Income Tax Appellate Tribunal - Pune
Technomics vs Assistant Commissioner Of Income-Tax on 15 July, 2005
Equivalent citations: [2006]100ITD324(PUNE), (2006)103TTJ(PUNE)998
ORDER
K.G. Bansal, Accountant Member
1. These two cross appeals arise out of the order of CIT (A) -I, Pune, passed on 25-1-1999. The corresponding assessment order was made by the ACIT, Cir. 2(2), Pune (hereinafter called 'the AO'), on 22-3-1997. The assessee had taken nine grounds of appeal.
1.2 Ground Nos. 1, 2 and 3 are directed against the findings of the learned CIT (A) regarding taxation of a sum of Rs. 1,84,517 under Section 41(1) in respect of technical know-how. In this connection, it is, inter alia, mentioned that the provisions of Section 41(1) are not applicable. It is further mentioned that the impugned amount is also not taxable under the head "Capital gains" because there is cost of acquisition of this asset. Ground No. 4 is directed against the finding of the learned CIT (A) that the assessee is liable to be taxed in the status of Body of Individuals (BOI). Ground No. 5 is directed against the initiation of proceedings under Section 147. However, but this ground was not pressed in the course of hearing before us. In Ground Nos. 6 and 7, liability to pay interest under Sections 234A, 234B has been challenged. Ground Nos. 8 and 9 are residuary in nature. On 9-3-2005, the assessee filed a petition dated 17-12-2004, raising two more grounds of appeal. In Ground No. A, it was mentioned that, the learned CIT (A) failed to appreciate that the assessee had transferred its entire business by way of slump sale and, therefore, there was no sale price attributable to any asset separately. Thus, there was no question of taxing any capital gains on such transfer. Ground No. B is directed against taxation of technical know-how and it is mentioned that the learned CIT (A) ought to have held that there was no capital gains liable to be taxed in the hands of the assessee on sale of technical know-how. Ground Nos. 1, 2 and 3 of the appeal are similar to Ground No. B, now taken as additional ground. It is seen that the facts regarding the non-taxation of any amount as capital gains are available in the orders of the authorities below. Therefore, Ground No. A is admitted as it is bona fide legal ground, and Ground No. B is considered along with Ground Nos. 1 to 3 of the appeal.
1.3 The revenue has taken six grounds of appeal. The 1st ground of appeal is that the learned CIT (A) erred in treating the profit on transaction as long-term capital gains, thereby allowing the benefit of indexation of cost, while the amount of Rs. 32.10 lakhs ought to have been taxed as short-term capital gain. The 2nd ground of appeal is that the learned CIT (A) erred in allowing cost of technical know-how of Rs. 12,500 in financial year 1988-89and also other expenses of Rs. 1,84,517 incurred thereafter. In Ground No. 3, it has been stated that the learned CIT (A) erred in deleting short-term capital gains of Rs. 14,32,235 on the ground that there was no dissolution of the firm when, in fact, the assessee had ceased to exist and conduct the business on conversion of the firm to a limited company. Ground No. 4 is directed against the finding of the learned CIT (A) in treating the assessee as BOI without giving opportunity to the Assessing Officer of being heard. Therefore, it is prayed in Ground No. 5 that the order of the learned CIT (A) may be vacated and that of the Assessing Officer may be restored. Ground No. 6 is residuary in nature.
2.1 The facts of the case are fairly narrated in paragraph 2 of the appellate order. It was mentioned that the assessee was a partnership firm, consisting of 4 partners, and it was carrying on the business of manufacturing electric switches since the year 1983. The assessee had filed returns of income for and up to assessment year 1993-94. However, no return of income was filed for assessment year 1994-95 up to the date of expiry of the due date of the filing of return. While making assessment in the case of Innovative Technomakes Pvt. Ltd. (hereinafter called the 'company'), the Assessing Officer noted that the assets and liabilities of the assessee were taken over by the company. In its return for assessment year 1994-95, the company claimed deduction amounting to 1/6th of a sum of Rs. 32,10,000 said to have been spent on purchase of technical know-how from the assessee. The assessee had not filed any return of income and, therefore, there was no question of disclosing any income on sale of the technical know-how to the company. Accordingly, a notice was issued to the assessee, in response to which a return was filed declaring Nil income. A note was appended to the return of income stating, inter alia, that the business of the assessee was taken over by the company from 1-4-1993. It was further stated that on 31-3-1993, an asset of Rs. 32,10,000 was entered in the books of the assessee as technical know-how. On creation of the aforesaid asset in the hands of the assessee equivalent amount was credited to capital accounts of the partners in the ratio of their profit sharing. The business of the assessee was taken over by the company as a going concern. The partners of the firm became the promoters of the company. In lieu of the transfer of the business as a going concern, the company allotted shares to the partners of the firm and paid balance amount by way of cash.
2.2 In the course of assessment proceedings, it was represented before the Assessing Officer that the assessee had not spent any money for acquiring the asset of technical know-how. In this connection, statement of one of the partners was recorded, who inter alia deposed that no expenditure was incurred for acquiring the aforesaid asset. It was further deposed that the asset was nothing more than a few drawings and designs, which was entered into the assessee's books on a day prior to the taking over of the business as a going concern by the company. It was also deposed that no amount was entered in the books of account by way of goodwill. The assessee had been making profits from year to year. The quantification of the technical know-how was done by a chartered accountant, who also prepared the return of income and audited the accounts. On these facts, the Assessing Officer observed that no such asset as technical know-how was in existence. No product was patented or entered in, the books of account prior to 31 -3-1993. Therefore, he was of the view that this asset has been entered in the books only for the purpose of avoiding taxation on transfer of the business as a going concern to the company. He was also of the view that the asset had been created to camouflage the actual asset of goodwill and to avoid its taxation as capital gain. For coming to this conclusion, reliance was placed on the decision of Apex Court in the case of MacDowell and Company, which according to the Assessing Officer permitted him to go behind the seen and find out the real intent and purpose of the transaction. Therefore, he held that the impugned amount of Rs. 32,10,000 was assessable to tax as short-term capital gains, being the gains arising on account of transfer of goodwill. He also gave an alternative finding that if surplus amount was realized on account of transfer of business undertaking, then provisions of Section 45(4) will be applicable notwithstanding the fact that there was no formal dissolution of the assessee-firm. In this connection, an opportunity was given to the assessee to get various assets valued, which was not availed of by the assessee. Therefore, he got the assets valued from the Assistant Valuation Officer, Solapur. In this valuation report, the value of the land as on 31-3-1993 was shown at Rs. 16.59 lakhs. The value of plant and machinery was made by another registered valuer at Rs. 5,83,800. On the basis of these reports, he computed short-term capital gains at Rs. 14,32,235.
2.3 Before the learned CIT (A), it was represented that the assessee was carrying on the business of manufacture and sale of soft starters and allied products for and up to 31-3-1993. The business as a going concern, was transferred by way of slump sale to the company. The consideration was paid by allotment of shares to the partneRs. Cash was also paid as part of consideration. This company was incorporated on 26-3-1993. The reason for incorporating the company was to create an entity of independent status with limited liability, so that the assets and know-how could be preserved. In this connection, a reference was made to Clause 16 of the partnership deed of the assessee, dated 1-4-1992, which had recognized the need to bring on its balance sheet the asset of "know-how" because of vide recognition of the products of the assessee. The clause was intended to safeguard the asset and that no partner may use this asset of the firm. It was further represented that in the course of hearing before the Assessing Officer, the evidence regarding existence of the asset of technical know-how was produced by way of drawings and designs contained in two box files. It was also represented that the technical know-how was a self-generated asset. In view of the aforesaid facts, it was argued that since the impugned asset held, by the assessee, was a self-generating asset, the machinery section relating to computation of capital gains on transfer of this asset failed. It was further argued that the asset had been acquired by self-exertion over a period of time and, therefore, the cost of improvement was also not ascertainable. A reference was made to the finding of the Assessing Officer that the asset of goodwill was camouflaged as technical know-how. However, it was argued that in the case of a slum sale, no value can be put on any individual asset and, therefore, capital gains on transfer of the business of the assessee was not taxable as the cost of acquisition of the business or improvement thereof was not ascertainable. Further, references were also made to the provisions of Section 45(4), sought to be invoked by the Assessing Officer in his alternative finding. It was pointed out that it was not a case of distribution of assets on dissolution or otherwise of the firm and, therefore, the impugned provisions were not applicable. The learned CIT(A) required the assessee to give details of expenditure incurred in various years on drawings, designs, technical consultancy, etc. The details of expenditure of Rs. 1,84,517 were furnished, which have been tabulated in paragraph 2.3 of the appellate order. It is seen that the expenses were incurred in the previous years relevant to assessment years 1988-89 to 1992-93. The learned CIT (A), made some enquiry about these expenses, but the specific purpose for which expenditure was incurred was not furnished. On perusal of assessment records, he found that the assessee had purchased silicon strips from M/s. MAK Corporation, Bombay, in the previous year relevant to assessment year 1989-90. It was explained to him that this material used for manufacturing soft starter panel and alternator test rig. It was further explained that this material is used as magnetic insulation to give proper direction to the magnetic field. It was also explained that the main activity of the assessee involved development of its products, which substitute the imported products. In particular, it had innovated the product of soft starters, which were based on magnification of magnetic force through intricate compensating circuits. This product ensured smooth and jerk less acceleration and also reduced requirement of strength of starting current.
2.4 The learned CIT (A) considered the facts of the case and various submissions before him. He also considered paragraph 1(b) of the agreement regarding transfer of business between the assessee and the company, in which it was stated that the technical know-how appearing as an asset at the value of Rs. 32,10 lakhs represents the invention and design of "magnetic amplifier soft starters for induction motors". On the basis of this narration, the learned CIT (A) came to the conclusion that the assessee had developed technical know-how, for which it incurred the cost by making payments in respect of drawings, designs, technical fee etc. to various persons over a number of yeaRs. He also concluded that in each case, the assessee manufactured and sold the custom built starters, depending upon the requirement of the client. For each contract, the know-how was developed by incurring the expenditure of aforesaid kind.
2.5 The learned CIT (A) referred to the decision of Hon'ble Supreme Court in the case of CIT v. Artex mfg. Co. . It may be worthwhile to mention the facts of that case here. The assessee was a firm and it was carrying on the business of manufacturing silk cloth. Its business was transferred to a company as a going concern for a consideration of Rs. 11,50,400. In lieu thereof, 11504 fully paid-up shares of Rs. 100 each were allotted to the erstwhile partners of the assessee. The assessee filed a return of income showing "NIL" income and a note was appended in the return to the effect that since the partnership firm had been converted into a private limited company as a going concern, there was no income chargeable to tax under Section 41(2) or under Section 45. However, the ITO, brought to tax the different between sale price and WDV of plant, machinery and dead stock under the provisions of Section 41(2). The AAC held that surplus was taxable under the head "Capital gains" in the status of Association of Persons (AOP). The Tribunal held that the provisions of Section 41(2) were applicable, but the assessee was liable to be assessed as registered firm. On a reference, the High Court held that the provisions of Section 41(2) were not applicable and the assessee was not assessable as a registered firm. On appeal, the Hon'ble Supreme Court held that - (i) that the assessee could not be taxed as a registered firm and its status should be taken as BOI, (ii) provisions of Section 41(2) were applicable even in the case of a slump sale in a situation where it could be found that a particular price was attributed to a particular item, and (iii) the liability of the Section 41(2) was limited to the amount of excess of the actual cost over written down value. The learned CIT (A) was of the view that the facts of that case were identical to the facts of this case and, therefore, he directed that since a specific value had been attributed to the asset of technical know-how, which was acquired over a period of time in previous years relevant to assessment years 1988-89 to 1992-93, the surplus has to be taxed as long-term capital gains after allowing, indexation of cost and cost of improvement. These cost and cost of improvement were mentioned in a tabular form in paragraph 2.3 of the appellate order. However, he held that provisions of Section 45(4) were not applicable as there was no dissolution of the firm or the distribution of assets. He also held that the status of the assessee ought to be taken as BOI, as held by the Hon'ble Supreme Court in the case of Artex Mfg. Co. (supra).
3.1 Before us, the learned, counsel of the assessee pointed out that provisions of Section 54B were placed on the statute with effect from 1-4-2000 and this, is apre-54B section case. The facts of the case are that the assessee had been carrying on the business of manufacturing and selling of soft starteRs. Over a period of time, the firm acquired considerable know-how in this line of business, so much so that it had acquired monopoly position over this product in the market. Due to the expertise in the field and the monopoly, its turnover increased very significantly from about 1.02 crore in assessment year 1993-94 to above 15.1 crores in assessment year 2000-01. The percentage of profit to turnover also improved greatly in this period from 0.1 per cent to 14.94 per cent (page 59 of the paper book). Keeping in view of various factors, namely, preservation of technical know-how, facility of dealing with the banks and limiting the liability, it was decided to float a company and to transfer the business as a whole to the company. Pursuant to this decision, the asset of technical know-how was created in the books of the assessee on 31-3-1993, putting the value at Rs. 32.10 lakh. The amount was credited to the capital accounts of the partners in their profit sharing ratio. The business was transferred to the company as a whole on 1-4-1993. The consideration of transfer of business was paid partly by way of cash and partly by allotment of shares in the company.
3.2 Our attention was drawn towards the agreement between the firm and the company and it may be worthwhile to briefly state the important clauses which are relevant for our purpose. In the beginning of the agreement, it is, inter alia, mentioned that all the assets and liabilities have been agreed to be purchased with effect from 1-4-1993 and the vendors have got a tentative balance sheet, profit & loss account and supporting documents to arrive at basis for the transfer. In paragraph 1(a), it is mentioned that the assets of the firm have been valued at Rs. 83,66,700 as per Schedule "A" appended to the agreement, and the liabilities have also been valued at the same figure as per the schedule. On perusal of the list of assets, it will be seen that a value has been placed on each item. In particular, value of technical know-how has placed at Rs. 32.10 lakhs. Values of all items have also been narrated in the agreement.
3.3 The learned Counsel pointed out that on the given facts, the learned Assessing Officer taxed the consideration received on transfer of know-how as short-term capital gain, though he also got land and building etc. valued from the valueRs. The learned CIT (A), taxed the technical know-how under the head 'Capital gains' and allowed indexation of cost acquisition and cost of improvement. The learned Counsel relied on a number of decisions to canvass his case that the instant case was a case of slump sale, in which machinery for computation of capital gains fails and, therefore, nothing was taxable in the hands of the assessee either by way of capital gains under Section 45(1) or 45(4).
3.4 The learned Counsel relied on the decision of Hon'ble Supreme Court in the case of CIT v. Mugneeram Bangur & Co. . The facts of the case were that the assessee was carrying on the business of buying land, developing it and then selling it. In pursuance of an agreement, it sold the business as a going concern with its goodwill and stock-in-trade to a company promoted by the partners of the firm. The company undertook to discharge its debts and liabilities. The consideration was paid to the partner by way of allotment of shares to them or their nominees. The method of computation of consideration of Rs. 34,39,300 was mentioned in the schedule to the agreement. It consisted of 8 assets aggregating to Rs. 36,26,029. After deducting liabilities of Rs. 1,21,729, the consideration was arrived at Rs. 34,99,300. The Hon'ble Court held that when the concern was sold lock, stock and barrel, no price could be attributed to the cost of any particular asset. The fact that the price of an asset was mentioned in the schedule of the agreement did not lead to the conclusion that any particular value of slump price was necessarily attributable to that asset. What was given in the schedule was the cost price of the land, as it stood in the books of the vendor. There was no intent that the value of land shown in the schedule represented the fair market value of the land. Accordingly, it was held that no value could be ascribed to the land as the concern was sold as a whole.
3.5 The learned Counsel further relied on the decision of Hon'ble ITAT Ahemdabad "A" Bench in the case of Industrial Machinery Associates v. CIT [2002] 81 ITD 482, The facts of the case were that the assessee-firm sold the entire business as a going concern for consideration of Rs. 1.25 crore to a company. The sale consideration was paid by way of allotment of equity shares, non-cumulative redeemable preference shares and issue of promissory notes. The Assessing Officer took the excess of assets over liabilities as the net value of the firm, which amounted to Rs. 21,19,311. He attributed this to stock-in-trade. After deducting transfer expenses of Rs. 83,000, he computed the short-term capital gain at Rs. 1,02,97,689. The CIT (A) confirmed the finding that the computation was in accordance with Section 48. In regard to cost of acquisition of the undertaking, he observed that the same was available from balance sheet at Rs. 21,19,311. Since the capital gains were attributable to stock-in-trade, he held that the Assessing Officer had rightly taxed the amount as short-term capital gain. The Hon'ble Tribunal pointed out that there were three conditions for levy of capital gains under Section 45, namely (i) there should be a capital asset, (it) there should be transfer of such capital asset, and (iii) profits and gains must arise on such transfer. There was no dispute that first two ingredients were satisfied in this case. However, in regard to the third ingredient, it was pointed out that no part on the sale consideration was indicated against any item and the agreed consideration could not be apportioned among different assets. Further, Section 48 prescribes the mode of computation of capital gain. It involves determination of cost of acquisition and cost of improvement. In the case of sale as a going concern, these ingredients were not ascertainable. In that case, cost of acquisition, cost of improvement, and date of acquisition of the going concern were not capable of determination. Therefore, it was held that no capital gains could be levied in the case of a slump sale.
3.6 In regard to taxation on technical know-how, by the Assessing Officer, the learned Counsel of the assessee relied on the decision of Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty . The gist of the decision is that in case goodwill is self-generated, then, capital gains on transfer of goodwill cannot be brought to tax as cost of acquisition is not ascertainable.
3.7 The learned Counsel also relied on the decision of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT . The case was decided in the context of the facts of capital contribution by a partner to the firm in kind. The question was whether the transaction amounted to transfer liable to capital gains under Section 45. Insofar as we are concerned, the Hon'ble Court pointed out that in such a case credit to the capital account in the books of a firm is not a debt due by the firm to the partner. Therefore, such credit does not represent consideration in the commercial sense and it does not represent any real income or gain. Thus, in a case where there is a transfer of an asset, but if machinery section failed in computation of capital gains by attributing consideration, it was held that no computation can be made under Section 48. However, we find that the ratio of this case does not really apply to the facts of the case at hand.
3.8 The learned Counsel also relied on the decision of Hon'ble ITAT, Hyderabad "B" Bench in the case of Coromandel Fertilisers Ltd. v. Dy. CIT [2004] 90 ITD 344. The issue before the Hon'ble Tribunal was whether transfer of two units owned by it amounted to slump sale or itemized sale. The Hon'ble Tribunal held, looking to the facts of the case, that the cement unit was sold as a going concern. It was true that separate procedures were laid down for valuation of current assets, obsolete items, statutory dues and contingent liabilities but such procedure did not detract from the concept of the slump sale. Therefore, no short-term capital gains tax was leviable under Section 50 of on transfer of depreciable assets.
3.9 The learned Counsel also relied on the decision of Hon'ble Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl CIT . In this case, it was, inter alia, held that none of the provisions, pertaining to levy of capital gains tax suggests that such tax can be levied on an asset, the cost of which cannot be conceived. The levy also contemplates the date of acquisition apart from cost of acquisition. If the cost of acquisition or the date of acquisition cannot be determined, then the transfer of such asset cannot be made a subject-matter of tax under the head 'Capital gains'.
3.10 The learned Counsel also relied on the decision of Hon'ble Bombay High Court (Nagpur Bench) in the case of CIT v. Narkeshari Prakashan Ltd. . The facts were that the assessee had been carrying on the business of a publishing house having two branches at two places. These branches were sold with assets and liabilities to two different co-operative societies. The ITO ascertained certain amount as profit arising on sale of two branches under Section 41(2). The learned CIT (A) confirmed the decision. The Tribunal deleted the assessment on the ground that each branch was a going concern and, therefore, provisions of Section 41(2) were not attracted. The Hon'ble High Court, inter alia, pointed out that even one branch of a publishing house could have goodwill, which depended upon a number of factoRs. It was further pointed out that what was sold in that case was the entire branch as a whole, lock, stock and barrel. Many items were there, which could not be independently purchased. Since an inventory was made for the purpose of identification and the value was indicated against each item, that did not change the character of overall transaction. Therefore, the Hon'ble Court upheld the decision of the Tribunal and held that no question of law arose for furnishing their opinion.
3.11 The learned Counsel also referred to the decision of Artex Mfg. Co. 's case (supra), we have seen that in the agreement of sale, there was no reference to value of plant, machinery or dead stock. On the basis of information furnished by the assessee, the ITO came to the conclusion that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of plant, machinery and dead stock as assessed by the valuer at Rs. 15,86,296. Therefore, provisions of Section 41(2) were applicable. The case of the learned Counsel was that in that case, certain assets were not sold under the agreement and that is how the question of applicability of Section 41(2) came into existence with regard to those assets. However, it was his case that the facts of instant case are entirely different from the facts of that case.
3.12 The learned Counsel also relied on the decision of Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. v. ITO . In that case, on perusal of documents, the Hon'ble Court found that the intention of the parties was to transfer Kalyani Unit by way of lump sum sale for a consideration of Rs. 247 crores. It was not their intention to make a sale of itemized assets. The Hon'ble Court pointed out that mere execution of conveyance deed for the immovable property, by itself would not constitute a sale of an individual asset. The buyer did not intend to purchase individual items, and apart from land, building, machinery or plant, the assessee had transferred many other assets, namely, licenses quota, user of brand name "premier", workers and other intangible assets. After the sale on 29-10-1994, the business continued as it is by manufacturing 118 NE cars, and Peugot caRs. Thus, the entire arrangement was intended to make an investment at Rs. 350 crores in joint venture by the buyer, a French company. In view of these facts, the Hon'ble Court came to the conclusion that the book profit of Rs. 81.31 crores arose to the assessee on a slump sale and that the Assessing Officer would have to compute the income liable to capital gains under the provisions of Sections 45 to 50. It was further argued before the Hon'ble Court that while computing capital gains, the Assessing Officer had not given deduction for cost relating to assets other than land, building , machinery or plant and the paint shop. This had adversely effected the assessee. It was argued that cost of assets, namely, intellectual property, technical information, etc. will also have to be deducted whether or not the case is to be taken as one of slump sale or sale of individual items and, therefore, in any event, the matter will have to be remanded back to the Assessing Officer. The learned Counsel placed great emphasis on this part of the judgment and it was pointed out that in that case the matter was remanded to the Assessing Officer because the issue of cost was not dealt with comprehensively by the Assessing Officer and it was also the case of the assessee that in any case, the matter has to go to Assessing Officer for fresh computation. However, it was argued that in case of slump sale, it is inconceivable to conceptualise the cost, cost of improvement, the date of acquisition and the dates of improvement. Therefore, it was further argued that no tax can be levied in such a case of slump sale.
3.13 The learned Counsel also relied on the decision of Hon'ble ITAT, Bangalore "C" Bench in the case of Dy. CIT v. Mahalasa Gases Chemicals (P.) Ltd. [2004] 84 TTJ 992. In this case, it was, inter alia, held that since the old business had been transferred as a going concern lock, stock and barrel, therefore, it was a case of slump sale. The fact that land, car and certain debtors were retained, would not make any difference in coming to the aforesaid conclusion. In such a case, it will not be permissible to split the sale consideration, over various assets and fasten the liability to capital gains accordingly. The case, which the learned Counsel tried to make on the basis of this decision, was that what is to be seen is whether the business has been transferred as a whole and if so, the fact that certain assets are retained will not make any difference to the conclusion. In this case also, the Assessing Officer was directed to consider the levy of capital gains on the basis that the sale was a slump sale and for this purpose, he was directed to follow the directions contained in various judgments, especially the one rendered by jurisdictional High Court at Bangalore.
3.14 The learned Counsel also drew our attention to the fact that in the case of transferee company, the learned CIT (A) disallowed deduction under Section 35AB, and an appeal is pending against that order, 3.15 The learned Counsel also took an alternate plea that in case it is held that the instant case is one of itemized sale, then also, nothing can be brought to tax as capital gains on transfer of technical know-how. In this connection, it was pointed out that the drawings and designs purchased by the assessee in various years and listed on page 6 of the order of the CIT (A) were not meant for design or production of soft starteRs. The instance of one purchase, inquired into by the learned CIT (A) was of goods and not technical know-how. The technical know-how was not purchased. Rather it was acquired in-house over a period of time. Therefore, its cost was 'Nil'. In this connection, he relied on the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Shetty (supra), wherein it was held that in case no cost can be attributed to an asset, then, the machinery section regarding computation of capital gains fails and, therefore, capital gains cannot be brought to tax.
3.16 A further alternative ground was taken that transfer of technical know-how and simultaneous stoppage of business by the assessee clearly implied that the impugned transfer constituted a non-compete agreement on the part of the assessee regarding non-utilization of the technical know-how, 3.17 The learned Counsel also stated that if the additional Grounds A and B are adjudicated, then he will not press for other grounds, except the ground regarding status, taken with the appeal memo.
3.18 As against the aforesaid, the learned DR relied on the order of the authorities below. In particular, she pointed out that the credit in respect of technical know-how was made just a day prior to the transfer of the assets to the company. According to her, it was a clear case of tax avoidance and, therefore, it was strongly argued that the orders of the authorities below may be upheld.
4. Before proceeding with the determination of the issues at hand, we may summarise the important ratios of the cases discussed in various sub-paragraphs of paragraph 3 (supra):
(i) If the business is transferred as a whole, lock, stock and barrel, it will be a case of slump sale. In a lock, stock and barrel transfer, if values of the assets are mentioned in the schedule to the agreement, it will not detract from the conclusion of slump sale, particularly when the values are not the fair market values [paragraph 3.3].
(ii) In a case of transfer as a going concern, no value can be attributed to any particular asset [paragraph 3.4].
(iii) If cost of acquisition is nil or it cannot be conceived, capital-gains cannot be taxed unless otherwise provided in the statute [Emphasis supplied; paragraphs 3.5, 3.8]
(iv) If a procedure is followed for valuation of current assets etc. in a lock, stock and barrel sale, it may still be a case of slump sale [paragraph 3.7].
(v) In a lock, stock and barrel sale situation, there are many items which cannot be independently purchased and, thus, the sale will have the character of slump sale [paragraph 3.9].
(vi) If certain assets are independently sold on the basis of their market values, then, such sale will invite capital gains tax notwithstanding the fact that other assets were also transferred lock, stock and barrel [paragraph 3.10],
(vii) Extension of the parties as to what they intended to sell or buy is a relevant consideration [paragraph 3.11], and
(viii) Slump sale may lead to levy of capital gains tax on that basis [paragraphs 3.11 and 3.12].
5.1. We have considered the facts of the case and rival submissions. We have also perused the agreement between the assessee and the transferee company dated 31-3-1993. We have already pointed out that as per this agreement, the assessee had got a tentative balance sheet and profit & loss account made as on 31-3-1993. As per paragraph 1(d), the parties agreed that the entire business of the assessee, carried on till now by the partnership firm, shall stand transferred to the company with effect from 1-4-1993 along with the assets, liabilities, rights and obligations of the business. On the basis of the tentative balance sheet, annexed as Schedule A to the agreement, which comprised of about Rs. 83.66 lakhs and liabilities of equivalent amount, which included the capital of partneRs. According to the sub-para (b), the fixed amount included technical know-how of the value of Rs. 32.10 lakhs regarding invention and design of magnetic amplifier based starters for induction motors, which was stated to have been developed by the partners of the firm. This know-how was transferred on an exclusive basis along with other assets, and the vendors, jointly, individually or with any other person promised not to carry out the business of manufacture or dealing in the aforesaid starteRs. Sub-paragraphs (d), (e) and (f) list out various other assets and their values in the tentative balance sheet. Along with these assets, all pending contracts, trade marks, trade name, patent rights and license, etc., telephone and telex connections etc. were also transferred to the company. As per paragraph 2 of the agreement, fixed assets were transferred on WDV and other current assets were transferred on the book value. As mentioned earlier, the consideration for sale was paid partly by way of cash and partly by way of allotment of shares. We have also perused Schedule A attached with this agreement, which furnishes values of various assets and liabilities on individual basis. The technical know-how is shown at Rs. 32.10 lakhs.
5.2 On superficial perusal of the annexure and agreement, one may tend to come to the conclusion that various assets were sold at book value and the technical know-how, or whatever else this asset may represent was transferred at a value of Rs. 32.10 lakhs. However, it is very clear from reading of the agreement that what was intended to be transferred was the business as a going concern. The agreement clearly states that not only assets mentioned in the schedule are transferred but trade mark, trade name, pending contracts, patent and license etc. were also transferred along with other assets, which existed on the balance sheet and the technical know-how which was entered in the balance sheet. This leads to an inescapable conclusion that it was the intention of the parties to transfer the business as a whole. In this connection, the decision of the jurisdictional High Court in the case of Premier Automobiles Ltd. (supra) is very clear. In that case, it was found, as a matter of fact, that parties intended to sell or buy respectively the business as a whole along with such assets as trade marks, trade name, employees etc. The buyer continued to do the same business as the seller was doing earlier. The individual items, namely, land, building and machinery were transferred, but the assessee had transferred the business advantages like license quota and brand name "premier" along with the workers and other intangibles. To our mind, the facts of that case are identical to the facts of the instant case. Not only the assets borne on the balance sheet or taken on the balance sheet were transferred, but other business advantages like pending orders, trade name etc. were also transferred. Therefore, we are of the view that it is a case of slump sale and not one of sale of individual items. In such a scenario, the consequential finding is that the learned CIT (A) could not have taxed individual item "technical know-how" under the head 'capital gains'. In this connection, we may again refer to the decision of Hon'ble Supreme Court in the case of Artex Manufacturing Company (supra). In that case, the learned Counsel appearing for the assessee had submitted that the value of machinery, plant and dead stock was not mentioned in the agreement and the agreement did not indicate the value attributable to the said items. The Hon'ble Court observed that it is no doubt true that in the agreement there was no reference to the value of the aforesaid assets but on the basis of information that was furnished by the assessee before the ITO, it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of plant, machinery and dead stock as assessed by the valuer at Rs. 15,87,296 . Thus, it was not a case in which it could not be said that the price attributed to the items transferred was not indicated and hence, Section 41(2) could not be applied. Accordingly, their Lordships were unable to agree with the view of High Court that the provisions of Section 41(2) are not applicable at all. On reading these facts and observations, it will be clear that the assessee had got certain assets valued for the purpose of transfer and on the basis of the valuation report, the assets were transferred to the transferee. In such a situation, the Hon'ble Supreme Court was of the view that insofar as these assets are concerned, they were transferred on itemized basis and provisions of Section 41(2) will be applicable. The facts of our case are different as no valuation was done in respect of any depreciable or other asset. The asset of know-how was entered in the balance sheet on the last date of the previous year on the basis of the value determined by the Chartered Accountant of the assessee, but it was also transferred along with other assets. Thus, the overall intent and purpose was to transfer all the assets of the business including assets not borne on the balance sheet, in a lump sum way for a consideration. Therefore, we are of the view that the instant case is one of slump sale.
5.3 In the case of Premier Automobile (supra), the Hon'ble Court found that the transaction was not taxed in the manner it ought to have been taxed. Therefore, they remanded the case to the Assessing Officer for fresh consideration of the matter. The case of the learned Counsel was that in a slump sale, it is inconceivable to determine the date of acquisition, the date of improvement, the cost of acquisition and cost of improvement. Therefore, relying on the decision of B.C. Srinivasa Shetty's case (supra), it was argued that capital gains are not liable to be taxed. We are of the view that the facts of this case are at par with the facts of the cases of Premier Automobiles (supra) and Mahalasa (supra). Neither the Assessing Officer nor the CIT (A) has considered the matter regarding computation of capital gains on slump sale. Therefore, following the decision of jurisdictional High Court, which is binding on us, the matter regarding computation of capital gains on the basis that the instant case is one of slump sale is remanded to the Assessing Officer. He is directed to give adequate opportunity of being heard to the assessee in this matter and pass an appropriate order.
5.4 Thus, Ground A of the additional grounds of appeal is partly allowed as indicated above.
5.5 We are also of the view that it is not a case of distribution of assets on dissolution or otherwise of the firm. The firm ceased to carry on the business firm from 1-4-1993. There was no distribution of assets to partners on 31-3-1993. The business was transformed as a whole. In lieu of that, partners were paid cash by the company and shares were also allotted to them. The cases of slump sale are so common, and now statutorily recognized, that it will not be feasible to give a finding that the instant case is on of excessive tax planning bordering on tax evasion. Thus, provisions of Section 45(4) are not applicable.
5.6 As it is a case of slump sale, there is no need to decide Ground B of additional grounds of appeal.
5.7 The other grounds of appeal, namely, Ground Nos. 1 to 9, except Ground No. 4, raised in the original appeal memo, were not pressed by the learned Counsel. Therefore, for statistical purpose, these grounds are treated as dismissed. Ground No. 4 is decided in the appeal of the revenue.
5.8 The result of the aforesaid discussion is that appeal of the assessee is treated as partly allowed.
6.1 Various grounds of appeal of the revenue, namely, Ground Nos. 1 to 3, relate to computation of capital gains taking the sale to be sale of separate items. We have already held that the instant case is one of slump sale. Therefore, these grounds of appeal are dismissed.
6.2 The ground of appeal regarding the status of the assessee is restored to the file of the Assessing Officer as the finding of the learned CIT (A), was based on the ratio of the case of Artex Mfg. Co. (supra). In view of our finding that the facts of this case are different, therefore, this part of the order requires determination afresh after hearing of the assessee. While doing so, he shall consider the decision of Hon'ble Supreme Court in the case of Artex Mfg. Co. (supra).
6.3 The result of the aforesaid discussion is that the appeal of the revenue is treated as dismissed.