TMI Blog1987 (11) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch Group, in 1974, transfer the industrial undertakings and businesses of Swastik Household and Industrial products division, business of operation Research group and the Sarabhai research centre to its subsidiary company M/s. Ofisade Pvt. LTD. The income tax officer in para 6 of his order, refers to this transfer as a going concern to its subsidiary company.". 3. In the earlier transfer, goodwill of the businesses was transferred at Rs. 2 crores. Scanning the details regarding the present transfer, the ITO came to the conclusion that the transfer did not represent in its terms the correct position. The value ascribed to goodwill, the other assets, etc. was not realistic. In effect, he come to the conclusion that on account of the transfer the assessee had gained substantial amounts taxable under section 41(2). Read with the order of the Inspecting Asst. Commissioner under section 144B, the order of the ITO reveals that he found that the assets have been transferred at their written down value without having any regard to their present market value. The fact that an amount of Rs. 6 crores had been shown as the value of goodwill without substantial reasons went to show that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd written down value in the hands of the previous owner, namely, M/s. Karamchand Premchand Ltd. If no particulars were to be filed, the ITO was to treat the sum of Rs. 4 crores as profit assessable under section 41(2). It effect, the CIT (A). In effect, the CIT (A) upheld the addition on this account made by the ITO. 5. The learned counsel for the assessee has pointed out that the whole exercise gone through by the department was a futile one. There was no profit taxable under section 41(2) in the present case. There was a simple slump sale of the entire undertaking in the present case. The business belonged earlier to M/s. Karamchand Premchand which transferred the same as a running concern to the assessee. The question of section 41(2) profit came up for consideration even in that transfer, the matter having come up on appeal before the Tribunal in ITA No. 752 (Ahd.) / 78-79 dated 28-2-1981. The tribunal held therein that the undertaking was sold as a whole and there was no question of assessing the profit under section 41(2). The position is exactly the same here also. The assessee has sold the undertaking to its own whole subsidiary. Section 47 ruled out of consideration any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Research group, Sarabhai Technical services Division and Sarabhai Research Centre of the Vendor as going concerns on and with effect from the 1st. day of March, 1977". The details of the assets were specified in the agreement only for the purpose of identifying the assets included in the undertaking. Even the computation of the consideration was made on the basis of a single transfer of the entire undertaking. As regards goodwill, the assessee had purchased the goodwill from the earlier vendor at Rs. 2 Crores. The goodwill of the business at the time of the present transfer was computed on expert advice after taking into account all the facts of the case. 7. For the department, stress is laid on the orders of the authorities below. It is pointed out that the factual position in the case does not indicate a slump sale. The subject matter of the transfer was not the sale of the entire business. In the first place, assets like land have been omitted from the transfer. Even if it is assumed that there is a slump sale, the valuation of the assets has been made item wise. There was a specific ascertainment of the existence and the valuation of several individual items comprised in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-2-1981, rejected the department's stand. By the agreement of 28-2-1977, the assessee had transferred the asset earlier it got from its holding company along with one or two businesses developed in the interim to its 100 per cent subsidiary, M/s. Ofisade Pvt. Ltd. The transform was effected under the agreement referred to above. The preamble to the agreement recites the nature of the businesses carried on the assessee which cover four times, i.e. Swastik Oil mills, operation Research Group, Sarabhai Technical services and Sarabhai research centre. The assessee is also in possession of several agreements relating to services, leases such as the HRO Agreement, the PACKART Agreement, the STDS Agreement, etc., which give the assessee substantial rights etc. These are also detailed in the transfer agreement. The operative part of the agreement is as under : "The vendor shall transfer and assign and the purchaser shall purchase and accept the transfer and assignment of the industrial understanding and business of Swastik Oil Mills Division and the Businesses and Activities of Operations Research Group, Sarabhai Technical Services Division and Sarabhai Research centre of the Vendor as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons mentioned in the books of account of the vendor, etc. The schedules attached to the agreement detail the assets comprised in the undertaking and transfer. 10. By an agreement dated 28-6-1977, certain modifications and clarifications were made including the specification in figures of the considerations. Clause C of the preamble to this agreement is as under : "In the light of the above, by an agreement for sale dated the 28th day of February 1977 and made between the parties hereto, the vendor has agreed to transfer and assign on and with effect from the 1st day of March, 1977 the industrial undertaking and businesses of its Swastik Oil Mills Sarabhai Technical Services Division and Sarabhai Research Center of the vendor as going concerns together with all the assets thereof including benefit of the contracts, agreements, arrangements and understandings as also the goodwill of the said business along with the liabilities relating thereof or arising out of the said industrial and activities and in particular...." Clauses X, Y and Z of this agreement detail the manner of payment of the consideration. Accordingly, the movable assets capable of passing by delivery had already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. (1) Current Liabilities and Provisions 3,81,92,920.24 (2) Liabilities under the cash credit and Packing Credit arrangements 3,22,09,560.97 (3) Amounts of Term Loan due to ICICI 2,98,657.88 (4) Amount of term Loan due to State Bank Of India 12,00,000.00 7,19,01,139.09 -------------- -------------- Net aforesaid 8,32,24,726.40" -------------- -------------- the balance of Rs. 4,09,71,751.75 was to be paid : Rs. 80,00,000.00 - When demanded by the assessee-balance of Rs. 3,29,71,751.75 to be paid in eight equal annual installments carrying interest at 11 per cent per annum. 12. A detailed analysis of the agreement as above leads to two clear conclusions. The assessee has transferred the entire undertaking to the subsidiary company as a whole. The fact that an item like land and buildings was not transferred would not, in our opinion, make the transfer less one of the whole undertaking. As stated above, there was a clear stipulation for conveyance of lands and bui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase price. 14. The department has set mush store by the value given to the goodwill at Rs. 6 crores. The assessee's valuer has valued this asset and put its value at Rs. 6 crores. The department sought to work out the value of the goodwill with the aid of a chartered accountant and came to the conclusion that what was put by the assessee at Rs. 6 crores would at best be worth Rs. 2 1/2 crores. The excess, according to the department, represented the increased value of the other assets. It is on this basis that the increased value was brought to tax under section. 41(2). The method of working out a super profit for the purposes of determining the goodwill of a business is certainly a good method but it is subject to several limitations. For instance, if the business has to be closed down for lack of custom or impossibility of selling goods, to work out the super profits on the basis of the preceding five year's receipts and treat the same as the goodwill would simply be absurd. While a super profit would be indicative of goodwill, if any, the evaluation of goodwill must take into account not merely the super profit available with the labour and capital put in but also other attrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an activity of type for some time. An import entitlement is available only to a person who has made stipulated exports, know-how, trade marks, etc., of considerable value to those interested but to the producer of these will remain unevaluated assets. What we want to point out is that even though the working of the consideration has taken into account assets of the business as rightly pointed out by the department, there are several assets of considerable value which have not been included. Apart, therefore, from even a goodwill worked out on the super profit method, substantial value will have to be ascribed to these intellectual properties, intangible assets, etc. We are not sure, if a proper consideration is taken of all these aspects of the transfer the figure put down by the assessee under the head 'goodwill' at Rs. 6 crores would not be a proper figure; it could be even more, The name utilised 'goodwill' (sic), If these assets are considered as assets, may be wrong. If the existence of these assets is taken into computation for the purpose of evaluating the goodwill in methods other than the simple super profit method, the computation of goodwill at Rs. 6 crores cannot also b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be penalised. This appears to be a strange approach. If there were items for which the details are only with the assessee and not with the department, even in discharging its burden of proof as to assessability, the department might place the burden on the assessee to produce those details and on their non-production decide against him. We are unable to understand how when all the details necessary to work out the profit under/section. 41(2) are with the department, instead of taking the trouble of ascertainment of the factual position, it throws the burden on the assessee, which does not fall on him, and makes an addition of an amount of Rs. 4 crores. 17. It is clear even from the stand of the department that capital gains in respect of depreciable assets are not taxable in view of section 47. The items of plant and machinery, for which a profit under/section. 41(2). is computed, if individually considered, may give rise to a profit under/section. 41(2) an obsolescence allowance or a capital gain - all of which have to be evaluated for tax purposes in respect of each asset. Even from a purely theoretical viewpoint, therefore, if the ITO were to take an overall excess figur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of a firm and a company. A company is a difference entity from the individuals composing it. The decision in the above two cases went on the basis of slump sale and a legal effect of a sale respectively. In the present case what has happened is transfer of certain assets by a parent company to its 100 per cent subsidiary company. The assets and liabilities were transferred at the book values obtaining in the parent company's book, a certain amount was raised calling it goodwill, all of which was added to constitute the consideration. A 100 per cent subsidiary of a parent company is in fact a creature of the parent company and the relation between the two is not of the same nature as that of shareholders of a company and the company itself. When a shareholder makes a sale to a company it cannot be stated that he is making a sale to himself. The shareholder cannot also claim that he has any right in a particular asset or liability of the company of which he is a shareholder. In the case of the parent and subsidiary company the parent company is virtually the holder of the assets and liabilities of the subsidiary company which in fact is only a firm of holding assets and liabiliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the parent company which in term reduced the value of the assets or even the share value of the subsidiary company. As a matter of fact, part from any gloss of law whether the goodwill stipulated in these transactions is the correct value of the goodwill or not even if the market value of the assets is taken for analysing the transaction rather than book value there could be no section. 41(2) profit or even business profit available to the parent company." 20. From any point of view, therefore, we hold that no profit under section 41(2) can be computed or included in the total income of the assessee. Addition of Rs. 4,38,789 : 21. The assessee-company had to receive a sum of Rs. 21,93,944 from M/s P. T. Kamaltex (Indonesia) in terms of the agreement entered into with them. Out of the above amount, a sum of Rs. 4,38,789 was deducted as withheld tax in Indonesia and only the balance of Rs. 17,55,155 was remitted to India. The assessee returned as its income a sum of Rs. 17,55,155 on which also it claimed exemption under section 80-0. The ITO treated the entire amount of Rs. 21,93,944 as the income of the assessee and applying the provisions of section 80-0 to the actual amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined that 50,000 Dollars have been deducted therefrom. According to the learned counsel, even this is not supported by evidence. As regards the application of section 80-0, it is clear that the assessee has brought in India by way or foreign exchange as required by section 80-0 only a sum of 200,000 Dollars. Section 80-0 would apply only to this amount brought in and not for any amount not brought into India. In fact, no permission for non-remittance of the balance of 50,000 Dollars has been obtained even from the Reserve Bank Of India. As regards the relief under section 91, according to the learned counsel, that comes up for consideration only if the relevant facts are looked into, the necessary procedure is gone through and a final decision made on the application of the section. In fact, the assessee has not put in any claim under sec. 91 at all. 25. On a consideration of the facts, we see no reason to sustain the addition. The decision is Y. N. S. Hobbs' case and Shaw Wallace Co. Ltd.'s case directly support the assessee's case. What is taxable in the hands of the assessment is what accrues to it by way of income. In a case where amounts are deducted from a gross figure an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. We would, however, state that if the assessee is entitled to relief under section 91, it can put an application for getting the same even if it has not already done so. Gifts of Rs. 4,256 Sales-tax penalty of Rs. 2,401 : 27. These two grounds are not pressed. Exchange difference of Rs. 1,20,387 : 28. This is covered by the full Bench decision of the Tribunal in Poysha Industrial Co. Ltd. v. ITO (1979) 1 SOT 206 (Bom.) against the assessee. Payment of Rs. 25,000 to S. V. Ghatalia Co. : 29. The assessee claimed the above expenditure for getting a valuation of the goodwill done as a business expenditure. Both the ITO and the CIT (A) disallowed the claim. After hearing the parties, we uphold the disallowance. The expenditure has nothing to do with the running business of the company. Interest under section 139 215 : 30. The assessee's claim challenging the levy of the above interest was rejected by the CIT (A) on the ground that no appeal lay in respect of it. Before us, the learned counsel for the department has relied on CIT v. Hansa Agencies (1980) 121 ITR 147 (Bom.) in support of this. For the assessee, reference is made to the decision in CIT v. Dai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a transfer from a holding company to subsidiary company. According to him, the land and building could not be transferred as there was some statutory difficulty and otherwise, it was a transfer of the undertaking as a going concern. He submitted that, therefore, the question of application of section 41(2) does not arise. He placed reliance on the following decisions : (i) West Coast Chemicals Industries Ltd.'s case, (ii) Mugneeram Bangur Co.'s case, (iii) Sarabhai M. Chemicals (P.) Ltd. v. P. N. Mittal, Competent Authority (1980) 126 ITR 1 (Guj.), and (iv) Artex Mfg. Co. v. CIT (1981) 131 ITR 559 (Guj.). Shri Palkhivala also submitted that a similar issue has been considered by the Tribunal (Ahmedabad Bench 'A') in the case of Shahibag Entrepreneurs (P.) Ltd. v. ITO (IT Appeal No. 752 (Ahd.) of 1978-79). a copy of which is placed at page 82 of the assessee's compilation. Sri S. P. Mehta has also joined Shri Palkhivala in favour of the assessee and supported the case of the assessee. He contended that when the intention of the assessee was to transfer the undertaking as a whole though the land and building could not be transferred as there was some statutory diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of the various premises as referred to hereinabove are not to be transferred by these present". These facts are apparent from the contents of the relevant portion of the Deed as under : Rs. Ps. (a) The book-value of the said Machinery and Equipment. 2,29,99,335.17 (b) The book-value of the said current Assets 6,69,61,115.93 (c) The book-value of the said Investment 35,414.39 (d) Value of the said Goodwill as certified in the Report dated the 24th February, 1977 of M/s Ghatalia Co., Chartered Accounts, Bombay 6,00,00,000.00 (e) Value of the right to receive royalty income from the said `Technical Assistance Fees Agreements'. 51,30,000.00 --------------- 15,51,25,865.49 --------------- As reduced by the following liabilities : Rs. Rs. (1) Current Liabilities and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the buyer till the entire consideration was paid made no difference as the agreement clearly indicated that the assessee was keeping the factory going not on his own behalf but entirely on behalf of the buyer. Taking into consideration the facts of the case before the Supreme Court, in my view, that case has no application to the facts of the present case on hand. 7. In Mugneeram Bangur Co., the Supreme Court held that the sale was the sale of a whole concern and no part of the price was attributable to the cost of the land and no part of the price was taxable. It was further held that in the schedule to the agreement the price of the land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold, and what was given in the schedule was the cost price of the land as it stood in the books of the vendor and even if the price attributed to goodwill could be added to the cost off the land, there was nothing to show that it represented the market value of the land. As stated somewhere above, in view of the fact that the land and buildings have not been transferred by the assessee in the case on hand, the issue b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business to a new company, whether the profits under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 were liable to tax. Their Lordships of the Supreme Court held in that case that as the assessee-company sold the property for a stated consideration was in excess of the original cost of the building, the difference between its original cost and its written down value was profit within the meaning of the second proviso to section 10(2)(vii) of the Indian income-tax Act. their Lordships further laid down there in that the burden of proving that the consideration for the sale of the property was less than what it purported to be, lay upon the company. In the said case, their Lordships distinguished the earlier decision of the Supreme Court in the case of Mugneeram Bangur Co. The facts discussed by their Lordships in the aforesaid case appear to be akin to the facts of the case on hand. Therefore, in my view, it would be proper to apply the ratio laid down by their Lordships in this case to the facts of the case on hand. 11. In B. M. Kharwar's case, the issue before their Lordships of the Supreme Court was also to the same effect, i.e., when the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 above, where on consideration of clause 'Y' of the Deed of sale, it has been emphatically made clear that there was no slump sale but sale of individual items. I am afraid, in view of the above glaring facts, the decision of the Tribunal in ITA No. 752/Ahd/1978-79 cannot be applied to the facts of the present case. 13. From the facts discussed above, it is clear that there was a sale of individual items and hence the question of slump and done not at all arise. It may be because of any specific difficulties that the land and building were not sole and transferred due once the assessee has not done so, which is an admitted fact, it cannot be said that there was transfer of the undertaking as a whole including all the assets and liabilities. Here, I and Shri Mehta my be right that the land and buildings could not be transferred due to certain statutory difficulties but once it is prohibited under the statutes and the a assessee was not allowed to transfer the land and building the fact remains that the a assessee has not transferred the undertaking as a whole, as already said. When there is some statutory prohibition, the assessee is not allowed to go beyond that and to enter int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Tribunal, Shri Mehta submitted that all the material relevant to the issue were with the Department. There is nothing new to be supplied to the Department. He also submitted that the valuation of the goodwill is based on the principles of super profits formula, and that, therefore, Shri Ghatalia has rightly taken it at Rs. 6 crores. He further submitted that the valuation of Shri Ghatalia is proper. On the other hand, Shri Jetley submitted that the report given by Shri Ghatalia should be rejected outrightly, as that does not at all give the true picture of the real value of the goodwill and, in fact, the appreciation in the value of the goodwill is nothing but the appreciated value of the machinery which is transferred by the assessee. He also produced before us the valuation of goodwill given by Sri Khare, who is also a senior Chartered Accountant. 16. We have heard the rival submissions and considered the material on record. Basically, it is seen that the valuation of goodwill as given by Sri Ghatalia is not a true glue of the goodwill. That appear after taking into account the report of Sri Khare and Sri Ghatalia. But, at the same time, the difference between the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue afresh applying the provisions of section 41(2) is proper ?" THIRD MEMBER ORDER Per Shri Dr. S. Narayanan, Vice President - The Income-tax Officer brought to assessment a profit of Rs. 4,00,00,000 under section 41(2) of the Income-tax Act, 1961, on the sales of an undertaking by the assessee during the previous year. The assessee claims that the sale of the undertaking was as a going concern. And hence section 41(2) was not attracted. The Department says it was. It is this issue that has come up for decision in this Third Member reference. The relevant facts may be seen first. 2. The assessee is a private limited company. During the relevant previous year (which ended on 30-6-1977) it was carrying on various business activities. These were (i) manufacture and sale job synthetic detergents, soaps, cosmetics, etc., in the name of Swastik Oil Mills Division; (ii) research and development in drugs and pharmaceuticals in the name of Sarabhai Research Centre; (iii) market research, E. D. P. systems analysis, etc., in the name of Operations Research Group; and (iv) supply of technical know-how, information for fabrication of plant and machinery (for manufacture of deterge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated to be effective from 1-3-1977. The assessee then put the vendee in full possession of the above industrial undertaking and the business so much so that the vendee ran the said industrial under taking and the businesses to the total exclusion of the assessee from 1-3-1977. It also brought into its accounts the profit/loss from the said activities for the period 1-3-1977 to 30-6-1977 when its accounting year ended. This much was common factual ground before me. 4. In the deed of assignment of 28-6-1977 however, the lands and buildings were excluded (See Clause 'Y' of the Preamble to deed at p. 233 of Paper Book I). Clause 'Y' reads as under : "Y. The said Lands and Buildings and the Tenancy/Occupancy Rights inrespect of the various premises as referred to here in above are not to be transferred by these presents." The deed of 28-6-1977 after reciting the facts relating to the agreement for sale of 28-2-1977 went on to list the various assets and liabilities covered by it, viz., the deed of 28-6-1977. Total of the assets so covered (machinery and equipment, current assets, investments, goodwill and right to royalty, technical assistance fees and agreements) came to R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------- 92,82,745.91 - - 92,82,745.91 ------------ ---- ---- ------------ Balance 1,81,178.24 - - 1,81,178.24" ------------ ---- ---- ------------ 5. The Departmental Representative, however, made the point that the above analysis was based not on actual but purely on guess-work. This was because, apart from the unpaid purchase price, the other liabilities set off against the book vague of the immovable properties (Rs. 94,63,924) were on the basis of a very vague basis of pro rata allocation and hence the above analysis had no validity at all. This charge could not be effectively answered by the assessee. It was in fact admitted that part from the figure of Rs. 45,22,410, the unpaid purchase price, the other figures were based only on a rough allocation. Not much importance can therefore be attached to the above analysis. I shall have occasion to refer to this deficit of Rs. 1,81,178 later on. 6. In other words, the consideration that the assessee was entitled to receive was only Rs. 9,02,90,573.51, this price bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (which were not transferred), was determined at Rs. 8,52,49,448 based on the Audited Books of Account. We further confirm that net value of said Land and Building at Ambernath was never included in the final Purchase Price and was never paid for any Ofisade Private Ltd." 7. When asked why the lands and buildings had remained to be transferred to the vendee, the assessee's case was that under the Urban Land (Ceiling and Regulations) Act, 1976, the said properties could not be transferred except with the prior permission, in writing, of the competent authority under the said act. This authority was the Maharashtra Industrial Development Corporation ("MIDC"). The assessee did write to MIDC on 17-4-1977 in which it referred to the agreement of 28-2-1977 and requested for permission for the transfer in the following terms : "An agreement for Sale dated 28th February, 1977 has been executed between this Company and out wholly-owned subsidiary, Ofisade Private Limited and in terms thereof Ofisade Private Limited has taken over the industrial undertakings and business of Swastik Household and Industrial Products Division at Ambernath, Operations Research Group at Baroda, Sarabhai Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed here is that the vendee, viz., Ofisade Pvt. Ltd., carried on the business of the above industrial undertaking and the other business transferred to it under the deed of assignment of 28-6-1977, only up to 30-6-1977. Under an agreement dated 29-6-1977 entered into by Ofisade Pvt Ltd., with Ambalal Sarabhai Enterprises Pvt. Ltd., the business in the names of Swastik Oil Mills Division, Operations Research Group Division, Sarabhai Technical Services Division, and Sarabhai M. Chemicals Division (all being the business transferred by the assessee to Ofisade Pvt. Ltd., under the deed of assignment of 28-6-1977 except for the lands and buildings as noted in paragraph 6 supra) and various other business also, e.g., Telerad Division, Systronics Division, Sarabhai Glass Division, etc., were all transferred to Ambalal Sarabhai Enterprises Pvt. Ltd. The transfer was stipulated to be completed by or before 31-12-1977 or such other date to be agreed upon between the parties. It was further provided that Ofisade Pvt. Ltd. would run the aid undertakings and business on behalf of the said vendee with effect from 1-7-1977 until the date of completion of the transfer and that the profits from 1-7- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Central Government under section 23(4) of the MRTP Act before giving effects to the Scheme". December, 1985 (vi) Central Government approved the scheme January, 1987 (vii) The Gujarat High Court "released the orders under/section 391 and 394 of the Companies Act, 1956" with retrospective effect from 1-7-1982 May, 1987" 10. Paragraph 10 of the proposed Scheme of Amalgamation found in the statement dated 4-6-1982 prepared under section 393(1) (a) of the Companies Act, 1956, recorded the following position : "10. On the amalgamation of the Transferor Companies with ASE all the properties and assets of the Transferor Companies including those which were required to be transferred by the former to the later and are still pending transfer would be automatically transferred and thereafter effectively from part of the respective undertaking of Swastik and Telerad and be utilised for the purpose and industrial activities for which they were allotted and/or acquired. " The Lands and buildings for the transfer of which MIDC had demanded Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets of the assessee-company, particularly fixed assets, would have appreciated substantially, i.e., their value would have been much higher than the written down values. The assessee failed to obtain such valuation of its assets. (f) Section 41(1) of the Act was not applicable but section 41(2) was, i.e., transfer of goodwill at Rs. 6,00,00,000 reflects in good measure the value attributable to the fixed assets which have ostensibly been transferred at written down values. Since the assessee had purchased the goodwill of Rs. 2,00,00,000 when it took over the Oil Mill Division from Karamchand Premchand Pvt. Ltd., in 1973, the cost of the goodwill would have to be taken at Rs. 2,00,00,000. (g) The assessee was unable to furnish the actual cost (of the assets transferred by it to Ofisade Pvt. Ltd.) in the hands of Karamchand Premchand Pvt. Ltd. In the absence of such information, the profit under section 41(2) of the Act would have to be estimated at Rs. 4,00,00,000. (h) There was no capital gains to be taxed in view of section 47(iv) of the Act. The assessee appealed. 12. The Commissioner of Income-tax (Appeals) confirmed the ITO's action and held as under : (a) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges. The valuation in that report was not based on the working of any super profits over and above what the assets would yield. The record showed the following position : Asst. Year Profit after tax Capital reserves 1975-76 Rs. 23,95,367 Rs. 2,02,75,664 1976-77 Rs. 38,95,060 Rs. 2,57,46,641 1977-78 Rs. 30,23,071 Rs. 3,39,79,248 Thus, in the latest available year the capital and the reserves of Rs. 340 lakhs yielded a distributable profit of Rs. 30 lakhs. This is less than 10 per cent of the capital reserves, i.e., there was no element of super profit whatsoever. Hence, it could not be said that there was any goodwill, much less goodwill which could be valued at Rs. 6,00,00,000. (f) Scientific Research assets which had been fully written of had been transferred by the assessee at 'nil' value. In the absence of any goodwill it has to be inferred that the surplus received in the name of goodwill would only represent the price for which the other assets were transferred. All the same, the Income-tax Officer took the goodwill value at Rs. 2,00,00,000 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings as a part of the transfer. Specific value for the assets was also noted. But the assessee could not effect such a transfer because of the Urban Land Act provisions. Hence, the assessee had to go through the device of getting this land conveyed to an amalgamated company. The business undertaking consisted of several assets and liabilities. Each and every item of assets and liability need not always be transferred. In the transfer of the whole undertaking, some items might be incapable of being transferred, some items may be unacceptable to the purchaser because of their onerous nature. Some other assets may not be transferee doubt of sentimental attachment, e.g., where the business is carried on by a Hindu undivided family or an individual, a house belonging to the family or the individual may be kept back and it would still be a transfer of the entire business undertaking. The mere fact threat the lands and buildings were not transferred was irrelevant in deciding the issue of slump sale. If, for example, a vendee had his own premises to carry on his newly purchased business more advantageously, it would be odd to hold that the business was not transferred merely because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the computation of the consideration and current assets and investments also have been taken at their book value for inclusion, absolutely no value was put on the several intangible or what may be called intellectual properties. These do have enormous value content, e.g., industrial licences, import entitlements, know-how, trade marks, etc. Apart, therefore, from even a goodwill worked out on the super profit method, substantial value will have to be ascribed to these intellectual proprieties, intangible assets, etc. In such a context, the goodwill estimated at Rs. 6 crores would be an underestimate. If there was no "perceivable excess" in the consideration over and above the book values or the written down values of the existing assets, no question of application of section 41(2) would arise. The addition made by the Department on this account should be straightway deleted for this reason alone. But, there are other aspects also which support the assessee's claim. (v) Factual details for the computation of profit under section 41(2) are available to the Department by way of assessment records, e.g., details of the plant and machinery originally acquired, additions made theret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usions. He held that this was not a case of slump sale and so profit under section 41(2) was rightly assessable here. He made the following points : (i) No doubt, under the agreement for sale of 28-2-1977 the assessee sought to transfer its entire industrial undertaking and other business to Ofisade Pvt. Ltd., as going concerns but in the deed of Assignment of 28-6-1977, the lands and buildings and tenancy and occupancy rights in respect of various premises were specifically stipulated as not transferred by the assessee. (ii) Neither the two decisions of the Supreme Court (West Coast Chemicals Industries Ltd.'s case or Mugneeram Bangur Co.'s case) was applicable here. Both these cases were of cases of slump sales, the business having been sold as going concerns. That was not the case here because the lands and buildings remained to be transferred by the assessee. (iii) Sarabhai M. Chemicals (P.) Ltd.'s case also was of no assistance to the assessee. That again was a case of transfer of an industrial undertaking as a going concern to its wholly owned subsidiary at a slump price. The Court held there was no material to show that consideration had not been truly stated in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that that case was one of the 'slump sale of the entire undertaking'. That was not the position in the instant case. See clause 'Y' of the deed of sale (Apparently the reference here is to the deed of Assignment of 28-6-1977). The instant case, as is evident from the said deed, was not one of a slump sale but of sale of individual items. (vi) There might have been difficulties in the ways of transfer of the lands and buildings but the fact remains that the assessee did not transfer them. That means there was no transfer of the undertaking as a whole, i.e., of all the assets and liabilities. There was a statutory prohibition against the assessee transferring the lands and buildings. In such a context, the assessee cannot be allowed to go beyond that and enter into an agreement contrary to the statute or otherwise. In other words, there was no slump sale here. (vii) The question that remained was whether "taxing the difference of goodwill" (Rs. 4 crores) as the appreciated value of the machinery, was justifiable. The Income-tax Officer and the Commissioner of Income-tax (Appeals) have no doubt recorded their reasons for taxing such an amount. It was, however, submitted before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de of the order of the CIT (A) and restoring the matter to the ITO with a direction to decide the issue afresh applying the provisions of section 41(2) is proper ?" This is how the matter has come up before me. 16. The first point of different referred to me raises the question whether the transfer in this case was a "slump sale". The noun "slump" means : "a gross amount, a lump". Similarly, "slump sum" means a "lump sum" (Chambers 20th Century Dictionary, 1983 Edn., p. 1220). A slump sale or a slump transaction would, therefor, means a sale or a transaction which has a lump sum price for consideration. It is in this sense the term "slump transaction" is used by the Privy Council in Doughty v. CIT (1927) Ac 327, at p. 335. Learned counsel for the assessee, Shri Palkhivala, rightly stressed this aspect. Doughty's case was, in fact, referred to with approval, by the Supreme court in Mugneeram Bangur Co.'s case. This latter was a case of a firm which carried on the business of buying land, developing it and then selling it. Pursuant to an agreement it sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y's case). Hence, no part of the price was taxable. The fact that in the schedule the price of the land was stated did not to the conclusion that part of the slump price was necessarily attributable to the land sold. What was given in the schedule was the cost price of the land as it stood in the books of the books of the vendor and even if the sum of Rs. 2,50,000 attributed to goodwill could be added to the cost of the land, there was nothing to show that this represented the market value of the land. 17. The Court was of the view that once it was accepted that there was a slump transaction, i.e., the business was sold as a going concern, the only question that would remain was whether any portion of the slump price was attributable to the stock-in-trade. Here, the Court distinguished between a "realisation sale" and an "ordinary sale" and held that it was very difficult to attribute part of the slump price to the cost of the land sold in the "realisation sale.", in the case of an assessee carrying on the business of buying land, developing it and developing it and selling it. The mere fact that part of the slump price was attributable to the land sold. There was no attempt made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement of 28-6-1977 with effect from 1-7-1977. An amalgamation scheme was initiated which resulted in the assessee's amalgamation with Ambalal Sarabhai Enterprises Ltd., with effect from 1-7-1982. Thus, the lands / buildings stood absorbed in Ambalal Sarabhai Enterprises Ltd., ultimately. 20. Faced with the demand from MIDC, the above inviolate steps were perhaps considered preferable by the assessee. If I may digress here, one need no hold that the steps taken by the assessee were justified : but one can understand the compulsions behind that business decision. If a man does not have in him the urge to pay the maximum fix possible to Government, he is not a criminal. (There are now not many like Justice Holmes. They broke the would after him apparently). It is, on the contrary, a wholly natural tendency to save as much money as possible : and if it is done legally, legitimately, there should be no room for criticism-specially for the irritating unctuousness of some of the criticism. Prof. Wheatcroft, a prolific writer on tax matters, points out that such criticism is most often from persons who are not in a position to avoid taxes. If the taxpayer comes under the letter of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver reached the vendee here. 22. As regards the claim that for a sale as a going concern each and every asset/liability need not be transferred, there is no authority for such a bald proposition. The claim lacks substance. I have seen the examples givens by the learned Vice - President. With great respect, I am unable to agree with him in this regard. If the building where the business is carried on is not transferred, be it for sentiment or for any other reason, there is obviously no sale of a going concern. What is sold in such a case is the sale of a dismembered business and not of the organic whole that would fit the description "sale of a going concern." 23. Shri Jetley, the learned Standing Counsel for the Department, had placed strong reliance on two decisions : Akbar Mfg. Press Co. Ltd.'s case and Associated Clothiers Ltd'. s case. The first decision has to be taken as impliedly overruled by the Supreme Court in so far as it related to a slump sale. Where there is a slump sale or the sale of a business as a going concern, then no part of the slump price can be attributed to any particular asset or assets. Hence, there would be no tax to be levied under section 41(2). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Act, 1970, with effect from the appointed date; and hence that circular (directing that no profit under section 41(2) shall be taxed) was not applicable to the facts of this case. I find substance in this objection. Lands and buildings remained to be transferred here. Hence, this circular does not help the assessee here. 26. In Nawab Sir Mir Osman Ali Khan v. CWT (1986) 162 ITR 888 (SC), had the assessee had sold certain immovable properties and also received the full consideration for them, having put the vendees in possession. He had not however executed any registered sale deeds in favour of the vendees. The Wealth-tax Officer held that the assessee still owned those properties and assessed him to wealth-tax on the properties. The Tribunal held that the assessee having received the consideration from the purchasers and the purchasers having been put in possession, was protected in terms of section 53A of the Transfers of Property Act, 1882. The Supreme Court upheld thus Wealth-tax Officer's order. It held that for all legal purposes the properties had to be treated as "belonging to the assessee". (The Court was not concerned with the expression "owner" found in the income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and Sarabhai Research Centre Divisions and the right to use the name "Swastik Oil Mills", "Operations Research Group" " Sarabhai Technical Services" and " Sarabhai Research Centre" as a part of its corporate name of trading style or a part therefor or in any other manner whatsoever..........." The above recital strengthens the Revenue's claim that this was not a sale of a going concern. 28. It must be noted here that no attempt was made to value any of the assets to be transferred, at their market values. All were listed at book values. This is normally a pointer to the position that the transfer is for a slump price. But this by itself is not conclusive against the revenue. The basic test is to see whether there has been a sale of a going concern. That test, in terms of law, is not satisfied here. 29. The question then arises : if it was not a slump sale why should section 41(2) alone be invoked ? For example there were stocks of the book value of Rs. 3,71,15,789 which were transferred to Ofisade Pvt. Ltd. But no attempt was made to tax the profit thereon under section 28(i). Such inconsistency in approach showed up the weakness of the Revenue's case, according to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the majority of the Members who have heard this appeal are of this view-subject to the following observations to be kept in view by the Income-tax Officer in his de novo enquiry. 32. Much has been made by the authorities below of the raising of the goodwill value to Rs. 6 crores in 1976 from Rs. 2 crores in 1973. Shri Palkhivala described this approach as coloured by suspicion. Certain factual claims were stressed by him in this regard. These were : (i) When Karamchand Premchand Pvt. Ltd., sold the oil mill division to the assessee in 1973 that Unit's (manufacture of detergents) licensed capacity was 20,000 M. T. per annum. By the time of the second sale in 1976 it had increased to 39,000 M. T. per annum. (ii) In 1972-73 the total production was 16,000 M. T. In 1976-77 it had gone up to 36,000 M. T. (iii) Rate of inflation was the highest in the period 1973-77. It went up by as much as 24 per cent per annum. The result was : the value of the rupee in 1977 was only 50 per cent of what it was in 1973. (iv) Over and above the detergent unit, the assessee had set up 3 other units, viz., Sarabhai Research Centre, Operation Research Group and Sarabhai Technical Services Divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at source in Indonesia while paying royalty; (ii) Disallowance of claim for gift of Rs. 4,256; (iii) Disallowance of claim for sales tax penalty of Rs. 2,401; (iv) Addition of profit under section 41(2) on assets of the Industrial undertaking transferred by the appellant company as a going concern to its subsidiary company; (v) Disallowance of claim for exchange difference of Rs. 1,20,387; (vi) Disallowance of fees of Rs. 25,000 Paid to M/s. S. V. Ghatalia for valuation of goodwill; and (vii) Levy of interest under section 139 and 215. 3. The appeals had been hired by a Bench and on one of the issues (addition of profit under section 41(2)), there was differences of opinion between the Members. While the leaned Accountant Member held that no profit under section 41(2) can be computed or included in the total income of the assessee, the learned Judicial Member had held that the assessee was liable to be taxed on the profit under section 41(2). He, however, remitted the issued to the ITO for finding out the profit under section 41(2) with a direction to make fresh enquiry. On all other issues, the learned Judicial Member agreed with the learned Accountant Member who ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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