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TMI Blog1997 (7) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company as a going concern, there was no income chargeable to tax either under section 41(2) or under section 45 of the 1961 Act. During the course of the assessment proceedings before the Income-tax Officer, for the purpose of determination of purchase consideration, the assets were shown at Rs. 41,73,973, out of which the machinery and dead stock, as revalued by Hargovandas Girdharlal, was Rs. 15,87,296. The liabilities were shown at Rs. 30,23,57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, therefore, the assessee was liable to be taxed ? 2. Whether, on the facts and in the circumstances of the case, section 41(2) was applicable ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus was not capital gains, but was business income ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the status of the assessee was a registered firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ap 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 or its scrap value : Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place." In CIT v. Bipinchandra Maganlal and Co. Ltd. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hinery, 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 destroyed is a building to which Explanation 5 to section 43 applies, and the moneys payable in respect of such building, together with the amount of scrap value, if any, exceed the actual cost as determined under that Explanation, so much of the excess as does not exceed the difference between the actual cost so determined and the written down value shall be chargeable to income-tax as income of the business or profession of such previous year. Explanation.--Where the moneys pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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] 46 ITR 135 (SC), after referring to the decision in Doughty [1927] AC 327 (PC), this court has observed : " This case shows that where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to hold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly be said that there was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 schedule was the cost price, as it stood in the books of the vendors. Even if the sum of Rs. 2,50,000 attributed to goodwill is added to the cost of the land, it is nobody's case that this represented the market value of the land." In B. M. Kharwar's case [1969] 72 ITR 603 (SC), the assessee was a firm carrying on the business of manufacturing, purchasing and selling cloth. It closed its manufacturing side of the business and transferred its machinery to a private limited company, in the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 the contention urged on behalf of the assessee that where a transfer of the assets is effected with a view to close down the business, no taxable profits result because the transfer is not in the course of business of the assessee, has observed : " If, since the amendment of the proviso, liability to pay tax on the excess over the written down value arises, whether the sale of building, machinery or plant is before or after the closure of the business, it would be illogical to say that the exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten 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 down value and the cost price was not liable to be included as income in the process of assessment and reliance was placed upon the decision of the Privy Council in Doughty [1927] AC 327, and on the decision of this court in Mugneeram Bangur and Co.'s case [1965] 57 ITR 299. Rejecting the said contention it was observed (page 231 of 63 ITR) : " That principle has however no application here. In the present case it is true that the entire assets of the appellant-company were sold to Messrs. Phelps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and the business is sold as a going concern, what is to be seen is whether any portion of the slump price is attributable to the stock-in-trade and if on the basis of the facts, it can be found that a particular price is attributable to a particular item, then the excess amount would be chargeable to tax under section 10(2)(vii), proviso (ii), of the 1922 Act (section 41(2) of the 1961 Act). In the facts of that case the court found that it was very difficult to attribute part of the slump price to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 the observations made in this judgment. As regards question No. 4, we are in agreement with the view of the High Court that the assessee cannot be taxed as a "registered firm" and has to be taxed in the status of a "body of individuals" and the answer given by the High Court to the said question is affirmed. Question No. 5 relates to the two circulars of the Central Board of Direct Taxes. The Tribunal has stated that one of the circulars related to the tax liability of surplus in the case of nationalise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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