TaxTMI 
TaxTMI 
2001 (3) TMI 36
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....er : 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 March 31 and on that basis its assessments were completed up to the assessment year 1973-74. KPP was amalgamated with Shahibaug Entrepreneurs Pvt. Ltd. (hereinafter referred to as "SEP" or "the assessee"), with effect from January 1, 1974. On March 30, 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. 7.5 5 lakhs for land and building, Rs. 6.45 lakhs for plant and machinery at book value and Rs. 10 lakhs for technical knowledge, etc., and Rs. 76 lakhs for goodwill. The assessee did not declare any income charge able to tax but the Income-tax Officer included a sum of Rs. 86 lakhs relating to sale of technical knowledge and goodwill as profits from an adventure in the nature of trade. He further held that as the fixed assets were sold at the written down value there was no profit under section 41(2). In appeal, the Appellate Assistant Commissioner hel....
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....30, 1973, the consideration was determined for the sale of each division. The particulars of the sale of the aforesaid divisions to four different wholly owned subsidiary companies of the assessee are as under : -------------------------------------------------------------------------------- | | | |Valuation of goodwill Sl. |Division (under- |Transferee company| Consideration |--------------------- No. |taking) trans- |(wholly owned sub-| Rs. | Determined | As per |ferred by asses- | sidary company of| (approx) | by assessee| assess- |see |assessee) | &....
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.... | | 2. |Sarabhai Chemicals| | | | |Sarabhai Common |Sarabhai Chemicals| 6.95 crores | 7.50 crores| 4.34 |(P.) Ltd | | | | crores |Service Division | | | |....
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....; | | |Division | Packart (P.) Ltd.| 54 lakhs | 10 lakhs |3.60lakhs -------------------------------------------------------------------------------- All the above transactions were with effect from June 30, 1973. The assessee did not offer any income as chargeable in its assessment for the assessment year 1974-75 in relation to the aforesaid transactions. The Income-tax Officer, however, held that in respect of each transaction there was a chargeable income which was includible in the assessments The Income-tax Officer 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 good will 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 muc....
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....ng a fresh assessment order after carrying out the enquiries in the light of the order of the Appellate Assistant Commissioner. The assessee file a second appeal before the Tribunal. In this appeal also, the Tribunal by a majority of 2 : 1 held in favour of the assessee on both the points, i.e., the Tribunal held that since the transaction in question was a case 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 per cent. subsidiary company. In this view of the matter, the Tribunal, by a majority of 2 : 1 held that the Appellate Assistant Commissioner was not right in setting aside the assessment and in requesting the Income-tax Officer to reframe the assessment after holding enquiries regarding the value of the goodwill and the other assets. From the aforesaid decision dated january 4, 1982, of the Tribunal 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 the assessment year 1974-75. Since both the references pertain to the same assessee a....
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....roversy raised in these references is squarely covered by the decision of the apex court in CIT v. Artex Manufacturing Co. [1997] 227 ITR 260. On the other hand, Mr. R. K. Patel, learned counsel for the respondent-assessee, has made the following submissions : I. The provisions of section 41(2) of the Act are not applicable to the transactions in question for the following reasons : (a) The aggregate value of any asset is not equivalent to itemwise value of that particular asset. (b) The 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 of the aggregate value is available. (c) All transfers are as going concerns by the assessee, as a holding company to 100 per cent. 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 B....
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.... and without prejudice to the aforesaid contention, even assuming that the charge is fastened or the charge fructifies in principle, the actual machinery for computation fails in arithmetical terms. This is because of the absence of any itemwise value of actual cost as well as written down value of the items of each asset in the schedules to the deeds of assignment. Practical difficulty will arise in arriving at the arithmetical value being the difference between the actual cost and the written down value of each item of assets for charging the same as income under section 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 v. 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 the difference between the written down value and the actual cost. Before dealing with the rival contentions, it will be necessary to make a brief reference to the findings given by, the Income-tax....
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....al know-how 10,00,000 Goodwill 76,00,000 The Ambernath unit of Swastik Oil Mills manufacturing detergents and cosmetics, etc., was sold by the assessee to its newly floated wholly owned subsidiary Swastik Household and Industrial Products (P.) Ltd. on June 30, 1973, for a sale consideration of Rs. 2.45 crores (which included goodwill of Rs. 2 crores). In support of its claim for goodwill of Rs. 2 crores, the assessee filed a valuation report dated June 25, 1973, of Sorab S. Engineer and Co. The report valued the goodwill on capitalisation of future maintainable profits. The Income-tax Officer did not accept the said valuation report on the following grounds : (a) The profit and loss account of Swastik Oil Mills division shows a huge loss of Rs....
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.... goodwill of Rs. 2 crores, it was credited to the capital reserve in the balance-sheet and then the assessee manipulated losses on the sale of shares of newly floated companies to its floated subsidiaries at less than 50 per cent. of their face value and squared up the amount credited in the capital reserve in the balance-sheet drawn on June 30, 1973, but thereafter in the months of july and December, 1973, the assessee-company sold a large number of shares to the other group companies (most of them were purchased in the recent past) to its large number of newly floated wholly owned subsidiaries and manipulated the c4pital loss amounting to Rs. 10.51 crores to square up the credit of Rs. 10 crores by selling such shares to its floated subsidiaries at 50 per cent. of their face value. In this process, the assessee received a benefit to the extent of the above amount of so called goodwill but without causing any loss either to itself or to the subsidiary. Since the assessee contended (without prejudice to its other contentions) that the Ambernath unit had become its stock-in-trade on June 30, 1973, but no resultant surplus arose in the form of gains or profits, the Income-tax Officer....
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....bsp; | (Rs. in lakhs) |(Rs.in lakhs)|(Rs.in lakhs) -------------------------------------------------------------------------------- | | | | 1. |Land and building | 23.00 | 91.00 | 6.00 2. |Machinery and equipments, | 28.00 | 372.00 | 21.00 |loans and advances, current| | &nb....
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.... 7. |Net amount | 136.00 | 695.00 | 45.00 -------------------------------------------------------------------------------- The Income-tax Officer noted that the transferees/wholly owned subsidiaries to which the shares were sold were floated only on June 20/22, 1973, pursuant to the board of directors' resolution dated June 14, 1973, and the assessee-company resolved to subscribe their entire share capita] by the resolutions passed by the board of directors of the assessee-company. The Income-tax Officer noted that the valuation report dated June 25, 1975, obtained by the assessee from Sorab S. Engineer and Co., chartered accountants, was not acceptable as the valuer had tried to value the goodwill on capitalisation of future maintainable profits, but Sarabbai Machinery division had incurred losses amounting to Rs. 3.05 lakhs during the last five years. If the average of the last five years was taken, then the loss came to Rs. 61 lakhs. Hence, if the super profits method were to be ad....
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.... ANNEXURE A Sarabhai Chemicals Division Sarabhai Marketing Division Sarabhai Common Services Division Rs. (1) Average net profits after tax as taken by the valuer 95,00,000 Less : Managerial remuneration 2,50,000 &nbs....
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....sp; ----------- 6,83,00,000 (3) Average purchase price 1,85,00,000 Add : super profits &n....
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....sessee at Rs. 7.50 crores and the value of the goodwill as worked out by the Incometax Officer at Rs. 4.34 crores, i.e., the balance amount of Rs. 3.16 crores, included in the sale consideration was nothing but the difference between the fair market value on the one hand and the bock value on the other hand of land, building, plant and machinery, raw materials, stock-in-trade, etc. The same reasoning was applied by the Income-tax Officer for working out the goodwill of Sarabhai Glass Division at Rs. 3.60 lakhs as against the goodwill of Rs. 10 lakhs as claimed by the assessee for sale consideration for Sarabhai Glass Division. When the Income-tax Officer gave show-cause notice dated January 11, 1977, the assessee filed its reply dated February 7, 1977, contending that the sums involved in question were nothing but pure and simple capital receipts which arose as a result of transfer of capital assets by the assessee-company to its wholly owned subsidiaries and, therefore, there was no liability to tax in view of the provisions of section 47 of the Income-tax Act. The sale consideration was supported by the valuation report made by a firm of chartered accountants. Whenever there ....
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....Committee held on August 16, 1971, and held that the same was applicable only where a parent company had transferred the assets at the Written down value, but the said committee had no occasion to discuss the situation where a company transferred its assets to its subsidiaries at book value and charged huge amount of profits in the garb of so called goodwill. The Assessing Officer also held that the assessing company is neither a banking company nor has it amalgamated with a banking company. Hence, Circular No. 63, dated August 16, 1971 was not applicable. As regards the assessee's arguments that the certificate from Sorab S. Engineers was obtained on June 23, 1973, on the basis of which entries were posted in the books of account of the concerned divisions, the Income-tax Officer noted that it was considered in the course of the healing that the valuation reports as produced before the Income-tax Officer were in fact dated June 25, 1975. The Income-tax Officer accepted that the question of taxability of capital gains would not arise in view of the bar imposed in section 47, but there is no prohibition in the statute in regard to the taxability of profits or business profits unde....
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.... no right to determine the profits on individual items of assets transferred." The Assistant Commissioner noticed how the Income-tax Officer had determined the goodwill of the units in question after pointing out the deficiency in the valuation of the goodwill as given by the assessee and the Assistant Commissioner gave the following detailed reasons for accepting the conclusion of the Assessing Officer that the assessee had overvalued the goodwill and that the accounts only appeared to justify that goodwill cannot be astronomical figures created by the assessee and there was, therefore, a great need to probe into the calculation, the criteria adopted for calculation of the goodwill and even the basis figures to be adopted for calculation. "(i) The appellant-company did not wind up its business after the transfer of assets to the four subsidiaries. It continued to be an investment company. The entire business was not sold as one going concern, but to four subsidiaries. (ii) The assets were transferred at specified values, (iii) The mere fact that the portions of the industrial undertaking had been sold does not establish that it was a slump sale. The facts of the case should a....
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....e of the claim of goodwill and if it is found to be incorrect, he is justified in treating it or a portion of it as r6presenting the enhanced value of other assets". However, the Assistant Commissioner held that the Assessing Officer had commuted mistakes in the calculation of the goodwill. By a general scheme of reorganisation, the assessee-company along with Kalindi Investments P. Ltd. (old Sarabhai M. Chemicals Ltd.) were decided upon to became investment companies and the family members of the Sarabhai transferred most of their shares to the mentioned main companies or their subsidiary investment companies. On account of the applicability of executive instructions for calculating share values of private investment companies, the assets of the family members would have registered a substantial fall for wealth-tax purposes. The assessee had created a goodwill of Rs. 10 crores which would have increased the value of shares of KPPL. The increase had been got rid of by an ingenious method. The assessee created about 48 new subsidiaries. The assessee sold the shares held by it to about 22 investment companies (subsidiaries) out of these 48. The assessee sold the shares of these twe....
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....of all the four units transferred to subsidiaries should be properly enquired into taking also into account Shri Ghatalia's report, in the light of the discussion in the appellate order. (ii) The Income-tax Officer should re-ascertain the market value of the depreciable assets transferred and also the market values of closing stock, raw materials, spare-parts, etc., as has been done in the assessments, after giving adequate opportunity. If the values are not furnished by the appellant he will be at liberty to estimate the values. (iii) Profit under section 41(2) and profit on sale of raw materials, closing stock, etc., should be considered as income of the appellant subject to the limit of difference between the goodwill created and the estimated goodwill by the Income-tax Officer". Findings given by the Tribunal : In second appeal before the Tribunal, there was a difference of opinion between the Judicial Member and the Accountant Member. Hence, the case was referred by the President of the Tribunal for hearing by the Vice-President of the Tribunal. The Judicial Member had accepted the stand of the Revenue and concluded that while it is open to the transferor to transfer the....
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....etc., the Appellate Assistant Commissioner was not right in setting aside the assessment and requiring the Income-tax Officer to reframe the assessment. Discussion : In view of the above controversy, the moot question is--whether the sales of the undertakings in question were slump sales or sales of individual assets. Learned counsel for the assessee has obviously tried to contend that since the agreements in question did not themselves give the value of the assets which are set out in the schedules to the agreements, the principle laid down by the apex court in Artex Manufacturing Co.'s case (1997) 227 ITR 260 would not apply, but the principle laid down by the apex court in Electric Control Gear Mfg. Co.'s case [1997] 227 ITR 278 would apply. We are unable to accept this contention because in Artex Manufacturing Co.'s case [1997] 227 ITR 260 (SC), the apex court has held that even if in the agreement there is no reference to the value of the plant, machinery and dead stock, if on the basis of the information that is made available to the Income-tax Officer, it becomes evident that the plant, machinery and dead stock was sold at a price higher than the book value of the plan....
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....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 business profit under section 41(2) and that the assessee was assessable in the status of a registered firm. On a reference, the High Court held that section 41(2) was not applicable. On appeal by the Revenue to the Supreme Court, it was held that in the agreement of sale, there was 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. Section 41(2) was applicable. It was further held that, the liability under section 41(2) was limited to the amount of surplus to the extent of the difference between the written down value and the actual cost. If the amount of surplus exceeded the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess would have to be treated as capital gains for the purpose ....
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....ited company, for a consideration of Rs. 8 lakhs. The erstwhile partners of the assessee-firm were allotted shares in the company of the same value in their profit sharing proportion. The Income-tax Officer held that depredation allowed to the assessee-firm amounting to Rs. 3,32,863 in respect of the assets transferred by the firm to the said company, was chargeable to tax under the provisions of section 41(2) of the Income-tax Act, 1961. He also brought to tax capital gains of Rs. 8 lakhs, being the sum of Rs. 5,000 as basic exemptions included the sum of Rs. 7,95,000 in the computation of the total income of the assessee under the head "Capital gains", The Appellate Assistant Commissioner held that the profits in question were taxable under the provisions of section 41(2). The Tribunal remitted the matter to the Income-tax Officer for recomputation of the aggregate amount chargeable as profits under section 41(2) and as capita] gains. The High Court held that section 41(2) was not applicable. On appeal by the Revenue to the, Supreme Court, the Supreme Court held that there was nothing to indicate the price attributable to the assets like machinery, plant or building out of the co....
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.... 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 Income-tax Officer and the Appellate Assistant Commissioner. 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. 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 Siddharthbai v. CIT [1985] 156 ITR 509, pertained to consideration which a partner acquires on making over his personal asset to the firm a....