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2001 (3) TMI 1042
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.... Reference No. 243-A, briefly stated, are as under :- 2.1 Karamchand Premchand Pvt. Ltd. (hereinafter referred to as "KPP") was a Private Limited Company which maintained its accounts on the basis of the financial year ending 31st March and on that basis its assessments were completed upto A.Y. 1973-74. KPP was amalgamated with Shahibaug Entrepreneurs Pvt. Ltd. (hereinafter referred to as "SEP" or "the assessee") with effect from 1.1.1974. 2.2 On 30.3.1970 the assessee sold the Wadala unit of one of its divisions called Swastik Oil Mills to Vegoll Pvt. Ltd., a wholly owned subsidiary of the assessee for a consideration of Rs. 1 Crore. This was made up of Rs. 7.55 lacs for land and building, Rs. 6.45 lacs for plant and machinery at book value and Rs. 10 lacs for technical knowledge etc. and Rs. 76 lacs for goodwill. The assessee did not declare any income chargeable to tax but the ITO included a sum of Rs. 86 lacs relating to sale of technical knowledge and goodwill as profits from an adventure in the nature of goodwill. He further held that as the fixed assets were sold at WDV there was no profit under section 41(2). 2.3 In appeal, the AAC held that all the relevant facts ....
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.... owned subsidiary Companies of the assessee are as under :- 2 Sarabhai Chemicals Sarabhai Chemicals 6.95 Crores 7.50 Crores 4.34Cr res 3.40 Crores Sarabhai Common P. Ltd. Service Dvn. Sarabhai Mktg. Dvn. 3 Sarabhai Machinery Fabriquip Pvt.Ltd. 1.36 Crores 40 lacs Nil 4 Sarabhai Glass Dvn Packart Pvt. Ltd. 54 lacs 10 lacs 03.60 lacs 3.3 All the above transactions were with effect from 30.6.1973. The assessee did not offer any income as chargeable in its assessment for A.Y. 1974-75 in relation to the aforesaid transactions. The ITO, however, held that in respect of each transaction there was a chargeable income which was includible in the assessment. The ITO firstly held that on sale of Swastik Oil Mills there was an adventure in the nature of trade and that the business did not have any goodwill and, therefore, the amount of Rs. 2 crores (determined as goodwill of the business) was charged under the head "business income" being income from an adventure in the nature of trade. He further held that the value of the goodwill of the business of the other undertakings was not as much as adopted by the assessee and to that extent the consideration had passed on the fi....
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....ase of slump sale of each of the divisions as a going concern, there was no question of assessing the profits under Section 41(2) in the hands of the assessee (a holding Company) to its 100% subsidiary Company. In this view of the matter, the Tribunal, by a majority of 2:1, held that the AAC was not right in setting aside the assessment and in requesting the ITO to reframe the assessment after holding inquiries regarding the value of the goodwill and the other assets. From the aforesaid decision dated 4.1.1982 of theTribunal based on the majority view, Income-tax Reference No. 243 of 1985 has been made under Section 256(2) of the Act at the instance of the revenue in respect of A.Y. 1974-75. 4. Since both the references pertain to the same assessee and raise common questions of law, with the consent of the learned counsel for the parties, the two references were heard together and are being disposed of by this common judgment. 5. We have heard Mr BB Naik, learned counsel for the revenue, instructed by M/s M.R. Bhatt & Co. We have also heard Mr RK Patel, learned counsel for the assessee. Both the learned counsel have taken us through the assessment order, the order of the Appe....
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.... value of that particular asset. (b) Deeds of Assignment relating to all the transfers indicate only aggregate values of assets and in the corresponding schedules no itemwise value by way of break-up value of aggregate value is available. (c) All transfers are as going concerns by assessee, as a holding Company to 100% wholly owned Indian subsidiary companies and all assets are transferred at book value. (d) The Tribunal's order, particularly the order of the third learned Member of the Tribunal, gives an undisputed finding of fact that the transactions are transactions of slump sales and each undertaking is sold as a whole. On this limited aspect, there is no difference of opinion between the Members of the Division Bench. The Tribunal further states that the appellant has not entered into sales of different items of the undertakings in question, but has sold the entire undertaking in each case. The parties have not put the valuation on the different assets and liabilities involved before coming to the net price in computing the slump price. Strong reliance has been placed on the decision of the Apex Court in CIT vs. Electrical Control Gear Mfg. Co.,....
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.... charging the same as income u/s. 41(2) because of several important factors like varying rates of depreciation for different assets. Strong reliance is placed on the decision of the Apex Court in Sunil Siddharthbhai vs. CIT, (1985) 156 ITR 509. III Lastly, in any case, the taxable event is applicable only to the building, machinery, plant and furniture and, therefore, no other assets can be included within the scope of section 41(2) for taxability of difference between written down value and the actual cost. 8. Before dealing with the rival contentions, it will be necessary to make a brief reference to the findings given by the Income-tax Officer in the assessment order, by the Assistant Appellate Commissioner in appeal and by the Members of the Tribunal regarding valuation of the goodwill as the said findings would assume considerable importance while deciding the rival contentions. 9.0 FINDINGS GIVEN BY THE ITO 9.1 Swastik Oil Mills Ltd. was a separate Company from 1930 onwards and it was under the managing agency of Sarabhai Sons (P) Ltd., a sister concern of the assessee. Earlier the shares of Swastik Oil Mills Ltd. were held by three groups including Sarabhai grou....
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....magined by the valuer prior to its amalgamation with the assessee Company. (c) When the Swastik Oil Mills Ltd. was incurring losses it was sold to the assessee by its shareholders. (d) Even after the assessee assumed its control it could not make any profits and it incurred losses to the tune of Rs. 54.92 lakhs as stated above. (e) As discussed above, the Swastik Oil Mills had two divisions - one of its divisions i.e. Wadala Unit has already been sold by the assessee in the accounting year 1969-70 to Vegoils (P) Ltd. and a goodwill of Rs. 76,00,000/- had already been charged. When a goodwill of Rs. 76,00,000/- had already been charged then where is the possibility of any further goodwill and that too to the extent of Rs. 2 Crores. (f) Goodwill in its present form means the business is better than normal return of profitability. But here the case is reverse. So there is no goodwill. The business is also not of a monopolistic nature. (g) It is pertinent to mention here that the Swastik Oil Mills division was sold to Swastik Household and Industrial Products (P) Ltd. on 30.3.1973 whereas the above valuation report is dated 25.6.1975. It mea....
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.... and equipments, loans and advances, current assets (including sundry debtors) and cash and bank balance, raw material, stock-in-process, strock-in-trade, spares, stores and other articles and current liabilities available in the books of accounts as noted by the ITO in the assessment order and reproduced at page 203 of the paper book are as under : Sr. No Divisions Sarabhai. Machinery Chemicals, Glass Rs. (in lacs) Sarabhai Common Services Rs. (in lacs) Sarabhai Mktg. Dvns. Rs. (in lacs) 1 Land & building 23.00 91.00 6.00 2 Machinery & equipments, loans and advances, current assets, cash and bank balances 28.00 372.00 21.00 3 Raw materials 74.00 838.00 26.00 4 Goodwill 40.00 750.00 10.00 5. Total 165.00 2051.00 63.00 6. Less : Current Liabilities 29.00 1356.00 18.00 7. Net Amount 136.00 695.00 45.00 The ITO noted that the transferees/wholly owned subsidiaries to which the shares were sold were floated only on 20/22.6.1973 pursuant to the Board of Directors' resolution dated 14.6.1973 and the assessee Company resolved to subscribe their enti....
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....years of the sale. If the above defects are removed from the computation of goodwill made by the value, the goodwill come only to Rs. 4,34,00,000/- 9.4 The aforesaid amount was worked out by the ITO and placed in Annexure "A" to the assessment order by working out the average net profits after tax as taken by the valuer for Sarabhai Chemicals Division, Sarabhai Marketing Division and Sarabhai Common Services Division for the A.Y. 1974-75 as under : ANNEXURE 'A' Sarabhai Chemicals Division Sarabhai Marketing Division Sarabhai Common Services Division 1) Average Net Profits after tax as taken by the value Rs.95,00,000/ Less: Managerial remuneration Rs.2,50,000/ Rs.92,50,000/- 2) Average purchase price equal to 2 years Rs.1,85,00,000/ Super Profits Net average profits Rs.92,50,000/- Multiple of 10 i.e. 10% Rs.9,25,00,000/ Less: Net Worth Rs.2,42,00,000/- Rs.6,83,00,000/ 3) Average purchase price Rs.1,85,00,000/- Add: Super profits Rs.6,83,00,000/- Rs.8,68,00,000/- Ave....
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....rtaking is transferred as a going concern and the assets are transferred at their respective book values, the question of levying any balancing charges should not arise. The assessee claimed that the total sum of Rs. 10 crores represented the value of the goodwill and was not required to be charged under Section 41(2) of the Act as balancing charge or as a business profit when what was sold was the entire undertaking in a nature of 4 divisions and not individual assets of those undertakings. The assessee also stated that it has no information about the market valuer of the assets. 9.6 After considering the aforesaid objections and negativing them, the ITO placed the valuation of the goodwill as stated in the chart in para 3.1 of this judgment as worked out as per the details given in the annexure to the assessment order and which is reproduced in para 9.4 hereinabove. The Assessing Officer came to the conclusion that the assessee had tried to avoid furnishing the of the details called for in order to conceal the fair market value of its assets so as to prevent the difference between the fair market value and the books value of the assets other than goodwill as business profits o....
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.... the said conclusion. Even at the hearing of these references, focus of controversy was whether the value of the goodwill as indicated by the assessee or as determined by the Assessing Officer is to be considered as representing profits under Section 41(2) which can be taxed. Under normal circumstances, goodwill being a capital asset is not taxable when the sale is to be subsidiary but after considering all the relevant evidence and circumstances and the arguments advanced on behalf of the assessee and the departmental representative, the Assistant Commissioner came to the broad conclusions in favour of the revenue on the following issues : "(i) the fallacy of creating a goodwill while other assets are transferred at book value or WDV especially when the transfer is to a subsidiary. (ii) the motive behind creating the so called goodwill which is primarily intended to circumvent the taxation laws and the consequent need for a through scrutiny as to whether it had been devised to escape taxation of profits u/s. 41(2) and other profits, and (iii) on the non acceptability of the arguments of the assessee that when an undertaking is sold as such the Income Tax....
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....other assets are sold at book value or WDV is more unusual and hence suspicious. (vii) The explanation that the inflated assets by creation of goodwill can common better financial or loan assistance is by itself not acceptable nice in such cases the real worth of the assess is often looked into and not the goodwill. The real explanation is that the so called goodwill can be said to represent the appreciated value of the assets. In fact in the case of valuation of Wadala unit goodwill created by the assessee was including the enhanced value of lease hold land. (viii) There has been kaleidoscopic changes in the pattern of companies and the shareholdings and as well be discussed in the later paragraph the underlying motive in the reorganization was tax planning and avoidance. This leads to the obvious inference that the assessee wanted to avoid tax by transferring the assets at book value and at the same time roap other benefits by creating the so called goodwill which really represented the enhanced value of assets, and at the same time it could avoid tax by resorting to this method of entry. (ix) The Income-tax Officer has therefore the right to examine th....
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....istant Commissioner also gave an illustration how the assessee floated the subsidiary investment Company called Alkapuri Investments Pvt. Ltd. and concluded that every move the assessee had been aimed at tax avoidance and tax planning and the creation of goodwill was only a part of the programme of tax avoidance and tax planning and there was, therefore, need for proper inquiry as to whether the question of goodwill had been given at an exaggerated figure. Even while holding that there was need for inquiry for purposes of ascertaining the correct figure of goodwill as accepted by the principles of accountancy, the Assistant Commissioner came to the conclusion that the inquiries conducted by the ITO were incomplete and, therefore, the Assistant Commissioner came to the conclusion that in the interest of justice the assessee should be provided with one more opportunity to furnish its estimate of the market value of assets transferred on which the profits can be taxed. The Assistant Commissioner accordingly set aside the assessment with the following directions to be observed by the ITO while reframing the assessment : "(i) Computation of goodwill of all the four units transf....
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....ccepted the assessee's arguments that the sales in question were slump sales of the entire undertakings and that, therefore, there was no question of valuing the goodwill separately. 12. On reference, the Vice President of the Tribunal agreed with the view of the Accountant Member and in view of the said judgement dated 28.2.1991 of the Vice President, the Tribunal by its decision dated 4.1.1982 allowed the appeal of the assessee after holding that the undertakings as a whole were sold and, therefore, there was no question of assessing profits under Section 41(2) of the Act. It was also held that the Assistant Appellate Commissioner did not have jurisdiction to direct the ITO to reframe the assessment including therein the balancing charge and profits from the sale of stocks, if any, in respect of the transaction of the sale of the Swastik Oil Mills division at Ambarnath and that even if it is assumed that he had such jurisdiction, since there was no scope for including in the total income any income by way of balancing charge under Section 41(2) and profit from the sale of stocks, spares etc. the Appellate Assistant Commissioner was not right in setting aside the assessment....
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....ring the course of the assessment proceedings before the Income-tax Officer, for the purpose of determination of the purchase consideration, the assets were shown at Rs. 41,73,973 out of which the plant, machinery and dead stock, as revalued by H 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 the purchase consideration. The written down value of plant, machinery and dead stock, according to the assessee's books, was Rs. 4,36,896. The difference between Rs. 15,87,296, the value of plant, machinery and dead stock as revalued, and Rs. 4,36,896, the written down value of plant, machinery and dead stock, according to the assessee's books, came to Rs. 11,50,400. The Income-tax Officer held that the written down value of plant, machinery and dead stock according to the income-tax records was Rs. 3,32,276. After deducting the same from the amount of Rs. 15,87,296 for which the plant, machinery and dead stock were transferred to the company, the Income-tax Officer held that tax was payable under section 41(2) on the income of Rs. 12,56,020. The Tribunal held that the surplus was taxable as business profit under sec....
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....ples of accountancy, there was no warrant for the Tribunal to interfere with the said order. Moreover, even if the assessee was not in a position to give the particulars about the market value of various assets, it was certainly open to the assessee to point out the actual cost of the assets and the difference between the written down value and the actual cost was liable to be taxed as balancing charge under Section 41(2). 16. We have not gone into details of the valuation made by the ITO as the question is left open by the Appellate Assistant Commissioner for determining the correct value of the goodwill. 17. We may point out that the principle in Electric Control Gear Mfg. Co. is not applicable. The facts in the said case were as under : The assessee was a partnership concern consisting of 13 partners. On March 31, 1966, it entered into an agreement whereby it transferred the entire assets of the business together with the liabilities as a going concern to a limited company, for a consideration of Rs. 8 lakhs. The erstwhile partners of the assessee firm were allotted share in the company of the same value in their profit sharing proportion. The Income-tax Officer held th....
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....t of Swastik Oil Mills division was sold by the assessee to its newly floated wholly owned subsidiary Vegoil (Pvt) Ltd. for a consideration of Rs. 1 Crore which had the following break up : Particulars Amount (Rs.) Land, building, plant & machinery 14,00,000/ Technical know-how 10,00,000/- Goodwill 76,00,000/- Even the said amount of Rs. 76 lakhs has been found to be an exaggerated figure as per the concurrent findings given by the ITO and the AAC. 18. In view of the aforesaid facts, we are satisfied that the order of remand passed by the Appellate Assistant Commissioner did not warrant any interference at the hands of the Tribunal. 19. As regards the contention of Mr Patel for the assessee that the actual machinery for computation would fail in arithmetical terms. We are unable to accept the said contention. If the difference between the actual cost and the written down value of the assets is taxable under Section 41(2), the same will have to be taxed. The decision of the Supreme Court in Sunil Siddharthbhai vs. CIT, (1985) 156 ITR 509 pertained to consideration which a partner acquires on making over his personal asset to the firm as ....