Income Tax Appellate Tribunal - Bangalore
T.S. Hegde And Sons vs Income-Tax Officer on 1 February, 1995
Equivalent citations: [1995]54ITD409(BANG)
ORDER
S. Bandyopadhyay, Accountant Member
1. This appeal has been filed by the assessee against the revisionary order passed by the CIT under Section 263 of the Income-tax Act.
The assessee-firm was running a hotel named "Hotel Samrat" at Sirsi providing boarding and lodging facilities since 1972. The accounts of the assessee were being closed every year on the Deewali date. During the previous year relevant to the assessment year 1986-87, the assessee-firm sold to M/s. Totgars Co-operative Society, Sirsi, its entire business undertaking of the nature of the hotel Samrat. All the items in the balance-sheet representing assets were sold away excepting the cash and bank balances. Similarly, some of the small items of liabilities were also not taken over by the purchaser.
As per the arrangement between the two parties, the prices for the different items sold were determined as below :
(i) Goodwill Rs. 8,00,000 (ii) Hotel building Rs. 15,00,000 (iii) Furniture, borewell, pump, etc. (as per detailed list) Rs. 2,00,000
In the assessment order passed on 12-3-1987, the ITO took the view that the provisions for taking capital gains, would not apply to a transfer of a business lock, stock and barrel. He stated that the sale of the business as a whole includes sale of the capital assets of the business and the gain arising on such sale attributable to the capital assets, is to be considered as a capital gain. He took into consideration the two decisions of the Supreme Court in the cases of Killick Nixon & Co. v. CIT [1967] 66ITR 714 and CIT v. Mugneeram Bangur & Co. (Land Deptt.) [1965] 57 ITR 299 and ultimately came to the conclusion that inasmuch as the business of the assessee had been sold as a going concern, the excess of sale consideration over the cost would be taxable as capital gains only and not as business profit.
2. In his impugned revisionary order under Section 263, the CIT considered the aforesaid order of the ITO to be erroneous and prejudicial to the interests of revenue. He found out that the sale price in the instant case had been fixed separately for the building, furniture, goodwill, etc. He, therefore, held that the difference between the actual cost of the assets and the WDV should have been assessed as profit under Section 41 (2) and the excess amount only should have been brought to tax as capital gains under Section 45. We will come to discuss the issues considered by the CIT in this order, in a threadbare manner below during the course of our order. For the time being, it would suffice to say that the CIT directed the ITO to re-do the assessment on the lines of discussion made by him in the order. The gist of the discussion was that the difference between the original costs of the assets and their written down values was required to be charged to tax under Section 41(2) and not under Section 45.
3. Shri K.R. Prasad, learned counsel for the assessee has strongly argued that this was a case of sale of the entire business concern of the assessee as a going concern. In proof of the said contention, he brought our attention to the fact that even the goodwill of the business had also been sold. He argued, by referring to the decision of the Supreme Court in the case of S.C. Cambatta & Co. (P.) Ltd. v. CEPT [1961] 41 ITR 500 and especially drawing our attention to the discussions made at page 504 of the reported judgment that it is not possible to sell away the goodwill unless the business itself is also sold away as a running concern.
Shri Prasad, thereafter, argued that inasmuch as the entire sale proceeding in the instant case was of the nature of a winding-up sale, which is evident from the fact that the buyer, co-operative society also later on ran the hotel, there cannot be any question of taking into consideration the sale prices of individual items comprised in the business undertaking. He also argued that the mere non-taking over of some of the negligible portions of the assets including cash and some minor liabilities does not make the case as a one not of the nature of sale of a going concern. He thus strongly objected to the comments passed by the CIT to the effect that on account of all the liabilities having not been transferred, to the purchaser along with the building and the furniture etc., the sale of the business cannot be considered as a sale of the undertaking as such as a going concern. We find that the CIT has discussed in the impugned order that there can be no sale of the entire business unless all the liabilities and all the assets of the business are sold to the transferee. We disagree with the above view taken by CIT and agree with the contention of the assessee that in the instant case, the facts as stated above and the points as raised by the learned counsel for the assessee clearly show that in essence this was a case of transfer of the entire business undertaking of the assessee as a going concern. The want of transfer of some assets and liabilities cannot vitiate the position. The learned counsel for the assessee has thereafter argued that in view of the above position, the ITO's order in charging the entire surplus out of the sale as capital gains was right. He has relied on the following decisions in support of his contention in this regard:
(i) Mugneeram Bangur & Co. 's case (supra)
(ii) CIT v. West Coast Chemicals & Industries Ltd. [1962] 46 ITR 135 (SC)
(iii) Artex Mfg. Co. v. CIT[1981] 131 ITR 559 (Guj.).
4. In the case of Mugneeram Bangur & Co. (LandDeptt.) (supra), the entire business of the assessee was sold as a going concern along with its goodwill and all stock-in-trade etc., to a company promoted by the partners of the assessee-firm. The amount of consideration was determined on the basis of a schedule which showed the different items of assets like land, goodwill, motor car and lorries etc., along with the respective values thereof. The Supreme Court held in this case that in spite of the fact that different values for the items sold were shown in the schedule separately, the sale was to be regarded as a sale with a slump price and it would not be permissible to take into consideration the balancing charges arising on sale of each individual item of asset. In arriving at such a decision, the Supreme Court took into consideration the special characteristic of the case that the transaction was the mere adjustment of the business position of the partners, and held that the Department was not entitled to take the book-keeping entries as evidence of any profits. The Supreme Court furthermore found that in the Schedule to the agreement, the price of land (stock-in-trade of that assessee) that was stated was actually the cost price of the land as it stood in the books of the vendor and that even if the sum of Rs. 2,50,000 attributed to goodwill could be added to the cost of the land, there was nothing to show that this represented the market value of the land. The above discussions show the distinguishing aspects of that particular case cited in this connection. In that case, the business concern was sold by the partners of the firm to a company which had also been promoted by themselves. There were merely certain book keeping entries. The prices shown in the schedule to the agreement for sale again merely represented the cost price of the assets and not their market values as on the date of sale. It was, therefore, not at all proper to hold that the slump price in that case could be broken up and attributed to different items of assets separately. In the instant case, however, the agreement for sale clearly itemises the prices in respect of three different and distinct types of assets like goodwill, building and other assets like furniture, etc. The aggregate of the figures in respect of these three items constitutes the sale price in the instant case. Hence, it must be held that the sale "price" of the different items like goodwill, building, etc., had separately been fixed in the instant case. The abovementioned decision of the Supreme Court in the case of Mugneeram Bangur & Co. (supra) would not therefore hold good.
5. In the case of West Coast Chemicals & Industries Ltd. (supra), the question to be decided was whether the sale in that case was a realisation sale or a sale in the course of business of chemicals and materials used in the manufacture of matches. It had been found that the sale was only of the type of winding up sale to close down the business although even after the date of sale, the assessee in that case ran the business for quite some time but on behalf of the purchaser. No detailed prices in respect of different items of assets comprised in the sale were fixed in the sale arrangement. The Department merely tried to allocate the sale price amongst the different items in its own way. The Supreme Court held that in view of the sale having been of the nature of a winding up sale and slump price having been fixed, it would not be possible to take into consideration the profits arising out of sale of individual items of assets. It is, therefore, clear that the facts of this case are quite different from those of the present case inasmuch as in the present case, sale arrangement itself has fixed the price for the different items of assets sold.
6. In the case of Artex Mfg. Co. (supra) also, the sale was of the business concern belonging to the assessee-firm in that case to a private company which had been formed with a view to take over the said business as a running concern. This was also a clear case where a slump price in respect of the entire business concern had been fixed. The High Court also found out that the said business concern had not been sold by any itemised value or item-by-item price fixed for the different assets of the firm. As already discussed, the facts of the present case are completely different from those in this case inasmuch as itemised values of the different types of assets were fixed in the present case.
7. We now turn our attention to some of the decisions cited by the learned departmental representative. One of such decisions is again of Gujarat High Court in the case of Jayantilal Bhogilal Desaiv. CIT [1981] 130ITR 655 at page 667. The Gujarat High Court, after considering the decision of the Supreme Court in the case of Mugneeram Bangur& Co. (supra) held that if separate items had been valued for the purpose of sale, even though it is a realisation sale, the amounts realised out of sale can be brought to tax. The Gujarat High Court thus held that in a case where itemised values for different types of assets had been fixed, the principles as discussed by the Supreme Court in the case of Mugneeram Bangur & Co. (supra) Would not apply but that on the other hand, the other decision of the Supreme Court in the case of C/7V. B.M. Kharwar[t969] 72 ITR 603 would apply. The learned counsel for the assessee tried to argue in this connection that while deciding this case, the notice of the Hon'ble Judges had not been attracted to the proposition that when goodwill is sold, the business concern as a whole must also be sold. He thus argued that that is why the Gujarat High Court held in this case that there was no slump sale in that case.
8. We, however, differ with the above argument of Shri Prasad, learned counsel for the assessee. We would like to note the decision of the Allahabad High Court as cited by the learned DR in the case of Chandra Katha Industries v. CIT [1982] 138 ITR 168. The Allahabad High Court clearly held in that case that in every case where a concern carrying on a business is sold as a whole it cannot be assumed that the transfer was for a slump price. Taking cue from that decision, we are of the view that it may be that a business concern may be sold as a going concern and in that way the sale as such can be considered as a slump sale but it is not necessary that there will be a slump price fixed for that sale. If there be arrangement for fixation of itemised prices for the different assets sold, it would be a case of a slump sale of the business without a slump price. The instant case is an example of that type.
9. Finally, we also like to examine the other decision of the Karnataka High Court as cited by the learned DR in the case of Syndicate Bank Ltd. v. Addl CIT [1985] 155 ITR 681. It is found that in that particular case also, it was clearly held by the Karnataka High Court as below:
If there is a transfer of a whole concern and no part of the agreed price is indicated against different and definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets, in specie.
It is clear from the above decision that there need not be a slump price in every case of realisation or winding-up sale. Only where a slump price is mentioned for the sale of the entire concern, without apportioning the same in an itemised manner, the case would be governed by the decision of the Supreme Court in the case of Mugneeram Bangur & Co. (supra), as discussed by the Karnataka High Court. However, the different Courts have recognised the possibility of existence of a realisation sale also with the total sale consideration being apportioned against different assets in an itemised manner. In such cases, as we have seen from the decisions of the different courts as mentioned above, it would be required to take into consideration profit under Section 41 (2) for each item of asset, in case such profit arises. In the instant case, therefore, we are of the view that inasmuch as separate prices have been mentioned in respect of the building and also the other assets like furniture etc., it was required of the ITO to have computed the balancing charges under Section 41(2) in respect of such items.
10. Shri Prasad, thereafter, has argued that the CIT had passed his revisionary order only on the ground that this is not a case of sale of the business undertaking of the assessee as a going concern and on this ground alone he considered the order of the ITO to be erroneous and prejudicial to the interests of revenue. Shri Prasad contends in this connection that if the Tribunal disagree with this view of the CIT, it would not be permissible for the Tribunal to uphold the order of the CIT on any other ground. In support of this contention, he has relied on the decision of the Karnataka High Court in the case of CIT v. L.F.D'Silva[ 1991] 192 ITR 547 at page 554 and also of the Punjab & Haryana High Court in the case of CIT v. Jagadhri Electric Supply & Industrial Co. [ 1983] 140 ITR 490. Further reliance has also been placed in this connection on the decision of the Rajasthan High Court in the case of State of Rajasthan v. Bundi Electric Supply Co. Ltd. reported in AIR 1970 Raj. 36 at page 41. Although we agree with the above legal proposition as pointed out by Shri Prasad, we would, however, show below that the impugned revisionary order of the CIT was not merely on the consideration that the sale as effected by the assessee was not a sale of a going concern. There is no doubt about the fact that this was one of the arguments taken up by the CIT in his impugned order with which we do not agree. But the CIT also considered the other aspects of the matter duly. The CIT clearly mentioned in his impugned order (at page 4) that the prices for the two depreciable assets viz., building and furniture etc., had clearly been specified and separately mentioned. At page 1 of the said order also, he had mentioned -
The price is paid item-wise... The sale price is fixed separately for the building, furniture, goodwill etc. and hence the difference between the actual cost of the assets and the WDV should have been assessed as profit under Section 41(2) Ultimately, in the operative portion of his order also, the CIT stated as below:
On a consideration of the facts of the case, it is clear that the assessee has sold depreciable assets like building, furniture, etc. after specifying the cost of each item. The sale also cannot be regarded as having been made for a slump consideration. Therefore, the provisions of sec. 41(2) are clearly attracted.
It is found that here, the CIT did not at all mention about the slump sale but simply stated that this was not a case of a slump consideration. We have already seen above that actually, the facts are so. We have concern without there being a slump consideration. The present case falls into such category. The CIT has also approached the present case from that angle although he has not discussed the issue in such categorical and explicit manner. We are, therefore, finally of the view that the impugned order as passed by the CIT not simply on the consideration that this is a case of a slump sale of the business concern of the assessee as a going concern. We thus uphold the order of the CIT.
11. The appeal filed by the assessee is dismissed.