Income Tax Appellate Tribunal - Delhi
Steriplate (P) Ltd. vs Asstt. Cit on 19 August, 2005
Equivalent citations: [2006]7SOT596(DELHI)
ORDER
Rajendra Singh, Accountant Member.
This appeal of the revenue and cross objection raised by the assessee relate to the order dated 20-11-1998 of Commissioner (Appeals) for assessment year 1995-96. Both the appeals which relate to the same assessment year and were heard together are being disposed of by a single consolidated order for the sake of convenience. In the revenue's appeal, the following grounds have been raised :
"(i) On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in law in directing the assessing officer to recompute the capital gained under section 45 of the Income Tax Act with reference to the consideration received for the said transfer vis-a-vis the cost of acquisition of undertaking without appreciating the facts that the assessee itself worked out the capital gain in the return of income on net asset value method and without appreciating the fact that the capital gains on depreciable assets are to be worked out in accordance with the special provisions of section 50 which override the general provision of sections 48, 49 and 55(2)(i).
(ii) On the facts and in the circumstances of the case the learned Commissioner (Appeals) erred in law in deleting the addition of Rs. 22,11,296 on account of interest paid to other concerns without appreciating the facts mentioned in the assessment order and without giving his own basis for deletion of addition made by the assessing officer on this point." 1.1 The cross objection raised by the assessee is as under :
"(i) That on the facts and circumstances of the case and in accordance with the provisions of law and contrary to various judicial pronouncements, the learned Commissioner (Appeals), Faridabad erred in not holding, after directing the assessing officer to compute the capital gain under section 45 of Income Tax Act with the reference to consideration received from such transfer vis-a-vis the cost of acquisition of undertaking, that the surplus arises on the transfer of undertaking of the company as a composite unit and since it is not possible to determine the cost of acquisition of the undertaking under section 48 of the income-tax Act, the computation provisions fail and that the amount cannot be included in the total income."
2. We first take up the ground No. (i) of the revenue and the cross objection of the assessee together as these involve common issues. The facts of the case are that the assessee which was engaged in the business of manufacture and sale of components of refrigerators, sold its manufacturing division as a going concern to M/s. Kelvinator India Ltd. vide agreement to sell dated 1-2-1995 for a lump sum price of Rs. 7.30 crorcs. The said lump sum price was for the entire undertaking consisting of plant and machinery, fixed and movable assets, liabilities and goodwill etc. The assessee, on the basis of valuation report of the Chartered Accountant firm, Walker Chandiok & Co., who had worked out the indexed cost of acquisition including cost of improvement of entire undertaking at Rs. 4,28,71,276, had offered for tax, long-term capital gain amounting to Rs. 3,01,28,742 in the return. However, subsequently during the assessment proceedings, the assessee vide letter dated 14-11-1997, pleaded that since the undertaking had been transferred as a going concern, no capital gain could be charged following the judgment of Hon'ble High Court of Calcutta in case of CIT v. Hindustan Co-operative Insurance Sociely (1993) 201 ITR 716 (Cal) and judgment of Hon'ble Supreme Court in the case of CIT v. Mugneeram Bangur & Co. (Land department) (1965) 57 ITR 299 (SC). The assessee also relied on the judgment of Hon'ble Supreme Court in case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) to argue that no capital gain could be charged, as cost of acquisition could not be determined. The assessing officer was, however, not satisfied with the explanation on the ground that the assessee itself had enclosed the valuation report from Chartered Accountant firm as per which the indexed cost of acquisition including cost of improvement had been determined at Rs. 4,28,71,276 and based on this, the assessee had offered long-term capital gain of Rs. 3,01,28,742 for taxation. The assessing officer was not satisfied even with this method of computation as according to him the capital gain was required to be computed under the provisions of section 50. Taking into account the fact that the buyer had also taken over the liabilities worth Rs. 80,64,499, he computed the total consideration received in respect of assets by adding these liabilities to the consideration of Rs. 7.30 crorcs received by the assessee and after deducting therefrom the sundry debtors, bank balances, loans and advances and inventories, arrived at the net consideration in respect of plant and machinery at Rs. 7,42,39,883. From this, he deducted the WDV of assets as on 31-3-1994 amounting to Rs. 12,31,946 to arrive at the short term capital gain of Rs. 7,30,07,937 under section 50 of the Income Tax Act and taxed accordingly.
2.1 In appeal, learned Commissioner (Appeals) held that capital gain should be computed under section 45 of the Income Tax Act as a long-term capital gain and not by applying the provisions of section 50 of the Income Tax Act. Accordingly, he directed the assessing officer to compute the capital gain under section 45 of the Income Tax Act with reference to the consideration received for such transfer vis-a-vis the cost of acquisition of the undertaking. Not satisfied, both the parties have objected to this decision of Commissioner (Appeals).
3. We have heard both the parties. It was submitted by the learned Authorised Representative for the assessee that the consideration received was for the entire undertaking as a going concern and not for transfer of individual assets. Quoting the judgment of Hon'ble Supreme Court in case of Rustom Cavasjee Cooper v. Union of India AIR 1970 SC 564 (610) (SC), it was argued by him that aggregate value of components is not necessarily the value of entirety of a unit or property acquired especially when property is a going concern with an organized business. In case of sale as a going concern it is not the individual items which are sold and that no part of sale consideration can be attributed to individual items of assets. No capital gain can, therefore, be charged in respect of plants and machineries, which were integral part of the undertaking. For these propositions, he relied on the following judgments :
(i) Sarabhai Chemicals (P.) Ltd. v. P.N. Mittal, Inspecting Asstt. CIT (1980) 126 ITR 1 (Guj.).
(ii) CIT v. Mugneeram Bangur & Co. (Land department) (1965) 57 ITR 299 (SC).
3.1 He also referred to the judgment of Hon'ble Supreme Court in case of CIT v. Electric Control Gear Mfg. Co. (1997) 227 ITR 278 (SC) in which it has been held that section 41(2) will not apply in a case where there was nothing to indicate the price attributable to individual depreciable assets out of a lump sum consideration. This was followed by Hon'ble High Court of Kolkata in case of CIT v. Carew Phipson Ltd (2003) 260 ITR 668 (Kol).
3.2 As regards the chargeability of capital gain on the sale of undertaking as a whole, it was argued by Learned Authorised Representative that taxability of a particular receipt has to be decided on the basis of legal provisions and not on the basis of what the assessee has stated in the return. For this proposition, he relied on the judgment of Hon'ble High Court of Allahabad in case of Pt. Sheo Nath Prasad Sharma v. CIT (1967) 66 ITR 647 (All) and some other ITAT decisions. Merely because the assessee had declared the long term capital gain on sale of undertaking in the return of income, the same cannot be the sole basis of taxing the receipts from the transfer of the undertaking. The issue has to be decided based on the provisions of law and judicial pronouncements on the subject and the assessee can also always change stand taken in the return.
3.3 Reference was also made to judgment of Hon'ble Supreme Court in case of CIT v. B. C Srinivasa Selty (1981) 128 ITR 294 (SC) and several other judgments reiterating the position that in a case where cost of acquisition cannot be computed, no capital gain can be charged. He also relied on the following decisions of learned ITAT to the effect that gain arising from the slump sale of an undertaking cannot be charged to capital gain prior to insertion of section 50B with effect from 1-4-2000.
(i) Coromandel Fertilisers Ltd. v. Dy. CIT (2004) 90 ITD 344 (Hyd.).
(ii) Industrial Machinery Associates v. CIT (2002) 81 ITD 482 2 (Ahd.) 3.4 The learned Departmental Representative on the other hand strongly supported the order of the assessing officer. He relied on the judgment of Hon'ble Supreme Court in case of CIT v. Artex A41g. Co. (1997) 227 ITR 260 (SC) in support. It was argued by him that section 50 being a special provision will override the other provisions of the Act.
4. We have perused the records and considered the rival submissions carefully. The assessee has transferred the industrial undertaking as a going concern for a lump sum consideration of Rs. 7.30 crores. The sale consideration in respect of each item of asset of the industrial undertaking, has not been specified in the sale agreement. The assessing officer has, however, taxed the sale consideration pertaining to plant and machinery under the specific provision of section 50. For this purpose, he computed the sale consideration in respect of plant and machinery at Rs. 74,23,988 as mentioned in para 2 of this order earlier. The said provision of section 50(2) is reproduced below for the sake of convenience :
"50(2) : Where any block of assets ceased to exist as such for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of asset at the beginning of the previous year as increased by the actual cost of any asset failing within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer shall be deemed to be capital gain arising from the transfer of short-term capital asset."
4.1 As the industrial undertaking has been transferred together with plant and machinery and other assets, it cannot be said that the plant and machinery has not been transferred. As all the plants and machineries of the undertaking have been transferred, provisions of section 50(2) are attracted. There is no difficulty regarding cost of acquisition of the plant and machinery as the same has been clearly defined in the said section as the Written Down Value (WDV). The only difficulty is ascertaining the price attributable to plant and machinery included in the lump sum consideration paid for the industrial undertaking. In case, the said price can be ascertained, the short-term capital gain can be easily computed and will be chargeable to tax under the provisions of section 50(2).
4.2 We find that similar issues had been considered by the Hon'ble Supreme Court in relation to chargeability of money receivable on account of plant and machinery in excess of WDV under section 41(2) of the Income Tax Act, 1961. Both the parties have quoted such judgments in support of their respective submissions. Whereas the learned Authorised Representative has relied on the judgment of Hon'ble Supreme Court in case of Artex Mfg. Co. (supra), the learned Authorised Representative for the assessee has relied on the judgment in case of Electric Control Gear Mfg. Co. (supra) and Mugneeram Bangur & Cos case (supra).
4.3 In the case of Artex Mfg. Co. (supra), the partnership firm had been converted into a private limited company as a going concern, for a net consideration of Rs. 11,50,400. The claim of the assessee was that there was no income chargeable to tax either under section 41(2) or under section 45 of the Income Tax Act. The assessing officer after noting that plant and machinery had been valued at Rs. 15,87,296, charged the excess over the written down value as business profit under section 41(2). On reference, Hon'ble High Court held that section 41(2) was not applicable. On further reference, Hon'ble Supreme Court observed that though in the agreement of sale, there was no reference to the value of plant and machinery and dead stock, the information furnished by the assessee showed that the consideration of Rs. 11,50,400 had been arrived at after taking into consideration the value of plant and machinery and dead stock as assessed by the valuer at Rs. 15,87,296. It was, therefore, held that section 41(2) was applicable. Hon'ble Supreme Court further held that amount of surplus exceeding the difference between the written down value and actual cost would have to be treated as capital gain under section 45 for the purpose of taxation. It is thus clear that in case, where lump sum consideration had been received the provisions of sections 41(2) and 45 shall be attracted if the price attributable to plant and machinery can be ascertained.
4.4 The Hon'ble Supreme Court in case of Electric Control Gear Mfg. Co. (supra), relied on by the assessee, in the facts of the case, held that provisions of section 41(2) were not applicable as in that case, there was nothing to indicate the price attributable to the assets like machinery, plant and building out of the total consideration of Rs. 8 lakhs. Similar was the position in case of Mugneeram Bangur & Co. (supra). The firm in this case sold the business as a going concern with goodwill and all stock in trade to a company promoted by the partners. The learned ITAT in that case held that sum of Rs. 2.50 lakhs shown as goodwill was in fact, the stock in trade, which in this case was land and although the concern had been sold as a going concern, value of stock in trade could be traced and charged to profit. Hon'ble Supreme Court had observed in this case that though in the schedule to the agreement, price of land was stated but it was only cost price of the land in books and there was nothing to show that this represented market value of the land. It was, therefore, held that provisions of section 10(2)(vii), proviso (ii) of 1922 Act (41(2) of 1961 Act) could not be applied.
4.5 In case of Artex Mfg. Co. (supra), the judgment of Hon'ble Supreme Court in case of Mugneerarn Bangur & Co. (supra) and the judgment of Hon'ble High Court in case of Sarabhai Chemicals (P.) Ltd. (supra), which have been relied upon by the assessee before us also, had been duly considered by the Hon'ble Supreme Court before deciding the case in favour of the revenue. The relevant portion of judgment of Hon'ble Supreme Court in case of Artex Mfg. Co. (supra) are reproduced below for the sake of clarity :
"According to the High Court such type of a case is found in Mugneeram Bangur's case (1965) 57 ITR 299 (SC). The High Courthas also placed reliance on its judgment in Sarabhai M. Chernicals (P.) Ltd. v. P.N. Mittal (1980) 126 ITR I (Guj.). The distinction pointed out by the High Court in B.M. Kharwar's case (1969) 72 ITR 603, this count was not dealing with a case of transfer of a business as a whole by a firm to a limited company is, in our opinion, not of much significance because this court in B.M. Kharwar's case (1969) 72 ITR 603, has held that by virtue of the amendment made in section 10(2)(vii), proviso (ii), of the 1922 Act by Act 67 of 1949 even under a "realisation sale" the excess over the written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax. In Mugneeram Bangur's case (1965) 57 ITR 299, this court has indicated that where there is a slump transaction and the business is sold as a going concern, what is to be seen is whether any portion of the slump price is attributable to the stock in trade and if on the basis of the facts, it can be found that particular price is attributable to a particular item, then the excess amount would be chargeable to tax under section 10(2)(vii) of the 1922 Act (section 41(2) of the 1961 Act). In the facts of that case, the court found that it was very difficult to attribute part of the slump price to the cost of the land sold in the realisation sale, since there was no evidence that any attempt was made to evaluate the land on the date of the sale. In the present case, however, it was the admitted case of the assessee before the Income Tax Officer that the plant, machinery and dead stock had been revalued by Hargovandas Girdharilal at the time of the agreement for sale and the amount of Rs. 11,50,400 was fixed after taking into account the value of the plant, machinery and dead stock at Rs. 15,87,296 as per valuation by Hargovandas Girdharilal. This shows that at the time of execution of the agreement on 31-3-1966, the value of the plant, machinery and dead stock that were transferred was Rs. 15,87,296."
4.6 It is thus clear that even in case of sale as a going concern, provisions of section 41(2) or section 50 being similar in nature, will be applicable if the part of consideration attributable to the plant and machinery can be determined. In a case where material was available to indicate price attributable to plant and machinery or stock in trade, Hon'ble Supreme Court decided the issue in favour of the revenue but when the material was not available, it was held otherwise. It may be noted that Hon'ble Supreme Court have to answer the question of law raised on the basis of material available. The situation in the case before us is, however, different. We are still at the fact-finding stage. For deciding the issue, it is necessary to find out whether value of plant and machinery on the date of sale can be assessed by a valuer. The method followed by the assessing officer in computing the part of consideration attributable to plant and machinery does not give true picture, as there may be many intangible assets whose market value has not been considered. As the valuation aspect has not been examined, we set aside the issue and restore the matter to the assessing officer for passing a fresh order after making necessary inquiries in the light of observation made above and after allowing opportunity of being heard to the assessee.
5. As regards the objection of the assessee to the direction of learned Commissioner (Appeals) to charge long-term capital gain on transfer of the industrial undertaking, we find that the decision of Commissioner (Appeals) cannot be rejected outright. There is no dispute that industrial undertaking constitutes capital asset, which has been transferred for a lump sum consideration. The assessee had referred the matter to a specialist Chartered Accountant firm regarding computation of cost of acquisition and cost of improvement of the industrial undertaking and the latter had computed the index cost of acquisition and cost of improvement at Rs. 4,28,71,276. Based on this, the assessee had also declared the long-term capital gain at Rs. 3,01,28,742 in the return of income. Though, we agree with the submission of learned Authorised Representative that taxability of a particular sum has to be decided based on the legal provisions and not merely on the basis what the assessee declared in the return and that the assessee can always change its stand, the assessee cannot change its stand without giving valid reasons. As the CA firm who is a specialist in the matter has computed the indexed cost of acquisition and indexed cost of improvement, it will not be correct to say that the same cannot be determined.
5.1 The argument advanced in favour of the plea that capital gain cannot be charged on transfer of industrial undertaking is that the undertaking also includes intangible assets in respect of which cost of acquisition and cost of improvement cannot be accurately calculated nor it is possible to accurately determine the date of acquisition. The assessee has quoted the decision of ITAT, Hyderabad in case of Coromandel Fertilizers Ltd. (supra) and some other ITAT decisions in support of this view. This argument is based on the judgment of Hon'ble Supreme Court in case of CIT v. B.C Srinivasa Setty (1981) 128 ITR 294 (SC) in which it has been held that the charging section and computation provisions together constitute an integrated code and where there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. In our view, the said judgment of the Hon'ble Supreme Court has not been considered in the correct perspective. In that case, issue was charging of capital gain on transfer of goodwill generated in a newly constructed business. On perusal of the provisions relating to capital gain, Hon'ble Supreme Court had observed that what was contemplated in section 48(ii) was an asset in the acquisition of which it was possible to envisage a cost. None of the provisions pertaining to the head 'capital gain' suggested that these included assets in the acquisition of which no cost could be conceived. In this view of the matter, Hon'ble Supreme Court held that the asset must envisage a cost and as cost of goodwill in case of newly constructed business could not be determined, the computation provisions fail and no capital gain could be charged.
5.2 But the observation that the provisions of capital gain do not include any asset in the acquisition of which no cost can be conceived was relevant at the time when the said judgment was delivered but not now. Subsequent to the said judgment, there have been amendments of the provisions as per which cost of several assets has been treated as nil. For instance, in case of goodwill generated in a newly constructed business, the cost has to be taken as nil. Goodwill, no doubt, has a definite market value but no specific expenditure is incurred for generation of goodwill in the newly constructed business and, therefore, its cost has been taken as nil and there are several assets in respect of which the position is similar. Thus the provisions relating to the head 'capital gains' do now conceive assets with no cost. It, therefore, follows that in case there is any intangible asset for the acquisition of which the assessee has incurred no expenditure, the cost of such assets has to be taken as nil. In case, the assessee has incurred expenditure the assessee should be able to give details and the same has to be taken as the cost incurred for that asset. As regards the date of acquisition of the undertaking, the same obviously will be the date on which the undertaking was set up and was in a position to produce goods and services. Similarly the cost improvement can be computed as and when such improvements have been made. In fact, as mentioned earlier, valuer in this case has already computed the cost of acquisition and cost of improvement at the instance of the assessee.
5.3 The argument that in view of specific provisions in section 50B for taxability of capital gain in case of slump sale, which is effective from assessment year 2000-01, capital gain cannot be charged in respect of such sale in the period prior to assessment year 2000-01, is not tenable in our opinion. There is no dispute that the industrial undertaking is a capital asset. Capital gain on the transfer of a capital asset will be chargeable if the cost of acquisition and improvement can be determined. For the period from assessment year 2000-01 onwards, the cost of acquisition and cost of improvement has to be taken as defined in that section and in the period prior to assessment year 2000-01, cost of acquisition and cost of improvement will have to be determined based on accepted commercial principles. In case, it is possible to determine cost of acquisition and cost of improvement, there is no reason why capital gain, cannot be charged in the period prior to assessment year 2000-01.
5.4 Now, the question may arise whether part of the industrial undertaking being depreciable asset can be charged as short-term capital gain under section 50 and the remaining as a long-term capital gain. In our view, this is possible. It is like the case of a house property. If the cost of construction is less than three years old, the sale price attributable to cost of construction can be charged as short-term capital gain and the land if older than three years can be charged to tax as long-term capital gain. This view gets support from the following judgments of Hon'ble High Courts :
(i) CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj.)
(ii) CIT v. Dr. D.L. Ramachandra Rao (1999) 236 ITR 51 (Mad.)
(iii) CIT v. Estate of 0mprakash Jhunjhunwala (2002) 254 ITR 152 (Cal.) 5.5 The issue relating to chargeability of long-term capital gain on the transfer of undertaking as a going concern, thus, requires further examination. The indexed cost of acquisition and cost of improvement determined by the valuer remained un-examined. The assessee also needs opportunity to point out if there are any intangible assets cost of which had not been included in the cost of acquisition of the undertaking determined by the valuer. We have already set aside the issue relating to short-term capital gain attributable to plant and machinery. This issue relating to long-term capital gain is also set aside and restored to the file of the assessing officer for passing a fresh order. The assessing officer will decide both the issues afresh after making detailed examination and inquiry in the light of observations made by us in this order and after allowing opportunity of being heard to the assessee.
6. Insofar as ground No. (ii) in the revenue's appeal is concerned, the facts of the case are that assessing officer during the course of assessment proceedings, noticed that the assessee had claimed interest payment of Rs. 25,27,959. The assessing officer also noted that the assessee had also .advanced substantial interest-free funds to sister concerns. He, therefore, disallowed the interest excluding the interest paid to the bank, totalling Rs. 22,11,296.
6.1 We have heard both the parties. Learned Authorised Representative brought to our notice that similar issue relating to disallowance of interest on account of interest free advances to sister concerns has been set aside and matter restored to the file of the assessing officer by ITAT in assessment years 1990-91 to 1992-93 for fresh examination and orders. Both the parties have no objection if the issue is restored to the file of the assessing officer this year also. We, therefore, set aside the issue and restore it to the assessing officer for fresh order after detailed examination in the light of direction given by ITAT in the earlier years and after allowing opportunity of being heard to the assessee.
7. In the result, both the appeals are allowed for statistical purposes.