs, do not support the assessee's claim. The 'Plant and Machinery' and the 'Factory Building', which were the subject-matter of the agreement dated 8-4-1996, find itemised mention in the Schedules I and II thereof. These specific items of assets were revalued as on 31-3-1995 and the appreciation in their value amounting to Rs. 1,62,00,044 was credited to the current account of the partners in their profit sharing ratio. In the balance sheet as on 31-3-1995, this amount was shown separately. In other words, this amount of Rs. 1,62,00,044 formed part of Rs. 5,64,79,500 which was mentioned in the said agreement as the price of the 'industrial unit'....
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.... facts giving rise to this dispute before me are as follows. The assessee before me is a partnership firm, and the assessment year involved is 1997-98, i.e., when section 50B was not on the statute. In the course of its assessment proceedings, the Assessing Officer noticed that the assessee has not carried any manufacturing activity in the relevant previous year but a sum of Rs. 3,90,75,996 has been credited in its profit and loss account as 'excess amount realized over net value' which has been, in computation of taxable income, claimed as exempt from tax on the ground that the surplus is on account of the slump sale of its business to Jagdish Electronics Pvt. Ltd. It was stated by the assessee that price for transfer of business has been fixed on the basis of profit capitalization method, taking last three years profit as base figures and with a weightage of three for the immediate preceding year, two for the preceding year before that and one for the last preceding year taken into account for the purposes of profit capitalization. It was also submitted that the valuation of business was purely on that basis of such profit capitalization, at five times the value of such weighted ....
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....on 50 of the Income-tax Act, the learned Accountant Member did not share that perception. He was of the view that "this impugned transaction between the assessee firm and its sister company Jagdish Electronics Pvt. Ltd. was not a slump sale". He took note of the fact that the seller and buyer of the industrial unit were sister concerns and the core of sale transaction was industrial unit which consisted of the plant and machinery, and the factory building, as also of the legal position to the effect that, in order to construe an agreement, courts have to look at the substance or essence of the transaction rather than its form. The value of building and plant and machinery, as revalued just about one year before the date of alleged slump sale, was available on record. Anything paid in excess of this value, according to the learned Accountant Member, was payment for goodwill liable to be taxed under section 55(2)(a). He thus upheld the stand of the authorities below on this issue, and declined to interfere with the matter. There is thus no meeting ground between the esteemed views of the learned Members who constituted the Division Bench. To come out of this cul-de-sac, and in accord....
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....s per revaluation report, it is definite that the value of P&M and factory building as well as other fixed assets such as two-wheelers, four-wheelers, furniture and fixtures and electrical installation which were also transferred to Jagdish Electronics (I) Pvt. Ltd. for a consideration value of Rs. 5,64,79,500 will not be more than Rs. 1,71,85,000. The value of P&M cannot be more than that has been revalued by the Regd. Valuer. If this aspect is taken into consideration that out of the total consideration value of Rs. 5,64,79,500, the value of P&M factory building and also all other assets which were shown in the fixed assets account of the assessee concern cannot be more than Rs. 1,71,85,000. Thus, it is definite that the remaining consideration value of Rs. 3,92,94,500 will be nothing than goodwill which the transferee Jagdish Electronics has paid to the assessee firm. Relying on the decision of Hon'ble Supreme Court in the case of A.R. Krishnamurthy reported in 176 ITR 417 and in the case of Artex Manufacturing Co. reported in 227 ITR 260 , the consideration received by the assessee firm is taxed in the following manner: (a)Total consideration received by the assessee firm for ....
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....he value of assets either appearing in the books or valuation thereof by an approved valuer". Learned CIT(A) did nowhere dispute the above contentions and yet the CIT(A) expressed the view that "the appellant firm has actually transferred the depreciable assets which fact is corroborated by the instrument evidencing the transfer and not denied by the appellant firm" as also the view that "the facts in the case of Artex Engg. Co. (supra ) are clearly comparable with the facts of the assessee's case". Learned CIT(A) then extensively reproduced from the said judgment of Hon'ble Supreme Court, and held that all the material facts of this case vis-a-vis the case of Artex Engg. Co. (supra) are similar. That was the only basis of CIT(A)'s confirming the action of the Assessing Officer. The CIT(A) confirmed the action of the Assessing Officer and observed as follows : "2.2 I have considered rival submissions. In the first place it must be understood that the subject-matter of transfer between the appellant firm and Jagdish Electronics (I) Pvt. Ltd. was an 'Industrial unit' which is defined in sub-clause (b) on page 3 of the 'agreement to assign' which reads as under : "The firm thus is s....
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....ld 13. Multi Bobbin Mould 14. Multi Tube Mould 15. Multi PVC Cap Die 16. Multi Copper Foil Die 17. Cutting Tool 18. Bending Tool Sr. No. Description of Asset 19. Piercing Tool 20. 4-Cavity Dies for Moulding Machine 21. 'I' Stamping Die Tool 22. 'C' Stamping Die 23. 'T' Stamping Die Punch 24. Winding Machines (2 nos.) 25. Press Cylinder (2, 'T' Cap.) (ii)Two Wheelers Sr. No. Description of Asset 1. Bajaj Sunny 2. Kinetic Honda (iii)Electrical Installation being electrical wiring and related equipment for providing motive power to the Plant & Machinery. (iv)Furniture & Fixtures consisting of miscellaneous items like tables, chairs & cupboards. This means that the appellant firm has actually transferred the depreciable assets which fact is corroborated in the instrument evidencing the transfer; and not denied by the appellant firm. The observations made by the Assessing Officer in the assessment order that all the depreciable assets have been specifically revalued for the value as mentioned in; the assessm....
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....ment there is no reference to the value of the plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee before the Income-tax Officer, it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of the plant, machinery and dead stock as assessed by the valuer at Rs. 15,87,296. This is not a case in which it cannot be said that the price attributed to the items transferred is not indicated and, hence section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that section 41(2) of the 1961 Act is not applicable. Question No. 2 referred to the High Court is, therefore, answered in the affirmative, i.e., in favour of the Revenue and against the assessee. Question Nos. 2 and 3 are interconnected in the sense that the surplus amount resulting from the transfer of plant, machinery and dead stock is either taxable as income under section 41(2) or as capital gain under section 45. The Tribunal was of the view that it was chargeable to income-tax under section 41(2) while the High Court has held that it was chargeable to tax as capital ga....
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.... as on 31-3-1995, and that any amount paid over and above such value must be treated as payment for goodwill. In support of their stand, both the authorities below have relied upon Hon'ble Supreme Court's judgment in the case of Artex Engg. Co. (supra). 9. In my view, there is an inherent fallacy in this approach. There is no dispute that valuation on 1-5-1996 for individual assets is not available, and the valuation report relied upon by the authorities below is dated 12-4-1995 estimating value of the assets as on 31-3-1995. The value of an asset as on 1-4-1996 cannot be the same as on 31-3-1995. There are bound to be variations. It cannot therefore be said that valuation of individual assets as on the date of transfer was available. In the case of Artex Engg. Co. (supra), all the related values of assets and liabilities as on the date of transfer were on record. As observed by Hon'ble Supreme Court in paragraph 2 of the said order, the relevant undisputed facts were as follows :- ".....During the course of assessment proceedings before the ITO, for the determination of purchase consideration, the assets were shown at Rs. 41,73,973, out of which the machinery and dead stock, as ....
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....ess and the said compensation was computed on the basis of capitalization of last five years' profits, Their Lordships, inter alia, held that Artex Engg. Co.'s case (supra) will not have any application to such a situation for the reason that in Artex Engg. Co.'s case (supra) "a valuer was appointed, that valuer submitted the valuation report in which itemized valuation was carried out, and, on that basis, the sale consideration was fixed". That certainly cannot be the situation in which admittedly sale consideration was arrived at by profit capitalization method, and, as such, the slump price is not capable of being attributable to individual assets. In view of this discussion, in my considered view, the Hon'ble Supreme Court's judgment in the case of Artex Engg. Co. (supra) does not have any application to the facts of this case. The sale of industrial unit, on the facts of the case, must be held to have been made on slump sale basis. The other aspect of the matter is that the unit has been transferred as a going concern basis. A plain reading of the agreement dated 18-4-1996, as a whole, would indicate that as a part of this sale agreement, the assessee also had an obligation to....
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....he payments have been made in accordance with this agreement on 1-5-1996 itself, and therefore, it cannot be said that the quantification of sales consideration was an afterthought. As for the assessee and the buyer being sister concerns, merely because an agreement is entered into by related parties the effect of the agreement cannot be ignored. The case of the assessee has all along been that the method of arriving at the sale consideration of the industrial unit has been 'capitalization of profits', and none of the authorities below has doubted correctness of this claim. When the sale consideration is so arrived at; and the method of its computation is not challenged by any of the authorities below, it cannot at all be said that the sale of unit is an itemized sale of the assets of the unit. In my view, therefore, the impugned transaction is not a case of itemized sale and it is clearly a case of slump sale of the business. Accordingly, while I am in well considered agreement with the conclusions arrived at by learned brother Judicial Member, I respectfully express my inability to concur with the conclusions arrived at by learned brother Accountant Member. 11. Let the matter be....