Income Tax Appellate Tribunal - Madras
Income-Tax Officer vs Smt. R. Shyamala on 7 May, 1996
Equivalent citations: [1996]59ITD383(MAD)
ORDER
Shri M.M. Cherian, Accountant Member
1. Revenue has filed these three appeals against the order of the CIT (Appeals) III, Madras in the case of M/s. Modern Re-Rollers, Pondicherry for the assessment year 1981-82. As the issue involved in these appeals are common, they are consolidated in a common order.
2. The assessees Smt. R. Shyamala, Smt. G. Meenakshi and Smt. R. Ambica were carrying on business in partnership till 3-1-1981. On 3-1-1981 eight new partners were brought into the partnership, with four incoming partners bringing in land as their share capital and the other four partners bringing in cash towards their share capital. This arrangement with 11 partners including the eight new partners continued till 23-1-1981 and then the firm is said to have been dissolved. On dissolution the factory building, sheds, machinery and plant were taken over by the four new partners who introduced cash as their capital. The land on which the factory building stood belonged to Shri Munuswamy Mudaliar and his three sons, Sri M. Ranganathan, Sri M. Ramachandran and Sri M. Govindaswamy. The sons of Sri Munuswamy Mudaliar who were brought in as partners on 3-1-1981 were the husbands of the lady partners. The persons who joined the firm bringing in cash of Rs. 25,000 on 3-1-1981 were the following :
1. Shri Govinda Prasad
2. Shri Murilal Sonthalia
3. Shri Pawankumar Sonthalia
4. Dr. C.L. Lohia.
Though the land belonged to Shri Munuswamy Mudaliar and his three sons, the factory building, plant and machinery etc. were owned by the firm comprising of the three lady partners. When the land was brought in by the partners, it was valued at Rs. 1 lakh and credit was accordingly given in the account of those four partners. On the eve of reconstitution on 3-1-1981 the assets of the firm such as factory building, shed, machinery, furniture etc. were revalued and the difference in value was credited to the accounts of the three lady partners. The firm was dissolved on 23-1-1981 and the four partners, Shri Govinda Prasad, Shri Murilal Sonthalia, Shri Pawankumar Sonthalia and Dr. C.L. Lohia took over the assets of the firm and also the land. They then continued the business after giving the retiring partners cash in settlement of their accounts. From these facts the Assessing Officer came to the conclusion that the transactions on 3-1-1981 and 23-1-1981 were in the nature of a device by which the lady partners transferred the assets of the firm to the successors in the business. On that view of the matter, the Assessing Officer proceeded to compute the profit under section 41(2) and the capital gains on the transfer of the assets by the firm consisting of three lady partners, to the four persons who took over the business on 23-1-1981. Profit under section 41(2) on the transfer of the factory building, shed, furniture etc. was assessed at Rs. 1,96,434 and the capital gains at Rs. 2,05,556.
3. Against the assessment, the assessees filed appeals and the CIT(A) held that the entire arrangement of reconstitution of the firm was made with a view to transfer the assets belonging to the firm of the three lady partners to the four incoming partners. The CIT(A) noticed that the land belonging to Shri Munuswamy Mudaliar and his three sons, was brought to the firm for a value of Rs. 1 lakh and then transferred to the four new partners on the same value and so there was no capital gains on that transaction. As regards the other assets transferred by the firm, the CIT(A) held that this was a case of transfer of the whole undertaking and so, the provisions of section 41(2) were not attracted and accordingly there could be no assessment of profit under section 41(2). The appellate authority further held that tax was rightly leviable on the capital gains arising on the transfer of the assets. Regarding computation of the capital gains, it was held that it should be computed deducting the sum of Rs. 4,29,444 representing the cost of the assets as mentioned in the assessment order from the sale consideration of Rs. 6.35 lakhs. The Assessing Officer was directed to assess the surplus of Rs. 2,05,556 as capital gains and allow the deduction under section 80-T. Revenue has filed these appeals with the plea that the CIT(A) was not correct in giving the direction to compute the capital gains after deducting the actual cost of the assets from the sale consideration.
4. On behalf of Revenue, the Departmental Representative, Shri O.P. Sachan, submitted before us that the CIT(A) was not justified in directing the Assessing Officer to deduct the cost of the assets from the sale price to arrive at the capital gains. The Departmental Representative explained that what the firm transferred for Rs. 6.35 lakhs were only four items of assets which had been previously used in the business carried on by the firm. It was pointed out that those were depreciable items being building, machinery, electrical fittings and furniture, on which depreciation had been granted in the earlier years. Drawing our attention to the provisions of section 50 of the Income-tax Act, 1961, the learned D.R. submitted that for the purpose of computing capital gains the cost of acquisition of depreciable assets was to be taken as per section 50 and accordingly WDV of the assets as defined in clause (6) of section 43 should have been taken as the cost of acquisition. Shri Sachan submitted that in giving the direction to assess the capital gains at Rs. 2,05,556, the above provisions had been lost sight of and the CIT(A) had considered the cost of assets at Rs. 4,29,444 as shown in the assessment order. The learned D.R. pointed out that in the assessment cost of the assets was taken at Rs. 4,29,444 because there was profit under section 41(2) assessed separately and that having made the assessment in that manner the Assessing Officer computed the capital gains with reference to the actual cost of the assets, probably thinking that there would have been otherwise a double assessment in the sense that the sum of Rs. 1,96,434 (i.e., depreciation so far allowed) would have been again included in the computation of the capital gains. Shri Sachan submitted that after finding that profit under section 41(2) was not assessable, the CIT(A) should have found that for computing the capital gains the cost of acquisition should have been taken as per section 50 only. Arguing on the above lines, the learned D.R. made a strong plea for modifying the order of the CIT(A) to the extent of deducting the WDV of the assets under section 50 of the I.T. Act in the computation of the capital gains.
5. On behalf of the assessees. Shri N. Devanathan, Advocate submitted that the CIT(A) had given rightly the direction to assess the capital gains at Rs. 2,05,556 deducting the cost of the assets from the sale consideration. Drawing our attention to the assessment order the learned counsel pointed out that in the assessment the Assessing Officer had worked out the capital gains at Rs. 2,05,556 and the CIT(A) had not done anything more than confirming that assessment. The counsel further submitted that what was transferred by the firm was the undertaking as a whole and not the assets separately and that in the case of transfer of the undertaking it was not correct to pick up certain assets to assess the capital gains. Shri Devanathan referred to the decision of the Karnataka High Court in the case of Syndicate bank Ltd. v. Addl. CIT [1985] 155 ITR 681 [1986] 29 Taxman 32 for the proposition that in the case of transfer of the undertaking as a whole what arose for consideration from the point of view of taxation was only the gain in respect of that transaction as a whole and no in respect of individual assets. Reference was also made to the decision of the Supreme Court in the case of CIT v. Mugneeram Bangur & Co. [1965] 57 ITR 299, wherein it was held that where transfer was of a whole concern and no part of the sale price was attributable to the cost of any particular asset, no capital gain was assessable. The learned counsel further contended that even the assessment of capital gains in this case was not justifiable in law as the CIT(A) had given a finding that this was a case of transfer of the whole undertaking. However, the counsel was not in a position to pursue that argument to ask for the deletion of the capital gains as the assessees were not in appeal before us. Still Shri Devanathan maintained that in any case the assessees might not be burdened with further liability by recomputing the capital gains applying the provisions of section 50.
6. After going through the facts of the case and giving careful consideration to the contentions of both sides, we are of the view that Revenue should succeed in this appeal. The CIT(A) has held that in this case the Assessing Officer was correct in assessing the capital gains in the hand of the assesses. That finding has become final. Neither the Department nor the assessee has challenged that finding. In this appeal the Department has challenged the computation of the capital gains only. As rightly pointed out by the D.R., for the purpose of computing the capital gains on the transfer of depreciable assets the provisions of section 50 are applicable. There cannot be two opinions on the applicability of section 50 in computing the capital gains arising on the transfer of depreciable assets. The learned counsel for the assessees has raised the contention that having assessed the capital gains at Rs. 2,05,555 after deducting the cost of the assets (and not the WDV as per the provisions of section 50) computation might not be changed now. There is no merit in this contention. It may be noticed that the Assessing Officer had separately assessed the profit under section 41(2) in respect of the same assets transferred by the firm. The Assessing Officer computed the capital gains not with reference to the WDV of the assets, after separately assessing the profit under section 41(2). But then the CIT(A) held that there could be no assessment of the profit under section 41(2). The CIT(A) was not correct in giving direction to compute the capital gains deducting the actual cost of the assets from the sale consideration, in violation of the provisions of section 50. The direction could have been to compute the capital gains in accordance with law only.
7. Coming to the contentions of the assessee's counsel that this was a case of transfer of the undertaking as a whole and so no capital gains should have been brought to tax, it is true that the CIT(A) has given a finding that the undertaking as a whole was transferred by the firm. It may be reiterated that though the factory building, furniture and other assets belonged to the firm, the land did not belong to the firm. The land belonged to Shri Munuswamy Mudaliar and his three sons. The CIT(A) noticed that it was valued at Rs. 1 lakh as on 3-1-1981 and transferred to the four new partners for the same value and there was no gain in the transaction. The firm consisting of three lady partners could not have transferred the entire undertaking including land (which did not belong to them). The firm transferred only the stock in trade, the fixed assets and the liabilities to the new partners. Thus, there are different transactions involved in this case. It can be clearly seen that Rs. 6.35 lakhs is the consideration agreed for four items of assets only. Price has been fixed separately for stock-in-trade; the liabilities have been transferred for book value. The land has been transferred at Rs. 1 lakh. It is difficult to envisage this as a case of transfer of the undertaking as a whole, for a lumpsum consideration. Even if it is taken as a case of transfer of the undertaking, still the assessment of capital gains on the transfer of the four items of assets for Rs. 6.35 lakhs appears to be in order. In the case of Syndicate Bank Ltd. (supra) referred to by the assessee's counsel, the Karnataka High Court observed :-
"If there is a transfer of a whole concern and no part of the agreed price is indicated against different and definite items having referred to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets in specie. What is sold in such a case is not individual items of property forming part of the aggregate, but the capital asset consisting of business of the whole concern or undertaking. What arises for consideration from the point of view of taxation is only the gain in respect of that transaction and nothing else."
If the price attributable to different assets cannot be ascertained, the Court held that, then no capital gains could be assessed in respect of individual assets. From the transaction under consideration it cannot be said that there was a price fixed for the whole undertaking. As already stated, sale value has been fixed for different assets like land, buildings etc. and stock. In the case decided by the Supreme Court in the case of Mugneeram Bangur & Co. (Supra) also no sale value was separately fixed for different assets. The consideration was agreed as under :
"The purchase price shall be Rs. 34,99,300 paid and satisfied by the Co., allotting to the vendors or their nominees seventeen thousand five hundred Redeemable Preference Shares of rupees one hundred each and seventeen thousand four hundred and ninety-three ordinary shares of rupees one hundred each in the capital of the company which will be accepted by the vendors in full satisfaction of the said purchase price."
The Supreme Court observed that the sale was the sale of the whole concern and no part of the price was attributable to the cost of the land and no part of the price was taxable. The Court further pointed out that the fact that in the Schedule to the agreement 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. Thus, on facts it was found that there was no price attributable to various assets and the lumpsum price was for the undertaking as a whole. The case before us is distinguishable on facts, as here the price, as already noted, has been fixed separately for different assets and it is not a transfer for a lumpsum consideration. The question of assessment of capital gains on the transfer of depreciable assets in a case of sale on closure of the business, came up for consideration before the madras high Court in the case of Gowri Tile Works v. CIT [1957] 31 ITR 250. The Court held that "section 12B (corresponding to section 50 of the present Act) was applicable to the case even though the sale was not a voluntary one, but was made by a Commissioner appointed by the Court in as much a sale by a Commissioner or receiver appointed by the Court in a litigation has for all legal purposes the same effect as a sale by the parties, and in any event section 12B was applicable not only to sales but also to other kinds of transfers of assets as well". Shri Devanathan, the learned counsel for the assessee wanted to distinguish this case, as a transfer not of the whole undertaking. But facts narrated on page 252 of the decision show otherwise. "In the suit, the Court appointed a Commissioner who stopped the business on 20th Aug., 1947 and sold on 24th Aug. 1947, by a public auction, all the assets of the firm including land and buildings, plant and machinery, furniture, fixtures, stocks of finished goods and in progress and the good will to Thomas Stephen & Co. Ltd. of Quilon through its manager, A. Karunakaran, for a sum of Rs. 1,52,600". It is relevant to point out that in the case also the Assessing Officer had assessed the profit under section 41(2) separately and in computing the capital gains, he deducted the cost of the assets without applying the provisions of section 12B (i.e., section 50) and it was the Appellate Asstt. Commissioner who modified the assessment, deleting the profit under section 41(2) and enhancing the capital gains to that extent (vide page 253). The Madras High Court upheld the computation on the ground that section 12B was applicable to all kinds of transfer of assets. In the circumstances of the case, we hold that the CIT(A) is not correct in directing to compute the capital gains by deducting the cost of the assets from the sale price of Rs. 6.35 lakhs, without applying the provisions of section 50. The order of the CIT(A) is modified to the extent that capital gains arising on the transfer of these assets which are depreciable assets, is to be computed by deducting in accordance with the provisions of section 50 of the I.T. Act, 1961, the WDV of the assets from the sale consideration. The Assessing Officer will revise the assessments accordingly.
8. In the result, these three appeals filed by Revenue are allowed.