TMI Blog2001 (3) TMI 1042X X X X Extracts X X X X X X X X Extracts X X X X ..... . (hereinafter referred to as KPP ) was a Private Limited Company which maintained its accounts on the basis of the financial year ending 31st March and on that basis its assessments were completed upto A.Y. 1973-74. KPP was amalgamated with Shahibaug Entrepreneurs Pvt. Ltd. (hereinafter referred to as SEP or the assessee ) with effect from 1.1.1974. 2.2 On 30.3.1970 the assessee sold the Wadala unit of one of its divisions called Swastik Oil Mills to Vegoll Pvt. Ltd., a wholly owned subsidiary of the assessee for a consideration of ₹ 1 Crore. This was made up of ₹ 7.55 lacs for land and building, ₹ 6.45 lacs for plant and machinery at book value and ₹ 10 lacs for technical knowledge etc. and ₹ 76 lacs for goodwill. The assessee did not declare any income chargeable to tax but the ITO included a sum of ₹ 86 lacs relating to sale of technical knowledge and goodwill as profits from an adventure in the nature of goodwill. He further held that as the fixed assets were sold at WDV there was no profit under section 41(2). 2.3 In appeal, the AAC held that all the relevant facts for the purpose of determining the profits from an adventure in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arabhai Chemicals Sarabhai Chemicals 6.95 Crores 7.50 Crores 4.34Cr res 3.40 Crores Sarabhai Common P. Ltd. Service Dvn. Sarabhai Mktg. Dvn. 3 Sarabhai Machinery Fabriquip Pvt.Ltd. 1.36 Crores 40 lacs Nil 4 Sarabhai Glass Dvn Packart Pvt. Ltd. 54 lacs 10 lacs 03.60 lacs 3.3 All the above transactions were with effect from 30.6.1973. The assessee did not offer any income as chargeable in its assessment for A.Y. 1974-75 in relation to the aforesaid transactions. The ITO, however, held that in respect of each transaction there was a chargeable income which was includible in the assessment. The ITO firstly held that on sale of Swastik Oil Mills there was an adventure in the nature of trade and that the business did not have any goodwill and, therefore, the amount of ₹ 2 crores (determined as goodwill of the business) was charged under the head business income being income from an adventure in the nature of trade. He further held that the value of the goodwill of the business of the other undertakings was not as much as adopted by the assessee and to that extent the consideration had passed on the fixed assets, stocks, spare parts etc. Thus, as against the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the divisions as a going concern, there was no question of assessing the profits under Section 41(2) in the hands of the assessee (a holding Company) to its 100% subsidiary Company. In this view of the matter, the Tribunal, by a majority of 2:1, held that the AAC was not right in setting aside the assessment and in requesting the ITO to reframe the assessment after holding inquiries regarding the value of the goodwill and the other assets. From the aforesaid decision dated 4.1.1982 of theTribunal based on the majority view, Income-tax Reference No. 243 of 1985 has been made under Section 256(2) of the Act at the instance of the revenue in respect of A.Y. 1974-75. 4. Since both the references pertain to the same assessee and raise common questions of law, with the consent of the learned counsel for the parties, the two references were heard together and are being disposed of by this common judgment. 5. We have heard Mr BB Naik, learned counsel for the revenue, instructed by M/s M.R. Bhatt Co. We have also heard Mr RK Patel, learned counsel for the assessee. Both the learned counsel have taken us through the assessment order, the order of the Appellate Assistant Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articular asset. (b) Deeds of Assignment relating to all the transfers indicate only aggregate values of assets and in the corresponding schedules no itemwise value by way of break-up value of aggregate value is available. (c) All transfers are as going concerns by assessee, as a holding Company to 100% wholly owned Indian subsidiary companies and all assets are transferred at book value. (d) The Tribunal's order, particularly the order of the third learned Member of the Tribunal, gives an undisputed finding of fact that the transactions are transactions of slump sales and each undertaking is sold as a whole. On this limited aspect, there is no difference of opinion between the Members of the Division Bench. The Tribunal further states that the appellant has not entered into sales of different items of the undertakings in question, but has sold the entire undertaking in each case. The parties have not put the valuation on the different assets and liabilities involved before coming to the net price in computing the slump price. Strong reliance has been placed on the decision of the Apex Court in CIT vs. Electrical Control Gear Mfg. Co., (1997) 227 ITR 278. II The dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... important factors like varying rates of depreciation for different assets. Strong reliance is placed on the decision of the Apex Court in Sunil Siddharthbhai vs. CIT, (1985) 156 ITR 509. III Lastly, in any case, the taxable event is applicable only to the building, machinery, plant and furniture and, therefore, no other assets can be included within the scope of section 41(2) for taxability of difference between written down value and the actual cost. 8. Before dealing with the rival contentions, it will be necessary to make a brief reference to the findings given by the Income-tax Officer in the assessment order, by the Assistant Appellate Commissioner in appeal and by the Members of the Tribunal regarding valuation of the goodwill as the said findings would assume considerable importance while deciding the rival contentions. 9.0 FINDINGS GIVEN BY THE ITO 9.1 Swastik Oil Mills Ltd. was a separate Company from 1930 onwards and it was under the managing agency of Sarabhai Sons (P) Ltd., a sister concern of the assessee. Earlier the shares of Swastik Oil Mills Ltd. were held by three groups including Sarabhai group and as per the agreement of the shareholders, all the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n owned by Swastik Oil Mills Ltd. since 1930 and it had never shown any prosperity as imagined by the valuer prior to its amalgamation with the assessee Company. (c) When the Swastik Oil Mills Ltd. was incurring losses it was sold to the assessee by its shareholders. (d) Even after the assessee assumed its control it could not make any profits and it incurred losses to the tune of ₹ 54.92 lakhs as stated above. (e) As discussed above, the Swastik Oil Mills had two divisions - one of its divisions i.e. Wadala Unit has already been sold by the assessee in the accounting year 1969-70 to Vegoils (P) Ltd. and a goodwill of ₹ 76,00,000/- had already been charged. When a goodwill of ₹ 76,00,000/- had already been charged then where is the possibility of any further goodwill and that too to the extent of ₹ 2 Crores. (f) Goodwill in its present form means the business is better than normal return of profitability. But here the case is reverse. So there is no goodwill. The business is also not of a monopolistic nature. (g) It is pertinent to mention here that the Swastik Oil Mills division was sold to Swastik Household and Industrial Products (P) Ltd. o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a transaction which was in the nature of a trade. Valuing the land and building, machinery and equipments, loans and advances, current assets (including sundry debtors) and cash and bank balance, raw material, stock-in-process, strock-in-trade, spares, stores and other articles and current liabilities available in the books of accounts as noted by the ITO in the assessment order and reproduced at page 203 of the paper book are as under : Sr. No Divisions Sarabhai. Machinery Chemicals, Glass Rs. (in lacs) Sarabhai Common Services Rs. (in lacs) Sarabhai Mktg. Dvns. Rs. (in lacs) 1 Land building 23.00 91.00 6.00 2 Machinery equipments, loans and advances, current assets, cash and bank balances 28.00 372.00 21.00 3 Raw materials 74.00 838.00 26.00 4 Goodwill 40.00 750.00 10.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic research in the profits. (d) In method II the value has taken the goodwill equal to 3 years purchase price. In this method if the average of 5 years profits is taken, the goodwill should have been equal to two years purchase price only. (e) It is pertinent to mention here that the sale of the above divisions took place on 30.6.73 whereas the valuation report relied on by the assessee is dated 25.6.75. It means the assessee had already charged the amount of goodwill of ₹ 7,50,00,000/- on the sale of above divisions but with a view to make its case goodwill pace it obtained the above just after 2 years of the sale. If the above defects are removed from the computation of goodwill made by the value, the goodwill come only to ₹ 4,34,00,000/- 9.4 The aforesaid amount was worked out by the ITO and placed in Annexure A to the assessment order by working out the average net profits after tax as taken by the valuer for Sarabhai Chemicals Division, Sarabhai Marketing Division and Sarabhai Common Services Division for the A.Y. 1974-75 as under : ANNEXURE 'A' Sarabhai Chemicals Division Sarabhai Marketing Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act. The sale consideration was supported by the valuation report made by a firm of Chartered Accountants. Whenever there is a transfer of an undertaking by a parent Company to its wholly owned subsidiary, it is prevalent practice to transfer the assets at book value and not at the so called market value. In any view of the matter, the purchaser Company, subsidiary or holding Company, is entitled to depreciation only on the written down value of the assets to the vendor Company and not on any higher value. At the meeting of the Central Direct Taxes Advisory Committee held on 5.8.1970 at New Delhi, it was suggested that there should be no balancing charges in such cases when the subsidiary Company is not allowed depreciation on the enhanced cost and that if the Company transfers the assets at the written down value, the question of balancing charge could not arise. Even in the circular No. 63 dated 16.8.1971 issued by the Central Board of Direct Taxes, it was clarified that in case of take over of the undertakings of the banks, there would be no liability of tax on the existing banks in respect of balancing charge under Section 41(2) of the Act and that when the undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxability of profits or business profits under Section 41(2) in case of transfer to subsidiary companies. The ITO then concluded as under : To conclude, the charging as income in the hands of the assessee the profits, including profits u/s. 41(2) held to be arising to the assessee on sale of the various undertakings to the newly floated subsidiary companies is approved in view of the clear-cut observations and the principles enumerated by the Supreme Court in CIT vs. B.M. Kharwar, 72 ITR 603. FINDINGS GIVEN BY THE APPELLATE ASSISTANT COMMISSIONER 10. In appeals, the Appellate Assistant Commissioner of Income-tax (hereinafter referred to as the Assistant Commissioner or the AAC ) delivered decision dated 13.1.1977 in respect of the assessment year 1970-71 and the decision dated 28.3.1978 in respect of the assessment year 1974-75. The Assistant Commissioner came to the conclusion that the sale of the units of Swastik Oil Mills did not constitute an adventure in the nature of trade. Since the questions referred to us do not refer to the said controversy, we do not detain ourselves in discussing the reasons which prompted the Assistant Commissioner to come to the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ump sale. Since in the present case the business of the assessee continued and that sales were by parts and tax specified values, the theory of slump sale not be accepted. The decision is the case facts of the case (vide para 12 in the appellate order of Sarabhai Sons Ltd.) (iv) The Supreme Court decision in the case of B.M. Kharwar (72 ITR 603) is an effective answer to the interpretation put forward by the assessee and hence his arguments relying on the decision of Mugneram Bangur and Co. cannot be accepted. (v) The assessee's reliance on circular No. 63 issued by the Board in connection with assessment problems on nationalized banks cannot have in view of the special provisions of the Banking Companies Act. The proceedings of the Taxation Advisory Council cannot be binding as in the case of circulars. ( vi) Goodwill by its definition is created at times of sale to an outsider and that is normally done as a last step after revaluing the market value of assets. It is something extra realized on sale over and above the book value of the assets. To create goodwill and that too on a sale to a subsidiary when other assets are sold at book value or WDV is more unusual and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f another twenty two subsidiaries. On account of the sale of share of the 22 Companies, they ceased to be subsidiaries of the assessee, but they became the subsidiaries of another set of subsidiaries (52). Since the sale of shares was of investment Companies, the assessee applied the instructions in Board's circular for valuation of shares of investment Companies, issued for wealth tax purpose. Since the twenty two Companies had existed for a few months, they did not earn any income. Since the income yield was nil, applying the Board's instructions, the value of the share was to be computed a half of the break up value of value based on yield which was zero since yield was nil. Hence the assessee sold the share to the subsidiaries (52) at almost half the price. On account of the sale the assessee incurred an artificial loss and this was used to set off against the artificial increase of ₹ 10 Crores due to creation of goodwill. It is also worth nothing that the assessee had taken care that it held only 99.98 to 99.9% of the shareholding so that the capital loss could be taken into account. The Assistant Commissioner also gave an illustration how the assessee floated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue to show that goodwill is overvalued and the other assets are undervalued. The Judicial Member relied on the decision of the Supreme Court in 85 ITR 599 wherein the Supreme Court had laid down that if circumstances exist showing that a fictitious price has been put on the asset or there is fraud or collusion between the vendor and the vendee and there has been inflation or deflation of value for ulterior purposes it is open to Income-tax Authorities not to accept the price mentioned in the deed or alleged by the assessee and to ascertain what the actual cost was. The Judicial Member concluded as under :- It does require investigation whether the assessee would sell and the 1004 subsidiary Company would purchase machinery, plant and furniture at the book value of the assessee and at the same time, though a losing concern, would charge for the goodwill exorbitantly. It also does require investigation whether sale price of plant and furniture in excess of book value is charged by the assessee under the guise of charging for appeal is dismissed. However, the Accountant Member accepted the assessee's arguments that the sales in question were slump sales of the entire un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vate limited Company by the name of A was formed with a view to take over the business of the assessee as a running concern. On March, 31, 1996, the assessee and the company entered into an agreement where under the assessee agreed to sell to the company the business hitherto carried on by the assessee as a whole going concern. The consideration for the sale was ₹ 11,50,400 which was paid and satisfied by allotment of 11,504 fully paid up equity shares of ₹ 100 each according to the original shares of the partners of the assessee. In pursuance of the agreement, the assessee ceased to carry on the business with effect from April 1, 1966, and the said business stood transferred to the company. In respect of the assessment year 1967-68, the assessee filed its return showing `nil' income. On January 9, 1970, a revised return was filed showing `nil' income, with a note, that since the partnership firm was converted into a private limited company as a going concern, there was no income chargeable to tax either under section 41(2) or under section 45 of the Income-tax Act, 1961. During the course of the assessment proceedings before the Income-tax Officer, for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he circulars related to the tax liability of surplus in the case of nationalized banks and it has no application to the present case and that the second circular was based on the decision in Mugneeram Bangur (1965) 57 ITR 299 (SC), and since the said case dealt with the provisions of section 10(2)(vii), proviso (ii), of the 1922 Act prior to amendment, the said circular has no application and that the matter was governed by the decision in B.M. Kharwar (1969) 72 ITR 603 (SC). The view of the Tribunal was correct. In view of the above decision, reliance placed on behalf of the assessee on the circulars of the Central Board of Direct Taxes is clearly misconceived. 15. In view of the aforesaid decision, we are of the view that the Appellate Assistant Commissioner was fully justified in remanding the matter to the ITO for determining the correct valuation of the goodwill as the goodwill determined by the assessee was at an exaggerated figure for the loss making undertakings. Since the order of the Appellate Assistant Commissioner was only an order of remand requiring the ITO to determine the value of the goodwill by applying the correct principles of accountancy, there was no war ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of Section 41(2) were not applicable. It is thus clear that the consideration amount in the said case was only ₹ 8 lakhs as the cost of the total undertaking and the decision was rendered on the peculiar facts of the said case. The Court held that there was nothing to indicate the price attributable to the assets like machinery, plant or building was out of the consideration amount of ₹ 8 lakhs and merely because a sum of ₹ 3,32,863 had been allowed as depreciation to the assessee firm, it cannot be said that that was the excess amount between the price and the written down value. In the present case, however, the facts are too glaring to fall within the four corners of Electric Control Gear Mfg. Co. As rightly noted by the ITO and the Appellant Assistant Commissioner, when the undertakings in question like Swastik Oil Mills were incurring huge losses, its units could not have been sold at a price of ₹ 2.45 Crores when the written down value of its assets other than goodwill was only about ₹ 45 lakhs meaning thereby ₹ 2 Crores could not have been the value of the goodwill for the Ambarnath unit of the said undertaking. Similarly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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