Gujarat High Court
Commissioner Of Income Tax vs Garden Silk Weaving Factory on 15 June, 2005
Equivalent citations: (2005)199CTR(GUJ)13
JUDGMENT D.A. Mehta, J.
1. The Tribunal, Ahmedabad Bench 'B' has referred the following question for the opinion of this Court under Section 256(1) of the IT Act, 1961 (the Act), at the instance of the CIT :
"Whether the Tribunal was right in law and on facts in holding that what was sold by the assessee-firm to the limited company was its running business as a going concern together with all the assets and liabilities, and the provisions of Section 41(2) of the Act cannot be invoked under the facts and circumstances of the assessee's case ?"
2. The assessment year is 1973-74 and the relevant accounting... period is calendar year 1972, The assessee, a registered firm, entered into an agreement with a private limited company known as Garden, Silk Mills (P) Ltd. The agreement dt. 1st Dec., 1971 recorded that the assessee was to transfer the business of the firm, run in the firm name and style of Garden Silk Weaving Factory, as a going concern together with all the assets and liabilities. The agreement was followed by necessary accounting entries made on 1st Jan., 1972 showing the amount of consideration received from the private limited company at Rs. 15,15,000 received for transfer of the running business with all assets and liabilities/On 17th Aug., 1973 the assessee-firm executed a conveyance deed in respect of the immovable property.
3. (a) The ITO framed an assessment order on 15th March, 1976 computing profit under Section 41(2) of the Act at Rs. 10,25,135.
(b) The assessee carried the matter in appeal before the AAC who set aside the assessment by order dt. 18th July, 1977.
(c) The assessee preferred second appeal before the Tribunal. The Tribunal by order dt. 9th Jan., 1979 restored the matter to the file of the AAC after setting aside the order passed by the AAC on 18th July, 1977.
(d) The reinstated matter was taken up by CIT(A) who had derived jurisdiction by then. The CIT(A) held by his order dt. 29th-Feb., 1980 that Section 41(2) of the Act was applicable and the correct profit taxable under the said section would be Rs. 5,66,177 and not Rs. 10,25,135.
(e) The assessee challenged the said order by way of appeal before the tribunal and the Revenue preferred cross-objections challenging the reduction of taxable profit under Section 41(2) of the Act.
(f) The Tribunal vide its order dt. 16th July, 1981 restored the matter back to the ITO to consider the claim of the assessee that the transfer was of the whole business and not of any individual assets in light of the judgment of this High Court in the case of Artex Manufacturing Co. v. CIT . The cross-objections of the Department were dismissed as being barred by limitation.
(g) Once again the AO treated a sum of Rs. 10,25,135 as profit liable to tax under Section 41(2) of the Act by framing a best judgment assessment under Section 144 of the Act.
(h) The assessee sought rectification of the said assessment by application under Section 154 of the Act, as a result of which by order dt. 6th April, 1984 the addition was reduced to Rs. 5,66,177.
(i) The assessee had also filed application under Section 146 of the Act which came to be allowed vide order dt. 16th April, 1984.
(j) The ITO again passed a fresh assessment order on 23rd March, 1987 computing profit chargeable under Section 41(2) of the Act at Rs. 10,25,135. He negatived the contention raised by the assessee by holding that there was no transfer of the going concern and the assessee's case was not covered by the ratio of the decision of this Court in the case of Artex Manufacturing Co. (supra). In the assessment order, alternatively it Was held that as the judgment of this High Court had not been accepted by the Department and the matter was pending before the Supreme Court, the issue had to be kept alive.
(k) The assessee went in appeal before CIT(A) who for the reasons stated in his order dt. 23rd March, 1988 held that the assessee-firm had entered into a slump sale whereby the entire business was sold to the limited company as going concern and therefore, the assessee was not liable to be taxed under Section 41(2) of the Act.
(l) The Revenue carried the matter in appeal before the Tribunal. The Tribunal for the reasons stated in their order dt. 6th Jan., 1992 came to the conclusion that the CIT(A) had rightly read the documents in question and the assessee was not liable to be taxed under Section 41(2) of the Act. However, the Tribunal restored the matter back to CIT(A) to determine whether the assessee was liable to be charged under the head 'Capital gains'. It is this order which is under challenge in the present proceedings.
4. Mr. Tanvish U. Bhatt, learned standing counsel appearing on behalf of the applicant-Revenue, assailed the order of the Tribunal primarily on the ground that the AO had taken the details which are available on record to compute the balancing charge under Section 41(2) of the Act and the Tribunal had wrongly read the agreements between the assessee-firm and the limited company to hold that there was transfer of the entire business as a going concern. Alternatively, relying on the decision of apex Court in the case of CIT v. Artex Manufacturing Co. it was contended that even if the transaction was regarded as slump sale on the basis of information that was available with the AO, the assessee had rightly been held to be taxable under Section 41(2) of the Act. He also cited decision of this Court rendered in the case of CIT v. Shahibaug Entrepreneurs (P) Ltd. to submit that even this Court had read and applied the decision of the apex Court in case of Artex Manufacturing Co. (supra) in the manner Revenue was contending. He, therefore, urged that the Tribunal's order was required to be set aside and the order of AO restored.
5. Mr. J.P. Shah, learned advocate appearing on behalf of the respondent-assessee, submitted that there was no error in the impugned order of the Tribunal and there was no dispute as to the legal proposition, but the findings of fact recorded by the Tribunal were such that no interference was called for. The Tribunal had applied the settled legal position to the facts found.
6. As can be seen from the record, the Tribunal has confirmed the order of CIT(A) and deleted the addition made under Section 41(2) of the Act by holding that what the assessee-firm had sold was the whole business as a going concern. The Tribunal has agreed with the findings given by CIT(A) that when all the agreements are read together what emerges is that what was sold by the assessee-firm to the limited company was the running business as a going concern together with all the assets and liabilities and hence applying ratio of the decision of the jurisdictional High Court and the apex Court, provisions of Section 41(2) of the Act cannot be invoked. CIT(A) has referred to agreement dt. 1st Dec., 1971 and after reproducing various clauses of the said agreement together with agreements dt. 1st Jan., 1972 and 17th Aug., 1973 came to the conclusion that it was beyond the pale of doubt that the transfer was of the entire business if various terms of the agreements are borne in mind.
7. The AO by relying on the deed of assignment executed on 17th Aug., 1973 has worked out the surplus liable to tax under Section 41(2) of the Act by adopting following figures. The Tribunal has extracted the said portion in para 2 of its order :
"In this deed, it was inter alia, mentioned that value of all the assets taken over by the company was determined at Rs. 77,37,579 comprising of the following items :
(a) Rs. 3,76,000 Value of building structure at Bell Mill Compound.
(b) Rs. 45,837 Being value of goodwill of the firm.
(c) Rs. 44,80,984 Being the value of plant and machinery and equipment
of Rampura Unit and of Bell Mill Compound Unit,
furniture and the value of stock-in-trade
(d) Rs. 28,34,758 Aggregate value of loans, advance, cash, bank balance,
investment, etc.
Rs. 77,37,579 Total
Rs. 62,22,579 Less : Liabilities taken over
______________
Rs. 15,15,000"
______________
8. On going through the aforesaid figures, it is apparent that the AO had adopted the aggregate values of the building structure as well as plant and machineries, furniture and stock-in-trade. On a plain reading of Section 41(2) of the Act it becomes clear that for the purpose of invoking the said section it is necessary that each individual asset, be it a building or plant or machinery, has to be (a) owned by the assessee, (b) used for the purpose of business of the assessee, (c) should have WDV and actual cost, and (d) there should be excess which does not exceed the difference between the actual cost and the WDV which shall be chargeable to tax as income of the business of the previous year in which monies payable for such building, machinery, plant or furniture became due. Therefore, for each asset which is sold, the AO must have with him the actual cost, WDV and the sale consideration. In absence of the same, Section 41(2) of the Act cannot be applied. In a case like the present one where the entire business is sold as a going concern with all assets and liabilities, it is apparent that the provision cannot be invoked unless and until the aforesaid information is available with the assessing authority. It is in this context that the ratio of the apex Court's decision in case of CIT v. Artex Manufacturing Co. (supra) has to be appreciated and applied when it is observed that provisions of Section 41(2) of the Act can be applied on the basis of the information that may be available with the AO.
9. As already noticed hereinbefore, in the present case both the CIT(A) and the Tribunal have concurrently found after appreciating evidence on record (in the form of various agreements) and on facts that the transaction was a slump sale, i.e., the entire business undertaking was sold as a going concern and there was no itemised sale. Even the assessing authority has not been able to work out the itemised sale qua each building, machinery or plant, as the case may be. Therefore, in absence of any evidence on record to dislodge the findings of fact recorded by the CIT(A) and the Tribunal, it is not possible to find any infirmity in the impugned order of Tribunal so as to hold that provisions of Section 41(2) of the Act are applicable to the facts of the present case.
10. Before parting, it is necessary to take note of the fact that Supreme Court itself has in similar fact situation in the case of CIT v. Electric Control Gear Mfg. Co. distinguished its own decision in Artex Manufacturing Co. (supra) by holding that there was nothing to indicate the price attributable to the assets like machinery, plant or building out of the total consideration amount and merely because depreciation had been allowed, it could not be said that the balance was the excess amount between the price and the WDV.
11. The Tribunal was, therefore, right in law and facts in holding that what was sold by the assessee-firm to the limited company was its running business as a going concern together with all the assets and liabilities and the provisions of Section 41(2) of the Act cannot be invoked on the facts and circumstances of the case. The question referred to is, therefore, answered in the affirmative i.e., in favour of the assessee and against Revenue.
12. The reference stands disposed of accordingly. There shall be no order as to costs.