TaxTMI 
TaxTMI 
2001 (3) TMI 36
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....erence No. 243A, briefly states, are as under : 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....
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....liabilities as shown in the balance-sheet as at June 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) |&n....
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....sp; | | | 2. |Sarabhai Chemicals| | | | |Sarabhai Common |Sarabhai Chemicals| 6.95 crores | 7.50 crores| 4.34 |(P.) Ltd | | | | crores |Service Division | | &n....
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....bsp; | | | |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....
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....ssioner accordingly set aside the assessment and restored the matter on the file of the Income-tax Officer for making 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 ....
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....s have been made for pointing out the errors in the valuation made by the valuer relied upon by the assessee. (iv) The controversy 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 ....
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....edules appended to the corresponding deed of assignments read along with the relevant minutes books of the concerned companies. (d) Alternatively 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 an....
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....hinery 14,00,000 Technical 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 Inc....
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.... dated March 14, 1977. After considering the objections, the Income-tax Officer held that there was no justification for valuing the goodwill at Rs. 2 crores. After charging the so-called 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 prejudi....
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....nbsp; |bhai Mktg. Divisions| Chemicals | -------------------------------------------------------------------------------- | | (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 &n....
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....liabilities | 29.00 | 1356.00 | 18.00 -------------------------------------------------------------------------------- 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 Sa....
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....er 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 assessment year 1974-75 as under : 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  ....
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....nbsp; ----------- 6,83,00,000 (3) Average purchase price 1,85,00,000 Add : super profits &....
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....; 4,34,00,000 So goodwill is Rs. 4,34,00,000 The Income-tax Officer, therefore, came to the conclusion that the difference between the value of the goodwill claimed by the assessee 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 capit....
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.... 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 or as balancing charge. The Income-tax Officer also considered the minutes of the meeting of the Central Direct Taxes Advisory 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 t....
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....nt the taxation laws and the consequent need for a thorough scrutiny as to whether it had been devised to escape taxation of profits under section 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 Officer has 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 i....
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.... by transferring the assets at book value arid at the same time reap 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 the nature 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 goo....
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....ed 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 Income-tax Officer while reframing the assessment : "(i) Computation of goodwill 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 T....
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....m the sale of stocks, if any, in respect of the transaction of the sale of the Swastik Oil Mills division at Ambernath 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 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 I....
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....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 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 s....
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....Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (SC), is not applicable. The facts in the said case were are 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 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 r....
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....; 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 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....