Income Tax Appellate Tribunal - Mumbai
Swastik Household And Industrial ... vs Income-Tax Officer on 9 November, 1987
Equivalent citations: [1988]25ITD479(MUM)
ORDER
V. Balasubramanian, Vice President
1. This appeal by the assessee has raised several issues which are considered seriatim below.
Profit under Section 41(2) :
2. The assessee-company had three separate divisions of business :
(i) Swastik Household & Industrial Products, (ii) Sarabhai Research Centre and (iii) Operation Research Group. A company, M/s. Karamchand Premchand Pvt. Ltd., transferred and assigned as a going concern on 30-6-1973 its various industrial undertakings and businesses to its wholly-owned subsidiary. While doing so, with effect from 30-6-1973, that company had transferred and assigned its industrial undertaking of Swastik Oil Mill division as a going concern to the assessee-company. With effect from the close of business of the assessee as on 28-2-1977, the assessee-company which had in the meanwhile set up two divisions, Swastik Research Centre and Operation Research Group, in 1974, transferred the industrial undertakings and businesses of Swastik Household & Industrial Products Division, business of Operation Research Group and the Sarabhai Research Centre to its subsidiary company, M/s. Ofisade Pvt. Ltd. The Income-tax Officer in para 6 of his order, refers to this transfer "as a going concern to its subsidiary company.
3. In the earlier transfer, goodwill of the business was transferred at Rs. 2 crores. Scanning the details regarding the present transfer, the ITO came to the conclusion that the transfer did not represent in its terms the correct position. The value ascribed to goodwill, the other assets, etc., was not realistic. In effect, he came to the conclusion that on account of the transfer the ases-see had gained substantial amounts taxable under Section 41(2). Read with the order of the Inspecting Asst. Commissioner under Section 144B, the order of the ITO reveals that he found that the assets have been transferred at their written down value without having any regard to their present market value. The fact that an amount of Rs, 6 crores had been shown as the value of goodwill without substantial reasons went to show that a substantial part of the value attributable to -goodwill, in fact, reflected the value of the fixed assets transferred to the subsidiary company. The assessee-company itself had not supplied any material regarding the market value of the assets. Under the direction of the IAC, therefore, the ITO ascertained the difference between the actual value of the assets transferred and the written down value and treated the difference as income taxable under Section 41(2). The ITO also held that any amount over and above the actual cost of the asset transferred would constitute capital gains; but in view of the provisions of Section 47(iv), the capital gains would not be taxable in respect of a transfer made to a subsidiary company. The ITO, therefore, assessed a sum of Rs. 4 crores as profit under Section 41(2). He, however, noted that this working would be subject to modifications on the ascertainment of the actual cost of the assets, if furnished by the assessee.
4. On appeal, the CIT (Appeals) went in detail into the facts. According to him, the claim of the assessee that there was a slump sale could not be accepted on facts. Even in the case of a slump sale, the provisions of Section 41(2) would apply. He also doubted the genuineness of the claim that goodwill has increased from a value of Rs. 2 crores to Rs. 6 crores during the relevant period. There was nothing to show that the goodwill of the business had appreciated to any considerable extent between June 1973 to June 1977. The working of the goodwill given by a chartered accountant produced by the assessee was also not regarded by the CIT (A) as acceptable. The figures of profit, capital, reserves, etc., of the business did not indicate the existence of any super profit. The CIT (Appeals), therefore, held that in the absence of any goodwill the surplus received in the name of goodwill would only represent the price of the other assets transferred. The CIT (A) also found that the ITO had taken the goodwill value at Rs. 2 crores and taken the surplus at Rs. 4 crores as representing profit on sale of assets assessable under Section 41(2). Observing that he did not want to further interfere in the matter and enhance the assessment, the CIT (A) directed the ITO to allow the assessee time to produce the necessary particulars relating to the actual cost and written down value in the hands of the previous owner, namely, M/s. Karamchand Premchand Ltd. If no particulars were to be filed, the ITO was to treat the sum of Rs. 4 crores as profit assessable under Section 41(2). In effect, the CIT (A) upheld the addition on this account made by the ITO.
5. The learned counsel for the assessee has pointed out that the whole exercise gone through by the department was a futile one. There was no profit taxable under Section 41(2) in the present case. There was a simple slump* sale of the entire undertaking in the present case. The business belonged earlier to M/s. Karamchand Premchand which transferred the same as a running concern to the assessee. The question of Section 41(2) profit came up for consideration even in that transfer, the matter having come up on appeal before the Tribunal in ITA No. 752 (Ahd.)/78-79 dated 28-2-1981. The Tribunal held therein that the undertaking was sold as a whole and there was no question of assessing the profits under Section 41(2). The position is exactly the same here also. The assessee has sold the undertaking to its own whole subsidiary. Section 47 ruled out of consideration any capital gains. The fact of the slump sale took out of account any computation of profit under Section 41(2) also. The learned counsel took us in detail through the order of the Tribunal relating to the earlier transfer of the entire undertaking to the assessee. Reference was made also in this connection to a circular of the CBDT dated 16-8-1971. Though this related to the nationalization of commercial banks, the circular clearly answered the question as to taxing as "balancing charge" under Section 41(2) of the Income-tax Act in relation to the transfer assets on which depreciation had been granted. The circular clearly laid down that there will be no liability to tax under Section 41(2). Reference is made in para 5 of the circular to the computation of capital gains at best on the transfer of the entire undertaking as a single asset. Even there, it has made clear, according to the learned counsel, that the transfer of the entire undertaking has to be considered and not any individual assets leading to capital gains or profit under Section 41(2). Dealing with certain passages and the observations in the earlier order of the Tribunal which dealt with almost the same matter it is pointed out that the case law considered at length in that decision would apply with equal force to the present case. The fact that the transfer was by a parent company to its subsidiary thus leading to no real benefit to the parent company which held all the shares-which is stressed in the earlier order of the Tribunal-is also emphasized.
6. There was no independent valuation of any of the assets or any calculation made thereunder. The position in the present case, according to the learned counsel, was exactly the same as in the earlier transfer. In both the cases, the assets were taken at written down value by the succeeding owner. In fact, for depreciation purposes, the law required the succeeding owner of business to adopt the written down value and not the market value, especially in a case where the entire business is transferred. Elaborating the point about the transfer of the undertaking as such instead of the separate assets, which alone could attract the provisions of Section 41(2), the learned counsel has drawn attention to certain clauses of the agreement of transfer. Clause 1 of the agreement dated 28-2-1977 specifically provided, according to the learned counsel, that "the Purchaser shall purchase and accept the transfer and assignment of the industrial undertaking and business of Swastika Oil Mills Division and the businesses and activities of Operations Research Group, Sarabhai Technical Services Division and Sarabhai Research Centre of the Vendor as going concerns on and with effect from the 1st day of March, 1977". The details of the assets were specified in the agreement only for the purpose of identifying the assets included in the undertaking. Even the computation of the consideration was made on the basis of a single transfer of the entire undertaking. As regards goodwill, the assessee had purchased the goodwill from the earlier vendor at Rs. 2 crores. The goodwill of the business at the time of the present transfer was computed on expert advice after taking into account all the facts of the case.
7. For the department, stress is laid on the orders of the authorities below. It is pointed out that the factual position in the case does not indicate a slump sale. The subject-matter of the transfer was not the sale of the entire business. In the first place, assets like land have been omitted from the transfer. Even if it is assumed that there is a slump sale, the valuation of the assets has been made itemwise. There was a specific ascertainment of the existence and the valuation of several individual items comprised in the business. The case will not be governed by the decisions in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299 (SC) and Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.) but would come under the ratio of Associated Clothiers Ltd. v. CIT [1967] 63 ITR 224 (SC). The transfer also has excluded the tenancy and occupancy rights. A full list of items not transferred is referred to in the agreements These comprise lands, buildings, tenancy rights, etc. According to the learned counsel, this exclusion of some of the vital elements of the business itself indicated that the transfer was not of the entire undertaking. There was no slump sale as claimed of a running concern. In fact, some time after the sale, the land and buildings were sold to another concern. This is referred to in para 7 of the order of CIT (Appeals). The learned counsel has posed a question : How could goodwill alone go up in value from Rs. 2 crores to Rs. 6 crores when, according to the assessee, none of the assets has gone up in value and has in fact been included in the transfer at its book value. Detailed reference to the computation of the sale consideration is made in this connection. A reading of the agreement also shows that every item of property is individually and separately evaluated and included in the consideration. Itemwise description of the assets with their value is also available even in the agreement. Stress is laid, in this connection on Clauses R and Y of the agreement which clearly go to show that individual items were considered for the transfer rather than a lump sum value for the whole undertaking as such. The stipulation of consideration in the agreement specifically mentions that lands, buildings and tenancy/occupancy rights shall be separately transferred. Movable properties also are separately transferred.
8. The value put on the goodwill, though sought to be supported by the report of a chartered accountant, could not, according to the learned counsel, be accepted as correct. In fact, according to a provisional report prepared by the department's valuer, goodwill would not cost anything more than Rs. 2.3 crores as against the figure of Rs. 6 crores computed by the assessee's expert.
9. The facts lie in a short compass. The assessee had transferred to it a business from a parent company, M/s. Karamchand Premchand Ltd., in 1973. At the time of the transfer, the same question of taxability under Section 41(2) came up for consideration. The Tribunal, by its order in ITA No. 752(Ahd.)/78-79 dated 28-2-1981, rejected the department's stand. By the > agreement of 28-2-1977, the assessee had transferred the asset earlier it got from its holding company along with one or two businesses developed in the interim to its 100 per cent subsidiary, M/s Ofisade Pvt. Ltd. The transfer was effected under the agreement referred to above. The preamble to the agreement recites the nature of the businesses carried on by the assessee which cover four items, i.e., Swastik Oil Mills, Operations Research Group, Sarabhai Technical Services and Sarabhai Research Centre. The assessee is also in possession of several agreements relating to services, leases such as the HRO Agreement, the PACKART Agreement, the STDS Agreement, etc., which give the assessee substantial rights, etc. These are also detailed in the transfer agreement. The operative part of the agreement is as under :
The vendor shall transfer and assign and the purchaser shall purchase and accept the transfer and assignment of the industrial undertaking and business of Swastik Oil Mills Division and the businesses and activities of Operations Research Group, Sarabhai Technical Services Division and Sarabhai Research Centre of the Vendor as going concerns on and with effect from the 1st day of March, 1977 and as incidental thereto, the Vendor shall sell, transfer and assign to the Purchaser and the Purchaser shall purchase and accept the transfer and assignment of goodwill of the aforesaid businesses and activities and other intangible rights and benefits thereof or accruing or appurtaining thereto under all licences and quotas and the like or all subsisting agreements, contracts, arrangements and understandings except for the rights and benefits arising or accruing under the said Geigy Conveyance, the said Technical Assistance Fees Agreements and the said Teknoserv Agreement or otherwise belonging or appurtaining to or held in or in connection with the businesses of the Vendor for the manufacture, sale and distribution of detergents, soaps, cosmetics, hair-oils, glycerine, surfactants, toiletories etc. carried on by Swastik Oil Mills Division of the Vendor and business and activities of Operations Research Group, which goodwill has been valued at Rs. 600 lacs on the basis of the report dated 24th February, 1977 of S. V. Ghatalia & Co., Chartered Accountants, Bombay. submitted to the Vendor, together with the benefit to the Purchaser to use the names Swastik. Oil Mills and Operations Research Group and Sarabhai Research Centre and Sarabhai Technical Services Division as a part of its corporate name or trade names of trading style or in any other manner whatsoever.
As incidental to the sale, transfer and assignment of the industrial undertaking and business of the said Swastik Oil Mill Division and of the businesses and activities of the said Operations Research Group, Sarabhai Technical Services Division and Sarabhai Research Centre, the Vendor shall sell, transfer and assign and the Purchaser shall purchase and accept the transfer and assignment, as the case may be, of all the following assets, properties, rights and benefits of the said undertaking, businesses and activities as aforesaid, subject to all subsisting mortgages, charges or encumbrances whether registered or otherwise, in favour of banks, financial institutions, debenture trustees or other persons whatsoever as aforesaid.
The mode of payment is also prescribed therein. The agreement provides for all incidental and supplementary matters such as dealing with the employees, the debenture fund taking over the assets, liabilities and provisions mentioned in the books of account of the vendor, etc. The schedules attached to the agreement detail the assets comprised in the undertaking and transfer.
10. By an agreement dated 28-6-1977, certain modifications and clarifications were made including the specification in figures of the consideration. Clause C of the preamble to this agreement is as under :
In the light of the above, by an agreement for sale dated the 28th day of February 1977 and made between the parties hereto, the Vendor has agreed to transfer and assign on and with effect from the 1st day of March, 1977 the industrial undertaking and businesses of its Swastik Oil Mills, Sarabhai Technical Services Division and Sarabhai Research Centre of the Vendor as going concerns together with all the assets thereof including benefit of the contracts, agreements, arrangements and understandings as also the goodwill of the said businesses along with the liabilities relating thereto or arising out of the said industrial undertaking, businesses and activities and in particular....
Clauses X, Y and Z of this agreement detail the manner of payment of the consideration. Accordingly, the movable assets capable of passing by delivery had already been delivered to the purchaser by the assessee on the 1st day of March, 1977. In respect of this transfer, a sum of Rs, 70,65,847.11 had been received, Rs. 847.11 in cash and Rs. 70,65,000 being the amount set off, adjusted and applied for payment in full of the uncalled capital of Rs. 90 per share of 78,500 equity shares of Rs. 100 each in the purchaser. This agreement stipulated that the lands and buildings were not to be transferred thereunder, even though the earlier agreement had stipulated that the lands were to be transferred separately by appropriate conveyance upon receiving permission of the competent authority under the Urban Land (Ceiling & Regulation) Act, 1976. Under Clause Z, the purchaser had paid the assessee already a sum of Rs. 4,22,52,974.65 as under :
(i) Rs. 47,67,974.65 being part of the earnest money
of Rs. 49,50,000 paid, on or b-
efore the 28th day of February,
1977.
(ii) Rs. 3,74,85,000.00 being the amount set off, adjus-
ted and applied for payment in
full of the uncalled capital of
Rs. 90 per share on 4,16,500
equity shares of Rs. 100 each in
the Purchaser.
11. Taking into consideration the above already completed transactions, out of the sum of Rs. 8,32,24,726.40 to be paid to the assessee as under :
Rs. Ps.
(a) The book-value of the said
Machinery and Equipment 2,29,99,335.17
(b) The book-value of the said
Current Assets 6,69,61,115.93
(c) The book-value of the said
Investments 35,414.39
(d) Value of the said Goodwill
as certified in the Report
dated the 24th February,
1977 of M/s Ghatalia & Co.,
Chartered Accountants, Bombay 6,00,00,000.00
(e) Value of the right to receive
royalty income from the said
'Technical Assistance Fees
Agreements' 51.30,000,00
---------------
15,51,25,865.49
---------------
As reduced by the following liabilities :
Rs.
(1) Current Liabilities and
Provisions Rs. 3,81,92,920.24
(2) Liabilities under the
Cash Credit and Pack-
ing Credit arrang-
ements Rs. 3,22,09,560.97
(3) Amount of Term Loan
due to ICICI Rs. 2,98,657.88
(4) Amount of Term Loan
due to State Bank of
India Rs. 12,00.000.00 7,19,01,139.09
---------------- --------------
Net aforesaid 8,32,24,726.40,
the balance of Rs. 4,09,71,751.75 was to be paid :
Rs. 80,00,000.00-when demanded by the assessee-balance of Rs. 3,29,71,751.75 to be paid in eight equal annual instalments carrying interest at 11 per cent per annum.
12. A detailed analysis of the agreement as above leads to two clear conclusions. The assessee has transferred the entire undertaking to the subsidiary company as a whole. The fact that an item like land and buildings was not transferred would not, in our opinion, make the transfer less one of the whole undertaking. As stated above, there was a clear stipulation for conveyance of lands and. buildings as part of the transfer. A specific value for this was also noted. It would appear that the assessee was not able, in the light of the Urban Land Act provisions, to execute this conveyance. The assessee, therefore, had to go through the device of getting this land conveyed to an amalgamated company. The business undertaking consists of several assets and liabilities. In a transfer of the undertaking, it is not always necessary that every item of assets and liabilities should be transferred. Some of the items may be incapable of being transferred ; some on account of their onerous nature may not be acceptable to the purchaser. In ordinary business transactions, it is not uncommon that one or other such items are not transferred. For instance, in an extensive business carried on by a Hindu undivided family or an individual, transferred to another, if a house belonging to the family or individual to which sentimental attachments are there, is not transferred, it cannot be said that the business undertaking remains not transferred. On facts, the business is continued by the subsidiary company on its own terms. The mere fact that land and buildings were not transferred is irrelevant for deciding the issue of a slump sale of the entire undertaking. In fact, where a purchaser has his own premises where he can more advantageously carry on a newly purchased business, it would be odd to hold that the business was not transferred merely because the vendor's premises were also not purchased.
13. Secondly, even though individual items have been grouped together as such, even included at a particular valuation in the sale consideration, this does not by itself lead to an inference that it is not the entire business but the individual items which are to be transferred. Even in evaluating the overall worth of a business, the most accurate and perhaps normal method would be to take into account the items comprised in the business and having regard to an approximate value of these items, deductions to be made, etc., work out the overall value of a business. When a price is thus fixed for sale of a business as such, to hold that the existence of book or other value of the items comprised therein should be ignored, would not be a correct proposition. On the contrary, having regard to these details, the vendor and the purchaser would normally come to a figure of purchase price.
14. The department has set much store by the value given to the goodwill at Rs. 6 crores. The assessee's valuer has valued this asset and put its value at Rs. 6 crores. The department sought to work out the value of the goodwill with the aid of a chartered accountant and carne to the conclusion that what was put by the assessee at Rs. 6 crores would at best be worth Rs. 2 1/2 crores. The excess, according to the department, represented the increased value of the other assets. It is on this basis that the increased value was brought to tax under Section 41(2). The method of working out a super profit for the purposes of determining the goodwill of a business is certainly a good method but it is subject to several limitations. For instance, if the business has to be closed down for lack of custom or impossibility of selling goods, to work out the super profits on the basis of the preceding five years' receipts and treat the same as the goodwill would simply be absurd. While a super profit would be indicative of goodwill, if any, the evaluation of goodwill must take into account not merely the super profit available with the labour and capital put in but also other attributes of the business including its potentialities. This proposition, which is one both of law and accounts, is very relevant in this connection.
14A. The assessee has certain assets and liabilities. It has been doing business for some time and earning profit. The capital and reserve in the accounts are also known. Bat, there are several items of substantial worth which are not in the balance-sheet. These are clear from the transfer agreements. The agreements clearly refer to the rights, benefits and privileges in several agreements such as HRO Agreement, PACKART Agreement, PREMIER Agreement, etc. (vide Clause K of the agreement). Clause Z-B refers to the right, title and benefit under the know-how and other inventions and benefits arising with the research and development carried on by the assessee. Secret techniques, formulae, processes, etc., in the possession of the assessee, which in a market could be traded for substantial amounts, do not find a place in the balance-sheet. Items in Clauses (h), (i), (j) and (k) of Clause 2 also refer to items not evaluated and included in the balance-sheet. The fourth schedule to the agreement deals elaborately with import licences, industrial licences, etc. The fifth schedule deals with a very large number of registered trade marks, patents, copyrights, export entitlements and pending applications. These include also trade marks registered in foreign countries, export entitlements, etc. The sixth schedule deals with tenancies and occupancy rights in various premises, some of which are included in the transfer, but those relating to the land and buildings owned by the assessee are not transferred. The seventh schedule to the agreement deals with know-how, Indian patents, etc. We have enumerated above the details of the agreement, especially those comprised in the schedules, to show that while the book value of plant, machinery, etc., has been included in the computation of the consideration, current assets and investments also have been taken at their book value for inclusion, absolutely no value is ascribed to the several intangible or what in modern industrial law are treated as intellectual properties.
15. A look at the extent and nature of the items would show the enormous value content these items would have. For instance, an industrial licence can be obtained in certain cases only by a person who has conducted an activity of a type for some time. An import entitlement is available only to a person who has made stipulated exports, know-how, trade marks, etc., of considerable value to those interested but to the producer of these will remain unevalua-ted assets. What we want to point out is that even though the working of the consideration has taken into account assets of the business as rightly pointed out by the department, there are several assets of considerable value which have not been included. Apart, therefore, from even a goodwill worked out on the super profit method, substantial value will have to be ascribed to these intellectual properties, intangible assets, etc. We are not sure, if a proper consideration is taken of all these aspects of the transfer, the figure put down by the assessee under the head 'goodwill' at Rs. 6 crores would not be a proper figure ; it could be even more. The name utilised 'goodwill' (sic), if these assets are considered as assets, may be wrong. If the existence of these assets is taken into computation for the purpose of evaluating the goodwill in methods other than the simple super profit method, the computation of goodwill at Rs. 6 crores cannot also be proved to be wrong. At any rate, the assessee has fixed the consideration for the overall transfer on a particular method which includes taking into account assets, investments, plant and machinery, etc., at book value and for all other assets putting down a figure of Rs. 6 crores under the head "goodwill". As a matter of fact, it cannot be said that this involves any manipulation or could be said to be erroneous at all. In any package transfer of an undertaking as such, it is for the purchaser and seller to fix an overall considera-tion or price. The fixation of the price for the transfer as per the impugned agreements, in our view, cannot be said to be wrong.
15A. When once we hold that there is no perceivable excess in the consideration over and above the worth-book value or WDV-of the existing assets, no question of Section 41(2) applies. The addition made by the department on this score should straightaway be deleted for this reason. We find, however, there are several negative aspects to this problem which also support the assessee's claim.
16. The assessee has been in business for a long time and assets have been acquired over a period. The details of the plant, machinery, etc., originally acquired and added from year to year are with the department. Depreciation has been allowed by the department in respect of these items. The written down value worked out is available with the department. When thus the cost of each item comprised under the different groups, plant and machinery, etc., as well as the depreciation allowed on them are available with the department, we do not see how the ITO could come to a conclusion without examining the details that there is an excess in the first place. Secondly, all the details are with the department. In order to bring to tax any item of income, it is well settled, the burden of proof is on the department to establish its taxability. Against this, we find it difficult to appreciate the direction of the CIT (A) to treat the whole amount of Rs. 4 crores as profit under Section 41(2) for the simple reason that the assessee has not produced certain details. The inevitable implication of the direction of the CIT (Appeals) is that for all particulars furnished to the department for the purpose of depreciation computation, the assessee must necessarily retain with him details and office copies. If he does not do so, he should be penalised. This appears to be a strange approach. If there were items for which the details are only with the assessee and not with the department, even in discharging its burden of proof as to assessability, the department might place the burden on the assessee to produce those details and on their non-production decide against him. We are unable to understand how when all the details necessary to work out the profit under Section 41(2) are with the department, instead of taking the trouble of ascertainment of the factual position, it throws the burden on the assessee, which does not fall on him and makes an addition of an amount of Rs. 4 crores.
17. It is clear even from the stand of the department that capital gains in respect of depreciable assets are not taxable in view of Section 47. The items of plant and machinery, for which a profit under Section 41(2) is computed, if individually considered, may give rise to a profit under Section 41(2), an obsolescence allowance or a capital gain-all of which have to be evaluated for tax purposes in respect of each asset. Even from a purely theoretical viewpoint, therefore, if the ITO were to take an overall excess figure and reduce therefrom an overall written down value, what results therefrom would not be a profit under Section 41(2). If there is a capital difference in respect of these items in excess of such difference, the assessee, in fact, would be not liable to Section 41(2) but would even have a capital loss to be adjusted. It is unfortunate that the ITO has not gone into any one of these computations but has merely added the lump sum figure of Rs. 4 crores as profit under Section 41(2). As a matter of fact, therefore, even if each of the items comprised in the transfer was individually considered, there is no evidence to show that there is any profit taxable under Section 41(2). There could be a net obsolescence allowance allowable. There could be even a capital loss.
18. It is enough to dispose of this appeal to hold that, as a matter of fact, no excess on the transfer has been pointed out and that the transfer in the present case is clearly a slump sale. With regard to the latter, certain broad principles can be treated as having been judicially well settled. The decision in CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) lays down that it is the legal effect of the transactions which is to be noted in coming to a conclusion on this point and not merely the substance of the transaction. In Mugneeram Bangur & Co.'s case (supra), applying the principles earlier laid down by the Supreme Court in CIT v. West Coast Chemicals and Industries Ltd. [1962] 46 ITR 135 that where a slump price is paid and no portion is attributable to stock-in-trade, it cannot be possible to hold that there is a profit other than what results from the appreciation of capital. Their Lordships upheld the assessee's claim. The general principle thus seems to have been laid down that where there is a slump sale or the realisation of a slump price, it is not possible to bifurcate the price of the items and bring to tax individually one or other items. This proposition was applied by the Gujarat High Court also in SOP 1394 and 1481 of 1973.
19. We also find there is another important point which supports the assessee in the present case. The position here is exactly as was the case in ITA No. 752 (Ahd.)/78-79 dated 28-2-1981. The following observations of the Tribunal in that case would equally apply to the present case :
22. Both in Mugneeram's and Kharwar's cases the transactions were between partners of a firm and a company. A company is a different entity from the individuals composing it. The decision in the above two cases went on the basis of slump sale and a legal effect of a sale respectively. In the present case what has happened is transfer of certain assets by a parent company to its 100 per cent subsidiary company. The assets and liabilities were transferred at the book values obtaining in the parent company's books, a certain amount was raised calling it goodwill, all of which was added to constitute the consideration. A 100 per cent subsidiary of a parent company is in fact a creature of the parent company and the relation between the two is not of the same nature as that of shareholders of a company and the company itself. When a shareholder makes a sale to a company it cannot be stated that he is making a sale to himself. The shareholder cannot also claim that he has any right in a particular asset or liability of the company of which he is a shareholder. In the case of the parent and subsidiary company the parent company is virtually the holder of the assets and liabilities of the subsidiary company which in fact is only a firm of holding assets and liabilities and doing business. The relation between the two would be almost; like the relation between the two branches of a business owned by a sole proprietor. A transfer of assets from one branch to the other whatever be the price or an ad hoc price cannot have any effect on any outsider dealing with the proprietor or with any of the branches. In the case of a parent and subsidiary company likewise it is open to the parent company to transfer its assets for certain amounts in excess to the subsidiary company or even as a gift. That would not in any case increase the total wealth of the parent company on account of the holding shares of the 100 per cent subsidiary. What is reduced in one hand is only increased in the other hand. To decide the question therefore of making a profit even after there is a sale technically between the parent and subsidiary company, in our opinion the proper principle to be applied is the principle whether there is any extraneous accretion to the assets or net wealth of the assessee as such. Adopting the analogy of the two branches of a sole proprietor any inter-transfer at whatever prices between the parent and subsidiary company would not have any effect on the net wealth of the parent company or result in any accretion to it by way of income. As defined in Spanish Prospecting Company's case [1911] 1. Ch. 92, 98, the income or the profit of a proprietor would represent the difference between his net assets at two points of time. Whatever be the inter se transaction between the parent and subsidiary company there would be no income available to the parent company in the commercial or even legal sense referred to above. In other words even if as the Income-tax Officer and the Appellate Asst. Commissioner has claimed the market value of some of the assets transferred by the parent company to the subsidiary company is much more than the book value by writing it up in the hands of the subsidiary company the parent company does nob get an 'increase in value or money as this is nullified by the decrease in value represented by the equivalent reduction in the value of its own assets. In the case before us if the sum of Rs. 2 crores does not represent goodwill but represents the enhanced value of the assets, the total consideration received by the parent company will be set off by the same amount of consideration given up by the subsidiary company to the parent company which in term reduced the value of the assets or even the share value of the subsidiary company. As a matter of fact, apart from any gloss of law whether the goodwill stipulated in these transactions is the correct value of the goodwill or not even if the market value of the assets is taken for analysing the transaction rather than the book value there could be no Section 41(2) profit or even business profit available to the parent company.
20. From any point of view, therefore, we hold that no profit under Section 41(2) can be computed or included in the total income of the assessee.
Addition of Rs. 4,38,789 :
21. The assessee-company had to receive a sum of Rs. 21,93,944 from M/s. P.T. Kamaltex (Indonesia) in terms of the agreement entered into with them. Out of the above amount, a sum of Rs. 4,38,789 was deducted as withheld tax in Indonesia and only the balance of Rs. 17,55,155 was remitted to India. The assessee returned as its income a sum of Rs. 17,55,155 on which also it claimed exemption under Section 80-O. The ITO treated the entire amount of Rs. 21,93,944 as the income of the assessee and applying the provisions of Section 80-O to the actual amount received in India of Rs. 17,55,155, he brought to tax the balance of Rs. 4,38,789 to which, according to the ITO, the exemption under Section 80-O did not apply.
22. On appeal, amongst other things, the assessee relied on the Supreme Court decision in Associated Stone Industries (Kotah) Ltd. v. CIT [1971] 82 ITR 896 and also in CIT v. South East Asia Shipping Co. Ltd. [IT Appeal No. 123 of 1976] where the High Court rejected a Reference Application. The CIT (A) held that the royalty was income taxable on the application of Section 40(a)(ii) of the Act and, if at all, the assessee was entitled to relief under Section 91 of the Act. He thus sustained the addition.
23. The learned counsel for the assessee has pointed out that what was relevant in a matter of this type was the actual and real income earned by the assessee. Even if the assessee was entitled to royalty receipts of $ 250,000, it was undisputed that there was a compulsory deduction of $ 50,000 kept back as tax withheld. The assessee could not get this amount at all. It cannot also be stated that in view of the even impossibility of resisting the deduction that the amount accrued to it. The addition has been challenged on four grounds. The assessee has received only $ 200,000. This is its real income, especially when it cannot lay any claim to the withheld tax on any ground. Reference is made in this connection to CIT v. Y.N.S. Hobbs [1979] 116 ITR 20 (Ker.) and CIT v. Shaw Wallace and Co. Ltd. [1981] 132 ITR 466 (Cal.). Secondly, it is claimed that the amount of Rs. 4,38,789 should be treated as an amount kept back even under the directions of the Reserve Bank of India for the purpose of Section 80-O. The correct application of Section 80-O would cover the entire amount of 250,000 Dollars which the assessee was entitled to bring into India. Thirdly, it is claimed that the tax deducted of 50,000 Dollars should be treated as an expenditure from the accrued income. Fourthly, it is pointed out, at any rate, the assessee was entitled to unilateral relief under Section 91 of the Act which, if properly calculated, would result in a straight deduction of the impugned amount in the peculiar circumstances of the case.
24. For the department, stress is laid on the orders of the authorities below. The entire amount of 250,000 Dollars accrued to the assessee outside India and is taxable in India. It was explained that 50,000 Dollars have been deducted therefrom. According to the learned counsel, even this is not supported by evidence. As regards the application of Section 80-O, it is clear that the assessee has brought in India by way of foreign exchange as required by Section 80-O only a sum of 200,000 Dollars. Section 80-O would apply only to this amount brought in and not for any amount not brought into India. In fact, no permission for non-remittance of the balance of 50,000 Dollars has been obtained even from the Reserve Bank of India. As regards the relief under Section 91, according to the learned counsel, that comes up for consideration only if the relevant facts are looked into, the necessary procedure is gone through and a final decision made on the application of the section. In fact, the assessee has not put in any claim under Section 91 at all.
25. On a consideration of the facts, we see no reason to sustain the addition. The decisions in Y.N.S. Hobbs' case (supra) and Shaw Wallace & Co. Ltd.'s case (supra) directly support the assessee's case. What is taxable in the hands of the assessee is what accrues to it by way of income. In a case where amounts are deducted from a gross figure and only the net amount is available to the assesses, apart from any reliance on a real income theory, even, as a matter of fact, the assessee cannot claim that he has or is entitled to receive the withheld tax. The position, perhaps, would have been different if that amount of tax is entitled to being accounted for as tax paid by the assessee in India. In no income or tax computation in India will the assessee get any deduction or credit for this sum of 50,000 Dollars. It is clearly in the nature of an outgoing from a gross amount the assessee is entitled to receive. Both from the theoretical and from the practical point of view, a compulsorily withheld tax outside India cannot be different in concept from a compulsory expenditure or other outgoing. Only the net constitutes the assessee's income accrued or receivable. On this ground alone the addition should be deleted.
26. We would, however, like to mention that while a strict interpretation of Section 80-O would refer only to the amount received by way of foreign exchange in India, if the assessee were capable of recovering the amount of 50,000 Dollars, it could have as well have brought the same into India as foreign exchange entitling it to the relief under Section 80-O. It is because the assessee could not recover the amount that it has not brought it. In applying Section 80A to a particular situation which gives rise to the remittance of foreign exchange, the situation has to be seen as a whole. If, for instance, the aseessee has a permit for taking foreign exchange outside India and instead of doing so he adjusts it against foreign exchange, the bringing into India of which would attract Section 80-O, would it be said that the adjustment would deprive the assessee of the relief ? In the above background, it is not necessary to go into the question of unilateral relief under Section 91. In the case of such a relief, if the assessee were to claim it, perhaps the entire amount of tax levied on 250,000 Dollars would, in view of the relief under Section 80-O, result in a tax of 100 per cent ha,ving been collected by the foreign country on the sum of 50,000 Dollars. If that be so, the assessee would be entitled to a relief not merely of the lesser of the tax but, in fact, the whole amount of 50,000 Dollars. Since we are allowing the claim on the other ground, we do not express any opinion on this claim of the assessee. We would, however, state that if the assessee is entitled to relief under Section 91, it can put an application for getting the same even if it has not already done so.
Gifts of Rs. 4,256 & sales-tax penalty of Rs. 2,401 :
27. These two grounds are not pressed.
Exchange difference of Rs. 1,20,387 :
28. This is covered by the Full Bench decision of the Tribunal in Poysha Industrial Co. Ltd. v. ITO [1979] 1 SOT 206 (Bom.) against the assessee.
Payment of Rs. 25,000 to S.V. Ghatalia & Co. :
29. The assessee claimed the above expenditure for getting a valuation of the goodwill done as a business expenditure. Both the ITO and the CIT(A) disallowed the claim. After hearing the parties, we uphold the disallowance. The expenditure has nothing to do with the running business of the company.
Interest under Sections 139 & 215 :
30. The assessee's claim challenging the levy of the above interest was rejected by the CIT(A) on the ground that no appeal lay in respect of it. Before us, the learned counsel for the department has relied on CIT v. Hansa Agencies [1980] 121 ITR 147 (Bom.) in support of this. For the assessee, reference is made to the decision in CIT v. Daimler Bens A.G. [1977] 108 ITR 961 (Bom.) (FB) and CIT v. Abdul Razak and Co. [1982] 136 ITR 825 (Guj.). It is claimed, relying on the latter decision, that where additions are sustained which could not be anticipated earlier, it amounted to a denial of the liability to pay interest. We cannot agree. The decisions cited do not help the assessee. The denial of liability should refer to the denial of liability to be taxed. There is certainly no such claim here. In fact, there is no claim that even no interest is payable. No interference in the CIT(A)'s order is called for on this point.
31. The appeal is partly allowed.
Y.R. Meena, Judicial Member
1. I have carefully gone through the order of my learned brother, Dr. V. Balasubramanian. I agree with the view taken by him in all the issues in the appeal except the issue regarding profit under Section 41(2) of the Income-tax Act, 1961 and hence, unfortunately, I am persuaded to write this separate order.
2. The relevant facts are that a company in the name and style of Messrs. Karamchand Premchand Pvt, Ltd. transferred and assigned as a going concern on 30-6-1973 its various industrial undertakings and businesses to its wholly-owned subsidiary. The said company had also transferred and assigned its industrial undertaking of Swastik Oil Mills Division as a going concern to the assessee-company. On 28-2-1977, the assessee-company has transferred the industrial undertaking and its two other divisions, namely, Swastik Research Centre and Operation Research Group, to its subsidiary company, Messrs. Oflsade under an agreement dated 28-2-1977 and Deed of Assignment dated 28-6-1977. Under the Deed of Assignment, the land and buildings of the concerned undertaking were not transferred. These facts are not in dispute. Now the question which remains for consideration is whether the transfer of the machinery, etc., of the undertaking would amount to a slump sale or a sale of various items of the undertaking ; and in latter case, whether the provisions of Section 41(2) are applicable ?
3. The learned counsel for the assessee, Shri N.A. Palkhivala, read out the concerned agreement of sale and the Deed of Assignment. According to him, the transfer in question is a slump sale and, therefore, the provisions of Section 41(2) are not applicable. He further submitted that capital gain also cannot be charged as there is a transfer from a holding company to subsidiary company. According to him, the land and building could not be transferred as there was some statutory difficulty and otherwise, it was a transfer of the undertaking as a going concern. He submitted that, therefore, the question of application of Section 41(2) does not arise. He placed reliance on the following decisions :
(i) West Coast Chemicals & Industries Ltd.'s case (supra),
(ii) Mugneeram Bangur and Co.'s case (supra),
(iii) Sarabhai M. Chemicals (P.) Lid. v. P.N. Mittal, Competent Authority [1980] 126 ITR 1 (Guj.), and
(iv) Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.).
Shri Palkhivala also submitted that a similar issue has been considered by the Tribunal (Ahmedabad Bench 'A') in the case of Shahibag Entrepreneurs (P.) Ltd. v. ITO [IT Appeal No. 752 (Ahd.) of 1978-79], a copy of which is placed at page 82 of the assessee's compilation. Sri S.P. Mehta has also joined Shri Palkhivala in favour of the assessee and supported the case of the assessee. He contended that when the intention of the assessee was to transfer the undertaking as a whole though the land and building could not be transferred as there was some statutory difficulty, therefore, it should be taken as a slump sale.
4. On the other hand, the learned counsel for the Revenue, Shri G.S. Jetley assisted by Shri K.K. Tuli, submitted that this is not a case of slump sale ; but it is a sale of individual items of machinery. He stated that the prices of the individual items have also been given in the Deed itself. According to him, when the land and building is not sold and transferred, which is not disputed, it cannot be said that the transfer in question was a slump sale. His further submission was that the cases relied upon by the learned counsel for the assessee are not applicable to the facts of the case before us. According to him, the issue before us is covered by the decisions of the Supreme Court in the cases of Associated Clothiers Ltd. (supra) and B.M. Kharwar's case (supra). He further submitted that till 1982, there was no transfer of land and buildings in question by the assessee.
5. We have heard the rival submissions on the issue regarding slump sale. The facts statded in the operative part of the order are not disputed in regard to the fact that the assessee has transferred the business except the land and buildings. It is an admitted position that the land and buildings have not been transferred till 1982. On the contrary, the CIT(A) states in para 7 of his order that the assessee has entered into a scheme of amalgamation with Ambalal Sarabhai Enterprises Limited as on 4th June, 1982 and has proposed to transfer the lands and immovable properties to the said Ambalal Sarabhai Enterprises Ltd. Though in Clause (E) of the agreement dated 28th February, 1977, it is said that the assessee has agreed to sell, transfer and assign with effect from 1st March, 1977 its industrial undertaking and business of Swastik Oil Mills Division and business of Operations Research Group, Sarabhai Technical Services Division and Sarabhai Research Centre as a going concern together with the assets, property, rights and benefits thereof including benefit of the goodwill of the said businesses and the liabilities, duties and obligations relating thereto or arising out of the said businesses to Ofisade Private Limited, but in the Deed of Assignment dated 28th June, 1977 (Clause 'C'), the assessee has shown separate price of individual items and clarified in Clause 'Y' that "the said lands and buildings and the tenancy/occupancy rights in respect of the various premises as referred to hereinabove are not to be transferred by these presents". These facts are apparent from the contents of the relevant portion of the Deed as under :
Rs.
(a) The book value of the said machinery and equipment 2,29,99,335.17
(b) The book value of the said current assets 6,69,61,115.93
(c) The book value of the said investments 35,414.39
(d) Value of the said goodwill as certified in the Report dated the 24th February, 1977 of M/s Ghatalia and Co., Chartered Accountants, Bombay 6,00,00,000.00
(e) Value of the right to receive royalty income from the said 'Technical Assistance Fees Agreements' 51,30,000.00
---------------
15,51,25,865.49
---------------
Rs. Rs.
As reduced by the following liabi-
lities :
(1) Current liabilities and
provisions 3,83,92,920.24
(2) Liabilities under the
Cash Credit. and Pa-
cking Credit arrangements 3,22,09,560,97
(3) Amount of Term Loan due
to ICICI 2,98,657.88
(4) Amount of Term Loan due
to State Bank of 12,00,000.00 7,19,01,139.09
---------------- -------------
Net aforesaid : 8,32,24,726.40
6. Adverting to the case laws relied upon by the learned counsel for the aesessee, in West Coast Chemicals and Industries Ltd.'s case (supra), the issue before their Lordships of the Supreme Court was that the assessee entered into an agreement for the sale of lands, buildings, plant and machinery of a match factory belonging to it with a view to close down its business. Since the purchaser made a default in payment, a fresh agreement was entered into between the parties for the sale of the properties mentioned in the first agreement and also chemicals and paper used for manufacture which had not been included in the first agreement for a stated sum. As the memorandum of association of the assessee-company allowed the assessee to manufacture and sell chemicals and even after the sale the company carried on manufacture on behalf of the purchaser, the department sought to assess the profits derived from the sale of the chemicals and paper as profits from business. Considering the contention of the assessee that it was a realisation sale and the said amount was not liable to tax, the Supreme Court held that the question whether a sale was a realisation sale or a sale in the course of business is not easy to decide and depends upon the facts. On the facts of the case before it, the Supreme Court said that the sale of the chemicals and material used in the manufacture of matches was only a winding up sale to close down the business and to realise all the assets and that the fact that the memorandum gave power to the company to sell chemicals was not of much significance, especially as this power was rarely exercised. The Supreme Court further held that the fact that the business of the company was sold as a going concern and was in fact worked by the assessee on behalf of the buyer till the entire consideration was paid made no difference as the agreement clearly indicated that the assessee was keeping the factory going not on his own behalf but entirely on behalf of the buyer. Taking into consideration the facts of the case before the Supreme Court, in my view, that case has no application to the facts of the present case on hand.
7. In Mugneeram Bangur & Co. (supra), the Supreme Court held that the sale was the sale of a whole concern and no part of the price was attributable to the cost of the land and no part of the price was taxable. It was further held that in the schedule to the agreement the price of the land was stated did not lead to the conclusion that part of the slupip price was necessarily attributable to the land sold and what was given in the schedule was the cost price of the land as it stood in the books of the vendor and even if the price attributed to goodwill could be added to the cost of the land, there was nothing to show that it represented the market value of the land. As stated somewhere above, in view of the fact that the land and buildings have not been transferred by the assesses in the case on hand, the issue before the Supreme Court In the aforesaid case cannot be compared with the case under consideration.
8. In Sarabhai M. Chemicals (P.) Ltd.'s case (supra), the issue before the Gujarat High Court was concerning acquisition of immovable property. In that case there was a transfer of an industrial undertaking as a going concern together with goodwill and all other assets thereof by a holding company to its wholly-owned subsidiary at a slump price and the valuation which was mentioned was the book value (i.e., written down value) so far as land, buildings, plant, machinery and other assets were concerned. Their Lordships of the Gujarat High Court held in that case that in the absence of the presumption arising under Section 269C(2)(a), there was no material to show that the consideration had not been truly stated in the instrument of transfer and that the condition precedent as to the object of reducing or evading liability to tax could not be satisfied since the sale was by a parent company to its wholly-owned subsidiary and the consideration for the depreciable assets was at its book value. The ratio of this decision also cannot be straightaway applied as the basic issue before their Lordships was regarding acquisition of immovable property under Section 269C. Besides, the undertaking as a whole including all its assets and liabilities were transferred in that case, while in the case on hand, the land and buildings have not been transferred.
9. In Artex Mfg. Co.'s case (supra), the Gujarat High Court held that what was transferred and sold was the whole business of the undertaking together with its assets and liabilities for a slump price and it was not sold by any itemised value or item-by-item price fixed for the different assets of the firm. It was further held that since the entire business of the undertaking together with its assets and liabilities was sold for a slump price, the surplus was not assessable under see. 41(2). This case also cannot be applied to the facts of the present case as there was itemised value or item-by-item price fixed for the different assets, as can be seen from the Deed of Assignment reproduced in para 5 above.
10. Adverting to the case laws relied upon by the learned counsel for the Revenue, in the case of Associated Clothiers Ltd. (supra), the issue before their Lordships was when the assessee has transferred its assets and liabilities of the business to a new company, whether the profits under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922 were liable to tax. Their Lordships of the Supreme Court held in that case that as the assessee-company sold the property for a stated consideration which was not shown to be notional and that consideration was in excess of the original cost of the building, the difference between its original cost and its written down value was profit within the meaning of the second proviso to Section 10(2)(vii) of the Indian Income-tax Act. Their Lordships farther laid down there in that the burden of proving that the consideration for the sale of the property was less than what it purported to be, lay upon the company. In the said case, their Lordships distinguished the earlier decision of the Supreme Court in the case of Mugneeram Bangur & Co. (supra). The facts discussed by their Lordships in the aforesaid case appear to be akin to the facts of the case on hand. Therefore, in my view, it would be proper to apply the ratio laid down by their Lordships in this case to the facts of the case on hand.
11. In B.M. Kharwar's case (supra), the issue before their Lordships of the Supreme Court was also to the same effect, i.e., when the assessee transferred its assets to a company, whether the excess realised over the written down value is liable to be taxed under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922. Their Lordships held in that case that by virtue of the amendment made in the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922 by Section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 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.
12. Now, I take up the decision of the Tribunal in ITA No. 752/ Ahd/1978-79 relied upon by Shri S.P. Mehta. In that case, there was a difference of opinion among the Members of the Ahmedabad Bench of the Tribunal in regard to the point as to whether the AAC was justified in setting aside the assessment and directing the ITO to re-do the assessment and further whether the question of assessing the profits under Section 41(2) of the Income-tax Act, 1961 in the hands of a holding company arises in case of sale by a holding company as a going concern to its hundred per cent subsidiary company. As regards the main issue, i.e., as to whether the profits are chargeable to tax under Section 41(2), when the case was referred to a Third Member he held that they may be chargeable in the case of a sale by the holding company to a subsidiary company only if the different assets of the undertaking are sold and not the whole of the undertaking as a going concern. In that case, since there was no scope for including any income from balancing charge under Section 41(2), the majority view was that the AAC was not justified in setting aside the assessment and requiring the ITO to re-do the same. It would be clear from the order of the Third Member in that case that in fact there was no difference between the Members who have heard the matter originally so far as the question of slump sale is concerned. It is very much clear from Sub-para 1 of para 20 of the order of the Third Member that "The Appellate Assistant Commissioner and also my two learned Brothers who have heard the appeal in the first instance have also held that it is a case of a slump sale of the entire undertaking". This is, admittedly, not the position in the case on hand as is clear from para 5 above, where on consideration of Clause 'Y' of the Deed of Sale, it has been emphatically made clear that there was no slump sale but sale of individual items. I am afraid, in view of the above glaring facts, the decision of the Tribunal in ITA No. 752/Ahd/1978-79 cannot be applied to the facts of the present case.
13. From the facts discussed above, it is clear that there was a sale of individual items as indicated in the Sale Deed as well as the Deed of Assignment and hence the question of slump sale does not at all arise. It may be because of any specific difficulties that the land and buildings were not sold and transferred but once the assessee has not done so, which is an admitted fact, it cannot be said that there was a transfer of the undertaking as a whole including all the assets and liabilities. Here, I and Shri Mehta may be right that the land and buildings could not be transferred due to certain statutory difficulties but once it is prohibited under the statutes and the assessee was not allowed to transfer the land and buildings, the fact remains that the assessee has not transferred the undertaking as a whole, as already said. When there is some statutory prohibition, the assessee is not allowed to go beyond that and to enter into agreements contrary to the statutes or otherwise. However, on a consideration of the relevant facts and circumstances of the case, I am of the opinion that the inference that could be drawn in this case is that the undertaking as a whole was not transferred and, hence, it cannot be said that there was a slump sale.
14. In view of the above discussions, I hold that the sale in question was not a slump sale.
15. Now the only question remains whether the authorities below were justified in taxing the difference of goodwill, i.e., Rs. 4 crores as the appreciated value of the machinery. The relevant facts are that while the business in question was transferred to the assessee in 1973, the value of the goodwill indicated according to the assessee was Rs. 2 crores. When it was transferred by the assessee to Ofisade in 1977, the value of the goodwill was shown at Rs, 6 crores on the basis of valuation given by Shri Ghatalia, Chartered Accountant. According to the ITO, this value is not correct. The ITO has considered the valuation report given by Shri Ghatalia and rejected the same on the basis that the valuation is abnormal and that the valuation of goodwill can be taken on the basis of profitability in the past and the future projection, which factors are extremely important. Thereafter, the ITO has requested the assessee to furnish the relevant material so that the real profit on the machinery can be ascertained. In the absence of furnishing the required material, the ITO has taken Rs. 4 crores as the appreciated value of the machinery and taxed it as a profit under Section 41(2). In appeal, the CIT(A) has considered the valuation report of Shri Ghatalia. According to him, that report does not properly contain any computation but only a. descriptive report and that he has given three years' profit and found that three years' distributable profits come to Rs. 30 lakhs. Therefore, there was no justification for increasing the value from Rs. 2 crores to Rs. 6 crores. He further pointed out that for working out the profits under Section 41(2), the actual cost and the depreciation allowed in the hands of previous owner would be necessary as it was the holding company of the assessee-company and he directed that it is the duty of the assessee to make available to the ITO all the particulars necessary to enable him to work out the proper computation. In appeal before the Tribunal, Shri Mehta submitted that all the materials relevant to the issue were with the Department. There is nothing new to be supplied to the Department. He also submitted that the valuation of the goodwill is based on the principles of super profits formula and that, therefore, Shri Ghatalia has rightly taken it at Rs. 6 crores. He further submitted that the valuation of Shri Ghatalia is proper. On the other hand, Shri Jetley submitted that the report given by Shri Ghatalia should be rejected ontrightly, as that does not at all give the true picture of the real value of the goodwill and, in fact, the appreciation in the value of the goodwill is nothing but the appreciated value of the machinery which is transferred by the assessee. He also produced before us the valuation of goodwill given by Sri Khare, who is also a senior Chartered Accountant.
16. We have heard the rival submissions and considered the material on record. Basically, it is seen that the valuation of goodwill as given by Sri Ghatalia is not a true value of the goodwill. That appears after taking into account the report of Sri Khare and Sri Ghatalia. But, at the same time, the difference between the value of the goodwill which was taken by the assessee in 1973 and the value transferred in 1977, i.e., Rs. 4 crores cannot be taken straightaway as the appreciated value of the machinery for taxing it under Section 41(2). In my view, both the authorities have gone on the wrong footing by adding the difference of the goodwill straightaway as the appreciated value though basically it is true that there was a rise in the price of machinery all over and while the profits are not extraordinarily increased, the value of the goodwill in three years cannot be increased from Rs. 2 crores to Rs. 6 crores. Therefore, the proper course would be that the matter should be remitted back to the ITO with a direction to refer the matter relating to valuation of the machinery to the Valuation Officer and full opportunity of being heard should be given to the assessee to explain its case regarding the market value on the date of transfer and the difference should be taken as profits under Section 41(2). At the same time, the issue regarding the valuation of the goodwill should also be ascertained from the experts on the general principles mainly followed unless the assessee distinguishes the same to depart from those general principles. That should be recorded in writing if there is any need to depart from the general principles for valuing the goodwill. I also direct the assessee to co-operate with the Income-tax Officer to find out the real value of the machinery and goodwill both. In case the assessee does not co-operate with the Income-tax Officer, the Income-tax Officer is free to estimate or to come to his own conclusion regarding valuation of the machinery and goodwill both, on the basis of the material on record. While doing so, I would like to place my reliance on the latest decision of the Hon'ble Supreme Court in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 regarding tax evasion or tax avoidance.
17. In the result, the matter is restored to the Income-tax Officer to decide the value of the machinery and goodwill separately as discussed above.
REFERENCE UNDER Section 255(4) OF THE INCOME-TAX ACT, 1961
(i)Whether, on the facts and in the circumstances of the case, the transfer in question was a slump sale ?"
(ii) "If the answer to question (i) is in the negative, whether setting aside of the order of the CIT(A) and restoring the matter to the ITO with a direction to decide the issue afresh applying the provisions of Section 41(2) is proper ?
THIRD MEMBER ORDER S. Narayanan, Vice President
1. The Income-tax Officer brought to assessment a profit of Rs. 4,00,00,000 under Section 41(2) of the Income-tax Act, 1961, on the sale of an undertaking by the assesses during the previous year. The assessee claims that the sale of the undertaking was as a going concern. And hence Section 41(2) was not attracted. The Department says it was. It is this issue that has come up for decision in this Third Member reference. The relevant facts may be seen first.
2. The assessee is a private limited company. During the relevant previous year (which ended on 30-6-1977) it was carrying on various business activities. These were : (i) manufacture and sale of synthetic detergents, soaps, cosmetics, etc., in. the name of Swastik Oil Mills Division ; (ii) research and development in drugs and Pharmaceuticals in the name of Sarabhai Research Centre ; (in) market research, E.D.P. systems analysis, etc., in the name of Operations Research Group ; and (iv) supply of technical know-how, information for fabrication of plant and machinery (for manufacture of detergents, soaps, etc.) and rendering technical advice and services to ventures in India and abroad, in. the name of Sarabhai Technical Services Division. In June 1973, the assessee had purchased the business in the name of Swastik Oil Mills Division supra from Karamchand Premchand Pvt. Ltd., of which the assessee was then a 100 per cent subsidiary. The total consideration for the purchase was Rs. 2,45,80,616.71 including goodwill valued at Rs. 2 crores not shown in the books but which was valued separately.
3. Under an agreement dated 28-2-1977 the assessee agreed to transfer to its 100 per cent subsidiary, Oflsade Pvt. Ltd., the industrial undertaking and business in the name of Swastik Oil Mills Division and also the businesses and activities in the names of Operations Research Group, Sarabhai Technical Services Division and Sarabhai Research Centre, as going concerns, together with the assets, property, rights and benefits thereof including benefit of the goodwill of the said business ; and the liabilities, debts and obligations relating thereto, on the terms and conditions specified in the agreement of 28-2-1977 itself. The transfer was to be effective from 1-3-1977. It was specifically agreed between the parties under Clause Z-C (i) of the Preamble to the deed of 28-2-1977 (p. 145 of Paper Book I) that the assessee shall transfer, inter alia, the lands and buildings forming part of the aforesaid industrial undertakings and businesses, situated at Ambernath and Anik Chembur. Further, under Clause Z-C (vii)(b) of the said Preamble the assessee also agreed to transfer the tenancy/occupancy rights in respect of various premises, described in particular in the Sixth Schedule to the deed of 28-2-1977. The book value of goodwill which was also to be transferred under the said deed was raised to Rs. 6 crores, based on the valuation report of M/s. S.V. Ghatalia, Chartered Accountants, dated 24-2-1977. The total consideration was stipulated as that equal to the book values as on 28-2-1977 of the assets of the industrial undertaking and the businesses agreed to be transferred and reduced by debts and liabilities as on 28-2-1977 plus Rs. 6 crores being the value of the goodwill of the business in the names of Swastik Oil Mills Division and the other three units supra. Apparently there were difficulties in transferring the lands and buildings to the said vendee. A deed of assignment was drawn up on 28-6-1977 stipulated to be effective from 1-3-1977. The assesses then, put the vendee in full possession of the above industrial undertaking and businesses so much so that the vendee ran the said industrial under taking and the businesses to the total exclusion of the assessee from 1-3-1977. It also brought into its accounts the profit/loss from the said activities for the period 1-3-1977 to 30-6-1977 when its accounting year ended. This much was common factual ground before me.
4. In the deed of assignment of 28-6-1977 however, the lands and building's were excluded (See Clause 'Y' of the Preamble to the deed, at p. 233 of Paper Book I). Clause 'Y' reads as under :
Y. The said Lands and Buildings and the Tenancy/Occupancy Rights in respect of the various premises as referred to herein-above are not to be transferred by these presents.
The deed of 28-6-1977 after reciting the facts relating to the agreement for sale of 28-2-1977 went on to list the various assets and liabilities covered by it, viz., the deed of 28-6-1977. Total of the assets so covered (machinery and equipment, current assets, investments, goodwill and right to royalty, technical assistance fees and agreements) came to Rs. 15,51,25,865.49. Total of the liabilities so covered (current liabilities and previous liabilities under the Cash Credit and Packing Credit arrangements, Term loan due to ICIC and Term loan due to State Bank of India) amounted to Rs. 7,19,01,139.09. The net value of the assets was thus worked out at Rs, 8,32,24,726.40 (p. 234 of Paper Book I). Over and above the aforesaid items of assets are liabilities, movables of the book value of Rs. 70,65,847.11 were separately mentioned as being part of the assignment (p. 233 of Paper Book I) and as representing movable assets which were capable of passing by delivery. Such delivery was also effected with effect from 1-3-1977 as already noted in paragraph 3 supra. Thus against the aforesaid items the consideration to be met by the vendee came to Rs. 8,32,24,726.40 plus Rs. 70,65,847.11, i.e., Rs. 9,02,90,573.51. However, the deed of 28-6-1977 stipulated a consideration of Rs. 9,04,71,751.75 [See Clause "T" of the Preamble, at p. 230 of Paper Book I. But this Clause mentions not only the agreement for sale of 28-2-1977 but also "the supplemental agreement of 4-3-1977". This latter agreement is not part of the record. It has not been referred to in the orders of the authorities below. Nor do the orders of the two differing Members of the Bench which heard the appeal originally discuss it. It was also not referred to by the parties before me]. When asked to explain the above discrepancy of about Rs. 2 lakhs, it was pointed out for the assessee that the actual difference was Rs. 1,81,178.24 and this could be analysed as under : [See p. 6 of Paper Book III].
ANNEXURE-I
SWASTIK HOUSEHOLD AND INDUSTRIAL PRODUCTS
PRIVATE LIMITED
Conveyance Deed
SHIP ORG SRC TOTAL
ASSETS Rs. Rs.
Land, Roads & Build-
ings 94,63,924.15 - - 94,63,924.15
------------ ------------
94,63,924.15 - - 94,63,924.15
------------ ------------
LIABILITIES
UPP (Old) 45,22,410.00 - - 45,22,410.00
Investment Com-
panies 22,26,119.93 - - 22,26,119.93
Current Liabilities
Provisions 25,34,215.98 - - 25,34,215.98
------------ ------------
92,82,745.91 - - 92,82,745.91
------------ ------------
Balance 1,81,178.24 - - 1,81,178.24
------------ - - ------------
5. The Departmental Representative, however, made the point that the above analysis was based not on actuals but purely on guess-work. This was because, apart from the unpaid purchase price, the other liabilities set off against the book value of the immovable properties (Rs. 94,63,924) were on the basis of a very vague basis of pro rata allocation and hence the above analysis had no validity at all. This charge could not be effectively-answered by the assessee. It was in fact admitted that apart from the figure of Rs. 45,22,410, the unpaid purchase price, the other figures were based only on a rough allocation. Not much importance can therefore be attached to the above analysis. I shall have occasion to refer to this deficit of Rs. 1,81,178 later on.
6. In other words, the consideration that the assessee was entitled to receive was only Rs. 9,02,90,573.51, this price being baaed on the book values, prior to audit. Clause S of the preamble to the deed of 28-6-1977 (p. 230 of Paper Book I) stipulated that the said book values were subject to audit and the purchase consideration would increase or decrease following the final audited figures. It was stated before me that following such audit the final consideration received by the assessee on the transfer was as under : [See pp. 1 and 2 of Paper Book III] "Statement showing how the final Purchase Price was received from Ofisade Private Limited.
Rupees I. Net Purchase Price Receivable from Ofisade Private Limited on transfer of undertaking on 28-2-1977 (excluding Land and Building at Ambarnath and ce-
rtain liabilities in relation
thereto) 8,52,49,448
------------
II. Mode of Receipt of Purchase
Price
(a) Amounts received/adjusted
in year ended 30-6-1977 Rupees
(i) Earnest Money Received 49,50,000
(ii) Adjusted and set off
against shares of
Ofisade Pvt. Ltd. 4,45,50,000
(iii) Further amount receive 1,54,067, 4,96,54,067
(b) Amounts received during
the year ended 30-6-1978 82,70,153
(c) Amounts satisfied by re-
ceipt of Bonds during
the year ended 30-6-1980 2,50,00,000
(d) Amounts received/adjusted
during the year ended
30-6-1981 23,25,228
-----------
Total 8,52,49,448
-----------
It was further clarified by the assessee as under :
This is to confirm that the Net Worth of the entire business and undertakings of Swastik Household and Industrial Products Private Limited based on the Provisional Books of Account, amounted to Rs. 9,04,41,751.75 as on 28-2-1977 as recorded in Deed of Assignment dated 28th June, 1977. This provisional net worth included value of Land and Buildings at Ambernath and certain liabilities.
In accordance with Clause S of the said Deed of Assignment (p. 230 of the Paper Book), the final Net Worth and consideration for all assets and liabilities excluding value of Land and Buildings at Ambernath and certain liabilities allocated there against (which were not transferred), was determined at Rs. 8,52,49,448 based on the Audited Books of Account.
We further confirm that net value of said Land and Buildings at Ambernath was never included in the final Purchase Price and was never paid for any Ofisade Private Ltd.
7. When asked why the lands and buildings had remained to be transferred to the vendee, the assessee's case was that under the Urban Land (Ceiling and Regulations) Act, 1976, the said properties could not be transferred except with the prior permission, in writing, of the competent authority under the said Act. This authority was the Maharashtra Industrial Development Corporation ("MIDC"). The assessee did write to MIDC on 17-4-1977 in which it referred to the agreement of 28-2-1977 and requested for permission for the transfer in the following terms :
An agreement for Sale dated 28th February, 1977 has been executed between this Company and our wholly-owned subsidiary, Ofisado Private Limited and in terms thereof Ofisade Private Limited has taken over the industrial undertakings and business of Swastik Household and Industrial Products Division at Ambernath, Operations Research Group at Baroda, Sarabhai Technical Services Division at Ambernath and Sarabhai Research Centre at Baroda of this Company and as incidental thereto all the assets, rights and properties are agreed to be taken over by Ofisade Private Limited with effect from 1st March, 1977. One of such fixed assets is leasehold, land bearing Plot Nos. 15, 16 and 21 in the industrial estate at Ambernath.
We, therefore, hereby approach you for your permission to transfer and assign the aforesaid leasehold land bearing plot Nos. 15, 16 and 21 in favour of the said Ofisade Private Ltd. Please note that the transfer contemplated is only as between a holding company and its 100 per cen tsubsidiary company and is being done with a view to reorganising and restructuring of the industrial undertakings and businesses of this Company including our wholly-owned subsidiary Ofisade Private Limited. The proposed transfer and assignment is thus just nominal and formal and does not involve transfer to an outsider for profit by way of sale or otherwise.
We trust, you will accord your early permission to the proposed transfer and assignment of the aforesaid leasehold laud bearing-Plot Nos. 15, 16 and 21 in the industrial estate of MIDC at Ambernath.
MIDC by its letter dated 22-7-1977 replied as under :
Please refer to your letter No. SHIP/EST/ dated the 17th April. 1977.
2. We have since considered your request for grant of a consent to transfer the above plots in favour of Messrs. Ofisade Private Limited. According to the guidelines laid down by the Corporation, such consent can be granted subject only to payment of additional premium equal to the difference calculated at the prevailing rate minus the premium already paid by you at the time of allotment of the plots. The amount payable by you works out to Rs. 42,07,486.81.
3. We would request you kindly to arrange to pay the above amount, whereafter a letter of consent permitting you to transfer your leasehold interests in the above plots in favour of Messrs Ofisade Private Limited will be issued.
Yours faithfully, Sd/-
(Y.S. BHAVE) Chief Executive Officer.
The assessee then wrote to MIDC on 9-6-1979 asking for a review of MIDC's decision. On 28-1-1980 MIDC declined to review its decision and insisted on the payment of about Rs. 42 lakhs by way of additional premium so that it could issue an order of consent to the proposed transfer.
8. Another fact to be noticed here is that the vendee, viz., Ofisade Pvt. Ltd., carried on the business of the above industrial undertaking and the other businesses transferred to it under the deed of assignment of 28-6-1977, only up to 30-6-1977. Under an agreement dated 29-6-1977 entered into by Ofisade Pvt. Ltd., with Ambalal Sarabhai Enterprises Pvt. Ltd., the businesses in the names of Swastik Oil Mills Division, Operations Research Group Division, Sarabhai Technical Services Division and Sarabhai M. Chemicals Division (all being the businesses transferred by the assessee to Ofisade Pvt. Ltd., under the deed of assignment of 28-6-1977 except for the lands and buildings as noted in paragraph 6 supra) and various other businesses also, e.g., Telerad Division, Systronics Division, Sarabhai Glass Division, etc., were all transferred to Ambalal Sarabhai Enterprises Pvt. Ltd. The transfer was stipulated to be completed by or before 31-12-1977 or such other date to be agreed upon between the parties. It was further provided that Ofisade Pvt. Ltd. would run the said undertakings and businesses on behalf of the said vendee with effect from 1-7-1977 until the date of completion of the transfer and that the profits from 1-7-1977 would be accounted for by Ofisade Pvt. Ltd., to the vendee. Clause F(c) of the Preamble to this agreement recited as under : [See p. 24 (internal page 8) of Paper Book-II].
(c) The Vendor has, subject to the necessary permission and approval of Government under the Urban Land (Ceiling and Regulation) Act, 1976, agreed to purchase the leasehold land together with the rights and benefits thereto and subject to the terms of lease dated the 28th day of May, 1970 entered into between Maharashtra Industrial Development Corporation (MIDC) and Karamchand Premchand Private Limited and registered in the Office of the Sub-Registrar of Assurances at Bombay under Serial No. 2944, Book No. 1 on the 20th day of June, 1971 read with letter No. AMB-1473/15, 16 & 21/L/17198, dated the 9th day of September, 1974 of MIDC (hereinafter collectively referred to as 'MIDC Loans') MIDC has assigned unto SHIP Ltd. Plot Nos. 15, 16 and 21 in Ambernath Industrial Area situate within the village limits of Morivli and Chikhooli, Taluka Kalyan, District Thana for a period of 99 years from 1st day of August, 1963.
9. The final stage in this series of transactions is represented by the amalgamation brought about under a scheme of amalgamation. These have been summarised by the assessee as under : (See p. 3 of Paper Book III) Event Date
(i) Ofisade Pvt. Ltd., transferred its undertakings to its 100 per cent subsidiary, Ambalal Sarabhai Ente-
rprises Pvt. Ltd. 16-5-1978
(ii) Ambalal Sharabhai Enterprises Pvt.
Ltd., became a widely held public
company March 1981
(iii) Shareholders of the assessee-com-
pany approved the scheme of amal-
gamation of the assessee-company
with Ambalal Sarabhai Enterprises
Ltd. June 1982
(iv) The Bombay High Court approved
the scheme with effect from
1-7-1982 July 1984
(v) The Gujarat High Court (which had
jurisdiction as Ambalal Sarabhai
Enterprises Pvt. Ltd., had its
registered office at Wadi Wadi,
Baroda) approved the scheme of
amalgamation for not only the
assessee-company but also S.M.
Chemicals and Electronics Pvt. Ltd.
(with its registered office in
Bombay) with Ambalal Sarabhai Ent-
erprises Ltd., but directed that the
"assessee-company should get approval
of the Central Government under Sect-
ion 23(4) of the MRTP Act before
giving effect to the Scheme". December 1985
(vi) Central Government approved the
scheme January 1987
(vii) The Gujarat High Court "released
the orders under Section 391 and
391 of the Companies Act, 1956"
with retrospective effect from
1-7-1982 May 1987.
10. Paragraph 10 of the proposed Scheme of Amalgamation found in the statement dated 4-6-1982 prepared under Section 393(1)(a) of the Companies Act, 1956, recorded the following position :
10. On the amalgamation of the Transferor Companies with ASE all the properties and assets of the Transferor Companies including those which were required to be transferred by the former to the latter and are still pending transfer would be automatically transferred and thereafter effectively form part of the respective undertaking of Swastik and Telerad and be utilised for the purpose and industrial activities for which they were allotted and/or acquired. [See p. 9 of PB III].
The lands and buildings for the transfer of which MIDC had demanded Rs. 42 lakhs and odd from the assessee (for transfer to Ofisade Pvt. Ltd.) stood automatically transferred, not to Ofisade Pvt. Ltd., but to Ambalal Sarabhai Enterprises Ltd., with effect from 1-7-1982.
11. The Income-tax (Officer following the directions of the Inspecting Assistant Commissioner, Companies Range III, issued (under Section 144B of the Act) held as under :
(a) The assessee created goodwill as a new asset in its books (assessment year 1975-76) when it took over the business of "oil division" as a going concern from Karamchand Premchand Pvt. Ltd. For this assessment year (1978-79) the assessee raised the goodwill value by Rs. 4,00,00,000. Thus the total value of the goodwill stood at Rs. 6,00,00,000. As a result, the assessee "has charged Rs. 6,00,00,000 over and above the assets transferred by it at book value to Ofisade Pvt. Ltd." Goodwill was a valuable asset of the assessee which could be sold for consideration. It was not really goodwill which was raised in the books but was profit on "sale of a going concern" representing increase in value of assets over the book value.
(b) The assets have been transferred to Ofisade Pvt. Ltd., at book value, i.e., depreciated value. Rights in intangible assets, such as, trade mark, technical know-how, agreements, licences, etc., were transferred without charging anything as there was no book value for these items in the Balance Sheet. Even fixed assets were not revalued as per market price before transferring the same.
(c) Provisions of Section 41(2) of the Income-tax Act, 1961, were applicable as the assessee "recorded these moneys in the garb of goodwill".
(d) No doubt the assessee's contention was that goodwill at Rs. 6,00,00,000 was as per the valuation report of an independent valuer, vis., Messrs S.V. Ghatalia & Co., Chartered Accountants, who valued the goodwill of the assessee-company as on 31-12-1976 in their report dated 24-2-1977 but that report was in very general terms and the report merely gave a lump sum figure of Rs. 6,00,00,000 as the value of the goodwill. There was no attempt made in this report to quantify the value of the goodwill with reference to the market value of the assets transferred or the profitability of the assessee-company in the earlier year or the future trends of profitability. Hence, this valuation report could not be accepted as reflecting the real value of the goodwill.
(e) Due to continuous inflation, the value of the assets of the assessee-company, particularly the fixed assets, would have appreciated substantially, i.e., their value would have been much higher than the written down values. The assessee failed to obtain such valuation of its assets.
(f) Section 41(1) of the Act was not applicable but Section 41(2) was, i.e., transfer of goodwill at Rs. 6,00,00,000 reflects in good measure the value attributable to the fixed assets which have ostensibly been transferred at written down values. Since the assessee had purchased the goodwill for Rs. 2,00,00,000 when it took over the Oil Mill Division from Karamchand Premchand Pvt. Ltd., in 1973, the cost of the goodwill would have to be taken at Rs. 2,00,00,000
(g) The assessee was unable to furnish the actual cost [of the assets transferred by it to Oftsade Pvt. Ltd.] in the hands of Karamchand Premchand Pvt. Ltd. In the absence of such information, the profit under Section 41(2) of the Act would have to be estimated at Rs. 4,00,00,000.
(h) There was no capital gains to be taxed in view of Section 47(iv) of the Act.
The assessee appealed.
12. The Commissioner of Income-tax (Appeals) confirmed the ITO's action and held as under :
(a) The assessee's claim was that the above transfer represented a slump sale by the assessee and hence Section 41(2) of the Act was not applicable. This was not a correct proposition in law. In Akbar Mfg. and Press Co. Ltd. v. CIT [1957] 31 ITR 99 (Bom.), it was held that Section 41(2) of the Act would be applicable in the case of a slump sale also.
(b) The facts also show that there was no slump sale here. Page 24 of the Deed of Assignment of 28-6-1977 very clearly mentioned that all the assets excluding lands and buildings and the tenancy/occupancy rights, were being transferred, i.e., lands and buildings and tenancy/occupancy rights were not transferred. Hence, it was not a slump sale of assets and liabilities as a going concern.
(c) Even as late as 4-6-1982 the assessee entered into a scheme of amalgamation with Ambalal Sarabhai Enterprises Ltd., proposing to transfer lands and immovable properties to that company. Hence, it was evident that the lands and immovable properties had not been transferred till then.
(d) No doubt it was explained for the assessee that all the assets had been transferred at book values or written down values (the assessee could not however categorically state whether the transfer was at book values or the written down values) and that only goodwill was transferred at the enhanced value of Rs. 6,00,00,000. This was difficult to understand because the earlier book value of goodwill was only Rs, 2,00,00,000. If so, how did it apppeciate to Rs. 6,00,00,000 between the assessment years 1975-76 and 1978-79 while the other assets did not increase in value ?
(e) For the purpose of computation of profit under Section 41(2), Explanation 6 to Section 43(7) would be relevant. Originally, the assets in question were transferred by Karamchand Premchand Pvt. Ltd., to the assesses, its 100 per cent subsidiary. The same assets now stood transferred to the asessee's subsidiary, Oflsade Pvt. Ltd. The actual cost of the assets in the hands of Karamchand Premchand Pvt. Ltd. had to be ascertained in working out the profit under Section 41(2) of the Act. There was no material available to show that the goodwill would have appreciated to a considerable extent between June, 1973 and June, 1977, i.e., in a period of four years. The valuation report of M/s. S.V. Ghatalia & Co., did not contain any computation but only a general descriptive report of three pages. The valuation in that report was not based on the working of any super profits over and above what the assets would yield. The record showed the following position :
Asst. Year Profit after Capital &
tax reserves
1975-76 Rs. 23,95,367 Rs. 2,02,75,664
1976-77 Rs. 38,95,060 Rs. 2,57,46,641
1977-78 Rs. 30,23,071 Rs. 3,39,79,248
Thus, in the latest available year the capital and reserves of Rs. 340 lakhs yielded a distributable profit of Rs. 30 lakhs. This is less than 10 per cent of the capital reserves, i.e., there was no element of super profit whatsoever. Hence, it could not be said that there was any goodwill, much less goodwill which could be valued at Rs. 6,00,00,000.
(f) Scientific Research assets which had been fully written off had been transferred by the assessee at 'nil' value. In the absence of any goodwill it has to be inferred that the surplus received in the name of goodwill would only represent the price for which the other assets were transferred. All the same, the Income-tax Officer took the goodwill value at Rs. 2,00,00,000 and has brought to tax only Rs. 4,00,00,000 as the profit on sale of assets assessable under Section 41(2) of the Act.
The Commissioner of Income-tax (Appeals) then went on to dispose of the issue as under :
... I do not want to further interfere in the matter and enhance the assessment but would sustain the figure of Rs. 4 crores as representing the additional value received over and above the book value in respect of assets other than goodwill. For a proper working out of the profit under Section 41(2) the actual cost and the depreciation allowed in the hands of the previous owner, viz., Karamchand Premchand Pvt. Ltd. would be necessary as it was the holding company of the appellant company. It was the duty of the appellant to make available to the ITO all the necessary particulars without prejudice to the stand taken by it, to enable the ITO to work out a proper computation. The ITO is directed to allow a fortnight's time to the appellant to produce the necessary particulars relating to the actual cost and the written down value in the hands of the previous owner of the assets, viz., the holding company M/s. Karamchand Premchand Pvt. Ltd. If no particulars are filed, it would be open to the ITO to treat the amount of Rs. 4 crores as the profit assessable under Section 41(2).
The assessee appealed to the Tribunal.
13. The learned Vice-President [sitting as Accountant Member,] wrote the leading order. In his view, no profit under Section 41(2) of the Act was assessable in this year. His reasons for this conclusion were, briefly, as follows :
(i) By an "agreement" dated 28-6-1977 certain modifications and clarifications were made (in the original agreement of 28-2-1977) including the figure of the consideration. The consideration actually represented the book values of various assets such as machinery and equipment, current assets, investments, goodwill and right to receive royalty from various agreements as reduced by the liabilities. The net value payable as consideration amounted to Rs. 8,32,24,726.40.
(ii) Two clear conclusions could be drawn from the above agreement. The first was : the assessee transferred the entire undertaking to it3 subsidiary as a whole. The lands and buildings were not transferred no doubt but the transfer was nonetheless one of the whole undertaking. In fact, there was a clear stipulation for conveyance of the lands and buildings as a part of the transfer. Specific value for the assets was also noted. But the assessee could not effect such a transfer because of the Urban Land Act provisions. Hence, the assessee had to go through the device of getting this land conveyed to an amalgamated company. The business undertaking consisted of several assets and liabilities. Each and every item of asset and liability need not always be transferred. In the transfer of the whole undertaking, some items might be incapable of being1 transferred, some items may be unacceptable to the purchaser because of their onerous nature. Some other assets may not be transferred out of sentimental attachment, e.g., where the business is carried on by a Hindu undivided family or an individual, a house belonging to the family or the individual may be kept back and yet it would still be a transfer of the entire business undertaking. The mere fact that the lands and buildings were not transferred was irrelevant in deciding the issue of slump sale. If, for example, a vendee had his own premises to carry on his newly purchased business more advantageously, it would be odd to hold that the business was not transferred merely because the vendor's premises were also not purchased.
(iii) The second conclusion is : merely because individual items have been included at a particular valuation in the sale consideration, it could not be inferred that the transfer was not of the entire business but of the individual items. Even in evaluating the overall worth of a business, the normal method would be to consider the items comprised in the business and having regard to the approximate value of those items, work out the overall value of the business. Hence, this aspect does not come in the way of accepting the assessee's claim.
(iv) The Department has set much store by the valuation of the goodwill at Rs. 6,00,00,000. The Department itself sought to work out the value of the goodwill with the aid of a Chartered Accountant and came to the conclusion that such goodwill would, at best, be worth Rs. 21/2 crores. The excess, according to the Department, represented the increased value of the other assets and hence tax was assessable on such excess as profit under Section 41(2). The method of working out goodwill on super profits basis was no doubt a good one but it has its limitations, e.g., such a method should also take into account not only the profits of the preceding years but also the potentialities of the business. The asses-see has been doing business for some time and earning profit. Capital and reserves, as per the accounts, are known but there are several items of substantial worth not reflected in the Balance Sheet, e.g., rights, benefits and privileges of several agreements, such as the hro agreement, the packart agreement, the premier agreement ; and right, title and benefits in the know-how and other inventions and. benefits arising from the research and development work carried on by the assessee, as also secret techniques, formulae, processes etc., in the possession of the assessee which could fetch substantial price in the market. None of these items figures in the balance sheet. The existence of such assets as registered trade marks, patents, copyrights, "export entitlments" and pending applications as also tenancy/occupancy rights in various buildings, some of which are included in the transfer excepting of course those relating to the lands and buildings owned by the assessee which were not transferred. Thus, while the book value of the plant and machinery has been included in the computation of the consideration and current assets and investments also have been taken at their book value for inclusion, absolutely no value was put on the several intangible or what may be called intellectual properties. These do have enormous value content, e.g., industrial licences, import entitlements, know-how, trade marks, etc. Apart, therefore, from even a goodwill worked out on the super profit method, substantial value will have to be ascribed to these intellectual properties, intangible assets, etc. In such a context, the goodwill estimated at Rs. 6 crores would be an underestimate. If there was no "perceivable excess" in the consideration over and above the book values or the written down values of the existing assets, no question of application of Section 41(2) would arise. The addition made by the Department on this account should be straightaway deleted for this reason alone. But, there are other aspects also which support the assessee's claim.
(v) Factual details for the computation of profit under Section 41(2) are available to the Department by way of assessment records, e.g., details of the plant and machinery originally acquired, additions made thereto, depreciation allowed thereon and their written down value. In spite of this information being available, how could the Income-tax Officer conclude that there was an excess assessable as profit under Section 41(2) without examining the said details. In any case, the burden of proof was on the Department to establish the taxability of such excess since the details were all with the Department. Rs. 4,00,00,000 cannot be taxed under Section 41(2) by simply remarking that the assessee has not produced certain details. That would be putting the burden on the assessee wrongly.
(vi) The Income-tax Officer himself has held that no capital gains were assessable in respect of the depreciable assets in view of Section 47. It could well be that if the Income-tax Officer were to take the overall excess figures and reduce therefrom the overall written down value what results therefrom would not be a profit under Section 41(2). It might even be a capital loss to be adjusted. Unfortunately, the Income-tax Officer did not go into any specific computation but merely added the lump sum difference of Rs. 4,00,00,000 as profit under Section 41(2). Even if each of the items comprised in the transfer was individually considered, there was no evidence to show that there was any profit taxable under Section 41(2). There may be, on the other hand, an obsolescence allowance due to the assessee ; there could be evena capital loss.
(vii) As a matter of fact no excess on the transfer has been pointed out. The transfer, in the present case, was clearly a slump sale. Where a slump price is paid no portion of it is attributable to transfer of any particular asset. See West Coast Chemicals & Industries Ltd.'s case (supra), Mugneeram Bangur & Co.'s case (supra) and Sarabhai M. Chemicals (P.) Ltd.'s case (supra).
(viii) In fact an earlier Bench of the Tribunal had held by its order in IT Appeal No. 752(Ahd.)/78-79, dated 28-2-1981 that under similar circumstances no profit under Section 41(2) was assessable. The same conclusion holds good here also. [The reference here is to the transfer of the Swastik Oil Mills Division made by Karamchand Premchand Pvt. Ltd., to its subsidiary, the assessee, in 1973 as noted in paragraph 1 supra. The Department sought to tax the said vendor company under Section 41(2) but the Tribunal held it was a slump sale and hence no profit was taxable under Section 41(2)].
14. The learned Judicial Member disagreed with the above conclusions. He held that this was not a case of slump sale and so profit under Section 41(2) was rightly assessable here. He made the following points :
(i) No doubt, under the agreement for sale of 28-2-1977 the assessee sought to transfer its entire industrial undertaking and other businesses to Ofisade Pvt. Ltd., as going concerns but in the deed of Assignment of 28-6-1977, the lands and buildings and the tenancy and occupancy rights in respect of various premises were specifically stipulated as not transferred by the assessee.
(ii) Neither the two decisions of the Supreme Court [West Coast Chemicals & Industries Ltd.'s case (supra) or Mugneeram Bangur & Co.'s case (supra)] was- applicable here. Both these cases were of cases of slump sales, the businesses having been sold as going concerns. That was not the case here because the lands and buildings remained to be transferred by the assessee.
(iii) Sarabhai M. Chemicals (P.) Ltd.'s case (supra) also was of no assistance to the assessee. That again was a case of transfer of an industrial undertaking as a going concern to its wholly-owned subsidiary at a slump price. The Court held there was no material to show that consideration had not been truly stated in the instrument of transfer. The ratio of this decision cannot be straightaway applied to the instant case as the basic issue before the Court there was regarding the acquisition of an immovable property under Section 269C. Nor was the decision in the case of Artex Mfg. Co. (supra) of any assistance to the assessee because that was a case of slump sale, unlike the present case.
(iv) On the other hand, the decision in the case of Associated Clothiers Ltd. (supra) was applicable here as contended by the learned counsel for the Department. In fact, as held in the case of B.M. Kharwar (supra) by virtue of the amendment made in the second proviso to Section 10(2)(vii) of the old Act of 1922, by Section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, even in 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.
(v) The earlier decision of the Tribunal dated 28-2-1981 in the case of Karamchand Premchand Pvt. Ltd., did not help the assessee. In that case, there was a difference of opinion between the Members of the Ahmedabad Bench of the Tribunal on the point whether the Appellate Assistant Commissioner was justified in setting aside the assessment and directing the Income-tax Officer to redo the assessment and further on the question of assessing the profits under Section 4.1(2) in the hands of the holding company as a going concern to its 100 per cent subsidiary company. On the main issue, i.e., as to whether the profits were taxable under Section 41(2), the case having been referred to a Third Member, it was held (by the Third Member) that such profits may be chargeable in the case of a sale by the holding company to the subsidiary company only if the individual assets of the undertaking were sold and not if the whole of the undertaking was sold as a going concern. In that case, since there was no scope for taxing any profit under Section 41(2), the majority view was that the Appellate Assistant Commissioner was not justified in setting aside the assessment and requiring the Income-tax Officer to redo the same. It was clear from the order of the Third Member that, in fact, there was no difference between the Members who heard the matter originally on the question of slump sale. The Third Member specifically noted that the Appellate Assistant Commissioner, as also the two differing Members, had held that that case was one of "slump sale of the entire undertaking". That was not the position in the instant case. See Clause 'Y' of the deed of sale (Apparently the reference here is to the deed of Assignment of 28-6-1977). The instant case, as is evident from the said deed, was not one of a slump sale but of sale of individual items.
(vi) There might have been difficulties in the way of transfer of the lands and buildings but the fact remains that the assessee did not transfer them. That means there was no transfer of the undertaking as a whole, i.e., of all the assets and liabilities. There was a statutory prohibition against the assessee transferring the lands and buildings. In such a context, the assessee cannot be allowed to go beyond that and enter into an agreement contrary to the statute or otherwise. In other words, there was no slump sale here.
(vii) The question that remained was whether "taxing the difference of goodwill" (Rs. 4 crores) as the appreciated value of the machinery, was justifiable. The Income-tax Officer and the Commissioner of Income-tax (Appeals) have no doubt recorded their reasons for taxing such an amount. It was, however, submitted before the Tribunal that all the materials relevant to the issue were with the Department. There was nothing new to be supplied to the Department and the valuation of the Chartered Accountants (Ghatalia & Co.) was also on the right lines. But, it was seen that the valuation of goodwill by the assessee's valuer was not acceptable. This became evident after considering the report of the assessee's valuer as well as the report given by Sri B.K. Khare (another Chartered Accountant) on behalf of the Department. At the same time, the difference of Rs. 4,00,00,000 cannot be taxed straightaway as the appreciated value of the machinery under Section 41(2). While it was true that there was "rise in the prices of machinery all over" and while "the profits were not extraordinarily increased", the value of the goodwill in three years could not have increased from Rs. 2,00,00,000 to Rs. 6,00,00,000. It would, therefore, be proper to remit the matter to the Income-tax Officer with a direction to refer the matter relating to valuation of the machinery to the Valuation Officer and also to give an opportunity of being heard to the assessee "to explain its case regarding the market value on the date of the transfer and the difference should be taken as profits under Section 41(2)". The issue "regarding the valuation of the goodwill should also be ascertained from the experts on the general principles mainly followed unless the assessee distinguishes the same to depart from those general principles. That should be recorded, in writing, if there is any need to depart from the general principles prevailing the goodwill". The assessee should co-operate with the Income-tax Officer to find out the real value of the machinery and goodwill. If the assessee does not so co-operate, the Income-tax Officer would be "free to estimate or to come to his own conclusion" regarding such valuation on the basis of the material on record.
(viii) The matter should thus go back to the Income-tax Officer for deciding "the value of the machinery and goodwill separately as discussed above.
15. The President, on receipt of the above differing orders, has referred the points of difference to the Third Member as under :
(i) Whether, on the facts and in the circumstances of the case, the transfer in question was a slump sale ?"
(ii) "If the answer to question (0 is in the negative, whether setting aside of the order of the CIT(A) and restoring the matter to the ITO with a direction to decide the issue afresh applying the provisions of Section 41(2) is proper ?
This is how the matter has come up before me.
16. The first point of difference referred to me raises the question whether the transfer in this case was a "slump sale". The noun "slump" means : "a gross amount, a lump". Similarly, "slump sum" means a "lump sum" [Chambers 20th Century Dictionary, 1983 Edn., p. 1220.]. A slump sale or a slump transaction would, therefore, mean a sale or a transaction which has a lump sum price for consideration. It is in this sense the term "slump transaction" is used by the Privy Council in Doughty v. CIT [1927] AC 327, at p. 335. Learned counsel for the assessee, Shri Palkhivala, rightly stressed this aspect. Doughty's case (supra) was, in fact, referred to with approval, by the Supreme Court in Mugneeram Bangur & Co.'s case (supra). This latter was a case of a firm which carried on the business of buying land, developing it and then selling it. Pursuant to an agreement it sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities, development expenses and liability in respect of deposits made by the intending purchasers. The consideration of Rs. 34,99,300 was paid by allotment of shares of the face value of Rs. 34,99,300 to the partners or their nominees. The schedule to the agreement indicated that a sum of Rs. 34,99,300 was arrived at as follows :
Rs. As. Ps.
1. Land 12,68,628 7 7
2. Goodwill 2,50,000 0 0
3. Motor car and lorries 25,866 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 outstanding 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
-------------------
The Tribunal held that the firm had no goodwill and that the sum of Rs. 2,50,000 although shown as the value of the goodwill was really the excess value of the land, which was its stock-in-trade ; and that although the sale was that of a business as a going concern, the value of its stock-in-trade could be traced ; but that the transaction was the mere adjustment of the business position of the partners and the Department was not entitled to take the book-keeping entries as evidence of any profits. [In fact in holding so the Tribunal seems to have had Doughty's case (supra) in mind. See observations of the Privy Council in Doughty's case (supra)]. The High Court also accepted this as a valid proposition-CIT v. Mugneeram Bangur & Co. [1963] 47 ITR 565 (Cal.). But this proposition was later disapproved by the Supreme Court in B.M. Khar war's case (supra).
16.1 The Supreme Court held that the sale was of the sale of a whole concern. [This was an important, even crucial "view of facts", to quote the Privy Council in Doughty's case (supra)]. Hence, no part of the price was taxable. The fact that in the schedule the price of the land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold. What was given in the schedule was the cost price of the land as it stood in the books of the vendor and even if the sum of Rs. 2,50,000 attributed to goodwill could be added to the cost of the land, there was nothing to show that this represented the market value of the land.
17. The Court was of the view that once it was accepted that there was a slump transaction, i.e., the business was sold as a going concern, the only question that would remain was whether any portion of the slump price was attributable to the stock-in-trade. Here, the Court distinguished between a "realisation sale" and an 'ordinary sale' and held that it was very difficult to attribute part of the slump price to the cost of the land sold in the "realisation sale", in the case of an assessee carrying on the business of buying land, developing it and selling it. The mere fact that in the schedule the price of the land was stated did not mean that part of the slump price was attributable to the land sold. There was no attempt made to evaluate the land on the date of sale. No effort in that direction would have been made ordinarily because the transfer was between the partners of a firm and the limited company floated by the same partners.
18. In an earlier decision in West Coast Chemicals & Industries Ltd.'s case (supra) the Supreme Court had held that the question whether a sale was a realisation sale or a sale in the course of business had to be decided on the facts of the case ; that the fact that the business of the assessee-company was sold as a going concern and was in fact worked by the assessee (the vendor) on behalf of the vendee till the entire consideration was paid made no difference as the business was kept going on behalf of the vendee. The facts of this case being different in some important respects, e.g., the sale agreement was entered into with a view to close down the business, the only assistance offered by this decision is the above principle stated by the Supreme Court, i.e., in a winding up sale with a view to realising the capital assets, not being a sale in the course of business operations, no tax can be levied on the profit, if any, on such sale.
19. So the question is : was the sale here a slump transaction ? The parties clearly intended it to be so under the agreement of 28-2-1977. See Clause Z-C(i) and Clause Z-C (vii)(b) of the Preamble to that deed at pp. 145/146 of Paper Book I. Also see Article 1 of the deed of 28-2-1977 at p. 148 of Paper Book I. The term "going concerns" is used. The consideration was agreed to be on the basis of book value (goodwill having been raised to Rs. 6 crores) of the assets including the lands and buildings as also tenancy/occupancy rights less the liabilities. The vendee was also put in possession with effect from 1-3-1977 and who thereupon carried on the business from the same premises and closed its accounts as usual on 30-6-1977. The profit for the period 1-3-1977 to 30-6-1977 was also reflected in the vendee's books to the total exclusion of the assessee. Meanwhile, the assessee tried to transfer the lands/ buildings also to the vendee but in the face of the demand of Rs. 42 lakhs from midc (considered exorbitant by the assessee apparently) the path of a straightforward transfer to the vendee was given up. The vendee itself sold off all the businesses it had purchased from the assessee to Ambalal Sarabhai Enterprises Pvt. Ltd., under the agreement of 28-6-1977 with effect from 1-7-1977. An amalgamation scheme was initiated which resulted in the assessee's amalgamation with Ambalal Sarabhai Enterprises Ltd., with effect from 1-7-1982. Thus, the lands/buildings stood absorbed in Ambalal Sarabhai Enterprises Ltd., ultimately.
20. Faced with the demand from midc, the above involute steps were perhaps considered preferable by the assessee. If I may digress here, one need not hold that the steps taken by the assessee were justified : but one can understand the compulsions behind that business decision. If a man does not have in him the urge to pay the maximum tax possible to Government, he is not a criminal. [There are now not many like Justice Holmes. They broke the mould after him apparently]. It is, on the contrary, a wholly natural tendency to save as much money as possible : and if it is done legally, legitimately, there should be no room for criticism- specially for the irritating unctuousness of some of the criticism. Prof. Wheatcroft, a prolific writer on tax matters, points out that such criticism is most often from persons who are not in a position to avoid taxes. If the taxpayer comes under the letter of the law, tax him. If he is guilty of tax defaults, penalise him : prosecute him (bell, book and candle) as the law permits. Why then the Pecksniffery ? That is best avoided according to one school of thought. [The opposite school of thought is of course equally committed. It refuses to see any distinction between avoidance and evasion and looks upon both as evil. The debate goes on with unabated acrimony].
21. The assessee's learned counsel pointed out that only because of impediments in transferring legal title to the vendee for the lands and buildings no consideration therefor was received by the assessee, i.e., out of the total consideration of Rs. 9,04,71,751.75 (based on unaudited book values) what was received was only Rs. 8,52,49,448 (based on audited book values) excluding the value of the lands and buildings and liabilities referable thereto. He also contended that even if some assets or liabilities were left out it could still be a sale of a going concern. I do not find this acceptable. The lands and buildings (as also the tenancy/occupancy rights) were not an insignificant part of the undertaking transferred. They reflected the core of the undertaking. The book value of the lands and buildings as on 28-2-1971 stood at Rs. 94,63,924.15- see p. 215 of Paper Book I. There was a liability of Rs. 45,22,410 against the properties as unpaid purchase price. Thus the assets and the liabilities not transferred with the rest of the undertaking were by no means insignificant. And how do you carry on a business without the lands and buildings forming part of it ? The vendee was put in possession no doubt. But no rent was charged at all as it was not fully an arm's length transaction, It wag a domestic arrangement between a holding company and its subsidiary. It did not show the indicia of a transfer of immovable property as understood in law. It was contended for the assessee that in any case after 12 years the vendee would have got the title by adverse possession. This argument does not appeal to me. As on 30-6-1977 there was no transfer in law. By July 1982, even the possibility of adverse possession had disappeared. The assessee dealt with the lands and buildings as an unfettered owner [as indeed it was] in July 1982, when it decided to amalgamate with Ambalal Sarabhai Enterprises Ltd., taking the lands and buildings along with it. Thus, the lands and buildings never reached the vendee here.
22. As regards the claim that for a sale as a going concern each and every asset/liability need not be transferred, there is no authority for such a bald proposition. The claim lacks substance. I have seen the examples given by the learned Vice-President. With great respect, I am unable to agree with him in this regard. If the building where the business is carried on is not transferred, be it for sentiment or for any other reason, there is obviously no sale of a going concern. What is sold in such a case is the sale of a dismembered business and not of the organic whole that would fit the description "sale of a going concern".
23. Shri Jetley, the learned Standing Counsel for the Department, had placed strong reliance on two decisions : Akbar Mfg. & Press Co. Ltd.'s case (supra) and Associated Clothiers Ltd.'s case (supra). The first decision has to be, taken as impliedly overruled by the Supreme Court in so far as it relates to a slump sale. Where there is a slump sale or the sale of a business as a going concern, then no part of the slump price can be attributed to any particular asset or assets. Hence, there would be no tax to be levied under Section 41(2). In Associated Clothiers Ltd.'s case (supra) proceeding on the facts found by the Tribunal and left unchallenged in the Statement of the case drawn up by the Tribunal, the Supreme Court noted that the entire assets of the assessee were sold by it to another limited company, that there was no separate sale of different items but the consideration of each item of property sold was expressly mentioned in the agreement of sale, i.e., the property in question (building) was sold for a stated consideration which was not shown to be notional and since the consideration was in excess of the original cost of the building, the difference was profit assessable under Section 10(2)(vii), second proviso of the old Act of 1922 [Section 41(2) of the new Act]. But, this case seems to have turned on its special facts. In fact no conveyance was executed for the transfer of the said building and yet on the facts found by the Tribunal the Supreme Court held that the "entire assets" were sold by the assessee. It could certainly enable the assessee before me to rely on this decision for its claim that the sale was of a going concern. Perhaps the learned Standing Counsel for the Revenue relied on this decision to claim that once the items are individually valued, Section 41(2) would be attracted even it is a sale of all the assets and liabilities.
24. There is no authority for such a claim. See Mugneeram Bangur & Co.'s case (supra). In that case the Court observed that merely because the price of the land was specified in the agreement of sale, it did not follow that part of the slump price was necessarily attributable to land. Hence, neither of the above two decisions clinch the Revenue's case so far as this aspect is concerned.
25. It was pointed out for the assessee that the Central Board of Direct Taxes had directed its assessing officers not to tax profit under Section 41(2) in the cases of banking companies, following nationalization. A copy of this circular is available at pp. 73-78 of Paper Book I (Circular No. 63, dated 16-8-1971). I have seen this circular. Shri Jetley submitted that as made clear in paragraph 1 of this circular itself, the situation covered by this circular was one where all assets (movable and immovable) and all liabilities forming the undertaking of the old banks stood transferred to the new banks under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970, with effect from the appointed date ; and hence that circular [directing that no profit under Section 41(2) shall be taxed] was not applicable to the facts of this case. I find substance in this objection. Lands and buildings remained to be transferred here. Hence, this circular does not help the assessee here.
26. In Nawab Sir Mir Osman Ali Khan v. CWT [1986] 162 ITR 888 (SC), the assessee had sold certain immovable properties and had also received the full consideration for them, having put the vendees in possession. He had not however executed any registered sale deeds in favour of the vendees. The Wealth-tax Officer held that the assessee still owned those properties and assessed him to wealth-tax on the properties. The Tribunal held that the assessee having received the consideration from the purchasers and the purchasers having been put in possession, was protected in terms of Section 53A of the Transfer of Property Act, 1882. The Supreme Court upheld the Wealth-tax Officer's order. It held that for all legal purposes the properties had to be treated as "belonging to the assessee". [The Court was not concerned with the expression "owner" found in the income-tax statute but with the term "belonging to" found in the Wealth-tax Act]. In the instant case even the consideration was not received as regards the immovable properties. Only possession was handed over to the vendee but that by itself is of no legal consequence so far as title is concerned. Shri Palkhivala urged that what remained with the asseasee was the mere husk of title. But the Supreme Court observed in Nawab Sir Mir Osman Alt Khan's case (supra) after pointing out that the vendee was in rightful possession-full consideration having passed-only against the vendor :
Even though the assessee had a mere husk of title and as against the vendee no reality of title, as against the world he was still the legal owner and the real owner.
In the instant case, even the consideration had not passed. This much was common ground. A fortiori, the assessee has continued to be the owner and the real owner of the lands and buildings even after 28-6-1977.
27. I have tried to read both the deeds of 28-2-1977 and 28-6-1977 together as urged by the learned counsel for the assessee. Even so, I find it difficult to describe the impugned transaction as a slump transaction. The lands and buildings were excluded "by these presents" under the deed of 28-6-1977. See Clause 'Y' of the Preamble to the deed of 28-6-1977 at p. 233 of Paper Book I as also at p. 236 where the following recital occurs :
And in consideration of the Purchaser's covenants hereinafter contained the VENDOR DOTH HEREBY DECLARE, ACKNOWELDGE AND CONFIRM THE TRANSFER AND ASSIGN unto the Purchaser for ever ALL THAT the said Industrial undertaking: and business of Swastik Oil Mills and the businesses and activities of the said Operations Research Group, Sarabhai Technical Services and Sarabhai Research Centre Divisions carried on by the Vendor as going concerns TOGETHER WITH all the assets thereof (excluding the said Lands and Buildings and Tenancy/Occupancy Rights which shall be separately transferred by appropriate Conveyance upon receiving permission of the Competent Authority under the Urban Land (Ceiling and Regulation) Act, 1976 and the said Movable Assets possession of which has been already delivered) but including the beneficial interest and goodwill of the Vendor in the said business of Swastik Oil Mills of the manufacture, sale and distribution of detergents soaps. cosmetics, etc. and the said businesses and activities of Operations Research Group, Sarabhai Technical Services and Sarabhai Research Centre Divisions and the right to use the name "Swastik Oil Mills", "Operations Research Group", "Sarabhai Technical Services" and "Sarabhai Research Centre" as a part of its corporate name or trading style or a part thereof or in any other manner whatsoever....
The above recital strengthens the Revenue's claim that this was not a sale of a going concern.
28. It must be noted here that no attempt was made to value any of the assets to be transferred, at their market values. All were listed at book values. This is normally a pointer to the position that the transfer is for a slump price. But this by itself is not conclusive against the revenue. The basic test is to see whether there has been a sale of a going concern. That test, in terms of law, is not satisfied here.
29. The question then arises : if it was not a slump sale why should Section 41(2) alone be invoked ? For example there were stocks of the book value of Rs. 3,71,15,789 which were transferred to Oflsade Pvt. Ltd. But no attempt was made to tax the profit thereon under Section 28(i). Such inconsistency in approach showed up the weakness of the Revenue's case, according to the asses-see's learned counsel. This is certainly a point of some importance. If the Department has failed to consider this aspect, it will have certain legal consequences. But it cannot change the position in law which is discernible even otherwise.
30. Two decisions remain to be noticed. Much emphasis was laid on them to support the assessee's claims. These are : Sarabhai M. Chemicals (P.) Ltd.'s case (supra) and Artex Mfg. Co.'s case (supra). In the first case, the question before the Court was regarding the validity of a notice of acquisition issued by the Competent Authority under Chapter XX-A of the Income-tax Act, 1961. In that case it was seen that there was a transfer of an industrial undertaking as a going concern together with goodwill and all other assets thereof by a holding company to its 100 per cent subsidiary at a slump price. The valuation mentioned was the book value (written down value) so far as lands, buildings, plant and machinery and other assets were concerned. The Court held that when the sale was of the whole concern, particularly at book values and was to a connected party, what is sold is not the individual itemised property but the capital asset consisting of the business of the undertaking. This case was relied upon for the assessee to argue that mere listing of individual assets at book values in the transfer deed did not mean such individual assets were separately sold. There is no quarrel with this proposition. There cannot be. But the instant case is not one of a sale of a going concern as the material on record shows. The second decision is Artex Mfg. Co.'s case (supra). This case also concerned the sale of a business as a going concern and it was held that such being the case, no profit under Section 41(2) was assessable. Hence, this decision is not very helpful to the assessee here.
31. Having come to the conclusion that this was not a slump sale, I must agree with the learned Judicial Member that the assessee was liable to be taxed on the profit under Section 41(2). The matter of finding out the profit under Section 41(2) has been remitted to the Income-tax Officer for a fresh enquiry by the learned Judicial Member. But there is no comment on this by the learned Vice-President. And yet a point of difference has been proposed by way of question (ii). I would endorse, with respect, the learned Judicial Member's order in this respect also that means the majority of the Members who have heard this appeal are of this view-subject to the following observations to be kept in view by the Income-tax Officer in his de novo enquiry.
32. Much has been made by the authorities below of the raising of the goodwill value to Rs. 6 crores in 1976 from Rs. 2 crores in 1973. Shri Palkhivala described this approach as coloured by suspicion. Certain factual claims were stressed by him in this regard. These were :
(i) When Karamchand Premchand Pvt. Ltd., sold the oil mill division to the assessee in 1973 that Unit's (manufacture of detergents) licensed capacity was 20,000 M.T. per annum. By the time of the second sale in 1976 it had increased to 39,000 M.T. per annum.
(ii) In 1972-73 the total production was 16,000 M.T. In 1976-77 it had gone up to 36,000 M.T.
(iii) Rate of inflation was the highest in the period 1973-77. It went up by as much as 24 per cent per annum. The result was : the value of the rupee in 1977 was only 50 per cent of what it was in 1973.
(iv) Over and above the detergent unit, the assessee had set up 3 other units, viz., Sarabhai Research Centre, Operation Research Group and Sarabhai Technical Services Division. The benefits of all these units also went to the vendee.
It was hence urged that the raising of the goodwill to Rs. 6 crores had no sinister significance whatsoever. It was fully justified. The Income-tax Officer will no doubt keep these aspects also in view.
33. One of the points made by the learned Vice-President was that in evaluating the goodwill transferred one had to take into account also the "intangible or intellectual properties" transferred. But such a claim was never made by the assessee before the authorities below. The learned Judicial Member also does not record any such claim. Nor, among the many contentions raised before me, such a claim was ever made. Quite apart from this, perhaps one has to go by the document of transfer first to see what was transferred and for how much. If thereafter, the contracting parties lead evidence to show that something more was transferred and the consideration stated in the document also related to such additional asset(s) then a finding could be given on that aspect, But no such claim, as I said before, was ever made by the assessee. I shall leave it at that.
34. I have not considered it necessary to comment on the order of the Tribunal dated 28-2-1981 supra in the case of Karamchand Premchand (P.) Ltd. The central issue for decision here was whether the business was sold as a going concern. That had to be answered independently on the relevant facts and evidence or. record in this case.
35. The answers to the questions on the points referred to me are as under :
Question Answer
(i) Whether, on the facts and in the
circumstances of the case, the
transfer in question was a slump sale ? No
(ii) If the answer to question (i) is in the
negative, whether setting aside of the
order of the CIT(A) and restoring the
matter to the ITO with a direction to
decide the issue after applying the pr-
ovisions of Section 41(2) is proper ? yes
The appeal will now go back to the Bench for disposal in accordance with law.
A.V. Balasubramanyam, Judicial Member
1. This is an appeal by the assessee and it relates to the assessment for the year 1978-79.
2. The memorandum of appeal raises as many as seven grounds and they are :
(i) Addition of a sum of Rs. 4,38,789, being tax deducted at source in Indonesia while paying royalty ;
(ii) Disallowance of claim for gift of Rs. 4,256 ;
(iii) Disallowance of claim for sales tax penalty of Rs. 2,401;
(iv) Addition of profit under Section 41(2) on assets of the Industrial undertaking transferred by the appellant company as a going concern to its subsidiary company ;
(v) Disallowance of claim for exchange difference of Rs. 1,20,387 ;
(vi) Disallowance of fees of Rs. 25,000 paid to M/s. S.V. Ghatalia for valuation of goodwill; and
(vii) Levy of interest under Sections 139 and 215.
3. The appeal had been heard by a Bench and on one of the issues [addition of profit under Section 41(2)], there was difference of opinion between the Members. While the learned Accountant Member held that no profit under Section 41(2) can be computed or included in the total income of the assessee, the learned Judicial Member had held that the " assessee was liable to be taxed on the profit under Section 41(2). He, however, remitted the issue to the ITO for finding out the profit under Section 41(2) with a direction to make fresh enquiry. On all other issues, the learned Judicial Member agreed with the learned Accountant Member who had written the leading order.
4. On the difference between the Members, there was a reference to Third Member. The learned Third Member, in his order dated 24-7-1987, has agreed with the conclusions of the learned Judicial Member. In view of the conclusions reached by the learned Third Member, we proceed to pass a final order in the appeal as here-under.
5. With regard to the first issue relating to addition of Rs. 4,38,789 being the tax deducted at source in Indonesia while paying royalty, the unanimous opinion is that the addition made in this regard should be deleted. We accordingly hold the issue in favour of the assessee. However, as observed by the learned Accountant Member in para 26 of his leading order, if the assessee is entitled to relief under Section 91, it can put in an application for getting the same even if it has not already done so. With this remark, we conclude this issue in favour of the assessee.
6. Grounds (ii) and (iii), relating to gift of Rs. 4,256 and disallowance of Rs. 2,401 towards sales tax penalty, had not been pressed. Hence, these two grounds are rejected.
7. Ground No. (iv) relates to addition of profit made under Section 41(2) on assets of industrial undertaking transferred by the appellant-company as a going concern to its subsidiary company. On this issue, we hold that the assessee is liable to be taxed on the profit under Section 41(2) on the basis that the sale was not a "slump sale". We further hold that in regard to the matter of finding out the profit under Section 41(2), it is remitted to the ITO for a fresh enquiry who shall compute the same bearing in mind the observations of the learned Judicial Member made in para 16 of his order and the observations of the learned Third Member in paras 31 and 32 of his order. With these directions, we direct the ITO to compute the profit liable to be taxed under Section 41(2).
8. With regard to ground (v), it relates to disallowance of exchange rate difference of Rs. 1,20,387. This issue is held against the assessee following the decision of the Special Bench of the Tribunal in the case of Poysha Industrial Co. Ltd. (supra). We, therefore, uphold the disallowance and reject the fifth ground,
9. The sixth ground relates to disallowance of fees of Rs. 25,000 paid to Sri S.V. Ghatalia for valuation of goodwill. On this issue, it has been held that the disallowance was proper inasmuch as the expenditure had nothing to do with the business of the assessee-company. We, therefore, reject this ground and sustain the disallowance made by the authorities below.
10. The last ground relates to levy of interest under Sections 139 and 215. On this issue, the learned Accountant Member has held that no interference is called for. We, therefore, uphold the order of the CIT(A) in this regard. The seventh issue stands rejected.
11. In the result, the appeal is allowed in part.