Deputy Commissioner Of Income Tax vs Mahalasa Gases And Chemicals (P) Ltd. on 1 April, 2004

[Cites 33, Cited by 6]

Income Tax Appellate Tribunal - Bangalore

Deputy Commissioner Of Income Tax vs Mahalasa Gases And Chemicals (P) Ltd. on 1 April, 2004

Equivalent citations: (2004)84TTJ(BANG)992

ORDER

P. Mohanarajan, J.M.

1. This appeal is by the Revenue and is directed against the order of the learned CIT(A)-III, Bangalore, dt. 7th June, 2002 for the asst. yr. 1999-2000.

2. We have heard both sides and perused the records. The assessee-company had filed its return of income for the asst, yr. 1999-2000 showing a total income of Rs. 26,69,230. During the relevant financial year, the assessee-company had sold their business as a 'going concern' to M/s Praxair Carbon Dioxide (P) Ltd. for a consideration of Rs. 2.9 crores (net of liabilities). The company in its return of income has mentioned in Schedule 16 in the notes forming part of the accounts as under:

"The company had obtained the approval of the shareholders in the EGM held on 3rd Jan., 1998 for sale of business undertaking as a going concern for a slump price. Accordingly, vide agreement dt. 9th Feb., 1998 with Praxair Carbon Dioxide (P) Ltd., the CO2 manufacturing and distribution business is transferred on 1st April, 1998 for Rs. 3,40,39,332 and capital profit of Rs. 1,95,18,130 arising on such sale is transferred to capital reserve as per the decision of the Board of Directors. As per legal experts opinion such a slump sale is not taxable and hence, requires no provision for taxation."

The assessee-company had claimed the profit of this sale of going concern was a non-taxable capital receipt.

3. The AO did not accept the claim of the assessee. According to the AO this transfer includes both tangible and intangible assets. Tangible assets include land, building, structures and directors (sic), the plant and machinery etc., and intangible assets include valid licenses, permits and sanctions, benefit of all pending contract and more importantly 'non-competition'. The AO did not accept the claim of the assessee, according to him all the assets sold are depreciable assets and the written down value should be the cost of acquisition and the sale consideration is already known. Therefore, he computed the capital gains under Section 50 of the IT Act. On first appeal, the learned CIT(A) granted relief to the assessee considering the submissions and the facts. The learned CIT(A) in his order held as follows: , "11.5 In this case also, there is the question of this unexpired portion of contract with suppliers of raw CO2 to the assessee and it is indeed impossible to determine the benefit that would have accrued to the assessee in future years the benefit of which has gone to the purchasers in the sale agreement. Similarly, the cost of technology and improved technology is yet another imponderable.

11.6 Apart from this 'cost of acquisition' which is very difficult to determine, there is the issue of cost of improvement [Evans Fraser & Co. Ltd. (In Liquidation) v. CIT (1982) 137 ITR 493 (Bom)]. Then I find that yet another problem is the compensation for 'non-competition' which is also included in the sale consideration and in what way to apportion the same between 'capital portion' and 'extinguishment of business'. Actually, I find that due to this issue of 'non-competition' perhaps it would be difficult to determine the cost of acquisition even under the newly introduced Section 50B of the Act because such a situation is not envisaged even in this newly introduced provisions of Section 50B of the Act.

11.7 As stated above, the computation of capital gain as done by the AO under Section 50 cannot be upheld .which is deleted because what was sold was entire undertaking and not a few depreciable assets and the sale price also included compensation for non-competition for 10 years which was different from the sale of undertaking as such."

4. Aggrieved with the finding of the learned CIT(A), the Revenue is in appeal before us. The Revenue in their appeal raised the following grounds:

"(i) That the CIT(A) has erred in holding that assessee has sold the entire business as. a going concern and not just depreciable assets without verifying the fact that the assessee has retained certain assets like land Rs. 97,000, vehicle Rs. 4,35,081 and 2,410 cylinders each valuing approximately Rs. 3,000 per cylinder and cylinder deposit aggregating to Rs. 1.5 crores.

(ii) That the CIT(A) ought to have considered the fact that the buyer had taken over the business only selectively.

(iii) That the CIT(A) has failed to appreciate the fact that the assessee had transferred all the depreciable assets and bulk of the consideration is attributable to those assets and hence capital gain under Section 50 is exigible.

(iv) That the CIT(A) ought to have considered the fact that capital gains is all exigible since the assets transferred include depreciable assets and the capital gains computable is short-term capital gains under Section 50 in the light of Hon'ble Delhi High Court judgment in the case of P.N.B. Finance Ltd. v. CIT (2001) 252 ITR 491 (Del)."

5. The learned Departmental Representative Shri Amitabh Kurnar, vehemently contended that the claim of the assessee about the slump sale was totally incorrect. The AO held that as three of the assets namely, sundry debtors at Rs. 12,97,150, land at Rs. 97,000 and vehicle at Rs. 4,35,029 were not sold as part of the going concern, it could not be said that the agreement entered into with the buyer was a sale of an undertaking as a going concern and therefore, was not a slump sale. The learned Departmental Representative crystallised the issue on the following four points:

1. Whether there is a slump sale.

2. If there was a slump sale, whether Section 50B is retrospective and applicable.

3. If there was no slump sale, whether the sale of assets is taxable.

4. If the sale of assets is taxable what is the cost of acquisition, what is the cost of sale and what is the cost of improvement.

6. The learned Departmental Representative submitted that what mitigates against the concept of slump sale is that the assessee had not sold certain assets of the undertaking viz.:

                    Sundry debtors              12,97,150
                    Land                           97,000
                    Vehicle                      4,35,029

The learned Departmental Representative also pointed out even the cylinders which were sold were described as only "legal cylinders". In other words, certain other old cylinders which were part of the undertaking, were not transferred and it was only the cylinders which were owned by the assessee which could be legally filled with CO2 were transferred and delivered to M/s Praxair as a part of the concern. It was stated that the motor car valued at Rs, 4,35,029 was not transferred as the vehicles were under the use of the directors of the assessee with sentiments attached. It was submitted that in a slump sale sentiments had no role to play and all assets have to be transferred. The learned Departmental Representative wondered, whether any credence could be given to the contentions of the assessee that lump sum consideration determined in the agreement dt. 9th Feb., 1998 was arrived at without valuation of the various assets of the undertaking. The learned Departmental Representative stated that it could hardly be accepted that the American company had acquired the undertaking without any knowledge as to costs and that the sale consideration was arrived at "in a dream". He then drew our attention to para 9 of the CIT(A)'s order that sale of the business undertaking would envisage without itself a transfer of all the rights to manufacture, produce or process an article or a thing within the meaning of Section 55(2)(a) and that the cost of such a right ought to be taken as nil. It was submitted that the name, Mahalasa Gases & Chemicals (P) Ltd., (MGCL) was not transferred to M/s Praxair and therefore all the assets of the company could not be said to be transferred as a very important component thereof viz., the name itself had remained with the transferor. It was further submitted that on the one hand, assessee had argued that manufacture of CO2 could be undertaken by any party and on the other hand, it was being submitted that a non-compete fee was paid. It was submitted that it was a contradiction inasmuch as there could be no question of non compete fee being payable in an open environment and even if such a fee was payable, it could have no value as anyone was entitled to manufacture CO2.

7. The learned Departmental Representative summarised the findings of the CIT(A) as under:

(1) That there was a slump sale.

(2) That also included in the slump sale price was consideration for non compete for a period of 10 years.

(3) That there was no revaluation of assets either by the seller or buyer prior to 9th Feb., 1998.

(4) That there was no apportionment possible between tangible and intangible assets.

(5) That after setting aside the order of the AO in Syndicate Bank Ltd., effect has not been given to the order of the High Court even after 17 years due to practical difficulties faced by the Department.

8. The learned Departmental Representative thereafter highlighted certain features of the agreement. The learned Departmental Representative drew our attention to recital of the agreement under which it was noted that the assessee carried on business of manufacture, sale and distribution of CO2 at various places in India including inter alia, at Mangalore in the State of Karnataka, where MGCL was established and was operating a manufacturing unit. Recital 2 was emphasised which noted that it was "pursuant to negotiations between the parties" that the manufacturing unit of MGCL agreed to be sold as a going concern together with all the business and all goodwill in respect thereof. Attention was invited to Clause 1.2 which noted that the unit was agreed to be sold, transferred, conveyed and assigned to Praxair as a going concern together with all the said business and all goodwill in respect thereof or relating thereto (except the name MGCL). It was emphasised that there could not be sale of goodwill without sale of name MGCL,

9. The learned Departmental Representative further drew our attention to Clause- 4 of the agreement with reads as under:

"4. Non-competition and Exclusivity 4.1 In consideration of the obligations assumed by Praxair under this agreement and Praxair agreeing to purchase and pay for the said unit and the said business and all the goodwill etc., pertaining thereto, the sufficiency of which consideration MGCL hereby acknowledges, MGCL agrees to abide by the following non-compete provisions. MGCL further agrees, in recognition that it is essential to preserve the value of the said business, that will be a condition of this agreement, that MGCL's promoters/directors, Dr. K.D. Kini, Mr. K.C. Kini and Mr. K.B. Kini will likewise, agree to the said non-compete provisions and to abide thereby on terms to be separately agreed between Praxair and them. MGCL further agrees and acknowledges, that the provisions of this Clause 4 constitute an essential condition of the contract between the parties, any breach whereof, will entitle Praxair either to terminate this agreement and/or to claim appropriate damages, apart from seeking any injunctive, prohibitory or similar urgent or interim relief as referred to in Clause 15.4 below.

4.2 MGCL agrees and undertakes, not to compete, directly or indirectly with Praxair within India in respect of the products and accordingly, not to manufacture, sell, market or distribute products therein, whether by itself or by or through any others, and not to enter into any joint venture or other collaborative arrangements for such manufacture, sale, marketing and/or distribution of products therein for a period of ten years from the transfer date.

4.3 MGCL undertakes, within a period of 30 (thirty) days from the effective date of this agreement (as defined in Clause 13.1), to provide to Praxair, all supplier and customer lists and other pertinent information and data pertaining to their suppliers and customers in respect of any of the products, past, present and prospective, and, to the extent possible, to introduce the concerned Praxair personnel to all such suppliers and customers and generally to assist Praxair in their dealings with such customers. MGCL agrees and undertakes that it will not, after the transfer date, deal in any manner with such customers, in respect of products, other than at the request and for the benefit of Praxair.

4.4 MGCL agrees and undertakes not to render consultancy or advisory or other services of any kind to any others, for or in any manner connected with, the manufacture, sale or distribution of products, in India.

4.5 Notwithstanding anything in the foregoing sub-clauses, it is agreed and understood, that the promoters/shareholders/directors of MGCL will be entitled to continue to carry on the following business activities:

Design and sale of CO2 manufacturing plant;

Design and sale of CO2 storage vaporiser systems;

Design and sale of CO2 cylinder manifold and distribution systems;

Design and sale of bulk CO2 mobile tankers;

Design and sale of CO2 cylinder filling station;

Research and development in the field of CO2, including in new processes for the manufacture of CO2; provided that Praxair shall have preferential first option, on duly agreed commercial terms, to the use and exploitation of the results of all such R & D in India, either on an exclusive or non-exclusive basis, as may be desired by it. To enable Praxair to. exercise or decline such option, an offer will be made to it, specifying separately, the commercial terms of offer, for exclusive as well as non-exclusive rights of use and exploitation. Praxair shall have a period of 90 (ninety) days from the date: of receipt of. such offer, to exercise its option and to negotiate and agree to the terms for such use and exploitation. In the event of Praxair exercising the option and coming to terms, within the said time for exclusive use and exploitation, Praxair will have such exclusive rights and, accordingly, no offer may be made to any others, within India. In the event of Praxair exercising the option and coming to terms, within the said time for non-exclusive use and exploitation, Praxair will have such non-exclusive rights and other parties within India may be offered similar non exclusive rights, but not for any lower price or consideration or on better terms, than those agreed with Praxair. In the event of Praxair failing to exercise the option or to come to terms, within the said time, for exclusive or non-exclusive rights, then either exclusive or non-exclusive rights may be offered to other parties in India, but not for any lower price or consideration or on better terms, than those offered to Praxair.

Design and sale of equipment for handling CO2".

10. The learned Departmental Representative further submitted that Clause 4.5 indicated that the promoters/shareholders/director of MGCL were entitled to carry on several business activities and therefore, the restriction was not completely restrictive. Attention was invited to Clause 5.5 to show that certain items of assets and liabilities were not to be taken into account. Particular emphasis was placed on cylinder deposits amounting to Rs. 1.5 crores. He also drew our attention to Clause 6.1 to 6.4 which reads as follows:

"6. Cylinders 6.1 MGCL assures Praxair that it, along with the other groups concerns referred to in Clause 2.1 above, are in a position to and shall transfer to Praxair, at no extra cost to Praxair, absolute title to an aggregate 1,590 (one thousand five hundred and ninety) CO2 gas cylinder of a capacity of 22.5-31 Kgs which are "acceptable cylinders" duly tested as per the Gas Cylinder Rules, 1981. In addition, MGCL is in a position and shall make available perpetually to Praxair, on lease/rental basis, 2,410 (two thousand four hundred and ten) "acceptable cylinders" of 22.5 to 31 Kgs capacity, duly tested as per the Gas Cylinders Rules, 1981, on an annual lease/rental of Rs. 3,41,000, (Rs. Three lakhs forty one thousand), for which purpose, the parties will enter into a separate appropriate agreement. All such cylinders so transferred or made available, will be free of any encumbrances, whatsoever, other than any such as relate to those specific liabilities specified in Annex. 4 to this agreement which are taken over by Praxair.

6.2 If and to the extent it is found by physical verification, within 6 (six) months after the transfer date, that there is any shortfall in the number of such "acceptable cylinders", sold or made available on lease/rental to Praxair as aforesaid, the transfer price payable by Praxair will stand reduced at the mutually agreed rate of Rs. 3,000 (Rs. Three thousand) per cylinder, such reduction to be made, in the case of shortage of ownership cylinders, proportionately in the transfer price payable by Praxair under this and each of the other similar agreements with the other group concerns mentioned in Clause 2.1 above and in the case of shortage of leased cylinders from the transferred price payable hereunder. MGCL agrees to pay the concerned amounts in this respect to Praxair upon written request.

6.3 For the purpose of this agreement, the expression "acceptable cylinders" shall mean cylinders with valuable document of ownership, having matching manufacturers tests and certificates and appropriate currently valid approvals/certificates of usability from the Chief Controller of Explosives, Government of India, as well as the certification/marking to indicate their usability pursuant to the statutory required periodical testing as per the Gas Cylinder Rules, 1981.

6.4 If and to the extent it is found that any cylinders are "test due" as at the transfer date, are any cylinders do not have the necessary markings to indicate that they are not "test due" as at that date, Praxair will be entitled to test the concerned cylinders, and the cost thereof, at the rate of Rs. 100 (Rs. One hundred) per cylinder, will be to MGCL's account and deducted from the net transfer price. Only those cylinders which successfully pass such testing to the satisfaction of Praxair will be purchased or taken on lease/rental as aforesaid by Praxair and, to the extent that the number of cylinders that successfully pass such testing is less than the numbers specified above, the transfer price payable by Praxair will stand reduced at the aforesaid rate of Rs. 3,000 (Rs. three thousand) per cylinder of the shortfall. MGCL agrees to pay the concerned amounts in this respect to Praxair, upon written request."

It was submitted that if cylinders were not delivered, price of cylinders was fixed at Rs. 3,000 per cylinder and, therefore, the cost, attributable to a cylinder could be determined.

11. The learned Departmental Representative also drew our attention to Clauses 8.1 & 8.2 r/w Annex.-IV and vehemently contended that only certain assets were transferred. He also drew our attention to Clause VI of the agreement which relates to inventory. He argued that Clause 9.1 provides for a joint inspection and due diligence reports. According to the learned Departmental Representative, this contradicts the finding of the learned CIT(A) with the valuation taken. Similarly, our attention was drawn to Clause 12.1(b). The learned Departmental Representative submitted that according to this clause, i.e., 12.1(b) clearly indicates that nothing was required for intangible assets. It was further submitted that land valued at Rs. 97,000 was not transferred. He also drew our attention to p. 77 of the paper book and stated that the land was adjacent to the land on which the undertaking was operating.

12. The learned Departmental Representative submitted on the following lines:

(i) It would not be considered as a slump sale because land valued at Rs. 97,000 was not transferred.

(ii) Only 1,190 cylinders were transferred and 2400 cylinders were taken on lease were sub-leased to Praxair.

(iii) The security deposits of Rs: 1.5 crores were not transferred,

(iv) Only certain liabilities listed in Annex. IV were transferred as follows:

Rs

1. Karnataka State Finance Corpn. B'lore 15.22 lakhs

2. Karnataka State Finance Corpn. M'lore 1.61 lakhs

3. Syndicate Bank, Hampankatta, M'lore 14.00 lakhs

4. Dept. of Industries, Govt. of Karnataka, Mangalore 3.23 lakhs The learned Departmental Representative vehemently contended that the mere fact that Section 50B was introduced in the statute book w:e.f. 1st April, 2000 by the Finance Act, 1999 would not mitigate against the contention that even prior to the introduction of Section BOB, a slump sale could be taxable. He further argued that under Section 69A of the IT Act the unexplained money, bullion, jewellery or other articles or things not recorded in the books of account were brought to tax even before the introduction of Section 69A. Therefore, though Section 50B was introduced in the statute book w.e.f. 1st April, 2000 a slump sale was taxable even prior to the introduction of Section 50B. The learned Departmental Representative relied on the decision of the Bangalore Bench of the Tribunal in the case of Kamli Co-operative Sugar Factory Ltd. v. Jt. CIT in ITA No. 375(B)/2000, dt. 23rd Oct., 2000. The learned Departmental Representative further submitted that the facts of the aforecited case are similar to the case on hand and the ratio laid down therein is applicable to the facts of this case. In respect of the apex Court decision, in the case of CIT v. Mugneeram Bangui & Co. (1965) 57 ITR 299 (SC), the learned Departmental Representative submitted that the decision was not applicable to the facts of the assessee's case.

13. The learned Departmental Representative further relied on the decision of the Karnataka High Court in Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681 (Kar). Our attention was invited to p. 687 of the judgment. It was suggested that the decision of Bombay High Court in the case of Killick Nixon & Co. v. CIT (1963) 49 ITR 244 (Bom) was approved in Supreme Court in Killick Nixon & Co. v. CIT (1967) 66 ITR 714 (SC) and therefore, impliedly it could be held that the Hon'ble Supreme Court had approved the taxability of capital gains in the case of a slump sale; provided the cost of acquisition was determinable. It was submitted that Syndicate Bank did not agree with Killick Nixon & Co., and therefore, it could be concluded that Syndicate Bank cannot be held out as supporting the proposition that slump sale is not taxable. It was submitted that proposition that the cost .of acquisition or full value of consideration was not attributable to various assets merely presented a difficulty and the mere fact that a difficulty existed cannot lead to the conclusion that estimation was impossible. Attention was invited to Calcutta High Court decision in Hindustan Co-operative Insurance Society, (1993) 201 ITR 716 (Cal) wherein the case of a life insurance business which was nationalised, it was argued for the assessee that it was not possible to determine the cost of improvement. It was submitted that despite any difficulty faced in determination of either cost of acquisition or full value of the consideration or cost of the improvement the Tribunal should itself determine any or all the components thereof.

14. The learned CIT/Departmental Representative thereafter referred to the decision of the Supreme Court in CIT v. Artex Manufacturing Co. (1997) 227 ITR 260 (SC). That was the case dealing with the sale of entire business of a firm to the company and the question which arose was whether the provisions of Section 41(2) brings to tax the difference between the WDV and the actual cost applied in the case of the assessee. Attention was particularly invited to the passage at p. 270C being an extract of the speech of Lord Phillimore speaking for the judicial committee. It was submitted that even in the case of a realisation sale, if there is an item which could be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with a sale of the whole concern, might conceivably be treated as taxable income. It was submitted that the principle laid down was applicable to the assessee. Attention was thereafter invited to the same judgment at p. 273E and the decision of the Supreme Court in CIT v. B.M. Kharwar (1969) 72 ITR 603 (SC) and finally at p. 276C, it was submitted that it was not a material circumstance whether values were mentioned in the agreement or not. It was submitted that even if the value was determinate by way of attribution, capital gains are exigible to tax, Reference was also invited to the decision of Madras High Court in the case of Addl CIT v. Govinddoss Purshothamdoss (1980) 124 ITR 319 (Mad) for the proposition that in a slump sale value could be attributed by looking into the value shown in the transferor and transferee's cases and for this proposition, reliance was also placed in the case of B. Raghurama Prabhu Estate, Executrix Smt. M. Kaveri Bai & Ors. v. Jt. CIT. The decision of the Madras High Court in CIT v. S. Natarajan (1999) 236 ITR 472 (Mad) was cited for the same proposition.

15. It was submitted that the value of the plant and machinery and land could be obtained from the valuation report obtained from the purchaser Praxair and therefore, it could constitute the outside source for bringing to tax the surplus. The learned Departmental Representative submitted that it was, therefore, not a slump sale as all the assets and liabilities had not been transferred. Once it is not a slump sale, the values could be obtained aliunde "from another source" and for this purpose/he produced the income tax records of the transferee's files and a valuation report. It was submitted that the so-called intangibles which were purportedly transferred by MGCL to Praxair were without value as goodwill can only to be termed to be payable for the name and reputation of a concern and without the name being transferred goodwill could not be transferred and in this case the name MGCL had not been transferred. It was submitted that there could be no value for the list of suppliers and as the right to manufacture had not been transferred, there could be no value for that right and even assuming that the right to receive raw gas could be considered as having value, it was on revenue account. It would, therefore, be proper to submit that the matter be sent back to the AO to value each item and bring to tax the surplus. Insofar as the restrictive covenant given to MGGL was concerned, it was submitted that not only MGCL but also its three directors/promoters had received non-compete fees and therefore, there could be no attribution of any part of the consideration towards the restrictive covenant and even assuming for the sake of argument, there was a restrictive covenant, the amount attributable or apportioned to the restrictive covenant must be apportioned out and the balance brought to tax as consideration for the transfer of assets. Insofar as the restrictive covenant was concerned, it was submitted that it was nothing but deferred revenue and should be brought to tax on that account. Lastly, it was submitted that assuming for the sake of argument and without admitting the same, if the sale were to be considered to be a slump sale, the entire consideration ought to be attributed only towards tangibles (the intangible having no value) and, therefore, the assessment ought to be set aside to the AO for determination of the surplus arising on the slump sale.

16. In reply, the counsel for the respondent submitted that there was no principle in law that where each and every asset and liability was not transferred, it was destructive of the transaction being termed a slump sale. It was submitted that the question as to whether the transfer of the business as a going concern was a slump sale or not must be looked at having regard to the totality of the facts and circumstances of the case and one cannot take a super technical approach to this determination. It was submitted that when a business is sold as a going concern having regard to the totality of the circumstances and the documentation executed between the parties if the intention of the parties in a commercial sense was to transfer the whole business for a slump price and not to make a sale of itemised plant, machinery, buildings, etc., the fact that a' few items were not transferred cannot be destructive of the transaction being a slump sale. It was submitted that the decision of the Bombay High Court in CIT v. Naikeshari Piakashan Ltd. (1992) 196 ITR 438 (Bom) established this principle. It was pointed out that in the Bombay High Court decision only one of several branches of the assessee was transferred as a going concern and the Court accepted that the entire business activity of each branch was a going concern which was sold at a slump price. What was necessary to look at was whether the business, which is transferred can be considered to having been transferred as a whole lock, stock and barrel and the mere fact that some items were not transferred would not be destructive of the transaction being described as a slump sale. The decision of the Bombay High Court in Premier Automobiles Ltd. v. ITO (ITA No. 97 of 2003) was referred to.

17. It was submitted that applying the principles of the Bombay High Court to the case of the assessee, the CO2 manufacturing business had been transferred lock, stock and barrel. Therefore, it was a slump sale. Without prejudice, it was submitted that insofar as the land was concerned, a perusal of p. 77 of the paper book indicated that the land was physically distinct and unbuilt on and in fact the land which was retained by the assessee was not part of the gas plant and nothing was constructed on the said land. The land retained by the assessee was never used in the business of manufacturing, selling and distribution of CO2 at any time. In fact, there was no access to the retained land. Between the land on which the factory was situated and the common approach road referred to by the Departmental Representative was a private road belonging to the BWSSB and the assessee had to take special permission to use the road and also to construct a culvert across the pipeline carrying water to the treatment work which ran between the road and the factory land. Therefore, it is submitted that in order to have access to the retained land a separate culvert would have to be constructed after getting the permission from the BWSSB. Such permission had in fact not been obtained nor had the culvert been built. As such the land was even today inaccessible on account of the road built by the BWSSB. Therefore, it was submitted that land retained by the assessee was never used in the business of manufacturing, selling and distribution of CO2 and could not be considered as a part of the undertaking.

18. Insofar as Esteem car was concerned, it was submitted that the reference by the learned Departmental Representative to the expression "sentiments" used by the CIT(A) ignored the rationale given by the assessee vide para 2(c) of the submissions dt. 3rd May, 2002 made to the CIT(A) which was as under:

"(c) Vehicles of Rs. 4,35,029: This is the book value of a Maruti Esteem car that was for use of the directors of the appellant company. Since the appellant company continues to exist (it only sold and transferred an undertaking it owned and, being a company it did not become extinct merely because of that sale) it still has directors and hence, that car continues to be retained for use of the directors. Needless to say, if the car was being used in the business of manufacturing, selling and distributing carbon dioxide it would have automatically got transferred to the buyer, but that is not relevant in the present case."

19. The next point raised by the learned Departmental Representative was the alleged non-transfer of all cylinders and the learned CIT/Departmental Representative referred to para 5.2 of the CIT(A)'s order namely that only the cylinders owned by the appellant which could be legally filled were transferred. The learned Departmental Representative had referred to Clause 6 of the agreement that the ownership of 1590 acceptable cylinders were required to be transferred and 2,410 cylinders were to be given on a rent at lease rent of Rs. 3,41,000 per year. The counsel pointed out that the cylinders, which could be 'legally used', were to be transferred and the cylinders, which were of junk value or scrap, were not part of the transaction. This was because under the Gas Cylinder Rules, 1981, legally acceptable cylinders meant cylinders which were approved by the Department, had material certificates, were tested and ownership was defined. Obviously, scrap was not the subject-matter of the transaction and it could hardly detract from the transaction being a slump sale.

20. Insofar as Clause 5.5 of the agreement is concerned, which referred to cylinder deposit of Rs. 1.5 crores, it was submitted that this was not referring to deposits lying with the assessee but overall deposits with other concerns in the group. Attention was invited to p. 137 of the paper book under current liabilities and provisions, security deposits (cylinders) which showed nil as on 31st March, 1998 and as on 31st March, 1999. Therefore, it was submitted that this contention was baseless.

21. Insofar as the sundry debtors appearing in the balance-sheet as of 31st March, 1999 were concerned, it was submitted that these represented the amounts owned by Praxair as a result of the transaction itself and therefore, this could not be considered as assets relating to the going concern inasmuch as these were amounts owed to MGCL as a result of the transaction. With regard to the reference to Annex. 4 and liabilities transferred therein by the CIT/Departmental Representative, it was submitted that the liabilities as of 31st March, 1998 was Rs. 83.66 lakhs and as on 31st March, 1999 was nil. The transfer of the undertaking had taken place on 1st April, 1998. Thus, entire liability of the undertaking had been transferred. In the circumstances, it was submitted that on a factual basis the transfer encompassed all asset and liabilities relating to manufacturing and distribution of CO2 business. Thus, the business which was taken over as a going concern by Praxair was a going business undertaking producing high quality CO2, meeting international quality standards and a working plant based on low temperature technology developed in-house which made it possible to store and transport the product in bulk storage tank/tankers together with benefits of pending contracts such as raw gas supply without which the plant would have remained idle. Praxair also took over all liabilities pertaining to undertaking and also the current assets, stock of finished goods, spares, consumables, sundry debtors, all legal cylinders including the cylinders which the assessee had taken on rental from third party on the same rental charges as were being paid prior to the transfer. Therefore, it was submitted that this was a case of true slump sale to a totally unconnected third party by the assessee.

22. With reference to the submission of the learned CIT/Departmental Representative as to Clause 1.2 that the assessee had also agreed to sell, transfer, convey and assign to Praxair the undertaking as a going concern with all the business and goodwill except the name of MGCL, the counsel for the assessee submitted that it was not correct to equate good will with the name alone. The submission made had two facets. Firstly, that goodwill had several facets to, it. Attention was invited to the decision of Bombay High Court in Evans Fraser & Co. Ltd. (In Liquidation) v. CIT (1982) 137 ITR 493 (Bom) alp. 511:

"It has been zoologically explained by Rich J. in Federal Commissioner of Taxation v. Williamson (1943) 7 ATD 272, quoted at pp. 39-40 of the 4th Edn. of the valuation of company shares and business by Adamson and Coorey in these terms : .

'In Whiteman Smith Motor Company v. Chaplin (1934) 2 KB 35, the types were zoologically classified into cats, dogs, rats and rabbits. The cat prefers the old home to the person who keeps it, and stays in the old home although the person who has kept the home leaves, and so it represents the customer who goes to the old shop whoever keeps it, and provides the local goodwill. The faithful dog is attached to the person rather than the place, he will follow the outgoing owner if he does not go too far. The rat has no attachments, and is purely casual. The rabbit is attracted by mere propinquity. He comes because he happens to live close by and it would be more trouble to go elsewhere. These categories serve as a reminder that the goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is conducted, and the personality of those who conduct it and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom.'"

The learned counsel submitting as above contended that the mere name of MGCL would not constitute the goodwill of the going concern which was transferred by the assessee to Praxair. It would encompass within its fold the potentiality of retaining its customers, the benefit of raw material contracts, benefit of licences, the benefit of the quality of its plant, the benefit of its network distribution, the quality of trained employees, the low temperature technology of the plant and such other components of the business. Secondly and in any view of the matter, it could hardly be said that the value of the name MGCL was greater than the value of name Praxair keeping in view of the fact that MGCL had capacity of 18 tonnes per day and Praxair was a giant leading manufacturer of CO2 gas in the world controlling a capacity of over 30,00,000 tonnes annually. Therefore, it was submitted that the non-transfer of name MGCL was not destructive of the transfer of goodwill and consequential of the transaction not being a slump sale. With reference to the submissions made by the learned CIT/Departmental Representative referring to para 1.3 that only certain liabilities as listed out in Annex. 4 were transferred, it was submitted that the liability taken over was only the liabilities relating to the business which were outstanding as on the date of the transfer. It was submitted that other liabilities had, in fact, been discharged and therefore, the question of transferring them did not arise.

23. With reference to paras 9.1 and 9.2 of the agreement which referred to due diligence being carried out by Praxair, counsel for the assessee pointed out that on a bare reading of Clause 9.1, it would be clear that the object and thrust of the clause was that all the parties would jointly inspect the unit and its assets and properties, so as to satisfy Praxair that these tally with the inventory and details available with it and in the due 'diligence report. Clearly, therefore, the due-diligence report referred to was a technical due-diligence and had nothing to do with the valuation of the assets. Reference in the agreement to the list of individual assets made available to Praxair by the assessee which formed part of the agreement was to satisfy Praxair regarding the product capacity, etc. The intention of Clause 9.1 was only to ensure that the assessee did not remove any assets from the plant after the agreement' was signed and prior to the transfer. Clause 9.1 and 9.2 did not have any reference, whatsoever, to the value of the individual assets or to the concern as a whole. With reference to Clause 10.4(a) which required the assessee to discharge the dues upto the date of sale and Clause 10.5 which provided that the assessee would help Praxair to obtain all permissions, assessee's counsel submitted that these clauses, in fact, supported the proposition that the transfer took place as a going concern insofar as up to the date of transfer, the dues were required to be paid by the assessee and after the date of transfer they were to be paid by Praxair and the requirement in Clause 10.5 was only to be accepted when a going concern was transferred lock, stock and barrel to a new purchaser. As regards Clause 11.1 which required a conveyance to be executed, reference was invited to the decision of the Bombay High Court in Premier Automobiles Ltd. (supra), wherein a similar conveyance was required to be executed arid the Bombay High Court pointed out that the object and purpose of conveyance being executed was the legal transfer of the land and for Stamp Act purposes and question of the conveyance detracting from a slump sale did not arise. Accordingly, it was submitted that having regard to the conspectus of facts the transfer of the undertaking, manufacturing and distributing CO2 was a transfer of an undertaking as a going concern and would constitute a slump sale.

24. The learned counsel vehemently contended that the submission of the learned CIT/Departmental Representative that the decision of the Supreme Court in Mugneeram Bangui & Co. (supra) was not applicable to the assessee, was incorrect. The submission of the CIT/Departmental Representative that the decision of the Supreme Court was on account of there being no capital gains in asst. yr. 1949-50 was erroneous. Counsel for the assessee submitted that the question before the Hon'ble Supreme Court in CIT v. Mugneeram Bangui & Co. (supra) was the determination as to whether the amount, which was put down as relating to goodwill in the agreement to sell the business could be attributable to the land which was stock-in-trade. It is important to note the three questions raised which were answered by the Hon'ble Supreme Court, of which question Nos. 2 and 3 read as under:

"(2) Whether, on the facts and circumstances of this case, the sum of Rs. 2,50,000 represented the surplus on the sale of lands which was the stock-in-trade of, the assessee-company or was the value of goodwill alleged to have been transferred.

(3) Whether, on the facts and circumstances of this case by the sale of the whole business concern, it could be held that there was taxable profit in the sum of Rs. 2,50,000?"

In this case, the agreement was to sell the business as a going concern together with goodwill, stock-in-trade, fixtures, fittings, benefits and advantages at a price of Rs. 34,99,300. Clause 5 noted that all debts and liabilities would be transferred excluding certain debt. The agreement also listed eight assets whose total value was Rs. 36,21,029 less liabilities Rs. 1,21,729 led to a net result of the sale consideration amounting to Rs. 34,99,300. The case of the AO was that the amount of Rs. 2,50,000 was actually charged by the vendors as a lump sum amount of profits on sale of valuable stock-in-trade and not goodwill as alleged. Thus, implicitly the argument of the Revenue was that although the business was transferred as a going concern for a slump price it must be regarded as an itemised sale and once it is regarded as an itemised sale, the only question which required to be determined was whether any portion of the slump price purportedly for goodwill was on account of the stock-in-trade. Thus, it will be noted that the decision did consider the question as to whether slump sale could be broken up so as to attribute values to specific assets. In Mugneeram Bangui & Co., the asset was stock-in-trade. In the assessee's case the asset is plant and machinery (capital assets). Therefore, the question clearly was whether the slump sale can be broken up so as to attribute a cost to a type of assets. To what asset (stock-in-trade in Mugneeram, capital asset in MGCL) the amount is to be attributable is not a relevant consideration. In Mugneeram Bangui & Co., Court held that as the vendors were transferring the concern to a company constituted by the vendors themselves what was put in the schedule was the book value and therefore, even if a sum of Rs. 2,50,000 attributable to goodwill was added to the cost of land, it was nobody's case that this represented the market value of the land. Therefore, the Supreme Court concluded that the sale was a sale of the whole concern and no part of the slump price was attributable to the cost of the land and accordingly no part of the slump price was taxable. Therefore, it is submitted that the submission of the learned Departmental Representative that the decision of Supreme Court in Mugneeram Bangui & Co., is irrelevant as it does not deal with capital gains is erroneous. What Mugneeram Bangur & Co., lays down are the ingredients necessary to constitute a sale of an undertaking as a slump sale. The most important ingredient is that the business is transferred as a going concern lock, stock and barrel. If that ingredient is satisfied, the sale constitutes slump sale.

25. The learned counsel went on to distinguish the Kampli Co-operative Sugar Factory Ltd. v. Jt CIT (ITA No. 375(B)/2000) [reported at (2001) 70 TTJ (Bang) 874--Ed.] case. This case was cited by the learned Departmental Representative for the proposition that although a business was said to have been sold as a slump sale, capital gains could be computed by bifurcating the slump sale consideration amongst various assets. The learned counsel submitted that in that case the assessee firm had gone into liquidation and the liquidator sold the assets pursuant to an advertisement. It was argued for the liquidator that the sale was a slump sale. The AO and CIT both rejected the contention of the liquidator and the matter was before the Tribunal. The Tribunal noted that the AO had bifurcated the sale consideration into two parts and the consideration attributed to land was taken as the full value of consideration for computing long-term capital gains and the balance consideration was. attributable to the WDV of depreciable assets. The facts in the present case are totally different. Hence, not applicable to the present case.

26. The learned counsel for the assessee took us to the various decisions and explained the background and facts of each case and its applicability thereon. He referred to the decisions as follows:

(i) Syndicate Bank Ltd. v. Addl. CIT (supra)

(ii) CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) (lii) CIT v. Clive Mm Co. (in Liquidation) (1984) 148 ITR 14 (Cal)

(iv) CIT v. Satya Paul (1984) 148 ITR 21 (Cal) (v) CIT v. Artex Manufacturing Co. (supra)

(vi) CIT v. Electric Control Gear Mfg. Co. (1997) 227 ITR 278 (SC) Finally, the learned counsel submitted that in this case the capital assets which is the subject-matter of transfer is the concern as a whole. The full value of the consideration alone can only be determined. The other components such as the cost of acquisition, cost of improvement along with the date of acquisition and the date of improvement cannot be determined. On the other hand, the subject-matter of transfer being considered or various assets, the full, value of consideration itself cannot be allocated and therefore, capital gain cannot be computed. He, therefore, submitted that the order of the learned CIT(A) has to be upheld.

27. The learned counsel pointed out the salient features of the case laws and the facts and had explained how the case laws are either applicable or not applicable to the facts of the assessee's case.

28. We have heard the rival submissions and perused the records. We have taken note of the entire facts as available on records as submitted by both the parties. First of all let us deal with the decision cited by both the sides, in the decision of the Hon'ble Supreme Court in the case of CIT v. Mugneeram Bangui & Co. (supra). The questions that stood for consideration were :

"1. Whether, on the facts and circumstances of this case, the sum of Rs. 2,50,000 represented the surplus on the sale of lands which was the stock-in-trade of the assessee-company or was the goodwill alleged to have been transferred.

2. Whether, on the facts and circumstances of this case by the sale of the whole business concern, it could be held that there was taxable profit in the sum of Rs. 2,50,000."

In this case, the sum of Rs. 34,99,300 was arrived at in the schedule as under :

                                               Rs.          As       Ps
1. Land                                    12,68,628        7         7
2. Goodwill                                 2,50,000        0         0
3. Motor car & lorries "                      25,886        8         6
4. Furniture, fixtures, etc.,                  5,244        5         6
5. Mortgage secured                        17,62,367        6         0
6. Deposits for purchase of land              53,500        0         0
7. Advance  paid  to  pleaders, solicitors,
   contractors staff and other outstandings 1,83,622        3         6
8. Cash in bank                               71,800        1         8
                                          ----------       ---       ---     
                                           36,21,029        0         9
Less liabilities                            1,21,729        0         9
                                          ----------       ---       --- 
                                           34,99,300        0     
    0"

In the aforesaid case, the apex Court held that as the vendors were transferring the concern to a company constituted by the vendors themselves, what was put in the schedule was the book value and therefore, even if a sum of Rs. 2,50,000 attributable to goodwill was added to cost of the land, it can be seen that it was nobody's case that this represented the market value of the land. Therefore, the Hon'ble apex Court came to the conclusion that the sale of the whole concern and no part of the slump price was attributable to the cost of the land and accordingly no part of the slump sale was taxable. The ratio laid down by the apex Court is applicable to the assessee's case. Therefore, we do not find any force in the stand taken by the learned CIT/Departmental Representative that this decisions in Mugneeram Bangur's case (supra) does not deal with capital gains. The aforesaid decision in fact clarifies and defines what are necessary to conclude the sale of an undertaking as a slump sale. In the case on hand what was transferred is nothing but a business as a going concern lock, stock and barrel.

29. The learned Departmental Representative placed much reliance by citing the decisions of this Tribunal in the case of Kamli Co-operative Sugar Factory Ltd. vs. Jt CIT (ITA No. 375(B)/2000) (supra) for the propositions that although a business was said to have been sold as a slump sale, capital gains could be computed by bifurcating the slump sale consideration amongst various assets. In this case, the assessee-firm went in liquidation and the liquidator had sold the assets pursuant to an advertisement. The liquidation was only purpose of settling the liabilities of the company and for this purpose the assets were sold in pursuant to advertisement. It is a simple commonsense that such company cannot have goodwill and reputation.

Such are not the facts in the case before us. Therefore, this decision is factually distinguishable and not applicable to the present case.

30. In the decision reported in Syndicate Bank Ltd. (supra) (Syndicate Bank) had been nationalised and its banking business was taken over by the Government of India by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1961 (BCATU). Under the Act all the assets, rights, powers, privileges and all property investments together with all liabilities, borrowings, obligations than subsisting in the undertaking were taken over for a consideration of Rs. 3.6 crores. Syndicate bank filed a return for asst. yr. 1970-71 and submitted that no amount was taxable under Section 41(2) and capital gains. The ITO did not accept the contention and in his view the undertaking was capital asset and therefore, the surplus taxable. The High Court noted that it appeared that the assessee had opted to substitute the fair market value as on 1st Jan., 1954 for the cost of acquisition but later imposed a condition stating that it would exercise the option only if it was beneficial to it. The AO took the value of the undertaking as a whole as on 1st Jan., 1954 and into that he added the paid up capital and reserves and profits upto the date of nationalisation and deducted this from the compensation amount and arrived at long-term capital gains of Rs. 65 lakhs. Before the AAC it was submitted that neither the cost of acquisition nor the cost of improvement made could be ascertained and therefore, it was not possible to compute the capital gain. AAC further held that the only alternative for the Department would be to take capital gains as nil, The Department filed an appeal to the Tribunal and the assessee filed its cross-objection. It is relevant to note the observations of the High Court (as noted by the High Court at p. 685):

"Before the Tribunal, the common contention urged by both the sides was that the amount of Rs. 3.6 crores given as compensation for the compulsory acquisition of the business undertaking of the assessee is incapable of apportionment among the various assets constituting the undertaking. But, the Tribunal did not appear to have relished that submission and proceeded on the assumption that Parliament did not fix the compensation in a completely arbitrary manner..... The Tribunal observed that it would not be correct to state that no part of the compensation would be relatable to any particular asset of the undertaking. The Tribunal expressed the view that the total amount of compensation paid to the assessee was in excess of the entire capital and reserves of the assessee as on the date of acquisition and therefore, the amount of compensation must have covered all the assets less liabilities and so much so, the compensation awarded has to be apportioned among the various assets excluding the amount which could be attributed to the goodwill of the undertaking. :

The Tribunal, however, made it clear in its directions that the exclusion of the value of the goodwill from the compensation would be applicable only if the assessee did not exercise the option to substitute the fair market value of the undertaking as on 1st Jan., 1954 for the cost of acquisition."

The principle issue debated before the High Court was formulated in the following questions:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the undertaking of the assessee's company was a capital asset on transfer of which capital gains would arise?"

This question was itself divided into two parts, viz., (i) Whether the business undertaking was a capital asset and (ii) Whether capital gains accrued or arose on the assessee as a result of the transfer of the business undertaking. The first part of the question was answered in the affirmative and the Court held that the undertaking constituted the capital asset. Insofar, as the apportionment of compensation amount to various items or components in question, the High Court held at p. 687.

"Mr. Srinivasan, learned counsel for the Revenue submitted that it would be factually and legally impossible to apportion the compensation to various items constituting undertaking. The counsel, in our opinion, is tight in his submission....... Besides, there are other properties, which are inherent in such undertaking like the secret reserves which are also called "hidden reserves and inner reserves" not disclosed in the balance sheet of the business undertaking. (See. (i) William Pickles' Book of Accountancy, 3rd Edn. p. 186, (ii) Spicer & Pegler's Book Keeping and Accounts, 16th Edn. p. 65 and (iii) J.R. Batliboi's Book of Advance Accounting, 21st Edn. p. 701). It includes also rights contingent or definite, tangible or intangible and all interests and advantages partial or total, present or future. In the very nature of these kinds of properties comprising the business undertaking taken, over by the Government of India, it is neither possible nor desirable to apportion the lump sum compensation of Rs. 3.6 crores on itemwise basis. The BCATU Act does not give any indication to that effect. It may be, as the Tribunal has observed, that Parliament did not fix the compensation in a completely arbitrary manner. But it would be hazardous to guess that out of the total compensation awarded, so much would be attributable to a particular asset of the undertaking."

(emphasis, italicized in print, supplied) It further held and concluded:

"It will be clear from these observations, that if the sale of a whole concern and no part of the agreed price is indicated against different definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital asset in specie. What is sold in such a case is not individual items of property forming part of the aggregate, but the capital asset consisting of business of the whole concern or undertaking."

Thus, the High Court looked at the question from the two angles. The first angle was whether the consideration itself could be apportioned and clearly at 688 as extracted above it has held that no part of the agreed price for a sale of undertaking at a slump price can be apportioned to various assets. The second aspect of the matter is whether the cost of. acquisition and the cost of improvement can be determined. This was noted at p. 690 by the High Court in the following paragraphs:

"This takes us to the next contention, which was presented most persuasively by Mr. Sarangan. The learned counsel urged that the compulsory acquisition of the undertaking by the provisions of the BCATU Act resulted in no transfer of capital asset as such so as to attract Section 45 of the IT Act, 1961. The contention, in terms more easily understood, is that the undertaking in question is not an "asset" since for the purpose of computation of income chargeable under the head capital gains, the cost of acquisition and the cost of improvement thereto cannot be determined. While elaborating the contention, Mr. Sarangan placed strong reliance on the decision of the Supreme Court in CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC)".

The argument has been noted at p. 692:

"The critical points in this reasoning are these : (1) There are assets of different nature, those involving cost in their acquisition and those which could be acquired by way of production in which the cost element cannot be identified. But, none of the provisions pertaining to "capital gains" suggest that they include as asset in the acquisition of which no cost at all can be conceived, (ii) the cost of acquisition mentioned in Section 48 implies a date of acquisition. And (iii) if the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be described it as "asset" within the meaning of Section 45 and, therefore, its transfer is not subject to income-tax under the head "capital gain".

By setting out the following principles, the High Court then referred to the decision of the Supreme Court in Srinivasa Shetty (supra), the Bombay High Court in Evans Fraser & Co. Ltd. v. CIT (supra), the Delhi High Court in Bawa Shiv Chaian Singh v. CIT (1984) 149 ITR 29 (Del), Kolkata High Court in CIT v. Satya Paul (supra) where the principle laid down by the Supreme Court in Srinivasa Shetty was applied to not only self generated goodwill but to acquired goodwill (Evans Fraser & Co. Ltd.) loom hours (Clive Mills Co. Ltd. (supra) sale of import entitlements (Satya Paul) and transfer of tenancy rights (Bawa Shiv Charan Singh). The Court has thereafter sent back the matter to the Tribunal in the following words at p. 693:

"Of course, if the cost of acquisition of the business undertaking acquired by the Government of India under the BCATU Act cannot be ascertained, then the undertaking cannot be an "asset" within the meaning of Section 45. But, we express no opinion on this aspect of the matter since there is no finding by the Tribunal. This part of the question has to be examined by the Tribunal or at its instance by any other authority having regard to all the facts and circumstances of the case, in the light of the decisions, to which we have called attention. We may, however, point out that if this aspect of the matter is found against the assessee then, the assesses may be afforded an opportunity to exercise the option contemplated under Section 55(2),of the IT Act, 1961."

The Karnataka High Court is clearly, therefore, of the view "this takes us to the next contention which was presented most persuasively by Mr. Sarangan", that if the cost of the acquisition is unascertainable, then capital gains cannot be attracted. It was also of the clear view that in a slump sale no part of the consideration can be attributed to various assets comprised in the undertaking. It had nevertheless per-force obliged to send the matter back to the Tribunal only because there was no findings by the Tribunal as to whether the business undertaking as a whole had a cost of acquisition inasmuch as this question was never considered throughout the proceedings. It appeared to the High Court that the bank had taken the position that the substituted cost of acquisition as on 1st Jan., 1954 ought to have been taken. It was only at this stage of the argument before the High Court that the no cost of acquisition/improvement contention had been raised and urged and therefore, the High Court had to send the matter back to the Tribunal. It has, however, made clear what were the critical points of reasoning and what were the principles to be applied, viz., that if the cost of acquisition or the cost of improvement could not be ascertained capital gains could not be computed. As pointed out by the learned CIT(A), in the assessee's case, also the Syndicate Bank matter had been sent back to the Tribunal and the Tribunal had sent back the matter to the AO even after 17 years no effect had been given to the order. Therefore, it was submitted that the decision of Karnataka High Court and the Bangalore Bench of the Tribunal clearly support the contention of the assessee that if the cost of acquisition or cost "of improvement of the business undertaking is not ascertainable capital gains cannot be brought to tax.

31. The learned Departmental Representative referred to CIT v. Hindustan Cooperative Sugar Factory (supra) for the proposition that merely because difficulty is experienced in estimating an amount does not mean that estimating is impossible. It is submitted that the context in which these observations were made have to be kept in view. The Tribunal in that case found that improvement in the capital asset of the assessee could not be estimated at less than Rs. 3,98,000 and the only finding it gave was having regard to the facts that the total income assessed in 1954 and 1955 was over Rs. 36,00,000. The cost of improvement could never be less than Rs. 3,98,000 and therefore, on the date of acquisition thereof there would be no surplus at all which could be taxed. This case, therefore, entirely turned on its own facts that a precise computation was not required as it was nobody's case that the estimation was less than Rs. 3,98,000 and it was enough to determine that the estimate was greater than Rs. 3,98,000 for the case to be decided.

32. The decision of Gujarat High Court in CIT v. Shahibaug Enterpreneurs (P) Ltd. (2001) 251 ITR 433 (Guj) cited by the learned CIT/Departmental Representative which superficially appears to support the case of the Revenue does not carry the matter further insofar as the Revenue's case is concerned. In that case Swastik Oil Mills Ltd., sold its undertaking consisting of land and plant and machinery, technical know-how at a price in which goodwill was assumed to be valued at Rs. 2 crores. This is at a time when the P&L a/c showed a loss of Rs. 54 lakhs during the past five years and it had never shown any prosperity since 1930. The High Court came to the conclusion that there was, in fact, no goodwill attached at all to the business of Swastik Oil Mills division as claimed by the assessee and therefore, held that the attribution to goodwill was entirely baseless. It was in the light of this peculiar fact that the High Court held that the profits under Section 41(2) would be assessable. The decision, therefore, turned on the local impossibility of the existence of goodwill in the undertaking thus throwing doubts on the genuineness of the agreement.

33. The two decisions of the Supreme Court reported in CIT v. Artex Manufacturing Co. (supra) and CIT v. Electric Control Gear Manufactuiing Cos., (supra) need to be considered. In Artex Manufacturing Co. the question was whether the surplus as a result of the difference between the WDV and sale consideration for the plant and machinery and dead stock transferred by the assessee was taxable under Section 41(2). The amount assessed under Section 41(2) was Rs. 11,50,400. The AO found for the purposes of determination of purchase consideration the assets were shown at Rs. 41,73,973 and the liabilities at Rs. 30,23,573. In determination of the purchase consideration of Rs. 11,50,400 the machinery, dead stock were revalued by Hargovandas Girdharlal (Valuer) at Rs. 15,87,296. Therefore, clearly all other assets and liabilities were taken over at book values except for the plant and machinery and dead stock. This is made clear on a comparison of the two tables below :

-------------------------------------------------------------------------

Particulars Rs. Particulars Rs.

-------------------------------------------------------------------------

All assets        41,73,973    Value of plant and machinery   15,87,296
                               and dead stock as per report
                               of Hargovandas Girdharlal

All liabilities   30,23,573    Less:  WDV of plant and         4,36,896
                               machinery and dead stock as
                               per assessee's book

Surplus of assets 11,50,400    Net                          11,50,400
over liabilities

--------------------------------------------------------------------------

Thus, quite clearly the entire surplus arose because of the revaluation of the assets by the assessee which determined the purchase consideration. The Court noted that the valuation of Rs. 15,87,296 was determined on the basis of the information furnished by the assessee p. 276 :

"It is no doubt true that in the agreement, there is no reference to the value of the plant, machinery and dead stock. But, on the basis of the 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 the plant, machinery and dead stock as assessed by the valuer at Rs. 15,87,296. This is not a case in which it cannot be said that the price attributed to the items transferred is not indicated and. hence, Section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that Section 41(2) of the 1961 Act is not applicable. Question No. 2 referred to the High Court is, therefore, answered in the affirmative, i.e., in favour of the Revenue and against the assessee".

And, therefore, it answered the question No. 2 referred to the High Court in the affirmative and in favour of the Revenue. Question No. 2 reads as under:

"2. Whether, on the facts and in the circumstances of the case, Section 41(2) was applicable".

Thus, the Hon'ble Supreme Court reversed the decision of the High Court only because the consideration and the surplus attributable to the sale of plant and machinery was determined at market value, it was available with the assessee and clearly attributable to the sale of the plant and machinery and dead stock. The Supreme Court on the same day and in the Bench constituting of the same judges considered the matter again in CIT v. Electric Control Gear Manufacturing Cos. (supra). In that case unlike in the case of Artex Manufacturing Co., the assessee a partnership firm consisting of 13 partners entered into an agreement whereby it transferred the entire assets of the business together with liabilities as a going concern to a limited company styled Electric Control Gear (P) Ltd., for a consideration of Rs. 8 lakhs. The ITO brought to tax Rs. 7,95,000 (full value of the consideration equal to Rs. 8 lakhs minus basic exemption Rs. 5,000) as a capital gains and brought to tax at Rs. 3,32,863 being depreciation allowed in respect of assets transferred under Section 41(2). Before the Supreme Court, Artex Manufacturing Co., (supra) was cited. The Supreme Court held at p. 281 :

"The High Court has placed reliance on its judgment in Artex Manufacturing Co. v. CIT (1981) 131 ITR 559 (Guj). The said judgment of the High Court has been considered by us in our judgment pronounced today in CA No. 2276 (NT) of 1981, CIT v. Artex Manufacturing Co. (1997) 227 ITR 260 (SC). In that case, we have held that Section 41(2) was applicable, since the price 'attributable to the plant and machinery and dead stock which were transferred had been disclosed by the assessee during the course of assessment proceedings before the ITO and that the said price was as per the value assessed by the valuers at the time of execution of the agreement. In the present case, there is nothing to indicate the price attributable to the assets like the machinery, plant or building out of the consideration amount of Rs. 8 lakhs. 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. Question No. 2 was, therefore, rightly answered against the Revenue by the High Court. On question No. 4 the High Court has taken the same view as was taken by it while answering question No. 4 in Artex Manufacturing Co.'s case (supra). The said view has been affirmed by us in our judgment (1997) 227 ITR 260 (SC) (supra) in that case question No. 8 is similar to question No. 5 in Artex Manufacturing Co.'s case,(supra). The view of the High Court with regard to that question has been reversed by us in our judgment (1997) 227 ITR 260 (SC) (supra) in the case and for the same reasons question No. 8 must be answered in the affirmative, i.e., in favour of the Revenue and against the assessee".

The question No. 2 reads as follows:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of Section 41(2) were applicable?"

Therefore, it is submitted that the question which is principally to be considered is whether the business undertaking transferred is a slump sale or not? The Delhi High Court in P.N.B. Finance Ltd. v. CIT (2001) 252 ITR 491 (Del), a decision cited by the CIT/Departmental Representative also, did not express any opinion on the aspect as to what is actual cost of acquisition because none of the authorities below had undertaken that exercise and the issue was neither raised nor arose out of the order of the Tribunal. The matter was, therefore, sent back to the Tribunal to. re-examine in the light of the decision of Artex Manufacturing Co. (supra). 34. At the time of hearing, the learned counsel for the assessee relied on the decision of the Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. v. ITO & Am. (ITA No. 97 of 2003, dt. 9th April, 2003) (supra). In that case, tile assessee was manufacturing cars had plants at Kurla, Kalyan and at Pune. It entered into an MoU with automobile Peugeot to establish a joint venture company known as Kalyan Motors Co. Ltd. a joint venture agreement was entered into. A slump sale agreement was also entered into under which Kalyan undertaking was sold as a going concern on an "as is where is" basis. The Kalyan factory manufactured the body, seat and various gadgets of 118 NE Cars which was thereafter assembled at Kalyan. However, the gear box shop was located at Kurla and the machine shop was located at Pune. PAL transferred the entire Kalyan factory together with other assets not located in Kalyan. Further, even in the Kalyan plant a part of the land was not sold. It was contended for the Department that transaction could not be considered as a slump sale because as much as 7,43,000 sq. meters of factory land situate at Kalyan had not been transferred to the joint venture company although it formed and the land was contiguous to the Kalyan factory land. The Department submitted that inasmuch as only the Kalyan factory without land was transferred together with other assets located at Pune and Kurla, the transaction could not be considered as a slump sale. Further, the manufacture of Padmini Cars continued in the hands of PAL and therefore, it was submitted that it was not a slump sale. In other words, the case of the Revenue was that assets which formed part of the Kalyan undertaking were not transferred and other assets which did not form part of the Kalyan undertaking were transferred. Therefore, from both angles it was not a slump sale. Further, it was pointed out that certain creditors were not transferred nor were certain loans transferred. It was submitted before the Bombay High Court that when deciding the question as to whether the sale was a slump sale or a sale of itemised assets, one has to look at the overall transaction and ascertain whether the basic structure" of the unit was transferred or not transferred and that one cannot go by individual items of assets being transferred unless that particular assets goes to the root of the matter i.e.", cars could not have been manufactured without such an item like the gear box unit. The Court referred to its earlier judgment in Narkeshari Prakashan Ltd. (supra) and agreed that this would be the correct approach and the. mere fact that a separate conveyance was executed or that a few assets which did not relate to the basic structure of the going concern were not transferred or certain deposits were returned or certain book debts were not transferred or there was no transfer of some liabilities cannot be destructive of the position that the transfer was of a going concern. The Court held that one has to adopt commercial principles for interpreting the arrangement. Applying those principles, the Bombay High Court held that what was transferred was a going concern namely, the unit manufacturing 118 NE cars and the fact that the gear box unit and the paint shop not located at Kalyan were being transferred and the fact that land which was not being used by the Kalyan factory but which was contiguous to the Kalyan factory was not being transferred would not make a difference to the fact that the sale was a slump sale. Applying the principles laid down by the Bombay High Court in these two cases, the mere fact that the three items referred to by the learned CIT/Departmental Representative, namely, the retained land, the Esteem Car and certain alleged debtors would not be of any consequence in deciding the question as to whether the transaction was a slump sale or not.

35. Insofar as the land was concerned, a perusal of p. 77 of the paper book indicated that the land was physically distinct and unbuilt on and in fact the land which was retained by the assesses was not a. part of the gas plant and nothing was constructed on the said land. The land retained by the assesses was never used in the business of manufacturing, selling and distribution of CO2 at any time. In fact, there was no access to the retained land. Between the land on which the factory was situated and the common approach road referred to by the Departmental Representative was a private road belonging to the BWSSB and the assessee had to take special permission to use the road and also to construct a culvert across the pipeline carrying water to the treatment work which ran between the road and the factory land. Therefore, it is submitted that in order to have access to the retained land a separate culvert would have to be constructed after getting the permission from the BWSSB. Such permission had in fact not been obtained nor had the culvert been built. As such the land was even today inaccessible on account of the road built by the BWSSB. Therefore, it was submitted that land retained by the assessee was never used in the b0usiness of manufacturing, selling and distribution of CO2 and could not be considered as a part of the undertaking.. In Premier Automobiles Ltd., also the .matter had been sent back for determination in the light of these principles. In fact, the Bombay High Court had clearly held that the determination had to be made on the footing that Kalyan unit.constituted the capital asset and that the AO would have to determine the cost of the undertaking (if determinable) for the purposes of computing capital gains in the light of Sections 45, 48, 55 and then determine whether any capital gains arg exigible.

36. The learned Departmental Representative had next submitted that the sale consideration can be determined aliunde. There were three components to this submission:

(a) that the so called intangibles had no value;

(b) that goodwill had no value as the name had not been transferred;

(c) that non-compete clause was meaningless, because the product name CO2 was a generic one.

The first two issues have been dealt with above. Insofar as the question of non-compete is concerned, it is submitted that the learned Departmental Representative has failed to appreciate that a brand value and the value of technology is different from the ubiquitous availability of a product. The fact that salt is freely available and can be made easily does not detract from the value of technology which Tata Salt has to manufacture salt. Similarly, the fact that soap can be manufactured by anybody does not detract from the value of technology which Hindustan Lever has. In the case of the assessee, the fact that CO2 can be manufactured by anybody does not detract from the product quality, low temperature technology, production and marketing skill which the assessee has. Thus, it is wholly inappropriate to suggest that merely because a product can be made by any body makes it incompatible for a manufacturer to. receive a non-compete consideration. If Praxair had not arrived at a non-compete consideration as part of the overall consideration, it would have been open for MGCL to set up a new CO2 manufacturing plant as it had within its capacity the potential to manufacture a product of superior quality, it had the technology, namely, low temperature technology and it had production and marketing skills. It would thus compete with Praxair to its detriment.

37. In this view of the facts, found by us and on the basis of the catena of the case laws discussed, we are of the firm and considered opinion that the agreement dt. 9th Feb., 1998 clearly indicated that the transfer by the assessee to the purchaser was of a slump sale as a going .concern for a lump sum price and so it was nothing but a case of a slump sale.

38. In view of the above finding that the transfer was a case of slump sale, we. do not think it necessary to go into the aspects of computation of the capital gain on the basis that the sale was one of individual items. Therefore, the method adopted by the AO in computation of the capital gain is not be gone into by us as it would not serve any. purpose and would be only of academic importance. However, in view of the unanimous view taken by the Hon'ble High Courts of Karnataka, Bombay, Madras, Gujarat and Delhi and especially that of the Hon'ble High Court of Karnataka in the case of Syndicate Bank and that of the Delhi High Court in the case of PNB Finance Ltd. (supra), we are of the view that as the undertaking sold is a capital asset the provisions relating to capital gains would apply but while doing so the treatment that should be given to the transaction is that the undertaking is sold as a whole and the question of liability will have to be considered only as a transfer of an undertaking as a slump sale for a lump sum and that, it is not permissible to split the sale consideration amongst the individual assets for this purpose. We, therefore, uphold the order of the learned CIT(A), insofar as it relates to slump sale. However, we direct the AO to consider the liability to capital gain on the basis that this is a case of slump sale and the AO has to follow the directions contained in the various judgments cited above and especially the one by the jurisdictional High Court at Bangalore.

With this direction, the conclusion drawn by the learned CIT(A), is modified to the extent indicated above.

39. In the result, the appeal filed by the Revenue is partly allowed.

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Income Tax Appellate Tribunal - Bangalore

Deputy Commissioner Of Income Tax vs Mahalasa Gases And Chemicals (P) Ltd. on 1 April, 2004

Equivalent citations: (2004)84TTJ(BANG)992