Income Tax Appellate Tribunal - Ahmedabad
Camphor & Allied Products Ltd. vs Deputy Commissioner Of Income Tax on 16 August, 2000
JUDGMENT
T.N. Chopra, A.M.
1. These cross-appeals filed by the assesses and the Revenue are directed against the order of the CIT(A), dt. 12th Aug., 1993, for asst. yr. 1990-91. Since both the appeals are heard together these are being disposed of by a single order for the sake of convenience.
2. First we take up the assessee's appeal ITA No. 4112/Ahd. l993. Brief facts relevant for the points in issue may be set out at the outset. The assessee-company has been engaged during the assessment year under reference in the business of manufacture of computer diskettes and chemicals as also lease and hire income. During the year the computer diskettes manufacturing unit viz., Pinsel has been sold to M/s Vidarbha Iron & Steel Corpn. Ltd. (VISCO for short).
The question which arises for our consideration is the computation of capital gains under Section 50 of the IT Act, 1961.
Agreement dt. 17th April, 1989, as well as supplementary agreement dt. 5th Dec., 1989, containing the particulars of various assets and liabilities transferred by the assessee to VISCO and the consideration in respect thereof have been placed on record. In the agreement dt. 14th April, 1989, there are 10 articles in the preamble, the first nine articles enumerate the various assets of the computer diskettes unit which are being sold. Article 10 in the preamble reads as under :
"PCL have agreed to sell and transfer and VISCO have agreed to purchase and accept transfer of the said properties as also the said moveables, the said inventories (as on the date of taking over of operations hereinafter defined) as also transfer to VISCO such of the security deposits as are transferable and also the transfer of the said advances, the said book debts the said trademark and the said technological documents on the terms and conditions hereinafter contained."
Now we may refer to main clauses in the aforesaid agreement. Under Clause (2) of the agreement prices of various assets, movable and immovable, being sold to VISCO are enumerated aggregating to Rs. 22 lakhs. Clause (2) contains the following recital:
"(a) PCL shall sell and transfer to the said VISCO and the VISCO shall purchase and accept transfer of the said property at or for the price of Rs. 18 lakhs (Rupees eighteen lakhs) after adjusting the liabilities excluding the company's bank overdrafts aggregating to Rs. 29 lakhs on the date of take over of operations.
(b) PCL shall sell and transfer to the said VISCO and VISCO shall purchase and accept the transfer of the said movables at or at the price of Rs. 94 lakhs after adjusting the liabilities (excluding the company's bank overdrafts and amount due to Noida authorities) aggregating to Rs. 180 lakhs on the date of take over of the operations.
(c) PCL shall transfer and sell and VISCO shall purchase and accept transfer of the said inventories at or for the price of Rs. 67 lakhs (Rupees sixty-seven lakhs) (after adjusting the bank overdrafts of Rs. 5 lakhs) on the date of take over of operations.
(d) PCL shall transfer to VISCO the entire book debts valued at Rs. 28 lakhs (Rupees twenty-eight lakhs) on the date of take over of operations). Deposits/advance and other assets including cash and bank balances valued at Rs. 17-lakhs (Rupees seventeen lakhs) on the date of take over of operations."
Clause (3) contains the terms of payment of the aforementioned consideration of Rs. 224 lakhs.
3. Clause (4) recites that on the date of take over of operations, the exact value of the assets including cash and bank balances shall be determined and necessary adjustments will be made in the aforesaid amount of Rs. 224 lakhs.
4. Regarding transfer of trademark and technical know-how, Clause (5) specifically provides that these would be transferred without cost subject to the condition that if the licensor demands any consideration for giving their permission to transfer the technological documents to VISCO the same shall be borne and paid by VISCO. In the schedules attached to the agreement, Schedule I enumerates the immovable properties of the computer diskettes unit and Second Schedule enumerates the - plant, machinery equipments and other assets.
5. In the supplementary agreement, dt. 1st June, 1990, it has been stated in the preamble that the properties including plant and machinery, inventories, etc. of Pinsel unit have been taken over along with the liabilities in respect of borrowings from financial institutions and banks, etc. On 1st June, 1989, which is described as the date of take over of operations Article 3 in the preamble, refers to the determination of exact values of various assets determined at Rs.
2,10,08,445 as set out in Annexure A to the agreement. The art. 3 reads as under:
"By Cl. No. 4 of the said agreement dt. 17th April, 1989, on the date of take over of operations, the exact value of assets including cash and bank balances, were required to be determined and the necessary adjustments to be made in the sum of Rs. 2,24,00,000. The said purchase consideration in terms of the said agreement has now been determined at Rs. 2,10,08,445 as set out in Annexure 'A' to this agreement. As against this, a sum of Rs. 55,00,000 was paid by VISCO to PCL as advance which has been adjusted against this purchase consideration."
Annexure to the supplementary agreement list out the feed assets, current assets and the values thereof, the liabilities like overdraft from State Bank of Patiala and institutional liabilities and outstanding liabilities for expenses, etc. have also been indicated in the annexure to the agreement. These liabilities aggregate to Rs. 2,63,01,338. The assets taken over as listed out in the annexure are valued at Rs. 4,73;09,783. Thus, the purchase consideration as per the supplementary agreement has been arrived at Rs. 2,10,08,445. The assessee had credited an amount of Rs. 39,07,695 as profits on the sale of the Pinsel undertaking. However, the assessee disclosed nil figure on account of short-
term capital gains on the ground that Pinsei undertaking has been sold as a going concern on 1st April, 1989, and the sale consideration is equal to the cost of assets and no capital gains have been offered for taxation. The AO, however, worked out the short-term capital gains amounting to Rs. 1,74,26,031 as per p.
6 of the assessment order by applying the provisions of Section 50 of the IT Act. The computation has been made by the AO by working out the aggregate of the WDV increased by the additions on account of plant and machinery and other assets made during the year and the amount has been deducted from the aggregate sale proceeds of the assets as per the provisions of Section 50(2) of the IT Act.
6. Aggrieve, the assessee carried the matter in appeal before the CIT(A) and argued that since the entire Pinsel undertaking has been sold as a going concern, there is no occasion (or invoking the provisions of Section 50(2). The CIT(A) rejected the contentions and upheld the action of the AO in including the short-term capital gains under Section 50(2).
7. Aggrieved, the assessee has come up in appeal before us.
8. During the course of hearing the learned representatives of both sides made oral as well as written submissionSection The learned counsel, assailing the levy of capital gains under Section 50, argued that the Pinsel unit has been sold as a going concern and since no separate rate of depreciation has been prescribed for the industrial undertaking, Section 50 would not apply and no short-term capital gain would be liable to be assessed by invoking the provisions of Section 50. The learned counsel referred to the principles enunciated by the Hon'ble Supreme Court in the two judgments viz., CIT v. Artex Mfg. Co. Ltd. (1997) 227 ITR 260 (SC) and CIT v. Electee Control Gear Mfg. Co. (1997) 227 ITR 278 (SC) and argued that in the instant case since the unit has been sold as a going concern without indicating the value of different assets like machinery, building, etc. the ratio of Electric Control Gear Mfg. Co. (supra) would apply. According to the learned counsel in the sale agreement dt. 17th April, 1989, no separate value of depreciated assets like plant and machinery, building and furniture is exhibited in the Second Schedule and it -was only at the time of take over of operations that supplementary agreement dt. 1st June, 1990, indicates the itemised value of various assets of the Pinsel unit sold by the assessee-company. The learned counsel further argued that Section 50 is a deeming provision which envisages excess of sale consideration over WDV as deemed capital gain arising from the transfer of short-term capita! assets and the deeming provisions would not be applicable in the instant case. The learned counsel further placed reliance on the following decisions :
1. CIT v. Mugneeram Bangui & Co. (Land Dept.) (1965) 57 ITR 299 (SC):
2. CIT v. West Coast Chemicals & Industries Ltd. (1962) 46 ITR 135, 142 (SC);
3. Delhi Tambak & Udyog Ltd. v. IAC (1987) 201TD 718 (Del); and
4. CIT v. B.C. Siinivasa Setty (1981) 128 ITR 294 (SC).
9. The learned Departmental Representative on the other hand, placed reliance on the facts and reasoning indicated by the learned CIT(A) in the impugned order and argued that the short-term capital gain levied by the AO amounting to Rs. 1,74,26,035 deserves to be sustained.
10. We have carefully considered the facts and circumstances of the case including the sale agreement dt. 17th April, 1989, as well as supplementary agreement dt. 1st June, 1990. The various judicial authorities cited before us have also been carefully perused by us We have no hesitation in upholding the conclusion of the learned CIT(A) regarding levy of short-term capital gains under Section 50 of the IT Act, 1961. From the perusal of various clauses of sale agreement dt. 17th April, 1989, it is amply clear that the sale consideration for transfer of plant and machinery and stock-in-trade and furniture, etc. has been worked out separately at Rs. 224 lakhs as per Clause (2) of the agreement, which has been reproduced hereinbefore. Clause (4) of the agreement clearly stipulates that on the date of take over of operations the exact value of the assets including cash and bank balances shall be determined and necessary adjustment will be made in the aforesaid amount of Rs. 224 lakhs. Thereafter at the time of take over operations such adjustments were actually made as per Article. (Ill) of the preamble of the supplementary agreement, which has also been reproduced hereinbefore whereby purchase consideration after making itemwise adjustment was worked out at Rs. 2,10,08,445. In the light of the aforesaid facts the conclusion is inescapable that the assessee has sold various items of immovable and movable property held in the Pinsel unit on the basis of itemised value of such property. The facts on record thus clearly indicate that it is not the case of transfer and sale of a going concern for a lump sum consideration. The assessee has actually sold various items of assets belonging to Pinsel unit as per agreement dt. 17th April, 1989, and, therefore, provisions of Section 50(2) are clearly applicable and the surplus of the sale consideration over the WDV in respect of block of assets like building, furniture and fittings, plant and machinery are liable to be assessed as short-term capital gainSection The contention of the learned counsel that the sale consideration attributable to each block of assets has not been indicated in the sale agreement is factually incorrect. We have already reproduced various clauses of the sale agreement as well as the supplementary agreement which clearly indicate that the sale consideration has been specifically attributed to various assets held by the Pinsel unit at the time of transfer. In the facts of the case the decision of Hon'ble Supreme Court in CIT v. Artex Mfg. Co. Ltd. (supra) would apply. In the said decision their Lordships held at p. 276 of the report :
"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."
The facts in the instant case stand on a stronger footing inasmuch as sale consideration with regard to various assets has been indicated in the sale agreement itself and again at the time of takeover, adjustments with regard to various items like cash and bank balances, stock inventories, etc. have been made. Since Aitex Mfg. Co. 's case (supra) is the direct authority in support of the view being taken by us we do not consider it necessary to discuss the various 'other decisions cited by the learned counsel as above. We would accordingly uphold the order of the learned CIT(A) on the issue.
11. With regard to the full value of the sale consideration taken by the AO at Rs. 2,10,08,445 the learned counsel raised the alternate contention that in view of the decision of Karnataka High Court in the case of CZT v. Shivarudtappa (1993) 200 JTR 1 (Kai), the sale consideration of Rs. 55,00,000 should be adopted since this amount had become due and payable during the year. We see no merit in this contention which has been rightly rejected by the learned CIT(A). Section 45 provides for levy of capital gains on any profits or gains "arising from the transfer of a capital asset" effected in the previous year. Section 50 has been introduced w.e.f. 1st April, 1988, as a special provision for computation of capital gains in case of depreciable assets and provides for levy of short-term capital gains in respect of full value of the consideration received or accruing as a result of the transfer of the asset. In the instant case by virtue of the inclusive definition of transfer contained under Section 2(47), transfer of capital assets has taken place during the year and the consideration accruing thereon is liable to be considered for the purposes of Section 50. Thus, the consideration accruing on the transfer of various assets of Pinsel unit, which has taken place during the accounting year relevant for asst. yr, 1990-91, has been rightly adopted by the AO at Rs. 2,10,08,445. In view of the specific provision applicable in the instant case, the decision cited by the learned counsel would not apply. We would, therefore, rejected the alternative contention-of the assessee.
12. With regard to addition of Rs. 1,09,926 added by the AO on account of interest received from the IT Department under Section 216, no arguments have been addressed before us We uphold the order of the learned CIT(A) on the issue.
13. In the result, the appeal of the assessee is dismissed.
14. Now we take up the Departmental appeal No. 1TA 4062/93. The only ground of appeal raised by the Revenue reads as under:
"On the facts and in the circumstances, of the case and in law, the learned CIT(A) erred in directing to delete the amount of capital gain of Rs. 39,07,695 from the book profit while working out the chargeable profit under Section 115J of the IT Act."
Book profit as reflected in the books of account of the assessee-company reflected credit of Rs. 39,07,695 to the P&L ac on account of profit on sale of Pinsel undertaking. This amount in fact represents the depreciation claimed and allowed in respect of Pinsel undertaking in the earlier yearSection The assessee raised an additional ground before the CIT(A) that while computing deemed income under Section 115J the aforesaid amount of Rs. 39,07,695 should be excluded from the book profit. The CIT(A) admitted the additional ground and accepted the contention of the assessee and directed the AO to exclude the profit of Rs. 39,07,695 while computing deemed income under Section 115J. The CIT(A) placed reliance on the decision of the special Bench of the Tribunal in the case of Sutiej Cotton Milfe Ltd. v. Asstt. CJT (1993) 46 TTJ (Cal) (SB) 310 : (1993) 199 ITR 164 (AT).
15. Aggrieved the Revenue is in appeal before us The learned Departmental Representative assailed the impugned relief allowed by the learned CIT(A) by challenging the admission of the additional ground. The preliminary objection of the learned Departmental Representative is liable to be rejected in view of the Supreme Court decision in the case of National Thermal Power Co. Ltd v. CJT (1998) 229 ITR 383 (SC) wherein it has been held that the Tribunal has jurisdiction to admit question of law raised for the first time, provided the relevant facts are already on record and the question has a bearing on the tax liability of the assessee. In this decision the Hon'ble Supreme Court has disapproved of the earlier decisions of Gujarat High Court in Cff v. Cellulose Products of India Ltd. (1985) 151 ITR 499 (Guj) (FB) and OFT v. Kaiamchand Piemchand (P) Ltd. (1969) 74ITR 254 (Guj). Since the additional ground admitted by the learned CIT(A) involves legal issue arising from facts already on record we feel that the CIT(A) is justified in admitting the additional ground for adjudication. The preliminary objection raised by the learned Departmental Representative is therefore rejected.
16. On behalf of the assessee reliance is placed on Special Bench decision in Sutlej Cotton Mite Ltd.-'s case (supra) and it is argued that exclusion of the amount of Rs. 39,07,695 for computing deemed income under Section 115J is justified.
17. We have carefully considered the matter. The assessee has credited the amount of Rs. 39,07,695 to the P&L a/c as profits of the company on account of sale of Pinsel undertaking. The surplus realised on transfer has thus been considered by the directors of the assessee-company as part of the profits of the company and included in the distributable surplus It has been held by the Calcutta High Court in the case of CTT v. N. Eguin & Co. (P) Ltd. (1979) 116 JTR 475 (Cal) that when a company disposes of any of its capital assets and realises a price higher than its cost price resulting in a surplus, it will be for the directors to decide whether such surplus should be treated as part of the profit of the company and included in the distributable surplus The surplus, it is significant to note, has been treated as profits by the company. Obviously the book profits have been worked out by the assessee-company in the instant case in'accordance with Parts II and III of Sch. VI of the Companies Act and no adjustment with regard to the figure of book profits is permissible except in accordance with the Explanation appended to Section 115J. At this stage we may refer to Patt II of the Vlth Sch. of the Companies Act which lays down the requirements as to P&L a/c. Item No. xi and xii in this part read as under:
"(xi) (a) The amount of income from investments, distinguishing between trade investments and other investmentSection.
(b) Other income by way of interest, specifying the nature of the income.
(c) The amount of income-tax deducted if the gross income is stated under sub-paras (a) and (b) above.
(xii) (a) Profits or loss on investments showing distinctly the extent of the profits or losses earned or incurred on account of membership of a partnership firm to the extent not adjusted from any previous provisions or reserve. Note : Information in respect of this item should also be given in the balance sheet under the relevant provision or reserve account.
(b) Profits or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or nonrecurring nature, if material in amount, (c) Miscellaneous income."
A fair reading of the aforesaid items would clearly indicate that profit on investments included in book profit by the assessee-company in the instant case is clearly in conformity with the Companies Act. The expression "profit on investment" clearly brings within its sweep the profit realised on the sale of the investmentSection There is, therefore, no justification for the learned CIT(A) to direct the exclusion of the profits of Rs. 39,07,695 included as book profits by the assessee-company in its books of account. The view taken by us above .regarding the profits on sale of investments being covered under item No. (xi) of Part n of the Vlth Sch. of the Companies Act is directly supported by the Special Bench decision in Sutlej Cotton Mills Ltd. case (supra) cited by the learned counsel. At p. 195 of the report it has been held by the Special Bench that item No. (xi) of Part n clearly envisages that profits realised on sale of capital investments would be included in the book profitSection The Special Bench has in fact referred in its judgment to the observations in Spicer & Pegleis Book Keeping and Accounts (Seventh Edition) at p. 311 to the effect that realised capital surplus could be credited to the P&L a/c or alternatively directly charged to the account in which the surplus is credited in the balance sheet. In the instant case the accounting practice as per the first option has been followed by-the assessee-company which is clearly in conformity with the principles of accountancy. Therefore, the adjustment in the book profit directed to be made by the learned CIT(A) is clearly contrary to the express provisions of Section 115J and cannot be sustained. From the aforesaid it would be seen that the reliance placed by the learned counsel on the Special Bench decision in Sutiej Cotton Mills Ltd. (supraj is entirely misconceived and erroneous inasmuch as the principles enunciated in the said decision in fact directly advance the case of the Revenue against excluding the figure of Rs. 39,07,695 by recasting book profit as done by the learned CIT(A).
18. We -have carefully gone through the Special Bench decision and we find that the facts in the said case are clearly distinguishable. The assesses in that cash had revalued the capital asset as on 31st March, 1987, whereunder cost of quoted shares reflected as capital asset was substituted by the market value as on 31st March, 1987, and the difference was taken to the reserve account. In the subsequent year when the shares were sold, there was a shortfall which was deducted from the revaluation reserve account. The sale proceeds realised by the assessee were invested in the eligible assets for claiming exemption under Section 54E from the levy of capital gains On these facts the Special Bench came to the conclusion that the entries made by the assessee in the capital reserve account with reference to the realisation by the sale of shares were correct and in accordance with the requirements of Part n of Sch. VI to the Companies Act and conform to sound accepted accounting practice. It was in the context of these facts that the Special Bench held that the Revenue cannot be allowed to recast the book profit contrary to the entries recorded by the assessee in accordance with Vlth Sch. of the Companies Act. In the instant case before us even after drawing of the P&L a/c in accordance with Part n of the Vlth Sch. of the Companies Act, it is the assessee who is claiming that the book profit arrived at in conformity with'" the Companies Act should be subjected to adjustments which are admittedly contrary to the express provisions of the Explanation appended to Section 115J as well as the provisions of the Companies Act. We are, therefore, inclined to reverse the conclusion of the learned CIT(A) on the issue and direct that the amount of Rs. 39,07,695 treated as part of book profit by the assessee would not be deducted for the purpose of computation of deemed income under Section 115J.
19. In the result, the appeal of the Revenue is, therefore, allowed.