TaxTMI 
TaxTMI 
2009 (9) TMI 690
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....facts prevailing in the case. It further be held 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. 5....
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....ssing Officer about the taxability of the sale price received by 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 ....
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....elers, furniture, fixture and electrical installation were transferred to Jagdish Electronics (I) Pvt. Ltd. for a consideration of Rs. 5,64,79,500. According to the Assessing Officer, the value of these 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 vie....
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....TO [2003] 264 ITR 193 (Bom.). (d) Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681 (Kar.). (e) Coromandel Fertilisers Ltd. v. Dy. CIT [2004] 90 ITD 344 (Hyd.). (f) Industrial Machinery Associates v. 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 ....
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....uation prepared by a chartered accountant dated 4-4-1996. Para 5 above of this order describes the computation method. The said price was affixed by adopting the capitalization of profit method. In the said valuation, the weighted average 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 availabilit....
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....ity. (m)It is a transfer of lock, stock and barrel since effected as lump sum assignment of both tangible and intangible assets. (n)Transfer was not only for plant and machinery but inclusive of tenancy rights, building, spares, tools, electrical installations, furniture, 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 ....
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....ypes of cases. We may like to place on record that considering the totality of the facts of the case we have also held that a capital asset as defined under section 2(14) has been transferred; hence the applicability of the provisions of section 45 cannot be denied. As it was 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 ....
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....nsidered for determining the value of the business, and; that the difference of Rs. 3,90,75,997 did not form part of taxable income either under the head 'Business income' or 'Capital gain'. 2.4 The Assessing Officer did not accept the assessee's explanation and, for the reasons given in paragraphs 3.3 and 3.4 of his order 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 ....
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....under : S.No. Name of the Partners Year ending 31-3-1995 1. Shri Dinesh B. Chheda 24,30,006 2. Shri Vijay J. Chheda 29,16,007 3. Mrs. Rashmi J. Chheda 27,54,007 4. Mrs. Manju V. Chheda 40,50,011 5. Mrs. Pallavi N. Shah 40,50,011 Total 1,62,00,044 5.6 And, in the balance sheet as on 31-3-1995, the value of fixed assets was shown as under : Particulars Amount (Rs.) Fixed Assets 11,35,942.00 Add: Difference on revaluation of assets 1,62,00,044.00 1,73,35,986.00 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 ....
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....044.00 2,40,24,088.84 1,78,00,678.00 Current Liabilities Current Assets Sundry Creditors 1,22,621.43 Stock-in-Trade 29,560.00 Provisions 89,19,729.00 Cash and Bank 23,33,690.47 Loans & Advances 85,44,876.88 Sundry Debtors 43,57,633.92 Total 3,30,66,439.27 3,30,66,439.27 5.12 Interestingly, the business of the assessee-firm was allegedly valued by a firm of chartered accountants, vide their so-called report dated 4-4-1996 based on the 'capitalisation of past profits method', as under : F.Y. Net Profit before tax Weightage Weighted 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 5.13 It needs to be mentioned that in the year ending on 31-3-1997, 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 Repor....
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....tween the Members constituting the aforesaid Bench, a question is to be referred by virtue of section 255(4) for the esteemed view of a Third Member as follows : "Whether or not, on the facts and in the circumstances of the case, the impugned transaction was a 'slump sale' or an 'itemized sale'?" Therefore, we accordingly refer this issue to the Hon'ble President, Income-tax Appellate Tribunal, for reference to a Third Member or any other order as the Hon'ble President deems fit. THIRD MEMBER ORDER Pramod Kumar, Accountant Member. - On a difference of opinion between the Members constituting the Division Bench when this appeal originally came up for hearing, following point of difference has been referred to me by Hon'ble President under section 255(4) of the Income-tax Act, 1961 "Whether or not, on the facts and in the circumstances of the case, the impugned transaction was a 'slump sale' or an 'itemized sale'?" 2. Briefly, the material 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 ....
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....as per valuation report dated 12-4-1995, and the total consideration paid by Jagdish Electronics Pvt. Ltd. for transfer of assets as on 1-5-1996, represented payment for goodwill. The amount of Rs. 3,92,94,500, being difference of these two figures, was thus brought to tax as long-term capital gain on transfer of goodwill. Aggrieved, the assessee carried the matter in appeal before the CIT(A), but without any success. Not satisfied with the order of the CIT(A), the assessee carried the matter in appeal before this Tribunal. 3. When the matter was argued before a Division Bench of this Tribunal, it resulted in a split verdict. While the learned Judicial Member was of the view that the industrial unit has been sold on going concern basis, along with not only building and plant machinery, but also along with all its tangible and intangible assets; that it was a case of slump sale; and that, accordingly, it was outside the ambit of taxable income under section 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....
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.... assessee firm was valued at Rs. 1,71,85,000. As per Annexure 1 and Annexure 2 of the Valuation report, the value of building (as per Annex 1) has been revalued to Rs. 8,85,000 whereas P&M were valued at Rs. 1,62,00,000 and accordingly, the revalued value was taken to the balance-sheet at the year ended on 31-3-1995 and the difference of revaluation of WDV of Rs. 1,62,00,000 were credited to the partners' current account as per valuation account. 3.4 Considering the assessee's submission and revaluation report, it is very clear that the value of P&M factory building was Rs. 1,71,85,000 as on 31-3-1995. The assessee's submission dated 22-6-1999 shows the method by which the consideration value of Rs. 5,64,79,500 was determined. The same is based upon the weighted profit capitalization method on the basis of profits earned by the assessee firm in the last three Financial Years. Also the WDV of P&M and factory building after revaluation is shown at Rs. 1,71,85,000. As 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 t....
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....9,500 The total sum of Rs. 5,64,79,500 has been received by the firm as per the details hereunder : Date Cheque Number Amount Name of Bank/Branch 1-5-1996 50428 25,00,000 Bank of India FC Road, Pune 1-5-1996 455414 3,50,00,000 Cosmos Co-op. Bank, 1-5-1996 45415 1,89,79,500 Gokhalenagar, Pune 7. When the matter travelled to the CIT(A) in appeal, once again it was the case of the assessee that the unit has been sold on the basis of slump sale basis and the sale consideration has been computed on the basis of profit capitalization method. It was pointed out by the assessee that values have not been assigned to the individual assets. In the statement of facts attached to the appeal, the assessee stated that, "The assessee firm has entered into the sale agreement with Jagdish Electronic Pvt. Ltd. who offered to buy the unit at a total consideration of Rs. 5,64,79,500 being slump price fixed on the basis of profitability of the unit for last three years" and that "the consideration being based on yield method had nothing to do with the value of assets either appearing in the books or valuation thereof by an approved valuer". Learned C....
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.... be required more particularly described in Schedule I hereunder. (b)Plant and Machinery, Spares Tools and Equipments including electrical installation, furniture & fixtures, two wheeler, four wheeler as the necessarily required & exclusively used for sustaining the working of the Unit and its administration and the same is more particularly described in Schedule II hereunder." Schedules I & II of the agreement read as under : Schedule-I Two inter-connecting factory sheds having built-up area admeasuring approximately 5645 sq. ft. and having RCC construction. Schedule-II (i)Plant & Machinery Sr. No. Description of Asset 1. Yamada Dobby High Speed Mech. Press 2. Ogaki Stamping Dies (3 nos.) 3. Elgi Air Compressor 4. Bull Arbor Press -(3 nos.) (3/4 TC) 5. Falcon Surface Grinder 6. Hydraulic Auto Rivetting Press 7. Dytek Die Tool 8. Hydraulic Moulding Machine 9. Scrap Grinder 10. Multi Cavity Bobbin Mould 11. Multi Cavity Box Mould 12. Multi Cavity Grommet Mould ....
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....: "In the present case the machinery of the factory belonging to the firm was transferred to the private limited company. Assuming that thereby readjustment of the business relationship was intended the liability to be taxed in respect of the readjustment had to be determined according to the strict legal form of the transaction. The company was a legal entity distinct from the partnership under the general law. Transfer of the machinery was by the firm to the company; and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. The transaction resulted in excess realization over the written down value of the machinery to the firm, and the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery." Further on page 276 and 277, it was held as under : Shri Ganesh, learned counsel appearing for the assessee, has submitted that in the present case the value of the plant, machinery and dead stock is not mentioned in the agreem....
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.... categorically depreciable assets, provisions of section 50 are clearly attracted to the facts of the appellant's case. Secondly, the ratio of the Supreme Court judgment in the case of B.C. Srinivasa Setty (128 ITR 294) relied by the appellant is not applicable to the facts of the case because of the amendment in the Act vide section 55(2)( a)(ii), defining the cost of acquisition for goodwill as 'zero', of Nil. The assessment framed by the Assessing Officer in this regard is found to be legally and arithmetically; correct and therefore, the same is confirmed. Appeal fails on this ground." 8. It is thus clear that none of the authorities below had any issues with genuineness or bona fides of the valuation method adopted for sale of the unit. It has never been the case of any of the authorities below that the consideration arrived at was part of the sham arrangement and that inter se relationship between the buyer and the seller has vitiated the bona fides of the sale agreement. I have also noted that, as is evident from the operative portions of the orders of the Assessing Officer as well as the CIT(A) as reproduced above, the only basis of their rejecting the stand of the asses....
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....buted to each item is not indicated, and, hence provisions of section 41(2) cannot apply". In my considered view the observations made by the Hon'ble Supreme Court in the case of Artex Engg. Co. (supra) will be relevant only in a case in which sale consideration of the business is computed on the basis of values of specific assets and liabilities. Unless, therefore, it can be established that the sale consideration is computed on the basis of value of specific assets and liabilities, this decision has no application. I am unable to see any parity between material facts of this case and the case of the assessee, as it would be wholly inappropriate to compare the computation of sale consideration admittedly on the basis of value of individual assets, as was the situation in Artex Engg. Co.'s case (supra), with computation of sale consideration on the basis of capitalization of profits, as is the situation in assessee's case. As to what should be done in a situation in which sale consideration of the business is computed on the basis of capitalization of profits, I find guidance from Hon'ble Supreme Court's judgment in the case of PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC). ....
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....nit on 'as is where is' basis and in its entirety. In my considered view, the unit was transferred as a 'going concern'. Revenue's suggestion that price paid for going concern over and above the price of the specific physical assets owned by the going concern, is on account of 'goodwill' alone amounts to a sweeping oversimplification. Not only that, as I have noted above, the value of these assets as on the date of transfer was not known, the price of a unit as a whole, on a going concern basis, need not be necessarily restricted to sum total of value of its individual assets. In the present case, sale consideration for each asset can neither be identified nor allocated to each of the asset. I have also taken note of learned Commissioner (DR)'s argument, relying upon certain observations made in the dissenting order passed by the learned Accountant Member, that the sale transaction before us is a collusive transaction between the sister concern, and, as is evident from the fact of a one page valuation report, the whole theory of valuation on the basis of capitalization of profits is an afterthought.: I am unable to see any substance in this plea. It has not been the case of any of ....