Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs Gokul Gas (P.) Ltd. on 29 April, 1988
Equivalent citations: [1989]28ITD60(MUM)
ORDER
R.L. Sangani, Judicial Member
1. This appeal by the department and the cross-objection by the assessee relate to the assessment year 1980-81.
2. The assessee is a Private. Limited Company. The assessment year is 1980-81. The accounting year ended on 31-3-1980.
3. During the year under appeal the assessee carried on the business of bottling and marketing of L.P. Gas. The assessee had other business activities also.
4. The said business of bottling and marketing of L.P. Gas was originally carried on by a firm in the name of Kosangas Company. The firm was dissolved and the assessee-company took over the said business as proprietor.
5. With effect from 26-5-3979, the said business of bottling and marketing of L.P. Gas was nationalised by the Act of Parliament. That Act is known as Kosangas Company (Acquisition of Undertaking) Act, 1979 (Act No. 28 of 1979).
6. Section 3(1) of the said Act laid down that on the appointed day, the right, title and interest of Gokul Gas Pvt. Ltd. (assessee-company) in relation to the undertaking (Kosangas Company) shall stand transferred to and vest in the Central Government free from all encumbrances. Sub-section (1) of Section 4 lays down that all liabilities other than the liabilities specified in Subsection (2) of the assessee-company in relation to the period prior to the appointed day shall be enforceable against the assessee.
7. The liabilities which are enumerated in Sub-section (2) of Section 4 have been taken over by the Central Government and were liable to be discharged by the Central Government. These liabilities are (i) deposits collected from the customers for the use of gas cylinders and pressure regulators and from agents, (ii) provision for gratuity to officers and employees employed in or in connection with the said undertaking, and (iii) current liabilities relating to sundry creditors and accrued expenses of the undertaking.
8. Section 8 of the Act lays down that for the transfer to and vesting in, the Central Government under Section 3 of the said undertaking, the Central Government shall pay the assessee an amount of rupee tea thousand.
9. The Income-tax Officer observed that from the depreciation statement of assessment year 1979-80, the written down value of the assets representing the L,P, Gas business worked out to Rs. 41,93,777. He made the following- computation of the value of total assets and liabilities taken over by the Central Government:
Liabilities as per assessee's statement Rs. 5,79,14,487 Less: Assets
1. W.D.V. of the fixed assets as per I.T. records Rs. 41,93,777
2. Current assets loans & advances as per assessee's statement filed Rs. 1.36,19,735 Rs. 1,78,13,512 Rs. 4,01,00,975
10. He then observed that as a result of acquisition by the Central Government, there took place "cessation" of liabilities to the extent of Rs. 5,79,14,487. This "Cessation" according to him, took place on surrendering the assets by the assessee to the tune of Rs. 1,78,13,512. The "net cessation" of liabilities, according to him thus worked out to Rs. 4,01,00,975. This amount according to him, represented deemed profit under Section 41(1) of the Income-tax Act, 1961. This amount along with Rs. 10,000 receivable by the assessee as compensation under Section 8 of the Act No. 28 of 1979 was, according to him, liable to be added as business income. He, accordingly, made addition of Rs. 4,01,00,975 in total income.
11. The above addition was challenged by the assessee in the appeal filed before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that no deduction had been allowed in the earlier years and as such provisions of Section 41(1) were not attracted. He then considered provisions of Section 41(2) and held that this was a case of acquisition of the concern as a whole for slump price and as such provisions of Section 41(2) were not attracted. He deleted the addition of Rs. 4,01,00,975.
12. The department has now come in appeal before us. Following two grounds have been raised in the memo of appeal:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that provisions of Section 41(1) cannot be applied and on that ground deleting an addition of Rs. 4,01,00,975.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that computation under Section 41(2) cannot also be made in respect of the amount of Rs. 4,01,00,975.
13. We have heard the parties. We shall first consider the question of applicability of Sub-section (1) of Section 41 of the Act The first condition for applicability of said sub-section is that deduction or allowance should have been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee.
14. Regarding the amount of Rs. 5,79,14,487 mentioned in the computation of the Income-tax Officer it was not disputed before us that the said liability represents deposits obtained by the assessee from customers, agents and distributors (Rs. 5,28,47,771) and current liabilities (Rs. 50,68,951). There was no question of grant of any deduction or allowance in any previous year in the computation of profits and gains as far as this amount representing deposits from customers, agents and distributors was concerned. As far as current liabilities are concerned, we find the same thing. The Income-tax Officer has nowhere mentioned that any deduction or allowance had been allowed in respect of these liabilities in any previous year. We specifically asked Shri Jetley, the learned counsel who appeared for the department to show us to whether any deduction or allowance had been allowed in respect of the above amounts appearing as liabilities in the balance sheet, in any previous year. The learned counsel was unable to point out any such deduction or allowance in any previous year. Thus, it is an admitted position that no deduction or allowance had been made in respect of the above amounts or any part thereof in any previous year. Consequently, the first condition of applicability of Sub-section (1) of Section 41 was not satisfied.
15. The second condition of applicability of Sub-section (1) of Section 41 is that subsequently during any year the assessee should have obtained some benefit in respect of trading liability (regarding which allowance or deduction had been allowed in prior year) by way of remission or cessation thereof. In the present case the liabilities in question do not stand remitted or have not ceased. The Central Government has to discharge the said liabilities. The liabilities subsisted. They were to be discharged by Central Government instead of the assessee. The second condition is thus, also not satisfied. For either of the two reasons provisions of Section 41(1) were not attracted. This position is beyond any shadow of doubt.
16. The learned Commissioner of Income-tax (Appeals) has in paragraph 5 of the order given one more reason in support of the view that provisions of Section 41(1) are not attracted. The said reason given is that no amount has been actually received by the assessee in the relevant year whereas the words "has obtained whether in cash or in any other manner whatsoever" in Section 41(1) imply actual receipt and not mere accrual of right. He has relied on the decision of the Gujarat High Court in CIT v. Rashmi Trading Co. [1976] 103 1TR 312. We do not express any opinion on this aspect. We rest our decision on the facts that in respect of Rs. 5,79,14,487 no deduction or allowance had ever been allowed in any previous year and that the liabilities have not ceased or have not been remitted.
17. The Income-tax Officer has not relied on the provisions of Subsection (2) of sectional of the Act. This is because there was no material to indicate that any particular asset had fetched any particular price. However, the Commissioner of Income-tax (Appeals) has considered those provisions and has held that even under those provisions no addition could have been made. Shri Jetley the learned counsel for the department has relied on the said provisions. We, therefore, proceed to consider them in order to determine whether any addition could have been made thereunder.
18. Sub-section (2) of Section 41, so far relevant, lays down that where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business is sold (which expression includes compulsory acquisition by the Government) and the moneys payable in respect thereof together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the concerned previous year.
19. In this connection, we have examined the provisions of Act No. 28 of 1979 and materials on record. We find that this is a case of compulsory acquisition of business of the assessee relating to bottling and marketing of L.P. Gas for slump price. In the said Act no price is fixed for any individual item of building, plant, machinery or furniture. Before the business was taken over there was no attempt to make valuation in respect of each item of asset which vested in the Central Government. Compensation of Rs. 10,000 provided in Section 8 represents a symbolic amount for taking over the said business as a going concern. There was no sale of individual item of building, plant machinery or furniture, Shri Jetley submitted that certain buildings, freehold land and filling plant machinery had not vested out of the assets listed at page 41 of Paper Book and as such, it was nob slump sale. Shri Dastur on behalf of the assessee submitted that Hindustan Petroleum Corporation Limited, who took possession of assets on behalf of Central Government by virtue of relevant Notification was claiming that these assets had also vested in the Central Government under the Act and the dispute was now pending in Delhi High Court in Writ Petition filed by the assessee. It is not necessary for us to record any opinion whether those items of assets had also vested in the Central Government along with other assets under the provisions of the Act. Even if they have not vested, the sale as a result of compulsory acquisition in the present case would be regarded as slump sale. This is because the business of bottling and marketing of L.P. Gas carried on by the assessee has been taken over as an integrated unit and no separate price for any item of asset has been specifically agreed upon. This is a case of sale of business as a whole for slump price at book value.
20. It is now well settled that business fis property and undertaking of a business is a capital asset of the owner of the undertaking. When an undertaking as a whole is transferred as a going concern, as in the present case, together with all its assets, what is sold is not the individual itemised property but what is sold is the capital asset consisting of the business of the undertaking and any tax that can be attracted to such transaction for a slump price at book value would be merely capital gains tax and nothing else. If the capital asset, vis., the business of the undertaking, has a greater value than its original cost of acquisition, then, capital gains may be attracted in the case of the sale of an undertaking and that is precisely what has been indicated in Doughty v. Commissioner of Taxes [1927] AC 327 (PC), CIT v. Mugneeram Bangur & Co. [1965] 57 ITR 299 (SC) and Killick Nixon & Co. v. CIT [1963] 49 ITR 244 (Bom.).
21. For the reasons given above, there cannot be balancing charge under Section 41(2) of the Act when the entire business stands transferred for slump price. This is because no individual item of building, plant, machinery or furniture is transferred for a particular price. No part of slump price could be attributed to any individual item of building, plant, machinery or furniture. In fact the Income-tax Officer has not even attempted to attribute any amount towards price of any individual item of building, plant, machinery or furniture and indeed any such attempt would not have been worth while. This is because before the undertaking was taken over, the assets were not valued individually and no attempt had been made to fix even notional price for individual item of assets. The assets and liabilities were taken over at book value by legislative enactment. Consequently, no balancing charge under Section 41(2) could be levied. We are supported in this view of the matter by decisions already referred to and also the decision of the Gujarat High Court in Artex Mfg. Co. v. CIT [1981] 131 ITR 559 in which all the relevant decisions of the Supreme Court have been considered.
22. The learned counsel for the department has relied on the decision of the Bombay High Court in Akbar Mfg. & Press Co. Ltd. v. CIT [1957] 31 ITR 99. The following observations are made in said decision:
The second point urged by Mr. Palkhivala is that under the relevant proviso to Section 10(2)(vii), if the undertaking is sold as a whole, then the proviso has no application. There is no warrant whatever for this contention. The proviso refers to any such building, machinery or plant being sold, and whether the building, machinery or plant is sold separately and individually or sold together and the whole of the undertaking is transferred, the position is identical under the proviso. The object of the Legislature in enacting the proviso is clear that if any building, machinery or plant realises a price on sale which is more than the written down value, then to the extent that depreciation has been claimed and allowed to the company, the company should make good that depreciation. If that is the principle underlying this proviso, we see no reason why the application of that principle should be limited to a case where a part of the undertaking is sold and not the whole.
23. Prima facie it appears that the above decision is authority for the proposition that second proviso to Section 10(2)(vii) of the Income-tax Act, 1922 [which is in pari materia with Section 41(2) of the Income-tax Act, 1961] applies equally when building, machinery or plant are sold together as it applies when each item is sold individually. However, that decision does not consider the question as to what would be the consequence when it is not possible to ascertain as to what price could be attributed to particular asset which forms part of all assets sold together. We are concerned with a situation in which it is not at all possible to attribute any particular price to each item of assets and determine as to what was the difference between the sale price and cost of that particular asset. Consequently, computation provision for determining the income under Section 41(2) would be unworkable. The above decision is not an authority for the proposition that even if the computation provision is unworkable, provisions referred to there would apply. If this could be said to follow, which does not appear to us to follow, then the same would be contrary to the view expressed by the Supreme Court in decisions referred to above. Consequently, this decision is of no assistance to the assessee.
24. Before parting with this matter we may mention that the learned counsel for the assessee had relied on the Board's circular published in 82 ITR 1 (Statute) in which guidelines are given for the assessments of the Banks for the year in which they were nationalised by the Act of Parliament and in these guidelines, it is mentioned that provisions of Section 41(2) would not be attracted and that provisions regarding capital gains would be attracted. Since that circular is in respect of Banks which were nationalised, we are not basing our decision in this case on that circular. However, legal position which the Board enunciated in said circular is the same on which we have based our decision.
25. In the cross-objections filed by the assessee following two grounds have been raised:
1. The CIT (Appsals) has not considered the assessee's claim of depreciation amounting to Rs. 1,10,793 on buildings owned and used by the assessee. This claim of depreciation is disallowed by the Income-tax Officer.
2. The CIT (Appeals) has not considered the assessee's claim for short-term capital loss of Rs. 2,39,71,106 which arose on the transfer of the Undertaking of the L.P. Gas business by an Act of Parliament as slump sale. This claim was also disallowed by the Income-tax Officer.
26. We find that these grounds though raised were not considered by the learned Commissioner of Income-tax (Appeals). We, accordingly, restore the matter to the learned Commissioner of Income-tax (Appeals) to consider these grounds and decide them in accordance with law after giving opportunity of being heard to the assessee and the Income-tax Officer. We express no opinion on merits in respect of these two grounds.
27. The departmental appeal is dismissed while the assessee's cross-objections shall be treated as allowed for statistical purposes.