TMI Blog2005 (7) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... 147. However, but this ground was not pressed in the course of hearing before us. In Ground Nos. 6 and 7, liability to pay interest under sections 234A, 234B has been challenged. Ground Nos. 8 and 9 are residuary in nature. On 9-3-2005, the assessee filed a petition dated 17-12-2004, raising two more grounds of appeal. In Ground No. A, it was mentioned that, the learned CIT(A) failed to appreciate that the assessee had transferred its entire business by way of slump sale and, therefore, there was no sale price attributable to any asset separately. Thus, there was no question of taxing any capital gains on such transfer. Ground No. B is directed against taxation of technical know-how and it is mentioned that the learned CIT(A) ought to have held that there was no capital gains liable to be taxed in the hands of the assessee on sale of technical know-how. Ground Nos. 1, 2 and 3 of the appeal are similar to Ground No. B, now taken as additional ground. It is seen that the facts regarding the non-taxation of any amount as capital gains are available in the orders of the authorities below. Therefore, Ground No. A is admitted as it is bona fide legal ground, and Ground No. B is consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income stating, inter alia, that the business of the assessee was taken over by the company from 1-4-1993. It was further stated that on 31-3-1993, an asset of Rs. 32,10,000 was entered in the books of the assessee as technical know-how. On creation of the aforesaid asset in the hands of the assessee equivalent amount was credited to capital accounts of the partners in the ratio of their profit sharing. The business of the assessee was taken over by the company as a going concern. The partners of the firm became the promoters of the company. In lieu of the transfer of the business as a going concern, the company allotted shares to the partners of the firm and paid balance amount by way of cash. 2.2 In the course of assessment proceedings, it was represented before the Assessing Officer that the assessee had not spent any money for acquiring the asset of technical know-how. In this connection, statement of one of the partners was recorded, who inter aliadeposed that no expenditure was incurred for acquiring the aforesaid asset. It was further deposed that the asset was nothing more than a few drawings and designs, which was entered into the assessee's books on a day prior to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of consideration. This company was incorporated on 26-3-1993. The reason for incorporating the company was to create an entity of independent status with limited liability, so that the assets and know-how could be preserved. In this connection, a reference was made to clause 16 of the partnership deed of the assessee, dated 1-4-1992, which had recognized the need to bring on its balance sheet the asset of "know-how" because of vide recognition of the products of the assessee. The clause was intended to safeguard the asset and that no partner may use this asset of the firm. It was further-represented that in the course of hearing before the Assessing Officer, the evidence regarding existence of the asset of technical know-how was produced by way of drawings and designs contained in two box files. It was also represented that the technical know-how was a self-generated asset. In view of the aforesaid facts, it was argued that since the impugned asset held, by the assessee, was a self-generating asset, the machinery section relating to computation of capital gains on transfer of this asset failed. It was further argued that the asset had been acquired by self-exertion over a period o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical know-how appearing as an asset at the value of Rs. 32.10 lakhs represents the invention and design of "magnetic amplifier soft starters for induction motors". On the basis of this narration, the learned CIT(A) came to the conclusion that the assessee had developed technical know-how, for which it incurred the cost by making payments in respect of drawings, designs, technical fee etc. to various persons over a number of years. He also concluded that in each case, the assessee manufactured and sold the custom built starters, depending upon the requirement of the client. For each contract, the know-how was developed by incurring the expenditure of aforesaid kind. 2.5 The learned CIT(A) referred to the decision of Hon'ble Supreme Court in the case of CIT v. Artex mfg. Co. [1997] 227 ITR 260. It may be worthwhile to mention the facts of that case here. The assessee was a firm and it was carrying on the business of manufacturing silk cloth. Its business was transferred to a company as a going concern for a consideration of Rs. 11,50,400. In lieu thereof, 11504 fully paid-up shares of Rs. 100 each were allotted to the erstwhile partners of the assessee. The assessee filed a return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... starters. Over a period of time, the firm acquired considerable know-how in this line of business, so much so that it had acquired monopoly position over this product in the market. Due to the expertise in the field and the monopoly, its turnover increased very significantly from about 1.02 crore in assessment year 1993-94 to above 15.1 crores in assessment year 2000-01. The percentage of profit to turnover also improved greatly in this period from 0.1 per cent to 14.94 per cent. Keeping in view of various factors, namely, preservation of technical know-how, facility of dealing with the banks and limiting the liability, it was decided to float a company and to transfer the business as a whole to the company. Pursuant to this decision, the asset of technical know-how was created in the books of the assessee on 31-3-1993, putting the value at Rs. 32.10 lakh. The amount was credited to the capital accounts of the partners in their profit sharing ratio. The business was transferred to the company as a whole on 1-4-1993. The consideration of transfer of business was paid partly by way of cash and partly by allotment of shares in the company. 3.2 Our attention was drawn towards the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at Rs. 34,99,300. The Hon'ble Court held that when the concern was sold lock, stock and barrel, no price could be attributed to the cost of any particular asset. The fact that the price of an asset was mentioned in the schedule of the agreement did not lead to the conclusion that any particular value of slump price was necessarily attributable to that asset. What was given in the schedule was the cost price of the land, as it stood in the books of the vendor. There was no intent that the value of land shown in the schedule represented the fair market value of the land. Accordingly, it was held that no value could be ascribed to the land as the concern was sold as a whole. 3.5 The learned counsel further relied on the decision of Hon'ble ITAT Ahemdabad "A" Bench in the case of Industrial Machinery Associates v. CIT [2002] 81 ITD 482. The facts of the case were that the assessee-firm sold the entire business as a going concern for consideration of Rs. 1.25 crore to a company. The sale consideration was paid by way of allotment of equity shares, non-cumulative redeemable preference shares and issue of promissory notes. The Assessing Officer took the excess of assets over lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Court pointed out that in such a case credit to the capital account in the books of a firm is not a debt due by the firm to the partner. Therefore, such credit does not represent consideration in the commercial sense and it does not represent any real income or gain. Thus, in a case where there is a transfer of an asset, but if machinery section failed in computation of capital gains by attributing consideration, it was held that no computation can be made under section 48. However, we find that the ratio of this case does not really apply to the facts of the case at hand. 3.8 The learned counsel also relied on the decision of Hon'ble ITAT, Hyderabad "B" Bench in the case of Coromandel Fertilisers Ltd v. Dy. CIT [2004] 90 ITD 344. The issue before the Hon'ble Tribunal was whether transfer of two units owned by it amounted to slump sale or itemized sale. The Hon'ble Tribunal held, looking to the facts of the case, that the cement unit was sold as a going concern. It was true that separate procedures were laid down for valuation of current assets, obsolete items, statutory dues and contingent liabilities but such procedure did not detract from the concept of the slump sale. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the value of plant, machinery and dead stock as assessed by the valuer at Rs. 15,86,296. Therefore, provisions of section 41(2) were applicable. The case of the learned counsel was that in that case, certain assets were not sold under the agreement and that is how the question of applicability of section 41(2) came into existence with regard to those assets. However, it was his case that the facts of instant case are entirely different from the facts of that case. 3.12 The learned counsel also relied on the decision of Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. v. ITO [2003] 264 ITR 193. In that case, on perusal of documents, the Hon'ble Court found that the intention of the parties was to transfer Kalyani Unit by way of lump sum sale for a consideration of Rs. 247 crores. It was not their intention to make a sale of itemized assets. The Hon'ble Court pointed out that mere execution of conveyance deed for the immovable property, by itself would not constitute a sale of an individual asset. The buyer did not intend to purchase individual items, and apart from land, building, machinery or plant, the assessee had transferred many other assets, namely, licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gains accordingly. The case, which the learned counsel tried to make on the basis of this decision, was that what is to be F seen is whether the business has been transferred as a whole and if so, the fact that certain assets are retained will not make any difference to the conclusion. In this case also, the Assessing Officer was directed to consider the levy of capital gains on the basis that the sale was a slump sale and for this purpose, he was directed to follow the directions contained in various judgements, especially the one rendered by jurisdictional High Court at Bangalore. 3.14 The learned counsel also drew our attention to the fact that in the case of transferee company, the learned CIT(A) disallowed deduction under section 35AB, and an appeal is pending against that order. 3.15 The learned counsel also took an alternate plea that in case it is held that the instant case is one of itemized sale, then also, nothing can be brought to tax as capital gains on transfer of technical know-how. In this connection, it was pointed out that the drawings and designs purchased by the assessee in various years and listed on page 6 of the order of the CIT(A) were not meant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuation, there are many items which cannot be independently purchased and, thus, the sale will have the character of slump sale. (vi) If certain assets are independently sold on the basis of their market values, then, such sale will invite capital gains tax notwithstanding the fact that other assets were also transferred lock, stock and barrel. (vii) Extension of the parties as to what they intended to sell or buy is a relevant consideration. and (viii) Slump sale may lead to levy of capital gains tax on that basis. 5.1. We have considered the facts of the case and rival submissions. We have also perused the agreement between the assessee and the transferee company dated 31-3-1993. We have already pointed out that as per this agreement, the assessee had got a tentative balance sheet and profit loss account made as on 31-3-1993. As per paragraph 1(a), the parties agreed that the entire business of the assessee, carried on till now by the partnership firm, shall stand transferred to the company with effect from 1-4-1993 along with the assets, liabilities, rights and obligations of the business. On the basis of the tentative balance sheet, annexed as Schedule A to the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively the business as a whole along with such assets as trade marks, trade name, employees etc. The buyer continued to do the same business as the seller was doing earlier. The individual items, namely, land, building and machinery were transferred, but the assessee had transferred the business advantages like license quota and brand name "premier" along with the workers and other intangibles. To our mind, the facts of that case are identical to the facts of the instant case. Not only the assets borne on the balance sheet or taken on the balance sheet were transferred, but other business advantages like pending orders, trade name etc. were also transferred. Therefore, we are of the view that it is a case of slump sale and not one of sale of individual items. In such a scenario, the consequential finding is that the learned CIT(A) could not have taxed individual item "technical know-how" under the head 'capital gains'. In this connection, we may again refer to the decision of Hon'ble Supreme Court in the case of Artex Manufacturing Company. In that case, the learned counsel appearing for the assessee had submitted that the value of machinery, plant and dead stock was not mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of this case are at par with the facts of the cases of Premier Automobiles and Mahalasa. Neither the Assessing Officer nor the CIT(A) has considered the matter regarding computation of capital gains on slump sale. Therefore, following the decision of jurisdictional High Court, which is binding on us, the matter regarding computation of capital gains on the basis that the instant case is one of slump sale is remanded to the Assessing Officer. He is directed to give adequate opportunity of being heard to the assessee in this matter and pass an appropriate order. 5.4 Thus, Ground A of the additional grounds of appeal is partly allowed as indicated above. 5.5 We are also of the view that it is not a case of distribution of assets on dissolution or otherwise of the firm. The firm ceased to carry on the business firm from 1-4-1993. There was no distribution of assets to partners on 31-3-1993. The business was transformed as a whole. In lieu of that, partners were paid cash by the company and shares were also allotted to them. The cases of slump sale are so common, and now statutorily recognized, that it will not be feasible to give a finding that the instant case is on of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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