TMI Blog1997 (7) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal relates to the assessment year 1967-68. The assessee is a partnership firm which was carrying on the business of manufacturing art silk cloth. A private limited company by the name of Artex Manufacturing Company Private Ltd. (hereinafter referred to as "the company") was formed with a view to take over the business of the assessee as a running concern. On March 31, 1966, the assessee and the company entered into an agreement whereunder 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 said sale was Rs. 11,50,400 which was paid and satisfied by allotment of 11,504 fully paid up equity shares of Rs. 100 each according to the original shares of the partners of the assessee. In pursuance of the said 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the status of "association of persons" or "registered firm" ? On the first question the contention urged on behalf of the assessee was that the principle of mutuality was applicable and consequently the surplus was not liable to tax. The said contention was rejected by the Tribunal on the basis of the decision of this court in Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790. On the second question regarding applicability of section 41(2), the Tribunal held that the language of section 41(2) was wider than the language of section 10(2)(vii) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the 1922 Act"), and, therefore, the surplus was taxable under section 41(2) of the 1961 Act. As regards the third question, the Tribunal held that the surplus was taxable as business profit under section 41(2) and that the assessee was assessable in the status of a registered firm. At the instance of the assessee, the Tribunal referred the following questions for the opinion of the High Court (see [1981] 131 ITR 559, 561) : 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the principle of mutuality will not apply and, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on relating to the "balancing charge" was contained in clause (vii) of sub-section (2) of section 10 which originally read as follows : " 10. (2)--Such profits or gains shall be computed after making the following allowances, namely : (vii) in respect of any machinery or plant which has been sold or discarded, the amount by which the written down value of the machinery or plant exceeds the amount for which the machinery or plant is actually sold or its scrap value Provided that such amount is actually written off in the books of the assessee : Provided further that where the amount for which any machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place." Clause (vii) and the second proviso were amended by Act 8 of 1946 and Act 67 of 1949. After the amendment the said clause and the second proviso read as under : "(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of, the business was carried on by the assessee and the building, machinery or plant was used in the business, the excess over the written down value was liable to tax by virtue of the second proviso to section 10(2)(vii) even though the sale took place in the year of account after the closure of the business. (see CIT v. Ajax Products Ltd. [1965] 55 ITR 741 (SC)). At the relevant time section 41(2) of the 1961 Act provided as under : " 41. (2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due : Provided that where the building sold, discarded, demolished or dest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books does not give rise to a profit taxable to income-tax. Lord Phillimore, speaking for the Judicial Committee, said : ". . . where, however, the business consists, as in the present case, entirely in buying and selling, it is more difficult to distinguish between an ordinary and a realization sale, the object in either case being to dispose of goods at a higher price than that given for them, and thus to make a profit out of the business, The fact that large blocks of stock are sold does not render the profit obtained anything different in kind from the profit obtained by a series of gradual and smaller sales. This might even be the case if the whole stock was sold out in one sale. Even in the case of a realization sale, if there were an item which could be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with a sale of the whole concern, might conceivably be treated as taxable income." (emphasis supplied). In CIT v. West Coast Chemicals and Industries Ltd. [1962] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was necessarily attributable to the land sold and that what was given in the schedule was the cost price of the land as it stood in the books of the vendor and even if the sum of Rs. 2,50,000 attributed to goodwill could be added to the cost of the land, there was nothing to show that this represented the market value of the land. In this context, Sikri J. (as the learned Chief Justice then was) has said : "It seems to us that in the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land on the date of sale (empahsis supplied). As the vendors were transferring the concern to a company, constituted by the vendors themselves no effort would ordinarily have been made to evaluate the land as on the date of sale. What was put in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery." After referring to the observations in West Coast Chemicals and Industries Ltd. [1962] 46 ITR 135 (SC), that where the business is sold as a going concern and the sale of the assets is a realisation sale, the difference between the written down value and the price attributable to the assets which were admitted to depreciation is not taxable under section 10(2)(vii), proviso (ii), as it stood enacted before it was amended by Act 67 of 1949, Shah J. (as the learned Chief Justice then was) said : ". . . in our judgment, by virtue of the amendment made in section 10(2)(vii), proviso (ii), of the Indian Income-tax Act, 1922, by section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 67 of 1949, even under a 'realisation sale' excess over the written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax. " After taking note of the second proviso to section 10(2)(vii) of the 1922 Act, as amended by Act 67 of 1949, the learned judge, while rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of property described in the schedules annexed to the deed. No deed of conveyance was executed. The new company took possession of the properties agreed to be sold on July 1, 1952. In the agreement the properties sold were allotted specific values and no attempt was made to prove that the values so allotted were not true. The consideration for a building transferred was in excess of its original cost and the question was whether the difference between the original cost of the building and its written down value would be deemed profits under the second proviso to section 10(2)(vii) of the 1922 Act. This court held that since the appellant-company has sold the property for a stated consideration which was not shown to be notional and that consideration was in excess of the original cost of the building, the difference between its original cost and its written down value was profit within the meaning of the second proviso to section 10(2)(vii) of the 1922 Act. On behalf of the appellant-company, it was submitted that the transfer was a slump sale of the assets and that there being no separate sale of the property described in the second schedule, the difference between the written d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is as their shares in the profits of the partnership firm. According to the High Court, in B. M. Kharwar's case [1969] 72 ITR 603, this court was not dealing with a case of transfer of a business as a whole by a firm to a limited company. According to the High Court such type of a case is found in Mugneeram Bangur's case [1965] 57 ITR 299 (SC). The High Court has also placed reliance on its judgment in Sarabhai Al. Chemicals P. Ltd. v. P. N. Mittal [1980] 126 ITR 1 (Guj). The distinction pointed out by the High Court that in B. M. Kharwar's case [1969] 72 ITR 603, this court was not dealing with a case of transfer of a business as a whole by a firm to a limited company is, in our opinion, not of much significance because this court, in B. M. Kharwar's case [1969] 72 ITR 603, has held that by virtue of the amendment made in section 10(2)(vii), proviso (ii), of the 1922 Act by Act 67 of 1949 even under a "realisation sale" the excess over the written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax. In Mugneeram Bangur's case [1965] 57 ITR 299, this court has indicated that where there is a slump transaction a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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