Calcutta High Court
Kwality Ice Creams (India) Ltd vs Commissioner Of Income Tax on 21 January, 2011
Author: Kalyan Jyoti Sengupta
Bench: Kalyan Jyoti Sengupta
1
ITA 19 OF 2002
In The High Court At Calcutta
Special Jurisdiction (Income Tax)
Original Side
Present:
The Hon'ble Justice Kalyan Jyoti Sengupta
And
The Hon'ble Justice Kalidas Mukherjee
Kwality Ice Creams (India) Ltd.
Vs.
Commissioner of Income Tax, W.B.-IV, Calcutta
Judgment on: 21.1.2011.
K. J. Sengupta, J.:-
The above appeal has been admitted against the judgment and order dated
15th October, 2001 passed by the learned Income Tax Appellate Tribunal in
relation to assessment year of 1996-97. It was admitted by this Court by an
order dated 31st July 2002 on the following substantial question of law:-
(i) Whether the amount received by the appellant for transfer of its
entire marketing undertaking by way of slump sale in terms of the
agreement was a capital receipt to which the provisions of Section
50(1) of the Income Tax Act, 1961 had no application and no capital
gains could be assessed and the purported findings of the Tribunal
rejecting the said contention of the appellant have been arrived at by
2
ignoring the relevant materials and/or by taking into consideration
irrelevant and/or extraneous materials and/or is otherwise arbitrary,
unreasonable and perverse?
(ii) In the event of it being held that there was any liability to tax in
respect of transfer of the marketing undertaking, whether the
consideration of Rs. 3 crores received for transfer of the said
undertaking had to be apportioned between the physical depreciable
assets and other assets and only the amount referable to physical
depreciable assets less the written down value could be subjected to
tax as short term capital gains, the rest being capital receipt was not
chargeable to tax and the purported findings of the Tribunal rejecting
the said contentions of the appellant have been arrived at by ignoring
the relevant materials and/or by taking into consideration irrelevant
and/or extraneous materials and/or are otherwise arbitrary,
unreasonable and perverse?
(iii) Whether the entirety of Rs. 3 crore is exempt in law from the
incidence of capital gains tax by reason of the consideration thereof
being of a compendious and joint nature, as a whole not attracting
capital gains tax?
(iv) If the answer to the question (iii) is given against the assessee and in
favour of the Revenue, then whether the whole of Rs.3 crores and if
not, which part of it is liable to the incidence of capital gains tax and
at what rate?
3
The short fact for which the present appeal has been preferred and being
admitted for hearing are stated hereunder:-
The appellant above-named at all material times carried on the business of
manufacturing and marketing ice creams. The marketing undertaking of the
petitioner comprised of physical depreciable assets such as cabinets, vans,
pushcarts etc. as also the entire dealership network built over several years,
management and non-management employees with complete marketing data and
know-how and developed by the appellant over the years, vending, licenses, sales
contracts, relationship with franchisees.
On 2nd June, 1995 the appellant entered into a strategic alliance
agreement and several other agreements with Ms. Brooke Bond Lipton (India)
Limited (subsequently amalgamated with Hindustan Lever Limited) [hereinafter
referred to as (Brooke Bond)]. By the said agreements the appellant transferred
its ice cream business and agreed not to compete, and to function merely as a job
worker of Brooke Bond. In substance, the appellant by the said agreements was
merely to manufacture, and supply the ice creams agreed to Brooke Bond's
instructions and requirements as its employed contractor. The agreements had
the effect of depriving the appellant of its main business. The particulars of said
agreements are as under:-
(i) Assignment of self-generated trade marks for consideration of Rs.
3.25 crores.
4
(ii) Assignment of marketing undertaking as a going concern comprising
physical depreciable assets like cabinets, vans, pushcarts, etc. as
also the entire dealership network, management and non-
management employees, complete marketing data and know-how
vending licences, sales contracts, relationship with franchisees, etc.
for a sum amount of Rs. 3 crores.
(iii) Non-competition agreement wherefrom the appellant gave up its ice
cream business and agreed not to compete with Brooke Bond for a
consideration of Rs.4 crores.
(iv) Acquisition of franchisees' marketing assets by Brooke Bond for a
consideration of Rs. 15 crores. The strategic alliance agreement
further provided for termination of franchisees' operations for which
a fund of Rs.1 crore was to be created with equal contributions from
the petitioner and Brooke Bond. The fund was to be held by Brooke
Bond for settlement of all claims of the franchisees.
(v) Sourcing agreement under which Brooke Bond undertook to source
its ice cream requirements from the appellant. The said agreement
provided for interest free deposit of Rs. 3.5 crores by Brooke Bond.
Pursuant to the agreements as above Brooke Bond paid to the appellant an
aggregate sum of Rs.13.75 crores. The amount for acquisition of franchisees'
marketing assets was agreed to be settled directly between the franchisees and
5
the Brooke Bond. The appellant therefore paid its contribution of Rs. 50 lakhs
towards the fund for termination of franchisees' operation.
Thereafter, the differences and disputes arose between he appellant and
the Brooke Bond during the previous year ended on March 31, 1996 itself leading
to initiation of legal proceedings. The case of the appellant in the legal
proceedings was that the agreements were void as having been obtained by
fraud/misrepresentation and fraudulent concealment of facts and agreements be
so adjudged.
In the circumstances, the amounts received by the appellant under the
said agreements were shown in appellant's accounts for the year ended March
31, 1996 as advances. The appellant did not claim or assert any title to the
money received pursuant to the said agreement and treated the same as mere
advance which it offered to refund back to Brooke Bond.
A settlement was arrived at between the parties on April 27, 1998 which
led to termination of all the legal proceedings and the original agreements after
substantial modifications were given effect to. In terms of the settlement, the
sourcing agreement was cancelled against a consideration of Rs. 6.5 crores and
the deposit of Rs. 3.5 crores was refunded by the appellant. Furthermore the
appellant agreed to transfer its manufacturing undertaking for a consideration of
Rs. 10 crores.
The return of the appellant for the assessment year under consideration
was assessed by the Assessing Officer and after deciding all the contentions
raised by the appellant the A.O. held that the receipts were required to be
6
considered in the assessment year 1996-97 in terms of the said agreements,
since the parties had acted on the basis of the agreement and the disputes arose
for the first time in January 1996 after a lapse of seven months and concerned
non-fulfilment of the terms of the agreement. It was further held that the entire
sum of Rs. 3 crores received pursuant to the agreement for transfer of the
marketing undertaking attracted to the provisions of Section 50 (1) and was
liable to be taxed as a short term capital gain after deducting the written down
value of the marketing assets appearing in the books of account. The Assessing
Officer further sought to subject to tax the amount received for the trade marks
and in terms of the non-competition agreement.
The appellant being aggrieved by the said order of Assessing Officer carried
this matter in appeal to the First Appellate Authority, the Commissioner of
Income Tax (Appeals) and by an order dated 25th October, 1999 granted part
relief to the assessee. It appears from the said judgment and order that the
Appellate Authority rejected the appellant's contention as to assessability of the
amounts in question and held that the same had to be considered in the
assessment year 1996-97. He however held that the amounts relating to trade
marks and non-competition are capital receipts and are not liable for taxation.
He refused to accept the appellant's contention that the amount received for
marketing undertaking was also a capital receipt to which the provisions of
Section 50(1) had no application. He upheld the action of the Assessing Officer
in subjecting the entire sum of Rs. 3 crores less the written down value of the
depreciable assets to tax as short term capital gains and did not give any
7
direction for apportionment of the lump sum consideration of Rs. 3 crores
between the physical depreciable assets and other assets and for treatment of the
consideration referable to other assets as a capital receipt not liable for tax. The
Commissioner (Appeals) did not decide some of the grounds urged before him
including the ground that in any event the payment of Rs.50,00,000/- made by
the appellant to Brooke Bond for termination of franchisees' operation was
required to be deducted in computing the alleged income attributable to the
transfer of marketing undertaking.
Being aggrieved by the said order of the Commissioner of Income Tax
(Appeals) the appellant preferred further appeal before the Income Tax Appellate
Tribunal (hereinafter referred to as "the Tribunal"). The Revenue also preferred
an appeal before the Tribunal in so far as the relief having been granted to the
appellant by the Commissioner (Appeals). Both the said appeals were heard
together and decided by the impugned judgment and order.
By the impugned judgment learned Tribunal dismissed the Revenue's
appeal. The learned Tribunal by the said order granted part relief to the
appellant remanding the matter to the extent of the points which are not decided
by the Commissioner of Income Tax (Appeals), with a direction to look into the
same afresh and decide on merits after granting an opportunity of being heard.
Mr. Bajoria, learned Senior Counsel in support of the appeal submits that
the said marketing undertaking was transferred with composite assets both
tangible and intangible. The tangible assets are depreciable in nature. He
submits that intangible assets are distributorship agreements and arrangements
8
with retail outlets including user of assets not belonging to the assessee, benefits
of tenancies, advertisement contracts, refrigeration, storage and other facilities
etc.
He further submits that in the statute there is no provision for bifurcation
of the consolidated consideration arising out of the said agreement for sale of the
entire undertaking as a going concern and further its allocation to different
assets. Accordingly it is not permissible to do so.
He further submits while explaining legal proposition that charging and
computation provisions for levy of capital gains are integrated code, and in case
the computation provisions fail the charge also fails and no tax can be imposed.
In support of his legal contention he has sought reliance on the Supreme Court
decisions in case of PNB Finance Ltd. vs. CIT reported in (2008) 307 ITR 75 (SC),
CIT vs. B.C.Srinivasa Setty reported in (1981) 128 ITR 294 (SC).
He reminds us that though aforesaid decisions were not rendered in the
context of provisions of Section 50 of the said Act, the principle laid down therein
is equally applicable for assessing amount of tax in respect of depreciable assets
which were earlier assessable under Section 41(2) of the Act and now assessable
under Section 50 of the Act after introduction of the concept of block assets. He
has relied for the above proposition of law on the decision of the Supreme Court
in case of CIT vs. Electric Control Gear Manufacturing Co. reported in (1997) 227
ITR 278 (SC). He has also relied on the Division Bench judgment of this Court in
relation to the aforesaid legal principles, in the case of CIT vs. Carew Phipson Ltd.
9
reported in (2003) 260 ITR 668 and that of the Hon'ble Gujarat High Court in the
case of CIT vs. Garden Silk Weaving Factory reported in (2005) 279 ITR 136.
He submits further drawing our attention to the balance sheet for the
purpose of Section 50 of the Act, that the cost of depreciable assets is
ascertainable and while written down value could be from the assessment
records. Apart from the depreciable assets only manpower was transferred.
He submits that entire composite sale consideration could not be taken
into consideration and it should be apportioned. He further submits that Section
50 of the Act has no manner of application as far as intangible assets is
concerned. It has application for determination of capital gains in case of
depreciable assets and for such purpose it allows deduction of the written down
value of such depreciable assets as their costs from the sale consideration
received therefor.
He further contends that in the instant case it is not possible to determine
sale consideration in respect of the depreciable assets since the sale
consideration is a composite one for the entire marketing undertaking.
His further contention is that composite consideration cannot be allocated
item-wise unless it was so done by the parties and that principle would equally
be applicable whether it is a case under Section 41(2) or Section 50 of the Act.
The provisions of Section 41(2) are the predecessor provisions of Section 50 of the
present Act and the principles applicable for its interpretation would be equally
applicable to Section 50 of the Act.
10
He submits further that in any event there can be no justification or basis
at all for treating the entire consideration received in lump-sum for depreciable
assets and various other intangible assets as consideration for depreciable assets
only under Section 50 of the Act.
Learned counsel for the respondent while supporting the judgment and
order of the learned Tribunal submits that Section 50 is a special provision and it would have effect over other sections 48 and 55 of the Act. In this connection he has placed reliance on the decision of the Supreme Court in the case of Commonwealth Trust Ltd. vs. CIT (1997) 228 ITR 1 (SC), the decision of this Court in case of India Jute Co. Ltd vs. CIT reported in (1982) 136 ITR 597 (CAL), the decision of the Gujarat High Court in case of Mihir Textiles Ltd. vs. CIT (1997) 225 ITR 327 (GUJ) and the decision of Madras High Court in case of CIT v. Peirce Leslie and Co. Ltd. reported in (1997) 227 ITR 759 (MAD).
It is also submitted that apart from depreciable assets only manpower has also been transferred. The learned Tribunal therefore has correctly held that it was a composite consideration and it is absolutely the income of the nature of the capital gain and the same was received while transferring the entire marketing undertaking of the appellant to Brooke Bond.
We have heard the respective contention of the learned counsel and gone through the records. It appears that in order to decide this appeal on the admitted question of law we find only point involved is whether the consideration amount of Rs. 3 crores received under the deed of assignment dated 2nd June, 1995 from the BBL is exigible to tax or not and further whether it is partly 11 exigible to income tax or not under Section 50(1) of the aforesaid Act. Therefore, we need to set out the Section 50 then prevailing.
Special provision for computation of capital gains in case of depreciable assets:-
"Section 50 - Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:-
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely:-
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and 12
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets."
The very heading of the said section appears to be a special provision for computation of capital gains in case of depreciable assets which form part of a block of assets. Even the method of computation of such capital gains has been provided therein. Before we proceed further on fact in this matter on face of challenge to judgment on the ground of perversity we need to examine law laid down by the Supreme Court regarding applicability of the Section 50 in relation to the tax on capital gains.
13
In case of PNB Finance Ltd. vs. CIT reported in (2008) 307 ITR 75 (SC) at page 81 of the report while discussing the decision of the same Court in case of Artex Manufacturing Co. reported in (1997) 227 ITR 260 (SC) and also the Electric Control Gear Manufacturing reported in (1997) 227 ITR 278 (SC) has held that in principle the three tests are required to be applied as regards applicability of Section 45 of the said Act. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated code. Therefore, where the computation provisions cannot be applied (supplied by us), it is evident that such a case was not intended to fall within the charging section. The second test which needs to be is the test of allocation/attribution. This test applies to a slump transaction. The object behind this test is to find out whether the slump price is capable of being attributable to individual assets, which is also known as item-wise earmarking. The third test is that there is a conceptual difference between an undertaking and its components. Plant, machinery and dead stock are individual items of an undertaking. A business undertaking can consist of not only tangible items but also intangible items like, goodwill, manpower, tenancy rights and value of banking licence. However the cost of such items is not determinable.
In the case of Commissioner of Income Tax, Bangalore vs. B.C. Srinivasa Setty reported in (1981) 128 ITR 294 the Supreme Court held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it 14 is evident that such a case was not intended to fall within the charging section. In this case Supreme Court while dealing with the question as to whether goodwill, capital assets and transfer thereof and/or sale thereof constitute any capital gain for the purpose of Income tax. The Supreme Court held in that case that the goodwill is an intangible asset and it cannot be said to be a capital in the sense. It is held specifically that when goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is material factor in applying the computation provisions pertaining to capital gain, but in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence.
The Division Bench of this Court in case of Commissioner of Income Tax vs. Carew Phipson Ltd. (2003) 260 ITR 668 (Cal) relying on amongst others Artex Manufacturing Company (1997) 227 ITR 260 (SC) the court held that the provisions of section 41(2) of Income Tax Act, 1961 will not apply to a case where the entire business is sold. It was also held in substance that the provision is not attracted where transfer was made without indicating any item-wise consideration, inasmuch as when the entire concern is sold, the business is no more retained and carried on. Selling the whole concern or business, so long carried on is not the business. It is the giving up or closing down or cessation of the business. Therefore, the receipt therefrom cannot be an income from business. It can at best be a capital gain, if on materials item-wise fixation of price of assets can be attributed attracting the application of section 41(2). Even 15 if item-wise distribution is indicated, the question will be a little different if the whole of it is sold as a going concern. In such a case, section 41(2) cannot be attracted.
In the case of Commissioner of Income Tax v. Garden Silk Weaving Factory reported in (2005) 279 ITR 136 (GUJ) the Division Bench of the Gujarat High Court has found several conditions are to be fulfilled in order to attract section 41(2) of the Income Tax Act. Those conditions are as follows:-
(a) each and individual assets be it a building or plant or machinery, has to be owned by the assessee,
(b) Assets are used for the purpose of business of the assessee,
(c) The assets should have written down value and actual cost, and
(d) there should be excess which does not exceed the difference between he actual cost and the written down value which shall be chargeable to tax as income of the previous year in which monies payable for such building, machinery, plant or furniture became due.
In this matter basic point for consideration is whether section 50 of the said Act has any application in relation to transfer of its entire marketing undertaking or not. We think this section really also provides for computation method of capital gain which is chargeable basically under Section 45 of the Act. All the authorities below including learned Tribunal has considered the receipt of Rs. 3 crores for consideration of assignment of marketing undertaking together with strategic alliance agreement. We have also examined the two documents 16 and we feel that all the authorities below have rightly taken into consideration of both the documents to understand the nature of the receipt. Learned Tribunal as well as the Commissioner of Income Tax (Appeals) have found while reading both the documents, that transfer of marketing undertaking, consist of both tangible and intangible assets. It is true the officers and staff of the undertaking is not an asset for taxation sense but network of working system undoubtedly has significant utility and it has some value. The learned Tribunal as well as the Commissioner of Income Tax (Appeals) have rightly held Section 50 of the said Act has full application in this transfer. It is not specifically discussed and decided by both the authorities how the intangible assets could be brought within the purview of Section 50(1) of the said Act.
We are of the view that the Section 50 has application as far as the tangible assets are concerned and it does not have any application in case of intangible assets, for in case of tangible assets the depreciation can be worked out whereas in case of intangible assets there is no scope of depreciation. Precondition for pressing Section 50 for computation is that the capital asset must be an asset forming part of block asset in respect of which the depreciation has been allowed under this Act. The depreciation is allowed in the present Act in case of tangible assets. Hence, we find considerable force in the submission of Mr. Bajoria that both the authorities had erroneously clubbed the intangible assets with the tangible assets for holding the entire consideration amount being capital gain. At the same time, we are unable to accept the submission of Mr. Bajoria that the consideration received under the said deed of assignment of 17 marketing undertaking is not exigible to Income Tax because there is no specific provision for charging and computation of receipt from transfer of block assets, because segregation of tangible assets from entire consideration in this case is factually possible. The decision of Supreme Court relied on by Mr. Bajoria in case of Punjab National Bank Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) has got impact in this case in two directions. This decision has specifically said by necessary implication where item-wise earmarketing of the assets transferred, is possible charging provision viz. Section 45 read with Section 50 being computation provision can be pressed into operation. In that case it was found on fact that item-wise earmarketing was not possible. As such the entire compensation of Rs. 10.20 crores was not allocable item-wise. Indeed in case of Artex Manufacturing Company reported in (1997) 227 ITR 260 the Supreme Court has specifically held if item-wise allocation is possible then charging section can be brought into operation.
Accordingly, we are unable to accept the contention of Mr. Bajoria that in this case, Section 50 cannot be applied.
In view of the aforesaid discussion we hold that the assets and properties which are tangible in nature and for which depreciation was allowed should be apportioned from the other intangible assets and to that effect Section 45 read with Section 50 shall be made applicable.
We, therefore direct the Assessing Officer concerned to apportion and/or segregate the amount of consideration received by way of transfer of assets, out of total consideration of Rs. 3 crores to pick up the amount of consideration of 18 tangible assets for assessment of tax under the heading capital gain under Section 45 read with 50 of the said Act. Thus we allow the appeal partly.
The Assessing Officer shall complete this exercise within three months from the date of receipt of the copy of this order.
(Kalyan Jyoti Sengupta, J) I agree.
(Kalidas Mukherjee, J.) Stay of operation of the said order has been prayed for on behalf of the respondents. We allow such prayer for stay of operation of this order for a period of three weeks from date.
(Kalyan Jyoti Sengupta, J) (Kalidas Mukherjee, J.)