TaxTMI 
TaxTMI 
2009 (12) TMI 595
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....lf, 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." 3. Under the circumstances, as a majority view, we hold that the impugned transaction is not a c....
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....d that the consideration so computed was paid by the seller on 1st May 1996. The contention of the assessee was that individual value of assets and liabilities were not considered in computation of price of sale of business None of these submissions, however, impressed the Assessing Officer. He noted that the assessee had got its assets revalued at Rs.1,71,85,000, as on 31st March 1995, vide valuation report dated 12th April 1995. On the basis of this valuation report, the assets were also revalued in the books of accounts, and the resultant surplus of Rs.1,62,50,000 was credited to the partners capital accounts. It was thus clear that the value of assets was not more than Rs.1,71,85,000 shortly before the date of transfer of assets and that this valuation was done by an independent valuer. The Assessing Officer was further of the view that nothing could have influenced the price of assets within a few months to the extent that what was valued at Rs.1,71,85,000 on 31st March 1995, could be valued at Rs.5,64,79,500 within a year. The Assessing Officer thus came to the conclusion that the total value of the assets was no more than Rs.1,71,85,000 whereas the consideration for the busi....
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....accordance with the scheme of Section 255(4), Hon'ble President has nominated me as a Third Member so as the appeal can be disposed of by the majority view. 4. I have heard Shri S N Inamdar, learned counsel for the assessee, and Shri Raminder Kaushal, learned Commissioner (DR). I have also carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 5. I have noted that the Assessing Officer, while framing the assessment, took specific note of the assessee's submission that sale price of the undertaking was arrived at on the basis of profit capitalization method and even extracted the complete computation of sale price, as furnished by the assessee, in the assessment order. He did not dispute the bonafides of such a computation of sale price of the unit, even though, relying upon Hon'ble Supreme Court's decision in the case of Artex Engineering (supra), proceeded to adopt the value of various fixed assets as per report of the 'registered valuer' as on 31st March 1995. The operative part of Assessing Officer's order is as follows: 3.3 The assessee's submissions given through various letters in the course of a....
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....ee firm for P & M of Rs. 1,71,85,000/- as reduced by WDV of P & M as on 31.3.96 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/-(564,79,500 1,71,85,000) is taxed as long-term capital gain as goodwill under sub-sec 2(ii) of Sec 55 of the IT Act. 6. Even as the Assessing Officer concluded as above, he did not dispute the factual contention of the assessee to the effect that the price of transfer is arrived by the profit capitalization method. The said contention was duly recorded by the Assessing Officer at page 3 of the assessment order as follows: The price for transfer is arrived at the capitalization of profits method. The weighted average of net profits for three preceding years has been capitalized and the sales consideration is arrived at on the basis of 5 times of such weighted average. The working of consideration is arrived at as under : Financial year 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....
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.... clause (b) on page 3 of the 'agreement to assign' which reads as under: "The firm thus is seized and possessed of an is otherwise well and sufficiently; entitled to all that piece and parcel of the freehold industrial plot, within the limits of Registration District of Pune, Sub. Registrar, Mulshi, and Gram Panchayat of Village Pirangut, bearing consolidation Blck (Gat) No. 162 (part), admeasuring 192.45 sq mt or thereabout, together with the superstructure admeasuring 524.43 sq.mt. built up, or thereabout, comprising of ground floor only, constructed for the purposes of industry, constructed thereon, and together plant, machinery, assets, liabilities, rights, obligations, business, licences, permissions, contracts, electrical, installations, fixtures, fittings, easements, appurtenances, ingress, egress and, together with all incidental, consequential land supplementary rights, title, interest, claims (for short, collectively referred to as the said "INDUSTRIAL UNIT"); It is also seen that what is transferred is the said industrial unit which means the industrial unit as defined above. On page 4 of the agreement, para 1.a and 1.b reads as under: "1 In this agreement Indus....
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....oks of account while preparing the balance sheet as on 31.3.1995 has not been denied any time on behalf of the appellant. In other words it has been accepted by the appellant firm. Now coming to the contention of the appellant firm, it is seen that but for the depreciable assets, the appellant firm has not specifically transferred any other assets as mentioned in the agreement. In other words, the stand taken by the Assessing Officer is factually correct to say that the appellant firm has transferred depreciable assets for a specific value and the remaining portion is to be treated as goodwill as impliedly admitted by the appellant firm. I find that the facts in the case of Artex Mfg Co (1997) 227 ITR 260(SC) are clearly comparable with the facts of appellant's case. In that case on page 272 it was held that: "The said view was reversed by this court and it was held that "the taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction". It was observed (page 608) : "In the present case the machinery of the factory belonging to the firm was transferred to the private limited company. Assuming that thereby readjustment....
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....come was chargeable to Income-tax under section 41(2), the decision of the High Court that it was chargeable to tax as capital gain cannot be upheld. But the liability under section 41(2) is limited to the amount of surplus to the extent of difference between the written down value and the actual cost. If the amount of surplus exceeds the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess will have to be treated as capital gain for the purpose of taxation. The Tribunal has not considered the matter in this light and on the basis of the record it is not possible to answer question No. 3. We, therefore, discharge the answer recorded by the High Court on question No.3. It will be open to the Tribunal to rehear the parties and record clear findings in the light of the observations made in this judgment." 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 are clearly attracted to the facts of the appellant's case. Secondly, the ratio of the Supreme Court jud....
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....s valued by Hargovandas Girdharilal, was Rs.15,87,296. The liabilities were shown at Rs. 30,23,573 and the balance amount of Rs. 11,50,400 was shown as purchase consideration....... 10. On these facts, argument of the assessee was that "in the present case, the value of plant, machinery and dead stock is not mentioned in the agreement and the agreement does not indicate the value attributable to each item" and, therefore, provisions of Section 41(2), which require the precise sale consideration for each asset sold, cannot apply. Their Lordships rejected this argument and observed that "it is no doubt true that in the agreement, there is no reference to the value of plant, machinery and dead stock, but on the basis of information which was furnished by the assessee before the ITO, it became evident that the amount of Rs 11,54,000 has been arrived at by taking into consideration value of plant, machinery and dead stock as assessed by the valuer". Accordingly, Their Lordships held that "This is not a case in which it cannot be said that the price attributed to each item is not indicated, and, hence provisions of Section 41(2) cannot apply". In my considered view, the observations m....
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.... concern basis'. At page 2 of the said agreement, the land and superstructure thereon "together with plant, machinery, assets, liabilities, rights, obligations, business, licences, permissions, contracts, electrical installations, fixtures, fittings, easements, appurtenances, ingress, egress and together with all incidental, consequential and supplementary rights, title, interests and claims" are collectively referred to as 'industrial unit'. No doubt, at page 3, industrial unit has been given an inclusive meaning covering schedule I and II, which deal with physical assets alone, but then the agreement has to read as a whole. As an integral part of this arrangement as set out in various other specific clauses in the same agreement, even the manpower, registrations, contracts, permissions and sanctions were to be transferred to the buyer. The unit has been transferred to the buyer in a fully functional state and alongwith all the employees and all the contracts. What has in effect been sold is a functional unit 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 ov....
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.... to decide the appeal in accordance with the majority view. (Pramod Kumar) AM IN THE INCOME TAX APPELLATE TRIBUNAL BENCH 'A', PUNE ITA No.874/PN/2001 Assessment Year : 1997-98 M/s J B ELECTRONICS PIRANGUT, TAL MULSHI DIST PUNE PAN NO:FQ7127 Vs JT CIT SPECIAL RANGE-5 PUNE Mukul Shrawat and Ahmad Fareed Dated: October 20, 2008 REFERENCE UNDER SECTION 255(4) OF I.T. ACT, 1961 On a difference of opinion between the Members constitution 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 be Hon'ble President, Income-tax Appellate Tribunal, for reference to a Third Member or any other order as the Hon'ble President deem fit. (Ahmad Fareed) AM (Mukul Shrawat) JM Dissenting order in the case of M/s J.B. Electronics, Pune ITA No.874/PN/2001 for AY 1997-98 Dated: October 3, 2008 Per : Ahmad Fareed : I have gone through the order proposed by my learned br....
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....d 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 AO 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 08.04.1996 as under. 1. In this agreement I....
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....ssets 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 31.03.1997 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 Add: Income Tax Adjustment 82,111.00 PROFIT ALLOCATED TO PARTNERS 2,78,98,796.16 Mr. Dinesh B.Chheda ....
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....ly valued by a firm of Chartered Accountants, vide their so called report dated 04.04.1996 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 31.03.1997, 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 Report dated 04.04.1996 was a sequel to this afterthought, and it has to be treated only as an eyewash. 6. The contents of the Agreement dated 08.04.1996, and the Books of Account comprising 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 08.04.1996, find itemised mention in the Schedules I a....
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.... 20.03.2001 Grounds raised are as follows: "1. On facts and circumstances prevailing in the case and as per provisions of law, it be held that amount of Rs.3,90,75,997/- being the difference between the slump price of the business realized and the book value as is worked out by the assessing officer is not exigible to tax. It further be held that the conclusions drawn by the taxing authorities below taxing the said difference consisting of Rs.1,55,84,366 taxed as short term capital gain and Rs.3,92,94,500 taxed as long term capital gain is erroneous and contrary to the provisions of the Act and 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 and another vs 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 re....
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....the return, as follows : "The whole concern has been sold by the assessee at slump price on 1.5.96 as per the agreement executed, a copy of which is enclosed. The difference of Rs. 3,90,75.997 realized is not considered as forming part of income either assessable under the head business income and or capital gain relying inter-alia on ratio of following decisions: Syndicate Bank Ltd. 155 ITR 681 (Karnataka) B.C.Shrinivasan Shetty 128 ITR 294 (S.C) Mugneeram Bangur & Co 57 ITR 299 (S C) 4. On the basis of the said information a query was raised by the A.O about the taxability of the sale price received by the assessee on sale of total concern alongwith Plant and Machinery to a sister concern viz. Jagdish Electronics (I) Pvt. Ltd. For this proposition A.O placed reliance on the following decisions : i. A.R Krishnamurthy, 176 ITR 417 ii. Artex Engineering Co. 227 ITR 260 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....
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....n by the A O was that the Plant and machinery and factory building was revalued as per valuation report at Rs. 1,71,85,000 as on 31.03.1995. A.O's next observation was that it was definite that the value of plant and machinery and factory building as well as oilier fixed assets such, as two-wheelers, four-wheelers, furniture, fixture and electrical installation were transferred to Jagdish Electronics (I) Pvt. Ltd for a consideration of R 5,64.79,500. According to A.O, 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 good will under long term capital gain 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 31.03.96 of Rs. 16,00,634 ie. 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....
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....bility of provision 50 of I.T.Act In support of his arguments he has relied upon : • a. a. Artex Manufacturing Co. [ 1997) 227 ITR 260 (S.C) • b. b. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (S.C) • c. c. Premier Automobiles Ltd [2003] 264 ITR193 (Bom.) • d. d. Syndicate Bank Ltd [1985] 155 ITR 681 (Kar.) • e. e. Coromandel Fertilisers Ltd. [2004] 90 ITD 344 (Hyd.) • f. f. Industrial Machinery Associates [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 [1966] AIR 1178 (S.C). It was also pleaded that a tax payer cannot escape the consequence of law merely by choosing a particul....
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....y, spares, stores, tools, equipments, furniture, fixtures, electrical installations, vehicles, facilities, licences, registrations, amenities concessions, benefits of incentive scheme enjoyments goodwill along with the benefits of the services of the present employees without assignment of specific values of particular items." 13. The next point high lighted was the basis on which the said price of the entire Industrial Unit was fixed It was a valuation prepared by a Chartered Accountant dated 04.04.1996. 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 F.Y. 1993-94 to 1995-96, were 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%; 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 asse....
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....potential in the terms of productivity. k. Nothing to indicate that the price was affixed by adopting the method of market price valuation or price fixation of each item by a valuer. I. Consideration as a whole of the entire concern was arrived at by applying average weightage profit capitalization method by taking average profit of the past year and not a valuation method of each asset and each liability. m. It is a transfer of lock, stock and barrel since effected as lumpsum 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. Case law study has revealed an interesting feature that the Hon'ble S.C has passed the two decisions on the same date i.e on 08.07.1997. Simultaneously of Artex Manufacturing Co. [1997] 227 ITR 260 (S.C) and Electric Control Gear Mfg. Co, [1997] 227 ITR 278 (S.C). However, the....