TMI Blog2009 (9) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in the case. It further be held that the facts are distinguishable in the case of the appellant as compared to the ratio of decisions in case of AR Krishnamurthy v. CIT 176 ITR 417 (SC) and that of Artex Engineering reported in 227 ITR 260 (SC) relied upon by the taxing authorities below, and they do not cover the issues prevailing in the case of the appellant and are distinguishable on facts. The income so assessed by the taxing authorities below be held as not taxable. The income so taxed be deleted. The appellant be granted just and proper relief in this respect. (2) On facts and circumstance prevailing in the case and as per provisions of law, it be held that the bifurcation made by the taxing authorities below of the consideration realized on transfer of the business is beyond the jurisdiction of the Assessing Officer and erroneous and perverse. There is no scope for making any bifurcation of the consideration realized on account of the transfer of the business. It further be held that the case of the appellant is covered inter alia by the ratio of decisions of Syndicate Bank Ltd. 155 ITR 681 B.C. Shrinivasa Shetty 128 ITR 294 (SC), Mugneeram Bangur Co. 57 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer about the taxability of the sale price received by the assessee on sale of total concern along with plant and machinery to a sister concern, viz., Jagdish Electronics (I) Pvt. Ltd. For this proposition, Assessing Officer placed reliance on the following decisions : ( i ) A.R. Krishnamurthy v. CIT [1989] 176 ITR 417 (SC). ( ii ) CIT v. Artex Engineering Co. [1997] 227 ITR 260 (SC). 5. In compliance, the assessee has submitted the following explanation: "( i )The price for transfer is arrived at by capitalization of profits method. The weighted average of net profits for 3 preceding years has been capitalized and the consideration is arrived at on the basis of 5 times of such weighted average. The working of the consideration arrived at is as under : F.Y. Net Profit before tax Weightage Weightage value 1993-94 50,69,100 1 50,69,100 1994-95 1,07,08,500 2 2,14,17,000 1995-96 1,37,63,100 3 4,12,89,300 Total 6 6,77,75,400 Weighted average Rs. 6, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s next observation was that it was definite that the value of plant and machinery and factory building as well as other fixed assets such as two-wheelers, four-wheelers, furniture, fixture and electrical installation were transferred to Jagdish Electronics (I) Pvt. Ltd. for a consideration of Rs. 5,64,79,500. According to the Assessing Officer, the value of these assets could not be more than the revalued amount of Rs. 1,71,85,000. In his view, the rest balance, i.e., of Rs. 3,92,94,500 was nothing but good-will , paid by the transferee to the assessee. Accordingly, under two heads, i.e., ( i ) value of assets under short-term capital gain ( ii ) value of goodwill under long-term capital gain, it was taxed as per the following calculation : "( a )Total consideration received by the assessee firm for P M of Rs. 1,71,85,000 as reduced by WDV of P M as on 31-3-1996 of Rs. 16,00,634 i.e., Rs. 1, 55,84,366 is taxed as short-term capital gain. ( b )The remaining part of consideration value of Rs. 3,92,94,500 (5,64,79,500 - 1,71,85,000) is taxed as long-term capital gain as goodwill under sub-section (2 ii ) of section 55 of the Income-tax Act." 7. Those additions were cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of his arguments, he has relied upon : ( a ) Artex Engg. Co. s case ( supra ) ( b ) CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (SC). ( c ) Premier Automobiles Ltd. v. ITO [2003] 264 ITR 193 (Bom.). ( d ) Syndicate Bank Ltd. v. Addl. CIT [1985] 155 ITR 681 (Kar.). ( e ) Coromandel Fertilisers Ltd. v. Dy. CIT [2004] 90 ITD 344 (Hyd.). ( f ) Industrial Machinery Associates v. CIT [2002] 81 ITD 482 (Ahd.). 10. From the side of the revenue, ld. DR has supported the orders of the authorities below and also argued that the true effect of a transaction can be gathered from the terms embodied and the surrounding circumstances of the transaction carried out thus cited Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178. It was also pleaded that a taxpayer cannot escape the consequence of law merely by choosing a particular term though in substance it gives a different meaning, decision cited CIT v. Panipat Woollen General Mills Co. Ltd. [1976] 103 ITR 66 (SC). Ld. D.R. Mr. Bains has also cited Mahindra Sintered Product Ltd. v. CIT [1989] 177 ITR 111 (Mum.) for the preposition that where price had been fixed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits of the services of the present employees without assignment of specific values of particular items." 13. The next point highlighted was the basis on which the said price of the entire Industrial Unit was fixed. It was a valuation prepared by a chartered accountant dated 4-4-1996. Para 5 above of this order describes the computation method. The said price was affixed by adopting the capitalization of profit method. In the said valuation, the weighted average of net profit of the immediately past three financial years financial years 1993-94 to 1995-96, was capitalized. Thus, the figure has arrived at Rs. 6,77,75,400 which was divided by the figure of 6 so the weighted average came at Rs. 1,12,95,900. That average profit was thereafter capitalized at 20 per cent; so as to arrive at the figure of Rs. 5,64,79,900. This was made basis to fix the price of the said Industrial Unit for the purpose of affixing the consideration of the impugned transfer and it was not a case of assets and liabilities valuation method. 14. The above two impugned factors, first, the contents of the agreement and second, the method adopted for determination of the lump sum consideration, are the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each item by a valuer. ( l )Consideration as a whole of the entire concern was arrived at by applying average weightage profit capitalization method by taking average profit of the past year and not a valuation method of each asset and each liability. ( m )It is a transfer of lock, stock and barrel since effected as lump sum assignment of both tangible and intangible assets. ( n )Transfer was not only for plant and machinery but inclusive of tenancy rights, building, spares, tools, electrical installations, furniture, fixture, licenses, registration benefits of incentive schemes, goodwill, etc. ( o )The price so fixed i.e., the total consideration was such that it could not be apportioned among the various assets constituting the undertaking. 15. A case law study has revealed an interesting feature that the Hon ble Supreme Court has passed two decisions on the same date, i.e., on 8-7-1997. Simultaneously of Artex Engg. Co. s case ( supra ) and CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 . However, themselves made a distinction that in the case of Artex Engg. Co. ( supra ) section 41(2) was applicable since price was attributable to the plant, ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain in the case of lump sum transfer. To answer this question, we rely upon Premier Automobile ( supra ); wherein the Hon ble Court has referred the issue back to the stage of the Assessing Officer with the direction that the provisions of section 45 have to be applied in such types of cases. We may like to place on record that considering the totality of the facts of the case we have also held that a capital asset as defined under section 2(14) has been transferred; hence the applicability of the provisions of section 45 cannot be denied. As it was held by the Hon ble jurisdiction of High Court on identical terms, we hereby remand this issue to the Assessing Officer to compute the quantum of capital gain and for that purpose the Assessing Officer will have to decide the cost of the undertaking for the purpose of computing capital gain, if any, that may arise on transfer. The court has further held that the Assessing Officer will also be required to decide its value under section 55 of the Act and will be required to decide on what basis indexation should be allowed in computing the capital gains. The Assessing Officer s venture of treating the balance amount as "goodwill", ignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2.3 It was submitted on behalf of the assessee before the Assessing Officer that the assessee had disposed of the entire business with all the assets and liabilities at a slump price of Rs. 5,64,79,500; that the price for transfer was arrived at by capitalisation of profit method; that in the Valuation Report dated 4-4-1996, the values of individual assets were not considered for determining the value of the business, and; that the difference of Rs. 3,90,75,997 did not form part of taxable income either under the head Business income or Capital gain . 2.4 The Assessing Officer did not accept the assessee s explanation and, for the reasons given in paragraphs 3.3 and 3.4 of his order under section 143(3) dated 29-2-2000, he assessed the total income at Rs. 5,51,00,070 as under : Particulars Amount (Rs.) Amount (Rs.) 1. Income from Business: Income as per computation 39,534 Add: Depreciation 1,81,670 2,21,204 II. Income from Capital Gain: Short-Term Capital Gain 1,55,84,366 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-1995 (Rs.) Net Block as on 31-3-1995 (Rs.) 1. Factory building 4,38,580.68 2,15,766.00 2. Electrical Installation 13,169.00 772.00 3. Plant Machinery 38,51,429.59 7,76,690.00 4. Furniture Fixtures 8,783.41 5,479.00 5. Two Wheeler 40,641.00 21,193.00 6. Four Wheeler 2,01,462.00 1,16,042.00 45,54,065.68 11,35,942.00 5.5 The above difference of Rs. 1,62,00,044 was credited directly to the current accounts of the partners, in their profit sharing ratio, as under : S.No. Name of the Partners Year ending 31-3-1995 1. Shri Dinesh B. Chheda 24,30,006 2. Shri Vijay J. Chheda 29,16,007 3. Mrs. Rashmi J. Chheda 27,54,007 4. Mrs. Manju V. Chheda 40,50,011 5. Mrs. Pallavi N. Shah 40,50,011 Total 1,62,00,044 5.6 And, in the balance sheet as on 31-3-1995, the value of fixed assets was shown as under : Particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the company to the assessee-firm by cheques as under : S.No. Cheque No./Date Amount (Rs.) Bank 1. 50428/1-5-1996 25,00,000 Bank of India 2. 455414/1-5-1996 3,50,00,000 Cosmos Co. op. Bank 3. 455415/1-5-1996 1,89,79,500 -do- Total 5,64,79,500 5.10 The partners withdrew the entire amount from the firm during the year ending 31-3-1997. 5.11 The Net Book Value of Rs. 1,74,03,504 (5,64,79,500 - 3,90,75,996) was comprised of two main items of Plant and Machinery which were re-valued at Rs. 1,63,00,000 and the factory building, which was re-valued at Rs. 8,85,000, as on 31-3-1995. These two main/major items forming part of the Net Book Value are fully described in the Schedules I and II of the said Agreement dated 8-4-1996. The balance sheet of the assessee-firm as on 31-3-1996 appeared as under : Liabilities Amount (Rs.) Assets Amount (Rs.) Partners Capital Accounts 20,000.00 Fixed Assets 16,00,634.00 Partners Capital Accounts 2,40,04,088.84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,75,996, was worked out after deducting the Net Book Value as per the balance sheet. It can be seen that in the balance sheet as on 31-3-1996, and as reproduced above, the two main items were Plant and Machinery and the Factory Building , which find itemised description in the Schedules I and II of the Agreement dated 8-4-1996. The transaction was between the sister - concerns, and advance tax had been paid by the assessee-firm during the year. The so-called valuation report dated 4-4-1996, was intended merely to lend support to an afterthought. 7. It is well-settled that the courts, in order to construe an agreement, have to look to the substance or the essence of it rather than to its form, and an assessee cannot escape the consequences of law merely by describing an agreement in a particular form though in essence and in substance it may be a different transaction. In taking this view I am fortified by the decision of the Supreme Court in the case of Panipat Woollen General Mills Co. Ltd. ( supra ). In the present case, the contents of the agreement dated 8-4-1996 and the assessee s books of account, as discussed in detail in the above paragraphs, leave no doubt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age, and that the consideration so computed was paid by the seller on 1-5-1996. The contention of the assessee was that individual value of assets and liabilities was not considered in computation of price of sale of business. None of these submissions, however, impressed the Assessing Officer. He noted that the assessee had got its assets revalued at Rs. 1,71,85,000, as on 31-3-1995, vide valuation report dated 12-4-1995. On the basis of this valuation report, the assets were also revalued in the books of account, and the resultant surplus of Rs. 1,62,50,000 was credited to the partners capital accounts. It was thus clear that the value of assets was not more than Rs. 1,71,85,000 shortly before the date of transfer of assets and that this valuation was done by an independent valuer. The Assessing Officer was further of the view that nothing could have influenced the price of assets within a few months to the extent that what was valued at Rs. 1,71,85,000 on 31-3-1995, could be valued at Rs. 5,64,79,500 within a year. The Assessing Officer thus came to the conclusion that the total value of the assets was no more than Rs. 1,71,85,000 whereas the consideration for the business rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with the scheme of section 255(4), Hon ble President has nominated me as a Third Member so that the appeal can be disposed of by the majority view. 4. I have heard Shri S.N. Inamdar, learned counsel for the assessee, and Shri Raminder Kaushal, learned Commissioner (DR). I have also carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 5. I have noted that the Assessing Officer, while framing the assessment, took specific note of the assessee s submission that sale price of the undertaking was arrived at on the basis of profit capitalization method and even extracted the complete computation of sale price, as furnished by the assessee, in the assessment order. He did not dispute the bona fides of such a computation of sale price of the unit even though, relying upon Hon ble Supreme Court s decision in the case of Artex Engg. Co. ( supra ), proceeded to adopt the value of various fixed assets as per report of the registered valuer as on 31-3-1995. The operative part of the Assessing Officer s order is as follows : "3.3 The assessee s submissions given through various letters in the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee firm for P M of Rs. 1,71,85,000 as reduced by WDV of P M as on 31-3-1996 of Rs. 16,00,634 i.e., Rs. 1,55,84,366 is taxed as short-term capital gain. ( b )The-remaining part of consideration value of Rs. 3,92,94,500 (564,79,500 1,71,85,000) is taxed as long-term capital gain as goodwill under sub-section (2 ii ) of section 55 of the Income-tax Act." 6. Even as the Assessing Officer concluded as above, he did not dispute the factual contention of the assessee to the effect that the price of transfer is arrived by the profit capitalization method. The said contention was duly recorded by the Assessing Officer at page 3 of the assessment order as follows : The price for transfer is arrived at the capitalization of profits method. The weighted average of net profits for three preceding years has been capitalized and the sales consideration is arrived at on the basis of 5 times of such weighted average. The working of consideration is arrived at as under : Financial year Net profit before tax Weightage Weighted Value 1993-94 50,69,100 1 50,69,100 1994-95 1,07,08,500 2 2,14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have considered rival submissions. In the first place it must be understood that the subject-matter of transfer between the appellant firm and Jagdish Electronics (I) Pvt. Ltd. was an Industrial unit which is defined in sub-clause ( b ) on page 3 of the agreement to assign which reads as under : "The firm thus is seized and possessed of an is otherwise well and sufficiently; entitled to all that piece and parcel of the freehold industrial plot, within the limits of Registration District of Pune, Sub-Registrar, Mulshi, and Gram Panchayat of Village Pirangut, bearing consolidation Blck (Gat) No. 162 (Part), admeasuring 192.45 sq. mt. or thereabout, together with the superstructure admeasuring 524.43 sq. mt. built up, or thereabout, comprising of ground floor only, constructed for the purposes of industry, constructed thereon, and together plant, machinery, assets, liabilities, rights, obligations, business, licences, permissions, contracts, electrical, installations, fixtures, fittings, easements, appurtenances, ingress, egress and, together with all incidental, consequential land supplementary rights, title, interest, claims (for short, collectively referred to as the said "In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( ii )Two Wheelers Sr. No. Description of Asset 1. Bajaj Sunny 2. Kinetic Honda ( iii )Electrical Installation being electrical wiring and related equipment for providing motive power to the Plant Machinery. ( iv )Furniture Fixtures consisting of miscellaneous items like tables, chairs cupboards. This means that the appellant firm has actually transferred the depreciable assets which fact is corroborated in the instrument evidencing the transfer; and not denied by the appellant firm. The observations made by the Assessing Officer in the assessment order that all the depreciable assets have been specifically revalued for the value as mentioned in; the assessment order and that such new value has been taken into the books of account while preparing the balance sheet as on 31-3-1995 has not been denied any time on behalf of the appellant. In other words it has been accepted by the appellant firm. Now coming to the contention of the appellant firm, it is seen that but for the depreciable assets, the appellant firm has not specifically transferred any other assets as mentioned in the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price attributed to the items transferred is not indicated and, hence section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that section 41(2) of the 1961 Act is not applicable. Question No. 2 referred to the High Court is, therefore, answered in the affirmative, i.e., in favour of the Revenue and against the assessee. Question Nos. 2 and 3 are interconnected in the sense that the surplus amount resulting from the transfer of plant, machinery and dead stock is either taxable as income under section 41(2) or as capital gain under section 45. The Tribunal was of the view that it was chargeable to income-tax under section 41(2) while the High Court has held that it was chargeable to tax as capital gain. Since we are of the view that the income was chargeable to Income-tax under section 41(2), the decision of the High Court that it was chargeable to tax as capital gain cannot be upheld. But the liability under section 41(2) is limited to the amount of surplus to the extent of difference between the written down value and the actual cost. If the amount of surplus exceeds the difference between the written down value an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able, and the valuation report relied upon by the authorities below is dated 12-4-1995 estimating value of the assets as on 31-3-1995. The value of an asset as on 1-4-1996 cannot be the same as on 31-3-1995. There are bound to be variations. It cannot therefore be said that valuation of individual assets as on the date of transfer was available. In the case of Artex Engg. Co. ( supra ), all the related values of assets and liabilities as on the date of transfer were on record. As observed by Hon ble Supreme Court in paragraph 2 of the said order, the relevant undisputed facts were as follows : ".....During the course of assessment proceedings before the ITO, for the determination of purchase consideration, the assets were shown at Rs. 41,73,973, out of which the machinery and dead stock, as valued by Hargovandas Girdharilal, was Rs. 15,87,296. The liabilities were shown at Rs. 30,23,573 and the balance amount of Rs. 11,50,400 was shown as purchase consideration. ....." 10. On these facts, argument of the assessee was that "in the present case, the value of plant, machinery and dead stock is not mentioned in the agreement and the agreement does not indicate the value attrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was carried out, and, on that basis, the sale consideration was fixed". That certainly cannot be the situation in which admittedly sale consideration was arrived at by profit capitalization method, and, as such, the slump price is not capable of being attributable to individual assets. In view of this discussion, in my considered view, the Hon ble Supreme Court s judgment in the case of Artex Engg. Co. ( supra ) does not have any application to the facts of this case. The sale of industrial unit, on the facts of the case, must be held to have been made on slump sale basis. The other aspect of the matter is that the unit has been transferred as a going concern basis. A plain reading of the agreement dated 18-4-1996, as a whole, would indicate that as a part of this sale agreement, the assessee also had an obligation to transfer the industrial unit on going concern basis . At page 2 of the said agreement, the land and superstructure thereon "together with plant, machinery, assets, liabilities, rights, obligations, business, licences, permissions, contracts, electrical installations, fixtures, fittings, easements, appurtenances, ingress, egress and together with all incidental, con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has all along been that the method of arriving at the sale consideration of the industrial unit has been capitalization of profits , and none of the authorities below has doubted correctness of this claim. When the sale consideration is so arrived at; and the method of its computation is not challenged by any of the authorities below, it cannot at all be said that the sale of unit is an itemized sale of the assets of the unit. In my view, therefore, the impugned transaction is not a case of itemized sale and it is clearly a case of slump sale of the business. Accordingly, while I am in well considered agreement with the conclusions arrived at by learned brother Judicial Member, I respectfully express my inability to concur with the conclusions arrived at by learned brother Accountant Member. 11. Let the matter be placed before the Division Bench now so as to decide the appeal in accordance with the majority view. ORDER Mukul Shrawat, Judicial Member. - In this case, there was a difference of opinion between the Members, when this appeal originally came up for hearing, on the following point; duly referred under section 255(4) of Income-tax Act, reproduced below ..... X X X X Extracts X X X X X X X X Extracts X X X X
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