Income Tax Appellate Tribunal - Mumbai
Sankeya Chemicals (P) Ltd. vs Asstt. Cit, Circle 4(2) on 16 February, 2006
Equivalent citations: [2006]8SOT50(MUM)
ORDER
Ms. Sushma Chowla, Judicial Member.
This appeal by the assessee is against the order of Commissioner (Appeals)-V, Mumbai dated 17-7-1996 relating to assessment year 1991-92.
2. Shri Arvind Sonde, A.T. Jain, learned Counsels appeared for the assessee and Mr. Pankaj Kumar, Departmental Representative appeared for the revenue.
3. The assessee has raised the following grounds in the appeal :
(1) The learned Commissioner (Appeals) erred in confirming the taxability of profits arising on sale of undertaking as short-term capital gain.
(2) The learned Commissioner (Appeals) erred in not holding that gain arising on the sale of industrial undertaking was not chargeable to tax since the undertaking had been sold as a going concern for a slump price and, therefore, no part of the sales consideration was attributable to any specific asset.
(3) The learned Commissioner (Appeals) erred in not holding that since the cost of acquisition and/or cost of improvement of the industrial undertaking could not be ascertained, the machinery provisions for computation of capital gains were not applicable and, therefore, the gain arising on sale of industrial undertaking was not chargeable to tax as capital gain.
(4) Without prejudice to the above the learned Commissioner (Appeals) further erred in holding that the industrial undertaking was a short-term capital asset. The appellant submits that since the industrial undertaking was a capital asset held for more than 3 years the same was a long-term capital asset. The gain arising on sale of the undertaking was, therefore, long-term capital gains and was chargeable to tax accordingly.
(5) The learned Commissioner (Appeals) erred in not holding that the profits and gains on the sale of the undertaking had arisen during the course of business and was, therefore, taxable as "Income from business".
(6) The learned Commissioner (Appeals) erred in not holding that the profits and gains (whether "capital gains" or "Income from business") arising on sale of the undertaking was not eligible for deduction under sections 80HH and 80-I of the Income Tax Act.
(7) The learned Commissioner (Appeals) erred in confirming the disallowance of interest of Rs. 6,63,785 out of the total interest of Rs. 7,21,506 paid in respect of loans borrowed.
(8) The learned Commissioner (Appeals) erred in not holding that the sum of Rs. 77.70 lakhs was not in the nature of loan and, therefore, the same ought to have been excluded for determining the loans advanced.
(9) The learned Commissioner (Appeals) erred in not holding that the interest of Rs. 3,88,982 received was taxable under the head "Income from other sources" as against "Income from business" as declared by the appellant.
4. The brief facts of the case are that during the year under consideration, the assessee had claimed that it had sold its entire business undertaking for the manufacture of chemicals to Shri Anandeya Investments Pvt. Ltd. The assessee had entered into an agreement dated 1-4-1990 for the sale of going concern at a price of Rs. 20 lakhs. It was agreed between the parties as under :
Para 1 The vendor shall sell and the purchaser shall purchase the business undertaking of the vendor under the name Sankeya Chemicals as a going concerned including leasehold land, buildings, plant and machinery electrical fittings and equipments, furnitures and fixtures and dead stock and vehicles, located at Taloja Industrial Estate, Panvel, Maharashtra. The intention between the parties is that the entire undertaking with all its assets and liabilities, rights and obligations exclusively secured ind unsecured loans, current assets and current liabilities shall in terms of this agreement to be sold to the purchaser. The sale and purchase of the above assets shall be together with arrangements and obligations, licences quotas, etc., relating to the undertaking to be transferred in due course.
Para 4 All liabilities and obligations, rents, rates, taxes, claims, settlements, duties, etc., up to the period prior to the 1-4-1990 shall be to the account of the vendor and to the period subsequent thereto shall be to the account of the purchaser.
It is clarified that all rights and benefits including refunds of the excise duties, sales tax, export incentives as related to the period prior to 1-4-1990 shall be to the account of the vendor.
Para 7 For giving effect to the intention of the parties, it is agreed that pending the completion of the sale of the above property vendor shall permit the purchaser use of the said property as from 1-4-1990. The purchaser has been authorized by vendor to use the said property at its risk and-costs.
Pending all the formalities as may be necessary, the vendor will supply raw material required for the manufacture of peptizing agents for being processed by the purchaser. The terms and conditions on which purchaser will process the material of vendor will be agreed by and between the parties from time to time and shall be regarded as temporary arrangement till all the formalities required for the undertaking are completed.
The assessing officer held that the gain arising on the transfer of the undertaking is a short-term capital gain and computed the same as under :
Rs.
Total slump price 20,00,000 Less : W.D.V. of block of assets as on 1-4-1990 2,92,658 Balance 17,97,342
5. Before the Commissioner (Appeals), the assessee relying on the decision of the Honble Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681 (Kar) and jurisdictional High Court in the case of Evans Fraser & Co. Ltd. v. CIT (1982) 137 ITR 493, submitted that the lump sum consideration of Rs. 20 lakhs received on the transfer of undertaking was not chargeable to tax under the head Capital gains. An alternative submission was made before the Commissioner (Appeals) that the capital gain if any arising on the transfer of the undertaking is to be computed then the entire business undertaking is to be considered as a single capital asset. Since the undertaking was held for more than 36 months, the sum is a long-term capital asset within the meaning of section 2(29A) read with section 2(42)(A) of the Income Tax Act and the assessee worked out the long-term capital gain arising on sale of undertaking at Rs. 7,73,485 by claiming the deduction of cost of acquisition of factory building, plant and machinery, electric installation and thereafter deduction under section 48(2) of the Income Tax Act. After taking into consideration the terms of agreement the Commissioner (Appeals) observed as under :
"... As per the terms of agreement and particularly para 1 thereof, it is clear that the entire undertaking with all its assets and liabilities, rights and obligations, exclusively secured and unsecured loans, current assets and liabilities were transferred to the purchasers. However, from the facts of the case it is evident that though it is claimed that the unit was sold as a going concern, the items that were reduced from the block of assets were factory building, plant and machinery and electrical installations. As a result of sale of this undertaking the entire block of assets in the aforesaid 3 categories were reduced to Rs. Nil It is thus clear that there was no itemization of the value of the different items of assets that were transferred by the appellant. The appellant has not furnished any information regarding transfer of asset in the form of raw material, closing stock, finished goods etc. The aforesaid items were not transferred but only machinery was transferred. It is well settled that business is property and the undertaking of business is a capital of the owner of the undertaking and when such undertaking is transferred as a going concern what is sold is the capital asset consisting the business of the undertaking and any tax that can be attracted to such transaction for a slump price at book value would be capital gain tax. The Supreme Court in the case of Syndicate Bank Ltd. 155 ITR 682 (SC), has held that business undertaking is a capital asset. The Bombay High Court in the case of Killick Nixon and Co. v. CIT 49 ITR 244 (Bom), which was affirmed by the Supreme Court in 66 ITR 714 has held that the sale of business as a whole includes the sale of capital assets of the business and the gain arising on such a sale attributable to the capital asset is a capital gain. As there is a direct decision of the Bombay High Court which is affirmed by the Supreme Court, other decisions cited by the appellant are not applicable and immaterial in the case of the appellant. . . ."
6. The alternate plea of the assessee that the profits arising on sale of the undertaking is to be treated as long-term, capital gains was also held to be not correct in view of section 50 of the Income Tax Act and the Commissioner (Appeals) held that the surplus if any is to be taxed as short-term capital gains. Assessee is aggrieved and hence this appeal.
7. The learned authorised representative for the assessee vehemently argued that the assessee had sold its Chemical manufacturing unit as a going concern and on the sale of the said unit the profits are not taxable as the said sale is a slump sale. Strong reliance was placed on the decision of Hyderabad Bench in the case of Coromandel Fertilizers Ltd. v. Dy. CIT (2004) 90 ITD 344. It was clarified by the learned A.R. that as per the terms of agreement the Chemical Unit was transferred to M/s. Shri Anandeya Investments Pvt. Ltd., which is a subsidiary of the assessee but not wholly owned by the assessee. He further pointed out that in case only the assets of any business undertaking are sold then the provisions of section 50 are attracted. But, in case the undertaking as such is sold then it is the case of slump sale and no tax is exigible as section 50B of the Income Tax Act was introduced on a later date. The learned A.R. drew our attention to the directors report wherein it was clearly mentioned that the company had sold its entire business undertaking of Chemical Division for the manufacture of Peptizine Agent to the subsidiary of the assessee-company as a going concern. On the sale of the going concern the value of assets was reduced to Nil. The learned A.R. further clarified that all the liabilities except the contingent liabilities were transferred to the subsidiary company including the provisions made for payment of salary, wages, bonus and contribution to employees provident fund and other funds.
8. The learned Department Representative vehemently argued that the assessee has only transferred some of its assets to its subsidiary company and there is no transfer of the entire business undertaking as a going concern, as alleged by the assessee. The learned D.R. drew our attention to the Schedule of Fixed Assets filed along with the return of income which clearly provided that only the value of assets, i.e., factory building, plant and machinery and electrical installations were reduced to Nil and the balance, i.e., the excess realized on the sale of the said asset was transferred to the capital reserve account of the assessee. No stocks or finished goods were transferred and as such there is no transfer of business undertaking but only the sale of certain assets by the assessee-company, though the agreement is for the sale of undertaking as a going concern and gains on such sale is to be taxed as short-term capital gains under section 50 of the Income Tax Act.
9. We have heard the rival submissions and perused the record. During the year under consideration the assessee- company entered into an agreement with the one of its subsidiary company, i.e., M/s Shri Anandeya Investments Pvt. Ltd. for the sale of its business undertaking of Chemical Division for a total consideration of Rs. 20 lakhs. That as per the terms of agreement entered between the parties, the assessee had agreed to sell and the purchaser had agreed to purchase the business undertaking as a going concern including leasehold land, building, plant and machinery, electrical fittings, furniture, dead stock and vehicles along with all its assets and liabilities, rights and obligations, current assets and current liabilities. The parties entered into an agreement dated 1-4-1990. The perusal of the agreement reveals that the assessee had agreed to sell the business undertaking as a going concern with factory building, plant and machinery, electrical installation, etc., located at Taloja Industrial Estate, Panvel, Maharashtra including all its assets and liabilities, rights and obligations, current assets and current liabilities as per the terms of the agreement entered into between the parties. From the perusal of para 1, the parties agreed that all the contingent liabilities and obligations relatable to rents, rates, taxes, claims duties etc. up to the period prior to the date of agreement shall be the responsibility of the assessee-company and for the period thereafter shall be the responsibility of the purchaser. In addition, it was also agreed that the refund of excise duty, sales tax, export incentive relatable to the period prior to 1-4-1990 shall be to the account of the assessee-company.
10. In addition, permission was sought from the Directorate of Industries for the transfer of raw material from the assessee-company to Shri Anandeya Investments Pvt. Ltd., and also permission was sought for the transfer of imported raw material. The assessee-company was registered as a small scale ancillary undertaking for the manufacture of Peptizing Chemicals with the Directorate of Industries from which No Objection was sought for transfer of business to Shri Anandeya Investments Pvt. Ltd. The permission was granted by the Chief Executive Officer, Maharashtra Industrial Development Corporation to Shri Anandeya Investments Pvt. Ltd. for establishing the industrial unit for the manufacture of Peptizing Chemicals. The permission was also sought from Maharashtra industrial Development Corporation for the transfer of unit before the actual transaction was carried out. From the Maharashtra Pollution Control Board and Maharashtra State Electrical Board also the permission was sought for the change in the name of the company from the assessee-company to Shri Anandeya Investments Pvt. Ltd.
11. The above clearly shows that in addition to the transfer of factory building, plant and machinery and electrical installation all steps were taken, permission sought for transferring the business of industrial undertaking as a going concern from the assessee-company to Shri Anandeya Investments Pvt. Ltd. The perusal of the Balance Sheet as on 31-3-1991 reveals that the cost of the factory building, plant and machinery and electrical installations has been transferred and the surplus on the sale of the undertaking was booked and transferred to the capital reserve of the assessee-company along with transfer of liabilities on account of certain expenses and provisions made for the benefits of the employees.
12. Elaborate arguments have been made by the learned authorised representative by placing reliance on the decision of Hyderabad Bench in the case of Coromandel Fertilizers Ltd. (supra) and also Karnataka High Court in the case of Syndicate Bank Ltd. (supra) for the proposition that if there is a transfer of a whole concern, the agreed price cannot be apportioned among individual items of property and what is sold is an undertaking which is not amenable to levy capital gains taxed. In the facts of the present case, what has been sold is the Chemical Division of the assessee-company as a going concern. The agreement between the parties very clearly shows that for the lump sum price of Rs. 20 lakhs, the leasehold rights of the land, factory building, plant and machinery and electrical installation have been transferred to the subsidiary company i.e., M/s. Shri Anandeya Investments Pvt. Ltd. along with other assets and liabilities including transfer of raw material and other licences, etc. For the transfer of going concern what is material is not only the transfer of movable and immovable properties, but also the assets and liabilities connected with the running of the going concern. In the facts of the present case, the business as a whole has been transferred as a going concern to the subsidiary company Shri Anandeya Investments Pvt. Ltd.
13. In terms of provisions of section 50 of Income Tax Act where the sale value of consideration received is in excess of the W.D.V. the block of assets at the beginning of the previous year, such excess is to be considered as capital gain arising from the transfer of short-term capital assets. The provisions of section 50 of the Income Tax Act are clear and categorical inasmuch as these are applicable on transfer of assets and surplus on such transfer is exigible to tax as short-term capital gains. In the facts and circumstances of the present case, wherein the business as a whole has been transferred as a going concern, the gain arising on the said transfer is not chargeable to tax under the provisions of section 50 of the Income Tax Act. Section 50 comes into operation only where asset forming part of block of assets has been transferred; but in case of slump sale what is transferred is the entire undertaking as a whole and not only the depreciable assets. The Hyderabad Bench in the case of Coromandel Fertilizers Ltd. (supra) extensively considered the provisions of section 50 of the Income Tax Act vis-a-vis section 50B of the Income Tax Act, which covers slump sale. It has been held as under :
".. . . . Section 50 comes into operation only when the following three conditions on the transfer of depreciable assets are cumulatively fulfilled: (a) the asset that is transferred forms part of a block of assets; (b) depreciation has been allowed; and (c) the full value of the consideration accruing or arising as a result of the transfer of such asset, can be ascertained. These three conditions are to be satisfied before the provisions of section 50 can be attracted. In a slump sale, none of these three conditions are attracted. In a slump sale, it is not the depreciable asset alone that is transferred, but what is transferred is the entire undertaking as one asset. The undertaking in the instant case did not receive any depreciation at the hands of the department. Further, the consideration received in a slump sale is not allocable to the depreciable assets. Actually section 50 visualises only the transfer of a depreciable asset or the cessation of the block and not the transfer of an undertaking. (para 40) Section 50 and section 50B are mutually exclusive. In other words, section 50B is attracted, when there is a slump sale and section 50 is attracted when there is an itemized sale. Section 50B was not applicable for the assessment year in question, as it had no retrospective operation. So, the position that emerged was that what was transferred by the assessee was the cement unit as a going concern for a lump sum price and so, the sale in question was a slump sale, and so, section 50 was not attracted. (para 43)...."
14. Section 50B of the I.T. Act was introduced with effect from 1-4-2000 and in the facts of the present case, the business undertaking was sold on 1-4-1990, i.e., prior to the introduction of the provisions of section 50B of the Income Tax Act. Taking into consideration, the facts of the present case in totality, we are of the considered view that no tax is exigible to the gains arising on the transfer of the business undertaking as a going concern by the assessee-company to Shri Anandeya Investments Pvt. Ltd., and the gains on such transfer are not includible in the hands of the assessee as income from short-term capital gains in view of the decision of the Hyderabad Bench in the case of Coromandel Ferlizers Ltd. (supra). The assessee had claimed depreciation on assets transferred to the subsidiary company for the period up to the date of transfer. Respectfully following the decision of Hyderabad Bench in the case of Coromandel Fertilizers Ltd. (supra), no depreciation is allowable on assets forming part of business undertaking transferred to Shri Anandeya Investments Pvt. Ltd., and such depreciation if allowed shall be withdrawn by the assessing officer. Hence, the ground Nos. 1 to 6 are decided in favour of the assessee subject to withdrawal of claim of depreciation on such assets transferred to the subsidiary company.
15. The ground Nos. 7 to 9 are against the disallowance of interest of Rs. 6,63,678 paid by the assessee for the year under consideration and claimed as a business deduction. The assessee had borrowed funds at the rate of 14 per cent and had paid interest totalling to Rs. 7,21,506. The assessee had also made advances to two parties, on which interest of Rs. 6,63,678 was received by the assessee. The said advances were made at the rate of 12 per cent interest per annum. The assessing officer was of the view that the assessee had diverted the interest bearing loans for the purpose other than its business and accordingly disallowed 92 per cent of interest paid i.e., Rs. 3,63,785. The Commissioner (Appeals) confirmed the order of the assessing officer. In addition the assessee had claimed to have advance loans during the course of business and interest earned thereon of Rs. 3,88,982 was shown as taxable under the head "Income from business". The assessing officer treated the said interest income as "Income from other sources" as against from business income declared by the assessee in the return of income. The Commissioner (Appeals) confirmed the action of the assessing officer. The assessee is aggrieved and hence this appeal.
16. The learned authorised respresentative for the assessee submitted before us that the assessee had borrowed funds at 14 per cent rate of interest. The assessee had also advanced funds to different concerns as part of its business and had received interest at the rate of 12 per cent per annum. The question of nexus of money borrowed and advanced has not been looked into by the assessing officer or by the Commissioner (Appeals) and the learned AR pleaded that disallowance of interest of Rs. 6,63,678 is not warranted in the facts of the present case. Further, he pleaded that there is no merit in treating the interest income of Rs. 3,88,982 as income from other sources as against the claim of the assessee to treat the same as income from business.
17. We have heard the rival submissions and perused the record. No nexus has been established by the assessing officer or by the Commissioner (Appeals) to prove that the money borrowed by the assessee has been advanced to different parties at reduced rate of interest. Following the principle of natural justice, we deem it fit to restore this issue to the file of the assessing officer to deliberate upon and decide the issue of nexus between the borrowed fund and applied funds. In case, nexus is established between the two i.e., the borrowed fund and the applied fund, interest after netting shall not be allowed as a business deduction. But in case the assessee is able to prove that no nexus existed between the two, no disallowance of interest shall be made in the hands of the assessee. Further, there is no merit in treating the interest income of Rs. 3,88,982 received by the assessee during the year under consideration as income from other sources without establishing that such receipts are not part and parcel of business carried on by the assessee. Therefore, the issue is restored to the file of the assessing officer to decide the nexus : (a) between the borrowed fund and applied fund; (b) nature of the interest income of Rs. 3,88,982 received by the assessee. Hence, these grounds of appeal are set aside for statistical purpose.
18. In the result, the appeal filed by the assessee is partly allowed.