TaxTMI 
TaxTMI 
2004 (4) TMI 258
X X X X Extracts X X X X
X X X X Extracts X X X X
....98 for sale of business undertaking as a going concern for a slump price. Accordingly, vide agreement dt. 9th Feb., 1998 with Praxair Carbon Dioxide (P) Ltd., the CO2 manufacturing and distribution business is transferred on 1st April, 1998 for Rs. 3,40,39,332 and capital profit of Rs. 1,95,18,130 arising on such sale is transferred to capital reserve as per the decision of the Board of Directors. As per legal experts opinion such a slump sale is not taxable and hence, requires no provision for taxation." The assessee-company had claimed the profit of this sale of going concern was a non-taxable capital receipt. 3. The AO did not accept the claim of the assessee. According to the AO this transfer includes both tangible and intangible assets. Tangible assets include land, building, structures and directors (sic), the plant and machinery etc., and intangible assets include valid licenses, permits and sanctions, benefit of all pending contract and more importantly 'non-competition'. The AO did not accept the claim of the assessee, according to him all the assets sold are depreciable assets and the written down value should be the cost of acquisition and the sale consider....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en over the business only selectively. (iii) That the CIT(A) has failed to appreciate the fact that the assessee had transferred all the depreciable assets and bulk of the consideration is attributable to those assets and hence capital gain under s. 50 is exigible. (iv) That the CIT(A) ought to have considered the fact that capital gains is all exigible since the assets transferred include depreciable assets and the capital gains computable is short-term capital gains under s. 50 in the light of Hon'ble Delhi High Court judgment in the case of P.N.B. Finance Ltd. vs. CIT (2001) 168 CTR (Del) 509 : (2001) 252 ITR 491 (Del)." 5. The learned Departmental Representative Shri Amitabh Kumar, vehemently contended that the claim of the assessee about the slump sale was totally incorrect. The AO held that as three of the assets namely, sundry debtors at Rs. 12,97,150, land at Rs. 97,000 and vehicle at Rs. 4,35,029 were not sold as part of the going concern, it could not be said that the agreement entered into with the buyer was a sale of an undertaking as a going concern and therefore, was not a slump sale. The learned Departmental Representative crystallised the is....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... remained with the transferor. It was further submitted that on the one hand, assessee had argued that manufacture of CO2 could be undertaken by any party and on the other hand, it was being submitted that a non-compete fee was paid. It was submitted that it was a contradiction inasmuch as there could be no question of non compete fee being payable in an open environment and even if such a fee was payable, it could have no value as anyone was entitled to manufacture CO2. 7. The learned Departmental Representative summarised the findings of the CIT(A) as under: (1) That there was a slump sale. (2) That also included in the slump sale price was consideration for non compete for a period of 10 years. (3) That there was no revaluation of assets either by the seller or buyer prior to 9th Feb., 1998. (4) That there was no apportionment possible between tangible and intangible assets. (5) That after setting aside the order of the AO in Syndicate Bank Ltd., effect has not been given to the order of the High Court even after 17 years due to practical difficulties faced by the Department. 8. The learned Departmental Representative thereafter....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., sell, market or distribute products therein, whether by itself or by or through any others, and not to enter into any joint venture or other collaborative arrangements for such manufacture, sale, marketing and/or distribution of products therein for a period of ten years from the transfer date. 4.3 MGCL undertakes, within a period of 30 (thirty) days from the effective date of this agreement (as defined in cl. 13.1), to provide to Praxair, all supplier and customer lists and other pertinent information and data pertaining to their suppliers and customers in respect of any of the products, past, present and prospective, and, to the extent possible, to introduce the concerned Praxair personnel to all such suppliers and customers and generally to assist Praxair in their dealings with such customers. MGCL agrees and undertakes that it will not, after the transfer date, deal in any manner with such customers, in respect of products, other than at the request and for the benefit of Praxair. 4.4 MGCL agrees and undertakes not to render consultancy or advisory or other services of any kind to any others, for or in any manner connected with, the manufacture, sale or dist....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../director of MGCL were entitled to carry on several business activities and therefore, the restriction was not completely restrictive. Attention was invited to cl. 5.5 to show that certain items of assets and liabilities were not to be taken into account. Particular emphasis was placed on cylinder deposits amounting to Rs. 1.5 crores. He also drew our attention to cl. 6.1 to 6.4 which reads as follows: "6. Cylinders 6.1 MGCL assures Praxair that it, along with the other groups concerns referred to in cl. 2.1 above, are in a position to and shall transfer to Praxair, at no extra cost to Praxair, absolute title to an aggregate 1,590 (one thousand five hundred and ninety) CO2 gas cylinder of a capacity of 22.5-31 Kgs which are "acceptable cylinders" duly tested as per the Gas Cylinder Rules, 1981. In addition, MGCL is in a position and shall make available perpetually to Praxair, on lease/rental basis, 2,410 (two thousand four hundred and ten) "acceptable cylinders" of 22.5 to 31 Kgs capacity, duly tested as per the Gas Cylinders Rules, 1981, on an annual lease/rental of Rs. 3,41,000 (Rs. Three lakhs forty one thousand), for which purpose, the parties will enter into....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he shortfall. MGCL agrees to pay the concerned amounts in this respect to Praxair, upon written request." It was submitted that if cylinders were not delivered, price of cylinders was fixed at Rs. 3,000 per cylinder and, therefore, the cost attributable to a cylinder could be determined. 11. The learned Departmental Representative also drew our attention to cls. 8.1 & 8.2 r/w Annex.-IV and vehemently contended that only certain assets were transferred. He also drew our attention to cl. VI of the agreement which relates to inventory. He argued that cl. 9.1 provides for a joint inspection and due diligence reports. According to the learned Departmental Representative, this contradicts the finding of the learned CIT(A) with the valuation taken. Similarly, our attention was drawn to cl. 12.1(b). The learned Departmental Representative submitted that according to this clause, i.e., 12.1(b) clearly indicates that nothing was required for intangible assets. It was further submitted that land valued at Rs. 97,000 was not transferred. He also drew our attention to p. 77 of the paper book and stated that the land was adjacent to the land on which the undertaking was operating. 12. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... vs. CIT (1963) 49 ITR 244 (Bom) was approved in Supreme Court in Killick Nixon & Co. vs. CIT (1967) 66 ITR 714 (SC) and therefore, impliedly it could be held that the Hon'ble Supreme Court had approved the taxability of capital gains in the case of a slump sale; provided the cost of acquisition was determinable. It was submitted that Syndicate Bank did not agree with Killick Nixon & Co., and therefore, it could be concluded that Syndicate Bank cannot be held out as supporting the proposition that slump sale is not taxable. It was submitted that proposition that the cost of acquisition or full value of consideration was not attributable to various assets merely presented a difficulty and the mere fact that a difficulty existed cannot lead to the conclusion that estimation was impossible. Attention was invited to Calcutta High Court decision in Hindustan Co-operative Insurance Society (1992) 107 CTR (Cal) 323 : (1993) 201 ITR 716 (Cal) wherein the case of a life insurance business which was nationalised, it was argued for the assessee that it was not possible to determine the cost of improvement. It was submitted that despite any difficulty faced in determination of either cost ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that it was, therefore, not a slump sale as all the assets and liabilities had not been transferred. Once it is not a slump sale, the values could be obtained aliunde "from another source" and for this purpose, he produced the income tax records of the transferee's files and a valuation report. It was submitted that the so-called intangibles which were purportedly transferred by MGCL to Praxair were without value as goodwill can only to be termed to be payable for the name and reputation of a concern and without the name being transferred goodwill could not be transferred and in this case the name MGCL had not been transferred. It was submitted that there could be no value for the list of suppliers and as the right to manufacture had not been transferred, there could be no value for that right and even assuming that the right to receive raw gas could be considered as having value, it was on revenue account. It would, therefore, be proper to submit that the matter be sent back to the AO to value each item and bring to tax the surplus. Insofar as the restrictive covenant given to MGCL was concerned, it was submitted that not only MGCL but also its three directors/promoters had re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erred as a whole lock, stock and barrel and the mere fact that some items were not transferred would not be destructive of the transaction being described as a slump sale. The decision of the Bombay High Court in Premier Automobiles Ltd. vs. ITO (ITA No. 97 of 2003) was referred to. 17. It was submitted that applying the principles of the Bombay High Court to the case of the assessee, the CO2 manufacturing business had been transferred lock, stock and barrel. Therefore, it was a slump sale. Without prejudice, it was submitted that insofar as the land was concerned, a perusal of p. 77 of the paper book indicated that the land was physically distinct and unbuilt on and in fact the land which was retained by the assessee was not part of the gas plant and nothing was constructed on the said land. The land retained by the assessee was never used in the business of manufacturing, selling and distribution of CO2 at any time. In fact, there was no access to the retained land. Between the land on which the factory was situated and the common approach road referred to by the Departmental Representative was a private road belonging to the BWSSB and the assessee had to take special permissi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s was because under the Gas Cylinder Rules, 1981, legally acceptable cylinders meant cylinders which were approved by the Department, had material certificates, were tested and ownership was defined. Obviously, scrap was not the subject-matter of the transaction and it could hardly detract from the transaction being a slump sale. 20. Insofar as cl. 5.5 of the agreement is concerned, which referred to cylinder deposit of Rs. 1.5 crores, it was submitted that this was not referring to deposits lying with the assessee but overall deposits with other concerns in the group. Attention was invited to p. 137 of the paper book under current liabilities and provisions, security deposits (cylinders) which showed nil as on 31st March, 1998 and as on 31st March, 1999. Therefore, it was submitted that this contention was baseless. 21. Insofar as the sundry debtors appearing in the balance-sheet as of 31st March, 1999 were concerned, it was submitted that these represented the amounts owned by Praxair as a result of the transaction itself and therefore, this could not be considered as assets relating to the going concern inasmuch as these were amounts owed to MGCL as a result of the transac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....35, the types were zoologically classified into cats, dogs, rats and rabbits. The cat prefers the old home to the person who keeps it, and stays in the old home although the person who has kept the home leaves, and so it represents the customer who goes to the old shop whoever keeps it, and provides the local goodwill. The faithful dog is attached to the person rather than the place, he will follow the outgoing owner if he does not go too far. The rat has no attachments, and is purely casual. The rabbit is attracted by mere propinquity. He comes because he happens to live close by and it would be more trouble to go elsewhere. These categories serve as a reminder that the goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is conducted, and the personality of those who conduct it and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom.'" The learned counsel submitting as above contended that the mere name of MGCL would not constitute the goodwill of the going concern which was transferred by the assessee to Praxair. It would encompass within its f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cl. 10.4(a) which required the assessee to discharge the dues upto the date of sale and cl. 10.5 which provided that the assessee would help Praxair to obtain all permissions, assessee's counsel submitted that these clauses, in fact, supported the proposition that the transfer took place as a going concern insofar as up to the date of transfer, the dues were required to be paid by the assessee and after the date of transfer they were to be paid by Praxair and the requirement in cl. 10.5 was only to be accepted when a going concern was transferred lock, stock and barrel to a new purchaser. As regards cl. 11.1 which required a conveyance to be executed, reference was invited to the decision of the Bombay High Court in Premier Automobiles Ltd., wherein a similar conveyance was required to be executed and the Bombay High Court pointed out that the object and purpose of conveyance being executed was the legal transfer of the land and for Stamp Act purposes and question of the conveyance detracting from a slump sale did not arise. Accordingly, it was submitted that having regard to the conspectus of facts the transfer of the undertaking, manufacturing and distributing CO2 was a trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Thus, it will be noted that the decision did consider the question as to whether slump sale could be broken up so as to attribute values to specific assets. In Mugneeram Bangur & Co., the asset was stock-in-trade. In the assessee's case the asset is plant and machinery (capital assets). Therefore, the question clearly was whether the slump sale can be broken up so as to attribute a cost to a type of assets. To what asset (stock-in-trade in Mugneeram, capital asset in MGCL) the amount is to be attributable is not a relevant consideration. In Mugneeram Bangur & Co., Court held that as the vendors were transferring the concern to a company constituted by the vendors themselves what was put in the schedule was the book value and therefore, even if a sum of Rs. 2,50,000 attributable to goodwill was added to the cost of land, it was nobody's case that this represented the market value of the land. Therefore, the Supreme Court concluded that the sale was a sale of the whole concern and no part of the slump price was attributable to the cost of the land and accordingly no part of the slump price was taxable. Therefore, it is submitted that the submission of the learned Departmental....
X X X X Extracts X X X X
X X X X Extracts X X X X
....one can only be determined. The other components such as the cost of acquisition, cost of improvement along with the date of acquisition and the date of improvement cannot be determined. On the other hand, the subject-matter of transfer being considered or various assets, the full value of consideration itself cannot be allocated and therefore, capital gain cannot be computed. He, therefore, submitted that the order of the learned CIT(A) has to be upheld. 27. The learned counsel pointed out the salient features of the case laws and the facts and had explained how the case laws are either applicable or not applicable to the facts of the assessee's case. 28. We have heard the rival submissions and perused the records. We have taken note of the entire facts as available on records as submitted by both the parties. First of all let us deal with the decision cited by both the sides, in the decision of the Hon'ble Supreme Court in the case of CIT vs. Mugneeram Bangur & Co.. The questions that stood for consideration were: "1. Whether, on the facts and circumstances of this case, the sum of Rs. 2,50,000 represented the surplus on the sale of lands which was the stoc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eration amongst various assets. In this case, the assessee-firm went in liquidation and the liquidator had sold the assets pursuant to an advertisement. The liquidation was only purpose of settling the liabilities of the company and for this purpose the assets were sold in pursuant to advertisement. It is a simple commonsense that such company cannot have goodwill and reputation. Such are not the facts in the case before us. Therefore, this decision is factually distinguishable and not applicable to the present case. 30. In the decision reported in Syndicate Bank Ltd. (Syndicate Bank) had been nationalised and its banking business was taken over by the Government of India by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1961 (BCATU). Under the Act all the assets, rights, powers, privileges and all property investments together with all liabilities, borrowings, obligations than subsisting in the undertaking were taken over for a consideration of Rs. 3.6 crores. Syndicate bank filed a return for asst. yr. 1970-71 and submitted that no amount was taxable under s. 41(2) and capital gains. The ITO did not accept the contention and in his view the undertakin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... acquisition." The principle issue debated before the High Court was formulated in the following questions: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the undertaking of the assessee's company was a capital asset on transfer of which capital gains would arise?" This question was itself divided into two parts, viz., (i) Whether the business undertaking was a capital asset and (ii) Whether capital gains accrued or arose on the assessee as a result of the transfer of the business undertaking. The first part of the question was answered in the affirmative and the Court held that the undertaking constituted the capital asset. Insofar as the apportionment of compensation amount to various items or components in question, the High Court held at p. 687. "Mr. Srinivasan, learned counsel for the Revenue submitted that it would be factually and legally impossible to apportion the compensation to various items constituting undertaking. The counsel, in our opinion, is right in his submission. Besides, there are other properties, which are inherent in such undertaking like the secret reserves whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hile elaborating the contention, Mr. Sarangan placed strong reliance on the decision of the Supreme Court in CIT vs. B.C. Srinivasa Shetty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC)". The argument has been noted at p. 692: "The critical points in this reasoning are these: (1) There are assets of different nature, those involving cost in their acquisition and those which could be acquired by way of production in which the cost element cannot be identified. But, none of the provisions pertaining to "capital gains" suggest that they include as asset in the acquisition of which no cost at all can be conceived. (ii) the cost of acquisition mentioned in s. 48 implies a date of acquisition. And (iii) if the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be described it as "asset" within the meaning of s. 45 and, therefore, its transfer is not subject to income-tax under the head "capital gain". By setting out the following principles, the High Court then referred to the decision of the Supreme Court in Srinivasa Shetty, the Bombay High Court in Evans Fraser & Co. Ltd. vs. CIT, the Delhi High Court in Bawa Shiv Char....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and what were the principles to be applied, viz., that if the cost of acquisition or the cost of improvement could not be ascertained capital gains could not be computed. As pointed out by the learned CIT(A), in the assessee's case, also the Syndicate Bank matter had been sent back to the Tribunal and the Tribunal had sent back the matter to the AO even after 17 years no effect had been given to the order. Therefore, it was submitted that the decision of Karnataka High Court and the Bangalore Bench of the Tribunal clearly support the contention of the assessee that if the cost of acquisition or cost of improvement of the business undertaking is not ascertainable capital gains cannot be brought to tax. 31. The learned Departmental Representative referred to CIT vs. Hindustan Co-operative Sugar Factory for the proposition that merely because difficulty is experienced in estimating an amount does not mean that estimating is impossible. It is submitted that the context in which these observations were made have to be kept in view. The Tribunal in that case found that improvement in the capital asset of the assessee could not be estimated at less than Rs. 3,98,000 and the only fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ideration of Rs. 11,50,400 the machinery, dead stock were revalued by Hargovandas Girdharlal (Valuer) at Rs. 15,87,296. Therefore, clearly all other assets and liabilities were taken over at book values except for the plant and machinery and dead stock. This is made clear on a comparison of the two tables below: Particulars Rs. Particulars Rs. All assets 41,73,973 Value of plant and machinery and dead stock as per report of Hargovandas Girdharlal 15,87,296 All liabilities 30,23,573 Less: WDV of plant and machinery and dead stock as per assessee's book 4,36,896 Surplus of assets over liabilities 11,50,400 Net 11,50,400 Thus, quite clearly the entire surplus arose because of the revaluation of the assets by the assessee which determined the purchase consideration. The Court noted that the valuation of Rs. 15,87,296 was determined on the basis of the information furnished by the assessee p. 276: "It is no doubt true that in the agreement, there is 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 ITO, it became evi....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... In that case, we have held that s. 41(2) was applicable, since the price attributable to the plant and machinery and dead stock which were transferred had been disclosed by the assessee during the course of assessment proceedings before the ITO and that the said price was as per the value assessed by the valuers at the time of execution of the agreement. In the present case, there is nothing to indicate the price attributable to the assets like the machinery, plant or building out of the consideration amount of Rs. 8 lakhs. Merely because a sum of Rs. 3,32,863 had been allowed as depreciation to the assessee-firm, it could not be said, that was the excess amount between the price and the written down value. Question No. 2 was, therefore, rightly answered against the Revenue by the High Court. On question No. 4 the High Court has taken the same view as was taken by it while answering question No. 4 in Artex Manufacturing Co.'s case. The said view has been affirmed by us in our judgment (1997) 141 CTR (SC) 290 : (1997) 227 ITR 260 (SC) in that case question No. 8 is similar to question No. 5 in Artex Manufacturing Co.'s case. The view of the High Court with regard to that q....
X X X X Extracts X X X X
X X X X Extracts X X X X
....artment submitted that inasmuch as only the Kalyan factory without land was transferred together with other assets located at Pune and Kurla, the transaction could not be considered as a slump sale. Further, the manufacture of Padmini Cars continued in the hands of PAL and therefore, it was submitted that it was not a slump sale. In other words, the case of the Revenue was that assets which formed part of the Kalyan undertaking were not transferred and other assets which did not form part of the Kalyan undertaking were transferred. Therefore, from both angles it was not a slump sale. Further, it was pointed out that certain creditors were not transferred nor were certain loans transferred. It was submitted before the Bombay High Court that when deciding the question as to whether the sale was a slump sale or a sale of itemised assets, one has to look at the overall transaction and ascertain whether the basic structure of the unit was transferred or not transferred and that one cannot go by individual items of assets being transferred unless that particular assets goes to the root of the matter i.e., cars could not have been manufactured without such an item like the gear box unit. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rmission had in fact not been obtained nor had the culvert been built. As such the land was even today inaccessible on account of the road built by the BWSSB. Therefore, it was submitted that land retained by the assessee was never used in the business of manufacturing, selling and distribution of CO2 and could not be considered as a part of the undertaking. In Premier Automobiles Ltd., also the matter had been sent back for determination in the light of these principles. In fact, the Bombay High Court had clearly held that the determination had to be made on the footing that Kalyan unit constituted the capital asset and that the AO would have to determine the cost of the undertaking (if determinable) for the purposes of computing capital gains in the light of ss. 45, 48, 55 and then determine whether any capital gains are exigible. 36. The learned Departmental Representative had next submitted that the sale consideration can be determined aliunde. There were three components to this submission: (a) that the so called intangibles had no value; (b) that goodwill had no value as the name had not been transferred; (c) that non-compete clause was meaningle....