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TMI Blog2009 (12) TMI 595X X X X Extracts X X X X X X X X Extracts X X X X ..... t the quantification of sales consideration was an afterthought. As for the assessee and the buyer being sister concerns, merely because an agreement is entered into by related parties the effect of the agreement cannot be ignored. The case of the assessee 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." 3. Under the circumstances, as a majority view, we hold that the impugned transaction is not a case of itemized sale and it is clearly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention of the assessee was that individual value of assets and liabilities were 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 31st March 1995, vide valuation report dated 12th April 1995. On the basis of this valuation report, the assets were also revalued in the books of accounts, 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 31st March 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 received by the assessee was Rs.5,64,79,500. The difference between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me as a Third Member so as 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 bonafides 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 Engineering (supra), proceeded to adopt the value of various fixed assets as per report of the 'registered valuer' as on 31st March 1995. The operative part of Assessing Officer's order is as follows: 3.3 The assessee's submissions given through various letters in the course of assessment proceedings were considered at length and I hold as under: In the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-sec 2(ii) of Sec 55 of the IT 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 2,14,17,000 1995-96 1,37,63,100 3 4,12,89,300 Total 6 6,77,75,400 Weighted average 6,77,75,400/6 = 1,12,95,900 Capitalization at 20% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old 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 "INDUSTRIAL UNIT"); It is also seen that what is transferred is the said industrial unit which means the industrial unit as defined above. On page 4 of the agreement, para 1.a and 1.b reads as under: "1 In this agreement Industrial Unit shall deem to mean and include: a. The building & superstructure - any built-up area used for the unit for its manufacturing activities, administrative activities as may be required more particularly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets as mentioned in the agreement. In other words, the stand taken by the Assessing Officer is factually correct to say that the appellant firm has transferred depreciable assets for a specific value and the remaining portion is to be treated as goodwill as impliedly admitted by the appellant firm. I find that the facts in the case of Artex Mfg Co (1997) 227 ITR 260(SC) are clearly comparable with the facts of appellant's case. In that case on page 272 it was held that: "The said view was reversed by this court and it was held that "the taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction". It was observed (page 608) : "In the present case the machinery of the factory belonging to the firm was transferred to the private limited company. Assuming that thereby readjustment of the business relationship was intended the liability to be taxed in respect of the readjustment had to be determined 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 tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the written down value and the actual cost, then the surplus amount to the extent of such excess will have to be treated as capital gain for the purpose of taxation. The Tribunal has not considered the matter in this light and on the basis of the record it is not possible to answer question No. 3. We, therefore, discharge the answer recorded by the High Court on question No.3. It will be open to the Tribunal to rehear the parties and record clear findings in the light of the observations made in this judgment." In view of the above, there is no scope left for any different view to be held. In the first place, since the assets included in the agreement to assign are categorically depreciable assets, provisions of Section 50 are clearly attracted to the facts of the appellant's case. Secondly, the ratio of the Supreme Court judgment in the case of B C Srinivasa Setty (128 ITR 294) relied by the appellant is not applicable to the 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; corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicate the value attributable to each item" and, therefore, provisions of Section 41(2), which require the precise sale consideration for each asset sold, cannot apply. Their Lordships rejected this argument and observed that "it is no doubt true that in the agreement, there is no reference to the value of plant, machinery and dead stock, but on the basis of information which was furnished by the assessee before the ITO, it became evident that the amount of Rs 11,54,000 has been arrived at by taking into consideration value of plant, machinery and dead stock as assessed by the valuer". Accordingly, Their Lordships held that "This is not a case in which it cannot be said that the price attributed to each item is not indicated, and, hence provisions of Section 41(2) cannot apply". In my considered view, the observations made by the Hon'ble Supreme Court in the case of Artex Mfg Co (supra) will be relevant only in a case 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itle, interests and claims" are collectively referred to as 'industrial unit'. No doubt, at page 3, industrial unit has been given an inclusive meaning covering schedule I and II, which deal with physical assets alone, but then the agreement has to read as a whole. As an integral part of this arrangement as set out in various other specific clauses in the same agreement, even the manpower, registrations, contracts, permissions and sanctions were to be transferred to the buyer. The unit has been transferred to the buyer in a fully functional state and alongwith all the employees and all the contracts. What has in effect been sold is a functional unit on 'as is where is' basis and in its entirety. In my considered view, the unit was transferred as a 'going concern'. Revenue's suggestion that price paid for going concern over and above the price of the specific physical assets owned by the going concern, is on account 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 tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ON 255(4) OF I.T. ACT, 1961 On a difference of opinion between the Members constitution the aforesaid Bench, a question is to be referred by virtue of section 255(4) for the esteemed view of a Third Member as follows: "Whether or not, on the facts and in the circumstances of the case, the impugned transaction was a 'slump sale' or an 'itemized sale'? Therefore, we accordingly refer this issue to be Hon'ble President, Income-tax Appellate Tribunal, for reference to a Third Member or any other order as the Hon'ble President deem fit. (Ahmad Fareed) AM (Mukul Shrawat) JM Dissenting order in the case of M/s J.B. Electronics, Pune ITA No.874/PN/2001 for AY 1997-98 Dated: October 3, 2008 Per : Ahmad Fareed : I have gone through the order proposed by my learned brother in this appeal and have also discussed the issues with him. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the order of the AO was dismissed by the CIT(A) and his order has been challenged by the assessee in the present appeal. 4. In my considered opinion, the impugned transaction between the assessee-firm and its sister - company M/s. Jagdish Electronics (I) Private Limited. was not a 'slump sale' for the reasons discussed in the following paragraphs. 5. It has to be kept in mind that the transferor - firm and the transferee -company were sister - concerns. 5.1 The subject matter of the impugned transaction was the 'industrial unit' which was described in detail in the clauses (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 particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00.00 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 3. Mrs.Rashmi J.Chheda 27,54,007 47,42,795 4. Mrs.Manju V.Chheda 40,50,011 69,74,699 5. Mrs. Pallavi N.Shah 40,50,011 69,74,699 Total 1,62,00,044 2,78,98,796 5.9 The total price of Rs.5,64,79,500 was paid by the company to the assessee-firm by cheques as under. S.No. Cheque No./ Date Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to the Current Accounts of the Partners in their profit sharing ratio. In the Balance Sheet as on 31.03.1995 this amount was shown separately. In other words, this amount of Rs.1,62,00,044 formed part of Rs. Rs.5,64,79,500 which was mentioned in the said Agreement as the price of the 'industrial unit'. 6.1 The balance of Rs. 3,90,75,996, 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 31.03.1996, 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 08.04.1996. 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 04.04.1996, was intended merely to lend support to an aftertho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 interalia by the ratio of decisions of Syndicate Bank Ltd. 155 ITR 681 B.C. Shrinivasa Shetty 128 ITR 294 (SC) Mugneeram Bangur & Co, 57 ITR 299 (SC). It further be held that no part of the income is taxable in the hands of the appellant in this respect. 3. On facts and circumstances prevailing in the case and as per provisions of law, it be held that the depreciation of Rs. 1,81,670 claimed by the appellant firm is admissible deduction as per provisions of law and on facts and circumstances prevailing in the case. The rejection of the claim made by the taxing authorities below is erroneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceding 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 Weighted 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.6,77,75,400 = Rs.1,12,95,900 6 Capitalisation at 20% Rs.5,64,79,900 ii. The total sum of Rs.5,64,79,500 has been received by the firm as per details hereunder. Date Cheque No Amount Name of Bank Branch 01.05.96 50428 25,00,000 Bank of India F.C. Road, Pune 01.05.96 455414 3,50,00,000 Cosmos Co-op Bank Gokhalenagar, Pune 01.05.96 455415 1,89,79,500 "It is respectfully submitted that the assessee firm disposed of entire business with all assets and liabilities on slump price of Rs.5,64,79,500. Thus, it is a slump sale by the assessee firm realizing the slump price against the entire business. It may further kindly be noted and appreciated that the value of the business has been determined purely on capitalization of the yield and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sub-sec 2(ii) of Sec 55 of the I T Act " 7. Those additions were challenged 8. The first appellate authority has primarily relied upon the decision in the case of Artex Mfg Co. 227 ITR 260 (SC) and thereafter given the finding as follows: "In view of the above, there is no scope left for any different view to be held. In the first place, since the assets included in the agreement to assign are categorically depreciable assets, provisions of Section 50 are clearly attracted to the facts of the appellant's case Secondly the ratio of the Supreme Court judgment in the case of B.S. Srinivas Shetty (128 ITR 294) relied by the appellant is not applicable to the 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' or 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." 9. From the side of the appellant ld A R Shri S.N.Inamdar appeared and after narrating the facts of the case have argued that the appellant-firm has valued the undertaking as an entire business which was to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oolen Mills 103 ITR 66 (SC). Ld. D.R Mr Bains has also cited Mahindra Sintered Products Ltd. 95 ITR 380 (Mum) for the proposition that where price had been fixed before hand of identifiable assets of an undertaking then such transfer would not constitute a slump sale 11. Heard the submission of both the sides at length. Due cognizance was given to the material facts; evidences and case laws cited. Undisputed facts, in short, were that the assessee firm as a going concern was transferred as a whole as per the term of an agreement placed before us dated 08.04.1996 agreed to be effective from 01.05.1996. it was executed between Jagdish Electronics (I) Pvt. Ltd; on one part and on the other part M/s. J B. Electronics, registered firm, the appellant. Terms of the said agreement can only lead us to determine the true nature of the transaction nonce certain clauses of the said agreement are to be highlighted such as clause (b); reproduced below: "b. Pursuant to negotiations by and between the parties hereto, the Firm agreed to assign, sell, transfer and otherwise convey the said Industrial Unit also to surrender its tenancy rights relating to the land thereunder, to the Company, and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the agreement and second, the method adopted for determination of the lump sum consideration, are the primary evidences which are helpful for answering the question posed to us. An another important material fact has also been placed on record in support of the plea that this was the case of a 'going concern' in form of the availability of the list of products being manufactured by the assessee as listed in the attached schedule 3 of the impugned agreement. So as to arrive at a conclusion we are required to examine the entire arrangement; which consisted of agreement, basis of valuation of property, the nature of total consideration assigned and finally the way the impugned transfer took place; hence the step wise findings are now hereinbelow. 14.1 It was a transfer of a capital asset as defined u/s 2(14) of the Act; which includes property of every kind except those exclusively excluded, hence a business undertaking as a whole would fall within this definition. 14.2 It was a slump sale reason being. a. Business was sold as a "going concern"; since not a closed down unit but a functional unit. b. The "Slump Price" was inclusive of all rights, assets, contingent or definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the plant, machinery, and dead stock which were transferred but in the case of Electric Control Gear Mfg. Co. there was nothing to indicate the price was attributable to assets like machinery, plant, building in the lump sum consideration. 16. In view of foregoing discussion in nut shell, we hereby hold that since the impugned transferred was not a transfer consisting of itemized sale of assets but a transfer of the entire business unit as a whole therefore, out of the ambits of the provisions of section 50. At the cost of repetition we hereby clarify that section 50 of I.T. Act visualized only the transfer of depreciable assets and not the transfer of an undertaking. Section 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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