Calcutta High Court
I.C.I. India Limited vs The Commissioner Of Income-Tax on 25 April, 2011
Author: Bhaskar Bhattacharya
Bench: Bhaskar Bhattacharya
1
IN THE HIGH COURT AT CALCUTTA
Civil Appellate Jurisdiction
(Original Side)
Present:
The Hon'ble Mr. Justice Bhaskar Bhattacharya
And
The Hon'ble Justice Sambuddha Chakrabarti
I.T.A. No.181 of 2004
I.C.I. India Limited
Versus
The Commissioner of Income-tax, Kolkata-IV Anr.
For the Appellant: Dr. D. Pal.
Mr. Somok Bose,
Mrs. Monisha Seal.
For the Respondent: Mr. S.N. Dutta,
Mr. Aniket Mitra.
I.T.A. No.182 of 2004
I.C.I. India Limited
Versus
The Commissioner of Income-tax, Kolkata-IV Anr.
For the Appellant: Dr. D. Pal.
Mr. Somok Bose,
Mrs. Monisha Seal.
For the Respondent: Mr. Md. Nizamuddin.
Heard on: 29.03.2011.
Judgment on: 25th April, 2011.
Bhaskar Bhattacharya, J.:
2 These two appeals were heard analogously as points involved in these two appeals are identical and there is one additional point required to be decided in ITA No.182 of 2004 which is not involved in ITA No.181 of 2004.
ITA No.181 of 2004 is at the instance of an assessee and is directed against an order dated 25th November, 2003, passed by the Income-tax Appellate Tribunal, "E" Bench, Kolkata, in ITA No.502 (Kol) of 2002 for the Assessment Year 1989-90 while ITA No.182 of 2004 is at the instance of the selfsame assessee and is directed against order dated 25th November, 2003, passed by the Income-tax Appellate Tribunal, "E" Bench, Kolkata in ITA No.500 (Kol) of 2002, relating to the Assessment Year 1992-93.
A Division Bench of this Court while admitting ITA No.181 of 2004 formulated the following substantial questions of law:
"i) Whether in view of the fact that the assessee has transferred the entire undertaking of the fertilizer division and the fiver division and did not transfer the plant & machinery in that respective divisions as such, it can be said that the provisions of Section 32A(5) of the Act is attracted as the plant & machinery has been the subject of sale or transfer otherwise?
"ii) Whether having regard to the object and scheme of Section 32A(5) of the Act if the plant & machinery is not separately transferred out of the business but such plant & machinery remains fully in the business or the undertaking which has been transferred, the provisions of Section 32A(5) is applicable?" 3
In ITA No.182 of 2004, a Division Bench formulated the following three substantial questions of law:
"i) Whether in view of the fact that the assessee has transferred the entire undertaking of the fertilizer division and the fiber division and did not transfer the plant & machinery in that respective divisions as such, it can be said that the provisions of Section 32A (5) of the Act is attracted as the plant & machinery has been the subject of sale or transfer otherwise?
"ii) Whether having regard to the object and scheme of Section 32A(5) of the Act if the plant & machinery is not separately transferred out of the business but such plant & machinery remains fully in the business or the undertaking which has been transferred, the provisions of Section 32A(5) is applicable?
"iii) Whether the fiction created under Section 32A (5) of the Act can be extended for the purpose of attracting the provisions of Section 234B for imposition of interest without even any consideration that it was not possible for the assessee to foresee in the previous year whether the said assets would be transferred so as to attract Section 32A(5) of the Act and whether such imposition of interest under Section 234B of the Act without any such consideration is permissible in law?"
Therefore, the first two questions of ITA No.182 of 2004 are the same as those formulated in ITA No.181 of 2004 and the question No. III formulated in 4 ITA no.182 of 2004 is the additional point which is, however, a consequential one, depending on the answer on the first two questions.
The facts giving rise to filing of these two appeals may be summed up thus:
a) The Assessing Officer while perusing the return of the assessee found that the assessee had sold/transferred certain items of plant & machinery of fertilizer division and fiber division during the relevant year ended 31st March, 1994. He also found that the assessee had capitalized Rs.12,85,69,303/- worth of plant & machinery in the Assessment Year 1989-90 in the fertilizer division which was subsequently sold/transferred in the year ended 31.3.94.
b) On the capitalized value, the investment allowance of Rs.2,57,13,859/- was granted to the assessee in the Assessment Year 1989-90. The assessee had similarly capitalized Rs.1,43,85,716/- worth of plant & machinery in the Assessment year 1989-90 in the fibers division, which was sold/transferred in the year ended 31st March, 1994. On this capitalized value also, the investment allowance of Rs.28,77,143/- was granted in the Assessment Year 1989-90. Thus, the total investment allowance granted to the assessee in the Assessment Year 1989-90 was Rs.2,85,91,002/-.5
c) Since the plant & machinery of fertilizer division and fiber divisions were sold/transferred within eight years of their installations, the Assessing Officer invoked the provisions of Section 32A(5) and Section 155(A) of the Act and withdrew the investment allowance already granted in the Assessment Year 1989-90- by his order dated 23rd March, 1995.
d) As a consequence of the aforesaid order, the Assessing Officer carried out the necessary rectifications so as to give the consequential effect to the investment allowance to be carried forward to subsequent assessment years which resulted in the creation of demand of Rs.4,36,23,595/- for the Assessment year 1992-93 including interest charged.
e) Aggrieved by the aforesaid orders of the Assessing Officer the assessee preferred appeals for both the assessment years before the CIT (Appeals). As far as Assessment Year 1989-90 is concerned, the assessee contended before the CIT (A) that since the assessee company had not transferred the plant & machinery per se out of the fertilizer and fibres undertakings, the transfer of the above two undertakings did not fall within the mischief of Section 32A (5) and hence, the investment allowance already granted to the assessee during the last eight years wherever applicable could not be withdrawn under Section 32A (5) of the Act.6
f) In the appeal for Assessment Year 1992-93, the assessee further contended that notwithstanding and without prejudice to the aforesaid submission, even if the Assessing Officer was justified in recalling the investment allowance granted to the assessee company for the plaint & machinery, there was no interest leviable according to Section 155 of the Act under which the Assessing Officer had carried out the rectification of earlier assessments.
g) Both the appeals were, however, dismissed and being dissatisfied, the assessee preferred two appeals before the Tribunal.
h) By the order impugned in these two appeals, the Tribunal below dismissed both the appeals preferred by the assessee.
Being dissatisfied, the assessee has come up with these two appeals. Dr. Pal, the learned senior Advocate appearing on behalf of the appellant, at the first instance, submitted before us that the assessee having sold the entire fertilizer division and fibre division as going concern by way of slump sale in the year ended 31st March, 1994 and not the plant and machinery per se, sub- section (5) of Section 32A of the Act is not attracted. According to Dr. Pal, the entire division of fertilizer and fibres by way of slump transaction were transferred and those were being used by the purchasers for the purpose of their business in the same way before their transfer and as such, the provisions contained in Section 32A(5) of the Act would not be applicable. In other words, 7 according to Dr. Pal if some of the plants and machineries were sold to a third party before the expiry of the period mentioned in Section 32A (5) of the Act the said provision might be attracted but when the entire division was transferred and no separate price was fixed for plant and machinery, the same could not be said to be an act of transfer within the meaning of the said provision.
Dr. Pal further submits that in the cases before us, the transfer of the entire division did not come within the purview of "sale" or "otherwise transfer"
appearing in Section 32A of the Act and thus, the authorities below erred in law in passing the orders impugned.
Dr. Pal next contends that when the provision contained in Section 32A (5) of the Act is not attracted where the plant and machinery are sold to the Government, local authorities, corporation established by Central or Provincial Act or Government Company as defined in Section 617 of the Act, there is no reason why in case a sale as going concern the said provision should be applicable.
Dr. Pal, in this connection submits before us that we should not make literal construction of the word "sale" or "otherwise transfer" appearing in the said provision as such construction would lead to absurdity, the unjust result or mischief and in such a case, we should modify the language used by the legislature or even do some violence to it so as to achieve the obvious intention of the legislature and produce a rational construction as according to Dr. Pal the 8 object of the legislature was to limit the instance where a plant and machinery are transferred but not where the entire division was transferred as a going concern. In support of such contention, Dr. Pal relies upon the following decisions.
1. K.P. Varghese vs. Income-tax Officer, Ernakulam & Anr., reported in 131 ITR 597;
2. Mysore Minerals Ltd. s. Commissioner of Income-tax , reported in (1999) 239 ITR 775;
3. Bajaj Tempo Ltd. vs. Commissioner of Income-tax, reported in (1992) 196 ITR 188;
4. Manish Maheshwari vs. Asst. Commissioner of Income-tax & Anr. & Indore Construction P. Ltd. vs. Commissioner of Income-tax, reported (2007) ITR 289 341;
5. State of Bihar & Ors. etc. vs. Bihar Distillery Ltd. etc., reported in AIR 1997 SC 1511;
6. Commissioner of Income-tax vs. Electric Control Gear Mfg. Co., reported in (1997) 227 ITR 278;
7. Arun Kumar & Ors. vs. Union of India & Ors., reported in (2006) 286 ITR 89.
9Mr. Dutta and Mr. Nizamuddin, the learned counsel appearing on behalf of the Revenue, in the aforesaid two matters, vehemently opposed the aforesaid contentions advanced by Dr. Pal and they contended that purposive interpretation of a statutory provision could only be made when the language of the statute concern is ambiguous, conflicting or gives a meaning leading to absurdity. Accordingly, in a case, where the language of the statute is without any ambiguity, there is no scope of giving purposive interpretation suggested by Dr. Pal. The learned counsel rely upon the following decisions in support of their contentions:
1. Commissioner of Income-tax vs. Anjum M. H. Ghaswala & Ors., reported in (2001) 252 ITR 1;
2. S.M. Chemicals & Electronics Pvt. Ltd. vs. Commissioner of Income-
tax, reported in (1995) 215 ITR 943;
In order to appreciate the points involved in these appeals, it will be profitable to refer to the following provisions of the Income-tax Act which are quoted below:
Section 32A(1): "In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this Section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was 10 installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty five per cent of the actual cost of the ship, aircraft, machinery or plant to the assessee".
Section 32A(5) : "Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act-
(a) if the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed; or
(b) ......................
(c) ......................
and the provisions of sub-section (4A) of section 155 shall apply accordingly:
Provided that nothing in clause (a) shall apply-
(i) where the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or
(ii) where the sale or transfer of the ship, aircraft, machinery or plant is made in connection with the amalgamation or succession, referred to in sub-section (6) or sub-section (7)."
Section 155(4A): "Where an allowance by way of investment allowance has been made wholly or partly to an assessee in respect of a ship or an aircraft or any machinery or plant in any assessment year under section 32A and subsequently-
11
(a) at any time before the expiry of eight years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in sub-section (6) or sub-section (7) of Section 32A; or
(b) .....................
(c) .....................
the investment allowance originally allowed shall be deemed to have been wrongly allowed, and the [Assessing} Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned,-
(i) in a case referred to in clause (a), from the end of the previous year in which the sale or other transfer took place;
(ii) ..................; (iii) ...................
Explanation.- For the purposes of clause (b), "new ship" or "new aircraft" or "new machinery or plant" shall have the same meanings as in the Explanation below sub-section(2) of section 32A."
Section 2(47): "transfer", in relation to a capital asset, includes,-
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(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishments of any rights therein; or
(iii) ...............
(iv) .....................
(v) any transaction involving the allowing of the
possession of any immovable property to be taken or
retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
(vii) Explanation.-For the purpose of sub-clauses (v) and
(vi), "immovable property" shall have the same
meaning as in clause (d) of section 269UA."
(Emphasis supplied)
A bare perusal of Section 32A(5) of the Act makes it abundantly clear that in order to apply the aforesaid provision to a given case, the following conditions must be satisfied: a) the allowance in respect of the plant and machinery must have been enjoyed by an assessee in his Income-tax assessment, b) the selfsame plant and machinery must have been sold or otherwise transferred by the assessee to any other person and c) such "sale" or "otherwise transfer" must have taken place before the expiry of eight years from the end of the previous year in which it was acquired or installed.
13
In the cases before us, there is no dispute that the assessee has transferred the entire two divisions as a going concern to a third party by a slump sale and there is no price separately indicated for plant and machinery. If such transfer of the entire division is treated to be a sale or "otherwise transfer"
of plant and machinery, in that case, the aforesaid provisions contained in Section 32A (5) would definitely be attracted.
Therefore, the question that falls for determination before us is whether the transfer of entire division including plant and machinery at a slump sale without separately fixing the price of different items comes within the purview of "sale" or "otherwise transfer" of the plant and machinery pointed out in Section 32A(5) of the Act which have been quoted above.
According to the definition of transfer indicated in Section 2(47) of the Act quoted by us earlier in details, transfer", in relation to a capital asset, includes, inter alia
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein;
Thus, once it is established that the right of the assessee in the Plant and Machineries has been extinguished due to the sale of the entire division, the provisions contained in Section 32A (5) of the Act are definitely attracted. We are unable to accept the submission of Dr. Pal, the learned Senior Counsel appearing on behalf of the assessee that notwithstanding the transfer of the entire division 14 of the assessee including the plant and machinery to a third party who has purchased as a going concern, the transaction is not a sale or "otherwise transfer" of the plant and machinery within the meaning of Section 32A (5) of the Act. We thus overrule the aforesaid contention of Dr. Pal.
The other point of Dr. Pal that when the provision contained in Section 32A (5) of the Act is not attracted where the plant and machinery are sold to the Government, local authorities, corporations established by Central or Provincial Act or Government Company as defined in Section 617 of the Act, there is no reason why in case of a sale as going concern the said provision should be applicable is equally devoid of any substance. The legislature by law having specifically exempted the operation of the provision only in favour of those authorities, it is preposterous to suggest that the same benefit should also be available to other transferees not specified with the exempted list. In these proceedings, there is no scope of branding the aforesaid exemptions as ultra vires and thus, we are not at all impressed by the aforesaid submission of Dr. Pal.
The last point i.e., that we should not make literal construction of the word "sale" or "otherwise transfer" appearing in the said provision as such construction would lead to absurdity, unjust result or mischief and in such a case, we should modify the language used by the legislature or even do some violence to it so as to achieve the obvious intention of the legislature and produce a rational construction, is in our opinion, equally misplaced. 15
In this connection, we find substance in the contention of the learned counsel for the Revenue that the aforesaid submission is not tenable in a case where the language of the statute is clear and its plain meaning reflects the real intention of the legislature. In this connection, we may profitably refer to the decision of the Supreme Court in the case of Commissioner of Income-tax vs. Anjum M. H. Ghaswala & Ors., reported in (2001) 252 ITR 1 where the Apex Court held that the question of purposive interpretation arises only when the language of the statute is ambiguous or conflicting or gives meaning leading to absurdity. Otherwise, the Supreme Court held, the plain meaning of the statute is to be given for interpreting the same. In the case before us, the language is clear and unambiguous and it also reflects the real intention of the legislature to withdraw the benefit if the plant and machinery are transferred within the specified period and the exemption is also specified clearly and there is no scope of extending the list beyond what are mentioned therein.
We now propose to deal with the decisions cited by Dr. Pal. In the case of K.P. Varghese vs. Income-tax Officer, Ernakulam & Anr.(supra), the principal question that arose for determination in that appeal by certificate was whether understatement of consideration in a transfer of property was a necessary condition for attracting the applicability of Section 52 sub- section (2) of the Income-Tax Act 1961 or it is enough for the Revenue to show that the fair market value of the property as on the date of the transfer exceeded 16 the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared. The facts giving rise to the appeal were as follows:
The assessee was the owner of a house situated in Ernakulam, which he had purchased in 1958 for the price of Rs.16,500/-. On 25th December, 1965 the assessee sold the house for the same price of Rs.16,500/- to his daughter-in- law and five of his children. The assessment of the assessee for the assessment year 1966-67 for which the relevant accounting year was the calendar year 1965 was thereafter completed in the normal course and in this assessment, no amount was included by way of capital gains in respect of the transfer of the house since the house was sold by the assessee at the same price at which it was purchased and no capital gains accrued or arose to him as a result of the transfer. On 4th April, 1968, however, the Income-tax Officer issued a notice under Section 148 of the Act seeking to reopen the assessment of the assessee for the assessment year 1966-67 and requiring the assessee to submit a return of income within thirty days of the service of the notice. The notice did not state what was the income alleged to have escaped assessment but by his subsequent letter dated 4th March 1969, the Income-tax Officer intimated to the assessee that he proposed to fix the fair market value of the house sold by the assessee on 25th December 1965 at Rs.65,000/ as against the consideration of Rs.16,500/- for which the house was sold and assess the difference of Rs.48,500/- as capital gains in the hands of the assessee. The assessee raised objections against the 17 reassessment proposed to be made by the Income-tax Officer but the objections were overruled and an order of reassessment was passed by the Income-tax Officer including the sum of Rupees 48,500/- as capital gains and bringing it to tax. Though the sale of the house by the assessee was in favour of his daughter- in-law and five of his children who were persons directly connected with him, the Income-tax Officer could not invoke the aid of Section 52 sub-section (1) for bringing the sum of Rs.48,500/- to tax, because there was admittedly no understatement of consideration in respect of the transfer of the house and it was not possible to say that the transfer was affected by the assessee with the object of avoidance or reduction of his liability under Section 45 of the Act. The Income-tax Officer, therefore, rested his decision to assess the sum of Rs.48,500/- to tax on sub-section (2) of Section 52 and taking the view that this sub-section did not require as a condition precedent that there should be understatement of consideration in respect of the transfer and it was enough to attract the applicability of the sub-section if the fair market value of the property as on the date of the transfer exceeded the full value of the consideration declared by the assessee by an amount of not less than 15% of the value so declared, which was indisputably the position in the present case, the Income-tax Officer assessed the sum of Rs.48,500/- to tax as capital gains. The assessee thereupon preferred a writ petition in Kerala High Court challenging the validity of the order of reassessment in so far as it brought the sum of Rs.48,500/- to tax relying on Section 52 sub-section (2) of the Act.18
The writ petition came up for hearing before Isaacs, J., sitting as a Single Judge of the High Court and after hearing both the parties, the learned Judge came to the conclusion that understatement of consideration in respect of the transfer was a necessary condition for attracting the applicability of Section 52 sub-section (2) and since in the present case, there was admittedly no understatement of consideration and it was a perfectly bona fide transaction, Section 52 sub-sec. (2) had no application and the sum of Rs.48,500/- could not be brought to tax as capital gains under that provision. The Revenue appealed against this decision to a Division Bench of the High Court and having regard to the importance and complexity of the question involved, the Division Bench referred the appeal to a Full Bench of three Judges. The Full Bench heard the appeal but there was a division of opinion, two Judges taking one view and the third Judge taking another. While Raghvan, C. J., agreed substantially with the view taken by Isaacs, J., Gopalan Nambiar, J. and Vishwanath Iyer, J., took a different view and held that in order to bring a case within Section 52 sub-section (2), it was not at all necessary that there should be understatement of consideration in respect of the transfer and once it was found that the fair market value of the property as on the date of the transfer exceeded the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared, Section 52 sub-section (2) was straightway attracted and the fair market value of the property as on the date of the transfer was liable to be taken as the full value of the consideration for the transfer. The writ petition was, accordingly, dismissed and the order of 19 reassessment was sustained by the majority decision of the Full Bench. Hence the matter went to the Supreme Court at the instance of the assessee with certificate obtained from the High Court.
It will be noticed from the above statement of facts that the principal question that arose for determination in the appeal before the Supreme Court turned on the true interpretation of Section 52 sub-section (2).
But in order to arrive at its proper interpretation, it is necessary to refer to some other provisions of the Act as well. Section 2 clause (24) defined the word 'income'. The definition is inclusive and covered 'capital gains' chargeable under Section 45. Section 4 is the charging section and it provided that income-tax should be charged in respect of the total income of the previous year of every person. Section 5 defined the scope of 'total income' by providing that the total income of the previous year of a person who was resident should include all income from whatever source derived which was received or was deemed to be received in India in such year by him or on his behalf or accrued or arose or was deemed to accrue or arose to him in India during such year or accrued or arose to him outside India during such year. Section 14 enumerated the heads of income under which income should, for the purposes of charge of income-tax and computation of total income, be classified and they include "capital gains". Section 45 provided that any profits or gains arising from the transfer of a capital asset effected in the previous year should be chargeable to income-tax under the head "capital gains" and should be deemed to be the income of the previous year 20 in which the transfer took place. The mode of computation of capital gains was laid down in Section 48 which provided that the income chargeable under the head "capital gains" should be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, two amounts, namely, (1) expenditure incurred wholly and exclusively in connection with such transfer and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. Then followed Section 52, which was the material section requiring to be construed by the Supreme Court. That section consisted of two sub-sections and ran as follows:
"(1) Where the person who acquires a capital asset from an assessee is directly or indirectly connected with the assessee and the Income-tax officer, has reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45, the full value of the consideration for the transfer shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be the fair market value of the capital asset on the date of the transfer."
"(2) Without prejudice to the provisions of sub-section (1), if in the opinion of the Income-tax officer the fair market value of a capital asset transferred by an assessee as on the date of the transfer exceeds the full value of the consideration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent of the value declared, the full value of the consideration for such 21 capital asset shall, with the previous approval of the Inspecting Assistant Commissioner, be taken to be its fair market value on the date of its transfer."
There was a marginal note to Section 52 which reads: "Consideration for transfer in cases of understatement". It may be pointed out that originally when the Act came to be enacted, Section 52 consisted of only one provision which was quoted above and numbered as sub-sec. (1) and it was by Section 13 of the Finance Act 1964 that sub-section (2) was added in that section with effect from 1st April 1964.
Now on these provisions, the question that arose was about the true interpretation of Section 52(2) of the Act. The argument of the Revenue found favour with the majority of the Judges of the Full Bench that on a plain natural construction of the language of Section 52(2), the only condition for attracting the applicability of that provision is that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeded the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared. Once the Income-tax Officer was satisfied that this condition existed, he could proceed to invoke the provision in Section 52(2) and take the fair market value of the capital asset transferred by the assessee as on the date of the transfer as representing the full value of the consideration for the transfer of the capital asset and compute the capital gains on that basis. According to the Revenue, nothing more was 22 necessary to be proved and to introduce any further condition such as understatement of consideration in respect of the transfer would be to read into the statutory provision something which was not there and that would amount to rewriting the section. This argument was based on a strictly literal reading of Section 52(2). According to the Supreme Court, such a construction could not be accepted as it ignored several vital considerations which must always be borne in mind in interpreting a statutory provision. The task of interpretation of a statutory enactment, the Supreme Court proceeded, was not a mechanical task. It was more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It was an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language was at best an imperfect instrument for the expression of human thought and as pointed out by Lord Denning, it would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity". The Supreme Court decided not to adopt a strictly literal interpretation of Section 52(2) but proceeded to construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurred.
The Supreme Court in such circumstances was of the view that if sub- section (2) was literally construed as applying even to cases where the full value of the consideration in respect of the transfer was correctly declared or disclosed by the assessee and there was no understatement of the consideration, it would 23 result in an amount being taxed which had neither accrued to the assessee nor been received by him and which from no view point could be rationally considered as capital gains or any other type of income. According to the Apex Court, it was a well-settled rule of interpretation that the Court should as far as possible avoid that construction which attributed irrationality to the legislature. Besides, under Entry 82 in List I of the Seventh Schedule to the Constitution which deals with "Taxes on income" and under which the Income-tax Act, 1961 had been enacted, Parliament could not "choose to tax as income an item which in no rational sense could be regarded as a citizen's income or even receipt. Sub- section (2) would, therefore, on the construction of the Revenue, go outside the legislative power of Parliament, and it would not be possible to justify it even as an incidental or ancillary provision or a provision intended to prevent evasion of tax. Sub-section (2) would also be violative of the fundamental right of the assessee under Article 19(1)(f) which was in existence at the time when sub- section (2) came to be enacted-since on the construction canvassed on behalf of the Revenue, the effect of sub-section (2) would be to penalize the assessee for transferring his capital asset for a consideration lesser by 15% or more than the fair market value and that would constitute unreasonable restriction on the fundamental right of the assessee to dispose of his capital asset at the price of his choice. The Court, the Apex Court continued, must obviously prefer a construction which renders the statutory provision constitutionally valid rather than that which makes it void.
24
Consequently, the Supreme Court held that sub-section (2) of Section 52 could be invoked only where the consideration for the transfer had been understated by the assessee or in other words, the consideration actually received by the assessee was more than what was declared or disclosed by him and the burden of proving such understatement or concealment was on the Revenue. This burden, the Court proceeded, might be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference could be drawn that the assessee had not correctly declared or disclosed the consideration received by him and there was understatement or concealment of the consideration in respect of the transfer. Sub-section (2), according to the Supreme Court, had no application in case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there was no concealment or suppression of the consideration.
In the case before us, the language of the Section 32A (5) of the Act is plain and unambiguous and there is no dispute that the assessee lost its right over the plant and machinery after the transfer of the entire division in favour of the third party as a going concern and thus, there is no necessity of any purposive interpretation suggested by Dr. Pal. Thus, the factors which weighed with the Supreme Court in the above case are not present in the facts and circumstances of the case. We, therefore, find that the said decision is of no avail to Dr. Pal's client in this case.
25
In the cases of Mysore Minerals Ltd. vs. Commissioner of Income-tax (Supra), and Manish Maheshwari vs. Asst. Commissioner of Income-tax & Anr. & Indore Construction P. Ltd. vs. Commissioner of Income-tax (supra), the Supreme Court reiterated the well-settled proposition of law that in interpreting a taxing statute, if two views are possible, the one favourable to the assessee should be preferred. In the case before us, the only view possible is that the assessee has sold or otherwise transferred its plant and machinery in favour of the third party and thereby attracted the provision of Section 32A(5) of the Act. Thus, those two decisions are not helpful to the appellant in any way.
In the case of Bajaj Tempo Ltd. vs. Commissioner of Income-tax (supra), the question before the Supreme Court was whether the assessee was entitled to claim partial exemption from payment of tax under Section 15C of Income-tax Act of 1922 on profits and gains derived from an industrial undertaking established in a building taken on lease used previously for other business. The facts of the said case was that M/s. Bachhraj Trading Corporation ('Corporation'), incorporated on 29th September 1945, carried on business of import-export in various items. In 1957 it was granted licence for manufacturing tempo 400cc three wheeled transporters. It entered into an agreement with a foreign collaborator, who agreed to grant the licencee the know-how rights for the manufacture, in India of tempo commercial three wheeler vehicles, against payment of German marks. Accordingly the assessee company M/s. Bajaj Tempo Ltd., Bombay ('Company') was, formed, for exploiting the manufacturing licence 26 issued by the Government 32% of the share capital of which was subscribed by the foreign collaborators and remaining 68% share capital was issued to the shareholders of the Corporation. The assessee company entered into an agreement with the Corporation, which was the promoter company, to secure and take over from the promoter company the rights under the licence to manufacture tempo vehicles and to take over the factory registered under the name of Auto Rickshaw Engineering Factory as a going concern with its assets, liabilities, machinery, power, quotas etc. Clause 10 of the agreement provided that the transferee, that is, the company shall be in possession of the premises of the factory and the buildings on payment of monthly rent as a lessee. Tools and implements, valued at Rs. 3,500 / - of the Corporation, were also transferred to the company. After take-over, the licence was endorsed by the appropriate authority of the Government of India in favour of the Company.
In assessment proceedings the assessee claimed benefit of partial exemption from payment of tax as the company was a new undertaking. The Income-tax Officer rejected the claim as even though the undertaking was new, it was not entitled to the benefit as it was formed by splitting up of business already in existence and also it was formed by transfer to the new business of the building and machinery previously used in other business. But while rejecting the claim the Income-tax Officer observed that on the facts furnished it was difficult to hold that it was a case of reconstruction of the business already in existence. He did not find much merit even in transfer of tools and implements 27 worth Rs. 3,500/-. In fact the main ground for rejection of the claim was establishing of business in a building which was used previously for business. The Appellate Commissioner did not agree with the Income-tax Officer as according to him taking premises on lease could not be held to amount to transfer of the building as the building in which the undertaking was set up was not purchased but taken on lease only. The appellate authority held that since it was admitted that the value of the building could not be included in the capital computation for the purposes of Section 15C the value of which would be negligible as compared to the value of the assets installed, the assessee was entitled to claim the benefit. In further appeal the Income-tax Appellate Tribunal agreed with the order of the appellate authority. It rejected the contention, advanced on behalf of the revenue, that since the premises in question were earlier used for the purpose of business the assessee was disentitled from claiming the benefit as the 'newly established undertaking must also refer to a building previously used by the assessee himself in any other business'. It was further of opinion that lease could not be held to be transfer. The tribunal held that an industrial undertaking to be covered in the mischief of Clause (i) of sub- section (2) of Section 15C should have been 'formed' by transfer of building, plant or machinery, which was substantial and prominent in the formation of the undertaking. In other words, the part played by such transfer should have been such that the industry without it could not have come into being. According to tribunal it could not stand to reason that a big industrial undertaking should be denied the benefit of Section 15C only because it took the business premises on 28 lease or used its implements and tools worth a small amount previously used for the purposes of business. On further reference made by the department in the High Court, the question of law raised by department was answered in its favour and against the assessee without any discussion, only, in view of the decision in Capsulation Services Pvt. Ltd. v. Commr. of Income-tax, Bombay (1973) 91 ITR 566: (1974 Tax LR 371) (Bom).
In such a case, the Supreme Court set aside the order of the High Court and observed as follows:
"Initial exercise, therefore, should be to find out if the undertaking was new. Once this test is satisfied then clause (1) should be applied reasonably and liberally in keeping with spirit of Section 15C(I) of the Act. While doing so various situation may arise for instance the formation may be without anything to do with any earlier business. That is the undertaking may be formed without splitting up or reconstructing any existing business or without transfer of any building material or plant of any previous business. Such an undertaking undoubtedly would be eligible to benefit without any difficulty. On the other extreme may be an undertaking new in its form but not in substance. It may be new in name only. Such an undertaking would obviously not be entitled to the benefit. In between the two there may be various other situations. The difficulty arises in such cases. For instance a new company may be formed, as was in this case a fact which could not be disputed, even by the Income-tax Officer, but tools and implements worth Rs. 3,500/- were transferred to it of previous firm. Technically speaking it was transfer of material used in previous business. One could say as was vehemently urged 29 by the learned counsel for the department that where the language of statute was clear there was no scope for interpretation. If the submission of the learned counsel is accepted then once it is found that the material used in the undertaking was of a previous business there was an end of inquiry and the assessee was precluded from claiming any benefit. Words of a statute are undoubtedly the best guide. But if their meaning gets clouded then the courts are required to clear the haze. Sub-section (2) advances the objective of sub-section (1) by including in it every undertaking except if it is covered by clause (i) for which it is necessary that it should not be formed by transfer of building or machinery. The restriction or denial of benefit arises not by transfer of building or material to the new company but that it should not be formed by such transfer. This is the key to the interpretation. The formation should not be by such transfer. The emphasis is on formation not on use. Therefore it is not every transfer of building or material but the one which can be held to have resulted in formation of the undertaking. In Textile Machinery Corporation Ltd. v. Commr. of Income-tax, West Bengal, (1977) 107 ITR 195: (AIR 1977 SC 11 34), this Court while interpreting Section 15C observed (para 16 of AIR):
"The true test, is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under Section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved."30
Even though this decision was concerned with the clause dealing with reconstruction of existing business but the expression 'not formed' was construed to mean that the undertaking should not be a continuation of the old but emergence of a new unit. Therefore even if the undertaking is established by transfer of building, plant or machinery but it is not formed as a result of such transfer the assessee could not be denied the benefit."
In the case before us, the true test for application of Section 32A (5) of the Act is whether by virtue of the transaction within the prohibitive period, the right of the assessee over the plant and machinery has been extinguished. Once the answer is in the affirmative, there is no scope of any further argument and thus, the principle laid down in the said decision has no application to the facts of the present case for interpreting the provisions contained in Section 32A(5) of the Act.
In the case of State of Bihar & Ors. vs. Bihar Distillery Ltd. etc. (supra), the Supreme Court while considering the question of validity of the Bihar Excise (Amendment and Validation) Act (9 of 1995), observed that the Court should try to sustain validity of the Act to the extent possible. It should strike down the enactment only when it is not possible to sustain it. The Court should not approach the enactment with a view to pick holes or to search for defects of drafting, much less inappropriate use of the language employed. Indeed, any such defects of drafting should be ironed out as part of the attempt to sustain the validity/constitutionality of the enactment. After all, the Supreme Court 31 proceeded, an Act made by the Legislature represents the will of the people and that cannot be lightly interfered with. The unconstitutionality must be plainly and clearly established before an enactment is declared as void. According to the said decision, the same approach holds good while ascertaining the intent and purpose of an enactment or its scope and application. In the case before us, within the narrow compass of Section 260A of the Act, there is no scope of declaring a provision of the statute as ultra vires the Constitution. On the other hand, the said decision goes against the contention of Dr. Pal as in the case before us, the intention of the legislature is in no uncertain term clear and it is not even a case of ironing out a part of the statute to uphold the same. Thus, the said decision is irrelevant in the facts of the present case.
In the case of CIT vs. Electric Control Gear Manufacturing Co. (supra), the assessee was a partnership concern consisting of 13 partners. On March 31, 1066 it entered into an agreement whereby it transferred the entire assets of business together with liabilities as a going concern to a limited company, styled as M/s Electric Control Gear Pvt. Ltd. for a consideration of Rs. 8 lakh. The erstwhile partners of the assessee firm were allotted the shares of the same value in their profit-sharing proportion. The Income Tax Officer held that depreciation allowed to the assessee firm amounting to Rs 3,32,863 in respect of the assets transferred by the firm to the said company was chargeable to tax under the provisions of Section 41(2) of the Income Tax Act, 1961. He also brought to tax the capital gains of Rs 8 lakh, being the purchase consideration received by the 32 assessee and after excluding the sum of Rs 5000 as basic exemption, included the sum of Rs 7,95,000 in the computation of the total income of the assessee under the head "Capital Gains". The Appellate Assistant Commissioner held that the impugned profits were taxable under the provisions of Section 41(2) of the Act. As regards capital gains, the Appellate Assistant Commissioner, however, was of the view that the capital gains could not be taxed in the hands of the registered firm under the provisions of Section 114 of the Act. Appeals were filed by the assessee as well as the Revenue against the said judgment of the Appellate Assistant Commissioner. The assessee challenged the liability to tax under Section 41(2) of the Act as well as the liability to capital gains while the Revenue challenged the decision of the Appellate Assistant Commissioner about recomputation of the profits under Section 41(2) as well as non-levy of capital gains in the hands of the registered firm under the provisions of Section 114 of the Act. The Income Tax Appellate Tribunal remitted the matter to the Income Tax Officer for recomputation of the aggregate amount chargeable as profits under Section 41(2) and as capital gains. The Tribunal held that the correct status of the assessee should be "registered firm" and not "association of persons". In that context, the Supreme Court held that Section 41(2) was applicable since the price attributable to the plant, machinery and dead-stock which were transferred had been disclosed by the assessee during the course of assessment proceedings before the Income Tax Officer and that the said price was as per the value assessed by the valuers at the time of execution of the agreement. It was further held that in that case, there was nothing to indicate the 33 price attributable to the assets like the machinery, plant or building out of the consideration amount of Rs 8 lakh and merely because a sum of Rs 3,32,863/- had been allowed as depreciation to the assessee firm, it could not be said that was the excess amount between the price and the written down value. By relying upon the said decision, Dr. Pal tried to convince us that as in this case, the entire division was sold as a going concern and no special price was fixed for plant and machinery, we should presume that there has not been any sale or transfer of the those plants and machineries so as to attack the provision of Section 32A(5) of the Act. We are afraid, we are not impressed by such submission. In the case before us, in order to invoke the provision of Section 32A(5) of the Act, all that are to be established are that a) the allowance in respect of the plant and machinery must have been enjoyed by an assessee in his Income-tax assessment, b) the selfsame plant and machinery must have been sold or otherwise transferred by the assessee to any other person and c) such "sale" or "otherwise transfer" must have taken place before the expiry of eight years from the end of the previous year in which it was acquired or installed. Thus, the exact amount of price of plants and machinery is insignificant for the purpose of giving effect to Section 32A (5) of the Act unlike the provisions of Section 41(2) of the Act.
We, therefore, find that the above decision is of no assistance to the Appellant.
34
By relying upon the decision of the Supreme Court in the case of Arun Kumar & Ors. vs. Union of India & Ors.(supra), Dr. Pal tried to convince us that the proviso to Section 32A(5) of the Act giving benefit to the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in sub- section (6) or sub-section (7) of Section 32A was improper and as such, we should hold that the case before us should also get the said benefit. In the above case of Arun Kumar and others, the Supreme Court held that it is no doubt true that Article 14 guarantees equality before the law and confers equal protection of laws and it is also true that it prohibits the State from denying persons or class of persons equal treatment provided they are equals and are similarly situated. But, it is equally well established that Article 14 seeks to prevent or prohibit a person or class of persons from being singled out from others situated similarly. If two persons or two classes are not similarly situated or circumstanced, they cannot be treated similarly. To put it differently, Article 14 prohibits dissimilar treatment to similarly situated persons, but does not prohibit classification of persons not similarly situated, provided such classification is based on intelligible differentia and is otherwise legal, valid and permissible. In that context, it was further held that the distinction sought to be made by the rule- making authority between employees of the Central Government as well as the State Governments and other employees i.e. employees of companies, corporations and other undertakings is reasonable classification based on 35 intelligible differentia and also has rational nexus to the object sought to be achieved. Rule 3 of the Income Tax Rules involved therein took into account service conditions of employees of the Government vis-à-vis employees of corporations, companies and other undertakings and prescribes a method of calculating value of all perquisites. Such a provision, the Supreme Court observed, could not be held ultra vires Article 14 of the Constitution. Ultimately, the Supreme Court made the following observations:
"For the foregoing reasons, we hold that though Rule 3 of the Rules cannot be held arbitrary, discriminatory or ultra vires Article 14 of the Constitution nor inconsistent with the parent Act [Section 17(2)(ii)], it is in the nature of machinery provision and applies only to the cases of concession in the matter of rent respecting any accommodation provided by an employer to his employees. Whether or not Parliament could have in the exercise of legislative power created a "deeming fiction" as to concession in the matter of rent in certain circumstances (for which we express no final opinion), no such deeming provision is found in the Act. It is, therefore, open to the assessee to contend that there is no concession in the matter of accommodation provided by the employer to the employees and the case is not covered by Section 17(2)(ii) of the Act."
We are unable to appreciate how the above decision can be of any help to the appellant in the facts of the present case.
We thus find that the decisions cited by Dr. Pal do not assist his client. 36 On consideration of the entire materials on records, we consequently answer the first two questions formulated in both the appeals in the affirmative in favour of the Revenue and against the assessee.
So far as the third question formulated in I.T.A no. 182 of 2004 is concerned we are of the opinion that in view of our answer in respect of the first two question, the third question must also be decided against the assessee by answering the same in the affirmative as, in our opinion, the fiction created under Section 32A (5) of the Act should be automatically extended for the purpose of attracting the provisions of Section 234B for imposition of interest as the said provision is mandatory in nature and there is no scope of waiver of the same.
The appeals are thus dismissed.
In the facts and circumstances, there will be, however, no order as to costs.
(Bhaskar Bhattacharya, J.) I agree.
(Sambuddha Chakrabarti, J.) 37 Later:
Photostat certified copy of this judgment be made available to the parties within a week from today.
(Bhaskar Bhattacharya, J.) I agree.
(Sambuddha Chakrabarti, J.)