Income Tax Appellate Tribunal - Hyderabad
Coromandel Fertilisers Limited vs Dy. Commissioner Of Income-Tax ... on 10 November, 2003
Equivalent citations: [2004]90ITD344(HYD), (2004)84TTJ(HYD)370
ORDER
M.V.R. Prasad, Accountant Member
1. These are three appeals in all, for the assessment year 1991-92. Two of them are filed by the assessee, and the third one, viz. ITA No. 253/Hyd/95 is filed by the Revenue. Of the two appeals filed by it, the assessee did not press the appeal, ITA No. 460/Hyd/95. The same is accordingly dismissed. In effect, we are left with two appeals, viz. ITA No. 99/Hyd/95 by the assessee and ITA 253/Hyd/95 by the Revenue, which are cross-appeals, directed against the order of the CIT(A)-V, Hyderabad dated 24.5.94.
2. The assessee company has two manufacturing units -one for fertilizers and the other for cement. Initially, the Company was incorporated on 16.10.61 for manufacture and sale of fertilizers. It set up a cement unit in 1984. The said cement unit was sold as per an agreement executed on 9.6.1990 between the assessee company and a Madras based company, the India Cements Limited, for a consideration of Rs. 105,69,54,104 and this consideration comprised of Rs. 105.30-crores for fixed assets and Rs. 39,54,104 for net current assets. It is this transaction of sale which has given rise to the above mentioned cross appeals.
3. The question arising in these cross appeals is whether the sale of the cement unit in question is a slump sale or an itemised sale and, in either case, what are the tax consequences thereof.
4. The case of the Department is that it is an itemised sale. The case of the assessee is that it is a slump sale. The case of the Department is that, as it is an itemised sale, tax under the head 'Short-term capital gains' on the transfer of depreciable assets is leviable in terms of Section 50 of the Income-tax Act. The case of the assessee is that, as it is a slump sale, the provisions of Section 50 are not attracted. Assuming it is a slump sale, and that the capital asset transferred is the undertaking itself, and not the separate assets thereof, the further question is whether any tax under the head 'capital gains' is leviable on the sale of the said undertaking. The case of the assessee is that there cannot be any tax under the head 'capital gains' on the sale of an undertaking, as the requisite computational factors, like the cost and date of acquisition thereof and the date and cost of improvement thereof cannot be ascertained. The case of the Department is that such computational factors are ascertainable and the tax under the head 'capital gains' is leviable, even if it is a slump sale.
5. Assessee computed the profit on the sale of cement, unit at a figure of Rs. 36, 29, 54, 491 as per the following computation, which is given in Annexure V to the assessment order.
" Total Sale consideration 105,30,00,000 Add:a)Surplus on sale of Net current assets 25,25,604
b)Amount received from insurance co. for Space Age Bank Guarantee 32,28,500 Less: Amount Payable 18,00,000 14,28,500 39,54,104 Sub- total 105,69,54,104 LESS:
1. Value of Fixed Assets taken over by ICL 64,82,98,196
2. Value of Capital work in process taken over by ICL 2,47,58,180 ,3.Adhoc provision made against cement receivables 75,00,000
4. Provision for legal fees, consul-tancy fees and Audit fees, Gratuity payable for non-managerial employees 2 7,02,786
5. Value of obsolete items to be written off 26,08,999
6. Deferred revenue expenditure to be written off 24,84,069
7. Loss on revaluation of inventories 12,70,672
8. Give aways for Employees of Cement Division 5,10,100
9. Value of trailing cable not paid by ICL 2,91,748
10. Standardisation expenses payable by ICL 7,82,234
11.Lime stone prospecting charges written off 1,71,840
12. Loss on revaluation of Multi Currency Loan 26,20,889 69,39,99,613 Surplus on sale of Cement undertaking 36,29,54,491 .......// The above amount of Rs. 36,29,54,491 was credited by the assessee to the Profit & Loss Account.
6. The assessing officer computed the capital gains on the sale of the undertaking at a figure of Rs. 38,38,97,728 with the following remarks-
".....
It is seen from Annexure B of the assessee's letter dt. 25.3.1994 that they have worked out the surplus at Rs. 36,29,54,491. This figure has been arrived at after claiming several deductions which are not admissible for computation of capital gains under the provisions of Section 45. I am, therefore, obliged to allow those deductions which are permissible Under Section 45 of the I.T. Act. The following deductions are being allowed.
Total sale consideration 105,69,54,104
LESS: Value of fixed assets taken by
India Cements, as admitted 64,82,98,196
-------------
40,86,55,988
LESS: Value of work-in-capital taken by
India Cements 2,47,58,188
------------
38,38,97,728
-------------
Only two deductions are admissible out of the deductions claimed by the assessee and no other deduction is possible as the assets are depreciable assets. Therefore, net capital gain works out to Rs. 38,38,97,728, which ought to have been included in the total income of the assessee."
7. Even though the assessing officer computed the profit under the head capital gains, as mentioned above at Rs. 38,38,97,728, he did not levy any tax on this amount. On the other hand, he proceeded to compute the capital gains under the head 'short term capital gains' leviable under the provisions of Section 50 of the Act. He noticed that the assessee had executed a separate sale deed dated 20th November, 1990 for the transfer of land of more than 2,000 acres for a consideration of Rs. 2,87,00,000. He also noticed that the tax written down value of the depreciable assets was Rs. 46,45,55,316. Deducting these two amounts alongwith the capital work in progress, which is also taken over by the India Cements Ltd., he worked out the short term capital gains assessable to tax under Section 50 of the Act, at Rs. 53,89,40,608 as per the following computation given on page 8 of the assessment order-
".....
W.D.V. of cement and fertilizer
Plants including additions as
Given by the assessee 46,47,65,108
Sale consideration received 105,69,54,104
LESS: Work in process 2,47,58,180
--------------
103,21,95,924
LESS: Sale value of land 2,87,00,000
--------------
100,34,95,924
--------------
This is the sale consideration which the assessee has received for its fixed assets. If we deduct this from block depreciable fixed/assets, the WDV of Rs. 46,47,65,108 is wiped out, meaning thereby that the assessee is not eligible for any depreciation in this year. The excess over the above WDV will be treated as capital gain Under Section 50 of the I.T. Act. This is treated as short-term capital gain, which is worked out as under.
Sale consideration Rs. 100,34,95,924
LESS: Cost of depreciable
Assets as per Annexure-2 Rs. 46,45,55,316
------------------
SHORT TERM CAPITAL GAIN Rs. 53,89,40,608
------------------
....."
8. It may be noticed that while working out the short-term capital gains assessable under Section 50, the assessing officer gave deduction for the tax w.d.v. of the depreciable assets of both the fertilizer and cement units, and so, in effect, he regarded both the units as one business.
9. The assessing officer brought to tax the above amount of Rs. 53.89,40,608 under the head short-term capital gains. He has separately worked out the long term capital gain on the sale of the land at Rs. 41,41,749 as per the following computation-
".....
Cost of land as shown by the assessee in
Annexure-V of his
letter dt. 29.3.1994 Rs. 2,45,58,251
Sale consideration received
by the assessee Rs. 2,87,00,000
Capital gains Rs. 41,41,749
..."
It is the above two additions which are the main grievance of the assessee along with a few others, which we shall refer to presently.
10. The CIT(A), however, held that the sale of cement unit in question was a slump sale, and so, the consideration received cannot be apportioned between depreciable and non-depreciable assets, and so, the provisions of Section 50 are not attracted. He further held that the asset sold being the entire undertaking, namely, the cement unit, the capital gains tax on the sale of the undertaking, which is a capital asset, is leviable, and he also gave certain directions for working out the said capital gains. He gave directions for the working out of the cost of acquisition and cost of improvement of the undertaking for the purpose of ascertaining the quantum of capital gains that can be brought to tax on the sale of the undertaking in terms of Section 45 of the Act.
11. As already mentioned, the Department is aggrieved by the finding of the CIT(A) that the sale was a slump sale and not an itemized sale, and so, tax under Section 50 of the Act is not leviable. The assessee's appeal is on the issue that, even assuming that it is a slump sale, there can be no capital gain on the sale of the undertaking.ITA No. 253/Hyd/95 filed by the Revenue
12. The grounds taken by the Revenue read as under-
"(i) The CIT(A) should have held that even if it is used as a transit accommodation, it is still a guest house and that the expenditure relating thereto is not allowable within the meaning of Section 37(4) of the I.T. Act.
(ii) The CIT(A) erred in stating that the entire unit should be treated as one capital asset.
(iii)The CIT(A) erred in treating the entire unit as long-term capital asset.
(iv) The CIT(A) ought to have upheld the action of the A.O. in bifurcating the land as long-term capital asset and other depreciable assets as short-term capital asset.
(v)......."
12. For deciding the issues raised in this appeal, it is necessary to consider the correspondence between the vendor and the vendee company and the relevant agreements and the sale deed.
13. Before us, the learned Departmental Representative requested for the admission of certain additional evidence vide his letter dated 14.5.2003. The additional evidence (paper-book 2) is stated to be by way of the documents located during a survey action on the premises of the company, India Cements Ltd., on 8.3.1999, i.e. after the disposal of the appeal by the CIT(A). The learned counsel for the assessee initially objected to the admission of the additional evidence, but not seriously, and ultimately gave up his objection. He also requested, in his turn, vide his letter dated 13.5.2003 for admission, by way of additional evidence, of the deposition taken by the Department from Shri Nagarajan, an employee of the assessee-company, during a survey action conducted on the assessee company on the same date i.e. 8.3.1999.
14. We accede to the requests of both the parties and admit the additional evidence sought to be introduced by them. Actually, we are surprised at the request of the Department for the admission of additional evidence, as according to us, the said additional evidence does not contain anything supportive of the stand of the Department, and rather supports the case of the assessee, as we shall show hereunder.
15. As already mentioned, to ascertain the nature of the sale of the cement unit involved, i.e. whether it is a slump sale or an itemized sale, it is necessary to go through the correspondence entered into by the assessee company with the bidders like India Cements Limited and the other relevant documents.
16. The assessee company, after having decided to sell the cement unit, issued to the prospective purchasers an invitation dated 2.4.1990 to make purchasers an invitation dated 2.4.1990 to make offer on certain terms and conditions and the said terms and conditions may be seen at pages 43 to 49 of the Department's paper-book No. 2. The relevant portion of the terms and conditions accompanying the invitation extended to the assessee-company reads as under-
"TERMS AND CONDITIONS FOR OFFER TO PURCHASE THE UNDERTAKING COMPRISING THE CEMENT DIVISION OF COROMANDEL FERTILISERS LTD.
1.0 Offers for purchase of the Undertaking comprising the Cement Division of Coromandel Fertilisers Limited (hereinafter referred to as "CFL") shall be subject to the terms and conditions set out below.
2.0 It is agreed and understood that the Undertaking comprises the operations and activities of the Cement Division of CFL as a going concern. This includes inter alia the Cement Plant with all and together with buildings, structures, housing colony thereon, monies and mining leases, all plant, machinery, equipment, capital work-in-progress, vehicles, furniture, fixtures therein at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh, and plant & machinery, office equipment, furniture fixtures at the Divisional Office at Secunderabad, at the marketing offices at Secunderabad, Madras, Bangalore and Ernakulam and at warehouses in the States of Andhra Pradesh, Tamilnadu, Karnataka and Kerala. Net Current Assets as specified in Paragraph 4 below, Industrial and other Licences, trade mark and brand name, goodwill and other intangible assets, all relating or pertaining to the operations and activities of the Cement Division of CFL but expressly excluding the office premises at Secunderabad.
3.0 Offers are invited for purchase of the Undertaking comprising the Cement Division of CFL as aforesaid ON AN AS IS WHERE IS BASIS. The price offered shall be (a) the purchase price for the Undertaking less the price of Net Current Assets the value of which is to be determined as specified hereunder and (b) the price for the Net Current Assets the value of which is to be determined as specified in Paragraph 4 below.
4.0 Net Current Assets shall mean Current Assets less Current Liabilities and Provisions as specified hereinafter.
4.1 Current Assets shall include inter alia raw materials, goods-in-process, finished goods, stores and spares, book debts, loans and advances, deposits and the like but shall expressly exclude those debts, loans and advances which are determined as doubtful by M/s. A.F. Ferguson & Co.
Inventories of raw materials, goods-in-process, finished goods, stores and pares as of the date of transfer of the Undertaking shall be physically verified jointly by representatives of the party whose offer is accepted (hereinafter referred to as the Prospective Buyer) and CFL alongwith representatives of M/s. A.F. Ferguson & Co. The value of the inventories so jointly verified shall be determined by M/s. A.F. Ferguson & Co. on a going concern basis in accordance with the principles hitherto followed in preparation of the Balance Sheet and Profit & Loss Account of CFL and the value so determined shall be final and binding. The fee of M/s. A.F. Ferguson & Co. shall be equally shared by CFL and the Prospective Buyer.
In regard to book debts, loans and advances, deposits and the like, their values, as of the date of transfer as of the Undertaking, shall be as per CFL's books of account duly verified by M/s. A.F. Ferguson & Co. and the value so determined shall be final and binding.
4.2. Save as mentioned hereinafter, Current Liabilities and Provisions, both secured and unsecured, shall include inter alia all monies payable by CFL towards materials received and services rendered whether on capital or revenue account, actionable claims subsisting on the date of transfer as of the Undertaking and arising in respect of or in relation to the operations and activities of the Undertaking. Such Current Liabilities and Provisions shall be taken over by the Prospective Buyer and the value thereof shall be adjusted against the value of the Current Assets. The value of the Current Liabilities and Provisions shall be as per CFL's books of accounts duly verified by M/s. A.F. Ferguson & Co. and the value so determined shall be final and binding. However, liabilities in respect of statutory levies such as sales tax, excise, customs, octroi, mineral rights tax, and liabilities appertaining to pending legal cases upto the date of transfer of the undertaking shall be and remain the liability of CFL. Similarly, any benefits or credits relating to the aforesaid statutory levies which accrue after the date of transfer of the Undertaking and which relate to the period upto the date of transfer of the Undertaking shall belong solely to CFFL.
Any possible or potential liability arising out of Orders made under the Jute Packaging Materials (Compulsory Use in Packing Commodities) Act, 1987 and the Rules framed thereunder, upto the date of transfer of the Undertaking shall be that of the Prospective Buyer and shall not be adjusted against the value of the Current Assets.
5.0 All employees of CFL employed in the operations and activities of the Undertaking at all locations of the Undertaking including Secunderabad on the date of its transfer shall continue, without any break or interruption of service, as employees of the Prospective Buyer upon terms and conditions of employment (including retirement benefits) which are not in any way less favourable than those applicable to them immediately before the transfer of the undertaking. In respect of pension and gratuity benefits, the liabilities up to the date of transfer of the Undertaking shall be determined by actuarial valuation and the liabilities so determined shall be that of CFL.
5.1 All contract labour engaged by CFL at the Cement Plant of the Undertaking on the date of the transfer shall be taken over by the Prospective Buyer upon terms and conditions which are not in any way less favourable than those applicable to them immediately before the transfer of the Undertaking.
6.0 All taxes land levies including stamp duty, registration charges, sales, tax and any other levies whatsoever assessed or payable on in respect of the transfer of the Undertaking or any part thereof shall be payable by the Prospective Buyer. The Prospective Buyer shall indemnify CFL against any taxes and levies aforesaid that may be assessed or become payable.
7.0 The Board of Directors of CFL reserves to itself the absolute and unfettered right and discretion to accept or reject all or any of the offers received without assigning any reasons therefor and the decision of the Board shall be final and binding. Should the Board decide on its discretion to accept a particular offer received, CFL shall convey acceptance of the offer to the Prospective Buyer concerned not later than the 15th day of May, 1990, subject to approval of they shareholders of CFL in General Meeting. Financial Institutions and banks, and all other authorities as required by law. The Board of CFL. However, reserves to itself the absolute right and discretion to extend the last date by which acceptance of the offer should be conveyed by CFL.
8.0 The Prospective Buyer shall within 30 days of the date of receipt by it of acceptance of the offer by CFL (time in this respect being of the essence) enter into an Agreement for Sale with CFL which will set out the terms and conditions of sale and purchase as of the Undertaking including those mentioned above and such other terms and conditions applicable to a transaction of this nature. The Prospective Buyer shall on or before the execution of the said Agreement for Sale pay to CFL 10 (Ten) percent of the agreed price for purchase of the Undertaking excluding the price determined as aforesaid to be payable for Net Current Assets as and by way of earnest money. Interest will not accrue on the earnest money so paid.
9.0 In the event of the Prospective Buyer failing or neglecting for any reason to comply with the terms or Paragraph 8.0 above, CFL shall be entitled without prejudice to its other rights or remedies at law, to revoke and cancel its acceptance of the offer of the Prospective Buyer by notice in writing to the Prospective Buyer and upon such revocation and cancellation, CFL shall stand discharged and released from any obligation to sell or transfer the Undertaking to the Prospective Buyer.
10.0 Within 90, days of the date of execution of the said Agreement for Sale or such further period as may be mutually agreed upon (time in this respect being of the essence) the Prospective Buyer and CFL shall respectively obtain at their respective cost all sanctions or approvals necessary or required for sale and purchase of the Undertaking. In this regard, both parties will mutually assist in obtaining all such sanctions or approvals, expeditiously. Upon receipt of all necessary or required sanctions or approvals, the Prospective Buyer and CFL shall forthwith enter into a Deed of Transfer of the Undertaking in a mutually agreed form. The Prospective Buyer shall on or before the execution of the said Deed of Transfer pay to CFL the aggregate of (a) the agreed price for purchase of the Undertaking excluding the price determined as aforesaid for Net Current Assets less the amount of earnest money paid to CFL on or before the execution of the said Agreement for Sale, and (b) price determined as aforesaid for Net Current Assets.
11.0 CFL shall be entitled to cancel the said Agreement for Sale in the event of the Prospective buyer failing or neglecting to obtain all sanctions or approvals necessary or required to be, obtained by it for the purchase of the Undertaking within the time stipulated in Paragraph 10.0 or within such further time as may be mutually agreed upon. Upon such cancellation CFL shall (without interest) paid by the Prospective Buyer to CFL under or pursuant to the said Agreement for Sale.
11.1 In the event of the Prospective Buyer failing or neglecting to enter into a Deed of Transfer of the Undertaking forthwith after having obtained all sanctions or approvals necessary or required to be obtained by it for the purchase of the Undertaking as required under paragraph 10.0 above and/or failing or neglecting to pay to CFL the amount specified in paragraph 10.0 on or before the execution of the Sale Deed of Transfer, CFL shall be entitled, without prejudice to its other right or remedies at law, to cancel the Agreement for Sale by notice in writing to the Prospective Buyer and to forfeit the earnest money paid by the Prospective Buyer to CFL under or pursuant to the said Agreement for Sale."
17. In response to the above invitation, M/s. India Cements Ltd. made an offer alongwith certain other companies, like Gujarat Ambuja Cements Ltd. The initial offer made by India Cements Ltd. dated 23.4.1990 may be seen at pages 68 to 74 of the Department's paper-book No. 2 and it reads as under-
"............ 23RDApril 1990 Dear Sir,
OFFER FOR PURCHASE OF THE UNDERTAKING COMPRISING THE CEMENT DIVISION OF COROMANDEL FERTILISERS LIMITED ****************************************************
1. We refer to your letter dated April 2, 1990 inviting our offer for the purchase of the Undertaking comprising the Cement Division of CFL.
2. We are pleased to make our offer as hereunder subject to the terms and conditions stipulated herein:
3.1. Our offer is for the purchase of the Undertaking as going concern comprising the Cement Division and its activities which includes inter alia the Cement Plant with all land together with buildings. structures, housing colony thereon, mines and mining leases, all plant machinery, equipment, capital work-in-progress, vehicles, furniture, fixtures therein at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh and plant and machinery, office equipment, furniture, fixtures at the divisional Office at Secunderabad, at the marketing offices at Secunderabad, Madras, Bangalore and Ernakulam and at warehouses in the States of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala, Industrial land other Licences, trade mark and brand name, goodwill and other intangible assets, all relating or pertaining to the operations and activities of the Cement Division of CFL but expressly excluding the office premises at Secunderabad.
3.2 This offer is ON AS IS WHERE IS BASIS, except that the value of any Fixed Assets which have been sold, discarded or otherwise disposed of or removed or rendered ineffective since 30.9.89 will have to be deducted from the Purchases Price herein mentioned as our offer is based on the list of assets prevailing as of 30.9.89. Similarly, we shall make an offer for the value of any Fixed Assets that may have been added after 30.9.89 and upto the date of take over, at the relevant point of time.
3.3 The Purchase Price offered by us for the Undertaking excluding the price for the Net Current Assets on the above basis is Rs. 94.50 Crores (RUPEES NINETY FOUR CRORES AND FIFTY LAKHS ONLY).
4. The above price excludes the value of Net Current assets to be determined as mentioned hereunder as on the date of take over of the Undertaking, which you will appreciate cannot be specified at this point of time. However, the basis of determining the value of the Net Current Assets is detailed in the following paragraphs.
5. Current Assets:
The scope of Current Assets and the method of determination of their quantities and values as detailed in para 4.1 of your letter cited above is acceptable to us except that-
a) The determination of bad and doubtful debts shall be carried out by M/s. A. F. Ferguson & Co. and a firm of Chartered Accountants to be nominated on our behalf (hereinafter referred to as ICL's Auditors) jointly.
b) We presume Stores & Spares includes Stock of Fuel and Packing Materials also.
c) The physical verification of the Inventories as on the date of transfer of the Undertaking shall be carried out on our behalf by ICL's Auditors besides our own employees jointly with your Representatives and Representatives of M/s. A.F. Ferguson & Co. The value of the Inventories so jointly verified shall be determined on a going concern basis in accordance with the principles hitherto followed in preparation of the Balance sheet and Profit & Loss Account of CFL in so far as such principles are generally accepted accounting practices and are consistent. The defective, obsolete or otherwise unusable inventory shall be treated as scrap. The value so determined jointly shall be the purchase price for the Inventories.
d) The Fees of M/s. A.F. Ferguson & Co. shall be borne by CFL and that of ICL's Auditors by ICL.
e) As regards book debts, loans and advances deposits and the like, their value as of the date of transfer of the Undertaking shall be as verified and determined by M/s. A.F. Ferguson & Co. and ICL's Auditors and as adjusted for any bad or doubtful debts/advances/debit balances.
6.1. The scope of Current Liabilities as mentioned in Para 4.2 of your letter cited is acceptable. However, the value of the Current Liabilities and Provisions as on the date of transfer of the Undertaking shall be duly verified by ICL's Auditors along with M/s. A.F. Ferguson & Co. and the value so jointly determined shall be the value of the Current Liabilities and Provisions to be taken over by ICL. The value so determined shall be deducted from the value of the Current Assets to be determined as per the procedure detailed in Para-5 and the same shall be the value of the Net Current Assets to be taken over by ICL and shall form the Purchase consideration therefor.
6.2 If, any liability arises upto the date of transfer of the Undertaking but is not reflected either in full or in part in the books of CFL, ICL shall have the right to claim the same from CFL within a period of three years from the date of transfer of the Undertaking as and when such liability comes to light.
6.3 Statutory Liabilities and Liabilities under any pending legal cases upto the date of transfer of the Undertaking as detailed in Para 4.2 of your letter shall be that of CFL.
6.4 We also note that any benefits or credits relating to the aforesaid statutory levies which accrue after the date of transfer of the Undertaking and which relate to the period upto the date of transfer of the Undertaking shall belong solely to CFL.
6.5 While we agree that any possible or potential liability arising out of orders made under the Jute Packaging Materials (Compulsory Use in packing Commodities) Act 19871 and the Rules framed thereunder upto the date of transfer of the Undertaking shall not be adjusted against the value of the Current Assets, at the time of take over, such liability as and when it is determined shall be recovered from, CFL in so far as it relates to the activities of the Cement Division, prior to the date of take over of the Undertaking.
6.6 Any contingent liability relating to the activities of the Cement Division of the CFL up to the date of transfer of Undertaking whether identified at the time of such take over or not shall be that of CFL.
7.1 While we agree to take over all the permanent employees of CFL, we reserve the right to vary the terms of employment of the Managerial grade employees on line with those of the Managerial grade employees of ICL. We also reserve the right to dispense with the services of any employee in accordance with the terms of employment/statutory provisions.
7.2 We also reserve the right to regulate the employment of Contract Labour to the needs of operation or to determine any such contract in accordance with the terms of the contract/statutory provisions.
7.3 In respect of Pension and Gratuity benefits, the liabilities up to the date of transfer of the Undertaking shall be determined by actuarial valuation by Life Insurance Corporation of India and the Liabilities so determined shall be that of CFL.
7.4 The liability of ICL for Pension/Gratuity in respect of the employees taken over shall therefore commence only from the date of transfer of the Undertaking.
8. We note that all taxes and levies including stamp duty, registration charges, sales tax and any other levies whatsoever assessed or payable in relation to the transfer of the Undertaking or any part thereof shall be payable by ICL.
9. This offer is subject to the approval of the Financial Institutions and it is also subject to the requisite approvals from the Shareholders/-Governmental authorities under the Companies Act/MRTP Act and/or any other law.
10. The purchase price for the Fixed Assets mentioned in Para 3.3 above will be paid by ICL by taking over the liability of CFL to the Financial Institutions in respect of various Secured Loans as on the date of the transfer of the Undertaking. This amount as of 30.9.89 was Rs. 78.13 crores.
11.1 ICL is willing within 30 days of the date of receipt by it of acceptance of the offer by CFL or within such extended time mutually agreed upon, to enter into an agreement for Sale with CFL which will set out the terms and conditions of sale and purchase of the Undertaking including those mentioned above and such other terms and conditions applicable to a transaction of this nature. All terms and conditions of the said agreement should be mutually acceptable to both the parties.
11.2 In as much as payment of the purchase consideration is to be effected by taking over the secured loans, ICL will be depositing only 10% of the balance amount payable to CFL.
12.1 ICL agrees that it shall endeavour to obtain all requisite sanctions and approvals within 90 days of the date of execution of the said agreement for sale or within such period mutually agreed upon. Thee offer made by ICL is subject to the approval of the Financial Institutions/Statutory approvals and if despite its efforts all requisite approvals including the approval of the Financial Institutions for the transfer of the loans due by CFL to ICL cannot be obtained, then the offer shall cease to be valid and ICL shall be entitled to the reimbursement of any earnest Money deposited with CFL and shall not be liable for any loss or damage that may be caused to CFL on account of the inability of ICL for the above reasons, or for any reason beyond its control, to take over the Cement Division.
12.2 Upon receipt of all necessary or required sanctions or approvals, ICL and CFL shall forthwith enter into a Deed of Transfer of the Undertaking in a mutually agreed form. ICL agrees to pay to CFL on or before the execution of the said Deed of Transfer-
a) The agreed price for the purchase of the Undertaking excluding the price for net current assets as set out in para 3.3, after deducting the amount of earnest money paid to CFL under Para 11.2 and also the amount of secured Loans due by CFL to Financial Institutions to be taken over by ICL as mentioned in Para 10.
b) The value of the net current assets determined in accordance with Paras 5 & 6.
12.3 ICL is also contemplating formation of a separate company to take over the Cement Division of CFL as a going concern in which case ICL reserves the right to effect payment and take over the assets in the name of the Company to be designated in case ICL is the successful bidder.
The above offer is also subject to the various Terms and Conditions mentioned in the enclosure to this Officer.
Should you require any clarifications, we will be too pleased to furnish.
We are also willing to participate in any negotiation you may hold.
Thanking you, Yours faithfully, Sd/-
N. SRINIVASAN MANAGING DIRECTOR..."
18. It may be seen that M/s. India Cements Ltd. has initially offered only a consideration of Rs. 94. 50-crores and, at this stage, the assessee- company recorded the fact of the bids received in the minutes of the meeting of the Committee of Directors on 3rd May, 1990, and it may be seen at page 53 of the Department's paper-book No. 2. The said minutes read as under-
"Minutes of the Meeting of the Committee of Directors held on May 3, 1990 at 8.30 a.m. at Secunderabad.
Present Mr. P. McCrea Mr. T.R. Bailek Mr. M.V. Subbaiah Mr. N.C. Roy The Committee discussed in detail the terms and conditions of the purchase price offered by the two highest bidders namely. The India Cements Ltd. and Gujarat Ambuja Cements Ltd.
At 9.30 a.m. discussions were held with the Managing Director of India Cements Ltd. And his team regarding the terms and conditions offered by them. It was also indicated that the purchase price offered was lower than our expectations. After the discussions it was agreed that India Cements Ltd. would submit their final revised offer by 10.00 a.m. on May 4, 1990 at the Registered Office of the Company at Coromandel House", Sardar Patel Road, Secunderabad-500 003.
Similarly, at 11.30 a.m., discussions were held with the Managing Director of Gujarat Ambuja Cements Ltd. and his team regarding the terms and conditions offered by them. It was also indicated that the purchase price offered was lower than our expectations. After discussions it was agreed that Gujarat Ambuja Cements Ltd. would submit their final revised offer by 10.00 a.m. on May 4, 1990 at the Registered Office of the Company at 'Coromandel House', Sardar Patel Road, Secunderabad-500 003.
Both the bidders were informed that the sealed bids would be opened at 8.30 a.m. on May 5, 1990 at the Registered Office of the Company and if they wished they could nominate their representative to be present at the opening of the bids.
The next meeting of the Committee was accordingly scheduled for 8.30 a.m. on May 5, 1990 at 'Coromandel House', Sardar Patel Road, Secunderabad-500 003.
Sd/- Sd/- Sd/- Sd/- -----"
19. Subsequently, it appears that some negotiations took place between the assessee-company and India Cements Ltd., and the latter agreed for the payment of a higher consideration of Rs. 105.30 crores and the same is recorded in the minutes of the meeting of the committee of Directors held on May 5, 1990. The said minutes may be seen at page 54 of the Department's paper-book No. 2 and it reads as under-
"Minutes of the meeting of the Committee of Directors held on May 5, 1990 at 8.30 a.m. at Secunderabad.
Present Mr. P. McCrea Mr. T.R. Bialek Mr. M.V. Subbaiah Mr. N.C. Roy The Committee met and after some discussion opened the revised sealed bids received from the India Cements Ltd. and Gujarat Ambuja Cements Ltd., at 8.45 a.m. The opening of the bids was in the presence of the representatives nominated by the Managing Directors of the two bidders -Mr. Swaminathan for India Cements Ltd. And Mr. R. Shankaran for Gujarat Ambuja Cements Ltd. On opening of the bids the two representatives were informed that the following were the final bids for the undertaking exclusive of current assets which were to be determined on the basis of the terms outlined:
The India Cements Ltd. Rs. 105.30- crores Gujarat Ambuja Cements Ltd. - Unchanged from the previous offer of Rs. 91.25- crores The two representatives were informed that the Committee would make a detailed evaluation of the two bids in terms of the purchase price offered and the detailed terms and conditions and submit its recommendations to the Board at its Meeting to be held at 11.00 a.m. the same day. The two representatives were requested to keep this information confidential until the commencement of the Board Meeting at 11.00 a.m. on May 5, 1990, which they agreed to do.
The Committee then evaluated the terms and conditions of the final two revised bids and submitted its recommendation to the Board that the highest bid of India Cements Ltd. should be accepted.
......."
20. The terms of the sale were reduced into an agreement dated 9.6.1990 and the said agreement may be seen at pages 1 to 53 of the assessee's paper- book No. 1. The said agreement is crucial for deciding the issue raised in this appeal. The relevant portion of the said agreement reads as under-
"AGREEMENT This Agreement made this Ninth day of 1 June 1990 between Coromandel Fertilisers Limited, a Company incorporated under the Companies Act, 1956 and having its Registered Office at Coromandel House, 1-2-10 Sardar Patel Road, Secunderabad 5000023 (hereinafter referred to as "the Vendor" which expression shall include, unless repugnant to the context or meaning thereof, its successors) of the One Part AND the India Cements Limited, a Company incorporated under the Indian Companies Act, 1913 and having its Registered Office at Dhun Building, 827, Anna Salai, Madras 600 002 (hereinafter referred to as "the Purchaser" which expression shall indlude, unless repugnant to the context or meaning thereof, its successors) of the Other Part :
WHEREAS the Vendor has for some time past been engaged, inter alia, in the manufacture and sale of cement at its plant situate at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh:
AND WHEREAS the Purchaser has been engaged in the manufacture and sale of cement at its plants situate at Sankaridurg, Salem District and Sankarnagar, Nellai Kattabomman District in the State of Tamil Nadu;
AND WHEREAS the Vendor has agreed to transfer and sell and the Purchaser has agreed to purchase and acquire for the consideration and upon the terms and conditions hereinafter set out, the entire undertaking of the Vendor comprising its Cement Division, as a going concern, on an as-is-where-is basis.
NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS :
1. In this Agreement, the following expressions shall, unless the context otherwise requires, have the following meanings:
(a) "Undertaking" means the operations and activities of the Cement Division of the Vendor as a going concern on an as-is-where-is basis and shall include, inter alia
(i) the Cement Plant of the Vendor and the freehold and, hereditaments and premises situate at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh together with all buildings and structures (including the housing colony) constructed thereon which land, hereditaments and premises are more particularly described in the First Schedule hereto;
(ii) the mines and mining leases on or in respect of the said land, hereditaments and premises relating or pertaining to the operations and activities of the Vendor's Cement Division;
(iii) all plant, machinery, equipment, capital work-in-progress, vehicles, furniture, fixtures being or lying on the said land, hereditaments and premises and/or the buildings or structures constructed thereon relating or pertaining to the operations and activities of the Vendor's Cement Division;
(iv) all plant, machinery, office equipment, furniture, fixtures and vehicles at the Vendor's Divisional Office at Secunderabad and at the Vendor's Marketing Offices at Secunderabad, Madras, Bangalore and Ernakulam and at the Vendor's warehouses in, the States of Andhra Pradesh, Tamil Nadu, Karnataka and Kerala (but excluding the Vendor's Office premises at Secunderabad) all relating or pertaining to the operations and activities of the Vendor's Cement Division;
(v) Net Current Assets of the Vendor as hereinafter defined relating or pertaining to the operations and activities of the Vendor's cement Division;
(vi) all the industrial and other licences held by the Vendor relating or pertaining to the operations and activities of its Cement Division;
(vii) trade mark and brand name owned by the Vendor relating or pertaining to the operations and activities of its Cement Division;
(viii) The goodwill and other intangible assets of the Vendor relating or pertaining to the operations and activities of its Cement Division; and
(ix) At the Purchaser's option to be exercised not later than July 31, 1990, but except as provided in Clause 10 herein, all the benefits and obligations of all current and pending contracts including that of purchase, selling, leasing, hire purchase, maintenance and such other contracts, policies, agencies, permits, orders, registration and other agreements relating or pertaining to the operations and activities, of the Cement Division of the Vendor, to the extent that all or any of the foregoing are capable of being transferred or assigned from or by the Vendor to the Purchaser, the Vendor to provide to the Purchaser not later than June 30, 1990 details of all the aforesaid contract.
(b) "Net Current Assets" means Current Assets as hereinafter defined less Current Liabilities and Provisions as hereinafter defined, the value of both of which shall be determined in the manner specified hereunder.
(c) "Current Assets" shall include, inter alia, raw-materials, goods-in-process, finished goods, stores, spares, fuel, packing material, book debts, loans and advances, deposits and the like relating or pertaining to the operations and activities of the Undertaking but excluding those debts, loans and advances, which are jointly determined as bad or doubtful by the Vendor's Auditors, M/s. A.F. Ferguson & Co. and the Purchaser's Auditors, M/s. Brahmayya & Co. In the event of there being any difference of opinion between the said two Auditors, the decision of the Vendor in that behalf shall be final and binding on the Purchaser.
(d) "Current Liabilities and Provisions" shall include, inter alia, all monies payable by the Vendor, whether secured or unsecured towards
(g) "Banks" mean
-State Bank of India(SBI),
-State Bank of Hyderabad (SBH)
-State Bank of Mysore (SBM)
-ANZ Grindlays Bank p.l.c(ANZ GB) and
-Punjab National Bank(PNB)
(h) "Secured Loans" mean loans granted by Public Financial Institutions and Banks to the Vendor and Debentures privately placed by the Vendor with UTI in respect of the undertaking aggregating to about Rs. 7896.44 lacs as of June 9, 1990, which are secured by a charge over the assets of the Undertaking and are more particularly described in the Third Schedule hereto.
(i) "Transfer Date" means the date on which the Deed of Transfer in respect of the Undertaking is executed by the Vendor and the Purchaser as hereinafter provided.
2. The Vendor shall sell and transfer and the Purchaser shall purchase and acquire from the Vendor the Undertaking with effect from and including the Transfer Date at or for (a) the sum of Rs. 105.30 crores (Rupees one hundred and five crores and thirty lacs only) excluding the value of the Net Current Assets which shall be determined in the manner hereinafter provided, and (b) such sum being the value of the Net Current Assets which is determined in the manner hereinafter provided.
3. The purchaser has on or before the execution of this Agreement (a) paid to the Vendor the sum of Rs. 5.27- crores (Rupees five crores and twenty seven lacs only) by Demand Drafts the receipt whereof the Vendor doth hereby admit and acknowledge, and (b) furnished to the Vendor the Guarantee dated June 9, 1990 of Citi Bank N.A. for a sum of Rs. 5.26 crores (Rupees five crores and twenty six lacs only) in a form agareed with the Vendor, as and by way of earnest money. Save as provided in Clause 21 herein, interest shall not accrue to the Purchaser on the earnest money deposited with the Vendor.
4. (A) The Purchaser agrees and undertakes to pay to the Vendor on or before the execution of the Deed of Transfer hereunder mentioned (time in this respect being of the essence)
(i) the balance of Rs. 100.03 crores (Rupees one hundred crores and three lacs only) as reduced by the amount of the Secured loans outstanding as of the Transfer Date transferred by the Vendor to and taken over by the Purchaser with the approval of the Public Financial Institutions and Banks; and
(ii) 90% of the value of the Net Current Assets as per the Vendor's books of accounts made up as of the last date of the English Calendar month immediately preceding the Transfer Date (not in any event being less than 30 days prior to the Transfer Date).
(B) Consequent upon the joint verification and valuation by the said Auditors of the Net Current Assets which shall be completed within 45 days of the. Transfer Date, the Purchaser shall pay to the Vendor the excess, if any, of the value of the Net Current Assets as on the Transfer Date of the Undertaking so determined over the amount referred to in Sub-clause (A) (ii) above paid by the Purchaser' to the Vendor, such payment to be made by the Purchaser within 7 days of such determination (time in this respect being of the essence). If the value so determined by the said Auditors is less than the amount referred to in Sub-clause (A) (ii) above paid by the Purchaser to the Vendor, then in such case, the Vendor shall pay to the Purchaser the difference between the amount referred to in Sub-clause (A) (ii) above and the value so determined, such payment to be made by the Vendor within 7 days of such determination, (time in this respect being of the essence).
(c) The Vendor shall be entitled, to and shall have, a charge and lien upon such of the Current Assets forming part of the Undertaking as have been delivered in the Purchaser on the Transfer Date and as in the possession of the Purchaser on the expiration of 7 days after the said Auditors have made the determination referred to in Sub-clause (B) above for the amount, if any, determined to be payable by the Purchaser to the Vendor under or pursuant to Sub-clause (B) above so long as the same remains unpaid.
(D) The Vendor shall, on or prior to the Transfer Date, deliver to the Purchaser a Guarantee from a Bank acceptable to the Purchaser guaranteeing to pay the amount, if any, determined to be payable by the Vendor to the Purchaser under or pursuant to Sub-clause (B) above in the event of the Vendor failing to make such payment to the Purchaser as therein provided, the liability of the Guarantor in no event to exceed Rs. 1 crore (Rupees one crore only).
5.(A) The Vendor has notified the Purchaser that (I) There is a subsisting mortgage by deposit of title deeds in favour of the Public Financial Institutions and Banks on or in respect of the said freehold land. Hereditaments and premises at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh and buildings and structures thereon more particularly described in the First Schedule hereto and on the other immovable assets of the Vendor, present and future, relating to the Undertaking and a Charge by way of hypothecation of all movable assets relating to the Undertaking (save and except book debts) to secure the repayment of the Secured Loans granted by the Public Financial Institutions and Banks to the Vendor;
(ii) it has issued privately placed tax Mortgage Debentures to the UTI, the redemption whereof is secured by the said mortgage and charge by way of hypothecation;
(iii) Out of the Secured Loans, more particularly described in the Third Schedule, a loan of Rs. 32.67-lacs is due and payable by the Vendor to HDFC as on June 9, 1990, which loan is intended to be secured by the Vendor creating in favour of HDFC a mortgage by deposit of title deeds in respect or;
(a) land admeasuring approximately 1.28 acres within the land, hereditaments and premises; more particularly described in the First Schedule hereto and
(b) the dwelling units constructed by the Vendor thereon land constituting the housing colony in the undertaking.
The Vendor undertakes to create the aforesaid Security in respect of the aforesaid loan in favour of HDFC on or prior to the Transfer Date.
(iv) there is a subsisting charge by way of hypothecation over raw materials, work-in-process, finished goods, stores, spares, fuel, packing material and book debts forming part of the undertaking to secure the cash credit facilities granted by the Banks to the Vendor;
(v) though the Vendor has been put in possession of approximately 141.91 acres out of the land, hereditaments and premises more particularly described in the First Schedule hereto by the Government of the State of Andhra Pradesh, the Vendor has not, as of the date of this Agreement for sale, paid the consideration therefor. The Vendor undertakes to pay to the Government of the State of Andhra Pradesh the aforesaid consideration on or prior to the Transfer Date; and
(vi) the Vendor has not, as of the date of this Agreement for Sale, taken possession of approximately 2.02-acres out of the land, hereditaments and premises more particularly described in the First Schedule hereto from the Government of the State of Andhra Pradesh and has not paid the consideration thereto. The Vendor undertakes to take possession of the aforesaid and to pay to the Government of the State of Andhra Pradesh the aforesaid consideration on or prior to the Transfer Date.
(B) Save as stated in Sub-clause (A) above, the Vendor declares that the said freehold land, hereditaments and premises and buildings and structures thereon more particularly described in the First Schedule hereto are free from encumbrances and that the Vendor has marketable title thereto.
6. Save as provided in Clause 5 above, the Undertaking shall be sold and transferred by the Vendor to the Purchaser free from all encumbrances.
7. The Vendor shall transfer or cause to be transferred as of the Transfer Date the Mining Leases to or in favour of the Purchaser for the then unexpired residue of the terms reserved thereunder respectively. The Vendor shall endeavour to transfer, or cause the Mining Leases to be transferred to the Purchaser as aforesaid on the same terms and conditions as applicable to the Vendor immediately prior to the Transfer Date.
8. The Vendor represents and warrants that consequent upon the withdrawal by the Government of India effective March 1, 1987 of the obligation of cement manufacturers to sell cement to the levy category, the Vendor shall have no unfulfilled levy obligation pertaining to the period upto and including February 28, 1989, as of the Transfer Date. Should such obligation be reintroduced by the Government of India at any time between the date of this Agreement and the Transfer date, the Vendor shall compensate the Purchaser such amount as is mutually agreed upon between them in writing in respect of any such obligation on the part of the Vendor remaining unperformed or unfulfilled by the Vendor as of the Transfer Date.
9. Notwithstanding anything to the contrary herein contained or implied, it is expressly agreed and declared that:
(A) A11 inventories of raw materials, goods-in-process, finished goods, stores, spares, fuel and packing material as of the Transfer Date shall be physically verified jointly by authorised representatives of the Vendor and Purchaser respectively along with authorised representatives of their said Auditors, The value of the inventories so jointly verified shall be thereafter determined jointly by the said Auditors of the Vendor and the Purchaser on a going concern basis in accordance with the principles previously followed by the Vendor in the preparation of its own Balance Sheet and Profit and Loss Account in so far as such principles are generally accepted accounting practices and are consistent. The value so determined shall be final and binding on the parties hereto and in the event of there being a difference of opinion between the said two Auditors, the decision of the Vendor in that behalf shall be final and binding on the Purchase. All defective, obsolete or otherwise unusable inventories shall remain the assets of the Vendor, provided that the purchaser will have the option to by such inventories from the Vendor at a price mutually agreed by both the parties hereto.
(B) The value of all book debts, loans and advances, deposits and the like forming part of Current Assets as of the Transfer Date shall be ...........as per the Vendor's hereunder, upto and including the Transfer Date and liabilities pertaining to pending legal cases upto and including the Transfer Date shall be and remain the liabilities of the Vendor whether or not the same accrue or arise before or after the Transfer Date and shall not be transferred by the Vendor to the Purchaser under or pursuant to Sub-clause (C) above. Likewise, any benefits or credits relating to the aforesaid statutory levies which accrue or arise after the Transfer Date and which relate to the period preceding the Transfer Date shall belong exclusively to the Vendor and shall not be transferred to the Purchaser under or pursuant to this Agreement.
(F) Any possible or potential liability arising out of or pursuant to Orders made under the. Jute Packaging Materials (Compulsory Use in Packing Commidities) Act, 1987 and/or the Rules framed thereunder upto the Transfer Date shall be the sole liability of the Purchaser and the value thereof shall not be adjusted against the value of the Current Assets.
(G) Save as provided in this Agreement, any contingent liability relating to the activities of the Undertaking agreed to be sold and transferred under or pursuant to this Agreement upto and including the Transfer Date, whether or not the same, has been identified on or before the Transfer Date, shall be that of the Vendor and the Vendor shall indemnify the Purchaser against the same Provided that the Purchaser shall not be entitled to claim from the Vendor any such contingent liability after the expiry of six months from the Transfer Date.
(H) The fees of the Vendor's said Auditors for all work done or services rendered by them under or pursuant to this Agreement shall be shared equally by the Vendor and the Purchaser.
(I) Any income tax or surtax liability relating to the period preceding and upto and including the Transfer Date shall be the sole liability of the Vendor, and (J) The Purchaser shall incur no liability for any income tax, surtax or such related levies on the sale and transfer by the Vendor to the Purchaser of the Undertaking pursuant to this Agreement or on the consideration agreed to be paid by the Purchaser to the Vendor hereunder.
10(a) The Purchaser shall take into its service as from the Transfer Date all the employees of the Vendor employed by it as of the Transfer Date in the operations and activities of the Undertaking at all locations of the Undertaking including Secunderabad without any break or interruption in their service with the Vendor upto the Transfer Date, upon terms and conditions of employment (including retirement benefits) not in any way less favourable than those applicable to the immediately before the Transfer Date. The Vendor has, at the request of the Purchaser, provided to the Purchaser a list of all its aforesaid employees as on April 24, 1990, the receipt whereof is hereby acknowledged by the Purchaser. The Vendor shall not increase the total number of such employees or vary the term's and conditions of employment of the aforesaid employees between April 24, 1990, and the Transfer Date. The Vendor has, prior to this Agreement, delivered to the Purchaser and the Purchaser confirms having received from the Vendor, the terms and conditions of employment currently in force in respect of such employees.
(b) The pension and gratuity liability upto the Transfer Date in respect of the employees of the Vendor taken into service by the Purchaser on the Transfer Date shall be determined by actuarial valuation to be done by the Vendor's Actuary and such determination shall be final and binding upon the Purchase. The liability determined as aforesaid shall be that of the Vendor. The Purchaser shall be liable for pension and gratuity only after the Transfer Date in respect of the employees of the Vendor taken into service by the Purchaser on the Transfer Date.
(c) The Purchaser shall continue to engage as from the Transfer Date all contract labour engaged by the Vendor at the Cement plant forming part of the Undertaking as on the date immediately preceding the Transfer Date upon terms and conditions not in any way less favourable than those applicable to them during their engagement by the Vendor immediately preceding the Transfer Date.
11. The Purchaser shall, save as herein expressly provided, bear and pay all assessments, rents, rates, taxes, outgoings and impositions of whatsoever nature relating or pertaining to the operations and activities of the Undertaking after the Transfer Date and save as provided in Clause 9(F) herein, if any such payments relate to the period upto and including the Transfer Date, the same shall be apportioned between the Purchaser and the Vendor. The Purchaser shall be liable and responsible for all obligations or liabilities arising from or in respect of the operations and activities of the Undertaking after the Transfer Date. The Purchaser shall indemnify and at all times keep the Vendor fully indemnified from and against all claims, demands, actions, proceedings, costs, charges, expenses or other liabilities made or brought against, suffered or incurred by the Vendor by or as a consequence of the failure, refusal or neglect on the part of the Purchaser to comply with its obligations under this Clause.
12. The Vendor shall bear and pay all assessments, rents, rates, taxes, outgoings and impositions of whatsoever nature relating or pertaining to the operations and activities of the Undertaking (save as provided in Clause 9(F)(herein) upto and including the Transfer Date and if any such payments relate to the period after the Transfer Date, the same shall be apportioned between the Vendor and the Purchaser. The Vendor shall, save as provided in Clause 9(F) herein, be liable and responsible for all obligations or liabilities arising from or in respect of the operations and activities of the Undertaking upto and including the Transfer Date. The Vendor shall indemnify and at all times keep the Purchaser fully indemnified from and against all claims, demands, actions, proceedings, costs, charges, expenses or other liabilities made or brought against, suffered or incurred by the purchaser by or as a consequence of the failure, refusal or neglect on the part of the Vendor to comply with its obligations under this Clause.
13. The Vendor shall retain for a period of at least 8 years from the Transfer Date all books of accounts and other relevant books, papers, documents and records relating to the Undertaking upto and including the Transfer Date, required by law, statute or order to be maintained and preserved by the Vendor and those required by the Vendor for discharging its obligations and liabilities under or pursuant to this Agreement, The Vendor shall permit the Purchaser and its authorised representatives to inspect the said books, papers, documents and records maintained by the Vendor and make copies thereof at all reasonable times on any working day in so far as it may be necessary for the purpose of enabling the Purchaser to carry on the activities and operations of the Undertaking and shall permit and allow the Purchaser to produce, exhibit and tender all such books, papers, documents, and records in any legal proceedings, and shall permit such employees of the Vendor who are required by the Purchaser to appear on behalf of the Purchaser as and when required to do so, to prove such books, papers, documents and records and give evidence in any such legal proceedings at the Purchaser's cost. Save as aforesaid, the Vendor shall give possession of all other books, papers, documents and records relating to the Undertaking to the Purchaser and the Purchaser shall permit the Vendor and its authorised representatives to inspect the same and make copies thereof at all reasonable times on any working day and permit and allow the vendor to produce, exhibit and tender such books, papers, documents and records in any legal proceedings, as and when required by the Vendor and shall permit all employees of the Purchaser to appear on behalf of the Vendor as and when required to do so, to prove such books, papers, documents and records and give evidence in such legal proceedings at the Vendor's cost.
14. The sale and transfer of the Undertaking by the Vendor to the Purchaser under or pursuant to this Agreement shall be complete and effective upon the parties hereto executing the Deed of Transfer as hereinafter provided and upon the Purchaser paying to the Vendor in full, on or before the execution thereof, the amounts stated in Clause 4 hereinabove.
15......... "
21. The above sale agreement was approved by the extra-ordinary general meeting of the company held on 2nd August, 1990 and copy of the resolution passed may be seen at page-54 of the assessee's paper-book and the same reads as under-
".......
2.....
3. RESOLVED THAT subject to the approvals of Public Financial Institutions, and Banks and all other authorities as required by or under any applicable law, consent of the Company be and is hereby accorded pursuant to the provisions of Section 293 of the Companies Act, 1956 to the Board of Directors of the Company selling, transferring or disposing of as a going concern, the whole of the Undertaking comprising the Company's Cement Division at Chilamkur Village, Cuddapah district in the State of Andhra Pradesh and other locations more particularly described in the Agreement for Sale dated 9th June, 1990 entered into by the Company with The India Cements Limited, a copy whereof is placed before this meeting, at the price and upon and subject to the terms, provisions and conditions therein contained.
AND RESOLVEDL FURTHER THAT the Directors be and are hereby authorised to execute all such documents and writings and to do all such other acts, deeds, matters or things necessary, proper or usual for the purpose of effectually transferring, selling and disposing of the said Undertaking to or in favour of The India Cements Limited in pursuance of the said Agreement for Sale."
22. It may be seen from the terms of the above sale agreement dated 9.6.1990 that the cement unit was sold as a going concern, on "as is where is" basis, for a lump sum consideration of Rs. 105.30- crores plus the value of the Net Current Assets. It is the contention of the learned counsel for the asses see that the said sale consideration of Rs. 105.30-crores crystalised as early as May 5, 1990, as is evident from the Minutes of the Meeting of the Committee of the Directors held on 5.5,1990, which we have extracted hereinabove.
23. Subsequently, the assessee company applied for a certificate under Section 230A to the Income-tax Department in Form No. 34A and a copy of the same may be seen at pages 9 to 15 of the Department's paper- book No. 1. In the said application, Col. No. 14 and 15 and assessee's response thereto, read as under-
".....
Form No. 34A (See Rule 44A) Application for a certificate under Section 230A(i) of the Income tax Act, 1961 To The Deputy Commissioner of Income-tax (Assessments)-Special Range-I, Posnett Bhavan, Hyderabad.
Sir, I request that a certificate under Sub-section (1) of Section 230-A of the Income-tax Act, 1961, be granted to me. I give below the necessary particulars.
1 to 13........... :............
14.Name and address of the INDIA CEMENTS LTD.,
transferee, Assignee, etc. 827 ANNA SALAI
MADRASS - 600 002
15.(i)Full value of the The sale is of the entire
consideration for which the Cement Undertaking, as a
property or the right,title or going concern, on an as-is-
interest to or in the property where is basis and no
is purported to be transferred. separate price/value has been
agreed for the parties covered
by Section 230A of the I.T. Act
(ii)If the transfer is to be In view of (i), the value
without consideration, the determined by a Government
value for the purposes of approved valuer engaged by
stamp duty the purchaser Incorporated in
the subject Deed of Sale And
Transfer for the purposes of
registration pursuant to the
provisions of the Registration
Act, 1908 is Rs. 20.07 crores.
16 to 18............... :.........
I declare that to thee best of my knowledge and belief, the information furnished above is correct, complete and is truly stated.
Place :Secunderabad Date:November 21, 1990 Yours faithfully, For COROMANDEL FERTILISERS LTD.
Sd/-
Secretary(Principal Officer) Notes :.......... ."
With the said application the assessee also gave an estimate of the capital gains exigible to tax on the sale of the cement unit, and the said estimate reads as under-
Tentative estimate of Deemed capital gain on account of cement unit sale (Rs. In crores) Rs.
Sale consideration 105.30
Less: Land value(estimated 2.87
surplus) -------
Balance consideration 102.43
Less: WDV of depreciable 34.22
Assets
Less:Additions during 1990- 13.59
91
-------
Deemed net Capital gains 54.82
-------
Note:......................
Sd/-29.11.90..."
24. After having obtained the certificate under Section 230A, the assessee executed a sale and transfer deed dated 29.11.1990 in favour of India Cements conveying the title to the land of over 2,000 acres and certain buildings. The said deed may be seen at pages 19 to 126 of the Department's paper-book. The relevant portion of the said deed reads as under-
DEED OF SALE AND TRANSFER THIS DEED OF SALE AND TRANSFER MADE AT Cuddapah, Andhra Pradesh, this 29th day of November One Thousand Nine Hundred and Ninety BETWEEN COROMANDEL FERTILISERS LIMITED, a Company incorporated under the Companies Act, 1956 and having its Registered Office at "COROMANDEL HOUSE", 1- 2-10, Sardar Patel Road, Secundderabad-500 003 (hereinafter referred to as "the Vendor", which expression shall, unless it is repugnant to the subject or context thereof, include its successors and assigns) of the ONE PART AND THE INDIA CEMENTS LIMITED, a Company incorporated under the Indian Companies At, 1913 and having its Registered Office at Dhun Building, 827, Anna Salai, Madras-600 002 (hereinafter referred to as "the Purchaser", which ;expression shall, unless it be repugnant to the subject or context thereof, include its successors and assigns) of the OTHER PART:
WHEREAS
1. THE vendor has for some time past been engaged inter alia, in the manufacture and sale of cement at its Plant situate at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh;
2. the Purchaser has also been engaged in the manufacture and sale of cement at its Plants situate at Sankaridrug, Salem District and Sankarnagar, Nellai Kattabomman District in the State of Tamil Nadu;
3. (a) the Government of Andhra Pradesh has acquired under the provisions of the Land Acquisition Act, 1894 for the purpose of the Vendor's Cement Factory land admeasuring about 2058.23 acres situate at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh, more particularly described in PART 'A' of the Schedule hereunder written and the Vendor has been put in possession of the same;
(b) the Government of Andhra Pradesh has put the Vendor in possession of certain poramboke land admeasuring about 141.91-acres situate at Chilamkur Village, Cuddapah District in the State of Andhra Pradesh, more particularly described in PART 'B' of the Schedule hereunder written;
(c) the Government of Andhra Pradesh has put the Vendor in possession of certain further poramboke land admeasuring about 2.02 acres SITUATE AT Chilamkur Village, Cuddapah District in the State of Andhra Pradesh, more particularly described in PART 'C' of the Schedule hereunder written;
(d) by diverse Sale Deeds, the Vendor purchased several pieces of land admeasuring in all about 3.13-acres situate at Chilamkur, Kalamalla and Chinnadandulur Villages, Cuddapah District in the State of Andhra Pradesh, more particularly described in Part 'D' of the Schedule hereunder written;
4. by virtue of the said acquisition and purchases the vendor is presently in physical possession of land admeasuring about 2205.29 acres situate in Chilamkur, Kalamallal and Chinnadandulur Villages, Cuddapah District in the State of Andhra Pradesh (hereinafter referred to as "the said Land");
5. The Government of Andhra Pradesh executed a Mining Lease dated the 25th day of February, 1984 in favour of the Vendor (hereinafter referred to as "the Mining Lease") covering an extent of about 1487.29 acres of land in Chilamkur Village, Cuddapah District, Andhra Pradesh, which forms part of the said Land, more particularly described in PART 'A' and PART 'C' of the Schedule hereunder written. Pursuant to the G.O.No. 326 dated the 22nd May 1981 issued by the Deputy Secretary to the Government of Andhra Pradesh, Industries and Commerce (Mines III) Department and the ' Order No. 2306/M(III)/81 dated the 25th February 1984 issued by the Assistant Director of Mines and Geology, Cuddapah, which Mining Lease the Vendor, has requested the Government of Andhra Pradesh, to transfer to the Purchaser for the residue of the unexpired period of the term reserved thereunder;
6. by an Agreement dated 9th day of June 1990 (hereinafter called "the said Agreement") made between the Vendor and the Purchaser, the Vendor agreed, subject to such consents and approvals as may be necessary, to sell an transfer and the Purchaser agreed to purchase and acquire from the Vendor, subject to such consents and approvals, as 09 may be necessary, the entire Undertaking of the Vendor comprising its Cement Division as defined therein as a going concern on an "AS IS WHERE IS" basis (hereinafter referred to as "the said Undertaking") for the consideration and on and subject to the terms, , provisions and conditions therein mentioned;
7. PURSUANT^O THE SAID agreement, the Vendor and the Purchaser have duly obtained the approval and consents of all authorities as are required by or under any applicable law, including but without the generality of the foregoing, the approvals of the Public Financial Institutions/Banks as defined in the said Agreement, Unit Trust of India (UTI) as the Debenture holder and the Industrial Credit and Investment Corporation of India Limited (ICICI) as the Debenture Trustees and the shareholders of the Vendor to the sale land transfer of the said Undertaking to the Purchaser;
(8) pursuant to the said Agreement, the Purchaser has, on or prior to its execution, paid to the Vendor the sum of Rs. 5.27-crores and also furnished to the Vendor the Guarantee dated 9th June 1990 of Citibank N.A. for Rs. 5.26-crores in the form agreed by the Vendor, as and by way of earnest money, which sum and Bank Guarantee, the Vendor admits and acknowledges having received;
9. prior to the execution of these presents, the Purchaser has, pursuant to the said Agreement, assumed and taken over all the Vendor's liabilities in respect of the Secured Loans as defined in the said Agreement outstanding as on the Transfer Date as defined therein, free from encumbrances;
10. all movable assets and properties comprised in the said Undertaking and capable of passing by delivery of possession, namely, plant, machinery, equipment, vehicles, furniture, fixtures and other assets and properties of a movable nature (hereinafter collectively called "the movable assets") have been transferred and delivered by the Vendor to the Purchaser prior to the execution of these present and the Purchaser has passed to the Vendor a separate receipt in respect thereof;
11. the movable assets are, in the premises aforesaid neither included in the Deed of Sale and Transfer nor intended to be conveyed and transferred hereunder nor is the Deed of sale and Transfer applicable thereto;
12. it is intended that only the immovable assets and properties comprised in the said Undertaking shall be governed under and by this Deed of Sale and Transfer, the market value whereof for the purpose of stamp duty chargeable on this Deed of Sale and Transfer has been determined by a Government approved valuer engaged by the Purchaser at Rs. 20.07 crores (Rupees twenty crores and seven lakhs only);
13. the Vendor has obtained prior to the execution of these presents the requisite certificate from the Income Tax authorities under Section 230A of the Income Tax Act, 1961;
14. in pursuance of the said Agreement, the Vendor has at the request of the Purchaser agreed to execute these presents.
NOW THEREFORE THIS DEED WITNESSETH TTHAT
1. In pursuance of the said Agreement and pursuant to the aforesaid sum of Rs. 20.07-croress (Rupees twenty crores and seven lakhs only) having been paid by the Purchaser to the Vendor on or before the execution of these presents (which the Vendor hereby admits and acknowledges of having received), the Vendor doth hereby grant, sell, convey, transfer, assign and assure unto the Purchaser for ever and absolutely on and from the date hereof (hereinafter called "the Transfer Date") ALL THAT (A)THE SAID land, more particularly described in PARTS A and 'D' of the Schedule hereunder written subject in so far as a part of the acquired land admeasuring about 2.37 acres which connects the Zilla Parishad Road to the Malepadu Road and covered by the following Survey Nos. viz, 1383, 1384, 1388, 1389, 1390, 1391, 1392, 1404, 1405, 1406, 1407, 1408, 1409, 1412 and 1413 in. Chilamkur Village, Cuddapah District is concerned to a right of way to the Public on a cart track of about 15 feet wide laid along the northern perimeter of the said Land;
(b) the housing colony together with the dwelling units and other houses, outhouses, edifices, buildings, courts, yards, compounds, factory and other buildings, structures, erections and other civil constructions erected, constructed or standing or being on the said land or any part or parts thereof (hereinafter collectively called "the said Buildings" more particularly described in PART 'E' of the Schedule hereunder written);
(all of which said Land and the said Buildings are hereinafter collectively called "the said immovable properties") AND ALL THE estate, right, title, interest, property, claim and demand whatsoever at law and equity of the Vendor in, to, out of or upon the said immovable properties or any part or parts thereof TO HAVE AND TO HOLD the said immovable properties unto and to the use of the Purchaser for ever free from all encumbrances whatsoever TOGETHER WITH all deeds, documents, writings, vouchers and other evidences of title exclusively relating thereto or any part thereof AND TOGETHER WITH ALL AND SINGULAR the trees, shrubs, ways, path, passages, sewers, drains, ditches, fences, yards, wells, waters, water courses, rights, liberties, easements, advantages, profits, privileges, appurtenances and opportunities whatsoever to the said immovable properties or any part or parts thereof or belonging or in anywise appertaining to the same now or at any time heretofore usually held, used, occupied or enjoyed therewith or reputed to belong or be appurtenant thereto or be part or member thereof AND ALL THE estate, right, title, interest, use, inheritance, property, possession, benefit, claim and demand whatsoever, at law or in equity of the Vendor in to out of or upon the said immovable properties and every part thereof. SUBJECT nevertheless to the payment of rents, rates, taxes, assessments, dues and duties now chargeable upon the same or which may hereafter become payable to the Government, Municipality or any other local or public body or authority in respect thereof AND SUBJECT to all such payments as are mentioned in the said Agreement AND SUBJECT ALSO to the right of way as aforesaid.
2. AND THE VENDOR DOTH HEREBY COVENANT WITH THE PURCHASER THAT..."
In the schedules to the above mentioned deed, the value of the lands is shown at Rs. 2,60,49,640 in Parts A to Part D-1 and the value of the buildings was shown in Part-E at Rs. 17,46,446.
25. It is mentioned by the learned counsel for the assessee that the market value of the land was estimated by the Government approved valuer at the instance of the purchaser.
26. It may be observed that, as per Clause 12 of the above transfer and sale deed, only the immovable assets and properties comprised in the cement unit, are governed by the said deed of sale and transfer, and as per Clause 11, the movable assets were neither included nor intended to be conveyed by the said deed of sale and transfer. It may also be observed that, as per Clause 10 of the said sale and transfer deed, the movable assets like plant and machinery etc. were transferred and delivered by the vendor to the purchaser prior to the execution of the said sale and transfer deed. It may also be mentioned that the assessee obtained a separate receipt from the India Cements Ltd for the delivery and handing over possession of the immovable assets and properties forming part of the Cement Unit. The said receipt dated 29.11.1990 was located during the survey conducted by the Department at the premises of India Cements Ltd., and a copy thereof may be seen at page 150(1) of the Department's paper-book.
It reads as under-
THE INDIA CEMENTS LIMITED ...............
RECEIPT RECEIVED from Coromandel Fertilisers Limited delivery and possession of all the movable assets and properties forming part of the Undertaking (as defined in the Agreement dated 9th June, 1990 executed between us), including the items detailed in the enclosure.
Dated this Twenty ninth day of November 1990.
For and on behalf of THE INDIA CEMENTS LIMITED Sd/-
(N. SWAMINATHAN) VICE PRESIDENT (FINANCE) & DIRECTOR Witness:
1. Sd/-
2. Sd/-
. . ."
Details of the machinery handed over in terms of the above receipt may be seen at pages 150 (1) to 150 (349) of the Department's paper-book No. II.
27. We have obtained the aggregate values of the machinery conveyed as per the said receipt and this comes to about Rs. 47.15-crores.
28. Subsequent to assessment, and actually subsequent to the order of the CIT(A), Department recorded a statement on the sale in question from Shri B.M. Mohan, General Manager, Corporate Finance of the India Cements on 8th March, 1999 and the relevant portion of the said deposition reads as under-
".....
4. Please give the details of the transactions made with Coromandel Fertilizers Limited and in specific the details of acquisition of their cement division.
Ans. We have acquired the cement division of Coromandel Fertilisers Limited during November 1990 for a total consideration of Rs. 105.30-crores (excluding the value of net current assets). The agreement for purchase was entered into during June 1990 based on a successful bid submitted by us. The entire acquisition was completed during November 90.
5. Who has made the offer and what was the offer made and is there any correspondence in connection with this?
Ans. We come to know that the cement division of Coromandel Fertilisers Limited was for sale. Also there was an invitation to bid from Coromandel Fertilisers Ltd. Based on this, we have submitted a final offer price of Rs. 105.30- crores excluding the value of net current assets. The bid submitted by us in writing which is being furnished for your reference.
6. How the price of Rs. 105.30-crores was arrived at and is there any specific appraisal report of valuation report by any technically competent person of your company or from outside?
Ans. I submit herewith that no detailed asset wise valuation has been done prior to the acquisition of the plant and the valuation of the land and building has been done by the Government approved valuers after the agreement for purchase was executed. The valuation report is furnished herewith for your reference. For the plant and machinery no item wise valuation has been done either prior or after the acquisition. However a technical team, from the company visited the plant to inspect the condition of assets and the potential of the plant.
7. Before acquiring this plant, any body from your company had visited for inspection of the plant? If so, please give the names and address.
Ans. Yes. The following officials of the company visited the plant for inspection.
Mr. R.K. Das, President (Operations) Mr PL Subramanian, Vice President (Technical) Mr S. Gopinath, General Manager, Dalavoi Plant
8.You have stated earlier that you have acquired this plant for Rs. 105.30-crores, out of which Rs. 75.84 crores was the loans taken over. Please give the details of those loans and is there any agreement with those financial institutions?
Ans. We have taken over these loans from various institutions and banks and a copy of the Multi Partite Agreement is being furnished for your reference. The institution/bank wise loans taken over is furnished in this agreement.
9. You have stated that the value of Rs. 105.30 crores arrived at is exclusive of net current assets value. Please give the details and the mode how you have valued the net current assets?
Ans. The basis of valuation of net current assets is detailed in the agreement to purchase the plant executed in June 90, a copy of which is furnished. The valuation done on this basis is furnished-herewith.
10. You have seated that out of the total consideration, the loans taken over is Rs. 75.85-crores and the balance amount is Rs. 29.45 crores has been paid by you. Please tell me the mode of payment and the source of that payment.
AOs. We have paid the sum of Rs. 29.45-crores by demand drafts to the Seller from The India Cements Ltd.'s account, which are reflected in the books of accounts for the financial year 1990-91. A copy of the same is submitted herewith. We have created a charge on the assets of the plant immediately for the loans which were taken over by us. We have not taken any specific loan from any financial institution for making the payment.
11. Please give the names of all the parties involved in this transaction.
Ans. The details are available in the multi partite agreement we have entered with Coromandel Fertilisers Ltd. and the Financial Institutions.
12. Names of the officials of your company who are involved in this transaction including, technical, engineering, etc. Mr. B.K.Das, President(Operations) Mr. PL Subramanian, Vice President (Technical) Mr. T.V. Swaminathan, Sr. General Manager (Operations) Mr. P. Srinivasa Sastry, Sr. General Manager (Internal Audit) Mr. A. Satyaseelan, General Manager (Corporate Affairs) Mr. V.M. Mohan, General Manager (Corporate Finance)
13. You have stated that there is no separate valuation for plant and machinery but for the purpose of claim of depreciation. How the consideration was split up in terms of land and building and plant and machinery.
Ans. Since there was a valuation report only for land and building the balance amount was treated as the value of plant and machinery and other assets which was considered for the purpose of claiming depreciation in our books of accounts.
14. Is there any valuation report of your own submitted to your financial institution and to the Board of Directors?
Ans. There is no such asset wise valuation report made by us. The valuation was based on setting up a plant of similar capacity and also the likely synergy the acquisition will bring to The India Cements Ltd. The Board has authorised the Chairman and the Managing Director to decide the bid price and accordingly the bid price of Rs. 105.-30 crores was determined.
Other than India Cements, the following companies seem to have submitted bid for the plant and we understand the bid details are as under
Gujarat Ambuja Cement Ltd. for about Rs. 95-crores (original bid was for about Rs. 90-crores) Larsen & Toubro Ltd. for about Rs. 75-crores (original bid was for about Rs. Crores) our bid for Rs. 105.30-crores (original bid was for Rs 94.50-crores)
15. Have you got valued plant and machinery with technical personnel before your offer of Rs. 105.30-crores?
Ans. No item wise valuation of assets was done by our technical people. Only a business valuation was done. The technical personnel have assessed the working condition and potential of the plant and machinery and not the item wise value.
16. Do you have physical inventory of plant and machinery of the cement division of Coromandel Fertilisers Ltd. If so please give the list.
Ans. There must be a physical inventory of plant and machinery.
17. Is there a special report before submission of bid or after acquisition of the plant? If so please give the details.
Ans. As indicated in item 15, a team from The India Cements Ltd. visited the plant and submitted a report. Copy enclosed.
18. Is cost auditing done for the financial year 1990-91? If so give a copy of the report.
Yes, Extracts of the report as desired are enclosed.
19. Is there expert valuation fees for inspection of plant? If so, give the details.
Ans. No. The officials who inspected the plant are all employees and they have not been paid any expert valuation fee. However, after acquisition of the plant, for valuation of land and building, we have retained a Government Approved valuer.
20. Have you anything more to say?
Yes. At the time of bidding for the cement division of Coromandel Fertilisers Ltd. during April/May 90, we have submitted our bid for Rs. 105.30-crores on the basis of business valuation only and not; on the asset valuation. The valuation of land and building has been done for the purpose of stamp duty and the balance value has been taken as the value of plant and machinery, which has been reflected in our books of accounts as claimed for depreciation purpose. As such, there is no item wise valuation for the plant and machinery and we have not paid to anybody towards expert valuation fees. However, our in house technical personnel have inspected the plant before submitting the bid and given their report only on the working condition and potential of the plant and machinery.
I hereby state that the term loans taken over at the time of acquisition have been repaid and at present there are no term loans taken over from the financial institutions or any other banks outstanding against this plant.
We have recently valued the plant -entire land and building and plant and machinery by approved valuer for our internal purpose. A copy of this report is enclosed.
....."
29. Similarly, the Department has recorded a deposition dated 8.3.1999 from Shri P. Nagarajan, Vice President, Finance of the assessee-company, which is contained in the additional evidence sought to be introduced by the assessee. It reads as under-
".....
Q.1 Please give the complete details of the sale of Cement division of Coromandel Fertilisers Limited (hereinafter referred to as CFL) to M/s. India Cements Limited (hereinafter referred to as ICL) like details of sale offer, details of negotiations, valuations if any done, 230A certificate, if any, obtained, proposals to banks and financial institutions and also show the correspondence in relation to all the points referred to above including the relevant resolutions and discussions held by the Board and any Committees constituted by the Board.
Ans. The Board of Directors of CFL at their meeting held on January 25, 1990 constituted a sub-committee to review the performance and prospects of the erstwhile Cement Division of CFL. Based on the report of the Sub-committee, the Board at its meeting held on February 10, 1990, after reviewing all the aspects relating to the Cement Division from the time since its commissioning, decided that it would be in the best interest of the Company that the sale of the Cement Division be explored.
The Board thereafter, appointed a Committee of Directors to identify and negotiate with prospective buyers for the Cement Division and submit their recommendations to the Board. Copy of the above documents are filed before you.
The Committee sent the invitation for offer for purchase of the undertaking of Cement Division of CFL vide their letter dated April 2, 1990 to various parties. The invitation also contained the terms and conditions for offer to purchase the undertaking. A copy of the letter dated April 2, 1990 addressed to India Cements Ltd. (ICL) is filed before you now. Identical invitations were sent to other parties also.
Thereafter, the parties concerned visited the Cement plant, held discussions with CFL's representatives and submitted their offers. These offers were received by the committee of the Board and discussions were held with the representatives of the parties concerned. The Committee unanimously recommended to the Board that having regard to the totality of the offers received, the offer of ICL which was highest, may be accepted.
The Board accepted the recommendations of the Committee and resolved at its meeting held on May 5, 1990 that subject to the approval of the shareholders and financial institutions, banks, thee undertaking comprising the Cement Division of the Company be sold to the ICL at Rs. 105.30-crores, being the purchase price for the undertaking excluding the price for Net Current Assets, the value of such Current Assets to be paid by ICL being jointly determined by the auditors of both ICL, and CFL as on the date of transfer of the Cement Division. A copy of the Board resolution passed in this regard is filed before you now.
On the basis of the said Board resolution, the Agreement for Sale of the undertaking was signed by CFL and ICL on June 9, 1990 and advance amounting to Rs 5.27-crores was paid by ICL to CFL against the sale consideration. A copy of the Agreement for sale is filed before you now.
Thereafter CFL approached various financial institutions banks and various other authorities of Govt. of India and Govt. of Andhra Pradesh for their approvals to effect the sale of the Cement Division.
After receiving all the approvals a Deed of Sale and Transfer was executed on November 29, 1990 before the Joint Sub Registrar, Cuddapah for transfer of the immovable properties connected with the Cement undertaking to ICL. Simultaneously, agreements were executed for transfer of the movable properties as well as for transfer of all the loan liabilities entered into by CFL with various financial institutions and banks to the ICL. On execution of these agreements CFL received the balance sale consideration on November 29, 1990.
As may be seen from the documents produced the entire process was based on bids received from the parties concerned and the highest bid was accepted after negotiations with the parties concerned. The Company did not carry out any valuation for the purpose of arriving at the sale price.
Q.2. Please state whether you are aware of the facts of the above transaction? Also state whether any technical persons from the engineering or valuation side of the company were involved in the process of negotiation with ICL or any other bidder at any time in the dealings related to the above transaction?
Ans: I was in the service of CFL as Controller- Finance & Accounts and I was assisting the President & Managing Director of the Company in the above transaction. To the best of my knowledge no technical or engineering person of the company was involved in the process of negotiation with ICL.
Q.3. Please produce the cash book and ledger of CFL for the years 1989-90 & 1990-91 for verification?
Ans: CFL has a decentralized set up since beginning. All the records relating to the cement division were maintained at Chilamkur/cement marketing office at Secunderabad. When ICL took over the cement division, the took all the records as per the agreement of sale. At present here we are maintaining only the records of corporate office of CFL.
Q.4. Was there any valuation done before the invitation for offer was made or during the process of negotiations by CFL in respect of the value of the Cement division? Was there any information submitted to banks and financial institutions in respect of the valuation of the assets of the cement division while seeking permission for sale or otherwise. Please also state the basis to accept certain value for the cement division or was there any benchmark price fixed by CFL? Also state whether any brokerage was paid or expert valuer's opinion was taken by CFL in the above transaction?
Ans. The company did not obtain any valuation report in respect of the cement division. There was no minimum price fixed by CFL for sale of the cement division. The entire process was through acceptance of sealed bids which were revaluated by the Committee of Directors. No brokers or outsiders were involved from CFL side. No brokerage was paid by CFL to any one. The company did not furnish any information concerning valuation to the banks and financial institutions.
Q. 5. Please state how you have as pertained the unsaleable items in the above transaction?
Ans. The net current assets were verified and valued jointly by the auditors of CFL and ICL. The details of unsaleable items of assets are furnished in the said audit report. A copy of which is filed before you now.
Q.6. DO you want anything more?
No ................."
30. In the minutes of the meeting of the Committee of Directors held on 9th March, 1990, there is a remark regarding proposed valuation of the cement unit. The minutes of the said meeting read as under-
"COROMANDEL FERTILISERS LIMITED STRICTLY CONFIDENTIAL March 20, 1990 Minutes of the Meeting of the Committee of Directors held on 9th March, 1990 at Madras PRESENT Mr. M.V. Subbaiah
------------------
Mr. N.C. Roy The Committee noted that discussions had been held at Hyderabad with M/s. Gujarat Ambuja Cements Ltd., Larsen & Toubro Ltd., and India Cements Ltd. when detailed operating, financial and other information as required had been provided. Plant visits by teams from the above three prospective purchasers were planned to commence from 14th March to be completed by end March, 1990.
There has been no further communication from Mysore Cements Ltd. after the preliminary information had been provided as required by them.
A telex message had been sent to the Chairman & Managing Director of Cement Corporation of India Ltd., in response to a telex enquiry from their General Manager at Yerraguntla Plant, asking for his confirmation whether there was serious interest. There has been no reply to the message so it is presumed that they are not interested.
An approach has been received from the Standard Chartered Bank, Merchant Banking Division, that they should be retained to handle the matter on our behalf. It was noted that they had been advised that in case they were representing any clients who were interested then they should let us have particulars, but it was not our intention to appoint Merchant Bankers to handle the sale from our side.
The Committee noted that discussions had been held with M/s. Craford Bayley & Co., and Mrs. R.C. Khanna regarding legal land taxation aspects involved. Based on this, opinion from Counsel was being sought on aspects such as stamp duty, sales tax, income tax implications of sale, etc. While a valuation of assets by an approved valuer would be necessary, in view of the high cost involved it was decided that this should be taken up at a later stage.
Sd/-
N.C. Roy Circulated to;
Mr. P. McCrea Mr. T.R. Bailek Mr. M.V. Subbaiah ....."
While the proposal was for getting the cement unit valued, it was actually the Fertiliser unit that was got valued. At any rate, during the survey operations conducted on the premises of the assessee-company, the Revenue could place its hands only on the valuation report of the fertiliser unit and no evidence of the valuation of the cement unit could be obtained. We shall be referring to the plea taken by the learned Standing Counsel on the basis of the proposed valuation of the Cement Unit and the actual valuation report of the fertilizer unit found during the survey.
31. The learned standing counsel for the Department, Shri S.R. Ashok, assailed the order of the CIT(A) on various counts. The most important plank of his argument is that the sale of the Cement Division in question is not at all a slump sale, and it is actually an itemized sale. Apart from arguing at length on this point, the learned standing counsel has also furnished some written arguments. We have duly taken into consideration both his oral and written arguments.
.1. The first limb of the argument advanced by the learned standing counsel is that as the assessee had proposed to get the cement unit valued, as is evident from the minutes of the meeting of the Committee of the Directors held on 9th March, 1990, as per the relevant portion extracted above, and as no such report is produced by the assessee, there is suppression of material facts on the part of the assessee. It is claimed that it is improbable that the unit which was actually sold was not valued, though its valuation was contemplated, while the fertiliser unit which was not contemplated for sale was actually got valued by an approved valuer. He further pointed out that as per the minutes of the Committee of the Directors of the assessee-company held on 3.5.1990 a copy of which is available at page 53 of the Department's paper-book, the Directors were of the view that the purchase price offered by one of the bidders, i.e. M/s.Gujarat Ambuja Cements was lower 'than our expectation' and such a remark from the Directors, according to the learned Standing Counsel, would be possible only if. the cement unit was otherwise got valued. In other words, the plea of the 'learned Standing Counsel is that there' would be no criterion for the Directors to judge the adequacy or otherwise of the purchase price offered by the bidders, if they did not have a valuation report in their hands. He pleaded that as such, there is 'Suppression of material facts by the assessee. In this context, he also pleaded that it is a case where the ratio of the decision of the 'Apex Court in the case of Mc. Dowell (154 ITR 148) is applicable.
.2. The learned Standing Counsel further referred to the application given by the assessee for obtaining the certificate under Section 230A and also the computation of the tentative liability for short-term capital gains, which we have extracted herein above in para-23 of this order. It is argued that the assessee could not have worked out the capital gain at a specific figure of Rs. 54.82-crores, unless there was an itemised sale of asset. In the same vein, he also referred to the receipt obtained by the assessee, extracted herein above, for the various movable assets delivered to the India Cements, and pleaded that the valuations given in the Schedule to the said receipt showed that the plant and machinery were valued separately and the sale of the unit is not a slump sale. He further mentioned that a legal document like the sale deed dated 29.11.1990 relating to the sale of the cement unit, which we have extracted hereinabove, has to be given complete legal effect and clear language of the deed cannot be ignored. According to him, as per the clear language of the deed, what is conveyed by the said deed is only the land and buildings for a consideration of Rs. 20,07 crores. In other words, the plant and machinery was excluded from the said deed. The plant and machinery were separately delivered by the receipt dated 29th November, 1990, which we have extracted hereinabove. The schedule to the said receipt gives the specific values of each machinery and as, (a) land, and (b) buildings and (c) plant and machinery were separately valued, the sale of the cement unit is not a slump sale.
.3. In this context, the learned standing counsel has also taken a collateral argument. It is stated that the plant and machinery must have been embedded in the land, and so, they could not have been conveyed or transferred without a registered sale deed, and as no such sale deed is produced, it means that the assessee has resorted to suppression of relevant material, and the assessee should not be allowed to get away with such suppression. In support of the plea that the sale of the cement unit is an itemised sale of its various assets, the learned standing counsel has also pointed out the various clauses of the agreement of sale dated 9th June, 1990. We have also extracted the relevant portion of this agreement in this order. The learned Stanching counsel referred to the clauses of the said agreement, like Sub-clause (B) Clause (4) , as per which different types of assets have to be got valued separately as under.
.4. Net current assets are differently valued by an independent team of auditors and paid for separately. As per Clause (1) (ix) (c) such current assets include raw-material, goods in process, finished goods, stores and spares, bad debts, loans and advances, deposits and the like. Even while evaluating such current assets, debts, loans and advances which are determined bad or doubtful shall be excluded. Defective, obsolete or unusable inventory is to be excluded from the ambit of transaction of sale (Clause 9(a) of the sale agreement). In terms of Clause 9(e) of the agreement, statutory rates for the anterior period were agreed to be responsibility of the assessee. In terms of Clause 9(g)contingent liabilities continued to be fastened on the assessee, if contingency arises six months after sale and in terms of Clause 9(f), levy obligations as on the date of transfer of undertaking shall be the liability of the assessee-company. Pointing out to these aspects of the agreement governing the valuation of the different types of assets, and the provisions for different types of assets and liabilities coupled with the separate sale of land, and buildings, and separate valuation of plant and machinery, as mentioned hereinabove, the learned Standing Counsel argued that the cement unit was not sold for a lumpsum consideration, but its various assets were separately valued and sold at specific rates. So, it is pleaded that the sale in question is not a slump sale at all.
.5. The learned Standing Counsel further pointed out that the so-called cement unit consists of land, building, plant and machinery, furniture and fittings, but the value of furniture and fittings is negligible as land and building have been separately valued at Rs. 20-crores. The balance of about Rs. 85-crores out of the total sale consideration of Rs. 105-crores is allocable almost exclusively to plant and machinery. In this context, he invited our attention to the written down value of the various depreciable assets as given in Annexure-3 to the assessment order, which are as under-
"
COROMANDEL FERTILISERS LIMITED INCOME TAX ASSESSMENT YEAR 1991-92 FIXED ASSETS - CEMENT PLANT Rs.
........
Factory Buildings 7242669
Furniture & Fittings 95163
Office Machinery 1211892
Motor Cars 16998
Plant & Machinery
a)Pollution Control Euip. 3155139
b)Roads, locomotives,
Railway sidings, Genl. 211231486
..............
Items costing less 47064
than Rs. 5000
TOTAL 268793033
......"
In the course of hearing before us, the learned
Counsel for the asssessee has also filed details of
tax w.d.v. of the various assets, but the only difference is in respect of the w.d.v. of the plant and machinery which is shown at an aggregate amount of Rs. 21,44,39,689 whereas the aggregate amount of the w.d.v. of the plant and machinery shown in Annexure 3 of the assessment order only at RS . 21,4(SIC),86,625.
.6. In the light of the above details, it is claimed that the plant and machinery of the cement unit constitutes the main component of sale, while the vehicles, furniture and office equipment constituted only negligible portion of the assets. As assessee executed a separate sale deed dated 29.11,1990 in respect of land and buildings, which were valued at Rs. 27.07-crores, it is pleaded, as already mentioned, that the balance of consideration of about Rs. 85-crores, viz.(Rs.105 crores - 27.07 crores) represents the sale proceeds of plant and machinery as adopted by the assessing officer in his assessment order, while invoking the provisions of. Section 50 of the Income-tax Act.
.7. The learned Standing Counsel further mentioned that in the case of the India Cements Ltd. it was held by the Tribunal vide its order dated 31.12.2002 in ITA No. 1090/Mad/97 for the assessment year 1991-92, that Coromandel Fertilisers had no goodwill as it was incurring losses and so, the vendee company was entitled to claim depreciation on the entire sale consideration of Rs. 105.30-crores, minus land value as the eligible amount without any deduction for goodwill. So, it is claimed that the above amount of Rs. 85-crores is allocable to depreciable assets, as held by the assessing officer for the purpose of levy of capital gains under Section 50. The learned standing counsel pointed out that, for a sale to fall within the concept of slump sale, there should be no piecemeal or itemised sale of assets and it should be sale of an undertaking as a whole - lock, stock and barrel. According to the learned standing counsel, the ideal example of the slump sale is the one considered by the Hon'ble Karnataka High Court in the case of Syndicate Bank(155 ITR 681)where the assessee-company had international franchise besides branches in remote areas and also had secret reserves. It is pointed out that, in the instant case, there is absolutely no material brought on record by the assessee to say that the cement unit was intended to be disposed off, as a going concern. On the other hand, the various clauses of the agreement dated 9.6.1990 indicate that the said sale was an itemised sale, where the parties provided for different modes of valuation for different assets like land, buildings, plant and machinery, current assets, obsolete items and similarly, for different kinds of liabilities like statutory liabilities and contingent liabilities. In other words, according to the learned Standing counsel for the Revenue, it is the best illustration of an itemised sale.
.8. The learned Standing Counsel further pointed out that according to the assessee, the cement unit and the fertliser unit constitute a single business and it is on this basis, the assessee claimed deduction for the interest on the capital borrowed for the cement unit as revenue expenditure. It is claimed that such interest did not have to be capitalized, as the capital was borrowed for the purpose of an existing business. If both the units constitute the same business, it is pleaded that the sale in question is an itemised sale for the simple reason that the assesses did not dispose of the fertilizer unit. The learned Standing Counsel pointed out that the assessee cannot be allowed to approbate and reprobate in the same breath. Expatiating on this point, the learned Standing Counsel mentioned that if a lawyer practising on civil and taxation sides, sells his practice on taxation side, he cannot claim that he has given up his profession. In other words, according to the learned Standing Counsel, both the Cement and Fertiliser units constituted one unit and one business and when only one of them is sold out, it does not mean that there is sale of an undertaking as such.
.9. Referring to the case-law on the subject, it is pleaded that the view of the Department that the sale in question is an itemized sale is strongly supported by the decision of the Apex Court in the case of Artex Manufacturing Co(227 ITR 260). It is further pointed out that simply because a round figure of sale consideration is mentioned in the agreement for sale, the sale does not become a slump sale. If there is material even outside the agreement to prove separate valuation of the assets, it ceases to be a slump sale, as held by the Apex Court in the said case of Artex Manufacturing Co.
.10. It is further pointed out that so far as the levy of short term capital gains on depreciable assets is concerned, it is the ratio of the decision of the Apex Court in B.M. Kharwar (72 ITR 603) that holds the field and not the earlier decisions of the Apex Court in the case of Mugneeram Bangur and Co. (57 ITR 229) and CIT v. Ajax Products (55 ITR 741). In this context, he referred to the observations of the Apex Court in the case of Kharwar(supra), which are as under-
"The High Court observed that it was not possible to say that the entire business carried on by the firm at Surat, namely, the manufacturing of art silk cloth and sale thereof, was not taken over by the company. We do not propose to express any opinion on the correctness of that view, for, in our judgment, by virtue of the amendment made in Section 10(2) (vii), proviso (ii), of the Indian Income-tax Act, 1922, by Section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 67 of 1949, even under a realisation sale, excess over written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax."
.11. In the light of the above observations, the learned Standing Counsel observed that, even when there is a realization sale, excess over the written down value to the specified extent has to be brought to tax in terms of second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922 which is analogous to the provisions of Section 41(2) of the 1961 Act, as it stood before its deletion. It is claimed that the ratio of this decision would be applicable for the levy of short term capital gains in respect of depreciable assets under Section 50(2) of the Income tax Act. So, it is pleaded that even when there is a realization sale, as in the instant case, the assessee cannot escape the provisions of Section 50 of the Act. It is pleaded that Section 50 brings to tax the excess depreciation granted earlier, though under the head 'short term capital gains' and the Revenue cannot be barred from taking back the excess depreciation allowed to the assessee earlier. It is pointed out that the facts of the case on hand are in line with those considered by the Apex Court in the case of Artex Manufacturing Co. (supra) and CIT v. B.M. Kharwar(supra).
.12. It is further stressed that, at any rate, so far as the applicability of the provisions of Section 50 in centra-distinction to the applicability of Section 45 is concerned, it is the ratio of the Apex Court in the case of B.M. Kharwar (supra) that holds the field and if the decision of the Apex Court in the case of Electric Control Gear Manufacturing Co. (227 ITR 278) which is in favour of the assessee is contrary to the principle laid down in the Case of Kharwar(supra), it is the decision of the Apex Court in Kharwar(supra) rendered by a larger Bench of three judges, which should be preferred. It is also pleaded that if the decision of the Apex Court in the case of Electric Control Gear Manufacturing Co.(supra) is contrary to the decision in Kharwar(supra), it should be regarded as a decision rendered per incurium or sub-silentio. It is however, agreed that the universe of applicable law on the question of slump sale and the tests to be applied to determine the slump sale are to be found in the following four decisions-
(a)CIT v. Mugneeram Bangur and Co. (57 ITR 299)
(b)CIT v. B.M. Kharwar (72 ITR 603) (c)CIT v. Artex Manufacturing Company (227 ITR 260)
(d)CIT v. Electric Control Gear Manufacturing Co. Ltd (227 ITR 278) We may mention even at this stage that the learned counsel for the assessee, Shri Dastur, also agreed with this proposition.
.13. The learned Standing Counsel pointed out that the assessee itself knew that a substantial portion of sale consideration of Rs. 105.3-crores is apportionable to depreciable assets, as is evident from the calculation of short-term capital gains given in the context of application for certificate under Section 230A.
.14. Apart from relying on the decision of the Apex Court in the case of Kharwar (supra) and Artex Manufacturing Co(supra), Shri Ashok also relied on the decision of the Tribunal in the case of Premier Automobiles Ltd. (84 ITD 169) to which one of us, viz. Judicial Member, was a party.
32. The learned counsel for the assessee, Shri S.E. Dastur, countered the above arguments of the learned Standing Counsel for the Revenue. He has also filed detailed written submissions. The main plank of his contention is that what is transferred by the assessee is the entire undertaking, i.e. the cement unit and the entire undertaking was sold for a consideration of Rs. 105.3-croress plus the value of the current assets and in the fixation of the said sale consideration, there is no allocation of any amount to the depreciable assets or to land and buildings.
.1. It is pleaded that what is transferred in the present case is the entire undertaking, and it is also pointed out that it is a settled principle that an undertaking or a business is a capital asset for the purposes of levy of tax under the head 'capital gains' in terms of Section 45 of the Income-tax Act,. Shri Dastur mentioned picturesquely that there is a different type of animal called 'undertaking', and when an undertaking is sold as a whole, there is no separate sale of land, plant and machinery, furniture, etc. For this proposition, he relied upon a plethora of decisions, and it is not necessary to Clutter this order with all those decisions. It is enough to cite in this context the decisions in CIT v. Mugneeram Bangur and Co. (supra); Syndicate Bank Ltd. v. Addl. CIT(supra) and the unreported decision of the Bombay High Court in the case of Premier Automobiles Ltd. v. CIT, a copy of which is filed before us. It is pleaded that it is clear from the evidence on record that the intention of the contracting parties was to sell the cement undertaking and not the land, buildings, plant and machinery, furniture and fixtures, and other intangible and current assets all of which comprised the cement unit separately.
.2. He has taken us through the entire gamut of the evidence gathered by the Revenue like the following-
(1) Invitation for offer dated 2.4.1990 made by the assessee company (2) Initial offer dated 23.4.1990 made by the India Cements.
(3) Acceptance of the offer by the assessee evidenced by its letter dated 10.5.1990.
(4)Contents of the sale agreement dated 19.6,1990;
(5) The resolution passed by the Extra-ordinary General Meeting of the assessee-company, etc. and pleaded that there is not even a shred of evidence in the whole material to indicate that either the land and buildings or the depreciable assets were separately valued by the assessee-company when it accepted the offer made by India Cements Ltd. of Rs. 105.3-crores, exclusive of net current assets.
.3. Shri Dastur also took us through the statements recorded from Shri Mohan, General Manager Finance of India Cements, which we have extracted herein above, and pleaded that this statement was recorded behind the back of the assessee in the course of survey and even then Shri Mohan had only confirmed the position that the land and depreciable assets were not separately valued. He took us through the statement of Shri Nagarajan, Vice President (Finance) of the assessee-company, also which we have extracted hereinabove and pleaded that even Shri Nagarajan confirmed the same position. He further pleaded that the estimate of short term capital gains assessable under Section 50, which was given by the assessee before the assessing officer in the context of his application under Section 230A was only an estimate, and it was given only at the instance of the assessing officer to indicate its liability to tax in the worst case scenario. It is pleaded that it does not mean that the assessee has in fact, admitted its liability at that figure.
.4. The learned counsel further invited our attention to the definition of the term 'slump sale' given by the Apex Court in the case of CIT v. Artex Mfg. Co. (supra) at page 269 of the Report, which reads as under:
"While dealing with the question as to whether Section 41(2) would be attracted where there is a slump sale in the sense that the entire business is transferred for a lump sum amount, it would be useful to take note of the decision of the Judicial Committee of the Privy Council in Doughty v. Commissioner of Taxes (1927) AC 327"
It may be observed from the above that in a slump sale, the entire business is transferred as a going concern for a lurnpsum consideration. Shri Dastur pleaded that the facts of the present case clearly fall within the scope of this definition. He further elaborated that the test to be adopted for ascertaining whether there is a slump sale is-
(a) To see whether the business was sold as a going concern for a lumpsum amount;
(b) To see whether an undertaking which operates as a unit has been so transferred without damage to its functional utility, i.e. the transferee should be in a position to carry on the same business that the transferor had hitherto been carrying on;
(c) To see whether the transferee would have in fact purchased the individual assets comprised in the undertaking in contradistinction to the undertaking as a whole.
.5. For this proposition, the learned counsel for the assessee relied upon the decision of the Apex Court in the case of CIT v. Mugneeram Bangur and Co. (supra) and the decision of the Hon'ble Bombay High Court in the case of Premier Automobiles (supra).
.6. It is further pleaded that from the available evidence in the present case, it is evident that the intention of the contracting parties was to sell the cement undertaking as a whole and not its various assets like land, buildings, plant and machinery, furniture and fixtures, intangible and current assets separately, all of which comprised the said cement undertaking.
.7. He explained that the transfer of certain kinds of property can be effected only by registered document, in which values have to be assigned for the property transferred for the purposes of stamp duty, and that is how a portion of the sale consideration was reflected as values of the land and buildings in the transfer deed dated 29.11.1990, relevant portion of which we have extracted hereinabove. He further pleaded that the fact that a conveyance was executed in which value was ascribed for stamp duty purposes to the immovable property conveyed, does not militate against the transaction being regarded as a slump sale of an undertaking as a going concern for a lump sum consideration. For this proposition, he relied upon the decision of the Bombay High Court in Premier Automobiles Ltd. v. CIT (supra) with particular attention to pages 60, 71, 78 and 79 of the said decision. He further explained that this principle is now recognized in Explanation (2) to Section 2(42C), which reads as under-
"(2)..
(42C)"Slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation. 1.......
Excplanation 2- For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities;"
.8. He further explained that the transferee company had to allocate some portion of the sale consideration to the depreciable assets for the .9. Referring to the contention of the learned Standing Counsel that the consideration for current assets and obsolete items, etc. have been separately provided for, he submitted that there is normally an interregnum between the date of agreement for sale and the date on which the actual transfer of the undertaking takes place, and during this period, the net current assets fluctuate , and it is to provide for these fluctuations in the values of the net current assets that a special procedure is provided for in the agreement for the valuation of the net current assets. Similar is the position in respect of the valuation of items like obsolete items, statutory dues, etc. It is argued that such special procedure for the valuation of certain categories of assets does not militate against the concept of a slump sale, when the undertaking as a functional unit has been transferred.
.10. Referring to the plea of the standing counsel for the Revenue that the plant and machinery has been delivered for specified values, the learned counsel for the assessee mentioned that the said receipt dated 29.11.1990 obtained was more as a proof of the delivery of the different items of plant and machinery, than of the values at which those items were delivered. He explained that it is not really clear, at this distance of time how the values were mentioned in the receipt, but they were not separately got valued for the purposes of transfer. The values mentioned aggregate to about Rs. 47-lakhs, which does not tally either with the sale consideration or with the book value. As the values were not considered important, neither of the contracting parties really was bothered about the values stated in the receipt.
.11. It is pleaded that, if the pleas taken by the learned Standing Counsel for disqualifying a sale from being treated as a slump sale are accepted, there cannot be any slump sale because in every case, there will be allocation of values in the books of the transferee company; there will be assignment of values in respect of immovable properties in the registered documents; and special procedures for the valuation of ancillary items of assets/liabilities which stand excluded from the sale consideration specified. It is stressed that, as already mentioned, what has to be seen is whether the undertaking is substantially transferred as functional unit for a lump sum consideration.
.12. The learned counsel for the assessee, Shri Dastur invited our attention to the report of the valuer, Shri B. Jagannadha Rao and Associates dated 6.11.1990 and mentioned that the said report was sent to India Cements Ltd. and not to the assessee- company because the properties were got, valued by the former company only for the purposes of payment of stamp duty. Referring to the contention of the learned standing counsel that the liability for capital gains tax in terms of Section 50 is attracted even in a slump sale on the basis of the decision of the Apex Court in B.M. Kharwar (supra), Shri Dastur explained that a realization sale is not the same as a slump sale. A realization sale may be a slump sale or may not be a slump sale. All sales as a going concern are realization sales but the converse is not true. The assets of a unit may be sold separately, and so, simply because it is a realization sale, it is not sale as a going concern. In the present case, it is stated that the entire unit was sold as a going concern and the assets had not been sold separately. So, it is pleaded that the lump price realized in the said sale which is a slump sale, cannot be allocated to different assets, whether stock in trade or depreciable assets.
.13. Referring to the contention of the learned Standing Counsel that the decision of the Apex Court in the case of Electric Control Gears Manufacturing Co. (supra) is sub-silentio or per incurium because it is not in consonance with the decision of the Apex Court in the case of Kharwar (supra), Shri Dastur explained that the decision of the Apex Court in Kharwar (supra) was discussed in the case of Artex Manufacturing Co. (supra) and as the judgments in both Artex Manufacturing Co. (supra) and Electric Control Gear Manufacturing Co. (supra) were delivered on the same day, it must be held that the Apex Court was quite aware of what it was doing and the decision in the case of Electric Control Gear Manufacturing Co. (supra) went against the Department simply because on the factual matrix of that case, it was not possible to allocate the consideration realized among different assets inclusive of the depreciable assets.
.14. Referring to the contention of the learned Standing Counsel that the concept of slump sale does not apply after the introduction of the concept of block assets for the purpose of granting of depreciation with effect from 1988, the learned Counsel, Shri Dastur argued that Section 50 comes into picture when assets of a unit are sold separately and Section 50B which came into effect from 1.4.2000, applies in a slump sale. He pointed out that Section 50 was not rendered otiose by subsequent introduction of Section 50B. They applied in different fields. In other words, the introduction of the concept of block of assets does not by itself rule out either slump sales or the fact that, in a slump sale, there is no tax on the transfer of individual assets or a block of assets. Shri Dastur further pointed out that there are more individual sales than slump sales.
.15. Shri Dastur also explained that simply because the written down value of certain items, like vehicles and furniture is not substantial, it does not follow that the consideration of Rs. 105.30-crores is allocable to depreciable assets. An undertaking consists of various assets like goodwill, brand name, licences, man-power and such other intangible assets like trade marks, mining rights etc. and it does not mean the sale consideration can be allocated to separate assets simply because the written down value of some of the tangible assets reflected in the Balance Sheet is low.
.16. It is further pleaded that, if the Revenue seeks to assert that the transaction is contrary to that evidenced by the terms of the agreement of sale, it is for the Revenue to establish that, in fact, there is an itemized sale of assets, with different values ascribed to each asset that is transferred, and that the values were so ascribed 6n the date when the agreement was arrived at. It is pleaded that the consideration of Rs. 105.30-crores was arrived at, in the present case, as early as on 5.5.1990, as is evident from the minutes of the meeting of Committee of Directors held of the same date, which may be seen at page 54 of the Department's paper-book No. 2. It is pointed out that there is no material whatsoever brought on record by the Revenue to establish that the parties in arriving at the lump sum price of Rs. 105.30-crores placed some values on individual assets, and such values were aggregated. It is further pleaded that it is not fair on the part of the Revenue to harp upon what must have been the case or what ought to have been the case instead of looking at what actually happened. It is also pleaded that it is futile to talk of suppression of material or evidence when even the depositions of the concerned functionaries of both the companies like Shri Mohan and Shri Nagarajan, whom the Revenue deemed fit to examine, as already mentioned above, behind the back of the assessee, confirmed that the sale in question was actually a slump sale.
.17. Countering the plea of the learned Standing Counsel that the lump sum consideration of Rs. 105.30-crores could not have been arrived at without aggregating separate values placed on individual assets, the learned counsel for the assessee pointed out that itemized valuation of assets is not the only possible method for arriving at the consideration of Rs. 105,30-crores. It is explained that such consideration could have been arrived at by different types of valuation like the following-
(a) Valuation with reference to the installed or productive capacity of the unit;
(b) Capitalisation of current incomes.
(c) Discounting of future stream of incomes.
It is explained that the above methods would preclude itemized valuation of assets.
.18. Referring to the case-law on the subject, it is admitted that the principles applicable to ascertain a slump sale and tax consequences thereof have to be ascertained with reference to the four decisions of the Apex Court, which we have referred to hereinabove.
.19. It is mentioned that the reliance placed by the learned Standing Counsel for the Revenue on the decision of B.M. Kharwar (supra) is misplaced. It is explained that in that case, what was transferred was only an item of machinery and the consideration for the said machinery was specified, and so, the Apex Court held that the provisions of Section 10 (2) (vii) of the Indian Income-tax Act, 1922 were attracted. As heavy reliance is placed by the Department on this decision, we find it worthwhile to reproduce the comments of the learned counsel for the assessee on this decision, as given in his written submissions. They are as under-
"l. CIT v. B.M. KHARWAR - 72 ITR 603 In this case the assessee, a firm, engaged in business of manufacturing, purchasing and selling cloth closed the manufacturing activity, and transferred the machinery to a private limited company in the share capital of which the partners of the firm had the same interest as they had in the assets and property of the partner. It was contended that as the firm and the company were in substance one entity only, there could be no liability to tax under the second proviso to Section 10(2)(vii) of the 1922 Act. Two contentions were raised before the Supreme Court. The first was that as the transfer had taken place between two entities, which were in substance the same, no liability to a balancing charge arose. The Supreme Court dealt with this argument at page 608 of the report and held that the company was a legal entity distinct from partnership under general law. The legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company and as the transaction resulted in excess realization over the written down value of the machinery to the firm there would be a liability to tax under Section 10(2)(vii), The second contention that was urged was that as the transfer was effected with a view to close down the business no taxable profit arose because the transfer was not in the course of business of the assessee. This contention was also rejected by the Supreme Court having regard to the amendment made in Section 10(2)(vii) by the Amendment Act of 1949 as a result of which a balancing charge could be levied even if the transfer of the asset took place after the cessation of the business. This decision therefore no way goes against the contentions that are urged by the assessee. The question as to what are the consequences that flow from a slump sale of business or what are the tests to be adopted to determine whether there was a slump sale of the business did not arise for consideration and were not considered by the Supreme Court. In fact it would appear that it is only certain items of machinery that were transferred and hence the contention that there was a sale of business as a going concern could not have been and was not raised on the prevailing facts.
It is not as if the Supreme Court has over ruled the decision in Mugneeram Bangur either expressly or impliedly or that the subsequent decisions in Artex Manufacturing Company and Electrical Control Gears if read in the manner canvassed by the assessee would be contrary to the principle laid down, in B.M. Kharwar's case. Initially the Supreme Court in Liquidators of Pursa Limited v. CIT (25 ITR 265) had held that a surplus realized on the sale of plant and machinery which was not used during the previous year was not taxable under the second proviso to Section 10(2)(vii) of the 1922 Act. Subsequently in CIT v. Express Newspapers Ltd. 53 ITR 250, the Supreme Court held that in order that the second proviso to Section 10(2)(vii) be attracted the business should have been carried on by the assessee for at least a part of the previous year, the machinery should have been used for the said business and machinery should have been sold when the business was being carried on and not for the purposes of closing it down. In that case as the machinery was sold after the business was closed down it was held that the provisions of Section 10(2)(vii) would not apply. The lacuna was plugged by the Amendment Act of 1949. Therefore, the Supreme Court in CIT v. Ajax Products Ltd. 55 ITR 741 held that the amendment made in 1949 only removed one of the conditions for the exigibility of the balancing charge to tax, viz. that the asset should have been sold when the business was carried on. Therefore all that B.M. Kharwar's case lays down is that after the Amendment Act 1949 referred to earlier even if plant and machinery is sold as a part of a realization sale the provisions of the second proviso to Section 10(2) (vii) would be attracted. It proceeds on the assumption that the sale price for the transfer of the assets is known. A slump sale undoubtedly would be a realization sale but all realisation sales may not necesssarily be slump sale as parties may after closing down the business transfer the assets individually. The said decision is in no way contrary to or inconsistent with the earlier decision in Mugneeram Bangur. They both operate in different fields. The first decision lays down the tests to be adopted in determining what would be a slump sale, the subsequent decision lays down the consequences that flow if it is a slae of itemised assets. The question of there being any assessment under the second proviso to Section 10(2)(vii) did not arise in Mugneeram Bangur's case and hence there is no question of the subsequent decision in Kharwar's case overruling it."
.20. It is thus pleaded that the question whether a unit was sold as a going concern did not fall for the consideration of the Apex Court in the case of B.M. Kharwar. It is pointed out that it is not as if the decision of the Apex Court in the case of B.M. Kharwar (supra) over-rules the earlier decision of the Apex Court in the case of Mugneeram Bangur (supra) either expressly or impliedly. In the case of Mugneeram Bangur (supra) there was a schedule attached to the agreement of sale in which stock in trade which was transferred was reflected at the book value. The department sought to bring to tax a portion of the sale consideration under the head 'business' as relatable to the transfer of stock-in-trade. The Court held that it was nobody's case that the price shown against the stock-in-trade in the schedule to the sale agreement was the market value and so no portion of the sale consideration could be ascribed to the stock-in-trade. Holding thus, the Apex Court decided that case against the Revenue. The learned counsel for the assessee has summarized, in his written submissions, the position emerging from the three decisions of the Apex Court in the case of Mugneeram Bangur (supra), Artex Manufacturing Co. (supra) and Electric Control Gear Manufacturing Co. (supra), in the following manner-
"The position that emerges from the three decisions of the Supreme Court in Mugneeram Bangur, Artex Manufacturing Company and Electric Control Gears is that if parties have contracted to sell a business as a going concern for a lump sum consideration, without any indication in the agreement or in a contemporaneous document or evidence of its split up between individual assets then, what is transferred is the business as such and there would be no liability to tax computed on the basis of a transfer of individual assets. If however, as in the case of Artex Manufacturing Company, the price for the transfer is determined as of the transfer date having regard to the individual values of the various assets transferred, then, even though the business as a whole may be transferred the tax consequences flow as if there was a transfer of individual assets. A valuation report valuing the individual assets or a schedule to an agreement listing out individual values would have no relevance unless the lump sum consideration has been determined on the basis of such itemized values."
.21. It is also pointed out that the subsequent decisions in the case of Artex Manufacturing Co. (supra) and Electric Control Gear Manufacturing Co. (supra) are in no way contrary to the principles laid down in the case of B.M. Kharwar (supra). It is further pointed out that both the cases of Artex Manufacturing (supra) and Electric Control Gear Manufacturing(supra) which involved similar issues also lay down the same ratio, even though, on facts, the conclusions drawn were different.
.22. Referring to the provisions of S 50 of the Income-tax Act, it is mentioned that S. 50 comes into operation only when the following three conditions on the transfer of depreciable assets are cumulatively fulfilled:
(a) The asset that is transferred forms part of a block of assets;
(b) Depreciation has been allowed either under the Indian Income-tax Act, 1922 or under the Income-tax Act, 1961.
(c) The full value of the consideration accruing or arising as a result of the transfer of such asset, can be ascertained.
.23. It is pointed out that, in the present case, none of the above conditions is fulfilled, and hence S, 50 is not attracted. In other words, the undertaking, which is transferred does not form part of block of assets, as the said expression 'block of assets' is defined under S, 2(11) of the Income-tax Act, and further no depreciation has been allowed on such undertaking.
.24. On a query from the Bench as to whether the block of assets cannot be deemed to have ceased to exist in terms of S. 50 (2) of the Income-tax Act, because of the transfer of the undertaking, which implies the transfer of its separate assets, the learned counsel for the assessee pointed out that, even in such a situation, the first two conditions mentioned above may be regarded as complied with, but, at least, the third condition is not complied with, as there is no full value of the consideration accruing or arising, as a result of the transfer of each such block of assets. In other words, even if for argument sake, it is held that the plant and machinery automatically stands transferred and the block of assets ceases to exist even in a slump sale, the consideration relatable to the block of assets that stands transferred, is not ascertainable, and so the provisions of S. 50(2) are not attracted.
.25. Adverting to the comment of the learned Standing Counsel that the provisions of S. 50 are attracted even in a slump sale, it is pointed out that the principles laid down by the Apex Court in the case of Artex Manufacturing Co. (supra) and Electric Control Gears Manufacturing Co. (supra) as to the non-applicability of the provisions of S. 10(2) (vii) of the Indian Income-tax Act, 1922 and S. 41(2) of the Income-tax Act 1961 in the case of a slump sale of a business as a going concern would be equally applicable when one is considering the applicability of S. 50 because of the nonfulfillment of the third condition mentioned hereinabove for attracting S, 50.
.26. Under S. 10(2) (vii) of the Indian Income-tax Act, 1922 and under S. 41(2) of the Income-tax Act, - 1961, the excess of the sale consideration received over the written down value of the asset upto the specified extent, i.e. the difference between the original cost and the written down value, is brought to tax as business profit. The excess over the original cost is brought to tax separately under the head 'capital gains'. In terms of S. 50, which was introduced in the present form by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 with effect from 1,4.1988, the excess of the sale consideration received over the written down value is brought to tax exclusively under the head 'short term capital gains' , and no portion of such excess is brought to tax under the head 'business', but the pre-condition for attracting both S, 50 and S, 41(2) is that a part of the sale consideration has to be relatable to the transfer of a depreciable asset. Otherwise, neither Section 41(2) nor Section 50 is attracted. As, in a slump sale, no portion of the sale consideration is relatable to the transfer of a specific asset, it is pleaded that the ratio of the decision of the Apex Court in the case of Artex Manufacturing Co. (supra) and Electric Control Gear Manufacturing Co. (supra) which are given in the context of Section 41(2) of the Income-tax Act, apply with equal force to Section 50. In other words, before Section 50 is invoked, it has to be seen whether the sale consideration is relatable to the transfer of depreciable assets. It is also mentioned that no portion of the sale price can be attributed to or ascribed to the transfer of depreciable assets, simply by some process of estimation or by invoking the. provisions of Section 145. It is pleaded that the conclusions drawn in so many cases decided by the Apex Court would have been different if the Apex Court blessed such a principle of estimation. For example, in Srinivasa Shetty's case (supra), the Apex Court could have estimated the goodwill, which it did not do. Similarly, in the case of Mugneeram Bangur case (supra), the Apex Court could have estimated the sale consideration relatable to the transfer of stock in trade, but it desisted from laying down any such rule of thumb. What has to be seen is whether the contracting parties placed a value on a specific depreciable asset, and not whether some value could be estimated by the Revenue authorities. It is conceded that such particulars of separate values relatable to depreciable assets need not be found mentioned in the sale agreement as such, and it is enough if evidence of such separate valuation was available on the record of the assessing officer obtained either from the assessee or elsewhere. It is, however, stressed that such separate valuation of assets should be available as on the date on which lump sum price was arrived at.
.27. The learned counsel for the assessee invited our attention to the provisions of Section 2(42C), defining a slump sale and mentioned that the concept of slump sale as defined by the Courts over the years, has found statutory recognition in Section 2(42C), which was inserted by the Finance Act, 1999 with effect from 1.4.2000. He also invited our attention to Section 50B providing for computation of capital gains in the case of a slump sale. Section 50B was also inserted by the Finance Act, 1999 with effect from 1.4.2000. He wanted us to consider the consequences of accepting the plea of the Department that even when the sale is a slump sale the provisions of Section 50 which in the present from, come with effect from 1-4-88 are attracted because the excess depreciation granted to the assessee by the Department has to be withdrawn. In the case of a slump sale, there would be no liability under Section 41 (2) or the analogous provision of S. 50 upto the assessment year 1988-89 in the light of the decision of the Apex Court in the case of Mugneeram Bangur (supra) and Electric Control Gear Manufacturing Co. (supra). Similarly, there would be no liability under S, 50 with effect from 1.4.2000 i.e. from the assessment year 2000-2001 because of the provisions of Section 50B which came into effect from 1.4.2000, and as Section 50 and Section 50B are mutually exclusive. But there would be liability under Section 41(2) or Section 50 in the intervening period, i.e. from assessment year 1989-90 to assessment year 1999-2000. It is pleaded that there is no warrant for accepting such a plea which leads to an odd interpretation.
33. The learned Standing Counsel for the Revenue, Shri Ashok assisted by Shri Jayashankar, CIT, in his rejoinder, pointed out that, as per the earlier decision of the ITAT in India Cements Ltd., some of the so-called intangible assets like goodwill, brand name, trade marks, mining rights were held to be nil. He pointed out that that leaves only licences and work force. He pointed out that the work force is more a liability than an asset as is evident from the report of the Technical personnel of the India Cements Ltd., a copy of which may be seen at page 95 of the Department's paper-book. He reiterated that the concept of slump sale does not survive the decision of the Apex Court in the case of Kharwar (supra) . It is pleaded that the assessee cannot hold back the benefit of excess depreciation on depreciable assets, and such benefit derived by him has to be coughed up, if the realization on sale is in excess of the written down value in terms of Section 50.
.1. The learned Standing Counsel for the Revenue stated that the decision of the Apex Court in the case of Kharwar (supra) is applicable in the context of a. realization sale, and a realisation sale is nothing but a slump sale. He pleaded that the entire division of the cement unit is disposed off, and so, it is a realization sale, and so, the excess over the written down value of plant and machinery has to be brought to tax in terms of Section 50, in the light of the ratio of the decision of the Apex Court in the case of Kharwar (supra).
.2. It is also reiterated that the unit was not sold as an integrated unit, but it has separate categories of assets like current assets, and land buildings and they were separately sold. The learned Standing Counsel emphasised that this is not a case where only the Managing Director's fanciful car is excluded. He reiterated the contention that the conduct of the assessee shows that he tried deliberately to bring the transaction in question into the formula laid down by the Apex Court in the case of Bangur (supra) or Electric Control Gears Manufacturing Co. (supra). As an illustration, he pointed out that the assessee plans to get the cement unit valued, but instead of the cement unit, it is the fertilizer unit that is valued. Assessee sells the cement unit, but it is not the unit under sale that is valued, but the fertilizer unit that is not meant for sale, that was valued. Assessee states that the fertilizer unit was got valued for the purpose of insurance, but gets it valued as a going concern, whereas for insurance purposes what is normally valued is not the entire unit, but separate assets of that unit.
.3. Shri Ashok reiterated that in a case where there is unsurmountable difficulty of evaluating assets, like secret reserves, etc. as in a Bank, there may be slump sale, but not in a case where there are only few assets of minor value like one or two vehicles, little furniture and the remaining assets comprise only plant and machinery. He pointed out that the ratio of the decision of the Apex Court in the case of Srinivasa Shetty (supra) cannot be interjected here and as there is no goodwill and the value of the other intangible assets is also nominal, the assessee is free to furnish their values if they have any, and a suitable deduction for such intangible assets can be given and the remaining sale consideration has to be regarded as allocable to plant and machinery which is the main asset. If the assessee does not cooperate and give such value, it is stressed that the Tribunal is free to resort to a suitable estimate. He pointed out that, whatever is the method of sale the assessee adopts, it is the obligation of the assessee to pay capital gains under Section 50 read with Section 43(6)(c) of the Income-tax Act.
4. Shri Ashok also pointed out that an assessee cannot be allowed to get away with such ruses. Hypothetically, an assessee owning two buses on which depreciation was allowed cannot combine the two buses into a trailer and sell the trailer and claim that Section 50 is not attracted because depreciation was not allowed on a trailer. Nomenclature of an asset may change as well as physical condition and additions and deletions may be there, but can the assessee be allowed by such changes to avoid liability under Section 50 by such means?, he questioned. Even if the consideration is a composite figure, it has to be assigned to different categories of assets to conform to the intention of the legislature, when it enacted Section 50. He also pointed out that the assessee is still claiming depreciation on the written down value of both the fertiliser and cement units on the ground that nothing is allocable to the depreciable assets of the cement unit, even after the entire cement unit had been sold out. He pointed out. that by such methods, the assessee has rendered Section 50 nugatory. In other words, he stressed that even if it is a slump sale because of the decision of the Apex Court in the case of B.M. Kharwar (supra), Section 41(2) or Section 50, as the case may be, has to be, applied.
34. Having regard to the rival submissions, we are of the view that the assessee deserves to succeed. There is no decisive evidence in favour of the Department's plea that it is an itemised sale. We have extracted hereinabove the terms of the invitation for bids, offer made by the India Cements Company and the sale agreement. In all these documents, the cement unit is stated to have been sold as a going concern on 'as is where is basis'. It is true that separate procedures have been laid down for valuation of current assets, obsolete items, statutory dues, contingent liabilities, etc. To our mind, such special procedures for the valuation of certain items do not detract from the concept of a slump sale. There is an intervening period between the sale agreement and the date of transfer. During this period, as mentioned by the learned counsel for the assessee, items of the current assets and other items, fluctuate widely, and it is to guard against such fluctuations, the agreement stipulated special procedures for valuation of such items. Such stipulation of special procedures for certain items do not detract from the fact that it is a slump sale of the unit as a whole and as a going concern. Physical assets of the assessee's cement unit involved huge machinery and also substantial acrage of land exceeding 2000 acres. These tangible assets are spread over different places like Cuddapah and Secunderabad in Andhra Pradesh and Madras, Bangalore, Ernakulam etc. When tangible assets situated at far-flung areas are involved, it would be nitpicking to say, on the basis of the valuation of a few ancillary items, that the sale is not a slump sale. The entire man power of the assessee company has been taken over by India Cements Ltd. Financial liabilities are taken over. What is to be seen is whether the cement unit as a functional productive unit has been transferred for a lumpsum price. We are of the view that it was so transferred.
35. In the case of Premier Automobiles v. CIT (supra),the Hon'ble Bombay High Court, while considering the sale of an undertaking where sizeable chunk of the business was not involved in the sale observed that one has to adopt commercial principles for interpreting such transactions and held that the sale was a slump sale. We are of the view that the case of the assessee is on a far better footing than the case considered and decided by the Hon'ble Bombay High Court.
36. The learned standing counsel rhetorically mentioned that it is not merely the fanciful car of the Managing Director, which has been excluded from the scope of the sale. Actually, there are no exclusions. At any rate, no such exclusions have been brought to our notice. The entire cement unit as an undertaking has been sold, though special procedures have been laid down for the valuation of a few items. It is true that for the purposes of claiming interest on borrowed capital, the assessee pleaded that both the cement and fertilizer units were one and the same business of the assessee. That does not detract from the concept of a slump sale. The cement unit as a separate undertaking has been transferred. There may be different undertakings, which constitute one business. The transfer of any one of the undertakings, as a unit may constitute a slump sale. In the case of CIT v. Narakeshari Prakashan limited, (1.96 ITR 438) it has been held by the Hon'ble Bombay High Court that even a branch of a business can be transferred as a whole to qualify as a slump sale.
37. It is true that some specific values have been mentioned in the schedules attached to the receipt obtained by the assessee from M/s. India Cements for the transfer of plant and machinery, but as the learned counsel for the assessee has mentioned, the values stated in the said documents are neither book values nor the market prices. The assessee was interested only in obtaining the receipt as a proof of the delivery of the various items of plant and machinery transferred, and viewed in that context, the schedule to the receipt is a proof more importantly for the items transferred than for the values of the items thus transferred. In the case of Mugneeram Bangur (supra), it was held that if the schedule reflects only the book value, it cannot be taken as the price at which the item is transferred. We are of the view that the decision is squarely applicable and is in favour of the assessee.
38. The separate valuation for the land and building is also in the context of the payment of stamp duty at the time of registration. The land and buildings were valued, after the sale consideration was arrived at Rs. 105.30-crores. So, at the time of fixation of the sale consideration at Rs. 105.30-crores, there was no separate valuation of land and buildings. Further, they were valued only by the approved valuer appointed by the vendee and not the approved valuer appointed by the assessee-company.
39. Reliance placed by the learned Standing Counsel for the Revenue on the decision of the Apex Court in the case of B.M. Kharwar (supra) is misplaced. In that case, what was transferred was only an item of machinery, and the item was transferred for a specific price. So, the Apex Court held that the provisions of Section 10(2) (vii) of the Indian Income Tax Act, 1922 corresponding to Section 41(2) of the 1961 Act were attracted. The said decision in no way over-rules the decision of the Apex Court in the case of Mugneeram Bangur, as explained by the learned Counsel for the Assesses. The decision of the Apex Court in the case of B.M. Kharwar (supra) operates in a different field, whereas the other three decisions of the Apex Court, i.e. Mugneeram Bangur (supra), Artex Manufacturing (supra) and Electric Control Gears Manufacturing (supra) are concerned with the transfer of an undertaking as a going concern. The ratio of all the three decisions is more or less the same, even though Artex Manufacturing Co. (supra) went against the assessee and the decisions in the other two cases went in favour of the assessee. The conclusions in these three cases were different because of the different factual matrix of the respective cases, even though the ratio is the same.
40. As stated by the learned counsel for the assessee, the provisions of S. 50 are attracted, only when there is an itemized sale. We agree that the three conditions mentioned by the learned counsel for the assessee are to be satisfied before the provisions of Section 50 can be attracted. In a slump sale none of these three conditions are attracted. In a slump sale, it is not the depreciable assets alone that are transferred, and what is transferred is the entire undertaking as one asset. The undertaking did not receive any depreciation at the hands of the Department. Further, the consideration received in a slump sale is not allocable to the depreciable assets. Actually, it appears that S. 50 visualises only the transfer of a depreciable asset or the cessation of the block and not the transfer of an undertaking. In the case of Indian Bank Ltd. v. CIT (153 ITR 285) decided by the Hon'ble Madras High Court, the bank was nationalized and a lump sum compensation for the entire undertaking was said. The question was whether the depreciation granted in respect of certain fixed assets up to the year before the transfer could be deducted from the book value of the assets for arriving at the cost of the undertaking. While considering this issue, the Hon'ble Madras High Court observed as under-
"The learned counsel for the assessee contends that it is not open to the ITO to cut up the lump sum compensation given under Schedule II to Act V of 1970, as compensation for individual assets to determine the capital gain for each asset. It is no doubt true that the said Act provides for a lump sum of compensation for the entire undertaking and the compensation cannot be cut up and attributed to the cost of the various individual assets. However, in this case, the ITO has not done any such thing. If the Income tax Officer has proceeded to determine the capital gains arising out of the transfer of each of the assets, then the complaint of the assessee can have some substance. But where the assessing authority has proceeded to determine the capital gains in respect of the entire undertaking as an asset transferred, he cannot be said to have cut up the sale price as referable to each individual asset. As the lump sum compensation has been determined the difference between the book value of the assets and the liabilities as per the books of the assessee, he proceeded to determine the cost of the undertaking which has been transferred by taking the book value of the assets and deducting depreciation which had been allowed on the depreciable assets so as to arrive at the written down value as adjusted for purposes of S. 50............"
41. It may be observed that the Hon'ble High Court held that lumpsum compensation received for the entire undertaking cannot be cut up and attributed to the cost of various individual assets. In the light of the explicit comments of the Hon'ble High Court in this case on this issue, we are of the view that the lumpsum consideration received in a slump sale, as the present one, cannot be cut up and allocated to depreciable assets. Similar are the observations of the Hon'ble Karnataka High Court in the case of Syndicate Bank v. Addl. CIT (155 ITR 681) in which the Hobn'ble High Court was considering the question of Capital Gains on the transferred entire undertaking being a banking concern. The relevant portion of Head note reads as under:
"If there is a transfer of a whole concern and no part of the agreed price is indicated against different and definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets in specie. What is sold in such a case is not individual items of property forming part of the aggregate, but the capital asset consisting of business of the whole concern or undertaking. What arises for consideration from the point of view of taxation is only the gain in respect of that transaction and nothing else."
42. The learned Standing Counsel has also argued that even if the amount received is a lumpsum consideration, it is for the assessee to allocate it or on the failure of the assessee to do so, for the Tribunal to do it, if necessary by resorting to the provisions of Section 145. We do not find such a procedure would be legal. If an estimate can be resorted to, the Supreme Court would not have held, in Srinivasa Shetty's case (supra), as contended by the learned counsel for the assessee, that the cost of acquisition of goodwill is not ascertainable.
43. We are also in agreement with the learned counsel for the assessee on the question of the interpretation of S. 50 in the light of the subsequent insertion of S. 50B and Section 2 (42C) Section 50 and Section 50B are mutually exclusive. In other words, Section 50B is attracted, when there is a slump sale and Section 50 is attracted when there is an itemized sale. Section 50B is not applicable for the assessment year in question, as it has no retrospective operation. So, the position that emerges is that what is transferred by the assessee is the cement unit as a going concern for a lump sum price and so, the sale in question is a slump sale, and so, Section 50 is not attracted.
44. We do not find merit in the contention of the learned Standing Counsel for the Revenue that there is suppression of material because the plant and machinery could not have been transferred without a registered deed, and no such registered deed has been produced. Firstly, the assessing officer did not question the transfer of the movable property without a registered deed. He took it that the plant and machinery were movable assets, and so, he proceeded to assume that there was a valid transfer, and so proceeded to compute the short term capital gain under s. 50. Whether the plant and machinery are movable assets or immovable property depends on whether the same are embedded in the ground or not. This is a question of fact, which, to our mind, cannot be raised for the first time before the Tribunal. The contracting parties appear to have taken the plant, and machinery as movable assets, which could be transferred by simple delivery, i.e. without a registered deed, and that is how, the asses see obtained a receipt in proof of the delivery given. It was for the Registration Authority to have questioned the transfer, if it had any doubt in mind. At any rate, at least, it was for the assessing officer to have raised this issue, if he doubted the validity of the transfer. The Revenue cannot have it both ways. They cannot compute the liability to tax under S. 50 on the assumption of a valid transfer, and, at the same time, question that there was no valid transfer. If there is no valid transfer, there should be no liability under Section 50. Having determined the liability under Section 50, we are of the view that it is too late in the day for the Revenue to raise the question of validity of the transfer for the first time before the Tribunal.
45. Further, if there is any suppression of materials, it is for the Revenue to establish the same. They have conducted a survey on the premises of both the asses see and the vendee company. They did not find anything adverse to dispute the claim of the assessee that it was a slump sale. On the other hand, both the functionaries of the contracting parties, viz. Shri Nagarajan and Shri B.M. Mohan, whom the Department found fit to examine during the survey proceedings, confirmed the stand of the assessee that it was a slump sale, and that there was no separate valuations of the assets.
46. We are actually surprised that the Revenue sought permission to introduce by way of additional evidence Paper Book II before the Tribunal, There is nothing in the so called additional evidence running into hundreds of pages, which contradicts the claim of the assessee or which at least throws doubt on the claim of the assessee. The evidence contains the statement of Shri Mohan which only confirms the claim of the assessee.
47. The Revenue sought to draw mileage out of the provisions of the sale agreement which were all along before them. The only evidence allegedly adverse to the assessee is the specific values mentioned against the plant and machinery in a schedule attached to the receipt obtained by the assessee. As we have already mentioned, those values are not the transfer prices, and so they do not clinch the issue either way. On the other hand, the depositions taken by the Revenue during the survey, which we have extracted hereinabove, are totally against the stand of the Revenue. So, we find no support for the stand of the Revenue in the entire additional evidence filed by it. 48. We are also surprised at the coyness of the learned counsel for the assessee in his initial resistence to the admission of the additional evidence. Being an astute counsel, he induced the opposite party to think that he would be embarrassed by such additional evidence and led it up the garden path.
49. Similarly, the Revenue sought to play down the fact that even the man power of the assessee-company was taken over by India Cements by calling it a liability. The question is not whether it is a liability or an asset. The question is whether the entire undertaking was sold as a going concern. The fact that even the manpower was taken over by the vendor company shows to our mind that it was a slump sale.
50. At one stage, the learned Standing Counsel argued that it is a case where the ratio of the decision of the Apex Court in the case of Mc Dowell (154 ITR 148) is attracted. We do not find merit in this contention also. It could be that the assessee deliberately resorted to a slump sale for the purpose of avoiding tax liability under Section 50. That, by itself, to our mind, does not attract the ratio of the decision of the Apex Court in the case of McDowell (supra). To invoke the ratio of that decision, the Revenue has to prove that the transaction in the form in which it was entered into is a sham transaction which is not done. In this context, it is also necessary to bear in mind the remarks of the Apex Court in the case of Union of India v. Azadi Bachao Andolan (263 ITR 706), in which as per the relevant portion of the head-note, it has been observed at pages 758-759 as under-
"We may in this connection usefully refer to the judgment of the Madras High Court in M.V. Valliappan v. ITO(1988) 170 ITR 238, which has rightly concluded that the decision in McDowell (1958) 154 ITR 148 (SC) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Counsel in IRC v. Challenge Corporation Ltd. (1987)2 WLR 24, and did not have the benefit of the House of Lords' pronouncement in Craven's case(1988)3 All ER 495(HL); (1990)183 ITR 216(HL), the view taken by the Madras High Court appears to be correct and we are inclined to agree with it.
We may also refer to the judgment of the Gujarat High Court in Banyan and Berry v. Commissioner of Income-tax (19996) 222 ITR 831 at 850 where referring to Mc.Dowell's case (1985)154 ITR 148 (SC), the court observed:
"The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from thee enunciation made in McDowell's case (1958)154 ITR 148(SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to Mc Dowells decision leave the freedom of the citizen to act in a manner according to his requirements, with circumspection, within the frame work of law, unless the same fall in the category of colourable device which may property be called a device or a dubious method or a subterfuge clothed with apparent dignity."
This accords with our own view of the matter."
The depositions taken by the Department from the functionaries of both the companies also prove that the transaction entered into is indeed what is reflected in the agreement of sale dated 9.6.1990. So, we have no reason to invoke the ratio of the decision of the Apex Court in the case of Mac Dowell (supra).
51. We may clarify that even in a slump sale there can be situations where specific values are relatable to specific assets. That is the circumstance in the case of Artex Manufacturing Co. In this case, the entire undertaking was sold. It was sold as a going concern. The Apex Court called it a slump sale. However, specific values were relatable to transfer of specific assets. That is why the case was decided in favour of the Revenue. That is not the position in the present case. There is no evidence of valuation of specific assets either in the agreement or in any schedule attached to the agreement. Actually, there is no schedule to the agreement. No such proof of valuation of specific assets is available even in the material obtained from the assessee before the assessing officer, or located during the survey by the Department on the premises of the contracting parties. In the circumstances, we are driven to the conclusion that the sale in question is a slump sale. We are also fortified in our conclusion by the unreported decision of the Bombay High Court in the case of Premier Automobiles (supra); and the decisions of the Apex Court in the case of Mugneeram Bangur (supra) and even Artex Manufacturing (supra). Lots of other decisions were cited by both the parties. As it is the admitted position of both the parties that the applicable law in the context of slump sale has to be ascertained from the four decisions of the Apex Court mentioned above, we do not find it necessary to deal with the other decisions cited by the parties.
52. In the light of the above, we do not find any error in the order of the CIT(A) in holding that the entire cement unit should be treated as a capital asset. As, admittedly, the unit was established in 1984, we do not see why it cannot be treated as a long term capital asset. As we have held that Section 50 is not applicable in a slump sale, we do not find any merit in Ground Nos. 2, 3 and 4 taken by the Revenue. They are rejected.
53. On ground No. 1 relating to the transit accommodation, no argument has been advanced before us. Further, the CIT(A) seems to have decided this issue in the light of the order of the Tribunal in assessee's own case for the assessment year 1982-83 and 1983-84. In this view of the matter, we reject this ground as well.
54. In the view we have taken of the matter, we uphold the order of the CIT(A) on the nature of the sale in question. We hold that it is a slump sale, and we also hold that no tax in terms of Section 50 is exigible.
55. Whether there is any liability for capital gains under Section 45 of the Act on the transfer of the capital asset, and whether any such tax can be computed or not is a moot point, and we have to consider that issue in the context of the assessee's appeal, viz,. ITA No. 99/Hyd/95.
56. Departments appeal is accordingly dismissed.
ASSESSES'S APPEAL-ITA No. 99/Hyd/95
57. Grounds taken by the assessee read as under-
"Ground No. 1The Commissioner of Income-tax (Appeals)-V Hyderabad (hereinafter referred to as 'the CIT(A)') having held that the transfer of the cement undertaking would constitute transfer of a capital asset, has erred in holding that profit on the transfer of the cement undertaking was exigible to capital gains tax having failed to appreciate that inasmuch as the date and cost of the asset and of its improvement are indeterminate for the purpose of Section 48 of the Act, determination of capital gains on the transfer is not possible and, therefore, no tax is leviable on such transfer.
Ground No. 2Without prejudice to ground (1) above, the CIT(A) erred in holding that it will be unnecessary exercise to find out whether the Cement Unit of the appellant had a goodwill at all or whether it had any ascertainable cost of acquisition for determining the cost of acquisition of the business undertaking as a whole. Similarly, whether the mining lease, licences, trademarks, patents, etc. and other such intangible assets had any determinable cost of acquisition or not, becomes Irrelevant.
Your appellant submits that all the above intangible assets relating to Cement Unit taken over by the purchaser are valuable assets without which no buyer would purchase the Cement Unit. The cost and dates of acquisition of such intangible assets taken over being indeterminate the computational machinery provided in Section 48 of the Act fails rendering the section inoperative even if it be possible to take the view that the cost of acquisition of the undertaking is the sum total of the cost of each of the assets transferred as a part of the undertaking.
Ground No. 3(a) Without prejudice to ground No. 8(1) and (2) above, having held that the sale is of the cement undertaking a distinct capital asset, the CIT(A) erred in directing the DCIT to consider the written down values of the assets which have been allowed depreciation in determining the cost of acquisition of the part of the cement undertaking having failed to appreciate that Section 50 of the Act has application only where capital gains has to be determined on the sale of assets and the actual cost of assets comprising the cement undertaking alone could be relevant to a computation of the cost of the undertaking as a whole.
(b) Without prejudice to ground 3(a) above, the CIT(A) failed to appreciate that the present scheme of the Income-tax Act, 1961, does not provide for determination of written down values of assets but only of block of assets and as such there are no written down values normally available for assets which form part of a block and thus a computation of 'cost' on the basis directed by him would not ba feasible.
Ground No. 4The CIT(A) erred in holding that-
(a)(i) Legal fees, consultancy fees and other similar items incurred in connection with the transfer of the Undertaking were not deductible in arriving at the capital gains that may be assessable as a result of the sale of the Undertaking having failed to appreciate that such expenditure having been incurred wholly and exclusively in connection with such transfer. The allowance of such expenditure is specifically under Section 48 of the Income-tax Act.
(ii) He further erred in holding that the difference on revaluation of multicurrency loan taken for the purpose of acquisition of fixed assets does not constitute a part of the cost of the assets transferred on the sale of the Undertaking having failed to appreciate that foreign currency adjustments from time to time are made on the basis of quotations of currency and not on actual remittances only and that in fact, such increase has always been so accounted by the Appellant and accepted by the Department.
(b) The learned CIT(A) erred in holding that the following items do not constitute expenditure wholly and exclusively incurred for the purpose of the business of the Appellant:
(i) provision for doubtful receivables of the Cement Undertaking of Rs. 75,00,000 having failed to appreciate that the act of making of provision for doubtful receivables is the act of writing off irrecoverable debts and,
(ii) the reduction in the value of items (value of obsolete items written off Rs. 26,08,999 and spare parts not paid by ICL Rs. 2,91,748) not taken over by the buyers as a part of the Undertaking but transferred to its other unit at nil value having failed to appreciate this written down was in Accordance with the normal practice of the Appellants to its value to the business,
(iii) the learned CIT erred in directing that net current assets be taken at the value on 31.3.1990 having failed to appreciate that these were transferred on a subsequent date on the basis of an inventory taken on that date because of which shortage of Rs. 12,70,672 against book value were determined and an excess of Rs. 25,25,604 was similarly, determined and that, therefore, the net amount taxable would be the difference between the excess and the shortages aforesaid to be treated as long term capital gains.Ground No. 5
The learned CIT erred in enhancing the quantum of capital gains which would arise on the basis set out in his order as against the amount adopted by the learned DCIT having failed to appreciate that an opportunity of being heard on such an enhancement should have been provided to the Appellant before directing an increase in the quantum of capital gains so determined.
Ground No. ,6
(a) The CIT (A) erred in directing the DCIT to allow investment allowance of Rs. 5,02,16,945 relating to the Fertiliser Unit under Section 32A(3) (II) of the Act only in case there is a surplus income under the head "income from business" on the basis of the fresh computations to be made for giving effect to this order, having failed to appreciate that Section 32A(3)(ii) permits setting off of the unabsorbed investment allowance carried from earlier year to reduce the total income of the assessee to nil and not his only the business income as erroneously directed by the CIT(A). The total income includes income under the head 'capital gains' and therefore the unabsorbed investment allowance of Rs. 5,02,16,945 is available for set off against the long term capital gains on sale of the cement undertaking.
(b) Your appellants request that the CIT (A) having held there is no transfer of any individual plant commissioned in the cement undertaking, unabsorbed investment allowance in respect of the Cement Plant as claimed in the Return of Income be allowed to be set off against the capital gains, if any, as may be determined or to the extent not set off be allowed to be carried forward.
Ground No. 7The CIT(A) erred in confirming the disallowance on account of entertainment expenditure of Rs. 2,64,266 having failed to appreciate that a portion of such expenditure (say 50%) was spent on employees of your appellants who were assigned the duty of accompanying the business associates to business lunches and dinners in hotels and restaurants for holding business discussions which temporarily become their "other place of work" within the meaning of the explanation 2 to Section 37 (2A) of the Act as held by the Karnataka High Court in the case of CIT v. Mysore Minerals Ltd. (162 ITR 562) Ground No. 8 The learned CIT(A) erred in not disposing of the Appellants ground of appeal No. 11(b) as set out hereunder and would request the Hon. Members to now dispose of the matter being a matter already covered by the orders of the Hon. Tribunal in earlier years:
The DCIT therefore erred in not allowing such interest charges of Rs. 35,92,822 having failed to appreciate that your appellants have added these interest charges to the fixed assets in order to arrive at the "actual cost" of the fixed assets under Section 43(1)of the Act. Your appellants submit that separate considerations apply for computation of the actual cost of assets under Section 43(1) of the Act and allowance of interest on borrowings for expansion of the existing business under Section 36(1) (iii) of the Act, as these concepts are mutually exclusive.
The Hon. Tribunal in the own case of your appellants for the assessment years 1982-83 and 1983-84 reported in 29 ITD 455 has held that the cement and fertilizer activities are the same business and interest is deductible under Section 36(1) (iii) of the Act.Ground No. 9
Your appellant submit that the learned CIT(A) having held there is no sale or transfer of any individual asset or a block of assets ought to have held that the learned DCIT erred in not allowing depreciation having failed to appreciate that under the new scheme of the Act a block of assets continues to be entitled to such depreciation irrespective of whether the assets continue to exist or not, now that there was no credit to be given to any block on a transfer of the Undertaking.
Your appellants crave leave to add to, alter or amend the aforesaid grounds of appeal or any of them as they may be advised from, time to time."
58. At the outset, we may note that the learned counsel for the assessee, at the time of hearing on this appeal, has not pressed grounds No. 5, 6 and 8. They are accordingly rejected.
59. In the course of hearing before us, the learned counsel for the assessee has summarized the main issues that arise in this appeal into three and they are as under
(1) Whether the transfer of the business of cement unit as a going concern, being a capital asset, gives rise to chargeable capital gains as the cost of acquisition of such a capital asset cannot be determined.
(2) Presuming a view is taken that the cost of acquisition of an undertaking is determinable, what exactly is the mode of determining such cost of acquisition and cost of improvement.
(3) Is the assessee-company eligible to depreciation in respect of depreciable assets, which have been transferred to India Cements.
60. In the context of department's appeal, ITA No. 253/Hyd/95, we have held hereinabove that the cement unit is a capital asset and what is transferred is the entire unit as a going concern, and so, the sale consideration received is not allocable to the depreciable assets, and so liability under Section 50 is not attracted. In the light of this finding, the main question to be considered is whether the transfer of the cement unit as a capital asset gives rise to chargeable capital gains under Section 45 of the Income-tax Act. If we hold that no chargeable profit under Section 45 arises, as the computational provisions of Section 45 read with Section 48 fail, i.e. the cost of acquisition and cost of improvement are not ascertainable, the further question as to how exactly to compute such cost does not fall for consideration. So, the issue at No. 2 above depends upon our decision on issue No. l above. In either case, the issue at No. 3 above requires to be considered.
61. In the light of the above, the main issue to be decided is whether the cost of acquisition and of improvement of the cement unit in terms of Section 48 are terms of Section 48 are capable of being ascertained for a levy under Section 45 to be exigible.
62. The learned counsel for the assessee explained that the said cement undertaking is not a business acquired by the assessee from another, but has been set up by the assessee as a result of its own efforts. It consists not only of the tangible physical assets, but also several intangibles like brand-name, mining rights, etc. which were acquired over a period of time. The undertaking was in existence since 1984. Further, it is stressed that an undertaking, which is the capital asset that was transferred, does not remain the same, and, as an asset, it is not constant but keeps fluctuating. It is pleaded that, having regard to the principles laid down in a number of decisions, it must be held that the cost of acquisition and cost of improvement of the cement business is not ascertainable, and so, the computational provisions of Section 48 fail and so, there can be no question of levy of tax under the head 'capital gains' under Section 45. In this context, the learned counsel has relied on a number of decisions, some of which are as under-
(1) CIT v. B.C.Srinivasa Setty (128 ITR 294)-SC (2) Evans Fraser and Co.Ltd. v. CIT(137 ITR 493)-Bom.
(3)Addkl, CIT v. Ganapathi Raju Jegi, Sanyasi Raju (119 ITR 715)-AP (4) CIT v. Ganapathi Raju Jegi (200 ITR 612) -SC (5)Bawa Shiv Charan Singh v. CIT(149 ITR 29)-Del.
(6) CIT v. Markapakula Agamma(165 ITR 386)(AP) (7) CIT v. Clive Mills Co.Ltd.(148 ITR 14) (8) CIT v. Suman Tea and Plywood Industries Pvt.Ltd.(226 ITR 34)-Cal.
(9) Srikrishna Dairy and Agricultural Farm v. CIT(169 ITR 291)-AP (10) Addl. CIT v. K.S.Sheikh Mohideen(115 ITR 243) (11) Voltas Ltdd. v. DCIT(64 ITD 232)
63. In the above decisions, various assets of tangible and intansible nature like tenancy rights, protected tenancy, import entitlements, trees of spontaneous growth, calves born on a farm, self generated trade marks were considered and it was held that there cannot be any levy of capital gains on the transfer of such assets, as computational provisions contained in S. 48 cannot be satisfied.
64. The learned counsel for the assessee invited our attention to the provisions of 3.55(2) (a) and mentioned that the legislature has realized the consequence of the view taken by the Courts as well as the Tribunal and has subsequently incorporated the definition of the 'cost of acquisition' in respect of a number of assets and provided for taking the cost of such assets to be 'nil'. Initially, the amendment was made to take the cost of goodwill to be 'nil' with effect from assessment year 1988-89. Thereafter, with effect from 1995-96, the cost of acquisition of tenancy rights, stage carrier permits and loom hours was taken to be nil. With effect from assessment year 1998-99, the cost of acquisition of the right to manufacture, produce and process any article or thing was taken to be nil and, thereafter, from the assessment year 2002-03, the cost of trade marks or brand name associated with a business was taken to be nil. Finally, with effect from assessment year 2003-04, it has been provided that the cost of acquisition of right to carry on any business is taken to be nil. It is pleaded that these successive amendments to S. 55(2) (a) show that, whenever the legislature thought it fit, it has treated the cost of acquisition of specified assets to be nil to counter the contentions that are raised by the assessees and accepted by the Courts. These amendments were brought only to counter the contentions of the assessees that the cost of acquisition of the assets in question is unascertainable. Till the said amendments, no Capital gains was leviable on the transfer of any of the above assets for the simple reason that the computational provisions of S. 48 failed. They were all capital assets and, technically, tax under the head 'capital gains' is chargeable on their transfer in terms of S. 45, but only because their cost of acquisition and their cost of improvement in terms of S. 48 was not ascertainable in respect of these assets, no capital gains tax was chargeable on the transfer of these assets. An artificial definition deeming the cost of acquisition to be nil had been provided for in respect of the above assets by the legislature by successive amendments noted above. It is further pleaded that when the cost of acquisition and the cost of improvement of such assets which are relatively simple in nature had been held by the Courts to be uuascertainable, there is all the more reason to hold that the cost of acquisition and the cost of improvement of an industrial undertaking like the cement unit in question, which comprises so many such assets is also unascertainable.
65. It is further pleaded that it is because of this lacuna in respect of the levy of capital gains under S. 45 on the slump sale of an industrial undertaking like the cement unit in question that the legislature has with effect from assessment year 2000-2001 inserted S. 50B to make a provision for the assessment of capital gain on the transfer of undertaking, by deeming the cost of acquisition and cost of improvement to be the net worth of the undertaking on the date of transfer. This amendment has been declared to be prospective and has been so held by the Bombay High Court in its unreported decision in the case of Premier Automobiles (supra) and the Ahmedabad Bench of the Tribunal in the case of Industrial Machinery Associates (78 TTJ 434), For the assessment year 1991-92 with which we are concerned in these matters, S. 50B was not on the statute book. It is further explained that Memorandum explaining the provisions of the Finance Bill 1999(236 ITR 127(St.)) makes it clear that the new Section is effective from 2000-01, It refers to the provision inserted to tax the slump sale as the 'new provision' as opposed to the provisions dealing with amalgamation of companies, which are referred to as rationalization of existing provisions. So, it is pleaded that it is clear that the provisions of S. 50B cannot be treated as clarificatory and they have only prospective operation.
66. In this context, the learned counsel for the assessee has also relied on the decision of the Supreme Court in CIT v. Official Liquidator Palai Central Bank(150 ITR 539) wherein it was held that a levy of super-profits tax would fail where the alternative method of arriving at the standard deduction (which was integral to the determination of the super-profits) was not determinable. In other words, it is pleaded that, if the computational provisions of S. 48 fail, the levy under S. 45 itself has to fail. It is also pleaded that the provisions levying the charge must be strictly construed and, in this context reliance is placed on the judgment of the Supreme Court in the following cases-
(a) Liquidators of Pursa Ltd. v. CIT(25 ITR 265)
(b) CIT v. Express Newspapers Ltdd.(5 ITR 250)
(c)CIT v. Ajax Producft6s Ltd.(55 ITR 741)
67. It is further pleaded that the cost of acquisition of a business cannot be equated with the cost of acquisition of assets that comprised the unit. Even otherwise, if there are certain assets of which one cannot conceive of a cost, the cost of the undertaking itself cannot be ascertained.
68. In support of the proposition that the cost of acquisition of an undertaking cannot be ascertained, he relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Industrial Machinery Associates (supra), and also Decision of the Madras High Court in the case of CIT v. P.V.K. Shaikh Mohmmed Rowther and Co. (1985 Tax LR 675).
69. It is further pleaded that if the cost of acquisition of the undertaking is held to be ascertainable, then question of the modus of its ascertainment would arise. The CIT(A) held that the cost of acquisition of the undertaking has to be determined with reference to the various assets reflected in the Balance Sheet, and he held that the depreciable assets should be taken at their written down value. It is pleaded that the written down value is not the same as cost. Relying on the dictionary meaning of the term 'cost' as "what is laid out or suffered to obtain anything", he pleaded that it is what the assessee has, in fact, expended and laid out for the purposes of acquiring the asset, that has to be regarded as the cost of acquisition thereof. In this context, he placed reliance reliance on the decision of the Hon'ble Bombay High Court in the case of Habib Hussain v. CIT(48 ITR 859). It is further pleaded that, while holding that the non-depreciable assets should be taken at cost, the CIT(A) has totally ignored the intangible assets which are not reflected on the Balance Sheet. He further directed the current assets to be taken as on 31st March, 1991, whereas they should have been taken on the date of transfer. It is further pleaded that the cost of certain intangible assets for which there is no cost of acquisition should be taken at the value of the asset on the date of transfer. It is pleaded that this proposition is in consonance with the principles laid down in CIT v. Soloman Brothers(1 ITR 324) and GIT v. Francis Vallabarayar (40 ITR 426). So, the cost of acquisition of the cement undertaking, according to the learned counsel for the assessee would be-
(a) Cost of acquisition of the depreciable assets (not just their written down value)
(b)Cost of acquisition of the non-depreciable assets; and
(c) Value(not the cost of acquisition) on the date of their transfer of the intangible assets.
70. So, it is pleaded that the method directed by the CIT (A) for ascertaining the cost of acquisition of the undertaking is wholly unsustainable. This is of course, without prejudice to his main contention that the cost of an undertaking is inherently undeterminable, as already mentioned hereinabove.
71. It is pleaded that the decisions of the Kerala High Court in CIT v. Rama Krishna (73 ITR 356) of the Madras High Court in Indian Bank Limited v. CIT (153 ITR 282) and of the Allahabad High Court in the case of Lachmandas Mohanlal and Sons v. CIT(54 ITR 315), relied upon by the CIT(A) in the impugned order are totally distinguishable. It is further pleaded that in none of the above decisions, the argument that the transfer of a going concern did not give rise to a capital gain as the cost of acquisition was not determinable, was argued. It is also mentioned that some of these decisions considered Section 50 and Section 52 as they stood during the relevant period, and hence they cannot be pressed into service for the assessment year under appeal.
72. On ground No. 9 relating to the claim for the grant of depreciation without reducing the w.d.v. of the assets of the cement unit from the block, the learned counsel for the assessee in the written submissions, separately filed in the context of assessee's appeal, mentioned as under-
"Ground No. 9It is submitted that having regard to the finding given by CIT(A) that what was transferred was the cement undertaking as a going concern and there was no identifiable consideration relatable to the various assets that were transferred, the CIT(A) ought to have directed the Assessing Officer to allow depreciation on the written down value of the assets of Rs. 46,47,65,108. Under Section 32 depreciation is allowed on the written down value of the block of assets. The term "written down value" is defined in Section 43(6). It is submitted that having regard to the said definition written down value can only be reduced by the money payable in respect of the asset that was transferred by way of sale or exchange. If therefore, an asset is transferred by a sale or exchange and an identifiable price is determined for such transfer only then can an adjustment as contemplated by Section 43 (6) (c) (i) (B) be made. As admittedly there is no price paid by India Cements Limited for acquiring the individual assets of the assessee the adjustment contemplated in Section 43 (6) (c) (i) (B) , cannot be made and, hence, the assessee ought to continue to get the depreciation on the written down value of the assets. Realising this impediment the Legislature has, with effect from assessment year 2000-01, amended the law to provide for an adjustment in the written down value where there is a slump sale (see section 43(6) (c) (i) (C) . In the course of the hearing a query was raised as to whether the appellant could claim depreciation in respect of assets of which it was not the owner. It was submitted that in the year subsequent to the year of acquisition of the asset, the question of ownership was irrelevant where an adjustment as contemplated by Section 43(6)(c)(i)(B) could be made (i.e. a case where the consideration attributable to a particular depreciable asset was determinable). It was submitted that even where such adjustment could not be made (as in the present case) the test of ownership was not required to be satisfied."
73. We have questioned the learned counsel for the assessee as to whether the blocks of depreciable assets of the cement unit did not cease to exist by virtue of the sale to India Cements Ltd. In other words, the question implied that, even if the sale in question is a slump sale, the block of assets ceased to exist, and so, the assessee cannot get depreciation on such ceased blocks of assets. We have also invited his attention to the provisions of Section 70 of the Income-tax Act, which read as under-
"Section 70. Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head."
74. In the light of the above provision, we put it to the learned counsel for the assessee whether the income of each source under the same head should not be separately computed. We implied that the fertiliser unit and the cement unit were two separate sources, though falling under the head 'business' and so, their profit should be separately computed, and so, each unit must be held to have separate blocks of assets for the purposes of grant of depreciation. In this context, we also invited his attention to the provisions of Section 32(2) relating to the carry forward of depreciation, which for some years stood as under-
(2) Where in the assessment of the asses see full effect cannot be given to any allowance under Clause (ii) of Sub-section (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance) as the case may be-
(i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;
(ii) if the unabsorbed depreciation allowance cannot be wholly set off under Clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year,
(iii) if the unabsorbed depreciation allowance cannot be wholly set off under Clause (i) and Clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and-
(a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;
(b) if the unabsorbed depreciation allowance cannot be so set off, the amount of unabsorbed. depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed;
Provided.....
Provided further...' Explanation-.."
75. The above provision was not there on the statute book for the assessment year under appeal before us. However, we pointed out that the section as it stood for some of the years on the statute book indicated, alongwith the provisions of Section 70 which we have extracted hereinabove, that the income of each source or business has to be separately computed. If this view is correct, we pointed out that the w.d.v. of the block of assets of the cement unit should be reduced for the grant of depreciation in subsequent years as they are not owned by the assessee and are not used in the business of the assessee.
76. The learned counsel for the assessee pleaded before us, that, firstly source-wise or business-wise computation of income is not called for, in terms of the Form of Return of Income. He mentioned that the source-wise or business-wise profit or loss before grant of depreciation is computed for different sources of business and they are aggregated and from the aggregate of such profit or loss, a deduction is granted for eligible depreciation of all the sources of business. He mentioned that blocks are maintained asaessee-wise and not source-wise or business-wise. He further mentioned that, if source-wise computation is called for, the entire practice of the Department has to be held to be wrong in the sense that no assessee files return source-wise or business-wise. He further pointed out that so far as the present case is concerned, the assessing officer himself considered both the fertiliser unit and cement unit as one business and while arriving at the short term capital gains under Section 50, he reduced the w.d.v. of the blocks of both the fertiliser unit and the cement unit from the allocated consideration. So, the question whether both the units constituted one source or not does not survive, for consideration before the Tribunal. He further invited our attention to the decision of the Tribunal in the case of the assessee reported in 29 ITD 455 for the assessment year 1982-83 and 1983-84 in which it was held that the cement and fertiliser units represented one and the same business, and so, the interest on the capital borrowed for setting up the cement unit was deductible under Section 36(1)(III) of the Income-tax Act as revenue expenditure, without its being capitalized.
77. On the various issues elaborately raised in ground No. 4, the learned counsel for the assessee in the above written submissions mentioned as under-
"Ground No. 4........................It is submitted that the CIT (A) has directed that the legal fees, consultancy fees etc. if actually incurred can form part of the business expenditure and a provision in respect thereof is not allowable. It is submitted that this expenditure was incurred in connection with the transfer of the cement undertaking and therefore, would be allowable under Section 48(i) as expenditure incurred wholly and exclusively in connection with the transfer. Even assuming that the amount has to be allowed as a deduction in computing the business income as the assessee admittedly follows the mercantile method of accounting, the same has to be allowed even if a provision for a liability has been made and actual payment was not made in the year.
The appellant had taken certain loans in foreign currency for acquisition of certain assets of the cement undertaking. Consistent with its accounting policy the Appellant used to value its indebtedness as on the last day of the accounting year and on account of an adverse fluctuation, the increased liability was provided for and correspondingly the cost of the assets was increased. The department has accepted the methodology adopted by the assessee. The sum of Rs. 26,20,889 represents the additional liability incurred as on 26.11.90 compared to 31.3.1990 and having regard to the methodology adopted, the CIT(A) ought to have directed that this figure also went to increase the cost of assets that were transferred. He erred in restricting the allowance to fluctuations upto 31.3.1990.
There were certain assets which were not taken over by India Cements Limited on account of the fact that they were considered obsolete. The Appellant submits that the value of these assets as appearing in the books prior to the write off ought to be allowed as a business loss as none of these assets were of a capital nature and were in the nature of items of stores and spares.
The agreement contemplated that the net current assets will be taken over at a figure arrived at after conducting a joint audit by Chartered Accountants of both the parties. As a consequence thereof certain assets were valued at Rs. 25,25,604 in excess of the value appearing in the books. Similarly there were certain assets which were valued by the Auditors at a figure which was less than the amount appearing in the books by a sum of Rs. 12,70,672. It is submitted that the sale consideration has to be increased only by the net figure of Rs. 12,54,932 and not Rs. 25,25,604. The CIT(A) has wrongly rejected the contention by holding that the loss on valuation of inventory becomes irrelevant for consideration since the valuation of inventory as on 31.33.90 alone that has to be taken into consideration. He has failed to appreciate that the cost has to be determined as on the date of the transfer viz. 28.11.1990."
78. As already mentioned, the learned counsel for the assessee did not press for grounds No. 5, 6 and 8 taken in the appeal, and as such the same were rejected at the very outset.
79. As for ground No. 7, it is mentioned that the Tribunal has been holding that, at least, 25% of the entertainment expenditure (claimed at 50% in the grounds) has to be treated as relatable to the employees and hence allowable as business expenditure.
80. The learned Standing Counsel for the Revenue, argued, firstly, that it is futile to argue that the cost of acquisition of an undertaking cannot be computed. For any undertaking, cost can be computed, as it is reflected in the books of account. Further, in the case of the assessee, it is stressed that it is a simple affair to calculate its cost, as it has no intangible assets. He invited our attention to the order of the Madras Bench of the Tribunal in the case of India Cements Ltd. wherein it was held that there was no goodwill for the assessee-company- and so the consideration paid by the India Cements could be allocated to depreciable assets for the purposes of grant of depreciation without reducing it by the cost of the goodwill. It is pleaded that the finding given by the Tribunal in the case of the vendee company is also applicable, if not binding on the Tribunal for deciding the present appeal.
81. In support of the contention that the assessee has no intangible assets, he also invited our attention to the cost audit report dated 23rd; March, 1990, which may be seen at pages 215 to 247B of the Department's paper-book No. I, according to which there were no intangible assets in the Balance Sheet as on 30th September, 1989. It is further pleaded that if the assessee has any intangible assets, which are not reflected in the balance Sheet, it is for the assessee to point out such intangible assets, so that valuation of such intangibles can also be made for deducting the same from sale consideration. It is mentioned that computation of cost of acquisition and cost of improvement is the job of an Accountant. There may be some difficulty in ascertaining such costs, but it does not mean that it is impossible to compute.
82. He further pleaded that the Fertiliser Division itself was got valued as a going concern, and similarly, the cost of the undertaking also can be computed. - In this context, he relied upon the decision of the Hon'ble Calcutta High Court in the case of Saharanpur Light Railway Co. Ltd.(208 ITR 882), wherein as per the relevant portion of the head-note, it was observed as under-
"(ii) that it was not the case that the property, namely, plant and machinery, did not have a cost of acquisition or the assets were self-generated assets like goodwill. The assets here were tangible assets and they were neither free commodities nor were they generated on their own as in the case of goodwill. In such a case, a mere practical obstacle to the valuation cannot defeat the charge of tax in respect of the capital gains arising. If valuation by inspection and empirical examination is not possible, the other methods of valuation have to be adopted. One has then to go by the book value or go by the market value as on the date of acquisition with such adjustments as the circumstances of the case may call for. Therefore, the assessee could not get away with not paying any tax on the capital gains taking advantage of the DVO's practical barrier to reporting the value."
In the light of the above remarks of the Hon'ble Calcutta High Court, it is pleaded that the mere difficulty in the computation of cost cannot come in the way of holding that the capital gains tax is exigible on the transfer of even an undertaking.
83. Shri Ashok invited our attention to the provisions of Section 55, as per which the cost of acquisition of the assets like goodwill has to be taken as nil. It is pleaded that the provision of Section 55(2)(a) can be relied upon and held that the cost of acquisition of such intangibles is nil. It is further plead that prior to insertion of Section 50B, it is not as though the slump sale was exempt from tax under the head capital gains. It is pleaded that the said provision is clarificatory. It is also pleaded that the said provision is retro-active though not retrospective. When asked to explain the distinction, the learned Standing Counsel said that the said provision can be invoked in pending proceedings, even though it cannot be invoked to unsettle the completed assessments. He further explained that it is analogous to the provisions of Rule 1BB of the Wealth-tax Act, relating to the valuation of residential properties, which has been held by the various Courts as being procedural, and so applicable for pending proceedings of even earlier years.
84. It is further pleaded that, as the case of the assessee is that he has sold the entire undertaking, it is not permissible for the assessee to argue that, as the cost of some of the individual items like goodwill and permits is unascertainable, the cost of the entire undertaking is unascertainable. In other words, the assessee cannot have it both ways. The learned Standing Counsel called it a case of approbation and reprobation by the assessee,
85. Elaborating that it is one of the many instances of approbation and reprobation by the assessee, Shari Ashok, the learned Standing Counsel stated that the assessee claims interest on capital borrowed for the purposes of setting up of the cement unit as revenue expenditure on the ground that both the fertiliser and cement units are part of one business of the assessee, and at the same time, calls it a slump sale when only the cement unit is sold, leaving the fertiliser unit in tact. Similarly, it contends that the entire undertaking of the cement unit is sold, and, at the same time, for evaluating its cost, it ropes in the difficulty of ascertaining the cost of its different items or assets.
86. Finally, Shri Ashok mentioned that as many as three High Courts have held that the cost of an undertaking is ascertainable for the purposes of levy of capital gains tax, and in this connection, he referred to the unreported decision of the Bombay High Court in the case of Premier Automobiles (supra) and the decision of the Karnataka High Court in the case of Syndicate Bank (supra) and the Madras High Court in the case of Indian Bank (supra). In the light of these decisions, he pleaded that there is no reason to hold that the cost of an undertaking is not ascertainable.
87. He further mentioned that the decisions relied upon by the learned counsel for the assessee like the decision of the Apex Court in
(a) Liquidators of Pursa Ltd. v. CIT(25 ITR 265);
(b) CIT v. Express Newspapers Ltd.(5 ITR 250); and
(c) CIT v. Ajax Products Ltd.(55 ITR 741) are all distinguishable. It is pleaded that these decisions are an authority for the proposition that, if there is no provision for taxing a subject, the Court shall not invent one. In the present case, an undertaking is clearly a capital asset and Section 45 clearly casts a liability to capital gains tax on the transfer of a capital asset. So, what is under debate is only cost of acquisition of the said undertaking, and there is no reason to think that the cost cannot be computed from the books of account and other records. Regarding the applicability of provisions of Section 50(2) or even Section 45, it is argued that, if liquor is taxable, the subject cannot escape tax simply because the assessee puts it in a tub and sells it. The plea taken is that as clearly capital gains is leviable on the sale of plant and machinery, the same would still be leviable even if the machinery is not sold piece meal, and the entire undertaking including the machinery is sold.
88. Referring to the decision of the Hon'ble Madras High Court in the case of P.V.K. Shaikh Mohammed Rowther & Co.(supra), the learned Standing Counsel pleaded that the decision was rendered in the light of a concession given by the learned counsel who appeared before it that the matter should be decided against the department because of the decision of the Supreme Court in CIT v. Sreenivasa Setty's case (supra). So, it is more an order than a judgment. So, it is pleaded that it need not be preferred to the decisions of the other High Courts like that of the Bombay High Court in the case of Premier Automobiles referred to above.
89. On the question of grant of depreciation raised in Ground No9 above, it is pleaded that it is imperative for the grant of depreciation in terms of Section 32 of the Income-tax Act that the asset is both owned and used in business. Even in a slump sale, assets are transferred and not legally owned or used by the assessee. So, the precondition for grant of depreciation on the block of assets relating to the cement unit is not satisfied, and so, there is no case at all for the assessee to claim in subsequent years depreciation on such assets, without reducing their written down value from the block.
90. Assisting the learned Standing Counsel, Shri Jayashankar, CIT-DR argued on the issues' raised in ground No. 4 above. On the question of the difference on revaluation of the multi-currency loans, the learned Departmental Representative invited our attention to the provisions of Explanation 2 to 43A and stated that, as the liability towards repayment of multi-currency loan is taken over by the India Cements, it does not go to increase the cost of the asset that was transferred, and so, there is no justification for the revaluation. On the question of obsolete items and spare parts that were written off, it is pleaded that it is not ascertained whether they represented allowable business expenditure or whether they were capital items. It is stated that the books have to be seen to verify as to how exactly they were reflected in the books.
91. In his rejoinder, the learned counsel for the assessee mentioned that there is no methodology by which one can arrive at the cost of an undertaking, as distinct from its value, as on a specified date. The asset called 'undertaking' is of a fluctuating nature and it is quite different at the time of sale from what it was when it was set up. If the argument is that one can determine its cost by aggregating the cost of all its assets, there are so many intangible assets of which the cost cannot be determined. Some of the intangible assets are also not reflected in the Balance Sheet. The books on valuation give the methods for valuing the undertaking, but we are not concerned with the value, but the cost of an undertaking. Simply because there is a loss, it does not mean that there is no goodwill. Referring to the report of the cost auditor, referred to by the learned Standing Counsel, it is mentioned that the cost auditor was only mentioning that there are no intangibles in the books of account, but he did not say that the Company did not have any intangibles. He pleaded that in long gestation projects, there would be losses in the initial years and profits in subsequent years, but irrespective of the profit or loss of the year, the undertaking can have goodwill.
92. Referring to the decision of the Calcutta High Court in the case of Saharanpur Light Railway Co. v. CIT(208 ITR 882) it is mentioned that the said decision is distinguishable. In that case, what was involved was the valuation of a particular machinery. It could not be valued because it was transferred, and the Valuation Officer could not inspect it for the purpose of valuation. It is pleaded that simply because of a particular difficulty, the cost could not be ascertained in that case. Unlike the present one, that is not a case where the cost is inherently unascertainable irrespective of facilities available for such ascertainment. Shri Dastur also took cudgels with the proposition that Section 50B is only a procedural provision and is retroactive. He mentioned that Section 50B is a charging section and not a procedural section. The language of Section 50B is identical with that of Section 45. Before the charge was imposed by Section 50B on a slump sale, the charge could not be imposed at all. As it is a charging section, it has no retrospective or even retro-active application, and it cannot be applied even for pending cases of earlier years.
93. It is also pointed out that, according to the learned Standing Counsel, Section 50 applies even to a slump sale and Section 50B applies retroactively. If that was so, every transaction would be subject to liability under both the provisions, which is absurd.
94. On the question of grant of depreciation without reducing the w.d.v. of the assets of the cement unit from the block, it is admitted that there is an anomaly, if the depreciation is allowed without such reduction. It is however, pleaded that such anomalies have to be rectified only by the legislature. It is also mentioned that the legislature has been seized of the anomaly, and it has brought in the necessary amendment under Section 43(6) (c) (i) (C) with effect from 1.4.2000 by the Finance Act, 1999. Section 43(6) (c) (i) (C) provides for the decrease, in a slump sale, of the w.d.v. of the assets that are sold. It is, however, pleaded that this provision has no retrospective operation, and hence cannot be applied for the assessment year under appeal.
95. Referring to the plea that ownership and user of the assets in business is mandatory for grant of depreciation, it is pleaded that these conditions cannot be applied after the introduction of the concept of 'block of assets' with effect from 1.4.1988. It is further pleaded that Section 43(6)(c) governed as to what has to be done when there is sale of an asset for arriving at the w.d.v. and the said provision is quite clear and, in the light of this provision, the concept of ownership and user are mandatory for the grant of depreciation only in the first year when the asset enters the block and not subsequently.
96. On the question of ascertainment of the cost of intangible assets, it is reiterated that their cost cannot be determined. If it can be determined, it is stated that their market value on the date of transfer should be considered and not their cost.
97. On the issues raised in ground No. 4 relating to legal and consultancy fees, it is mentioned that he has no objection if they are allowed as revenue expenditure instead of being allowed as expenditure incurred in the context of transfer. On the question of the liability arising because of the exchange value fluctuations on the multi-currency loans, it is mentioned that the Department has allowed the claim upto 31st March, 1990, and so, there is no reason why they should not allow the claim upto November, 1990, i.e. the date of transfer. Regarding the obsolete items written off, it is mentioned that the Department can be given an opportunity to verify whether they are capital items or not and if they are not capital items, they should be allowed, if not as part of the cost of the undertaking in the computation of capital gains, at least, as normal revenue expenditure.
98. On the question of Rs. 12,70,672 claimed as deduction, it is mentioned that, as the Department has taken the amount of Rs. 25,25,604 being the excess of the value at which certain assets were transferred, over their book value as part of sale consideration, the assessee must also get a deduction for Rs. 12,70,672, being the deficit in respect of other assets. In other words, the sale consideration can be increased only by the difference of Rs. 12,54,932,
99. It is also pointed that it is quite erroneous to think that any of the High Courts have held that the cost of acquisition of an undertaking is ascertainable. In the case of Premier Automobiles, the Hon'ble High Court has only remanded the matter to the Department to find out whether the cost of acquisition is ascertainable. It is pleaded that it is not the same as the High Court holding that the cost is ascertainable. Similar is the position in the decision of the Karnataka High Court in Syndicate Bank (supra) and the Madras High Court in the case of Indian Bank(supra). It is pleaded that in these cases, the CIT (A) had no occasion to consider the question of ascertaining the cost or date of acquisition and cost or date of improvement, etc. In the present case, the CIT (A) went in detail into the modus of ascertaining these aspects and so, it is not a case where the matter can be remanded to the Department, and it is for the Tribunal in the present case, to give a finding as to whether , the computational provisions of Section 48 can be fulfilled in the case of transfer of an undertaking or not.
100. With regard to the concession pleaded by the learned Standing Counsel in the case decided by the Hon'ble Madras High Court in Indian Bank(supra), the learned counsel for the assessee pleaded that the only concession given by the counsel in that case was that the decision of the Madras High Court in the case of K. Ratnam Nadar (71 ITR 433) was approved by the Apex Court in the case of CIT v. B.C. Srinivasa Setty(128 ITR 294). It was not conceded that the cost of an undertaking was not ascertainable. The Court took the view that, if the cost of goodwill cannot be ascertained , similar is the position in respect of the cost of an undertaking, and so, decided the issue in favour of the assessee.
101. We are of the view that the assessee deserves to succeed substantially. Firstly, we have to mention that the cases on which the CIT(A) relied for coming to the conclusion that the cost of an undertaking is ascertainable for the purposes of levy of capital gains tax under Section 45 are, to our mind, distinguishable. In the case of CIT v. Ramakrishna (73 ITR 357) before the Hon'ble Kerala High Court, the only question that was considered was whether the consideration shown in the sale document for the transfer of an undertaking was real or constructive. The other question as to whether the cost of the undertaking can be ascertained or not was neither raised by the parties nor decided upon by the Hon'ble High Court. In the case of Indian Bank Ltd. v. CIT (supra) decided by the Hon'ble Madras High Court, a banking company was nationalized and it was paid a lumpsum consideration for the entire undertaking of Rs. 2,30,00,000. The only argument that was raised was whether the . written down value of the assets could be the basis for determining the cost of the undertaking. The Court decided that the cost of acquisition of the undertaking could be determined by applying the provisions of Section 55(2) read with Section 48, 49 and 50, as they stood during the relevant period.
102. Section 50 during the relevant period stood as under-
"Section 50. Special provision for computing cost of acquisition in the case of depreciable assets- Where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (XI of 1922) or any Act repealed by that Act, or under executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications:-
(1)The written down value, as defined in Clause (6) of Section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.
(2) Where under any provision of Section 49, read with Sub-section (2) of Section 55, the fair market value of the asset on the 1st day of April 1974, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of t'he asset on the said date, as. reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted."
103. It may be observed that the cost of acquisition of a depreciable asset was taken as its written down value. It is on the basis of this provision that the Court concluded that the cost of acquisition of the undertaking could be worked out on the basis of the written down value of the depreciable asset. There is no provision comparable to Section 50 on the statute book for the assessment year 1990-91. In the present case, we are not concerned with the working out of the cost of acquisition of the depreciable asset or any other separate asset. Before us, the question is as to how to ascertain the cost of acquisition of the entire undertaking. The plea that the cost of acquisition of entire undertaking is unascertainable was not raised before the Hon'ble Madras High Court. The limited issue before the Hon'ble High Court was whether the cost of the undertaking should be taken at the written down value of the depreciable assets or their original cost. This is totally different from the issue raised before us. In other words, it was conceded before the Court that the cost of the entire undertaking could be determined on the basis of the cost of the depreciable assets in contradistinction to their w.d.v. The specific plea that the cost of the undertaking cannot be determined with reference to either the cost of the depreciable assets or their w.d.v. because the undertaking comprises so many intangible assets has not been taken. In this view of the matter, we are of the view that the decision of the Madras High Court in the case of Indian Bank (supra) is distinguishable.
104. In Karvalves Ltd. v. CIT(197 ITR 95) the Hon'ble Kerala High Court held that a business undertaking is a capital asset and capital gains on the transfer of such an undertaking are assessable to tax under the head 'capital gains'. There are a number of decisions, which hold that an undertaking is a capital asset like the following-
(a) CIT v. Narkeshari Prakashan Ltd. (196 ITR 438)-Bom.HC
(b) CIT v. F.X. Periera and Sons (Travancore) Pvt. Ltd.(184 ITR 461) at 465-Ker.HC
(c) CIT v. Hindustan Co-operative Insurance Society (72 Taxman 259) at 263-Cal.HC
105. We have also referred to some of these decisions in the context of Department's appeal in ITA No. 253/Hyd/95 hereinabove. The learned counsel for the assessee has not denied that the undertaking is a capital asset and that, in principle, capital gains tax is chargeable on the transfer of an undertaking in terms of Section 45 of the Income-tax Act. The only plea is that the computational provisions of Section 48 fail, and so, on the transfer, levy of capital gains tax has to fail. In other words, the situation is the same as on the transfer of goodwill or other self-generated assets like route permits, tenancy rights, import entitlements. This issue was not considered by the Hon'ble Kerala High Court or any of the other High Courts in the above mentioned cases.
106. In the case of Killick Nixon and Co. and Ors. v. CIT(XLIX ITR 244), referred to by both the parties before us there was transfer of an entire business of managing agency. The relevant argument of the learned counsel and the observations of the Court thereon are as under-
"We now come to question No. 3, which is first of the two additional questions raised on the further statement submitted by the Tribunal under Section 60 (2). The contention of Mr. Palkhivala is that Section 12B(I)will not apply where there is a transfer of the business lock, stock and barrel. According to him in order that Section 12B (I) may come into operation, there must be a transfer of capital assets as such. Where the entire business as a whole is disposed of including the capital assets held for the purpose of its business, it is not a sale or transfer of the capital assets as such but it is a sale or transfer of the business itself. Section 12(B)(I), therefore, will not apply to such cases.
In our opinion, the argument cannot be accepted. Capital assets, as defined in Section 2(4A), is "property of any kind held by an assessee whether or not connected with his business, profession or vocation" with the exception of certain specific items as are specified in the said definition. Capital gains under Section 12B(I) is gain, which arises on the sale, exchange or transfer of a capital asset, i.e. on the sale, exchange or transfer of property of any kind as specified in Section 2(4A). The fact that the property is connected with business or unconnected with the business is immaterial. It is the existence of the property and the gain arising on its disposal by sale, exchange or transfer that alone is necessary for the purpose of constituting a capital gain whether the assets are sold along with the business or as a part of the business as a going concern or without the business and separately would not make any difference. If the sale even of the business as a whole included a sale of the capital assets of the business, the gain arising on such sale as is attributable to the capital assets would be a capital gain. There is nothing, in Section 12B (I) which, in . our opinion, supports the submission of Mr. Palkhivala that in order that the gain to be a capital gain under Section 12B(I) there must be a sale of the capital assets as such and not a sale of the capital assets involved in the transfer of a business as a whole. The third question, therefore, also has to be answered against the assessee and our answer at the said question is, therefore, in the affirmative."
It may be observed that in this decision, the question whether the cost of an undertaking is ascertainable was not argued. The assessee opted for the market value of the asset as on 1.1.1939, as he was entitled to in terms of third proviso to Section 12(B)(2) of the 1922 Act as it stood during the relevant time. So, the question before the Tribunal was as to how the market value as on 1.1.1939 was to be ascertained. The other question as to whether the cost of the acquisition of the undertaking could be ascertained at all was neither raised nor considered. It requires to be remembered that the assessee is entitled to substitute the market value of the asset as on 1.1.1939 in the place of the cost of acquisition.
107. If the cost of acquisition is not ascertainable, no capital gains tax could be levied even if the market value of the separate asset or of the undertaking as a whole as on 1.1.1939 could be determined. In this context, a reference may be made to the decision of the Apex Court in the case of CIT v. Official Liquidator Palai Central Bank (150 ITR 539) in which, it was held that a levy of super profit tax was to fail where the alternative method of arriving at the standard deduction (which was integral to the determination of the superprofit) was not determinable.
108. The plea taken before us that the cost of acquisition of an undertaking, which is one of the elements in the computation of capital gains is not ascertainable, was not taken in the above case. The other plea that the sale consideration is not allocable to the depreciable asset was also not taken. It was assumed that consideration was attributable to depreciable assets. So, this decision, which was approved by the Supreme Court in 66 ITR 714 is also distinguishable.
109. Similarly, the decision of the Hon'ble Calcutta High Court in (SIC)(supra) is also distinguishable. In that decision, what was involved was the ascertainment of the fair market value of some machinery as on 1.1.1954. For the reasons validly brought out by the learned counsel for the assessee and detached while dealing with his arguments hereinabove, this decision is also distinguishable.
110. In" the case of Syndicate Bank v. Addl CIT (155 ITR 601), the Hon'ble Karnataka high Court considered the question of capital gains on the sale of an undertaking, being a banking concern as a whole. The concluding remarks of the High Court are as under-
"Of course, if the cost of acquisition of the business undertaking acquired by the Government of India under the BCATU Act cannot be ascertained, then the undertaking cannot be an "asset" within the meaning of Section 45. But, we express no opinion on this aspect of the matter since there is no finding by the Tribunal. This part of the question has to be examined by the Tribunal or at its instance by any other authority having regard to all the facts and circumstances of the case, in the light of the decisions to which we have called attention. We may, however, point out that if this aspect of the matter is found against the assessee then, the assessee may be afforded an opportunity to exercise the option contemplated under Section 55 (2) of the I.T. Act, 1961."
It may be observed that the Hon'ble High Court did not express any opinion as to whether the cost of acquisition of an undertaking is ascertainable or not. It left the matter to the Tribunal to decide it.
111. Similar is the position with the direction given by the Hon'ble Bombay High Court in the case of Premier Automobiles (supra). The final comments and the directions of the Hon'ble High Court in that case are as under-
"Accordingly, we set aside the Order of the Tribunal, We make it clear that Section 45 of the Income Tax Act applies in this case. This is on the footing that Kalyan Unit constituted the Capital Asset which has been transferred to PPL and on that basis the AO will have to apply the parameters under section 45, 48 etc. and decide on Remand whether any capital gains tax liability arises, and, if so, what is the amount thereof."
The above directions show conclusively that the matter is left open in this case also and the High Court did not give any finding that the cost of acquisition of an undertaking is ascertainable.
112. We may also mention that no case has been brought to our notice by the Department, where it has been held by any High Court or the Tribunal that the cost of the acquisiti6n of an undertaking is ascertainable and that the computational provisions of Section 48 can be met in the case of transfer of an undertaking as a going concern.
113. On the other hand, the learned counsel for the assessee has brought to our notice the decision of the Ahmedabad Bench of the Tribunal in the case of Industrial Machinery Associates (71 TTJ 434), in which it has been categorically observed that the cost of acquisition of an undertaking is not ascertainable. As this decision fairly covers the issue on hand, we deem it fit to reproduce the entire head note of this decision hereunder-
"Held: Section 50B alongwith the ancilliary sections has been introduced by the legislature by the Finance Act, 1999, by way of a special provision for levy and computation of capital gains in case of slump sale. Section 50B is a substantive provision which specifically brings to charge profits arising from the slump sale and enacted a deeming provision which lays down that such profits arising from the slump sale would be deemed to be the income of the previous year in which the transfer took place. The provision essentially deals with substantive rights of the subject and imposes new burdens. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. In the instant case the provision has been expressly enacted by the legislature prospectively w.e.f. 1st April 2000. Board's Circular No. 779 dt. 14th September, 1999 specifically indicated in para 56.5 that the amendments in relation to amalgamation, demerger and slump sale would apply to the asst. yr. 2000-01 and subsequent years. It is thus "manifestly clear that Section 50B introduced by the legislature for levy and computation of capital gains in slump sale, is effective from asst. year 2000-01 and subsequent years and would not apply for the earlier assessment years. Section 50B would not apply for asst. year 1993-94 under appeal.
What is sold in the case of a slump sale is not individual items of property forming part of the aggregate but the capital asset consisting of the business of the whole concern or undertaking. The provisions concerning computation of capital gains as contained under Section 48 contain three basic elements viz. cost of acquisition and cost of improvement as well as date of acquisition for working out the capital gains. In the case of sale of a going concern, these essential ingredients are not ascertainable and, therefore computation provisions would be incapable of computing the capital gains. ? The charging section and the computation provisions together constitute an integrated fiscal code. In the present case computation provisions contained under Section 48 fail and, therefore, slump sale is not intended to fall within the purview of charging section. Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining; the chargeable profits and gains. All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the IT Act whereunder each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. A business undertaking as a going concern includes all rights, assets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as part of organisation including the potentiality of the organisation to grow. It contains a variety of elements both tangible and intangible. It remains in-substantial in form and nebulous in character. A going concern is a dynamic concept characterised by perennial change influenced by socio-economic ecology. A going concern is essentially a fluctuating living oranism possessing attributes of vitality, growth and evolution. Obviously, it would not be possible to conceptualise the cost of acquisition of such a going concern as well as date of acquisition thereof. If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of Section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern the slump sale consideration realised by the assessee would be outside the purview of capital gains under Section 45. -CIT v. B.C. Srinivasa Setty (1981) 21CTR (SC)138; (1981) 128 ITR 294(SC); Sunil Siddharthbhai v. CIT (1985) 156 ITR 509(SC) CIT v. K.P.V. Shaikh Mohammed Rowther and Co.(1995)Tax LR675(Mad) and Syndicate Bank Ltd. v. Addl. CIT (1985)155 ITR 681(Kar) relied on : CIT v. F.X. Periera and Sons (Travancore) (P)Ltd. (1990)184 ITR 461(Ker); and CIT v. Artex Mfg. Co. (1997)227 ITR 260(SC) distinguished.
The capital gain has been arrived at an amount of Rs. 1,02,97,689 as short-term capital gain on the ground that it relates to stock-in-trade. The computation is on the face of it factually and legally erroneous. Stock-in-trade as pointed out by the counsel, is not capital asset as per the provisions of Section 2(14) . In any case the net value of the undertaking worked out by the AO on the basis of the balance-sheet as on 31st December, 1992 cannot be construed as cost of acquisition as per the provisions of Section 48. Balance sheet of the business undertaking as on the date of transfer viz. 31st December, 1992 reflects the book value of tangible assets and tangible liabilities which include inter alia WDV of depreciable assets. Such computation of cost of acquisition would obviously be contrary to the computation provisions contained under Sections 48 and 49. Regarding date of acquisition, this essential fact is truly unascertainable and understandably no attempt has been made by AO to identify the same. The AO has sought to overcome the difficulty by treating the surplus realization as attributable to stock-in-trade and treating the same as short-term asset. The entire approach of the AOP is contrary to computation provisions contained under Ss.48 and 49 and amply demonstrate the inherently unworkable nature of these provisions in relation to slump sale. What has been sold is the entire business undertaking as a going concern. Cost of acquisition, cost of improvement as well as date of, acquisition of the going concern are not capable of determination. Hence computation provisions fail and no capital gain would be chargeable under Section 45. If the law fails to bring the subject within its letter, the Department cannot succeed with the argument that the subject falls within the spirit of the law.
Conclusion: Section 50B introduced for levy and computation of capital gains in the case of slump sale is effective from asst. yr. 2000-01 and would not apply to earlier assessment years slump sale of a going concern was beyond the purview of Section 45."
We are in entire agreement with the above remarks of the Tribunal. Even the Hon'ble Karnataka High Court in the case of Syndicate Bank (supra), relying upon the decision of the Apex Court in the case of Srinivasa Setty (supra) held as per the relevant portion of the head note as under-
"If there is a transfer of a whole concern and no part of the agreed price is indicated against different and definite items having regard to their valuation from the date of sale, the agreed price cannot be apportioned on capital assets in specie. What is sold in such a case is not individual items of property forming part of the aggregate, but the capital asset consisting of business of the whole concern or undertaking. What arises for consideration from the point of view of taxation is only the gain in respect of the transaction and nothing else."
114. For an undertaking, apart from the cost of acquisition, cost of improvement has also to be computed to meet the requirements of Section 48. For this, initially date of acquisition and dates of improvement have also to be determined. Further, the cost of the undertaking may not possibly be equated with the cost of the assets, depreciable or otherwise reflected on the Balance Sheet. There are so many other intangible assets like brand/name and goodwill and even patent rights, permits and licences which are not reflected on the Balance Sheet. The improvement of an undertaking cannot possibly be equated to the new assets acquired after the commencement or setting up of the business. It is arguable that the improvements are a result of revenue expenditure written off in each year. For example, the improvement of, undertaking may involve such intangible factors like the trained manpower, and their morale and building up of customer confidence. Such factors are the result of the expenditure incurred year after year for staff welfare and training, research and development, employment of customer service staff and expenditure on maintenance, the expenses on which are all written off year after year by debiting to the Profit & Loss Account. We are of the view that an undertaking and goodwill of a business are both capital assets having the same fluctuating features. In the context of the taxability to capital gains on the transfer of goodwill, Bombay High Court in the case of Evans Fraser & Co. Ltd.(137 ITR 493) observed, as per the relevant portion of the head-note, as under-
"Goodwill is a property or asset of a business. It is a capital asset. But merely because it is a capital asset, gains arising on its transfer would not automatically be liable to tax. Even if the moment of acquisition of goodwill and its cost of acquisition can be pinpointed, its cost of improvement cannot be precisely ascertained in terms of money. It differs from a tangible asset such as an immovable property or a share in a joint stock company which retains its shape and form but of which the market value fluctuates. The market value of goodwill also fluctuates but it fluctuates because of its fluid nature. Goodwill built up over the years can be destroyed in a matter of days. Merely because the goodwill of a business, which had been started by some one else, had been acquired and at the time of acquisition its value ascertained, it does not mean that some time or some years later the goodwill enjoyed by that business in the hands of the purchaser is qualitatively the same goodwill which had been enjoyed at the moment of sale by the vendor. The income chargeable to capital gains tax is to be computed by deducting from the full value of the consideration "the cost of acquisition of the capital asset and the cost of any improvement thereto". Since the cost of improvement of goodwill cannot be ascertained, gains arising on its transfer would not be liable to tax under Section 12B."
We are of the view that the above comments of the Hon'ble High Court apply with equal validity to the capital asset called 'undertaking'.
115. The net current assets also fluctuate day after day. We are of the view that to equate the cost of the undertaking to the cost of the assets reflected on the Balance Sheet may not be correct, as the cost of the undertaking includes the expenditure on its improvement which is written off year after year by debiting to the Profit & Loss Account. What are reflected on the Balance Sheet are assets which, by definition, are those expenditures or resources which yield services in future. So far as the cost of acquisition of an undertaking is concerned, it cannot be restricted to such assets alone, whether they are taken at original cost or at their written down value.
116. We have indicated hereinabove, a number of decisions in which the Courts have held that the computational provisions failed in respect of levy of capital gains tax on the transfer of capital assets like route permits, goodwill, import entitlements, tenancy rights, trees of spontaneous growth etc. An undertaking involves a number of such items. When some of these items are not amenable for the levy of capital gains tax, as per the court rulings, there is all the more reason to hold that an undertaking, which comprises so many such items, is also not amenable to levy of capital gains tax, as the requirements of computational provisions of Section 48 are not satisfied.
117. In this context, we may also draw support from the judgment of the Hon'ble Madras High Court in the case of CIT v. CVK Shaik Mohammed Rowther and Co., Madras(1995 Tax LR 675). As it is a short judgment, we deem it fit to reproduce it and it reads as under-
"The following questions are referred for the decision of this court-
"1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the sum of Rs. 4,75,000/- assessed under the head 'capital gains' in respect of the transfer of the asseasee's concern to the limited company?
"2. Whether on the facts and in the circumstances of the case, the appellate Tribunal was right in canceling the penalty of Rs. 4,75,000/- levied under Section 271(1)(c) of the Act for assessment year 1972-73?"
3. The Tribunal following the ratio laid down by this court in Commissioner of Income-tax v. K.Ratnam Nadar reported in (1969)71 ITR 433, found that the assessment to capital gains on the facts of the case was not justified and accordingly, deleted the addition of Rs. 4,75,000/-. It is now fairly stated that the judgment of this Court in (1969)71 ITR 433 (supra) was subsequently confirmed by the Supreme Court in 128 ITR 294 : 1981 Tax LR 641)(Commissioner of Income-tax Bangalore v. B.C. Srinivasa Setty. In view of the admitted position, we answer the first question referred to us in the affirmative and against the Revenue. Consequently, the second question is also answered against the Revenue. No costs.
Reference answered in affirmative."
118. It may be observed that the only concession made by the learned counsel for the. Revenue was that the judgment of the Hon'ble Madras High Court in the case of CIT v. K. Ratnam Nadar (71 ITR 433) was approved by the Supreme Court in Srinivasa Setty's case (128 ITR 294). It does not follow that the learned counsel for the Revenue conceded that no capital gains tax on the transfer of an undertaking can be levied because the computational provisions are not satisfied. That is an inference drawn by the Hon'ble Court itself on the analogy of the transfer of goodwill considered by the Supreme Court in the case of Srinivasa Setty's case (supra). So, we are of the view that this judgment cannot be ignored as a mere order, as pleaded by the learned Standing Counsel. A judgment does not lose its precedential validity simply because of its brevity.
119. In the light of the above, we are of the view that the computational provisions of Section 48 in, respect of the levy of tax under the head capital gains on the transfer of an undertaking fail. It is to make up for this lacuna that Section 50B has been introduced by Finance At, 1999 with effect from 1.4.2000. The said section reads as under-
"50B(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place;
Provided......
(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may, be shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of Section 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.
3.............
Explanation 1- For the purposes of this section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account;
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.
Explanation 2- For competing the net worth, the aggregated value of total assets shall be-
(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of Sub-clause (c) of Clause (6) of Section 43; and
(b) in the case of other assets, the book value of such assets. "
120. It may be observed that in terms of the above section, net worth of the undertaking on the date of transfer is deemed to be its cost of acquisition. The question now to be considered is whether this section has a retrospective or retroactive operation, as claimed by the learned Standing Counsel. The learned counsel for the assessee argued, as already mentioned, that language of this provision is as close as possible to Section 45, and so, it is a charging section. If the section is construed as a charging section, we are of the view that there would be some anomaly. High Courts like the Hon'ble Karnataka High Court in the case of Syndicate Bank (supra) and the Hon'ble Bombay High Court in the case of Premier Automobiles (supra) have held that tax under the head 'capital gains' is leviable, in principle, on the sale of a capital asset, being an undertaking, in terms of Section 45 of the Income-tax Act. The Hon'ble Bombay High Court have also held that Section 50B is only prospective in operation. It means, if Section 50B is also a section imposing charge on the transfer of an undertaking, by way of slump sale, it means that there are two charging sections viz. Section 45 and Section 50, imposing charge on the same income, which, to our mind, is not correct. Even before insertion of Section 50B, there was charge on the transfer of a capital asset, whether it is a slump sale or only a realization sale.
121. So, the next question is, if Section 50B is not a charging section, whether it is procedural section, which can have retro-active operation, as claimed by the learned Standing Counsel. The learned Standing counsel pleaded that R. 1BB of the Wealth-tax Rules, prescribing a mode of computing the value of the residential house for wealth-tax purposes, has been held by the apex Court in the case of CWT v. Shravan Kumar Swarup and Sons(210 ITR 886) was having retroactive operation, and similar construction is warranted to be placed on Section 50B, which according to him is also a procedural section. This plea does not seem to be acceptable. If Section 50B is held to be retro-active, similar construction needs to be placed upon the provisions of Section 55(2) (a), which provides for deeming the cost of acquisition of certain assets like goodwill, trade marks, brand-name, etc. of a business as 'nil' from 'Specified dates. Section 55 (2) (a) is a deeming provision, inasmuch as it deems the cost of acquisition of specified assets to be 'nil'. Similarly, Section 50B is also a deeming provision, as it deems the cost of acquisition of an undertaking as its 'net worth' which has to be calculated as per the stipulated mode. There does not seem to be any decided case where the provisions of Section 55(2)(a) are held to be retroactive. So, analogously, there seems to be no case for holding that Section 50B is retroactive.
122. Further, there is a basic difference between R. 1BB of the Wealth-tax Rules on the one hand and Section 50B and Section 55(2)(a) of the Income-tax Act under consideration, on the other. Rule 1BB has been considered by the Apex Court as a rule of evidence because it deems the market value of the residential house to be one arrived at on application of a particular method of valuation, which is also a recognised and accepted method. So, R. 1BB has been held to be procedural. In the context of Section 50B or Section 55(2)(a), such is not the position. It is not one of the recognised methods of valuation, which is stipulated to arrive at the cost of either the assets mentioned in Section 55(2)(a) or the undertakings referred to in Section 50b. So far as Section 50B is concerned, cost of acquisition cannot be equated to the 'net worth' of the undertaking as on the date of transfer in terms of any recognized modes of ascertainment of cost. So, Section 50B cannot, to our mind, be regarded as a procedural section. While it is not a charging section, it is also not a procedural section. It may have to be regarded only as a substantive provision. So, it has only prospective operation, as held in the cases referred to above.
123. In view of our above findings, the computational requirements of Section 48 are not satisfied, and so, no tax is leviable in terms of Section 45 on the transfer of the cement unit in question. In this context, we also refer to the judgment of the Apex Court in the case of CIT v. Ajax Products Ltd. (55 ITR 741), in which it was held that the subject is not to be taxed unless the charging provision clearly imposes the obligation. In the present case, the charging provision, i.e. Section 45, is clear, but thee computational provisions of Section 48 are not satisfied as held by the Apex Court in the case of Srinivasa Setty (supra). In this view of the matter, we accept the contentions of the assessee on this aspect, and hold that no tax is leviable on the transfer of the cement unit in this case, as the requirements of computational provisions of Section 48 are not satisfied. Assessee's grounds on this issue are accepted. 123A. In the view we have taken of the matter, we do not have to go into the question of correctness or otherwise of the directions given by the CIT (A) for ascertaining the cost of acquisition of the undertaking.
124. The next question is the issue raised in ground No. 9 above regarding the claim for depreciation without reducing the W.D.V of the assets of the block. We have reproduced the written submissions of the learned counsel for the assessee on this issue and we have also mentioned the various queries we raised with him about whether the computation of income has to be source/business-wise in terms of Section 70 and Section 32 of the I. T. Act as it stood for some years on the statute. Learned counsel for the assessee contended that the blocks are maintained only assessee-wise and not source/business-wise. He, however, admitted that separate books of accounts have been maintained for the fertilizer unit and the -cement unit even though the books of the cement unit were subsequently handed over to M/s. India Cements Ltd. He mentioned that, however, the block-wise details of the fertilizer unit and the cement unit are available with the assessee. We are of the view that computation of income has to be made source/business-wise in terms of Section 70 of the I.T. Act. Section 32 (2) as it stood for some period on the statute book which we have extracted hereinabove leads us to the same conclusion. Further, there are various sections in Chapter VI-A like Section 80-I, 80IA, 80IB, 80HHC etc. under which relief has to be granted to specified industrial undertakings. So it appears to us that the scheme of the Act is that the income has to be computed for each source or business or undertaking under the head 'business' and the loss of one source/business or undertaking can be set off against income under a different source under the same head. The fact that the return of income does not provide for such computation has no bearing on the issue. The format of the return cannot override the specific statutory provisions of Section 70.
125. Under normal circumstances it may make no difference if the income before the grant of depreciation from all the sources is first computed and, from such aggregated income, a deduction is granted for eligible depreciation of all the businesses. Such a procedure, even if it is normal practice and even if it has no particular consequence in normal circumstances, cannot be regarded as the correct procedure conforming to the requirements of law.
126. In the present case, the Assessing Officer presumably treated both the fertilizer and cement business as one unit and so, while computing the short-term capital gains under Section 50, he gave deduction for the W.D.V. of the blocks of both the fertilizer unit and of the cement unit. As we have held in the context of departmental appeals hereinabove that the lumpsum consideration is not allowable to the depreciable assets and so the provisions of Section 50 are not attracted in this case, it makes no difference whether both the units are treated as the same business or they are treated as separate units or businesses,
127. But for the grant of depreciation in subsequent years, the question as to whether the two units constitute one business or not may have some importance. If they are separate businesses or sources or undertakings, it means that all the blocks of the depreciable assets relating to the cement unit have ceased to exist on their transfer to India Cements Ltd. The pre-condition for the grant of depreciation under Section 32 is ownership of assets and their user in the business of the assessee. The learned counsel for the assessee has mentioned that the Tribunal gave a finding in the context of the claim of the assessee for deduction of interest on capital borrowed for setting up the cement unit that both the fertilizer and the cement unit constituted one business. But we find that this finding cannot hold good in view of the decision of the jurisdictional High Court in the assessee's own case reported in 261 ITR 408. In this decision the plea taken by the assessee that the manufacture of fertilizer and cement units are one and the same business because of unity of control and management between them (Placitum E. page 411) in the light of the finding of the Tribunal in the context of the claim for deduction of Section 36(1) (iii) , was rejected. It was also held that the business of manufacture of cement did not commence in that year. So it appears to us that the fertilizer and cement units are separate sources and as all the blocks of assets of cement unit are transferred to India Cements Ltd., they have ceased to exist and so the pre-condition of ownership and user in the year stipulated in Section 32 are not satisfied, and, consequently the assessee is not eligible for the grant of depreciation without: reducing the WDV of the blocks of the cement unit from the block of assets. Actually, there is no such reduction involved because the blocks have to be maintained separately for each source. When the blocks of the cement unit have ceased to exist, they are no longer eligible for grant of depreciation. Section 43(6)(c)(ii) comes into picture only when the block continues and does not seem to apply to a case like the present one, where the block has ceased to exist. Section 43 (6) (c) (i) (C) relating to slump sale does not apply for the assessment year in question.
128. Even without going into the question whether the depreciation has to be granted in respect of each unit/business or not, we are of the view that the assessee has to fail on this issue for a different reason. The learned counsel for the assessee has argued that the ownership and user in business under Section 32 are relevant only in the year in which the particular asset enters the block and in subsequent years they lose their relevance in view of the provisions of Section 43 (6) (c) which reads as under:
"43. In Sections 28 to 41 and in this section, unless the context otherwise requires -
(1) to (5)..................................................
(6) "written down value" means -
(a) and (b) .........
(c) In the case of any block of assets, -
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,-
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced -
(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1908; and
(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed, in respect of that block of assets in relation to then said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i) .
Explanation 1: .... "
As already mentioned, Section 43(6) (c) (i) (C) is not applicable for the assessment year in question. It is claimed that Section 43(6) (c) (ii) stipulates what is to be done when an asset falling within a block is sold. The monies received in respect of the asset will have to be reduced from the value of the block and depreciation has to be granted on the remaining W.D.V. of the block and it is immaterial whether the asset is owned by the assessee or used in the business of the assessee. Supposing the money receivable on the sale of the asset is less than its WDV, what can be reduced is only the money receivable on the sale and not its WDV. In view of the specific provision of Section 43(6)(c)(ii) stipulating as to how exactly depreciation has to be granted on the block on sale of an asset falling on the block, it is claimed that it is immaterial that the blocks of the cement unit have ceased to exist and they are no longer owned by the assessee or used by the assessee. This is on the assumption that the fertilizer and cement units are one business and as the assessing officer himself has treated it as one business as mentioned herein above, it is not correct for the Tribunal to treat both the units as separate. As already mentioned, in view of the decision of the A.P. High Court, we have to treat both the units as separate and not as one business, notwithstanding the fact that the Assessing Officer himself treated it as one business. Even otherwise, Section 43(6) (c) (ii) covers a case where money is receivable on the sale of an asset. It does not cover a situation where, as in the present case, money in lump sum is received and no part of it is allocable for the depreciable assets. Similarly, if the asset is gifted, no amount is receivable but the asset has ceased to exist and we are of the view that in such a situation also Section 43(6)(c)(ii) is not attracted. We may mention that, to be fair to him, the learned counsel for the assessee himself has given this example of gift even though he did not concede the ground explicitly. As in the case of the assessee the conditions under Section 43(6)(c)(ii) are not satisfied, we are of the view that even without going into the question of source-wise computation of income, the assessee is not eligible for the grant of depreciation without the reduction of WDV of block of assets of the cement unit from the value of the aggregate value of blocks of both the units. In other words, in a situation like that of the assessee, the precondition of ownership and user are required to be satisfied as the lumpsum received is not allocable to depreciable assets and, as such, the procedure stipulated in Section 43(6)(c)(ii) cannot be followed. So we reject the ground No. 9.
129. So far as the issues raised in ground No. 4 are concerned, we find that all such items like consultation fee, exchange value difference, value of the obsolete items and the difference in the valuation of Rs. 12,70,672/- relating to the current assets were taken into account by the assessee in the computation of the profit on the sale of the cement unit. In other words, they are items that were claimed as deductible in the computation of the income under the head 'capital gains'. As we have held that the income under the head 'capital gains' in respect of transfer of cement unit cannot be computed and no tax under the head capital gains is leviable in respect of transfer of the cement unit, we are of the view that the assessee cannot be allowed separate deduction for these amounts from the other taxable income. So this ground is also rejected.
130. As for Ground No. 7 relating to disallowance in respect of entertainment expenditure, consistent with the view taken by the Tribunal on this issue in assesses's own case for earlier years, we hold that 25% of the entertainment expenditure claimed should be treated as business expenditure relatable to the employees of the assessee-company. Consequently, disallowance should be restricted to the balance 75% only. To this extent, order of the CIT(A) is modified and assessee's ground is allowed.
131. In view of the above, the appeal is partly allowed.