TMI Blog1985 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration, the Ordinance was replaced by an Act called " The Banking Companies (Acquisition and Transfer of Undertakings) Act (22 of 1969)". The Supreme Court struck down that Act as unconstitutional in Cooper v. Union of India [1970] 40 Comp Cas 325; AIR 1970 SC 564, on the ground that while determining the compensation payable for compulsory acquisition of the undertaking, the Government of India did not take into consideration the important components of the undertaking, such as, the goodwill and the value of the unexpired period of lease. After the decision of the Supreme Court in Cooper's case, [1970] 40 Comp Cas 325 (SC); AIR 1970 SC 564, the Government of India came forward with another ordinance called "The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1970 ", again taking over all the said banking undertakings. That Ordinance was again replaced by the Act called " The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (Act 5 of 1970) " (which is hereinafter called as the " BCATU Act "). It was by this BCATU Act that the entire banking business undertaking of the assessee has been nationalised with effect from July 19, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit of the banking business from January 1, 1969, to July, 18, 1969, profits under s. 41(2) of the I.T. Act, 1961, on transfer of assets and also capital gains on transfer of undertaking to the Central Government were indicated, claiming all the three to be not taxable. It was urged before the ITO that the compensation of Rs. 3.6 crores was a lamp sum compensation for the transfer of the business undertaking as a whole and it was not possible to split it up and apportion the same to any particular asset taken over by the Central Government. It was also urged that income chargeable under the head " Capital gains " could arise only when a specific capital asset is transferred and not when an undertaking as a whole is transferred. The ITO did not accept the said contentions. He observed that the definition of " Capital asset " under s. 2(14) of the I.T. Act, 1961, is wide enough to cover property of every description including an undertaking. He gave an option to the assessee under s. 55(2) of the I.T. Act, 1961. It appears that at one stage, the assessee seems to have exercised the option to substitute the fair market value of the asset as on January 1, 1954, for the cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee which had been compulsorily acquired was a capital asset within the meaning of s. 2(14) of the I.T. Act, 1961, and the gains arising from the transfer of such a capital asset has to be computed after determining the cost of acquisition. The Tribunal observed that it would not be correct to state that no part of the compensation would be relatable to any particular asset of the undertaking. The Tribunal expressed the view that the total amount of compensation paid to the assessee was in excess of the entire capital and reserves of the assessee as on the date of acquisition and, therefore, the amount of compensation must have covered all the assets less liabilities, and so much so, the compensation awarded has to be apportioned among the various assets excluding the amount which could be attributed to goodwill of the undertaking. The Tribunal, however, made it plain that its direction regarding the exclusion of the value of goodwill from the compensation amount would be applicable only if the assessee does not exercise the option to substitute the fair market value of the undertaking as on January 1, 1954, for the cost of acquisition. With these observations, the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se that are expressly excluded from the definition. So too, the meaning of the expression " property ". It includes every conceivable thing, right or interest or liability. In Cooper v. Union of India [1970] 40 Comp Cas 325 (SC) at p. 354; AIR 1970 SC 564 at p. 591, the Supreme Court observed: "The expression 'property' in entry 42, List III, has a wide connotation, and it includes not only assets, but the organisation, liabilities and obligations of a going concern as a unit. " In view of what would seem to be the plain, unambiguous and wide meaning of the word " capital asset " under s. 2(14) of the I.T. Act, 1961, and the word " property " as generally understood, we desire to say quite definitely that the business undertaking of the assessee taken over by the Government of India under the BCATU Act was a " capital asset ". As a preliminary to the consideration of the second part of the first question and other eight questions referred to by the Tribunal (which will be referred to at the end of this order), it will be necessary to examine whether the lump sum compensation awarded to the assessee under the BCATU Act could be apportioned on various items or components of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company promoted by the partners of the firm. The schedule to the agreement contained the properties agreed to be sold for total sum of Rs. 34,99,300. The Appellate Tribunal held that although the sale was of the business as a going concern, the value of the stock-in-trade could be traced. But the Supreme Court held that the sale was the sale of the whole concern and no part of the price paid was attributable to the cost of the land and no part of the price was taxable. It was observed (p. 305): " 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 realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of the 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. As the vendors were transferring the concern to a company, constituted by the vendors themselves, no effort would ordinarily have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was discontinued. The ITO held that that was not a case of discontinuance but a case of succession to the business of the firm by two new companies. He determined the capital gain on the sale of the business at Rs. 32,01,747 on the basis of a valuation on January 1, 1939, and included it in the assessment. In appeal before the AAC, the parties filed affidavits on the valuation of the assets sold. In the light of the new material coming forth, the AAC called for a report from the ITO. The ITO considered the entire material and submitted his report on the basis of which the AAC recomputed the capital gains liable to tax. Against the order of the AAC, the assessee appealed to the Tribunal. One of the contentions before the Tribunal was that s. 12B(1) of the I.T. Act, l922, had no application to the case because the assessee had sold its business lock, stock and barrel. It was contended that in order that the gain to be capital gain under s. 12B(1), there must be a sale of the capital assets as such and not a transfer of a business as a whole. This contention formed the basis for question No. 3 which was referred to the Bombay High Court (Supplemental question No. 1). While dealing w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined. While elaborating the contention, Mr. Sarangan placed strong reliance on the decision of the Supreme Court in CIT v. Srinivasa Setty [1981] 128 ITR 294. We are here concerned primarily with the terms of sections 45 and 48 of the I.T. Act, 1961. "45. Capital gains.-(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D and 54E, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place. " 48. Mode of computation and deductions.-The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. " The cost of acquisition of the capital asset mentioned in the above section implies date of acquisition and the date of acquisition of the asset is, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset is a material factor in applying the computation provisions pertaining to capital gains. It is possible to say that the 'cost of acquisition' mentioned in s. 48 implies a date of acquisition, and that inference is strengthened by the provisions of ss. 49 and 50 as well as sub-s. (2) of s. 55. It may also be noted that if the goodwill generated in a new business is regarded as acquired at a cost and subsequently passes to an assessee in any of the modes specified in sub-s. (1) of s. 49, it will become necessary to determine the cost of acquisition to the previous owner. Having regard to the nature of the asset, it will be impossible to determine such cost of acquisition. Nor can sub-s. (3) of s. 55 be invoked, because the date of acquisition by the previous owner will remain unknown. We are of opinion that the goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of s. 45 and, therefore, its transfer is not subject to income-tax under the bead I Capital gains'. " The critical points in this reasoning are these : (i) There are assets of different nature, those involving cost in their acquisition and those which could be acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find out the date on which the improvement has been effected even if it may be said that the date of acquisition is available in this regard. Mr. Sarangan also referred us to the decision of the Bombay High Court in Evans Fraser Co. Ltd. v. CIT [1982] 137 ITR 493, where the ratio of the decision in Srinivasa Setty's case [1981] 128 ITR 294 (SC), has been extended even to the " goodwill " built up by an undertaking on the ground that its cost of improvement cannot be determined. The two decisions of the Calcutta High Court were also depended upon in support of the contention. In CIT v. Clive Mills Co. Ltd. [1984] 148 ITR 14, the Calcutta High Court applied the ratio of the decision of the Supreme Court in Srinivasa Setty's case [1981] 128 ITR 294 (SC), to sale of loom hours with an observation that it would not be possible to envisage the cost of acquisition and, therefore, the profits and gains arising from the sale of loom hours are not chargeable to tax under the head " Capital gains ". The same High Court in CIT v. Satya Paul [1984] 148 ITR 21, held that the amount realised by sale of import entitlements, where it did not cost anything to the assessee, could not be brought t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gains on transfer of tions Nos. 4 and 5 do not call goodwill in case the assessee did not for answers. opt under section 55(2) of the Incometax Act, 1961, for the market value of the undertaking as on 1-1-1954 to be substituted for the cost of acquisition of the undertaking ? Questions Answers 5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that if the assessee opted for substitution of the market value of the undertaking as on 1-1-1954 for the cost of acquisition, capital gains liable to tax would arise on transfer of goodwill ? 6. Whether the Tribunal was Answers to these questions justified in law in holding that it was Nos. 6 to 9 are premature. As not permissible for the assessee to and when the option is exercise make a conditional option for the sub- ed by the assessee, it is open to stitution of the market value of the the ITO to adopt any reasonable undertaking as on 1-1-1954, for the method for determining the cost of acquisition under the provisions market value of the assets of the of section 55(2) of the Income-tax Act, undertaking as on 1-1-1954, 1961 ? without reference to the observations or findings r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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