TMI Blog2009 (12) TMI 595X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 of the I.T. Act comes into operation when the consideration of such assets can be ascertained may be a part of the block assets but depreciation had been allowed. On the other hand in the case of a slump sale or the sale of undertaking as a whole do not fall within the ambits of section 50 because no depreciation had ever been claimed or allowed on such an undertaking as a whole, hence the view of the Hon'ble Courts, as discussed above, is that in such a situation i.e in the absence of itemized sale, the provisions of section 50 are inapplicable. In the case of Premier Automobiles Ltd [2003 -TMI - 11540 - BOMBAY High Court) high court has held that provisions of section 45 has to be applied in such type of case. - ITA No. 874/PN/2001 - - - Dated:- 31-12-2009 - ORDER Per : Mukul Shrawat : 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 u/s.255(4) of I.T. Act, reproduced below:- "Whether or not, on the facts and in the circumstances of the case, the impugned transaction was a 'slump sale' or an 'itemized sale?" 2. Now the controversy stood resolved by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PUNE Pramod Kumar (TM) Dated: September 11, 2009 Appellant Rep by: Shri S N Inamdar Respondent Rep by: Shi Raminder Kuashal ORDER Per : Pramod Kumar : 1. On a difference of opinion between the Members constituting the Division Bench when this appeal originally came up for hearing, following point of difference has been referred to me by Hon'ble President under section 255(4) of the Income Tax Act, 1961. Whether or not, on the facts and in the circumstances of the case, the impugned transaction was a 'slump sale' or an 'itemized sale'? 2. Briefly, the material facts giving rise to this dispute before me are as follows. The assessee before me is a partnership firm, and the assessment year involved is 1997-98 i.e. when Section 50 B was not on the statute. In the course of its assessment proceedings, the Assessing Officer noticed that the assessee has not carried any manufacturing activity in the relevant previous year but a sum of Rs.3,90,75,996 has been credited in its profit and loss account as 'excess amount realized over net value' which has been, in computation of taxable income, claimed as exempt from tax on the ground that the surplus i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee carried the matter in appeal before the CIT(A) but without any success. Not satisfied with the order of the CIT(A), the assessee carried the matter in appeal before this Tribunal. 3. When the matter was argued before a Division Bench of this Tribunal, it resulted in a split verdict. While the learned Judicial Member was of the view that the industrial unit has been sold on going concern basis, alongwith not only building and plant machinery but also alongwith all its tangible and intangible assets, that it was a case of slump sale, and that, accordingly, it was outside the ambit of taxable income under Section 50 of the Income Tax Act, the learned Accountant Member did not share that perception. He was of the view that "this impugned transaction between the assessee firm and its sister company Jagdish Electronics Pvt. Ltd. was not a slump sale". He took note of the fact that the seller and buyer of the industrial unit were sister concerns and the core of sale transaction was industrial unit which consisted of the plant and machinery, and the factory building, as also of the legal position to the effect that, in order to construe an agreement, courts have to look at the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of WDV of Rs. 1,62,00,000 were credited to the partners' current account as per valuation account. 3.4 Considering the assessee's submission and revaluation report, it is very clear that the value of P M factory building was Rs. 1,71,85,000/- as on 31.3.95. The assessee's submission dt 22.6.99 shows the method by which the consideration value of Rs. 5,64,79,500/- was determined. The same is based upon the weighted profit capitalization method on the basis of profits earned by the assessee firm in the last three F. Yrs. Also the WDV of P M and factory building after revaluation is shown at Rs. 1,71,85,000/-. As per revaluation report, it is definite that the value of P M and factory building as well as other fixed assets such as two-wheelers, four-wheelers, furniture and fixtures and electrical installation which were also transferred to Jagdish Electronics (I) P Ltd for a consideration value of Rs. 5,64,79,500/- will not be more than Rs. 1,71,85,000/-. The value of P M cannot be more than that has been revalued by the Regd Valuer. If this aspect is taken into consideration that out of the total consideration value of Rs. 5,64,79,500/-, the value of P M factory building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55414 3,50,00,000 (Cosmos Coop Bank, 1.5.96 45415 1,89,79,500 (Gokhalenagar, Pune 7. When the matter travelled to the CIT(A) in appeal, once again it was the case of the assessee that the unit has been sold on the basis of slump sale basis and the sale consideration has been computed on the basis of profit capitalization method. It was pointed out by the assessee that values have not been assigned to the individual assets. In the statement of facts attached to the appeal, the assessee stated that, " The assessee firm has entered into the sale agreement with Jagdish Electronic Pvt. Ltd who offered to buy the unit at a total consideration of Rs. 5,64,79,500 being slump price fixed on the basis of profitability of the unit for last three years" and that "the consideration being based on yield method had nothing to do with the value of assets either appearing in the books or valuation thereof by an approved valuer". Learned CIT(A) did nowhere dispute the above contentions and yet the CIT(A) expressed the view that "the appellant firm has actually transferred the depreciable assets which fact is corroborated by the instrument evidencing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly used for sustaining the working of the Unit and its administration and the same is more particularly described in Schedule II hereunder." Schedule I II of the agreement read as under: SCHEDULE-I Two inter-connecting factory sheds having built-up area admeasuring approximately 5645 sq.ft. and having RCC construction. SCHEDULE-II i) PLANT MACHINERY SR. No. DESCRIPTION OF ASSET 1. YAMADA DOBBY High Speed Mech. Press 2. OGAKI Stamping Dies (3 nos) 3. ELGI Air Compressor 4. BULL ARBOR Press -(3 nos) (3/4 TC) 5. FALCON Surface Grinder 6. Hydraulic Auto Rivetting Press. 7. DYTEK Die Tool 8. Hydraulic Moulding Machine 9. SCRAP Grinder 10. Multi Cavity Bobbin Mould 11. Multi Cavity Box Mould 12. Multi Cavity Grommet Mould 13. Multi Bobbin Mould 14. Multi Tube Mould 15. Multi PVC Cap Die 16. Multi Copper Foil Die 17. Cutting Tool 18. Bending Tool 19. Piercing T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined according to the strict legal form of the transaction. The company was a legal entity distinct from the partnership under the general law. Transfer of the machinery was by the firm to the company; and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. The transaction resulted in excess realization over the written down value of the machinery to the firm, and the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery." Further on page 276 277, it was held as under: Shri Ganesh, learned counsel appearing for the assessee, has submitted that in the present case the value of the plant, machinery and dead stock is not mentioned in the agreement and the agreement does not indicate the value attributable to the said items. It is no doubt true that in the agreement there is no reference to the value of the plant, machinery and dead stock. But on the basis of the information that was furnished by the assessee befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case because of the amendment in the Act vide Section 55(2)(a)(ii), defining the cost of acquisition for goodwill as 'zero', of NIL. The assessment framed by the Assessing Officer in this regard is found to be legally and arithmetically; correct and therefore, the same is confirmed. Appeal fails on this ground. 8. It is thus clear that none of the authorities below had any issues with genuineness or bonafides of the valuation method adopted for sale of the unit. It has never been the case of any of the authorities below that the consideration arrived at was part of the sham arrangement and that inter se relationship between the buyer and the seller has vitiated the bonafides of the sale agreement. I have also noted that, as evident from the operative portions of the orders of the Assessing Officer as well as the CIT(A) as reproduced above, the only basis of their rejecting the stand of the assessee is that the value of assets of the undertaking cannot be any more than value of these assets adopted by the approved valuer as on 31st March 1995, and that any amount paid over and above such value must be treated as payment for goodwill. In support of their stand, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which sale consideration of the business is computed on the basis of values of specific assets and liabilities. Unless, therefore, it can be established that the sale consideration is computed on the basis of value of specific assets and liabilities, this decision has no application. I am unable to see any parity between material facts of this case and the case of the assessee, as it would be wholly inappropriate to compare the computation of sale consideration admittedly on the basis of value of individual assets, as was the situation in Artex Mfg Co's case (supra), with computation of sale consideration on the basis of capitalization of profits, as is the situation in assessee's case. As to what should be done in a situation in which sale consideration of the business is computed on the basis of capitalization of profits, I find guidance from Hon'ble Supreme Court's judgment in the case of PNB Finance Ltd Vs CIT (307 ITR 75) . While dealing with the situation in which the assessee received compensation of Rs 10.20 crores for acquisition of its banking business and the said compensation was computed on the basis of capitalization of last five years' profits, Their Lordships, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 'goodwill' alone amounts to a sweeping oversimplification. Not only that, as I have noted above, the value of these assets as on the date of transfer was not known, the price of a unit as a whole, on a going concern basis, need not be necessarily restricted to sum total of value of its individual assets. In the present case, sale consideration for each asset can neither be identified nor allocated to each of the asset. I have also taken note of learned Commissioner (DR)'s argument, relying upon certain observations made in the dissenting order passed by the learned Accountant Member, that the sale transaction before us is a collusive transaction between the sister concern, and, as evident from the fact of a one page valuation report, the whole theory of valuation on the basis of capitalization of profits is an afterthought.: I am unable to see any substance in this plea. It has not been the case of any of the authorities below that the sale agreement is a sham agreement or that valuation method adopted by the assessee is not bonafide. The payments have been made in accordance with this agreement on 1st May 1996 itself, and therefore it cannot be said that the quantification o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im. I am unable to persuade myself to subscribe to the view proposed by my learned brother in paragraphs 14.2, 15, and 16 of his proposed order, and therefore, I hereby pass a separate dissenting order. 2. The facts of the case have been stated by my learned brother in the proposed order and, I would like to mention here its salient features, in brief, for ready reference. The assessee, a partnership-firm, was engaged in the business of manufacturing certain parts required by automobile industry for ignition switches. The assessee-firm had four partners of Chheda family and one partner of Shah family. The four partners of Chheda family, together, had 75% share in the profit of the partnership - firm as under. S.No. Name of the partner Profit sharing ratio (%) 1 Shri. Dinesh B.Chheda 15 2 Shri. Vijay J. Chheda 18 3 Mrs. Rashmi J. Chheda 17 4 Mrs. Manju V. Chheda 25 5 Mrs. Pallavi N.Shah 25 2.1 The members of the two families formed a private limited company, M/s. Jagdish Electronics (I) Private Limited. Shri Jagdish J. Chheda and Shri Mahe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses (1) (a) and (1) (b) of the Agreement dated 08.04.1996 as under. 1. In this agreement Industrial Unit shall deem to mean and include: a. The building and superstructure -any built-up area used for the unit for its manufacturing activities, administrative activities as may be required more particularly described in Schedule I here under. b. Plant Machinery, Spares Tools Equipments including electrical installation, furniture fixtures, two wheeler, four wheeler as are necessarily required exclusively used for sustaining the working of the unit and its administration and the same is more particularly described in Schedule II hereunder. 5.2 The Schedules I and II of the aforesaid agreement give itemised description of the 'Plant and Machinery' and 'Factory Building' as reproduced in paragraph (2.2) of the order of the CIT(A). 5.3 It needs to be noted that in the immediately preceding year itself the 'Factory Building' and the 'Plant and Machinery' were re-valued (as on 31.03.1995) as under. Item Cost on 31.03.95 WDV on 31.03.95 Revaluation on 31.03.95 Difference Plant Machinery 37,89,570.07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Labour Charges 15,000.00 Miscellaneous Receipts 397.66 3,93,49,971.16 EXPENSES 2,33,286.00 PROFIT FOR THE YEAR 3,91,16,685.16 Less: Provision for Income Tax 1,13,00,000.00 2,78,16,685.16 Add: Income Tax Adjustment 82,111.00 PROFIT ALLOCATED TO PARTNERS 2,78,98,796.16 Mr. Dinesh B.Chheda 15% 41,84,819.42 Mr. Vijay J. Chheda 18% 50,21,783.31 Mrs.Rashmi J.Chheda 17% 47,42,795.35 Mrs.Manju V.Chheda 25% 69,74,699 04 Mrs. Pallavi N.Shah 25% 69,74,699.04 5.8 The Current Accounts of the Partners were credited during the accounting years ending 31.03.1995 and 31.03.1997 as under. S.No. Name of the Partners Year ending 31.03.1995 Year ending 31.03.1997 1. Shri. Dinesh B.Chheda 24,30,006 41,84,819 2. Shri. Vijay J. Chheda 29,16,007 50,21,783 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 5.13 it needs to be mentioned that in the year ending 31.03.1997, the assessee not only made a provision for Income Tax of Rs.1,13,00,000 but paid Advance Tax of Rs.1,13,00,000. It appears that at a later stage the assessee had an afterthought, and made the above claim of 'slump sale'. The so called Valuation Report dated 04.04.1996 was a sequel to this afterthought, and it has to be treated only as an eyewash. 6. The contents of the Agreement dated 08.04.1996, and the Books of Account comprising the Profit and Loss Account, the Balance Sheet, and the Capital Account, as reproduced in the above paragraphs, do not support the assessee's claim. The 'Plant and Machinery' and the 'Factory Building', which were the subject matter of the Agreement dated 08.04.1996, find itemised mention in the Schedules I and II thereof. These specific items of assets were re-valued as on 31.03.1995 and the appreciation in their value amounting to Rs. 1,62,00,044 was credited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of law, it be held that amount of Rs.3,90,75,997/- being the difference between the slump price of the business realized and the book value as is worked out by the assessing officer is not exigible to tax. It further be held that the conclusions drawn by the taxing authorities below taxing the said difference consisting of Rs.1,55,84,366 taxed as short term capital gain and Rs.3,92,94,500 taxed as long term capital gain is erroneous and contrary to the provisions of the Act and facts prevailing 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 and another vs 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 bifurc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement executed, a copy of which is enclosed. The difference of Rs. 3,90,75.997 realized is not considered as forming part of income either assessable under the head business income and or capital gain relying inter-alia on ratio of following decisions: Syndicate Bank Ltd. 155 ITR 681 (Karnataka) B.C.Shrinivasan Shetty 128 ITR 294 (S.C) Mugneeram Bangur Co 57 ITR 299 (S C) 4. On the basis of the said information a query was raised by the A.O about the taxability of the sale price received by the assessee on sale of total concern alongwith Plant and Machinery to a sister concern viz. Jagdish Electronics (I) Pvt. Ltd. For this proposition A.O placed reliance on the following decisions : i. A.R Krishnamurthy, 176 ITR 417 ii. Artex Engineering Co. 227 ITR 260 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Based upon the material on record a conclusion drawn by the A O was that the Plant and machinery and factory building was revalued as per valuation report at Rs. 1,71,85,000 as on 31.03.1995. A.O's next observation was that it was definite that the value of plant and machinery and factory building as well as oilier 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 R 5,64.79,500. According to A.O, 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 good will under long term capital gain 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 31.03.96 of Rs. 16,00,634 ie. 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 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale. He has clarified that this argument is because of the applicability of provision 50 of I.T.Act In support of his arguments he has relied upon : a. a. Artex Manufacturing Co. [ 1997) 227 ITR 260 (S.C) b. b. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (S.C) c. c. Premier Automobiles Ltd [2003] 264 ITR193 (Bom.) d. d. Syndicate Bank Ltd [1985] 155 ITR 681 (Kar.) e. e. Coromandel Fertilisers Ltd. [2004] 90 ITD 344 (Hyd.) f. f. Industrial Machinery Associates [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 [1966] AIR 1178 (S.C) . It was also pleaded that a tax payer cannot escape the consequence of law merely by choosing a particular term though in substance it gives a different meaning, decision cited Panipat Woolen Mills 103 ITR 66 (SC) . Ld. D.R Mr Bains has also cited Mahindra Sintered Products Ltd. 95 ITR 380 (Mum) for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oodwill along with the benefits of the services of the present employees without assignment of specific values of particular items." 13. The next point high lighted 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 04.04.1996. 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 F.Y. 1993-94 to 1995-96, were 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%; 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 lumpsum 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. Case law study has revealed an interesting feature that the Hon'ble S.C has passed the two decisions on the same date i.e on 08.07.1997. Simultaneously of Artex Manufacturing Co. [1997] 227 ITR 260 (S.C) and Electric Control Gear Mfg. Co, [1997] 227 ITR 278 (S.C) . However, themselves made a distinction that in the case of Artex Manufacturing Co. held that 41(2) was applicable since price was attributable to the plant, machinery, and dead stock which were transferred but in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Court has referred the issue back to the stage of the A.O with the direction that the provisions of section 45 has to be applied in such type of case. 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 u/s 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 back to the A.O to compute the quantum of capital gain and for that purpose the A.O 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 A.O will also be required to decide its value u/s 55 of the Act and will be required to decide on what basis indexation should be allowed in computing the capital gains. The A.O's venture of treating the balance amount as "goodwill", ignoring one of the clause of the agreement and thereupon invoking Section 55 has to be re-examined in the light of the aforesaid direction of the Hon'ble High Court. In short we hereby state that the A.O shall foll ..... X X X X Extracts X X X X X X X X Extracts X X X X
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