Income Tax Appellate Tribunal - Mumbai
Mahindra Sintered Products Ltd. vs The Dcit, Spl.Rg.49 on 30 March, 2004
Equivalent citations: [2005]279ITR1(MUM)
ORDER
Mukul Shrawat, Judicial Member
1. This is an appeal filed by the assessee arising out of the order of CIT (A) XXXIII, Mumbai dated 22/1/98 for the assessment year 1993-94.
2. In the first ground the assessee has challenged the upholding of short term capital gain of Rs. 35,57,295/- on the sale of building and Rs. 1,59,74,715/-on the sale of plant and machinery. In the ground of appeal it was further challenged that no capital gain could be computed as per Section 45 and in the alternative long term capital gain should be computed after deducting the cost of acquisition as on 1/4/81. Further one more alternate ground was raised that the sale consideration of depreciable assets should be deducted from the entire block of assets of the company in terms of Section 50 of IT Act and not from the block of assets of Ahmednagar Unit alone.
3. The facts in brief were that the assessee was engaged in the manufacturing of Sintered Bearings. The assessee also had units for manufacturing of Copper & Iron Powder at Ahmednagar. This Ahmednagar unit was sold for a consideration of Rs. 2,60,43,039/- to M/s. Hoganas India Ltd. It was claimed that the sale was made as a going concern of the assessee with all tangibles, intangibles, contingent rights and liabilities. The claim of the assessee was that there was a transfer of capital asset and the transfer of the said undertaking -did not make the assessee liable for capital gain tax. It was further claimed before A.O that it was difficult to arrive at the cost at the time of its inception nor possible to arrive at the figure of cost of improvement. It was claimed that there was no method to arrive at the exact cost of the undertaking, hence, applying the ratio of B.C. Srinivasashetty, 128 ITR 294 the assessee has claimed that there should not be any capital gain on such transfer. According to assessee as no precise cost could be attributed to the said undertaking therefore, on its transfer there would be no liability to capital gain tax. Reliance was placed on the decision of Syndicate Bank, 155 ITR 681. The other arguments was that the transfer consideration was for the entire undertaking hence a lumpsum figure was settled as per Clause (3) of the agreement dated 6/8/92. In this regard it was submitted that the price of the building at Rs. 52,05,000/- was taken in to account only for the purpose of stamp duty. The next issue which was raised during the course of assessment proceeding was that the appellant should be entitled to get depreciation on certain items of the "block of assets". The plant and machinery of the Ahmednagar division was a part of larger plant and machinery having same rate of depreciation, therefore, it had fallen under the same block of assets. It was submitted that the depreciation should be allowed on the full block of assets of the company without diminishing any part of the transfer consideration. The A.O was not convinced with all these submissions and according to him provisions of Section 50 of IT Act should be applied because the unit transferred had block of assets on which depreciation had been granted. After discussing the case laws cited by the assessee, the A.O has held that in terms of Section 50 assessee was liable to be taxed as short term capital gain. According to A.O since the value of the building was taken at Rs. 49,68,750/- on which depreciation was claimed, therefore, the sale consideration should be subject to tax as short term capital gain. For the balance amount of sale consideration he has also calculated the short term capital gain as a sale of plant and machinery along with electrical installation. The computation of short term capital gain on sale of building was worked out as under:-
Sale consideration Rs. 49,68,750
Add: Cost of land Rs. 1,01,300
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Rs. 50,70,050
Less: W.D.V of the building
As worked out above. Rs. 15,12,755
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Leaving the balance of Rs. 35,57,295
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To arrive at the short term capital gain on sale of plant and machinery the A.O has worked out the sale price at Rs. 1,64,75,000/-. This figure was arrived at by deducting the amount of consideration of current assets of Rs. 44,97,989/- and the sale price of the building of Rs. 49,68,750/- plus the cost of land at Rs. 1,01,300/-. After arriving at the sale price of plant and machinery along electrical installations the short term capital gain was computed as under:-
Sale price for plants machinery As ascertained above. Rs. 1,64,75,000/-
Less : Opening W.D.V Rs. 5,00,285/-
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Leaving a balance of Rs. 1,59,74,715/-
(which represents short term capital gain on sale of plant and machinery and electrical installation.) Being aggrieved, the assessee went in appeal against the order of A.O.
4. Ld. CIT (A) has summarized the ground that the action of the A.O was challenged according to which short term capital gain on sale of building at Rs. 35,57,295/- and short term gain on sale of plant and machinery at Rs. 1,59,74,715/- was challenged on account of transfer of Ahmednagar Unit by the assessee to M/s. Hoganas India Ltd. In this regard ld. CIT (A) has reproduced some of the clauses of the agreement dated 6/8/92 entered into with M/s. Hoganas India Ltd. Further he has given a finding that the appellant company had written to M/s. ICICI on 23/5/92 informing about the purpose of sale of Ahmednagar unit due to which the fair market value of building was valued by a Valuer. Ld. CIT (A) has further mentioned that M/s. Universal Surveyors & Adjusted Pvt. Ltd. was appointed under the joint instruction of the appellant company and the buyer which has valued the fair market value of the building. Ld. CIT (A) has also given a finding that one registered valuer namely M/s. Mehta Padamse was appointed by the buyer i.e. M/s. Hoganas India Ltd to value the plant and machinery. This valuer has valued the fair market value of plant and machinery at Rs. 1,64,75,000/-. On the basis of these two valuation reports the total consideration was bifurcated and accounted for by M/s. Hoganas India Ltd. in its books of account as under:-
"Buildings Rs. 49.69 lakhs
Plant & Machinery Rs. 164.75 lakhs
Stores & spares and raw-materials Rs. 44.98 lakhs
Leasehold land(Premiums paid to by
the appellant company Rs. 1.01 lakhs
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Total: Rs. 260.43 lakhs
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Ld. CIT (A) has further placed on record that M/s. Hoganis India Ltd. had accordingly claimed depreciation on the assets in its income tax assessment. The claim of the assessee before ld. CIT (A) was also considered. The appellant company in its books of account had recorded the surplus arising from the above sale transactions at Rs. 1,50,62,800/-. From the gross consideration of Rs. 260.43 lakhs book value of the fixed assets i.e. Rs. 64.82 lakhs and the inventories transferred of Rs. 44.98 lakhs were deducted and the surplus was credited to the P&L Account as extra ordinary profit from sale of industrial undertaking. It was argued from the side of the appellant that no capital gain had arisen as it was a slump sale of an undertaking. It was pleaded that the transactions should be viewed as a whole by treating the total industrial undertaking as a capital asset. In support the decision of B.C. Srinivas Shetty, 128 ITR and the decision of Artex Manufacturing Company 131 ITR 559 were cited. Ld. CIT (A) has observed that the revenue had gone in appeal against the decision of Artex Manufacturing Company and the Supreme Court in its decision reported in 93 Taxman 357 had overruled the decision of the Hon'ble Gujarat High Court.
4.1 Before ld. CIT (A) an alternate plea was raised that if the provisions of Section 50 were to be applied then the amount of consideration deserves to be set off against the WDV of the entire blocks of asset of the appellant company. It was subsequently argued that the set off should not be restricted against the blocks of assets of Ahmednagar unit. It was submitted that the Ahmednagar Plant was a part and parcel of the entire business, therefore, should not be segregated from the other units.
4.2 Before ld. CIT (A) an another decision of Hon'ble Supreme Court in the case of Electric Control Gear Manufacturing Co., 227 ITR 278 was also cited. However, he has concluded that it was not a case of transfer of undertaking as a whole as a going concern but it was a case of transfer of the assets of such undertaking. He has held that considering the situation under which the transfer took place it was not a case of slump sale but sale of various assets. In the end he has concluded that the term "block of assets" referred to in Section 50 should be construed as "block of assets" of Ahmednagar unit. He has also opined that the two units of the company one at Pimpri and another at Ahmednagar have constituted two different business and not forming the part of the same business. The action of the A.O to tax under the head short term capital gain was upheld and the ground was rejected. Being aggrieved, now the assessee is further in appeal.
5. On behalf of the assessee ld. A.R. Shri B.K. Khare appeared and argued at length. After exhaustively narrating the background of the case, as reproduced in above paras he has strongly relied upon the decision of Jurisdiction High Court in the case of Premier Automobiles Ltd., 264 ITR 193. His contention was that the entire Ahmednagar Unit was sold as a whole along with licences etc. as a going concern, therefore, it was a slump sale. As afar as the valuation of the assets was concerned he has mentioned that the same was done by the vendee through registered valuers and it was not an attempt on the part of the appellant vendor. In support of his arguments he has also cited certain clauses of the agreement dated 6/8/92. Ld. A.R has drawn our attention on the contents of the agreement wherein it was mentioned that M/s. Hoganas India Ltd(HIL) has expressed an interest in acquiring from the appellant its industrial undertaking at Ahmednagar. This transaction was with all rights directly attached there to and utilize exclusively for the production of atomized iron powder. As per the clauses of the agreement "MSP" has sold and HIL has purchased the said undertaking without any liability in good and running condition w.e.f. 1/11/92. Ld. A.R has further mentioned that as per Sub-clause (iii) of agreement, Page No. 5 , all the rights, benefits and privileges pertaining to the said undertaking along with assignable interest would be the entitlement of the buyer. He has also clarified that Clause (3) of the agreement, though, has mentioned the price of the undertaking at Rs. 2,39,00,000/- which included the value of the building at Rs. 52,05,000/- but the price of the building was assumed only for the purpose of payment of stamp duty. He has further submitted that some of the clauses has also mentioned that the above consideration was subject to increase or decrease depending upon certain circumstances. As there was a charge of ICICI, therefore, prior approval of the said institution and bank was required and for that purpose it was referred to them. Clause (9) of the agreement has also incorporated that from the appointed date M/s. HIL was entitled to take over all the employees of MSP which showed that the transfer was lock, stock and barrel. With this background he has compared the facts of the case with the fact of Premier Automobiles Ltd., 264 ITR 193. He has mentioned that the basic test to be applied is whether there was continuity of business by the buyer and in the present case in fact the buyer continued the business. One has to see whether there was a transfer of a business as a whole and the circumstances of the case were such that the whole business of undertaking was transferred. The intention can also be adjudged by considering the entire agreement and not certain clauses. The lumpsum price was fixed for the business as a whole and the employees connected with the activity have also been transferred as a part and parcel of the deal. The valuation was not carried out by the seller but by the buyer, so the revenue has wrongly computed the short term capital gain.
5.1 Shri Khare has also made an alternate submission that the revenue authorities have totally went wrong to restrict the claim to the Ahmednagar unit in respect of considering the entire block of assets of the company. Referring Section 50 of IT Act he has vehemently argued that the legislature has no where specified that the sale consideration of depreciable assets should be restricted only to the assets transferred . Since the concept of "block of assets" has been introduced, therefore, the view taken by the revenue authorities was entirely against the provisions of IT Act.
6. On behalf of the revenue ld. D.R, Shri Sunil Agarwal has appeared and supported the orders of the authorities below. At the outset he has relied upon the decision of Artex Manufacturing Company, 227 ITR 260. He has argued that the Hon'ble Supreme Court has held that the provisions of Section 41(2) were to be applied after examining that the portion of the slump price was attributable to stock in trade and it could be found that a particular price is attributable to a particular item. Ld. D.R has thus contended that in the instant appeal as well the price of each item could be identified and in fact the price of each item was allocated by the vendee in its books of accounts. He has further argued that it was not a sale of undertaking because this sale was only in respect of assets minus liabilities. The valuation reports prepared before the transaction were indicative of price of each asset so sale consideration of individual assets was very much within the knowledge of both the parties. The assessee himself has arrived at the exact figure of extra ordinary profit of Rs. 1,50,63,000/- so there was an element of cost which was taken into account by the assessee hence the decision of B.C. Srinivas Shetty, 128 ITR 294 ought not to apply in the present appeal. He has also distinguished the facts of the instant appeal with the facts of Premier Automobiles Ltd.(supra) relied upon by the assessee. He has argued that this is not the case of slump sale as there was no slump price fixed. He has also placed before us that the Hon'ble Supreme Court has distinguished the two decisions i.e. Artex Manufacturing Co(supra) and the Electric Control Gear Manufacturing Co.(supra) while deciding the latter one. As the facts were not identical the earlier decision was distinguished. He has concluded that action of the A.O deserves to be affirmed.
7. Parties have been heard at length, facts of the case were thoroughly examined and orders of the authorities below were duly considered in the light of the material placed before us as well as the precedents relied upon. On the basis of the elaborated discussions herein above it can be summarized that the assessee had two units one at Ahmednagar and another at Pimpri, Pune. It has sold Ahmednagar unit vide an agreement dated 6/8/92 to M/s. Hoganas India Ltd(in short HIL). The appointed date was 1/11/92 which was considered as the date of transfer. The entire controversy, in our opinion, revolve around an issue that whether under the present facts and circumstances it was a slump sale or itemized sale. So we have to examine the facts of the case to ascertain whether the sale consideration was for the entire unit or it was attributable to individual identifiable assets. On careful and deep examination of the agreement, valuation reports, treatment of transfer by vendor and vendee in their books of account, correspondence with financial institution i.e. ICICI and other related circumstances as well as the factum of the case we are of the view that it was not a case of slump sale. We have arrived to this conclusion inter alia because, firstly, the intention was not to transfer the unit at slump price. The clauses of the agreement have specified the sale consideration firstly at Rs. 2,39,00,000/- which was subject to increase and decrease and latter on agreed upon at Rs. 2,60,43,039/-. Secondly, the price of the building was well settled, relevant clause of the agreement cited (supra) at Rs. 52,05,000/-. Though it was argued by Mr. Khare that the value of the building was assumed only for the purpose of stamp duty, but for our consideration the issue is whether the sale consideration was attributable to a particular asset or not. If on the basis of the facts it can be found that a particular price out of total sale consideration belongs to a particular asset then it is difficult to accept this argument that the sale consideration was for lock, stock and barrel. Thirdly, we have observed that the appellant company was required to seek necessary approval for the approval from the bank or financial institution. For that purpose one M/s. Universal Surveyors Pvt. Ltd. was engaged to determine the fair market value of the building of Ahmednagar unit. The fair market value was thus determined by the valuer at Rs. 49,68,750/-. While computing the short term capital gain tax the A.O has taken this value and deducted the cost of land and the WDV arrived at the figure of Rs. 35,57,295/-, computation already reproduced in above paras, which was accordingly taxed. The approach of the assessee indicates that to settle the sale consideration help of professional was sought and thereafter a final figure was arrived at. Our fourth observation in this sequence is that one M/s. Mehta Padamse, registered valuer was also appointed, though claimed to be by the purchaser who has valued the fair market value of plant and machinery including electrical installation. As per the valuation given the fir market value of plant and machinery was determined at Rs. 1,64,75,000/-. The A.O has adopted this figure for the purpose of calculation of short term capital gain on sale of plant and machinery, the computation already reproduced in above paras. So undisputedly the appellant was aware before hand distinctly about the value of plant and machinery and the value of land and building. Hence it is not a case of lumpsum price for the business as a whole but the price was fixed in respect of the identifiable assets. At this juncture we would like to mention that from the side of the revenue it was argued that the broken up figure were accounted for in its books of account by the purchaser M/s. HIL, however, this argument is not in the right perspective. The reason is that the buyer has to claim certain deduction in its income tax matter and for the purpose the seller has its own independence. But the situation in the instant appeal is that the appellant was very much aware about the sale price of each and every assets and therefore, on that basis a figure was arrived at Rs. 150.63 lakhs as surplus on sale of industrial undertaking in its books of account. In view of the above observation based upon the factual matrix we can arrive at a conclusion that it was not a case of transfer of undertaking as a whole but it was a transfer of the assets of the undertaking excluding the liability. It is an admitted fact that the liability was not transferred to the buyer, hence cannot be termed as an instance of slump sale.
7.1 Now coming to the two decisions of the Hon'ble supreme Court cited supra namely M/s. Artex Manufacturing Co. and M/s. Electric Control Gear Manufacturing Co., we have noted that Their Lordship has distinguished the features with this observation, Quote "The High Court has placed reliance on its judgment in Artex Manufacturing Co. v. CIT . The said judgment of the High Court has been considered by us in our judgment pronounced today in C.A. No. 2277(NT) of 1981, CIT v. Artex Manufacturing Co. . In that case, we have held that Section 21(2) was applicable, since the price attributable to the plant, machinery and dead stock which were transferred had been disclosed by the assessee during the course of assessment proceedings before the Income-tax Officer and that the said price was as per the value assessed by the valuers at the time of execution of the agreement. In the present case there is nothing to indicate the price attributable to the assets like the machinery, plant or building out of the consideration amount of Rs. 8 lakhs. Merely because a sum of Rs. 3,32,863/- had been allowed as depreciation to the assessee-firm, it could not be said, that was the excess amount between the price and the written down value. Unqoute. (Extract from Electric Control Gear Manufacturing Co,227 ITR relevant page 281.) So the Hon'ble Court was very much aware about the two circumstances under which the undertaking is transacted. In one such circumstance the price happens to be attributable to the plant, machinery and dead stock which is being transferred has properly been disclosed. In such situation there happen to be nothing to indicate the price attributable to the assets like machinery, plant or building. Because in the case of Electric Control Gear Manufacturing Co. there was no evidence to indicate price of machinery, plant etc. therefore, it was held that the assessee was not assessable Under Section 41(2). Contrary to this in the case of Artex Manufacturing Co.(supra) there was a finding that portion of the price was attributable to plant, machinery etc. therefore, the Hon'ble Court has held that the assessee was assessable as business income under Section 41(2) and it was further held that the surplus over such difference was assessable as capital gain. So it is manifest that the controversy was set at rest by the Hon'ble Court by drawing a distinction between two conditions under which an undertaking is transferred. On the basis of the foregoing discussions and in view of the material facts, the essence of the matter is that the instant appeal is close to the facts of M/s. Artex Manufacturing Co, hence to be relied upon. One more decision of Hon'ble Jurisdictional High Court was also cited from the side of the appellant namely M/s. Premier Automobiles Ltd., 264 ITR 193. After considering the substance of the transaction and the facts of that appeal the Hon'ble Court has given a finding that the intention of the parties were to transfer the business as a whole for a lumpsum consideration. Interestingly the Hon'ble Court has specified that the parties in that appeal did not intend to make a sale of itemized assets and this observation was very much relevant because before the Hon'ble High Court the two afore cited decisions of the Hon'ble Supreme Court were referred to. Before us ld. A.R Shri Khare has tried to match the facts of the instant appeal with the facts of the Premier Automobiles Ltd., but in view of our above observation we hereby arrive at a conclusion that the facts are distinguishable hence this precedent is not directly applicable.
7.2 Now coming to the alternate plea of the applicability of Section 50 of IT Act we are of the view that the revenue authorities have gone wrong in not setting of the sale consideration from the entire block of assets of the company. On careful reading of Section 50 of IT Act we have found that no where it is mentioned that the sale consideration is to be deducted from the WDV of that particular asset. Rather with the concept of block of assets, now introduced in the IT Act the entire group of assets in respect of which same percentage of depreciation is prescribed fall under one block of the assessee. Ld. CIT (A) has reproduced the said section but arrived at a conclusion that two units of the appellant company at Pimpri and Ahmednagar constituted two different business, they were not parts of the same business. According to us it a wrong observation keeping in view the intention of the legislature as well as the language of Section 50 of IT Act. The block of assets referred to in Section 50 should be construed as the part of the business as a whole so that the total taxable income arising from various units of an assessee can be computed. The two units of the appellant company were part of the total business of the assessee and they were not segregated for the purpose of taxation, therefore, should also not have been segregated while computing short term capital gain. Moreover, as far as the business operation of the assessee is concerned, there is a factual finding that the Ahmednagar unit was operating as a feeder unit for Pimpri unit. Though the Ahmednagar unit was an independent unit but it was a part and parcel of the entire business venture of the appellant company. So the block of assets of particular unit should not be segregated from the entire WDV of an assessee for the limited purpose of computation of short term capital gain. The newly substituted Sub-section (2) provides that in a case where any block of assets ceases to exist for the reason that all the assets in that block are transferred during the previous year then in such a case the cost of acquisition of the block of assets shall be the written down value of the block at the beginning of the previous year. Once the capital asset that has been transferred is found to form part of a block of assets in respect of which depreciation has been allowed the surplus, if any, computed in the section will be treated as short term capital gain. The emphasis thus is that such block of assets should cease to exist. In terms of this section, in our opinion surplus arising on transfer of capital assets is taxable as short term capital gain when the written down value of a block of assets is reduced to "nil" even though all the assets falling within that block are not transferred. Thus where an assessee has obtained a deduction on account of depreciation in previous years, the provision of Section 48 and 49 shall have to be subjected to the modifications indicated in Section 50. Both the depreciation as well as the block of assets belongs to an assessee and for all purposes has to be taken into account as a whole. There is no indication in the language of Section 50 that while computing the short term capital gain of a particular asset is to be segregated from the block of assets. The view taken by the revenue authorities was thus ipso jure wrong.
7.3 Resultantly, in solido, first limb of Ground No. 1 is hereby decided against the assessee and second limb is decided in favour of the assessee. Before we part with we may mention a word of appreciation to Shri Khare and Shri Sunil Agarwal ld. representatives of both the sides for their valuable assistance in deciding this ground.
8. Ground No. 2 is in respect of upholding the action of the A.O of deducting the productivity amount received from ICICI in the process of computing depreciation admissible Under Section 32 of IT Act. Parties appearing before us have informed that this issue has already been decided in assessee's own case for the A.Y 1989-90 by "E" Bench Mumbai in ITA No. 7934/B/92 vide order dated 30/4/2001 in its favour, wherein it was held that the issue is covered by the decision of CIT v. P.J. Chemicals, 210 ITR 830(SC). Respectfully following the precedent for this year as well we decide this ground in favour of the assessee.
9. Ground No. 3 is in respect of upholding the action of the A.O in including Excise Duty and Sale Tax in the total turnover for the purpose of ascertaining the proportion of export turnover to such total turnover in the process of computing relief Under Section 80HHC of IT Act.
9.1 Now this issue has also been settled in favour of the assessee by the Jurisdictional High Court in the case of Sudharsan Chemicals Ltd. 245 ITR 769 wherein it was held that Excise, Sales Tax, Octroi etc. do not constitute a part of total turnover. - Respectfully following this precedent this ground is hereby allowed.
10. In the result, the appeal of the assessee is partly allowed.