Income Tax Appellate Tribunal - Mumbai
Assistant Commissioner Of Income Tax vs Asea Brown Boveri Ltd. on 5 April, 2007
Equivalent citations: (2007)11TTJ(MUM)502
ORDER
D.K. Srivastava, A.M.
1. The appeals filed by both the Department and the assessee are directed against the orders passed by the learned CIT(A) for asst. yrs. 1996-97 and 1997-98. Major issues involved in them are mostly common. We therefore find it convenient to dispose off all of them by a consolidated order.
LTA No. 2555/Mum/2003: Asst. yr. 1997-98 : Assessee's appeal
2. Ground No. 1 taken by the assessee reads as under:
1. The learned CIT(A) erred in confirming the disallowance of a sum of Rs. 62,26,739 being guest house expenses under Section 37(4) of the IT Act. It is submitted that the expenditure of Rs. 62,26,739 includes expenditure on rent, rate, taxes, insurance and depreciation and have been claimed as a deduction under section other than Section 37 of the IT Act and therefore provisions of Section 37(4) are not applicable. It is submitted that it may be so held now.
3. The assessee is in appeal against the order of the learned CIT(A) confirming the disallowance of Rs. 62,26,739 being expenditure incurred on guest house. At the time of hearing, the learned Counsel for the assessee fairly admitted that the aforesaid amount represented expenditure incurred on rent, rates, taxes, insurance and depreciation relating to the guest house maintained by the assessee. He also conceded, in all fairness, that the issue was now concluded against the assessee by the judgment of the Hon'ble Supreme Court in Britannia Industries Ltd. v. CIT . In this view of the matter, ground No. 1 taken by the assessee is dismissed.
4. Ground No. 2 taken by the assessee reads as undor:
2. The learned CIT(A) erred in confirming that the cash compensatory assistance and duty drawback are to be taxed on accrual basis as against on receipt basis offered by the appellant.
It is submitted that the appellant had changed the method of accounting from cash basis to accrual basis for its account purpose following the amendments in the Companies Act, and submit that for income-tax purposes the appellant continues to follow the receipt basis and the CIT(A) ought to have accepted the same.
5. In support of the aforesaid ground, the learned Counsel for the assessee submitted that the assessee used to follow the cash method of accounting in respect of cash compensatory support and duty drawback both in its accounts drawn up for the Companies Act as well as for the purposes of the IT Act. However, with effect from asst. yr. 1989-90, the assessee, in its accounts drawn up for the purposes of the Companies Act, started recognizing the cash compensatory support and duty drawback based on the claims filed by it before the concerned authorities. In other words, the assessee, following the mercantile system of accounting, started recognizing and accounting, in its accounts prepared under the Companies Act, for the export incentives at the time when it filed its claims before the concerned authorities. For tax purposes, the assessee, however, continued to adopt cash method of accounting for recognizing cash compensatory support and duty drawback. In the asst. yr. 1989-90, the AO did not accept the aforesaid plea of the assessee and accordingly has since been consistently adding the amount of cash compensatory support and duty drawback to the assessee's income based on the claims made before the concerned authorities. In the assessee's appeal for the asst. yr. 1989-90, this Tribunal dealt with the issue in paras 30-33 of its order, in which the contention of the assessee that it was entitled to follow the cash method of accounting was rejected. However, following the decision of the Delhi Bench of this Tribunal in Gupta Garments v. Asstt. CIT (1995) 52 TTJ (Mad) 574 : (1995) 53 ITD 362 (Mad), the alternative contention raised by the assessee that it was only when the claim made by the assessee was sanctioned by the concerned authority, was accepted and it was held that it was only when the claim made by the assessee was sanctioned by the concerned authority that the assessee's right to receive the cash compensatory support and duty drawback would fructify and resultantly the income would be regarded as accrued only in such a year. The learned Counsel for the assessee submitted that the aforesaid order of this Tribunal should be followed and applied to the case of the assessee to decide the issue under consideration.
6. In reply, the learned Departmental Representative submitted that the decision of the Tribunal in the assessee's own case for asst. yr. 1989-90 was not in conformity with the law laid down by the Hon'ble Punjab & Haryana High Court in CIT v. Punjab Bone Mills affirmed by the Supreme Court in CIT v. Punjab Bone Mills as also the statutory provisions contained in Section 145(2) of the IT Act and the circular issued by the Board in this behalf. The learned Departmental Representative has also filed his written submissions in this behalf in which he has made the following submissions:
(i) The order of this Tribunal in the assessee's own case for asst. yr. 1989-90 should not be followed in view of the decision of Hon'ble Punjab & Haryana High Court in CIT v. Punjab Bone Mills (supra), which has since been affirmed by the Hon'ble Supreme Court in (supra). It is pointed out that the High Court, in the aforesaid case, has dealt with a similar question and held in para 21 of its judgment that income in respect of cash incentive for export would accrue on the date of application filed by the assessee and that neither the date of making of export nor the date of receipt of incentive from the Government would be relevant. He submits that the action of the AO in taxing the cash incentives is in conformity with the aforesaid decision of the High Court, which has since been affirmed by the Hon'ble Supreme Court and hence binding on us.
(ii) The assessee has changed the method of accounting from cash basis to accrual basis for tax purposes only in respect of cash compensatory assistance. As per the amended provisions of Section 145(1), the assessee could choose either the cash or mercantile system and not a hybrid system of accounting. Section 145(1), as amended, requires the assessee to choose either of the aforesaid methods and follow the same in full. The assessee has chosen to follow the mercantile system of accounting and therefore it cannot be allowed to follow cash system of accounting in respect of cash compensatory assistance or other export incentives only.
(iii) Pursuant to the provisions of Section 145(2), the CBDT has prescribed accounting standards by notification originating from F. No. 132/7/95-TPL dt. 25th Jan., 1996. As per para B(9) of the said notification, change in accounting policy is allowable if it is required by statute or change will result in a more appropriate preparation of accounts by the assessee. This rule clearly indicates that reason for the change should be a very good reason at par with "required by statute". Assessee has not given any reason as to how the change in method is more appropriate especially when the Companies Act prescribes another method.
(iv) In its books of account, the assessee is accounting and recognizing the cash compensatory assistance as income on accrual basis as and when the claims are lodged with the authorities while, for the purposes of IT Act, it is following cash system. It is established that books of account for accounting purposes and for income-tax purposes have to be the same. In support of his submissions, he has relied upon the decision in Ahmad Din Alla Ditta v. CIT (1934) 2 ITR 369 (Lahore), Apollo Tyres Ltd. v. CIT (SC), State Bank of Travancore v. CIT , Laxmipat Singhania v. CIT , T.M.M. Madalai Nadai and Co. v. CIT and Motilal Ambaldas v. CIT 1977 CTR (Guj) 165 : (1977) 108 ITR 136 (Guj).
7. In his rejoinder submissions, the learned Counsel for the assessee referred to the decision of the Supreme Court in CIT v. Punjab Bone Mills (supra), relied upon by the learned Departmental Representative and submitted that, in CIT v. Punjab Bone Mills (supra), the Punjab & Haryana High Court had to consider a case where the assessee was accounting for the incentives on a receipt basis and, therefore, had not accounted for the incentives even though they had accrued. The AO took the view that the incentives accrued when the export took place and, therefore brought to tax the amount. The Tribunal however had taken the view that the incentives accrued to the assessee on the date when the claim was made by the assessee to the competent authority. The assessee, in that case, accepted the aforesaid finding of the Tribunal and did not prefer any reference to the High Court. The Revenue in its reference had urged that the cash incentives accrued as and when the export was made and the Tribunal's conclusion was therefore erroneous. It was this contention of the Revenue that was rejected by the High Court with the observation in para 21 of the judgment that the plea put forth by the Revenue that the date of export would give rise to a right in favour of the assessee, does not appear to be appropriate. The learned Counsel for the assessee urged that one would have to read the observations of the High Court to the effect that the right to receive the cash incentives accrued to the assessee on filing the claim in the light of the question that the Court had to consider. He submitted that the aforesaid decision in no way detracted from the correctness of the conclusion arrived at by this Tribunal in its order for the asst. yr. 1989-90 in the assessee's own appeal. Referring to the decision of the Karnataka High Court in CIT v. Kabbur Brothers , relied upon by the learned CIT--Departmental Representative, he submitted that the said decision was also distinguishable. In that case the sales-tax authorities had passed an order holding that the assessee was not liable to pay sales-tax and this order was intimated to the assessee and he was asked to come and take the refund vouchers. The assessee actually received the refund vouchers in the subsequent year. It was in these circumstances that the High Court upheld the contention of the Revenue that as the assessee was following a mercantile system of accounting the refund was liable to be included in the assessee's income in the earlier year. The High Court held that the order of the STO was made on 17th March, 1969 when the assessee became entitled to the refund of the amount. The assessee by merely postponing receipt of the refund could not delay the taxability thereof. This decision in fact would support the assessee more than the Revenue because it brings out that it is only when the authorities concerned, sanction the claim could the income be said to have ' accrued."
8. We have heard the parties and considered their submissions including the authorities referred to by them in their submissions. It is a fact admitted by the assessee that, with effect from asst. yr. 1989-90, it is recognizing and accounting for the cash compensatory support, duty drawback, etc., in its accounts drawn up for the purposes of the Companies Act, at the time of filing the claims before the concerned authorities. On perusal of the computation sheet filed before the AO, it is seen that the assessee has recognized and accounted for duty drawback amounting to Rs. 3,26,29,893 on accrual basis in its books of account. It is therefore clear that the assessee has followed accrual basis and following that basis recorded the export incentives in its books at the time when it lodged the claims for export incentives before the concerned authorities.
9. Section 145(1) provides that the income chargeable under Sections 28 and 56 of the IT Act shall, subject to the provisions of Section 145(2), be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Section 145(2) empowers the Central Government to notify accounting standards to be followed by any class of assessees or in respect of any class of income. Section 145(3) empowers the AO to discard the books of account if he is not satisfied about their correctness or completeness or where the method of accounting provided in Section 145(1) or accounting standards as notified under Section 145(2) have not been regularly followed by the assessee. It is therefore clear that, barring the cases covered by Section 145(2) and (3), the books of account maintained by the assessee are binding on the AO and will therefore form the basis for computation of income. Same logic applies to the assessee and binds him by the entries made in the books unless the assessee can show that the claim made by him is admissible in law notwithstanding the entries made by him in the books. Perusal of Section 145(1) further shows that the assessee has to choose either cash or mercantile system of accounting. He is not permitted to follow hybrid system of accounting any more. In the case before us, the assessee has followed mercantile basis for computation of income and accordingly it has credited the amount of export incentives in its books of account for the year under appeal. The assessee cannot reject its own method of accounting, namely, mercantile, which it has regularly employed in its books of account for computing its income and for disclosing its true state of financial affairs. It is not the case of the assessee that the amount of export incentives brought to tax by the AO has not been included in the books of account regularly maintained by it. Provisions of Section 145(1) are squarely applicable which provide primacy to the method of accounting as also the books of account regularly followed and maintained by the assessee in the day-to-day course of its business.
10. The aforesaid accounting treatment given by the assessee in the accounts maintained under the Companies Act is also in conformity with the accrual system of accounting as statutorily defined in para 6(b) of the Accounting Standards notified [No. 9949 (F. No. 132/7/95-TPL), dt. 25th Jan., 1996] by the Central Government (Central Board of Direct Taxes) in pursuance of the powers conferred upon it by Sub-section (2) of Section 145. The term 'accrual' has been defined in the said para thus : "Accrual refers to the assumption that revenues and costs are accrued, i.e., recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate". The method of accounting regularly followed by the assessee is mercantile, both as a matter of fact and also as a matter of meeting the statutory requirements of the Companies Act. The term "accrual" has now been defined through the accounting standards notified in exercise of the powers conferred by Section 145(2). It is therefore the aforesaid meaning of the term "accrual" which requires to be applied to the case of the assessee. The accounting treatment given by the assessee to the export incentives in the accounts maintained by it is in conformity with the income-tax law and more particularly in conformity with the accounting standards notified by the Government. We therefore confirm the orders of the AO and the CIT(A) in bringing the amount of export incentives to the charge of income-tax on the basis of their accrual as recognized and recorded by the assessee in its books of account.
11. The assessee has placed strong reliance on the decision of this Tribunal in the assessee's own case for asst. yr. 1989-90. That was the case for asst. yr. 1989-90 when accounting standards had not been notified. Now, the accounting standards have been notified w.e.f. asst. yr. 1997-98 in pursuance of the provisions of Section 145(2) and hence we have proceeded to consider and adjudicate upon the issue in the light of the law in force in the assessment year under appeal.
12. In view of the foregoing, the order of the CIT(A) is confirmed. Ground No. 2 is dismissed.
13. Ground No. 3 taken by the assessee reads as under:
3. The learned CIT(A) erred in confirming that 10 per cent of the total receipt be treated as expenditure incurred for earning the technical fees in foreign currency and therefore, deduction under Section 80-0 is to be restricted to 90 per cent of the fees received.
It is submitted that in the facts and circumstances of the case as no expenses were incurred in foreign currency, deduction should be allowed on gross fees received.
14. At the time of hearing, the learned Counsel submitted that the issue under consideration was concluded against the assessee by the decision of the Hon'ble jurisdictional High Court in CIT v. Asian Cable Corporation Ltd. . In this view of the matter, ground No. 3 taken by the assessee is dismissed.
15. Ground No. 4 taken by the assessee reads as under:
4. The learned CIT(A) erred in confirming the action of not allowing deduction claimed under Section 80-IA for new industrial undertaking established for the manufacture of combined cycle power plant and pollution and environmental control plant. In the facts and circumstances of the case, the appellant is entitled to deduction under Section 80-IA for these undertaking and it may be so held now.
Without prejudice, it is submitted that the above be considered as part of project division of and deduction should be allowed for the said division under Section 80-IA of the IT Act.
16. At the time of hearing, the learned Counsel for the assessee submitted that the assessee had claimed deduction in respect of the profits derived by it from its project activity which was rejected by the AO as well as by the CIT(A) for the reasons given by them in their orders for the earlier years. The learned Counsel invited our attention to the order of this Tribunal in assessee's appeal for asst. yr. 1989-90 and, in particular, to paras 57 to 65 thereof by which the claim of the assessee was rejected by this Tribunal. The learned Counsel further submitted, without prejudice to his contention that the aforesaid order of the Tribunal was erroneous, that the issue under consideration should be decided following the aforesaid order of the Tribunal. Since the issue has already been considered and decided by the Tribunal against the assessee and the assessee has given no reason as to why the aforesaid order of the Tribunal should not be followed by us, we see no reason to take a view different from the one taken by this Tribunal in assessee's appeal for asst. yr. 1989-90. Ground No. 4 taken by the assessee is dismissed.
17. Ground No. 5 taken by the assessee reads as under:
5. The learned CIT(A) erred in confirming that the head office expenses are required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction under Section 80-I of the IT Act.
Without prejudice, it is further submitted that the expenditure is allocated on a very higher side and it should be reduced substantially.
18. Briefly stated, the facts of the case are that the assessee had claimed a combined deduction under Sections 80-I and 80-IA of the IT Act in respect of 11 newly established undertakings out of which 7 undertakings were such in respect of which the claim had been made in the past and also allowed by the AO after detailed examination. However, the AO disallowed the claim in the year under consideration on the ground that the aforesaid units were situated within the existing factory buildings. According to him, the deduction is available only to a new entity that comes up on its own and has its own independent existence. On appeal the learned CIT(A) held as under:
10.3 The submissions made by the appellant's representative have been considered. From the assessment order it is clear that the only reason for which the claim was not allowed was that the undertakings were situated in existing buildings. Since each of the preceding assessment years the cases of the appellants were scrutinized, it cannot be said that the said fact was kept by the appellant away from the AO at that point. In the circumstance, though it has to be accepted that the doctrine of res judicata is not applicable in the income-tax proceedings, such rule is subject to limitation that the earlier decision cannot be reopened if the said decision is not arbitrary or perverse and there is no new fact available before the AO warranting reconsideration. Therefore in respect of unit Nos. 1. to 7 in respect of which the claims have also been made in the earlier assessment years the decision of the AO cannot be upheld. The appellant is entitled for deduction of the eligible amounts in respect of the profits derived from these undertakings after the allocation of head office expenses in the ratio of turnover as decided in the earlier years.
(Emphasis, italicised in print, supplied)
19. In support of the aforesaid ground of appeal, the learned Counsel for the assessee submitted that the assessee had claimed deduction under Section 80-IA in respect of the profits derived by it from certain industrial undertakings. According to him, there is no dispute as to the appellant's eligibility for the deduction in respect of the profits derived from these undertakings and the area of dispute is thus restricted to computation of profits eligible for deduction. He explained that the assessee had computed the deduction by determining the profits of each undertaking, the particulars whereof are available at pp. 119 to 123 of the compilation filed by the assessee. According to him, the AO has reduced such profits by allocating the expenditure incurred at the head office to the said units, which is not justified. He submits that Section 80-IA permits a deduction in respect of the "profits derived from the undertaking" and that the law is now well settled that when the legislature uses the phraseology "derived from" the receipt must have a direct and proximate nexus with the undertaking : CIT v. Sterling Foods . He contended that although the said judgment of the Supreme Court was in the context of an item of receipt the principle laid down therein would be equally applicable to an item of expenditure and hence, it was only that expenditure, which had a direct and proximate nexus with the earning of the profit that could be taken into consideration in determining such profits. He argued that the expenditure incurred at the head office would have no such nexus. In this regard, he placed reliance on a ruling of the Authority for Advance Ruling in National Fertilizers Ltd., In re (2005) 193 CTR (AAR) 498 : (2005) 142 Taxman 5 (AAR) wherein, in para 10 of the order, the Authority has observed "therefore the income and expenditure transferred by the corporate office and the marketing office to Vijaypur unit ignored the fact that for the purpose of claiming the exemption under Section 80-1, it is only income derived from the industrial undertaking that has to be reckoned in computation as such the income and expenditure which are not directly relatable to Vijaypur unit cannot but be ignored. In view of this position, the expenditure allocated by the corporate office and the marketing division ought to have been excluded from the debit side of the P&L a/c for working out the profits of industrial undertaking for the purpose of computing the said deduction under Section 80-1...."
20. The learned Counsel further submitted that the expenditure that was incurred at the head office had no nexus with the earning of the profits of the respective divisions. The expenditure at the head office would be in respect of the share Department, the secretarial Department, the finance Department, human resources, etc., (the respective divisions had their own finance Department) and hence they would not be relevant in determining the profits of the units that are eligible for a deduction under Section 80-IA. In this regard he placed reliance on para 28 of the unreported order dt. 28th May, 2002 of the Chennai Bench of this Tribunal in Ponds (India) Ltd. v. IAC ITA No. 2047/Mad/1988 for asst. yr. 1984-85 wherein the issue has been dealt with in para 28 as well as an order dt. 15th July, 1994 of the Pune Bench of this Tribunal in Vanaz Engineers Ltd. v. ITO 20 BCAJ 232 and a recent order dt. 24th Feb., 2006 of the Mumbai Bench of this Tribunal in Wockhardt Ltd. v. Asstt. CIT ITA No. 3991/Mum/2005 wherein the issue has been dealt with in para 14. He invited our attention to the decision of the Hon'ble Calcutta High Court in CIT v. Jiyajeerao Cotton Mills Ltd. (1995) 79 Taxman 51 (Cal) in which it has been held that the commission paid to the managing agent could not be apportioned to determine the profits of the unit eligible for the deduction under Section 80E (which used the expression "attributable to") and the ratio of this decision would apply with equal force to the expenditure incurred at the head office.
21. In reply, the learned Departmental Representative submitted that it was trite law that, to compute the profit derived, all deductions under Sections 29 to 43A would have to be deducted. In this connection, he referred to the decision in Cambay Electric Supply Industrial Co. v. CIT , Indian Rayon Corporation Ltd. v. CIT the decision of a Special Bench of this Tribunal in Vahid Paper Converter v. ITO (2006) 100 TTJ (Ahd)(SB) 532 : (2006) 98 ITD 165 (Ahd)(SB). According to him, all the expenses including head office expenses would have to be deducted to arrive at the correct profits eligible for deduction. He invited our attention to the decision of this Tribunal in Dy. CIT v. Eastern Medikit Ltd. (2006) 100 TTJ (Del) 382 : (2006) 153 Taxman 48 (Del)(Mag) in which it has been held that head office expenses would have to be allocated to each unit for determining profit derived for the purposes of Section 80-IA, unless there were compelling reasons to exclude specific items of expenses. According to him, the assessee has not given any compelling or special reasons for not apportioning the head office expenses to new units.
22. His next argument was that the IT Act always recognized allocation of head office expenses to compute the profits correctly. In this connection he referred to the provisions of Section 44C. According to him, head office expenses were always allowed for computing income of Indian branch, when head office was located out of India and one branch was in India. He referred to the decision in Grindlays Bank Ltd. v. ITO which pertained to asst. yr. 1959-60 in which head office expenses were allowed by the AO and all other higher forums (dispute was on quantum/reopening). When Section 44C was introduced to regulate quantum of head office expenses, CBDT issued Circular No. 202, dt. 5th July, 1976 recognising deduction of head office expenses as under:
Ceiling limit in respect of head office expenses in the case of non-residents-New Section 44C.
25.1 Non-residents carrying on any business or profession in India through their branches are entitled to a deduction, in computing the taxable profits, in respect of general administrative expenses incurred by the foreign head offices insofar as such expenses can be related to their business or profession in India. It is extremely difficult to scrutinise and verify claims in respect of such expenses, particularly in the absence of account books of the head office, which are kept outside India. Foreign companies operating through branches in India sometimes try to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. With a view to getting over these difficulties, the Finance Act has inserted a new Section 44C in the IT Act laying down certain ceiling limits for the deduction of head office expenses in computing the taxable profits in the case of non-resident taxpayers.
23. Clearly, the head office expenses, according to the learned CIT (Departmental Representative), have to be allocated to new units and, in the absence of specific details; apportionment is required to be made on a reasonable basis. He contended that consolidated receipts and expenses have always been considered apportionable on some rational basis. In this connection, he referred to the following decisions:
(i) Continental Construction Ltd. v. CIT for the proposition that for purposes of income-tax, the principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the contexts : (a) of the capital and revenue constituents comprised in receipts; (b) of portions of expenditure attributable to business and non-business purposes; (c) of places of accrual or arisal; and (d) of agricultural and non-agricultural elements in such receipts or payments.
(ii) Hukam Chand Mills Ltd. v. CIT for the proposition that, in the absence of some statutory or other fixed formula, any finding on the question of proportion involves some element of guesswork. The endeavour can only be to be approximate and there cannot, in the very nature of things, be great precision and exactness in the matter. As long as the proportion fixed by the Tribunal is based upon the relevant material, it should not be disturbed.
(iii) CIT v. Anniversary Investments Agencies Ltd. .
(iv) Neyveli Lignite Corporation Ltd. v. State of Tamil Nadu (1992) 193 ITR 685 (Mad) for the proposition that, with a view to claim deduction, it was essential for the assessee to establish that the staff was employed and deployed exclusively for the agricultural activity and since it failed to establish that by producing any material or-evidence, the statutory authorities had the option either to reject the claim in toto or to do substantial justice and arrive at an estimate and they fairly adopted the latter course.
(v) CIT v. National and Grindlays Bank Ltd. : The question of allocation of expenditure may arise when different activities do not constitute one and the same business and income from some of the activities is not taxable. In such a case, composite business expenditure has to be allocated to each one of the activities.
(vi) Kota Co-operative Marketing Society Ltd. v. CIT : If a co-operative society is carrying on a business and earning income a part of which is exempted and part of which is not exempted, the profits and gains attributable to the exempted activity has to be arrived at on the basis of the books of account maintained by the assessee. If separate sets of books or separate accounts of expenditure have been maintained for the exempted and non-exempted activities, there is no problem. If separate books of account have not been maintained and expenses have been incurred jointly for earning both the incomes, then such expenses have to be estimated by the ITO which are relatable to earn the non-exempted activities in order to arrive at the true and correct income.
24. The learned Departmental Representative further submitted that various provisions of the IT Act always preferred apportionment on turnover basis, e.g., Sections 80HHC, 80HHD(3), Rule 10, Section 80HHE(3A). The CIT(A) has Mowed turnover method and his bona fide estimate in the matter of apportionment of expenditure should therefore be approved. In this connection he referred to the decisions in CIT v. Rayala Corporation (P) Ltd. , Ganga Ram Balmokand v. CIT (1937) 5 ITR 464 (Lahore), CST v. H.M. Esufali H.M. Abdulali and Consolidated Coffee Ltd. v. State of Karnataka for the proposition that if the basis adopted to hold to be a relevant basis even though the Courts may think that it is not the most appropriate basis, the estimate made by the assessing authority cannot be disturbed.
25. We have heard both the parties and considered their submissions including the authorities referred to by them in their submissions. Let us first have a look at the relevant facts. The head office maintained by the assessee is essentially a cost centre in that it incurs expenditure for providing the facilities and services, which are common to all the units. The head office does not exist for its own sake. Its existence is relevant for all the activities undertaken by various divisions, units and profit centres. The very existence of the divisions, units and profit centres will be in jeopardy if there is no head-office. The head office in a company is somewhat akin to the head in a human body. It acts like an engine for all the units. The individual units, on the other hand, are profit centres or centres of business/industrial activity. The short question is whether head office expenses which are in the nature of common expenses are required to be allocated to different units or undertakings and more particularly to the undertakings claiming deduction under Section 80-IA of the IT Act in respect of the profits derived from those undertakings.
26. Section 14 of the IT Act classifies all income into five heads for the purpose of creating charge to income-tax and computation of total income. The term "total income" has been defined in Section 2(45) of the IT Act, to mean "the total amount of income referred to in Section 5, computed in the manner laid down in this Act". Sections 15 to 59 of the IT Act lay down the rules for computing income for the purpose of chargeability to tax under specified heads. It is therefore clear that computation of income under a given head will require accounting of not only the receipts but also of the expenses relating thereto. In other words, the expenses relating to a given head must be considered under that head only so as to arrive at the net income under that head. Likewise the income (i) may be chargeable to tax; and (ii) may not be chargeable to tax because of exemptions and deductions available under the IT Act. In order to work out profits correctly in respect of both exempted income and non-exempted income, it is necessary that all the expenses relating thereto are correctly identified, allocated and charged against each of them otherwise it will lead to distorted figures of exempted and non-exempted income. If the expenses relating to the income not chargeable to tax are not considered for determining the net income not chargeable to tax, the effect would be that the income not chargeable to tax would stand inflated while the income chargeable to tax would stand deflated. This is against the basic principles of taxation where under only the net income, i.e., gross income minus the cost/expenditure, is taxed. On this analogy the computation of profits eligible for deduction under Section 80-IA should also be in respect of the net profits. Expenses incurred, whether direct or indirect, must therefore be taken into account to determine the profits derived from the industrial undertaking. In CIT v. British Paints India Ltd. , the Hon'ble Supreme Court, in the context of stock valuation on cost price, has held : "Any system of accounting which excludes, for the valuation of the stock-in-trade, all costs other than the cost of raw materials for the goods-in-process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income."
27. It is not in dispute in the case before us that the assessee has a number of undertakings, which are independent of each other. It is on this ground that the assessee claims that common expenses namely head office expenses should not be allocated to the individual undertakings, as they are independent from each other. Let us consider the result if the submission made by the learned Counsel is accepted. The result would be that the non-allocation of head office expenses to individual undertakings eligible for deduction under Chapter VIA will lead to inflation of profits of such industrial undertakings for claiming deduction and, at the same time, it would lead to deflation of income chargeable to tax as the entire head office expenses will have to be adjusted against the profits chargeable to tax. This approach, in our view, defeats the basic principle of taxation whereby only the net income i.e. gross income minus the expenditure is required to be taxed. The head office expenses are, therefore, required to be allocated on pro rata basis between various undertakings, which according to the assessee are independent of each other.
28. In taking the aforesaid view, we are supported by a decision of the Hon'ble Supreme Court in Waterfall Estates Ltd. v. CIT (SC). In that case also the issue involved was whether managing agency commission, which was common to various sources of income, some of which were taxable and some non-taxable, should be allocated to the respective sources of income. In that case the Hon'ble Supreme Court upheld the order of the Tribunal and the High Court allocating common expenses namely management agency commission against the sources of income chargeable to tax as also to those not chargeable to tax. In the context of allocation of head office expenses to an industrial undertaking eligible for deduction under Section 80-IA, the Delhi Bench of this Tribunal has already held in Dy. CIT v. Eastern Medikit Ltd. (supra) that head office expenses have to be allocated to each unit for determining the profits eligible for deduction under Section 80-IA. Similar principle emerges on a reading of the judgments in Kota Cooperative Marketing Society Ltd. v. CIT (supra), Asstt. CIT v. Kanchanganga Seeds Co. (P) Ltd. (2002) 75 TTJ (Hyd) 520 : (2002) 81 ITD 152 (Hyd), CIT v. United General Trust Ltd. , Consolidated Coffee Ltd. v. State of Karnataka (supra) and Continental Construction Ltd. v. CIT (supra).
29. The case of the assessee, however, is that the subject-matter of deduction under Section 80-IA is the profits derived from the business of industrial undertakings and hence it is only that expenditure which is directly attributable to the earning of the said profits that can be the subject-matter of deduction for computing the aforesaid profits and not head office expenses. We are unable to agree with the aforesaid submission for two reasons. First reason is that it is the profit derived by the assessee from the business of industrial undertaking, which has been made eligible for deduction under Section 80-IA and not any other profit. Second reason is that the computation of profits eligible for deduction under Section 80-IA has to be done in accordance with the provisions of Sections 28 to 43. Perusal of the aforesaid provisions reveals that all those expenses, which are incurred for the purposes of the business of the industrial undertaking, are to be allowed while computing the business profit. It cannot be said that head office expenses or common expenses are not incurred or are uncommon for the purposes of the business of the industrial undertaking. What is now required to be computed is the profits derived from the business of industrial undertaking. Therefore, there is no warrant for the proposition that only those expenses, which are directly attributable to earning of profits derived from the business of industrial undertaking alone should be considered. As already stated above the profits eligible for deduction under Section 80-IA are net profits derived from the industrial undertaking and therefore they will have to be netted after adjusting all the expenses attributable to them in terms of the provisions contained in Sections 28 to 43 of the IT Act. Therefore all expenses, whether they are direct or indirect or fixed, semi-fixed or variable, must be adjusted to determine the profits derived from the industrial undertaking. Of course, any component of head office expenses, which has been incurred exclusively for the purposes of the business of any particular unit/undertaking/division will have to be adjusted against the receipts of that particular unit/undertaking/division only. Similarly, head office expenses or expenses which are common to all the units/undertakings/divisions expenses will have to be spread over and charged against the receipts of all the units/undertakings/divisions. If this course is not followed, then what would stand allowed under Section 80-IA would be inflated profits and not the net profits derived from the industrial undertaking in terms of the provisions of Sections 29 to 43. In this view of the matter and also in the absence of any better alternative, the CIT(A) is justified in holding that the assessee is entitled to deduction of the eligible amounts in respect of the profits derived from the eligible undertakings after the allocation of head office expenses in the ratio of turnover. We see no valid reason to take a view contrary to the one taken by the.CIT(A) in this behalf. Ground No. 5 is dismissed.
30. Ground No. 6 taken by the assessee reads as under:
6. The learned CIT(A) erred in confirming disallowance of Rs. 95,50,940 being gratuity debited to P&L a/c and outstanding as on 31st March, 1996 but paid before filing the return. Your appellant has an approved fund and contribution is made based on valuation. As the amount was paid before filing the return, the same should be allowed as deduction under Section 43B.
31. Briefly stated, the facts relating to the aforesaid ground are that the assessee has formulated an employees' gratuity fund, which is duly approved by the CIT. The assessee claimed deduction for incremental liability towards payment of gratuity amounting to Rs. 95,50,940 relating to the year under appeal. The aforesaid amount was admittedly paid over to the said fund after the end of the previous year relevant to the assessment year under appeal but before the due date prescribed for filing the return, on different dates from April, 1997 to November, 1997. The AO examined the claim of the assessee but disallowed it on the ground that it was paid over to the fund after the end of the relevant previous year and thus hit by Section 43B. On appeal, the learned CIT(A) upheld the impugned disallowance. He perused the scheme of the gratuity fund and found that no date was specified for payment of annual contribution by the assessee to the fund and therefore took the view that deduction could be allowed under Section 36(1)(v) r/w Section 43B only if the amount was paid over to the fund before the end of the accounting year. Aggrieved by the aforesaid order of the learned CIT(A), the assessee is now in appeal before this Tribunal.
32. In support of the aforesaid ground, the learned Counsel submitted that the disallowance made by the AO and sustained by the CIT(A) is not in accordance with law. According to him, the assessee's liability for contribution to the gratuity fund for the year ended 31st March, 1997 was Rs. 95,50,940 which was paid over to the fund after the end of the relevant previous year but before filing of the return of total income. He submits that Section 43B, inter alia, provides that notwithstanding anything contained in any other provision of the Act a deduction otherwise allowable in respect of any sum payable by the assessee as an employer by way of contribution to a gratuity fund shall be allowed (irrespective of the previous year in which the liability to pay such sum so incurred by the assessee according to the method of accounting regularly employed by him) in computing the income referred to in Section 28 of the previous year in which such sum is actually paid by him. It is submitted that in accordance with the rules governing the gratuity fund, the amount of Rs. 95,50,940, although it represented a liability for the year ended 31st March, 1997, was not "a sum payable" as on the last date of the accounting year and hence the provisions of Section 43B would have no application. In this regard, he has placed reliance on the ratio of the judgment of the Andhra Pradesh High Court in Srikakollu Subba Rao and Co. v. Union of India and Ors. wherein it has been held that, in order to apply the provisions of Section 43B, not only should the liability to pay the tax or duty be incurred in the accounting year but the amount should also be statutorily payable in the accounting year. According to him, the legislature has set at naught the ratio of the aforesaid decision by inserting Expln. 2 below Section 43B, which clarifies that it is only for the purposes of Clause (a) that "any sum payable" means the sum for which the assessee has incurred the liability in the previous year even though such sum might not have been payable within that year under the relevant law. He points out that the contribution to the gratuity fund is covered by Clause (b) of Section 43B and, therefore, Expln. 2 would have no application.
33. His next contention was that even if it be assumed for a moment that the provisions of Section 43B are applicable, then, by virtue of the amendments brought about by the Finance Act, 2003, the deduction for Rs. 95,50,940 ought to be allowed inasmuch the Special Bench of this Tribunal in Kwality Milk Foods Ltd. v. Asstt. CIT (2006) 102 TTJ (Chennai)(SB) 1 : (2006) 100 ITD 199 (Chennai)(SB) has taken the view that the deletion of the second proviso and the amendment to the first proviso by the aforesaid Finance Act are clarificatory in nature and would have retrospective effect. He further submits that even assuming that one would have regard to the second proviso as it stood prior to its omission, nevertheless, the same would have no application as the second proviso required that the payment had to be made before the due date as defined in the Explanation below Clause (va) of Section 36(1) according to which the expression "due date" means the date by which the assessee is required, as an employer, to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule or notification issued thereunder. He submits that as the employees do not make any contribution to the gratuity fund, the question of there being a due date does not arise and hence the question of making a disallowance by relying on the second proviso does not arise.
34. Without prejudice to the aforesaid submissions also, he submits that even if one assumes that the second proviso applies and the due date for making the employer's contribution is to be gathered having regard to the rules of the gratuity fund, then also the said rules provide that the company shall pay to the trustees in respect of each member annually at the end of the financial year or soon thereafter. According to him, the liability of the assessee for contribution to the gratuity fund has to be ascertained on an actuarial basis. He contends that the payment has been made soon after the ascertainment of such liability and, therefore, the requirement of the rule should also be regarded as complied with. In the circumstances it is submitted that the CIT(A) was not justified in confirming the disallowance.
35. In reply, the learned Departmental Representative submitted that the Rajasthan High Court in CIT v. Udaipur Distillery Co. Ltd. (2004) 187 CTR (Raj) 369 : (2004) 137 Taxman 201 (Raj) has held that first proviso to Section 43B relieved the hardship by making liberalized exception to the general provision about sums falling in Clauses (a), (c), (d) and (e) of Section 43B, which have been incurred during the concerned previous year and has been paid before filing the return for relevant assessment year within time allowed under Section 139 and return is accompanied by proof of such payments but this does not apply to the provisions of Section 4333(b) requiring actual payment within the previous year itself for claiming the deduction in respect of sums referred to in Clause (b) only if they were paid as and when they become due to be paid, under relevant statute or settlement, etc.
36. Referring to the facts of the present, case, he submitted that the assessee company was required to pay to the gratuity fund by the end of the financial year or soon thereafter. According to him, payment made after 8-9 months of the end of the financial year could not be said to have been made 'soon thereafter' when time frame itself is of 12 months. He contended that 'soon' would mean within a reasonable time after the end of the financial year and that the interval should not be much : p. 1787 of P. Ramanatha Aiyer's Law Lexicon--Reprint 2002 Edition.
37. We have heard both the parties. The assessee company has formulated an employees' gratuity fund operative from 1st May, 1975 for the benefit of the employees in the service of the assessee company who are entitled to payment of gratuity under the Payment of Gratuity Act, 1972 and/or under the terms and conditions of their service. Clause 4 of the rules governing the said fund provides for the scale of ordinary annual contribution, initial contribution, and additional contributions etc., to be made by the assessee as employer to the said fund. According to Clause 4 of the rules governing the said fund, the assessee is liable to pay the contributions in respect of each eligible employee annually at the end of each financial year or soon thereafter, to the trustees of the fund. It is further provided that the quantum of contribution shall be determined on the basis of gratuity liability that would be ascertained through actuarial valuation. From the aforesaid discussion three facts clearly emerge : (i) the contribution to the employees gratuity fund was required to be made by the assessee as an employer and hence the case of the assessee would fall under Section 36(1)(v) r/w Section 43B(b) of the IT Act; (ii) the liability of the employer to pay the impugned sum arose, according to the assessee, upon actuarial valuation carried out after the end of the financial year; and (iii) the amount of contribution was not only ascertained after the end of the previous year but also that it was paid after the end of the financial year.
38. Section 36(1)(v) provides for the deduction of any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. Section 43(2) defines the term 'paid' as actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession". The assessee follows mercantile system of accounting. It is the case of the assessee that the liability to pay was incurred upon actuarial valuation carried out after the end of the previous year and hence the amount in question could not be paid during the previous year relevant to the assessment year under appeal. It is the case of the assessee that the provisions of Section 43B are not attracted in its case as the impugned amount was not payable in the year under appeal. If that is so, the assessee, in our view, would not be entitled to claim deduction under Section 36(1)(v) itself in the year under appeal as the amount in question was not payable. However, if the case of the assessee is that it was payable in the year under appeal, it would, in that case also, be hit by Section 43B of the IT Act which, inter alia, provides that deduction for any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees shall be allowed, irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him, in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him. Section 43B thus bars the deduction otherwise allowable unless it is actually paid by the assessee in the previous year in which the deduction is claimed. The claim of the assessee for deduction is thus hit by Section 36(1)(v) as the impugned liability was not incurred, according to the assessee itself, during the year under appeal as also by Section 43B as the amount in question was not paid. The order of the learned CIT(A) therefore deserves to be confirmed which is accordingly confirmed.
39. Learned Counsel for the assessee has referred to the decision of a Special Bench of this Tribunal at Chennai in Kwality Milk Foods Ltd. v. Asstt. CIT (supra) wherein it was held that the deletion of the second proviso and the amendment to the first proviso to Section 43B by the Finance Act, 2003 were clarificatory in nature and would have retrospective effect. In CIT v. Synergy Financial Exchange Ltd. (2006) 205 CTR (Mad) 481, the Madras High Court has held that omission of second proviso to Section 43B by the Finance Act, 2003 has no retrospective operation so as to make it applicable to the earlier period. In this view of the matter, the order of Hon'ble Madras High Court will prevail over the order of the Special Bench of this Tribunal at Madras.
40. Learned Counsel for the assessee, however, has made an alternative submission that the AO should be directed to consider the claim of the assessee for deduction in the year in which payment has been made if this Tribunal is inclined to confirm the disallowance made by the CIT(A). We have already endorsed the order of the CIT(A) confirming the impugned disallowance. The assessee may if it is so advised take up the matter with the AO for seeking deduction in the year of actual payment upon which the AO shall consider the claim on merits and allow the same if requisite conditions in this behalf are satisfied. Ground No. 6 is dismissed with the aforesaid observations.
41. Ground Nos. 7 and 8 taken by the assessee read as under:
7. The learned CIT(A) erred in holding that while arriving at business income for the purpose of deduction under Section 80HHC various deductions made by AO are as per the provisions of Section 80HHC. It is submitted that various deductions made from the business income are not as per the provisions of Section 80HHC and it may be so held now.
8. The learned CIT(A) erred in holding that while arriving at business income for the purpose of deduction under Section 80HHE various deductions made by AO are as per the provisions of Section 80HHE. It is submitted that various deductions made from the business income are not as per the provisions of Section 80HHE and it may be so held now.
42. Briefly stated, the facts of the case are that the assessee has claimed a deduction for Rs. 1,37,58,241 under Section 80HHC of the IT Act. For the reasons given in para 15 of the assessment order, the AO has restricted the deduction to Rs. 1,08,76,244. One of the reasons for reduction in the eligible amount of deduction under Section 80HHC is the action of the AO in excluding 90 per cent of the receipts by way of the interest income, rental income, commission income and sundry income while computing the business profits under Sub-clause (i) of Clause (baa) of the Explanation to Section 80HHC. On appeal, the learned CIT(A) has confirmed the action of the AO in this behalf with the following observations:
14.2 In respect of the second area, the appellant's representative has submitted that the AO was not justified in excluding 90 per cent of the receipts by way of interest income, rental income, commission income and sundry income in the computation of business profits. It was further submitted that the sundry income represents an insurance claim received and hence should not be held as covered under Sub-clause (i) of Clause (baa) of the Explanation below Section 80HHC.
14.3 The submissions made have been considered. In this regard, on the issue of applicability of Clause (baa) to the Explanation it has been noticed that in the case of CIT v. K.K. Doshi and Co. , it has been held that the combined meaning of Clases (b) and (ba) of the Explanation to Section 80HHC shows that the business profit in the above formula shall not include receipt by way of brokerage, interest, rent charges or any other receipt of similar nature as these do not have any nexus with the sale proceeds from export activities.
14.4 Further, the explanatory memorandum to the Finance (No. 2) Bill, 1991 explaining the reason for inserting of Clause (baa) of the Explanation reads as under:
Receipt like interest, commission etc. which do not have an element of turnover are included in the P&L a/c. It is, therefore, proposed to clarify that the profits of the business was for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest rent charges or any other receipt of similar nature.
14.5 Further, in respect of the items of receipts to be excluded from the business profits under Clause (baa) of the Explanation to Section 80HHC, the observation made in the decision in the case of CIT v. Kantilal Chhotalal is also relevant. The Hon'ble Court has taken into account the fact that prior to the amendment incorporating the said Clause (baa), the formula provided, distorted the export profits when receipts like interest, commission etc., were included in the business profits. The Court observed that to clarify the meaning of business profits for the purposes of Section 80HHC, the legislature by the amendment had excluded the above items from the business profits in the formula. Hence, the legislature have clarified that receipts like interest, commission etc., have no nexus with the export activity and by including such receipts in the business profits the then existing formula became unworkable. Hence by amendment, such receipts were excluded. A reading of Clauses (b) and (ba) of the Explanation clearly indicates that the legislature has brought at par the components of export turnover and sales turnover. Both the numerator and the denominator show that they refer to sale proceeds. Any receipt which does not form part of the sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that proration applies to business profits in order to work out the export profits. Further, the exclusion provided under Clause (ba) to the Explanation further establish that the legislature clearly intended to exclude all receipts which have no nexus with the sale proceeds from the export activity.
14.6 In view of the above, as far as this area relating to computation of deduction under Section 80HHC is concerned, the action of the AO to hold the receipts as falling under Clause (baa) of the Explanation is as per law and hence is sustained.
43. Aggrieved by the aforesaid order, the assessee is now in appeal before this Tribunal.
44. In support of the aforesaid ground, the learned Counsel for the assessee submitted that the assessee had claimed a deduction under Section 80HHC of Rs. 1,37,58,241, which has however been restricted by the AO to the extent of Rs. 1,08,76,244 and therefore the issue that arises in the present ground is whether the AO is justified in determining "the profits of the business" by excluding there from 90 per cent of the interest income, rental income, commission income and sundry income. As regards the interest income and the rental income, it is submitted that it is only the net income that has to be reduced having regard to the decision of a Special Bench of this Tribunal in Lalsons Enterprises v. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048 : (2004) 89 ITD 25 (Del)(SB). As regards the view of the Department that the decision of the Special Bench in Lalsons ought not to be followed in view of the judgments of the Punjab & Haryana High Court in Rani Paliwal v. CIT as well as of the Madras High Court in CIT v. V. Chinnapandi he submits that both the aforesaid judgments have been considered by the Bombay Bench of this Tribunal in Rama Exports bearing ITA No. 3859/Bom/2003 in which this Tribunal by its order dt. 7th June, 2006 has held that it is only the net income which has to be reduced. Hence, following the said decision, the learned Counsel for the assessee urges that a direction should be given to the Department to exclude net interest alone from the profits of the business. As regards the exclusion of 90 per cent of Rs. 2,10,03,810 on the ground that it was commission receipt, the learned Counsel submits that it is not a receipt by way of commission but is a receipt for rendering certain technical services. According to him, the AO has wrongly proceeded on the basis that the aforesaid receipt is by way of commission. In this connection, he took us through Schedule 13 to the P&L a/c (p. 102 of the compilation submitted by the assessee) and submitted that bare perusal of the said schedule made it clear that the amount in question represented receipt for rendering technical services. He referred to the unreported decision of Bangalore Bench of this Tribunal in Motor Industries Co. Ltd. v. Dy. CIT ITA Nos. 397-99/Bang/1998 in which it has been held that a receipt for rendering technical services does not fall within the scope of the exclusion contemplated by Clause (baa) of the Explanation below Section 80HHC and submitted that, in view of the said decision, the conclusion of the AO cannot be sustained. Even the learned Departmental Representative was fair enough to concede this position but his alternative contention was that the assessee, after the said exclusion, would still be left with the actual commission receipt of Rs. 39,09,286 as is apparent from p. 125 of the assessee's compilation and hence 90 per cent of the same should be excluded from the profits of the business under Expln. (baa) to Section 80HHC to which the learned Counsel replied by contending that it would only be the net amount of commission that would be excluded following the principle laid down in Lalson's case. As regards the issue whether the AO is justified in reducing the profits of the business by a sum of Rs. 1,02,28,161 being the sundry income, the learned Counsel took us through the details at p. 125 of his compilation and submitted that the amount was received from the insurance company towards indemnification of the loss suffered by the assessee and hence could not be regarded as a receipt of a nature similar to interest, rent, commission or brokerage as is contemplated in Clause (baa) of the Explanation. In this regard, he placed reliance on the decision of the Ahmedabad Bench of this Tribunal in Gujarat Alkalies & Chemicals Ltd. v. Dy. CIT (2002) 77 TTJ (Ahd) 245 : (2002) 82 ITD 135 (Ahd) at 157 as well as the decision of the Chennai Bench of this Tribunal in Kadri Mills (CBE) Ltd. v. Jt. CIT (2002) 76 TTJ (Chennai) 38. The learned Counsel therefore submitted that both the AO and the CIT(A) were not justified in the view that they have taken in the matter.
45. Per contra, the learned Departmental Representative submitted that the main claim of assessee was that, following the order of the Special Bench in Lalsons (supra), it was only 90 per cent of the net amount which should be considered for exclusion from the profits of the business. According to him, the issue has since been decided in favour of the Revenue in K.S. Subbiah Pillai and Co. (India) (P) Ltd. v. CIT , Rani Paliwal (supra), CIT v. Chinnapandi (supra) and CIT v. Liberty Footwear Co. (P&H) and hence the view taken by the High Courts should be preferred over the view taken by the Special Bench and other Benches of this Tribunal in the matter in view of the decisions of Hon'ble Bombay High Court in CIT v. Smt. Nirmalabai K. Darekar (1990) 186 ITR 242 and CIT v. Smt. Godavaridevi Saraf wherein it has been held that the Tribunal acting anywhere in the country was obliged to respect the law laid down by the High Court, though of a different State, so long as there was no contrary decision of any other High Court on the question. Learned Departmental Representative further submitted, it was not in dispute that no High Court has taken a view contrary to the one taken by Madras and Punjab & Haryana High Courts in the cases cited above and hence the view so taken by them should be followed. Our attention has also been drawn to the decision in CIT v. Abhishek Industries Ltd. in which it has been held that it is the duty of the Tribunal being the final fact finding authority to decide the cases after recording complete facts and assigning cogent reasons on the basis of the law laid down by the Supreme Court/High Court and not what the Tribunal itself decides on a particular issue and that every effort must be made by the Tribunal to decide the issue by taking help from the decisions of the Supreme Court and if there is no direct authority of the Supreme Court on the point then of the jurisdictional High Court and lastly of any other High Court. He submitted that judicial discipline requires that the view taken by a superior judicial body, i.e., Supreme Court or High Court in matters of law should be preferred over the view taken by the Tribunal in a given case. His alternative submission was that even otherwise the decision in Lalsons case (supra) was on net interest as it was based upon a judgment of the Supreme Court regarding netting of interest to partners under Section 40 and hence it cannot be extended to rent, commission, etc., especially when two High Courts are against the decision in Lalsons (supra).
46. We have heard the parties and considered their submissions including the authorities referred to by them in their submissions. According to Expln. (baa) to Section 80HHC, "Profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced, inter alia, by 90 per cent of any sum referred to in els. (iiia), (iiib) and (iiid) of Section 28 or any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits. Bare perusal of the aforesaid Explanation shows that the profits of the business would mean only those items, which are subject-matter of computation under Section 28 of the IT Act under the head "Profits and gains of business or profession". Any receipt, which is not in the nature of income from business or assessable as profits and gains of business or profession under Section 28 of the IT Act, will clearly fall outside the scope of Clause (baa) to Explanation to Section 80HHC of the IT Act. The profit so computed under Section 28 is required to be reduced, inter alia, by 90 per cent of any sum referred to in Section 28(iiia) and (iiib) or any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. In para 14.4 of his order, the learned CIT(A) has referred to the Explanatory Memorandum to the Finance (No. 2) Bill, 1991 explaining the reasons for insertion of Clause (baa) of the Explanation. According to the said memorandum, receipts like interest, commission etc. which do not have an element of turnover are also included in the P&L a/c and therefore the Government thought it appropriate to clarify through the aforesaid Explanation that the profits of the business for the purposes of Section 80HHC would not include receipts by way of brokerage, commission, interest, rent charges or any other receipt of similar nature. In other words, the Explanation maintains a clear distinction between operational business income and non-operational business income. What is included in the turnover is treated as operational business income and what is not included in the turnover like brokerage, commission, interest, rent etc. is treated as non-operational business income. It is 90 per cent of the receipts constituting non-operational business income, which is required to be deducted in terms of Expln. (baa) from the profits of the business. The aforesaid view is also supported by the decision of the Hon'ble jurisdictional High Court in CIT v. Bangalore Clothing Co. in which the Hon'ble High Court has held that the phrase "profits of the business" for the purpose of Section 80HHC, does not include receipts which do not have an element of turnover like rent, commission, interest etc. The Hon'ble High Court has further observed that as "some expenditure might be incurred in earning such income, an ad hoc 10 per cent deduction from such income is provided for, to account for those expenses". The Hon'ble High Court has thus drawn a clear distinction between operational business income as meaning that business income, which has an element of turnover and non-operational business income, which does not have an element of turnover. Learned CIT(A) has recorded a categorical finding that the items, like interest, rent, commission are not included in the turnover. He therefore treated them as non-operational income falling under Sub-clause (1) of Clause (baa) of Explanation to Section 80HHC. In our opinion, learned CIT(A) is right in his observation that the "profits of the business" is required to be reduced by 90 per cent of the interest, rent, and sundry income as all these items of income have been held by the learned CIT(A) to be in the nature of non-operational income. The decision taken by the learned CIT(A) is broadly in conformity with the decision of the Hon'ble jurisdictional High Court in Bangalore Clothing Co. (supra).
47. It is, however, contended by the assessee that it is 90 per cent of the net amount of interest income, rental income, commission income and sundry income, which can be considered for reduction from the profits of the business. The learned Counsel for the assessee has relied upon the decision of a Special Bench of this Tribunal in Lalsons Enterprises (supra) in which a view has been taken that "it is only the 90 per cent of the net interest remaining after allowing a set off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest". Since the aforesaid decision of the Special Bench has been followed in a large number of cases decided by various Benches of this Tribunal at Mumbai, we see no reason to take a view different from the one taken by the Special Bench in Lalsons Enterprises (supra). This is more so when we are also persuaded by the reasoning given by the Special Bench for coming to the aforesaid conclusion. In this view of the matter, we restore the issue with regard to netting off interest income to the file of the AO with the direction to re-examine the issue and decide it afresh in the light of the decision in Lalsons (supra) that it is only 90 per cent of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest. The burden shall be on the assessee to establish the requisite nexus to the satisfaction of the AO in terms of the aforesaid principle laid down in Lalsons (supra) and it is only then that the AO shall reduce 90 per cent of the net interest remaining after allowing a set-off of interest paid, which has a nexus with the interest received, from the profits of the business. If the assessee fails to establish the requisite nexus in terms of the aforesaid directions, the AO shall be free to reduce 90 per cent of the interest from the profits of the business.
48. As regards the claim of the assessee for netting rental income, commission income and sundry income, the decision of Hon'ble Bombay High Court in Bangalore Clothing Co. (supra) is quite relevant in which it has been held that ad hoc 10 per cent deduction from non-operational income has been provided to account for the expenses in earning those incomes. Since the legislature itself has provided 10 per cent of gross non-operational income to cover up expenses relating thereto, further netting cannot be allowed in terms of the aforesaid decision of Bangalore Clothing Co. (supra). The principles laid down by the Special Bench in Lalsons Enterprises (supra) are applicable to interest income as there can be a nexus between interest paid and interest received but there cannot be any such nexus in earning other non-operational income like rental income, commission income and miscellaneous/sundry income of 'similar nature. As already mentioned above, deduction of expenses @ 10 per cent has already been statutorily provided for netting non-operational income. Statutory fixation of 10 per cent for expenses can neither be increased nor decreased by us. Netting of non-operational income is permissible @ 10 per cent alone. No further netting can therefore be allowed.
49. It has been pointed out by the learned Counsel for the assessee that the actual amount of receipt on account of commission is only Rs. 39,09,286 and hence it is 90 per cent of this amount which should be considered for exclusion from the profits of the business. The learned Counsel for the assessee however submitted that it is 90 per cent of net commission alone, which, in terms of the decision of the Special Bench of this Tribunal in Lalsons Enterprises (supra), should be considered for exclusion from the profits of the business. We have already rejected the aforesaid submission of the assessee and held that netting of commission is permissible @ 10 per cent for expenses as statutorily provided. The AO is however directed to verify the figures and correctly determine the actual receipt on account of commission for the purpose of exclusion from the profits of the business under Clause (baa) of the Explanation to Section 80HHC. In view of the above, ground No. 7 is treated as partly allowed in terms of aforesaid directions.
50. Ground Nos. 9 to 11 taken by the assessee read as under:
9. The learned CIT(A) erred in confirming that profit arising from sale of transportation business is not slump sale. It is submitted that your appellant has effected slump sale of transportation undertaking as going concern without assigning any individual value thereof and hence provision of capital gain tax not attracted and sale consideration being capital receipt not liable to tax. It is submitted that it may be so held now.
Without prejudice, the learned CIT(A) further erred in holding profit from sale of transportation business as short-term capital gain as against long-term capital gain rightly held by AO.
Without prejudice, it is submitted that if at all the amount is held liable to tax as capital gains it should be charged to tax as long-term capital gains.
10. The learned CIT(A) further erred in confirming that the interest on account of delay in receipt of sale consideration as well as non-compete fees is chargeable to tax as other income.
It is submitted that interest amount received by the appellant company on account of delay in receipt of the consideration be taken as part of the sale consideration and not separate receipt as has been confirmed by the CIT(A).
11. The learned CIT(A) rightly confirmed consideration received under the noncompetition fees as capital receipt but erred in holding its cost as nil and charged the entire receipt as long-term capital "gains. It is submitted that amount received being capital receipt, not liable to tax.
51. The assessee has agitated three issues in the aforesaid grounds : first being that the impugned sale is slump sale and the issues connected therewith (ground No. 9); second issue being the treatment given to interest received on account of delay in receipt of sale consideration and non-compete fee and its taxability (ground No. 10); and the third being the taxability of non-compete fee received by it (ground No. 11). We shall now deal with each one of them.
Ground No. 9: Issue of slump sale and matters connected therewith
52. We shall first take up the issue raised in ground No. 9 that the impugned sale is a slump sale and hence the profits and gains arising on transfer are not taxable. Briefly stated, the facts of the case are that the assessee was, inter alia, engaged in the business of manufacture, sale and distribution of machinery components for fabricating locomotives, signaling systems and electrification for the railways, compendiously referred to in the agreement as the transportation business. At a meeting of the board of directors of the assessee company held in December, 1995, it was resolved that the transportation business would be sold as a going concern to a company called ABB Diamler Benz Transportation (India) Ltd. (hereinafter referred to as "the purchaser"). It was also resolved that the assessee would enter into an agreement with the purchaser whereby it would furnish a covenant that it would not compete with the purchaser of the company in its business activities. A formal agreement dt. 28th June, 1995 ("agreement" in short) was executed between the assessee and the purchaser company where under it was agreed that the assessee would transfer the transportation business w.e.f. 1st Jan., 1996 for a total consideration of Rs. 53.10 crores. Clause 3 of the said agreement provided that Rs. 31.58 crores would be paid on the transfer day that was defined in the agreement to be 1st Aug., 1996 along with interest on the amount for the period from and including 1st Jan., 1996 upto and including 31st July, 1996 @ 18 per annum and the balance Rs. 21.52 crores to be paid on 1st Oct., 1996 along with interest @ 18 per cent per annum on the said amount for the period from 1st Jan., 1996 to 30th Sept., 1996. Clause 5(a) of the agreement provided that the said business would be acquired w.e.f. 1st Jan., 1996 and the profits or losses arising from that date would be to the account of the purchaser. Clause 9 provided that a deed of transfer would be executed by the assessee in favour of the purchaser on 1st Aug., 1996. A copy of the said agreement has been placed by the assessee at pp. 270 to 274 of its paper book filed before us.
53. Subsequently, as contemplated by Clause 9 of the agreement, a deed of transfer and assignment was executed on 1st Aug., 1996 ("deed" in short). It was recited therein that the assessee would from 1st Jan., 1996 carry on the transportation business as a trustee for the account of the purchaser. In terms of the assignment/deed all the debts were also assigned to the purchaser. Possession of other assets comprised in the transportation business, which were movable properties, was also given on that date.
54. Departmental authorities [para 20.6 of the order of the CIT(A)] took note of the accounts of the purchaser company for the year ended 31st Dec, 1997 reflecting the figures of previous year ended on 31st Dec, 1997 and found that they contained the values that were assigned to different blocks of assets transferred as under:
Particulars Net block as on 31-12-1996
(Rs. in lakhs)
(a) Plant and machinery 108.31
(b) Furniture and fixtures 30.34
(c) Tools and moulds 17.95
(d) Vehicles 3.58
(e) Technical know-how 4,317.62
(f) Building Nil
(g) Inventories 3.09
55. In the return of income filed by the assessee, the assessee claimed that no part of the consideration of Rs. 54,17,28,000 was chargeable to tax as the asset that was transferred was the undertaking as such in respect of which the cost of acquisition and the cost of improvement were not capable of being ascertained. The assessee had arrived at the aforesaid sale price of Rs. 54,17,28,000 after including therein the interest and excluding the profit. The AO took the view that a capital gain of Rs. 46,30,45,000 arose on account of the transfer and accordingly brought the same to the charge of income-tax as long-term capital gain. According to him, the full value of the consideration accruing or arising as a result of the transfer was a sum of Rs. 53,10,00,000 from which he reduced the (i) net value of the fixed assets of Rs. 68,02,000; and (ii) current assets of Rs. 6,11,53,000. He thus determined the capital gain at Rs. 46,30,45,000. In addition thereto he assessed the interest of Rs. 5,32,55,000 that the appellant had received as income chargeable under the head "Income from other sources". He also rejected the assessee's claim for depreciation on the assets, which constituted a part of the transportation business.
56. The assessee carried all the three issues, namely, taxability of Rs. 53.10 crores; taxability of interest; and, taxability of Rs. 33.21 crores, being the amount received as a result of the restrictive covenant agreed upon by the assessee, in appeal before the CIT(A). Learned CIT(A) has held that the transfer of the transportation business took place during the previous year relevant to the asst. yr. 1997-98 and that the consideration so received was liable to capital gains tax because the transaction could not be said to be a slump sale. According to him the consideration of Rs. 53.10 crores, after reducing the cost of the asset, which was determined by the AO at Rs. 6.79 crores, was chargeable to tax as short-term capital gain in terms of Section 50 and not as long-term capital gain as held by the AO. As regards the taxability of Rs. 33.21 crores being the amount received for furnishing restrictive covenant, the learned CIT(A) has taken the view that the said amount represented consideration for the transfer of goodwill and hence he directed the AO to charge the same as long-term capital gain. He has further held that the interest that was payable to the assessee owing to the delay in receipt of the sale consideration was liable to be apportioned in two parts and accordingly the interest for the period from 1st Jan., 1996 to 31st March, 1996 was chargeable in the asst. yr. 1996-97 while the balance of the interest received for the period commencing on 1st April, 1996 was chargeable to tax in asst. yr. 1997-98. The assessee is aggrieved by the order of the CIT(A) with regard to the taxability of the aforesaid amounts.
Submissions made on behalf of the assessee
57. As regards the taxability of Rs. 53.10 crores, being the amount received in pursuance of the first agreement transferring the transportation business, the learned Counsel for the assessee submitted that the conclusion reached by the learned CIT (A) was erroneous and therefore the claims made in the return of income ought to be accepted. According to him, the subject-matter of transfer is the transportation business as such and, therefore, the gain, if any which arises from such transfer ought to be computed on that basis. He referred to the following decisions in support of his submission that when a business as a whole is transferred as a going concern the capital gains, if any, ought to be computed on the basis that whole of the business is a capital asset and not the individual assets per se that constitute the business:
(i) CIT v. Mugneeram Bangur and Co. (Land Department) ;
(ii) CIT v. Narkeshari Prakasan Ltd. ;
(iii) CIT v. F.X. Periera and Sons (Travancore) (P) Ltd. ;
(iv) CIT v. Kar Valves Ltd. ;
(v) CIT v. Hindustan Co-operative Insurance Society (1992) 107 CTR (Cal) 323 : (1994) 72 Taxman 259 at 263 (Cal);
(vi) Syndicate Bank Ltd. v. Addl. CIT ;
(vii) West Coast Electric Supply Corporation Ltd. v. CIT ;
(viii) Premier Automobiles Ltd. v. LTO ;
(ix) Coromandel Fertilizers Ltd. v. Dy. CIT (2004) 84 TTJ (Hyd) 370 : (2004) 90 ITD 344 (Hyd);
(x) Industrial Machinery Associates v. CIT (2003) 78 TTJ (Ahd) 434;
(xi) M.R. Muchhala v. ITO (1996) 56 TTJ (Mumbai) 504;
(xii) Dy. CIT v. Mahalasa Gases and Chemical (P) Ltd. (2004) 84 TTJ (Bang) 992;
(xiii) Technomics v. Asstt. CIT (2006) 103 TTJ (Pune) 998 : (2006) 100 ITD 324 (Pune);
(xiv) Sankeya Chemicals (P) Ltd. v. Asstt. CIT (2006) 8 SOT 50 (Mumbai);
(xv) Walchandnagar Industries Ltd., unreported order dt. 22nd Nov., 2004 ITA No. 3568/Mum/1998;
(xvi) Bajaj Hindustan Ltd. v. Jt. CIT, ITA No. 3791/Mum/2000;
(xvii) Rakshak Chemicals (P)Ltd. v. Jt. CIT ITA Nos. 1527/Ahd/2001, 1514 and 1743/Ahd/2002;
(xviii) CIT v. KPV Shaik Mohd. Rowther and Co. 1995 Tax LR 675 (Mad).
58. According to the learned Counsel for the assessee, the AO himself has accepted that the asset forming subject-matter of transfer is the transportation business inasmuch he has computed the capital gains arising on the transfer of the undertaking as such. He submitted that even the CIT(A), inasmuch he has estimated the short-term capital gain to be computed by reducing from the full value of the consideration the cost of the undertaking as determined by the AO, has impliedly accepted that the asset that is transferred is the transportation business as such. He further submitted that the subsequent amendment in the IT Act by the insertion of Sections 50B and 2(42C) also bring out that the business is an asset, which is separate and distinct from the various items that constitute it.
59. The learned Counsel submitted that, in order to ascertain whether the transportation business has been transferred as such as a going concern for a lump sum amount, the following tests should be applied:
(i) Whether the parties to the transaction intended to transfer the business as a going concern for a lump sum consideration for the business as a whole ?
(ii) Whether, as a result of the transfer of the business, the transferee is in a position to carry on the business that the transferor was carrying on ?
(iii) Whether the transferee would have purchased the individual assets at all ?
60. Applying the aforesaid tests to the facts of the present case, the learned Counsel submitted that the intention of both the parties was very clear. The assessee not only transferred the transportation business as a whole but also ceased to carry on the said business after the transfer was effected. The purchaser, on the other hand, took over the transportation business as a whole and started to carry on the said business. According to him, the parties did not intend in any manner whatsoever that the there would be itemized transfer or acquisition of individual assets and liabilities of the transportation business. He contended that if the Revenue sought to assert that the transaction/transfer was contrary to the documents/agreement on record, the burden was on it to establish that the parties had agreed upon itemized sale of assets with different values being ascribed by them or at least by the transferor to each asset transferred and such values were ascertained when the transfer took place. He submitted that the Revenue has brought no material on record to discharge that burden. According to him, what was crucial was that the ascertainment of itemized values must have been made on the date when the consideration was arrived at : CIT v. Artex Manufacturing Co. , CIT v. Electric Control Gear Mfg. Co. , CIT v. Narkeshari Prakashan Ltd. (supra) and CIT v. Premier Automobiles Ltd. (supra).
61. He submitted that the fact that the act of the purchaser in allocating, in its accounts, the consideration paid by it for the individual assets acquired was irrelevant because in accordance with the accounting standards the purchaser was bound to allocate the consideration paid by him for the acquisition of the business over the assets acquired and such subsequent action on his part can in no manner would lead to the conclusion that the aggregate consideration was arrived at on the basis of the individual values of the assets : Premier Automobiles Ltd. v. CIT (supra) and Coromandel Fertilizers Ltd. v. Dy. CIT (supra).
62. The learned Counsel next submitted that what was transferred by the assessee was an undertaking of transportation business as a whole and as a going concern and not item-wise assets and liabilities of the said business. The mere fact that some assets that were being used for the purpose of the said business transferred were retained by the transferor was not, according to the learned Counsel, determinative of the issue and the fact that, in the present case, the assessee had not transferred the factory building in which the transportation business was being carried on could not detract from the transfer being regarded as one of the transportation business as a going concern. He supported his submission by placing reliance on the decisions in Dy. CIT v. Mahalasa Gases (P) Ltd. (supra) and Premier Automobiles Ltd. v. ITO (supra). He explained that, in the present case, there were sound commercial reasons for not transferring the building, viz., having regard to its location in the midst of the assessee's existing factory and hence it was physically incapable of being segregated and handed over to the purchaser.
63. Having contended that what was transferred was an undertaking as a whole amounting to a "slump sale", the learned Counsel submitted that the provisions of Section 50, as applied by the learned CIT(A), would not at all be applicable. According to him, three conditions that are required to be fulfilled to attract Section 50, namely, (1) the asset must form part of a block of assets; (2) depreciation ought to have been allowed in respect thereof; and (3) the full value of the consideration accruing in respect of the transfer of that asset should be ascertainable, are not complied with in the present case and hence the learned CIT(A) was not justified in directing the AO to apply Section 50. Elaborating his submissions, he submitted that the asset that was transferred was the business as such which would undoubtedly comprise of various items in respect of which depreciation might have been individually allowed but the business as such was not an asset, which could be said to have constituted a part of a block of assets. He pointed out that even assuming that a view was taken that as various items that constituted the business were assets in respect of which depreciation had been allowed and, therefore, formed a part of the block of assets, the full value of the consideration accruing in respect of the transfer of each such asset was not ascertainable and, in fact, was not ascertained by either of the Departmental authorities and, hence, the question of application of Section 50 would not arise in the present case.
Submissions made by the learned CIT--Departmental Representative
64. In reply, the learned Departmental Representative submitted that the Judge-made law has always been that when a unit as a whole and as a going concern is sold lock, stock and barrel it is a slump sale. In this connection, he referred to paras 20.1 to 20.7 of the order of the learned CIT(A) in which a finding has been recorded that the unit transferred was not a separate unit at all in that the Baroda factory was engaged in the manufacturing of many products simultaneously and no particular building or land or unit or undertaking in the said factory was specifically engaged in transportation business. The entire production unit at Baroda was one integrated unit, out of which some plant and machinery used for transportation products were transferred without any land or building. He submitted that the assessee had never claimed or treated transportation business as a separate unit or business in earlier years nor claimed any deduction under Chapter VI-A treating the said unit as a separate unit or undertaking. He referred to the observations made by CIT(A) at p. 24 of his order that it was not known as to how furniture and fixtures were identified with the transportation business. He further submitted that separate accounts were never prepared for the transportation business nor any profit attributable to the said business was ever shown separately in the accounts of the assessee company. According to him, the transportation unit was neither an identifiable and independent unit nor was it transferred "lock, stock and barrel". According to him, the transfer was not lock, stock and barrel in that the assessee continued to retain land and factory building and hence what was transferred was not an undertaking itself but some of the assets of the factory located at Baroda.
65. Referring to the factual matrix of the decisions cited by the learned Counsel for the assessee, he submitted that all of them had one common feature and that feature was that all the assets including land and building were sold whereas, in the present case, land and building were not sold. Referring to the decision of Bangalore Bench of this Tribunal in Dy. CIT v. Mahalasa Gases (supra), relied upon by the learned Counsel for the assessee, he submitted that the Bangalore Bench has not decided the matter on the legal premise that the sale of land was not warranted in order to term the sale as slump sale, but it was held in para 35 of that order that the land retained was never used for the business of transferred unit and that it was surplus land. He also referred to the judgment of the Hon'ble Bombay High Court in Premier Automobiles Ltd. (supra) relied upon by the assessee and submitted that the issue in that case was not decided on the legal premise that sale of land/building was not warranted in order to term the sale as slump sale. What was held, according to the learned CIT--Departmental Representative, in that case was that not selling surplus land was immaterial and that land pertaining to Kalyan unit was sold. He invited our attention to the following observations made in that case:
According to the impugned findings, since the entire land was not transferred there was no slump sale. This finding is erroneous. The Kalyan factory at all material times prior to 11th March, 1993 was located on an area admeasuring 7.23 lakh sq. meters. In fact, that area was bounded by a wall. In fact, that area always stood segregated from the open land. In fact, the open land and the built-up area were separated by a road. In the circumstances, the area admeasuring 7.23 lakh sq. meters was the fixed asset of the Kalyan business.
That, the entire area of 18.10 lakh sq. meters was never the asset of the Kalyan business. Hence, the impugned finding is erroneous. According to the next impugned finding, in this case, machines were not physically transferred from PAL to PPL. That, only name plates of PAL are put on the machines and, therefore, there was no transfer under the slump sale of plant and machinery.
According to the next impugned finding, no separate accounts were maintained by PAL for the Kalyan business. This finding is also erroneous. Before us, general ledgers for accounting year 1994-95 have been produced. They refer to sale of vehicles manufactured at Kalyan. They reflect asset account bearing No. 110 and sale account bearing No. 010 in respect of manufacture and sale of 118 NE cars. Similarly, a separate asset and sale account was maintained for Padmini cars under the Kurla business. In the circumstances, the finding given is erroneous.
66. The learned CIT--Departmental Representative contended that most of the favourable features found by the Hon'ble Bombay High Court in the aforesaid case were missing in the present case and hence that judgment would not be applicable on the facts of the case before us. He referred to the decision in Chetan Popatlal Shah ITA 2257/Mum/2004 of 'E' Bench, Mumbai of this Tribunal (copy submitted by the learned Departmental Representative) and submitted that the Tribunal has held in that case that it would not be a case of sale lock, stock and barrel when office premises (para 5) was not sold. He vehemently contended that the sale in the case before us was not a sale lock, stock and barrel and hence it was not a slump sale. He also referred to the decision of this Tribunal in Mahindra Sintered Products Ltd. v. Dy. CIT (2005) 96 TTJ (Mumbai) 785 : (2005) 95 ITD 380 (Mumbai) and submitted that the issue under consideration was squarely covered by the said decision in favour of the Revenue that the impugned sale was not a slump sale.
67. He took us through the agreement placed at p. 133 of the paper book filed by the assessee and submitted that what the assessee had transferred (p. 133 of paper book) were. tangible and non-tangible assets. Repelling the submissions made by the learned Counsel for the assessee that the cost of acquisition and cost of improvement were indeterminate in respect of intangible assets and hence not exigible to capital gains tax, he submitted that their costs of acquisition and improvement already stood allowed to the assessee in earlier years and hence it was not open to the assessee to contend that their costs of acquisition and improvement were indeterminate and thereby to contend further that they were not exigible to capital gains tax as the computation of capital gains would fail due to the indeterminate nature of their costs of acquisition and improvement. According to him, whatever expenditure was incurred by the assessee initially or later in relation to the acquisition of non-tangible items, already stood debited to the P&L a/c of one or the other assessment year in the past and thus there was no question of allowing any further deduction in respect of their acquisition and improvement for computing the profits on their sale. He submitted that it was a fairly well settled proposition of law that deduction cannot be claimed twice as income cannot be taxed twice. In support of his submissions, the learned Departmental Representative relied upon the decisions in Escorts Ltd. v. Union of India , CED v. Estate of Late K.S. Rangan, by Smt. Radha Ammal (1981) 11 TTJ (Mad) 534, WTO v. T.S. Sundaram (1981) 11 TTJ (Mad) 102, JCT Ltd. v. Dy. CIT , Beigei Paints India Ltd. v. CIT , Continental Construction Ltd. v. Union of India , Tube Investments of India Ltd. v. CIT . He concluded his submission by pointing out that it was a fundamental principle of taxation that no legislature would intend a double deduction in regard to the same outgoing; and, if it is so intended, it will be clearly expressed and therefore the assessee was not at all entitled to claim the deduction towards cost of acquisitions and improvements relating to intangible assets while computing the capital gains as they already stood claimed by the assessee and allowed by the Department.
68. The learned CIT--Departmental Representative raised an alternative submission before us and it was this that even if it were presumed that the impugned transfer was a slump sale, the profits arising there from would still be taxable. He invited our attention to para 5.3 of the order in Steriplate (P) Ltd. v. Asstt. CIT (2006) 7 SOT 596 (Del) in which it has been held, according to the learned CIT--Departmental Representative, that the Tribunal, at the stage of fact finding, must necessarily find out whether sale consideration could be » apportioned to individual items of assets. He invited our attention to the following observations made by the Hon'ble Karnataka High Court in B. Raghurama Prabhu Estate, Executrix Smt. M. Kaveri Bai, v. Jt. CIT (Kar):
...In the present case, admittedly, the assets of the firm as a going concern were sold for a consideration of Rs. 92 crores without expressly specifying the value of the individual assets of the firm which included lands and buildings, plant and machinery and the goodwill. Therefore, in a traditionally and judicially accepted sense the transaction can be said to be a slump sale. But, neither the IT Act nor any judicial pronouncement declares that where sale of the assets is made for a lump sum consideration, it cannot be subjected to tax under the heading "Capital gains". The law is that if individual assets can be reasonably valued for ascertaining their respective cost of acquisition, then by resorting to statutory parameters and mode of calculation devised under the head "Capital gains" in Chapter IV, the gains so computed can always be brought to tax. This aspect of law has been considered and declared to this effect by the Supreme Court in the case of CIT v. Artex Manufacturing Co. ....
Keeping in view the law declared by the Supreme Court in CIT v. Artex Manufacturing Co. (supra), the Tribunal has rightly rejected the contention of the assessee that the transaction in question cannot be assessed for resultant capital gains by holding that all the assets sold were capable of being appropriately valued for the purpose of computation.
69. Learned Departmental Representative has also referred to the following observations made by this Tribunal in Kampli Co-operative Sugar Factory Ltd. v. Jt. CIT (2001) 70 TTJ (Bang) 874 : (2002) 83 ITD 460 (Bang):
5. The reliefs claimed by the assessee are based on the contention that the aforesaid sale of the assets of the assessee factory was slump sale of business as a whole giving rise to long-term capital gains alone. The AO had bifurcated the sale consideration in two parts viz., in respect of consideration attributable to land was determined by him by applying the prevailing market rate and thus he had computed long-term capital gains by adopting fair market value of the land as on 1st April, 1981 as deemed cost in terms of Section 55(2)(b) and giving the benefit of indexation; on the balance consideration, he had computed the short-term capital gains by deducting the written down value of depreciable assets, the AO had accordingly rejected the claim of the assessee in the revised return filed on 18th Feb., 1999 that the transaction, being a slump sale of business as a whole gave rise to long-term capital gains only. The AO while denying the claim of the assessee has banked upon the decision of the Supreme Court in the case of Artex Mfg. Co. The CIT(A) has affirmed the order of the AO in this regard with observation that in the computation of long-term capital gains enclosed with the revised return, no capital loss has been worked out by the assessee despite the result of this computation if made as per law, being loss which is eligible for carry forward and set off against the capital gains of subsequent years by virtue of Section 74(1) of the Act, the assessee has ignored the excess indexed cost of assets over the full value of consideration and shown as the income from capital gains as nil which is not in conformity with law. We agree with the view of the CIT(A) that the decisions of the Supreme Court in the case of Artex Mfg. Co. and Electric Control Gear Mfg. Co. deal with the sale of business as a running concern i.e., taking over of business as a whole comprising assets as well as liabilities which is not the case of the assessee herein. A careful reading of Clauses 1 and 13 of the agreement reveals that liabilities do not enter into this transaction and what is sold is the assets, movables and immovables, comprised in the Annexures and not the liabilities (Annex. 5) to Clause 1 of the agreement. Clause 13 of the agreement makes it more clear that the liabilities will be the responsibility of the liquidator. Thus it was not a slump sale, rather only the assets excluding investment and deposits was sold and the liabilities remained with the assessee. In the cited cases of the Supreme Court, the sale of business as a running concern had involved both assets and liabilities. We agree with the view of the CIT(A) that in a case of slump sale of running business, there is always been a difficulty in applying the provision of Section 41(2) as well as those of capital gains in respect of depreciable assets, it is because in such cases of sale of assets with liabilities, to determine precisely what asset was sold and what consideration was attributable to that asset posed a moot point and when the business is sold as a running concern what possess on is the assets tagged with liabilities i.e., the net worth. This net worth is the benefit comprising the excess of assets over the liabilities which may or may not be a positive figure unless the assets are revalued upward. The legislature has now removed this difficulty by inserting w.e.f. 1st April, 2000, Section 50B of the Act providing for the levy of capital gains in case of slump sale and also Section 2(42C) defining "slump sale". According to the Section 2(42C), slump sale means the transfer of one or more undertakings for a lump sum consideration without values being assigned to the individual assets and liabilities. And what Section 50B makes chargeable to capital gains, is the difference between slump price and the net worth of the undertaking without giving the benefit of indexation and the net worth for this purpose is defined as the sum total of paid up capital and free reserves by importing the definition of Section 3(1)(aa) of the Sick Industrial Companies (Special Provisions) Act, 1985. We are thus of clear view that the transaction in the present case of the assessee, is entirely different from the transaction of slump sale i.e., the. sale of a running business as a whole and prior to insertion of Section 50B of the Act w.e.f. 1st April, 2000, no Court had given verdict that in case of such slump sale of running business, long-term capital gains will have to be computed with reference to the entire assets. Where no part of consideration could be attributed to particular assets, depreciable or otherwise, no amount would be chargeable either under Section 41(2) of the Act or as capital gains. The CIT(A) has rightly observed that the aforesaid agreement dt. 18th March, 1996 and its annexures details different assets that were sold and the components of the consideration at Rs. 8.01 crores attributable to depreciable and non-depreciable assets can easily be found out on proportionate basis and Section 50(2) can be applied; out of these only the land was not a depreciable asset, hence the consideration attributable to land will give rise to long-term capital gains under Section 45 of the Act and the consideration attributable to the depreciable assets will give rise to deemed short-term capital gains under Section 50(2) of the Act. Only the consideration attributable to intangibles i.e., self-generated assets having no cost cannot be taxed in view of the ratio settled in the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Shetty , only exception being in respect of the assets specifically mentioned in the deeming clause of Section 55(1)(a). The assessee has however not claimed the expenses of any such intangible assets for being part of sale transaction. We thus find no infirmity in the order of the CIT(A) in this regard.
70. Learned Departmental Representative further contended that capital gain arising on transfer was taxable regardless of whether the impugned transaction was a slump sale or not. As regards the computation of profits arising on transfer, he submitted that no fruitful purpose would be served by referring the matter back to the AO/DVO for valuation afresh as the matter was about 10 years old and all the relevant parameters for valuation, like ownership, location, and the state of assets transferred must have undergone changes over such a long period. According to him, no deduction could be allowed in respect of intangible assets, for the reasons given earlier by him. As regards the valuation of tangible assets, he submitted that the CIT(A) has estimated the profits after duly considering the entire material available on record before him and hence his estimate, being rational, should be upheld. He submitted that the learned CIT(A) has taken, inter alia, the following aspects into consideration while estimating the profits arising on transfer:
1. Transaction was between two very closely connected parties who have decided upon the restructuring at global level.
2. Assessee was not forthcoming with details regarding value adopted by the purchaser company, which was a very closely connected company.
3. Transaction was not at arm's length.
4. Only details of accounts of purchaser company as on 31st Dec, 1996 were furnished.
5. It was unbelievable that assessee was not aware of the value placed by the purchaser company.
6. So-called valuation report of KPMG is based upon past and projected profits as furnished by the assessee. When no separate accounts were available, assessee was at liberty to furnish profit details as it suited him to claim that a slump price was obtained.
71. As regards the computation of capital gains, he submitted that some clue could be taken from the provisions of Section 50B, which were introduced w.e.f. 2000-2001. He contended that Section 50B codified the Judge-made law and that the manner of computation prescribed therein, being computational and machinery provisions, could be followed even for working out the capital gains. In this connection, he referred to the judgment in CIT v. N.C. Budhiraja and Co. and CIT v. Banna Lal Jat for the proposition that subsequent amendments in law could be applied to decide a particular issue arising in earlier years.
Rejoinder submissions on behalf of the assessee.
72. In his rejoinder, the learned Counsel for the assessee submitted that the argument of the Revenue that Section 50B has retroactive effect is not correct. According to him, Section 50B was introduced by the Finance Act, 1999 w.e.f. 1st April, 2000. According to him, the Notes on Clauses, the Memo Explaining the Provisions of the Finance Bill as well as the circular issued by the CBDT containing the Explanatory Note on the provisions of the Finance Act would make it clear that the provisions of Section 50B have been introduced w.e.f. asst. yr. 2000-01. He submitted that Section 50B codified the legal position that the business transferred by way of slump sale was a "capital asset" within the meaning of Section 2(14)/45 but it was for the first time, by a fiction, deemed as to how the cost of acquisition of such business would be computed. He submitted that such a provision could never have retroactive/retrospective effect. He contended that if the contention of the Revenue in this behalf was to be accepted it would mean that the amendments made in Section 55(2)(a) deeming the cost of acquisition of certain assets to be nil would equally have retroactive/retrospective effect which was contrary to the judgment of the Hon'ble Supreme Court in CIT v. D.P. Sandhu Bros. Chembur (P) Ltd. in which it has been clearly held that the amendments in Section 55(2)(a) deeming the cost of acquisition of a tenancy right to be nil would have only prospective effect. He referred to the order (para 12 of the order) of the Ahmedabad Bench of this Tribunal in Industrial Machinery Associates (supra) and the order (paras 119 to 123 of the order) of the Hyderabad Bench of this Tribunal in Coromandel Fertilizers (supra), have both specifically rejected a similar contention urged by the Revenue. In fact, the very decision of the Supreme Court relied upon by the learned Departmental Representative in support of his proposition has been considered, according to the learned Counsel, by this Tribunal in Coromandel Fertilizers Ltd. (supra).
73. As regards the decision of the Delhi Bench of this Tribunal in Steriplate (supra), relied upon by the learned Departmental Representative, he submitted that the aforesaid order was contrary to the judgment of the Bombay High Court in the case of Premier Automobiles Ltd. (supra) and hence need not be followed. According to him, that order has proceeded on the basis that it is open to apply Section 50 by estimating the value of the assets transferred. He submitted that the aforesaid principle laid down by the Delhi Bench would be contrary to the principle laid down by the Supreme Court in CIT v. Artex Manufacturing Co. Ltd. (supra) and CIT v. Electric Control & Gears (supra). He reiterated that the ratio of the aforesaid two decisions was that if the parties had agreed upon a lump sum consideration for the transfer of the business and lump sum consideration was arrived at having regard to the individual values of the assets, then, the provisions of Section 41(2) of the Act would be applicable. On the other hand, if the consideration arrived at is not based on the individual values of the assets, then, the said provisions would have no application. In the present case, as noted earlier, the consideration was arrived at based on the valuation report of a chartered accountant who valued the business by capitalizing the earnings of the business and, therefore, the appellant's case would fall within the latter part of the ratio of the aforesaid decisions of the Supreme Court. The conclusion of the Delhi Bench of the Tribunal that it is open to the Revenue to apportion the consideration having regard to the values of the assets is thus contrary to the binding decision of the Supreme Court and the jurisdictional High Court. In fact, the Bombay High Court in the case of Premier Automobiles Ltd. (supra) has made it clear that the accounting treatment meted out by the purchaser in its accounts was not relevant in determining whether the consideration for each of the individual assets can be ascertained.
74. He next submitted that the argument of the Revenue that transaction was not to be regarded as a slump sale as all the assets of the business were not transferred was also not correct. He reiterated that the test that has to be applied for determining whether there was a slump sale or not has been complied with in that the intention of the parties was to transfer the business as a whole for a lump sum consideration and that the transferee would have never acquired the individual assets as such and also the fact that the purchaser was in a position to carry on the business from 1st Aug., 1996 that were handed over to the purchaser and in fact had so carried on the business as received on transfer. He contended that the mere fact that the land and building in which the undertaking that was operating were not transferred was not determinative of the issue as there were sound commercial reasons for not transferring the land and building. Both, the Bombay High Court in the case of Premier Automobiles Ltd. (supra) as well as the Bangalore Bench of the Tribunal in the case of Mahalasa Gases Ltd. (supra) have held, according to the learned Counsel, that the mere fact that some assets have not been transferred would not negate the sale from being a slump sale.
75. The decision of the Bangalore Bench of the Tribunal in Kampli Co-operative Sugar Factory Ltd. v. Jt. CIT (supra) relied on by the learned Departmental Representative was, according to the learned Counsel, also distinguishable on facts and, in fact, was distinguished subsequently by the Bangalore Bench itself in the case of Mahalasa Gases (supra). In this case it may be noted that the assessee was running a sugar mill, which had gone into liquidation. The liquidator sold the assets of the assessee's factory and none of the liabilities of the business were transferred. It was on this factual premise that the Tribunal came to the conclusion that it was not a case of a slump sale unlike the present case where a going business has been transferred along with all assets and liabilities.
76. The next decision referred to by the learned Departmental Representative, namely, the decision of the Mumbai Bench of this Tribunal in Mahindra Sintered Products Ltd. v. Dy. CIT (supra) is again distinguishable. In this case valuers were appointed by the transferor before the transfer took place who had valued the building as well as the plant and machinery. It was on the basis of the valuation reports that the parties had agreed upon the price. Further, no liabilities were taken over. In any event, -the decision in that case, according to the learned Counsel, is contrary to the judgment of the jurisdictional High Court in Premier Automobiles Ltd. inasmuch as the Tribunal has held that the value placed for stamp duty purposes could be adopted for the purposes of application of Section 50. The other decision of the Bombay Bench of the Tribunal in Chetan Popatlal Shah relied upon by the learned Departmental Representative was also, according to the learned Counsel, distinguishable. Section 47(xiv) on the basis of which the exemption in that case was sought clearly specified that all assets of the sole proprietary business have to be transferred to the company. The assessee therein had not transferred all the assets and it was for this reason that the Bench came to the conclusion that the exemption under Section 47(xiv) was not available.
77. Commenting on the reliance placed by the learned Departmental Representative on the decision of the Pune Bench of this Tribunal in Technomics v. Asstt. CIT (supra), he submitted that the said decision, in fact, supported the case of the assessee. He contended that, at p. 340 of the said report, the Tribunal has laid emphasis on the fact that the reading of the agreement in that case indicated that what was intended to be transferred was a business as a going concern. Not only were the assets mentioned in the schedule to the agreement in that case, like the case of the present assessee, transferred but other assets such as trademarks, trade name, pending contracts, patent, licences were also transferred which led to the inescapable conclusion that what was transferred was the business and not the individual assets.
Findings and decision
78. We have heard the parties and considered their submissions including the authorities referred to by them in their submissions. Both the parties have relied upon several decisions to support their respective cases. According to the well settled theory of precedents, every decision contains three basic ingredients : (i) findings with regard to material facts, direct and inferential; (ii) statement of the principles of law applicable to the legal problems disclosed by the facts; and (iii) judgment based on the combined effect of (i) and (ii) above. For the purpose of the parties themselves and their privies, ingredient (iii) is the material element in the decision for it determines finally their rights and liabilities in relation to the subject-matter of the action. It is the judgment that estops the parties from reopening the disputes. However, for the purpose of doctrine of precedents, ingredient (ii) is the vital element in the decision. That indeed is the ratio decidenci. The ratio decidendi is the statement of law applied to the legal problems raised by the facts as found, upon which the decision is based. The other two elements are not precedents. It is equally well settled that decisions are rendered in the context of a given set of facts. In Padmasundara Rao (Deed) v. State of Tamil Nadu and Ors. , the Hon'ble Supreme Court has held thus : "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Herrington v. British Railways Board (1972) 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases." In Union of India v. Major Bahadur Singh (2006) 1 SCC 368, 374, the Hon'ble Supreme Court has quoted, with approval, the following observations of Lord Denning:
Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one against the colour of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive....
Precedent should be followed only so far as it marks the path of justice, but you must CIT the dead wood and trim off the side branches, else you will find yourself lost in thickets and branches. My plea is to keep the path of justice clear of obstructions which could impede it.
79. Keeping the aforesaid observations in view, we shall now proceed to examine each finding of fact recorded by the learned CIT(A) in his appellate order to see the correctness of his conclusion that the impugned sale is not a slump sale.
Whether the impugned transaction is a slump sale ?
80. First issue that arises for consideration is whether the transfer of a part of the moveable assets, etc. out of several other assets and manufacturing activities at Baroda factory of the assessee, to ABB Diamler Benz Transportation (I) (P) Ltd. (the purchaser) is a slump sale. The advantage of a slump sale is that the business profits attributable to stocks cannot be treated as business profits taxable at normal rates applicable for taxing the business profits. In case of slump sale, the profit on sale of depreciable assets covered earlier under Section 41(2) could not be taxed at normal rates. After Section 41(2) was substituted by Section 50, incidence of tax on short-term capital gains arising on transfer of depreciable assets can also be avoided in cases of slump sales. Now Section 50B has been inserted in the IT Act w.e.f. asst. yr. 2000-01 to provide for a special procedure for computation of income from slump sale. Capital gains in case of slump sales are taxable under Section 50B in accordance with the mode of computation prescribed therein. The benefit of indexation is, however, not available for computing the capital gains under Section BOB. It is thus quite clear that tax implications are substantial if a sale is treated as "slump sale" and this is what has been responsible for many a battle at the bar. Quite obviously the Revenue is always keen to establish that a given sale is not a slump sale while the assessee is equally keen to establish that a given transaction is a slump sale as this helps him to get certain tax advantages, as explained above.
81. The concept of slump sale is not new for the purposes of income-tax law regardless of the fact that a special provision for computation of capital gains from slump sale has now been enacted under Section BOB effective from asst. yr. 2000-01. The concept of slump sale as incorporated in Section 50B of the IT Act follows the English decision in Doughty v. Taxes Commr. (1927) AC 327 (PC) and several Indian decisions in which it has been held that in the case of a slump sale, tax incidence cannot be fixed with reference to individual items covered by such sale as for example, stock-in-trade comprised in such business. The aforesaid principle was noticed and cited, with approval, by the Hon'ble Supreme Court in CIT v. West Coast Chemicals and Industries Ltd. (1962) 46 ITR 135 (SC). This was a case relating to the asst. yr. 1945-46 when capital gains were not chargeable to tax. Capital gains were subjected to the charge of income-tax for the first time in India by the Income-tax and Excess Profits Tax Act (Amendment) Act, 1947, which inserted, inter alia, Section 12B in the IT Act, 1922 from asst. yr. 1946-47. Quite obviously, the provisions analogous to Sections 45, 50 and 50B of the present IT Act were non-existent in asst. yr. 1945-46 or even thereafter till their insertion in the IT Act of 1961. The limited issue before the Hon'ble Supreme Court, in that case, was therefore whether profits, if any, on sale of trading stock, namely, chemicals and raw materials, sold along with business as a going concern was chargeable to tax as business profits. Similar issue came up before the Hon'ble Supreme Court in CIT v. Mugneeram Bangur (supra) wherein the decision in West Coast Chemicals & Industries Ltd. (supra) was noticed and cited with approval. The Hon'ble Supreme Court has held as under:
This Court in CIT v. West Coast Chemicals & Industries Ltd. understood Doughty's case thus:
This case shows that where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to hold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly be said that there was a trading from which alone profits can arise in business.
It follows from the above that once it is accepted that there was a slump transaction in this case, i.e., that the business was sold as a going concern, the only question that remains is whether any portion of the slump price is attributable to the stock-in-trade.
(Emphasis, italicised in print, supplied)
82. It is thus quite clear that the concept of "slump sale" has always been in existence and judicially recognized with well-defined parameters as to what constitutes a "slump sale". The tests for determination of what constitutes a slump sale are laid down in Artex Manufacturing Co. (supra) in which severalty in the sale, on the facts of that case, was inferred and held that it was not a slump sale and in CIT v. Electric Control Gear Manufacturing Co. (supra) in which the Hon'ble Court inferred, on the facts of that case, that it was a slump sale. Both the decisions are reported in 227 ITR.
83. After the decision in CIT v. Mugneeram Bangur & Co. (supra) it was always understood that in the case of sale of a business as a going concern, there could be no liability with reference to any asset comprised therein and that the liability for capital gains has to be computed by treating the business as a whole as a single asset distinguishing it from a severeable or item-wise sales. Such a view was followed in a number of cases ruling out any withdrawal of depreciation under Section 41(2) with the result that entire surplus was treated as long-term capital gains. Stock-in-trade forming part of slump sales of a going concern was not separately considered for computation as business profits, it was in fact, construed as part of capital gains arising on slump sales. This principle was applied in sales-tax cases also so that no sales-tax liability could arise on sale of stock as a result of slump sale of the business as a whole and as a going concern.
84. In CIT v. Aitex Manufacturing Co. (supra), the assessee was a firm carrying on the business of manufacturing of art silk cloth. A private limited company was formed with a view to takeover the business of the assessee as a running concern for which an agreement was entered into whereby the assessee agreed to sell to the company the business hitherto carried on by the assessee as a whole and as a going concern for a sum of Rs. 11,50,400 which was paid and satisfied through allotment of shares. In pursuance of the agreement, the assessee, in that case, ceased to carry on the business and the said business stood completely transferred to the company. The assessee did not return any" income on the ground that the assessee company stood converted into a private limited company as a going concern and hence there was no income chargeable to tax either under Section 41(2) or under Section 45 of the IT Act, 1961. In the agreement of sale, there was no reference to the value of the plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee before the ITO it became evident that the sale price had been arrived at by taking into consideration the value of the plant, machinery and dead stock as assessed by the valuer. On these facts, the Hon'ble Supreme Court held that Section 41(2) was applicable but the profits under Section 41(2) were chargeable only to the extent of difference between the written down value and the actual cost of the assets and any excess over and above the actual cost would have to be charged as capital gains. Referring to the decision in Mugneemm Bangur's case (supra), the Hon'ble Court has held that where there is a slump transaction, and the business is sold as a going concern, what is to be seen is whether any portion of the slump price is attributable to the stock-in-trade, and if on the basis of the facts it can be found that a particular price is attributable to a particular item, then the excess amount would be chargeable to tax under Section 10(2)(vii), proviso (ii) of.the 1922 Act (Section 41(2) of the 1961 Act), as applicable in that assessment year. The decision in Aitex has proceeded on the basis of three material facts : one, the items were severable; two, the values to the individual items were assigned by the valuer and not by the vendor; and, three, it is the information available on record that attracted the applicability of doctrine of severalty to reject the plea of slump sale.
85. In err v. Electric Control Gear Manufacturing Co. (supra), the assessee was a partnership concern and had entered into an agreement whereby it transferred the entire assets of the business together with liabilities as a going concern to a limited company for a consideration of Rs. 8 lakhs. The erstwhile partners of the assessee firm were allotted shares in the company. The ITO held that depreciation allowed to the assessee firm in respect of the assets, transferred by the firm to the said company, was chargeable to tax under Section 41(2) of the IT Act, 1961 as applicable in that assessment year. He also brought capital gains of Rs. 8 lakhs to tax, being the consideration received by the assessee. Hon'ble Supreme Court held that there was nothing to indicate the price attributable to assets like the machinery, plant or building out of the total amount of consideration and that merely because some depreciation has been allowed to the assessee firm, it could not be said that it was the excess amount between the price and written down value. Provisions of Section 41(2) were held to be not applicable on the facts of that case. The decision in Electric Control Gear Mfg. Co. (supra) has thus proceeded on the basis that information was not available on record to show that the items were severable or the values to the individual items were assigned and hence doctrine of severalty of sales, as applied in Artex (supra), was not applied in this case to reject the plea of sale being slump sale.
86. It is quite evident on perusal of the aforesaid and several other judgments on the concept of "slump sale" that the underlying philosophy has all along been that, in a slump sale, the seller cannot withdraw any asset from the business sold and the purchaser cannot reject any asset or liability comprised in the business. The slump sale envisages sale of entire business as a going concern at its realizable value without allocation of slump price to individual items of business and not as parts of a going concern. Transfer of the business as a whole and as a going concern for a lump sum price being its realizable value is the essence of a slump sale. Principle of severalty of sales on the basis of values assigned by the valuer to each item has been applied to infer that the sale was not a slump sale. On perusal of the decisions cited by the parties, a sale, in order to constitute a slump sale, must satisfy the following tests:
(i) The business has been sold as a whole and as a going concern at its realizable value;
(ii) The seller has not withdrawn any asset or liability from the business sold or the purchaser has not rejected any asset or liability comprised in the business;
(iii) The materials available on record do not indicate item-wise value of the assets transferred; and
(iv) There is no material on record to infer severalty in the sale, as in the case of Artex (supra). In other words, if the materials available on record indicate severalty of sales in terms of identification of items and their values, the sale would not be a slump sale.
87. From the foregoing, it is quite clear that all composite sales are not necessarily slump sales. A sale of various items put together may not constitute a "slump sale" unless it satisfies all the tests of a slump sale, as outlined in the preceding para. Learned CIT(A) has held (para 20.5 of his appellate order) that the impugned sale/transfer is, at the best, a composite sale of the items described in the agreement but not a slump sale.
88. In para 20.1 of his order, the learned CIT(A) has examined the shareholding pattern of the companies involved in the impugned transaction and observed that all the companies to the transaction are part of ABB Group. He has also observed that the purchaser company was incorporated as a part of the global restructuring of the operations of the group. It is on the strength of the facts brought by him on record that he has come to the conclusion that the impugned transaction is not at arm's length. Facts recorded by the CIT(A) are not in dispute. ABB is a large group. It has a group philosophy and a management to promote its interest through various entities worldwide. Group management was well aware of all the facts, details and position of accounts pertaining to all the companies of the group. It is quite obvious that the agreement could be drafted in a manner that promoted the interest of the group as a whole. It was therefore quite appropriate for the AO and the learned first appellate authority to go behind the veil of apparent legality expressed through the recitals in the agreement and get to the truth or substance of the impugned transaction and to deal with it in accordance with law. It is only normal that dealings involving transfer of funds and avoidance of tax through such oblique transfers to the close relatives or group companies need to be probed into with care and caution. Mere recitals in the agreements involving such transfers may not by themselves be sufficient unless they are corroborated by surrounding circumstances. In short, the recitals made in the agreement between two connected entities are required to be read and interpreted keeping the aforesaid facts in view.
89. Recitals made in the agreement show that the assets and other items relating to the manufacturing of goods for supply to the railways have been compendiously described in the agreement as "transportation business" and "undertaking". Railways was one of the customers for whom the assessee was manufacturing certain goods at its Baroda factory apart from manufacturing several other goods for other customers at the said Baroda factory. In para 20.2 of his order, the learned CIT(A) has observed that the said "transportation business" did not have any independent existence as "undertaking" or "business" in that it had neither any separate location nor any individual recognition in the books of account as such. The learned CIT(A) has highlighted in para 20.2 of his order that neither any accounts were drawn in respect of the transportation business identified as an undertaking in the agreement nor were profits arising therefrom indicated separately in the accounts. It is therefore quite clear that the creation and recognition of transportation business as a going concern or as an undertaking was undertaken for the first time in the agreement itself. The finding of fact recorded by the learned CIT(A) is not in dispute. As already stated above, the ABB Group had the option to draft the agreement in a manner that promoted its interest. The transportation business was recognized as an independent undertaking in the agreement only without there being any recognition and identification of such business either in the books of assessee or in terms of its independent existence. Since the transportation business identified in the agreement was neither recognized in the books of account nor had otherwise any independent existence, the parties to the agreement were tempted to identify the items, which could constitute transportation business and define it as "undertaking" to have the benefit of a slump sale. Secondly, the list of all items as given in the agreement is not precise and comprehensive inasmuch as the items so listed do not have any precise identification of the items to be transferred. Precise identification of the items in the agreement would have been possible only if the assessee had identified and allocated the assets and liabilities pertaining to the transportation business in its accounts as independent unit or as a going concern. It is precisely for this reason that various items pertaining to the railways were grouped together, without their precise identification, as constituting "transportation business" in the agreement. The books of account maintained by the assessee did not recognize transportation business as a going concern or as an independent undertaking. Thirdly, the learned CIT(A) has observed in para 20.2 of his order that the impugned transfer comprises of movable properties like plant and machinery, furniture and fixtures, office equipments, stocks, book debts, other current assets and liabilities without there being any transfer of immovable property. The assessee has indeed spelt out the reasons for not transferring out the immovable properties. But those reasons have to be seen in the light of another important finding recorded by the learned CIT(A) that it was Baroda factory of the assessee which could be termed as a going concern or a unit and not the individual activities carried out or machines installed at the said Baroda factory. His finding that the impugned transfer seeks to transfer only some of the machines and other items of Baroda factory and not Baroda factory itself and therefore the impugned transfer was not a transfer of a going concern as a whole and consequently not a slump sale, in our view, is correct on the facts of the case and does not call for our interference.
90. In para 20.3 of his appellate order, learned CIT(A) has referred to the valuation report obtained from M/s KPMG Pea Marwick (I) (P) Ltd. ("valuer" in short) wherein the valuer has valued the "transportation business" including the non-compete component at Rs. 83.10 crores on the basis of net maintainable earning method. For this purpose, the valuer took into account the earnings of the said business for the years ended December, 1994 and December, 1995 as furnished by the management and the projected earning for the year ended 1996. According to the finding recorded by the learned CIT(A), this also shows that the "transportation business" was never recognised as independent cost or profit centre in the books of the assessee which in turn negatived the plea of the assessee that the transportation business was in itself a going concern. There is no material before us to disturb the aforesaid finding of the CIT(A).
91. In para 20.6 of his appellate order, the learned CIT(A) has referred to the treatment given by the purchaser, a part of the ABB Group, in allocating the value to each item of the asset transferred. The assessee submits that the treatment given by the purchaser is immaterial in that it is a unilateral action on the part of the purchaser which cannot form the basis for holding that the assessee transferor has allocated the value to each item. He has referred to certain decisions, cited supra, to support his submission. The learned CIT-- Departmental Representative controverts the aforesaid submission by saying that it is not a case where the transaction is at arm's length in that the impugned transfer has been effected between group companies. In our view, the submissions made by the learned CIT--Department Representative carry greater conviction. It cannot be said that the group management controlling both the companies was unaware of the aforesaid allocation of the value. Even though in law the group companies have separate existence and are separate entities it is well established that in certain circumstances, the veil of corporate personality can be pierced; one such circumstance is when fiscal adjustments are tailor made for each other to gain tax advantage which would not have been admissible but for such fiscal adjustments between them on account of their close connection. On the facts of the case, corporate veil is required to be lifted. It cannot be said that the group management controlling both the companies was unaware of the aforesaid allocation of the value. The mere fact that another company of the group has allocated the value to each item instead of the assessee itself would not make any substantial difference in view of their close relationship. On the facts found by both the Departmental authorities, we cannot say that there is no material on the basis of which severalty in impugned transaction with allocation of value to each item cannot be inferred as was done by the Hon'ble Supreme Court in Artex (supra).
92. The facts brought on record and those discussed above are clear enough to indicate that the impugned transaction does not seek to transfer any unit or undertaking or business as a whole and as a going concern at its realizable value. In the absence of any precise recognition of "transportation business" as a separate unit or concern or business in the books of the assessee, it is neither possible to identify as to what assets and liabilities belonged to the "transportation business" nor consequently hold that the seller has not withdrawn any asset from the business sold or the purchaser has not rejected any asset or liability comprised in the business. The items indicated in the agreement are neither precisely identifiable nor comprehensive due to the absence of their identification in the books as those belonging to the transportation business. On the other hand, the materials available on record do indicate itemization of the assets and liabilities as also the item-wise value of the assets transferred. The assets have been itemized in the agreement itself and values assigned to them by the purchaser, a group company. Severalty in the sale can thus be inferred from the materials available on record. All the essential features of a slump sale are lacking in the impugned transfer. The facts of the case before us are well covered by the decision in Artex (supra). In this view of the matter, the finding recorded by the learned CIT(A) that the impugned transaction is not a slump sale is confirmed.
A. Taxability of the profits/gains in the absence of a slump sale.
93. One of the inevitable consequences of the transaction being treated as a case of non-slump sale is that the sale consideration is allocable. We have already held that the impugned transfer does not amount to slump sale. Consequently we direct that the gains arising on transfer of (i) inventory; (ii) depreciable assets; and (iii) other assets be charged to tax in terms of the directions given hereinafter.
94. Having held that the impugned transaction is not a slump sale, the learned CIT(A) has held in para 22 (iii) of his appellate order as under:
The sale consideration of Rs. 53.10 crores as reduced by the profit of Rs. 4.25 crores arising to the appellant company from 1st Jan., 1996 to 31st July, 1996 is chargeable to tax as short-term capital gains under Section 50 of Act and not as long-term capital gain as held by the AO in the assessment order. Hence the net sale consideration after reduction of the cost of asset taken by the AO at Rs. 6.79 crores is liable to tax as such.
95. The learned Counsel for the assessee submits that the aforesaid order of the learned CIT(A) is not in conformity with the provisions of Section 50. Our attention has been drawn to Section 50 of the IT Act, which contains special provisions for computation of capital gains in case of depreciable assets alone and of no other asset. He further submits that Section 50 envisages, inter alia, the computation of short-term gain arising on transfer of depreciable assets with reference to sale consideration and written down value of the depreciable assets with some other adjustments but in no case with reference to the cost of other assets including non-depreciable assets, as directed by the learned CIT(A).
96. We have heard both the parties. There are three distinct categories of assets which have been transferred under the agreement and to which values have been assigned by the purchaser, namely, (i) value assigned to the inventory sold; (ii) value assigned to the depreciable assets sold; and (iii) value assigned to the other assets sold. We shall now deal with each of them.
(i) Taxability of profits/gains arising on transfer of inventories
97. The purchaser has allocated Rs. 3.09 lakhs towards the purchase of inventories. It has been held in Doughty v. Commissioner of Taxes (1927) AC 327 that even in the case of realization sale, i.e., sale of an entire business, if there were one item which could separately be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with the sale of the whole concern might be treated as taxable income. The said decision has been cited, with approval by the Hon'ble Supreme Court in CIT v. West Coast Chemicals & Industries Ltd. (supra). In CIT v. Mugneeiam Bangui & Co. (supra) also, it has been held that profit embedded in any portion of the slump price which is attributable to the stock-in-trade, should be brought to tax as income. In the case before us, the purchaser himself has allocated a consideration of Rs. 3.09 lakhs towards the inventories and hence it has to be brought to tax as revenue receipt notwithstanding the finding as to whether the impugned sale is slump sale or not. We, therefore, direct the AO to tax the profits attributable to the inventories/stock-in-trade as business profits and to that extent the order of the CIT(A) would stand modified.
(ii) Taxability of profits/gains arising on transfer of depreciable assets.
98. Profits and gains arising on transfer of depreciable assets are taxable under Section 50 which provides for computation of capital gains arising on transfer of depreciable assets. Section 50 being a special provision will override the general provisions in the matter of computation of capital gains on transfer of depreciable assets. Section 50 envisages taxability of short-term gain arising on transfer of depreciable assets with reference to sale consideration and written down value of the depreciable assets with some other adjustments but in no case with reference to the cost of the assets, as directed by the learned CIT(A). We agree with the learned CIT(A) that Section 50 is applicable to the case of the assessee but that applicability has to be restricted to the gains arising on transfer of depreciable assets alone and to no other asset. Besides, the computation of short-term capital gain on transfer of depreciable assets needs to be done in the manner prescribed in Section 50 itself. Therefore, the order of the CIT(A) as given in para 22(iii) of his appellate order requires two-fold modification : one, that the computation of short-term capital gain under Section 50 shall be restricted to the depreciable assets alone; and, two, the computation shall be made in the manner prescribed by Section 50 and not in the manner prescribed by the learned CIT(A) in his order. We therefore modify the order of the learned CIT(A) and direct the AO to compute capital gains in respect of depreciable assets strictly in terms of Section 50. For this purpose, the total consideration will have to be split into three parts, namely (i) sale consideration allocable to the inventories; (ii) sale consideration allocable to depreciable assets; and (iii) remaining amount of sale consideration not allocable to inventories and non-depreciable assets. The AO is directed to compute the capital gains arising on transfer of depreciable assets in terms of Section 50 and not in terms of the directions given by the learned CIT(A) in para 22 (ii) of his appellate order.
(iii) Taxability of profits or gains arising on transfer of other assets
99. In view of our aforesaid direction modifying the order of the learned CIT(A) regarding the computation of capital gains under Section 50 in respect of depreciable assets only, a consequential issue arises as to what treatment should be given to the remaining amount of sale consideration, i.e., sale consideration not allocable to inventories and non-depreciable component of the assets transferred. It can be considered for taxation either as capital gains or as business profits depending upon whether it is in capital field or revenue filed. If it is not in any of the aforesaid fields, it can still be considered for taxation as a casual or non-recurring receipt under Section 56 r/w Section 10(3). Learned CIT (Departmental Representative) has pointedly submitted that the assessee has already claimed cost of acquisition/improvement/development of non depreciable assets in its accounts and hence cannot again claim deduction on the same account. He has also submitted that the assessee has neither capitalized those expenses nor shown them as investment or as capital assets in its accounts nor claimed any depreciation thereon. According to him, it is the total amount of sale consideration not allocable to inventories and depreciable assets that should be brought to tax without any deduction towards cost of acquisition/improvement/development, as such cost already stood claimed by the assessee in its accounts and allowed by the Department. The assessee has not rebutted the aforesaid submission, i.e., that the expenses towards acquisition/improvement/development already stood claimed as revenue expenses in the accounts, made by the learned CIT--Departmental Representative, in its submissions including the written submissions. We find that this aspect has not been looked into by the learned CIT(A) but adjudication on this issue of taxability of profits or gains arising on transfer of non depreciable assets is a necessary consequence of our directions to the AO to split the sale consideration into three parts.
100. We find that the purchaser has allocated Rs. 43.17 crores out of total sale consideration to technical know-how. The assessee has not purchased the technical know-how. It has developed the technical know-how in-house. It is unbelievable that the assessee could have developed the technical know-how in-house without incurring any expenditure or cost. There is nothing before us to indicate that the assessee has capitalised the expenses towards acquisition/improvement/development of technical know-how in its accounts or claimed depreciation thereon. The only inference that can be drawn is that the expenses incurred towards acquisition/improvement/development of technical know-how have been claimed as revenue expenditure in which situation the entire receipt would also be taxable in revenue field. However, the position would be different if the assessee has capitalized the expenses/costs incurred towards acquisition/improvement/development of technical know-how in its accounts in which case the profit or gain arising on their transfer would be chargeable to tax as capital gains under Section 45 after allowing deduction for the costs of their acquisition/improvement/development. The assessee cannot argue, after claiming deduction towards the expenses/costs of their acquisition/improvement/development as revenue expenditure, that the gains arising therefrom would not be exigible to capital gains tax as their costs of acquisition/improvement/development are not available for deduction under Section 48 of the IT Act. If the assessee has treated the costs/expenses relating to acquisition/improvement/development of intangible/non-depreciable assets in the revenue field, the gains arising as a result of sale thereof will have to be necessarily treated in revenue field either under Section 28 or Section 56 and not as capital gains. The provisions of Section 56 r/w Section 10(3) are quite apposite. Entire sale consideration not allocable to inventories and non-depreciable assets can also be considered for taxation as a receipt of casual and non-recurring nature under Section 56 of the IT Act if the assessee is not in a position to establish that the income accruing to it on account of the impugned transfer is not exempt from tax or is not liable to be taxed under Section 28. However, neither the AO nor the learned CIT(A) has recorded any finding of fact in this behalf. Therefore, the issue regarding the taxability of the remaining amount of sale consideration is restored to the file of the AO with the direction to verify all the aforesaid aspects, apply his mind afresh and decide the taxability or non-taxability of the remaining amount of sale consideration in accordance with law, after giving a reasonable opportunity of hearing to the assessee.
B. Taxability of the profits/gains if the transaction is treated as slump sale
101. Both the parties have also argued about the taxability of profits or gains if the impugned transaction is held to be a slump sale. Though we have held earlier in this order that the impugned transaction does not amount to slump sale, we feel it necessary to deal with the submissions made by the parties in this behalf and to dispose them of without prejudice to our aforesaid finding. It is the submission of the assessee that profit arising on slump sale is not taxable as it is not possible to determine the cost of acquisition with reference to any particular point of time. In our view the submission made by the assessee is not tenable in law. It is admitted by the learned Counsel for the assessee as well as the learned Departmental Representative that the slump sale of a business as a whole and as a going concern is a capital asset under Section 2(14) being property held by the assessee prior to transfer. The fact that the said property has been transferred for a consideration during the year ending 31st March, 1997 is also not in dispute. Thus, there is a capital asset, which has been transferred for a consideration during the year ending 31st March, 1997. In B. Raghurama Prabhu Estate v. Jt. CIT (supra), it has been held that neither the IT Act nor any judicial pronouncement declares that where sale of the assets is made for a lump sum consideration, it cannot be subjected to tax under the heading "Capital gains" and that the law is that if individual assets can be reasonably valued for ascertaining their respective cost of acquisition, then by resorting to statutory parameters and mode of calculation devised under the head "Capital gains" in Chapter IV, the gains so computed can always be brought to tax. Similar is the decision of the Hon'ble jurisdictional High Court in Premier Automobiles (supra). Therefore, the limited question now is as to what should be the mode of computation for working out the profits/gains from the slump sale. There are two provisions which are relevant in this behalf; (i) the provisions of Section 50B, which are specific to the computation of capital in case of slump sales, and (ii) the general provisions of Section 45, which would be applicable in the absence of special procedure prescribed in Section 50B.
(i) Taxability under Section 50B
102. The learned Departmental Representative submits that even if the transaction is held to be a slump sale, the taxability of the profits and gains arising on such sale has to be brought to tax under Section 50B of the IT Act. According to him Section 50B, being procedural and computational provisions, has retroactive operation and therefore would govern all the pending proceedings. Learned Counsel for the assessee, on the other hand, contends that Section 50B does not have retrospective operation and hence the taxability of profits/gains from a slump sale cannot be considered under Section 50B. They have made detailed submissions in this behalf, which have already been mentioned earlier in this order.
103. We have heard the parties and considered their submissions including the authorities referred to by them. "Slump sale" is now defined by Section 2(42C) of the IT Act, inserted by the Finance Act, 1999 w.e.f. 1st April, 2000, to mean "the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales". Explanation 1 to Clause (42C) of Section 2 provides that, for the purpose of Clause (42C) of Section 2, "undertaking" shall have the meaning assigned to it in Expln. 1 to Clause (19AA) of Section 2. Explanation 1 to Section 2(19AA) defines undertaking as including "any part of undertaking, or a unit or division of undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity." Explanation 2 to Clause (42C) of Section 2, which has been enacted for the removal of doubts, declares that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. It may be reiterated that Clause (42C) has been inserted in Section 2 of the IT Act by the Finance Act, 1999 w.e.f. 1st April, 2000. Assessment year involved in the appeal before us is asst. yr. 1997-98. Thus, the definition of the "slump sale" as now given in Section 2(42C) was not available on the statute book in the assessment year under appeal. Nevertheless the concept of slump sale was and continues to be a well known and judicially recognized concept. The concept of "slump sale", which was hitherto judicially recognized has now been codified and inserted in the form of Clause (42C) in Section 2 of the IT Act. What was earlier Judge made law is now a codified law. In Premier Automobiles Ltd. v. ITO (supra), the Hon'ble jurisdictional High Court has held at.p. 223 of the said report thus; "....The concept of slump sale initially was evolved under Judge-made law which has subsequently been recognized by the legislature by inserting Section 2(42C)...." Thus, the definition of "slump sale" in Section 2(42C) is nothing but codification of what was hitherto judicially recognized. Section 2(42C) is nothing but declaration of the existing law of slump sale. As regards the taxability of gains from slump sale, the Hon'ble High Court has held at p. 235 of the said report as under:
In this appeal, we were only required to consider whether the transaction was a slump sale and having come to the conclusion that there was a sale of business as a whole, we have to remand the matter back to the AO to compute the quantum of capital gains. For that purpose, the AO will have to decide the cost of the undertaking for the purposes of the computing capital gains that may arise on transfer. That, the AO will also be required to decide its value under Section 55 of the IT Act. Further, the AO will be required to decide on what basis indexation should be allowed in computing the capital gains and the quantum thereof. Lastly, the AO will be required, to decide the quantum of depreciation on the block of assets. It may be mentioned that these parameters, which we have mentioned are not exhaustive. They are some of the parameters under the Act.
(Emphasis, italicised in print, supplied)
104. Coming as it does from our own jurisdictional High Court, we are bound to follow the aforesaid dictum. In the aforesaid case also, the assessment year involved was 1995-96 when Section 50B was not in existence. Still the Bombay High Court did not accept the plea that profits and gains arising on slump sale were not taxable. This shows that it has always been the law that profits and gains from slump sale are taxable. In the face of the aforesaid decision of the Hon'ble jurisdictional High Court, the natural corollary is that the provisions of Section 50B(1) declaring that any profit or gain arising from the slump sale would be chargeable to tax as capital gains, is merely declaratory of the law as it then existed. The obvious question then is as to what was the necessity of enacting Section 50B when it was merely declaratory of the existing law. The answer to this question lies in the provisions of Sub-sections (2) and (3) of Section 50B, which provide for the mechanism for the computation of cost of acquisition and the cost of improvement. In the absence of any statutory mode of computation of cost of acquisition/improvement, difficulties were being experienced in the computation of capital gains arising from the slump sale. At this stage, we may fruitfully refer to the heading of Section 50B which reads : "Special provision for computation of capital gains in case of slump sale". It is therefore quite evident that Section 50B deals with computation of capital gain in cases of slump sale. While Sub-section (1) of Section 50B declares the existing law and thus puts the same beyond the pale of any doubt, Sub-sections (2) and (3) thereof merely lay down the machinery for computation of capital gains from slump sales.
105. The issue that now arises is whether the computational provisions enacted in Section 50B(2) and (3) to provide simplicity, uniformity and certainty the three pillars of taxation for the computation of capital gains are retroactive or not. In order to answer this question, we can fruitfully refer to the decision of the Hon'ble Supreme Court in CWT v. Sharvan Kumar Swarup & Sons wherein it has been held that machinery provisions, which provide for the machinery for the quantification of the charge, are procedural provisions and therefore would have retroactive operation and apply to all pending proceedings. Sub-sections (2) and (3) of Section 50B are thus procedural provisions inasmuch as they have been enacted to quantify and thereby simplify the procedure for computation of cost of acquisition/improvement in cases of slump sale. This being the position, we hold that the provisions of Section 50B(2) and (3) are machinery provisions and hence would have retroactive operation and apply to all pending matters. In Premier Automobiles (supra) also, the Hon'ble High Court has left the issue of working out the cost of acquisition to the AO with the observations, which are indeed quite significant, that the parameters set out in that judgment are not exhaustive and that there are some other parameters in this behalf under the IT Act. It is thus clear that the Hon'ble jurisdictional High Court in the aforesaid case has not excluded the applicability of the parameters prescribed in Section 50B(2) and (3) for computing the cost of acquisition/improvements in cases of slump sale. Thus the decision that we have taken that the provisions of Sub-sections (2) and (3) of Section 50B are retroactive and apply to all pending matters is in conformity not only with the law declared by the Hon'ble Supreme Court in CWT v. Shrawan Kumar (supra) but also with the decision of the Hon'ble Bombay High Court in Premier Automobiles (supra).
106. Sub-sections (2) and (3) of Section 50B, which have been held above to be retroactive and applicable to all pending proceedings require the computation of cost of acquisition and improvement to be done in the manner prescribed therein which inter alia requires the assessee to furnish in the prescribed form a report 'of a chartered accountant indicating the computation of net worth of the undertaking or division as the case may be. Neither the AO nor the CIT(A) has carried out the requisite exercise in terms of the aforesaid provisions. Therefore, the computation of capital gains, in case the impugned transaction is treated a slump sale, is required to be done by them under Section 50B, for which purpose the matter would need to be restored to them. However, we are not restoring this issue to the file of the Departmental authorities in view of our decision that the impugned transaction is not a slump sale. We have however decided the applicability of Section EJB to dispose off the alternative submissions made by the parties.
107. It is however the submission of the assessee that Section 50B can never have retroactive operation as it would, according to him, mean, by the same logic, that the amendments made in Section 55(2)(a) deeming the cost of acquisition of certain assets to be nil would equally have retroactive operation. According to the learned Counsel, the Hon'ble Supreme Court in CIT v. D.P. Sandhu Brothers (supra) has held that the amendments to Section 55(2)(a) deeming the cost of acquisition of a tenancy right to be nil would have only prospective effect and not retrospective effect. In our view, the aforesaid decision has been rendered in the context of the provisions of Section 55(2)(a) which deems the cost of acquisition of tenancy right to be nil and not in the context of Section 50B(2) and (3) which merely simplifies and standardizes the procedure for computation of cost of acquisition/improvement in cases of slump sale. It is not the case of either party that there is no cost of acquisition of the properties. Subject-matter of a slump sale will always have some cost of acquisition. There are several methods to compute the cost of acquisition. Section 50B(2) and (3) merely simplifies and standardizes the procedure for computation of cost of acquisition/improvement. It does not deem, like Section 55(2)(a), the cost of acquisition to be nil. There is a vast difference between a provision deeming the cost of acquisition as nil and a provision simplifying the procedure for computation of cost of acquisition where there is a cost of acquisition. In this view of the matter, the decision in D.P. Sandhu Brotheis (supra) cannot be pressed into service for canvassing the view that Section 50B(2) and (3) does not have retroactive operation. We are obliged to follow the law laid down by the Hon'ble Supreme Court in CWT v. Shrawan Kumai (supra) and of the Hon'ble jurisdictional High Court in Premier Automobiles (supra) which we have respectfully followed instead of following the decisions holding otherwise.
(ii) Taxability under Section 45
108. Referring to the decisions B. Raghurama Prabhu Estate v. Jt. CIT (supra) and Premier Automobiles Ltd. v. ITO (supra), the learned CIT--Departmental Representative submits that the profits and gains from slump sale would still be chargeable under Section 45 if a view is taken that Section 50B has no retroactive operation. Learned Counsel for the assessee has however submitted that they are not taxable as it is not possible to determine their cost of acquisition. They have made detailed submissions in this behalf which have already been elaborated earlier in this order.
109. We have heard the parties and considered their submissions. In both the aforesaid decisions, it has been held that profits/gains arising from slump sale are taxable. In Premier Automobiles Ltd. (supra), the Hon'ble jurisdictional High Court has restored the issue regarding computation of capital gains from slump sale to the file of the AO in the light of the directions given therein. Without prejudice to his other arguments, the learned Departmental Representative submits that the aforesaid decision is binding on us and hence we cannot hold that the profits and gains from slump sale in the present case are not taxable. He submits that both the AO and the CIT(A) have not attempted to compute the profits/gains from slump sale in view of their finding that the impugned sale was not a slump sale and therefore the matter would require to be restored to the file of the AO with similar directions as given by the Hon'ble Bombay High Court in Premier Automobiles. The submissions of learned CIT--Departmental Representative are correct and are in conformity with the aforesaid decisions of Hon'ble Bombay High Court and Karnataka High Court. We therefore reject the submission of the assessee that the profits/gains would not be taxable once it is held that the impugned sale is a slump sale. However, the question of computation of profits and gains from slump sale would arise only when the transaction is held to be a slump sale. Since we have already held that the impugned sale is not a slump sale, we cannot restore the matter to the file of the AO and direct him to compute the capital gains from slump sale in the light of the principles laid down in Premier Automobiles (supra). The submissions made by the parties in this behalf stand disposed off with the aforesaid observations.
Ground No. 10: Taxability of interest income
110. Clause 3 of the agreement provides that Rs. 31.58 crores would be paid on the transfer day that was defined in the agreement to be 1st Aug., 1996 along with interest on the amount for the period from and including 1st Jan., 1996 upto and including 31st July, 1996 at the rate of 18 per cent per annum and the balance Rs. 21.52 crores to be paid on 1st Oct., 1996 along with interest @ 18 per cent p.a. on the said amount for the period from 1st Jan., 1996 to 30th Sept., 1996. Any delayed payment was to carry interest at a rate per annum equal to one percentage point above the prime lending rate(s) applied by the assessee's bank for short-term borrowings during the period of delay. Pursuant to the aforesaid stipulation in the agreement, the assessee has received interest for both the periods, i.e., period ending 31st March, 1996 as also the period ending 31st March, 1997. The AO has taxed the interest income on revenue account on accrual basis. On appeal, the learned CIT(A) has confirmed the order of the AO in this behalf with the following observations:
21.15 In regard to the taxability of the interest receipt there cannot be two opinions that interest accrues on daily basis and hence required to be charged to tax as income. As held in the case of Tiruchirapalli Co-operative Marketing Society Ltd. v. CIT , the amount is liable to be taxed as on revenue account. The appellant company had resolved to transfer the business in a resolution that had taken place in December, 1995 much before the date of execution of the sale agreement. Hence in anticipation of income on account of sale has been all along there since then. Therefore, though the sale has taken place on 1st Aug., 1996, once it has been made effective from 1st Jan., 1996 and interest has been paid for the period starting from that date, on account of the delay in payment of sale consideration. Interest on both the payments of sale consideration and non-compete fee is required to be taken on revenue account on accrual basis.
111. We have heard the parties. It is the submission of the assessee that interest relatable to 1st Jan., 1996 to 31st July, 1996 should be treated as part of sale price while the remaining interest after 1st Aug., 1996 should be treated on revenue account. In support of his submissions, he has relied upon the unreported decision of this Tribunal in Niranjanlal Dalmia (P) Ltd. v. Jt. CIT ITA No. 3829/Mum/2000 (order dt. 29th Sept., 2005). We have perused the aforesaid order. The fact situation in that case was different from the one before us. In the said case, the possession of the property was withheld with the result that the value of the property had gone up during the intervening period. In order to compensate for the increase in the market value of the property, the arbitrator had awarded interest, which was included in the sale consideration on which stamp duty was also paid. In terms of the arbitration award, possession of the property was given against payment of sale price as enhanced by interest to compensate for the increase in the price. The fact situation in the case before us is altogether different. Here the possession was given as per agreed schedule. The purchaser was required to pay interest due to withholding of payment of consideration and not in order to compensate the assessee for the increase in the value of the property due to delay in transfer. Interest has accrued to the assessee due to the withholding of payment by the purchaser. Interest is nothing but compensation for use of money. Since the purchaser used the amount of sale consideration till it paid the same, it was required to pay interest. On these facts, we hold that the amount of interest received by the assessee was not in the nature of sale price or compensation for transfer of property but in the nature of interest per se arising after the property stood transferred. The law laid down by the Hon'ble Supreme Court in Dr. Shamlal Narula v. CIT and the Hon'ble jurisdictional High Court in K.S. Krishna Rao v. CIT and CIT v. Vishnu Dayal Dwaikadas squarely covers the issue against the assessee and in favour of the Revenue. In our view, learned CIT(A) has correctly examined the factual and legal aspects of the case. We therefore confirm his order in this behalf. Ground No. 10 is dismissed.
Ground No. 11 : Taxability of non-compete fee
112. Simultaneously with the execution of the agreement a non-competition agreement ("NCA" in short) was also executed between the assessee and ABB Bahnbeteiligungen Gmbh, a German company, which was the sole shareholder in the purchaser company. Pursuant to the NCA, it was agreed that as long as the assessee held directly or indirectly 25 per cent of the capital and voting stock of the purchaser company and for a period of 5 years thereafter neither the assessee nor any of its affiliates would engage in anyway directly or indirectly in any industrial activity which competes in India with the transportation business acquired by the purchaser. In consideration thereof the assessee was to be paid a sum of Rs. 30 crores along with interest from 1st Jan., 1996 upto 31st July, 1996 at the rate of 18 per cent per annum. The assessee claimed before the AO that the amount of Rs. 33,21,00,000 (inclusive of the interest component) was not exigible to tax being a receipt on capital account having regard to the ratio of several decisions of the Supreme Court and High Courts on the point. The AO took the view that the Revenue authorities were not bound by the form of agreement and that they were therefore competent to look at the substance of the transaction. According to the AO, once the global headquarters of the assessee decided that the assessee would not engage itself in the transportation business, the assessee had no choice in the matter and hence there was no question of entering into or furnishing the restrictive covenant. According to the AO, the amount received s was a revenue receipt. In this connection, he has placed reliance upon decisions of the Supreme Court in CIT v. G.R. Karthikeyan and Emil Webber v. CIT as well as the decision of the High Court at Bombay in Blue Star Ltd. v. CIT . According to the AO, the amount received would be chargeable to tax either under Section 28 or under Section 10(3). In the alternative he has taken the view that the amount received would be on account of goodwill and thus also chargeable to tax.
113. The assessee carried the matter in appeal before the CIT(A). Learned CIT(A) has dealt with the issue in para 21 of his appellate order. The learned CIT(A) has upheld the view taken by the AO that it is the substance of the transaction and not the form of transaction that needs to be looked into to decide the true character of the receipt. He has also agreed with the AO that the assessee was not in a position, after execution of the agreement, to compete with the purchaser and hence the impugned amount was not received for non-competition. He has however not agreed with the AO that the impugned receipt has the character of income chargeable to tax under Section 28. According to him, the "...so-called "non-compete" fee of Rs. 30 crores is on account of transfer of goodwill the cost of which is nil. Hence the entire receipt is taxable as long-term capital gain and not as revenue receipt." The assessee is aggrieved by the order of the CIT(A) with regard to the taxability of the aforesaid amount and hence is in appeal before this Tribunal. However, the Department has not filed any appeal against the directions of the learned CIT(A) in this behalf.
Submissions made by the parties
114. Repelling the finding recorded by the Departmental authorities that there can be no question of any non-competition as it is unlikely that the assessee would compete with a company in which the group of which it is a part has a 50 per cent interest, the learned Counsel for the assessee submitted that the compensation was paid by the purchaser on purely commercial considerations and that if the Revenue alleges that what is apparent is not real the burden is on it to establish the company. CIT v. Daulat Ram Rawat Mull further submitted that, apart from making the allegation, the Department has brought no evidence on record to prove that what is apparent from the NCA is not real. According to him, furnishing of a restrictive covenant by a co-venturer is not unknown in commercial circles. He submitted that while the assessee has been engaged in the business in India for last several decades, Diamler, the other co-venturer, had no presence in India and it was therefore apprehensive that the assessee could continue to compete with it more so if the joint venture agreement fell through and accordingly found it in its commercial interest to agree to pay an amount for obtaining a restrictive covenant. He pointed out that the fact that restrictive covenants are paid in such situations are borne out by the decision of the Bombay Bench of this Tribunal in Jt. CIT v. Alfa Laval (India) Ltd. (2006) 104 TTJ (Mumbai) 791 : (2006) 103 ITD 1 (Mumbai) in which the ABB Group and Alfa Laval had entered into a joint venture to manufacture certain equipments and it was the ABB group, which paid Alfa Laval an amount for agreeing to non-competition. The Tribunal held that the non-compete was a receipt on capital account and could not be regarded as consideration for the transfer of goodwill. He has referred to the decisions of the Tribunal in Asstt. CIT v. Kamlesh S. Sonawala/Hemant S. Sonawala ITA Nos. 4705-06/Bom/1991, Kushal N. Desai v. Jt. CIT, ITA No. 5025/Mum/2000 (order dt. 28th May, 2002), Godrej Soaps Ltd. v. Jt. CIT ITA No. 2583/Mum/2001 (order dt. 8th Nov., 2004), Jt. CIT v. FAA Jasdanwalla ITA No. 6897/Mum/1998 (order dt. 1st June, 2004), Jt. CIT v. Jamshed R. Desai ITA No. 3924/Mum/2000 (order dt. 27th May, 2004), Jt. CIT v. Desai Jamshed Rustom ITA No. 347/Mum/2001 (order dt. 29th Nov., 2004), Dinshaw F. Pandole v. Jt. CIT ITA Nos. 639-640/Mum/2000 (order dt. 27th Sept., 2000), Naval F. Pandole v. Jt. CIT ITA Nos. 5884-85/Mum/2000, Asstt. CIT v. Ashit M. Patel (2005) 96 TTJ (Mumbai) 439, Jt. CIT v. Clea Advertising ITA No. 90/Mum/1999 (order dt. 14th June, 2005), CIT v. A.S. Wardekar (2005) 199 CTR (Cal) 255, CIT v. Saroj Kumar Poddar , CIT v. Milk Food Ltd. , etc. Referring to some of the aforesaid judgments, he submitted that they would, inter alia, disclose that non-compete fee was paid to an individual who was a shareholder of the company because the other joint venturer wanted to be reasonably certain that its investment in the Indian company was adequately protected. Referring to the allegation by the Revenue that the assessee had attempted to show a part of the sale price as the consideration for non-competition, he submitted that there was no material at all to establish the said allegation. He contended that the stand of the assessee has all along been that both the sale consideration as well as the receipt for non-competition are not chargeable to tax and if that be so the question of a device being adopted to dress up a part of the sale price/consideration as a receipt for furnishing a non-compete would have no legs to stand on.
115. Per contra, the learned CIT--Departmental Representative rebutted the submissions made by the learned Counsel for the assessee. He submitted that, during 1994-95, a joint venture company "ABB Diamler-Benz Transportation AG" [Adranz] was. established by ABB and Diamler in Germany after which a subsidiary of ADRANZ was incorporated in India to take over transportation business from the assessee as part of global restructuring of the operations of ABB and therefore it was unbelievable that both the companies controlled by the same groups would compete with each other. According to him, there was only one single buyer of the railway goods produced by the assessee in India, i.e., Chittaranjan Loco Works. Entire transportation business was dependent upon this single customer and no free market existed. He invited our attention to five factual aspects of the case, namely, (i) entire arrangement was part of global restructuring; (ii) there was complete monopoly of production and of buyer; (iii) business was transferred voluntarily without any tender or negotiations; (iv) same groups are controlling both the companies, i.e., assessee company and purchaser company; (v) industrial license, technical know-how, etc., also stood transferred, and submitted that the aforesaid factual aspects of the case amply demonstrated that the assessee was not left with anything to offer competition to the purchaser and hence it was not possible to believe that the impugned sum was paid by the purchaser in lieu of the restrictive covenant furnished by the assessee. He further submitted that the manufacture of railway wagons required license, huge investment, trained manpower, procurement and commissioning of specialized plants and machinery, etc., and a long gestation period to put them in place. He submitted that even if the assessee had desired to compete with the purchaser, it would not have been possible for it to do so in view of the aforesaid factors within the time frame of noncompetition stipulated in the NCA. His argument therefore was that there was no possibility of any competition being given by the assessee and therefore the claim of the assessee that the impugned sum was received in lieu of its agreeing to a restrictive covenant was a mere colourable device to gain tax advantage. He also referred to the report of KPMG, valuer and submitted that the valuer has raised enough apprehensions against the claim of noncompetition and finally, without giving any scientific basis, just mentioned that one third be taken for non-competition component of the transaction. He submitted that both the parties, in view of their close connection and management, could prepare the agreement and NCA in a manner that helped the assessee in gaining tax advantage.
116. Learned CIT--Departmental Representative has also referred to the judgment in CIT v. Coal Shipments (P) Ltd. and several other decisions for the proposition that "payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time but the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time and as to how long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case." He reiterated that even if the assessee had desired to compete with the purchaser, it would not have been possible for it to do so in view of the aforesaid factors. Still if the assessee had desired to set up a competitive facility, the duration of the period of non-competition was such that it was meaningless and this being the position the claim of the assessee would be squarely hit by the aforesaid judgment. In this connection, he made elaborate references to the observations made in Chelpark Co. Ltd. v. CIT and several other decisions in which the principles laid down in Coal Shipments (supra) have been reiterated and followed.
117. Taking further his submission that the element of competition was nonexistent in the present case, he submitted that the restrictive covenant was, in view of the aforesaid facts, sham and a colourable device to defeat the levy of tax and hence should be ignored. In this connection, he referred to several authorities, namely, CIT v. Keshavji Moraiji and Anr. , Om Dutt v. CIT , CIT v. Kanchanlal Vadilal , CIT v. Mohamadmiya A. Topiwala , ITO v. Simpson & General Finance Co. Ltd. (1979) 7 TTJ (Mad) 1 and Siddho Mai & Sons v. CIT .
118. Having submitted that the restrictive covenant was sham and a colourable device, he contended that the non-compete fee, as held by the AO, was in the nature of business income or in the nature of income from other sources and hence the learned CIT(A) was not justified in holding otherwise. He argued that the word "income" used in Section 2(24) of the IT Act has wide import as held in several cases. In support of his submission, he relied upon the following observations made by the Hon'ble Supreme Court in CIF v. G.R. Karthikeyan (supra).
What, then, is the ordinary, natural and grammatical meaning of the word 'income' ? According to the dictionary it means 'as thing that comes in.' (Oxford Dictionary, Volume V, p. 162; Stroud, Vol. 11, pp. 14-16). In the United States of America and in Australia both of which also are English speaking countries the word 'income' is understood in a wide sense so as to include a capital gain. Reference may be made to Eisner v. Macomber (1919) 252 US 189, Merchants' Loan and Trust Co. v. Smietanka (1920) 255 US 509 and United States of America v. Stewart (1940) 311 US 60 and Resch v. Federal Commissioner of Taxation (1943) 66 CLR 198. In each of these cases a very wide meaning was ascribed to the word 'income' as its natural meaning. The relevant observations of the learned Judges deciding those cases which have been quoted in the judgment of Tendolkar quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word 'income'. Its natural meaning embraces any profit or gain, which is actually received. This is in consonance with the observations of Lord Wright to which reference has already been made.... The argument founded on an assumed legislative practice being thus out of the way, there can be no difficulty in applying its natural and grammatical meaning to the ordinary English word 'income'. As already observed, the word should be given its widest connotation in view of the fact that it occurs in a legislative head conferring legislative power.
Since the definition of "income" in Section 2(24) is an inclusive one, its ambit, in our opinion, should be the 'same as that of the word income occurring in Entry 82 of List I of the Seventh Schedule to the Constitution (corresponding to Entry 54 of List I of the Seventh Schedule-to the Government of India Act).
119. Referring to the decision in Emil Webber (supra), he submitted that the income of every kind has to be brought to the charge of income-tax either under the specific heads of income or under the residuary head of income, i.e., income from other sources, unless specifically exempted. He also referred to the decision in Mrs. Rooma Bose v. ITO (1974) 95 ITR 299 (Cal) for the proposition that if an income cannot be charged to income-tax under any of the heads mentioned in Clauses (a) to (e) of Section 14 of the IT Act, the same shall be chargeable to income-tax under the head "Income from other sources" mentioned in Clause (f) of the said Section 14 under the express provisions of Section 56(1).
120. He submitted that the impugned amount received by the assessee in the garb of non-compete fee is in the nature of income. He submitted that the aforesaid amount has been received without transferring any capital asset and hence the CIT(A) has erred in directing the AO to tax it as long-term capital gain. According to him, the AO has correctly taxed it as income under Section 28 of the IT Act. He sought to justify the action of the AO on the ground that the impugned receipts were intended to compensate the assessee for loss of profit arising on transfer of the business relating to one of its customers namely railways, to the purchaser without impairing the trading structure of its business. In support of his submission he referred to the decision of the Hon'ble jurisdictional High Court in Blue Star Ltd. (supra) in which it has been held that where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of the recipient business nor deprives the recipient of what in substance is the source of income, termination of contract being a normal incident of the business and such cancellation leaves the recipient of the amount free to carry on his trade, the receipt is "revenue". His alternative submission was that the amount was also taxable under Section 56 r/w Section 10(3) of the IT Act in the year under appeal, being a receipt of a casual and non-recurring nature.
121. At this stage of his argument, his attention was drawn by us to the fact f that the learned CIT(A) has not approved the action of the AO in taxing the impugned receipts under Section 28 or Section 10(3) of the IT Act and that the Department has not filed any appeal against the aforesaid order. The Bench therefore sought to know as tc how the learned Departmental Representative could argue on a point, which was not the subject-matter of appeal either by the Department or by the assessee before this Tribunal. The learned Departmental Representative explained that the issue of taxability of impugned receipts is very much involved in the appeal filed by the assessee. He contended that the Department has succeeded before the CIT(A) regarding the taxability of impugned receipts in that the CIT(A) decided the issue in favour of the Department by holding that the impugned receipts were taxable. According to him, the dispute was therefore not with regard to the taxability of the impugned receipts but with regard to the head of the income under which it is taxable. According to him, it is the duty of the Tribunal to determine correct head under which the impugned receipt is taxable as the order of the CIT(A) ' regarding taxability of the impugned receipt under a particular head of income i.e. capital gain is under challenge. His next argument in this behalf was that the respondent can defend the order of the AO even in the absence of cross-appeal in view of the decisions in CIT v. P.V. Corporation (2004) 187 CTR (Guj) 212 : (2004) 266 ITR 548 (Guj), CIT v. Common Wealth Trust (India) Ltd. ((Kei) and CIT v. Smt. Section Vijayalaxmi . On being asked as to whether such a consideration by the Tribunal would lead to enhancement of income and if so, whether the Tribunal has the power to enhance the income already determined by the CIT(A), the learned Departmental Representative invited our attention to the decision in CIT v. T. Namberumal Chetty & Sons (1933) 1 ITR 32 (Mad)(FB) and submitted that enhancement of the assessment would mean an enhancement of the assessment as a whole and not enhancement of a particular item of income in the assessment which does not result in the enhancement of the assessment as a whole and that income-tax is one tax and not a collection of taxes on different items of income. He also referred to the decision in Gulshan Kumar v. CIT to support the aforesaid submission. He also referred to the decision of this Tribunal in Jt. CIT v. Sakura Bank Ltd. (2006) 99 TTJ (Mumbai) 689 : (2006) 100 ITD 215 (Mumbai) and submitted that a co-ordinate Bench of this Tribunal has already taken a view that this Tribunal has the power to enhance the assessment of income and that the decision taken by the co-ordinate Bench of this Tribunal is equally binding on us.
122. Without prejudice to the aforesaid submissions, the learned CIT-- Departmental Representative took us through the assessment order and submitted that the impugned receipts were taxable as business profits failing which they were also taxable under Section 56 r/w Section 10(3) and if both of them failed, it would be taxable as long-term capital gain on the ground that the impugned amount was received not in lieu of non-competition but in lieu of parting with goodwill. He submitted that the assessee was not right in its stand that the impugned receipts were not taxable even as a long-term capital gain as held by the CIT(A).
123. In his rejoinder, the learned Counsel for the assessee referred to the judgment in CIT v. Coal Shipments (supra) relied upon by the learned Departmental Representative and submitted that the Supreme Court, in the context of the deductibility of an amount paid for furnishing a restrictive covenant, has held that the expenditure incurred for furnishing a restrictive covenant is generally to be regarded as an expenditure on capital account if the object of making the payment is to derive an advantage by eliminating competition over some length of time. Since the advantage was to endure for a very short period in that case, the Hon'ble Supreme Court held that the expenditure incurred was on revenue account. He also referred to certain other decisions were relied upon by the learned Departmental Representative, viz., , Smt. Nayantara G. Agrawal v. CIT (supra) and submitted that in those decisions the Courts had to consider whether certain expenditure was allowable as a deduction and, having regard to the peculiar facts of those cases, the expenditure was disallowed. The principle laid down in the said decisions, according to the learned Counsel, is that it would be open to the Court to lift the veil and look at the substance of the transaction. While not disputing the aforesaid proposition, he contended that there was no basis in the allegation of the Revenue that the consideration received by the assessee was for something other than furnishing of the restrictive covenant. He concluded by submitting that both the consideration for the restrictive covenant as well as for the sale of the transport undertaking should be held as not chargeable to tax.
124. We have considered the rival submissions including the authorities referred to by them. There is no doubt that the authorities which have been referred to lay down the proposition that if the amount of compensation has been received from a rival dealer in lieu of non-competition in business, the amount so received cannot be taxed as income. However, the same result would not follow if the materials on record reveal that the amount was not received from a rival dealer in lieu of non-competition in business. In order to appreciate the issue, we may now straightaway refer to para 3.2.2 of the report of "valuation of the transportation division" (January, 1996) of KPMG, a copy of which has been filed by the assessee before us. Para 3.2.2 of the said report reads as under:
In the absence of any comparable Indian precedent, we have relied on legal decisions in the USA in the cases of Forward Communications Corporation v. US 76-2 USTC para 9542 (Cl Cl Trial Div 1978), General Insurance Agency Inc. v. Commissioner 17 BTA 1213 (1929), Golden State Towel and Linen Service v. Commissioner TC Memo 67-1 USTC Para 9302, 179 Cl Cl 300, 393, F 2nd 938 (1967) etc. where the question of the portion of the purchase price properly attributable to a non-competition agreement was contended. The US Courts have specified four tests that have to be applied when adjudicating whether a proper amount has been attributed to the non-competition component out of the total purchase price. These are:
*whether the compensation paid for the agreement is severable from the price paid for acquired goodwill. Pursuant to this test, the purchaser must demonstrate that the vendor possessed a probable and viable means of competition;
*whether either party to the contract is attempting to repudiate an amount knowingly fixed by both the purchaser and the vendor as allocable to the non-competition agreement;
*whether there is proof that both parties actually intended, when they signed the sale agreement that some portion of the price be assigned to the non-4 competition agreement; and *whether the non-competition agreement is economically real and meaningful.
(Emphasis, italicized in print, supplied)
125. At the time of hearing, the learned Counsel was requested to supply copies of the judgments referred to in the aforesaid report. He expressed his inability to do so. Be whatever it may, the fact remains that the assessee's own consultants, who are quite reputed in the field, have referred to the US decisions, which, inter alia, require that (i) "the purchaser must demonstrate that the vendor possessed a probable and viable means of competition;" and (ii) "the non-competition agreement is economically real and meaningful". We feel » that the aforesaid tests are quite relevant in deciding upon whether the amount received by the assessee in the case before us is really for and on account of non-competition in business. t
126. We have also gone through the decision in CIT v. Coal Shipments (P) Ltd. (supra) cited at Bar, which lays down following three requisites for successfully claiming that the amount paid to a rival dealer to ward off competition is capital expenditure:
(i) It must be demonstrated that the payment has been made to ward off competition in business;
(ii) The payment must be demonstrated to have been made to a rival dealer; and
(iii) The object of making the payment is to derive an enduring advantage with certainty by eliminating the competition over some length of time.
127. Before we turn to the facts of the case, it may be mentioned that Courts have time and again declined to be bound by labels and have always tried to look through it and solve the question of substance. We also propose to follow the aforesaid dictum. Upon critical evaluation of the facts presented before us, we are inclined to hold that the assessee does not satisfy any of the aforesaid requisites. It is the case of the assessee that it has received the impugned sum in consideration of its agreeing to a restrictive covenant for undertaking not to compete in the similar business as that of the joint venture for a period of five years after it ceases to be a shareholder in the joint venture company. The burden was therefore on the assessee to establish and lead evidence in support of the recitals made in the non- competition agreement (NCA). Apart from relying on the NCA, which is between the parties of the same group, the assessee has given no other evidence to establish that there could have been, in reality, any threat from it to compete with the operations of the joint venture. Facts on record clearly establish that there could not have been any potential competition from the assessee to the purchaser and thus the consideration received by it cannot be said to be in lieu of warding off any competition which the assessee could have given if it had not agreed to a restrictive covenant. It also transpires from the record that the assessee, after transferring its activities relating to its client, namely, railways, to the purchaser, was not in a position to offer any competition to the joint venture for many reasons. Firstly, the activities relating to the supplies to the railways were highly technical activities requiring specialized plants and machinery. Having transferred the plant and machinery, and other assets to the purchaser, it was not possible for the assessee to start similar activity and that too so soon as to give competition to the purchaser. Secondly, the management of ABB Group had taken a conscious decision to carry out restructuring of its operations globally and therefore it was neither the intention of the group management that two entities of the same group should compete with each other in future nor it would have allowed them to compete with each other. Thirdly, the gestation period in setting up the entire facility afresh so as to give competition to the joint venture was so long and the time frame envisaged in the NCA for non-competition was so low that it would not have given the joint venture any benefit of enduring nature on account of non-competition. Besides, the assessee and the purchaser belong to the same group and are thus, in reality, sister concerns and not rivals and thus the requirement of the compensation being paid to a rival dealer is also not satisfied.
128. In para 1.2 of the report (January, 1996) of the valuer, namely, KPMG, it is stated : "In March, 1995, ABB, Switzerland and Diamler Benz, Germany (Diamler) agreed to merge their transportation activities wordwide and transfer their individual operations in various countries into a new joint venture company formed for this purpose." This clause itself rules out the possibility of any competition between the assessee and other companies of the group. Perusal of para 3.12 of the said report shows that there were internal projections indicating downward trend in the revenues in this segment of activity due to technology obsolescence. This again shows the desire of the assessee to close down this activity and also the absence of any desire on its part to enter into competition in long run with the other group companies. The valuation firm, namely, KPMG have indicated in para 4.2 of their report that they "have not been able to review the joint venture agreement between ABB and Diamler and therefore are unable to comment on all the factors that are enunciated in the various legal decisions of the US Courts. However, they have allocated 1/3rd of the total consideration to the non-compete component without reaching to the conclusion that there was any element of real noncompetition in the NCA. Two of the tests, inter alia, as referred to in the said report, i.e., that (i) the purchaser must demonstrate that the vendor possessed a probable and viable means of competition;" and (ii)' "the non-competition agreement is economically real and meaningful", are not satisfied in the case of the assessee. The assessee has failed to demonstrate that it possessed a probable and viable means of competition and that the NCA was economically real and meaningful.
129. In view of the foregoing, we endorse the order of the Departmental 1 authorities that the impugned amount received by the assessee is not in lieu of restrictive covenant and that the said covenant is a colourable device to pass off the impugned receipts as non-taxable.
130. Learned CIT(A) has noted in para 21.3 (p. 26) of his order the decision of the AO that the impugned receipts are taxable either under Section 28 or under Section 10(3) or, in the alternative, as attributable to transfer of goodwill. In other words, the learned CIT(A) was well aware of the fact that the AO has taxed it firstly as revenue receipts under Section 28 and then as income of casual 'and nonrecurring nature under Sections 10(3)/56 of the IT Act and it was only in the alternative that he recorded the finding that the impugned receipt is also liable to tax on account of transfer of goodwill. At para 21.7 (p. 28) of his order the learned CIT(A) has held that the receipt does not have the character of income and hence cannot be taxed as such and thereafter proceeded to decide that the impugned receipt was taxable as long-term capital gain on the ground that the impugned amount represented receipt on account of transfer of goodwill to the purchaser. The order of the learned CIT(A) is quite cryptic inasmuch as he has not given a well reasoned consideration to the relevant aspects of the issue. He has not recorded any finding as to how the impugned receipt failed to pass the test of being business profits or being the income of casual and non-recurring nature under Sections 10(3)/56. He ought to have first examined the correctness of the decision of the AO as to whether the impugned receipts were in the nature of business profits under Section 28,or income in the nature of casual and nonrecurring receipt under Sections 10(3)/56 if so, whether they were taxable under the aforesaid provisions instead of summarily rejecting it and proceeding to tax it as long-term capital gain on the basis that the assessee has transferred the goodwill. He seems to have lost sight of the fact that it was the goodwill of ABB Group which was common both to the assessee company and the purchaser company and hence the assessee could not possibly have its own goodwill independent of the goodwill of the ABB Group for transfer to the purchaser company. In any case, the goodwill of the ABB Group was equally available to the purchaser company. Since the learned CIT(A) has failed to consider the relevant aspects of the case and pass a well reasoned order in this behalf, it is considered appropriate to set aside his order. In normal course, we would have restored the matter to his file. However, we are not doing so because we have restored other issues to the file of the AO. We therefore restore the matter to the file of the AO for a fresh decision in accordance with law keeping in view the observations made by us earlier in this order. Ground No. 11 thus stands restored to the file of the AO.
Summing up
131. To sum up, our decision, in view of the foregoing, on the issues raised in ground Nos. 9 to 11 is as under:
(i) We confirm the finding of fact recorded concurrently by both the AO and the learned first appellate authority that the impugned transaction/sale is not a slump sale.
(ii) The AO is directed to tax the profits attributable to the transfer of inventory/stock-in-trade as business profits on the basis of materials available on record including the record of the purchaser indicating the sale consideration of such inventories/stock-in-trade, in terms of the directions given earlier in. this order.
(iii) The AO is further directed to tax the receipts allocable to the depreciable assets on the basis of information available on record under Section 50 of the IT Act, in terms of the directions given earlier in this order.
(iv) The issue regarding taxability of remaining amount of receipts under the agreement (i.e., receipts other than receipts on account of transfer of inventories/stock-in-trade and depreciable assets) is restored to the file of the AO with the direction to consider their taxability in accordance with the provisions applicable to them and in terms of the directions given earlier in this order.
(v) The order of the CIT(A) that the amount received as "non-compete fee" is not in lieu of restrictive covenant and that the said covenant is a colourable device to pass off the impugned receipts as non-taxable, is confirmed. However, the issue regarding the taxability of the amount represented by "noncompete fee" is restored to the file of the AO with the direction to consider its taxability under appropriate head afresh in accordance with the provisions applicable to them, in terms of the directions given earlier in this order.
(vi) The decision of the CIT(A) regarding taxability of interest on accrual basis on revenue account is confirmed.
132. Ground Nos. 9 to 11 stand disposed of in terms of the aforesaid directions.
133. Ground No. 12 reads as under:
The learned CIT(A) erred in confirming disallowance of Rs. 10,40,64,853 being customs duty paid and included in closing stock of raw materials/components. It is submitted that your appellant is entitled to deduction under Section 43B of the IT Act.
134. The facts of the case, in brief, are that the assessee had imported certain raw materials in respect of which it paid customs duty. The raw materials so imported were lying in stock as on 31st March, 1997. The assessee had included the component of custom duty while valuing the said closing stock. However, the assessee claimed a separate deduction under Section 43B in respect of the customs duty actually paid on such raw materials that were lying in stock in accordance with the judgment of the Gujarat High Court in Lakhanpal National Ltd. v. ITO and the decision of a Special Bench of this Tribunal in Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 206 ITR 96 (Del)(SB)(AT), in the computation of income. Consistent with its stand, the assessee used to reduce its opening stock of the succeeding year by the amount that was claimed as deduction in the earlier year. As the said adjustment had a negative impact in the assessment year under appeal, the AO did not make any addition to the assessee's income. However, the CIT(A) rejected the assessee's contention on merits. The assessee is now in appeal before the Tribunal.
135. In support of the ground of appeal, the learned Counsel for the assessee submitted that the issue is now concluded, by the decision of the Hon'ble Supreme Court in Berger Paints v. CIT (supra), in which the Hon'ble Supreme Court has approved, inter alia, the judgments and decisions relied upon by the assessee.
136. We have heard both the parties and considered their submissions. As rightly submitted by the learned Counsel for the assessee, the issue stands concluded in favour of the assessee by the decision of the Hon'ble Supreme Court in Beiger Paints (supra) in which the judgments relied upon by the learned Counsel for the assessee have been approved. Ground No. 12 is allowed.
137. Appeal filed by the assessee is partly allowed.
ITA No. 2715/Mum/2006 : Asst. yr. 1997-98 : Department's appeal138. Ground No. 1 taken by the Department reads as under:
(i) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of Rs. 20,00,000 under Rule 6D without proper appreciation of the facts.
139. We have heard the parties. The AO has disallowed a sum of Rs. 20 lakhs out of travelling expenses on estimated basis under Rule 6D of the IT Rules on the ground that the assessee company, while working out the disallowance under Rule 6D, has not taken into account the expenditure incurred by the employees while on travel outside the headquarters on conveyance, telephone etc. On appeal, the learned CIT(A) has deleted the disallowance made by the AO following the decision of the jurisdictional High Court in CIT v. Chemet CIT(A) has committed no error in following the order of the Hon'ble jurisdictional High Court, which is equally binding on us, in deleting the addition. Ground No. 1 taken by the Department is dismissed.
140. Ground No. 2 reads as under:
(ii) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to re-compute the deduction under Section 80M by making estimation of expenses at 1 per cent of the dividend income as against 5 per cent taken by the AO.
141. We have heard the parties. The AO has estimated the expenditure @ 5 per cent and reduced the same from the dividend receipts in order to arrive at the net dividend income. On appeal, the learned CIT(A) has reduced the expenses estimated by the AO at 5 per cent to 1 per cent after taking into account the submissions made by the assessee that dividends were received on units of UTI and shares of ICICI, HDFC and Co-operative Bank involving nominal expenses. In our view, the order passed by the CIT(A) is based on proper appreciation of facts. His order is therefore confirmed. Ground No. 2 is dismissed.
142. Ground Nos. 3 and 4 read as under:
(iii) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to exclude excise duty and sales-tax from the total turnover while computing the deduction under Section 80HHC.
(iv) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to exclude excise duty and sales-tax from the total turnover while computing the deduction under Section 80HHE.
143. We have heard the parties. The issue is covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in CIT v. Sudarshan Chemical Industries Ltd. (Bom) in which it has been held that excise duty and sales-tax would neither form part of the total turnover nor of the profits for computation of deduction under Section 80HHC. The AO is directed to act accordingly. Ground Nos. 3 and 4 are dismissed.
144. Ground No. 5 reads as under:
(v) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of Rs. 3,90,370 being expenditure incurred towards donation to school and on gift items without appreciating the fact that these expenses have not established this decision wholly and exclusively for the purpose of business.
145. We have heard the parties. The AO has disallowed a sum of Rs. 3,90,370 being expenditure incurred on gifts with logo, without logo, other customary gifts and donation to Don Bosco School. On appeal, the learned CIT(A) has deleted the impugned disallowance with the following observations:
16.1 In this regard, the appellant's representative has submitted that by making disallowance of the impugned amount, the AO has taken therein expenditure incurred on gift items without logo amounting to Rs. 2,46,961, that was also considered for disallowance under Rule 6B. Hence by doing so, it has resulted in disallowance of the same amount made twice. In respect of payment to Don Bosco School, it was submitted that the school is situated near the factory of the appellant and the contribution thus assisted employees obtaining admission of their children to school. As regards the balance, it was submitted that the balance expenditure was on gifts given to acquaintances on various social occasions. These are in the nature of expenditure incurred for the purposes of business eligible for deduction under Section 37(1) of the Act.
16.2 The submissions made have been considered. Insofar as the expenditure incurred on gifts without any logo it has been held elsewhere that no disallowance can be made. In respect of the balance amount considering the purpose and occasion it is held that no disallowance can be made. Consequently, the disallowance of Rs. 3,78,814 is deleted.
146. We have heard the parties. In our view., the learned CIT(A) has correctly appreciated the factual and legal aspects of the case while deleting the impugned disallowance. His order in this behalf is confirmed. Ground No. 5 is dismissed.
147. Ground No. 6 reads as under:
(vi) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 15,35,962 being expenditure incurred on issue of bonus shares without appreciating the fact that such expenditure is a capital expenditure as laid down by the Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. v. CIT .
148. We have heard the parties. Learned CIT(A) has deleted the impugned addition following the decision in Bombay Burmah Trading Corporation Ltd. v. CIT and CIT v. General Insurance Corporation of India . The issue is now covered in favour of the assessee by the decision of the Hon'ble Supreme Court in CIT v. General Insurance Corporation . Ground No. 6 is therefore dismissed.
149. Appeal filed by the Department is dismissed.
TTA No. 2554/Mum/2003 for asst. yr. 1996-97: Assessee's appeal
150. Ground No. 1 taken by the assessee reads as under:
1. The learned CIT(A) erred in confirming that the cash compensatory assistance and duty drawback are to be taxed on accrual basis as against on receipt basis offered by the appellant.
It is submitted that the appellant had changed the method of accounting from cash basis to accrual basis for its account purpose following the amendments in the Companies Act, and submitted that for income-tax purposes the appellant continues to follow the receipt basis and the CIT(A) ought to have accepted the same.
151. We have heard the parties. We have already adjudicated upon identical issue being ground No. 2 in the assessee's appeal for asst. yr. 1997-98 earlier in this order. Following the same, ground No. 1 is dismissed.
152. Ground No. 2 reads as under:
2. The learned CIT(A) erred in confirming inclusion 2/3rd of conferences expenses, annual general meeting expenses and club expenses for the purpose of computing disallowance under entertainment. It is submitted that there is no element of entertainment included in the above expenses and hence ought not to be included. It may be so held now.
Without prejudice, it is submitted that most of the conferences are in-house conferences for employees and therefore the expenditure incurred should be considered as incurred in office, factory or other place of work and no part of the expenditure should be disallowed.
The expenditure on annual general meeting of Rs. 97,525 includes expenditure on hall rentals and gift coupon to shareholders and therefore cannot be considered as entertainment expenses. It is submitted that it may be so held ' now.
153. We have heard the parties. The learned Counsel for the assessee has fairly 4 submitted that the issue was partly covered in favour of the assessee by the decision of this Tribunal in assessee's own case for asst. yr. 1997-98 in which the disallowance of 50 per cent of expenses has been confirmed and remaining 50 per cent deleted. The AO is directed to restrict the disallowance in the light of the order of this Tribunal in assessee's own case for asst. yr. 1989-90 (paras 34-37 at pp. 18 and 19). Ground No. 2 is partly allowed.
154. Ground No. 3 reads as under:
3. The learned CIT(A) erred in confirming that 10 per cent of the total receipt be treated as expenditure incurred for earning the technical fees in foreign currency and therefore, deduction under Section 80-O is to be restricted to 90 per cent of the fees received.
It is submitted that in the facts and circumstances of the case as no expenses ' was incurred in foreign currency, deduction should be allowed on gross fees received.
155. We have heard the parties. Learned Counsel for the assessee fairly contended that the issue is covered against the assessee by the decision of a Special Bench of this Tribunal in Petroleum India International v. Dy. CIT (1999) 65 TTJ (Mumbai)(SB) 671 : (1999) 71 ITD 31 (Mumbai)(SB) as also by the decision in CIT v. Asian Cables Ltd. (supra). Ground No. 3 is therefore dismissed.
156. Ground Nos. 4 and 5 read as under:
4. The learned CIT(A) erred in confirming that the head office expenses are required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction under Section 80-I of the IT Act.
Without prejudice, it is further submitted that the expenditure is allocated on a very higher side and same should be reduced substantially.
5. The learned CIT(A) erred in confirming that the head office expenses is required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction under Section 80-IA of the IT Act.
Without prejudice, it is further submitted that the expenditure allocated is on a very higher side and same should be reduced substantially.
157. We have heard the parties. We have already considered and adjudicated upon this issue while disposing off ground No. 5 in the assessee's appeal for asst. yr. 1997-98. Following the aforesaid order, ground Nos. 4 and 5 are dismissed.
158. Ground No. 6 reads as under:
6. The learned CLT(A) erred in confirming disallowance of deduction claimed under Section 80-IA for new industrial undertaking established for the manufacture of combined cycle power plant and pollution and environmental control plant. In the facts and circumstances of the case, the appellant is entitled to deduction under Section 80-IA for these undertakings and it may be so held now.
Without prejudice, it is submitted that the above be considered as part of project division of and deduction should be allowed for the said division under Section 80-IA of the IT Act.
159. We have heard the parties. Identical issue, being ground No. 4, in the assessee's appeal for asst. yr. 1997-98 has already been considered and adjudicated upon by us against the assessee. Following the same, ground No. 6 taken by the assessee is dismissed.
160. Ground No. 7 reads as under:
7. The learned CIT(A) erred in confirming disallowance on amount of Rs. 27,018,126 being gratuity debited to P&L a/c and outstanding as on 31st March, 1996 but paid before filing the return. Your appellant has an approved fund and contribution is made based on valuation. As the amount was paid before filing the return, the same should be allowed as deduction under Section 43B.
161. We have heard the parties. At the time of hearing the learned Counsel for the assessee did not press the aforesaid ground. Ground No. 7 is therefore dismissed as not pressed.
162. Ground Nos. 8 and 9 taken by the assessee read as under:
8. The learned CIT(A) erred in confirming disallowance for excise duty of Rs. 10,89,577 which was only provision towards possible CIT in the claim for refund of excise duty which was wrongly disallowed in asst. yr. 1995-96 and in the current assessment year same amount of provision is reversed. Hence this would have been allowed as deduction. Alternatively, the learned AO may be directed to allow the same for asst. yr. 1995-96.
9. The learned CIT(A) erred in confirming disallowance of deduction under Section 43B for Rs. 11,84,61,702 being custom duty paid and included in the closing stock. It is submitted that as per provisions of Section 43B of the IT Act, such payment is allowable as deduction and the learned CIT(A) ought to have allowed the same.
163. We have heard both the parties. Learned CIT(A) has followed his own order for asst. yr. 1997-98 while confirming the impugned addition/disallowance. In the assessee's appeal for asst. yr. 1997-98 similar issue has been considered and decided by us. The AO is directed to consider the claim of the assessee in the light of our order for asst. yr. 1997-98 in the assessee's appeal. Ground Nos. 8 and 9 are treated as allowed for statistical purposes.
164. Ground No. 10 reads as under:
10. The learned CIT(A) erred in holding that while arriving at business income for the purpose of deduction under Section 80HHC various deductions made by AO are as per the provisions of Section 80HHC. It is submitted that various deductions made from the business income are not as per the provisions of Section 80HHC and it may be so held now.
165. We have heard both the parties. Learned CIT(A) has dealt with the issue in para 20 at p. 11 of his order as under:
20. In this regard, the appellant has contested the action of the AO to allow deduction under the section of a lower amount of Rs. 1,74,76,301 as against the claim of Rs. 2,05,45,945 made by the appellant in the return. The grievance is threefold:
(i) ...
(ii) ...
(iii) determination of the profits derived from the business excluding 90 per cent of interest income, rental income, sundry receipts etc. under Clause (baa) of Explanation below Section 80HHC (4B) of the Act. It has been submitted that all these receipts are not such as covered under the clause and ought to have been taken as part of the business profits.
166. In the appeal before us, we are concerned with exclusion of 90 per cent of interest income, rental income, sundry receipts etc. under Clause (baa) of Explanation to Section 80HHC. We have considered identical issue in the assessee's appeal (ground No. 7) for asst. yr. 1997-98. Following the aforesaid order, we restore the issue to the file of the AO with the direction to him to decide the matter afresh in the light of our directions given in the said order. Ground No. 10 is treated as allowed for statistical purposes.
167. Ground No. 11 reads as under:
11. The learned CIT(A) erred in confirming inclusion of Rs. 3,73,95,000 on a notional basis as interest accrued from 1st Jan., 1996 to 31st March, 1996 for the alleged delayed payment of sale consideration as provided in the agreement executed on 26th June, 1996. In the facts and circumstances of the case, there is no question of accrual of any interest as transfer itself took place only after 31st March, 1996.
If at all-any interest is to be accrued it should be considered as part of the sale consideration of transportation undertaking. Without prejudice, it is further submitted that such interest is held as accrued, is only a capital receipt.
168. We have heard the parties. The AO has taxed interest amounting to Rs. 3,73,95,000 payable to the assessee for the period commencing on 1st Jan., 1996 and ending on 31st March, 1996 on account of late payment of sale consideration as provided in Clause 3 of the agreement between the assessee and the purchaser. The AO has taxed the impugned amount on the ground that it relates to the year ending 31st March, 1996. The AO did not accept the plea of the assessee that the impugned interest became payable to the assessee by virtue of agreement dt. 20th Aug., 1996 and hence could be brought to tax in asst. yr. 1997-98 only and not in asst. yr. 1996-97. On appeal, the learned CIT(A) confirmed the order of the AO in this behalf. The assessee is now in appeal.
169. We have heard the parties. The learned CIT(A) has disposed of the issue with the following observations:
22.2 Both the facts brought out in the assessment order as well as the submission made by the appellant's representative have been considered. As indicated above, the issue intricably linked to the consideration that has been received by the appellant company on the transfer of a part of its business undertaking. The issue of taxability of the said receipt, which the appellant had claimed as exempt from tax and the year of its accrual as income have been examined in detail in my appellate order bearing No. CIT(A) VIII/IT-542/2000-01 dt. 27th Jan., 2003 for the asst. yr.1997-98. Also examined therein was the issue of taxability of interest amount which the appellant company was to receive for the period commencing from 1st Jan., 1996. As held in the said order, the interest amount is required to be taken as of revenue nature having accrued on day-to-day basis on the amount receivable by the appellant company. In view of the said decision,-interest attributable for the period upto 31st March, 1996 is liable to be taxed in the year under consideration. Consequently, the action of the AO to tax the interest income accrued on both the receipts in the year is correct and hence liable to be upheld. Hence, the addition of Rs. 3,73,95,000 to the income of the appellant for the year is confirmed.
170. We have heard the parties. In the assessee's appeal for asst. yr. 1997-98, we have already considered and confirmed the order of the CIT(A) holding that the interest was taxable on revenue account; on accrual basis after rejecting the submission of the assessee that the interest receipts were part of sale consideration. The learned Counsel for the assessee however submits in the alternative that the right to interest flows from the agreement between the parties, which was executed in June, 1996, and therefore the amount of interest can legitimately be assessed to tax in asst. yr. 1997-98 and not in asst. yr. 1996-97. The submission of the assessee that the right to receive interest flows from the agreement executed in June, 1996 carries sufficient force. We therefore delete the assessment of interest income in asst. yr. 1996-97 and consequently direct its assessment in asst. yr. 1997-98. Ground No. 11 is treated as, allowed subject to the aforesaid observations.
171. Appeal filed by the assessee is partly allowed.
TTA No, 27U/Mum/2003 for asst. yr. 1996-97: Department's appeal
172. Ground No. 1 taken by the Department reads as under:
(i) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of Rs. 20,00,000 under Rule 6D without proper appreciation of the facts.
173. We have heard the parties. Identical issue has already been considered and decided by us against the Department in the Department's appeal for asst. yr. 1997-98. Ground No. 1 is therefore dismissed.
174. Ground No. 2 reads as under:
(ii) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of Rs. 7,96,610 being the contribution to school and expenditure on social occasions without, appreciating the fact that these expenses are not incurred wholly and exclusively for the purpose of business.
175. We have heard the parties. We have perused the order of the CIT(A). We are in agreement with his order. Identical issue has already been considered and decided by us against the Department in the Department's appeal for asst. yr. 1997-98. Ground No. 2 is therefore dismissed.
176. Ground No. 3 reads as under:
(iii) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to make estimation of expenses at 1 per cent of the dividend income while allowing deduction under Section 80M as against 5 per cent of the dividend income considered as expenses by the AO.
177. We have heard the parties. Identical issue has already been considered and decided by us against the Department in the Department's appeal for asst. yr. 1997-98. Ground No. 3 is therefore dismissed.
178. Ground No. 4 reads as under:
(iv) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to exclude excise duty and sales-tax from the total turnover while computing the deduction under Section 80HHC.
179. We have heard the parties. Identical issue has already been considered and decided by us against the Department in the Department's appeal for asst. yr. 1997-98. Ground No. 4 is therefore dismissed.
180. Appeal filed by the Department is dismissed.
ITA No. 6235/Mum/2003: Asst. yr. 1997-98: Assessee's appeal181. The assessee has taken the following grounds of appeal:
1. The learned CIT(A) erred in holding that a sum of Rs. 42,05,18,000 is assessable as short-term capital gains.
2. The learned CIT(A) ought to have held that even assuming the contention of the appellant that it had transferred the transportation undertaking as a going concern was to be rejected that the sale proceeds received would have to be allocated over the various assets transferred and provisions of Section 50 and Section 43(6) would have to be given effect to.
182. Facts giving rise to the present appeal are that the assessee had filed an appeal before the CIT(A) against the order dt. 4th March, 2003 passed by the AO giving effect to the order dt. 27th Jan., 2003 passed by the GIT(A) for asst. yr. 1997-98. It may be relevant to mention here that the said order of the CIT(A), i.e., the order passed by him on 27th Jan7 2003 has been the subject-matter of appeal before us which we have disposed of earlier in this order. It is this order of the CIT(A) to which effect was given by the AO vide his order dt. 4th March, 2003. The assessee was aggrieved by the aforesaid order of the AO and therefore filed an appeal before the CIT(A) which the CIT(A) has dismissed by his order dt. 25th July, 2003 against which the present appeal has been filed before this Tribunal. In our order for asst. yr. 1997-98 we have already restored both the issues raised in the present appeal to the file of the AO and therefore the present appeal has become infructuous and is accordingly dismissed.