TMI Blog1980 (2) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... this common judgment, The transferor company is, what is known in the language of company law, a holding company and the transferee company is its wholly-owned subsidiary. There is no dispute on this aspect of the case. The transferor company was incorporated on May 28, 1958, and its object was, inter alia, to manufacture chemicals, drugs, etc. In the month of March, 1971, the transferor company acquired all the shares of the transferee company. The objects of the transferee company were, inter alia to manufacture radios, television sets, etc. The transferor company appointed six nominees of its own to acquire one share each of the transferee company and the balance of the shares of the transferee company were acquired by the transferor company and thus the transferee company was from March, 1971, onwards, the wholly-owned subsidiary of the transferor company. In the month of December, 1971, a decision was taken by the transferor company with the object of restructuring and reorganising the transferee company and another wholly-owned subsidiary company. Under this decision, the scheme of amalgamation and reorganisation was to be effective from April 1, 1971. In the mouth of January ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets as reduced by the liabilities were concerned and also so far as investments were concerned. The goodwill which formed part of this aggregate amount of rupees three crores odd was valued by the auditors of the company, M/s. Sorab S. Engineer Co., at Rs. 1,10,00,000and thus in the course of the correspondence with the Valuation Officer and also with the competent authority before the notices came to be issued and even thereafter, the stand of the transferor company and the transferee company has been that the provisions of Chap. XX-A could not be invoked so far as this transfer was concerned. Before the notices which, are challenged came to be issued on September 17, 1973, an interview took place with the competent authority and in the course of that interview also, an attempt had been made to convince the competent authority that the transferee company was the wholly-owned subsidiary company of the transferor company. What transpired at that interview is reproduced in the letter dated September 7, 1973, part of annex. 'D' to the petition in Special Civil Application No. 1394 of 1973, Ultimately, on September 17,1973, notices were issued by the competent authority under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transferor and transferee companies, it would be open to either the transferor or the transferee to go in appeal to the Income-tax Appellate Tribunal against the decision of the competent authority and there would be a further appeal by the aggrieved party against the decision of the Income-tax Appellate Tribunal to the High Court and from the decision of the High Court an appeal would lie under the I.T. Act to the Supreme Court. It was, therefore, contended by Mr. Desai that the matter should not be gone into by this court at the stage of the mere issuance of notices under s. 269D(1). On the other hand, the learned Advocate-General appearing for the respective petitioner in each petition has contended that what he is challenging in these special civil applications is not on the merits of the case but what he is challenging is merely the exercise of jurisdiction by the competent authority to initiate proceedings for acquisition of the properties in question. He contends that the conditions precedent for the exercise of the powers of acquisition as set out in s. 269D of Chap. XX-A of the I.T. Act have not been satisfied in the instant case and since what is being challenged is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompetent authority and, for the purposes of this judgment, what is material is s. 269C. That section provides as follows: " 269C. (1) Where the competent authority has reason to believe that any immovable property of a fair market value exceeding twenty-five thousand rupees has been transferred by a person (hereafter in this Chapter referred to as the transferor) to another person (hereafter in this Chapter referred to as the transferee) for an apparent consideration which is less than the fair market value of the property and that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with the object of (a) facilitating the reduction or evasion of the liability of the transferor to pay tax under this Act in respect of any income arising from the transfer; or (b) facilitating the concealment of any income or any moneys or other assets, which have not been or which ought to be disclosed by the transferee for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act or the Wealth-tax Act, 1957 (27 of 1957), the competent authority may, subject to the provisions of this Chapter, initiate procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration is Rs. 3,00,03,350. It is necessary at this stage to refer to the definition of" immovable property " in cl. (e) of s. 269A. " Immovable property "means " any land or any building or part of a building, and includes, where any land or any building or part of a building is transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also " and the Explanation to the clause states: " For the purposes of this clause, land, building, part of a building, machinery, plant, furniture, fittings and other things include any rights therein. " In CIT v. Vimlaben Bhagwandas Patel [1979] 118 ITR 134 (Guj), the Division Bench has held that the satisfaction of the competent authority for the initiation of acquisition of an immovable property is the subjective satisfaction on the objective facts stated, in the section. The reasons for the formation of the belief must have original or direct connection with the material coming to the notice of the competent authority though the question of sufficiency or adequacy of the material is not open to judicial review.. It is clear from the decision in CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assets is not a sale of an immovable property since the undertaking is not immovable property as defined by a. 269A(3). He further contended in this connection that the goodwill of the business, current assets, investments, licenses, etc., are not immovable property even under the inclusive part of the definition under s. 269A(e) since goodwill,current assets, investments, licenses, etc., are intangible assets. (4) He lastly contended that s. 269C(2)(a) is violative of arts. 14 and 19 of the Constitution and is liable to be struck down for that reason. It must be pointed out that in the main petition itself, there is no submission or contention that sale of an undertaking as a going concern together with goodwill and assets, etc., is not sale of immovable property and to that extent Mr. Desai for the respondents was right in pointing out to us that that contention has not been taken in the main petition. It is only in the affidavit-in-rejoinder in para. 5.6 that it has been urged on behalf of the transferor company that by the conveyance dated March 30, 1973, the petitioner has transferred and assigned its undertaking and business as a going concern along with its goodwill, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondents had full notice of the fact that one of the grounds on which the appellant challenged the validity of the impugned order was that he had not been given a chance to show cause why the said notification should not be issued. We are, therefore, satisfied that the High Court was in error in assuming that the ground in question had not been taken at any stage by the appellant before the matter was argued before the High Court." It is not necessary for us to consider this aspect regarding the pleading and at what stage the assessee should have taken it because even in the affidavit-in-rejoinder there is no contention specifically taken that the sale of an undertaking as a whole together with goodwill and all its assets, when what is sold is a going concern, is not sale of immovable property.We, therefore, will not go into this question raised by the learned Advocate General in his third submission. It may also be further stated that as regards point No. (4), namely,challenge to the constitutional validity of s. 269C(2)(a), the learned Advocate-General did not press this particular submission in view of the conclusion which has been reached by this High Court in CIT v. Viml ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision in the I.T. Act for any tax on income arising from transfer of immovable property. On the other hand, Mr. G. N. Desai for the respondents in each of the special civil applications contended that, apart from these two categories of income-tax, namely, tax on capital gains and tax on balancing charge, when the business is sold as a whole and the stock-in-trade and other movable are sold since they are sold as movable property by virtue of the extended definition in s. 269A(e), they would be covered by the provisions of s, 269C(1) and further if any apparent consideration is less than the fair market value there will be a profit occurring to the transferor and if the apparent consideration is less than the fair market value, even such stock-in-trade which is deemed to be immovable property by virtue of the definition clause in s. 269A(e) will yield income arising from the transfer because there is in fact a profit derived from this particular transaction of sale of stock-in-trade. For this purpose Mr. Desai relied upon s. 28 of the I.T. Act and the ensuing sections in the provisions relating to profits and gains from business or profession. It must be pointed out that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-cls. (a) and (b) of cl. (iv) of s. 47 are satisfied ill the instant case, and hence in our opinion it is obvious that tax on capital gains arising from this particular transfer of March 30, 1973, between the transferor and the transferee company could never be taxed as capital gains and, therefore, the object of the transfer could never have been to facilitate reduction or evasion of the liability of the transferor to pay tax on capital gains arising from this transaction of March 30, 1973. Therefore, it is only if the provisions of s. 41(2) can be said to be attracted to the instant case that the condition precedent regarding the object of transfer can be said to be met. We have already referred to the provisions of s. 41 but for the purposes of, inter alia, s. 41, s. 43 lays down special definitions. Under sub. (1) of s. 43, " actual cost " means the actual cost of the assets, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority, Under Expln. 6 to sub-s. (1)of s. 43 : " When any capital asset is transferred by a holding company to its subsidiary company, or by a subsidiary company to its holding comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alued so far as the actual cost and the written down value are concerned at what they were in the hands of the transferor, the parent company, and are treated as if the capital asset continued to be the property of the transferor, the parent company. The learned Advocate-General urged before us that looking to the provisions of s. 41(2) read in the light of s. 43(1), Expln. 6, and s. 43(6),Expln. 2, since in the instant case the capital assets have been transferred by the parent company to its wholly-owned subsidiary company at the book value, that is the written down value, as an the date of transfer, so far as depreciable assets in respect of which depreciation has been allowed in the past are concerned, there was no question of any object of avoiding the liability to pay tax on the balancing charge under s. 41(2) or to reduce the liability in respect of that balancing charge. He contended that in the instant case the transaction is being affected at book value because that is what the law contemplates and what the law enjoins and even if higher consideration had been shown in the deed of transfer, in the eye of the law the written down value would have been deemed to be the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares of the face value of Rs. 34,99,300 to the partners or their nominees. The schedule in the agreement indicated that the sum of Rs. 34,99,300 was arrived, at by itemwising different sums against each of the items mentioned in the items. Item No. 2 was goodwill and goodwill was valued at RS 2,50,000. The Appellate Tribunal held that the firm had no goodwill and that the sum of Rs. 2,50,000, although shown as the value of the goodwill, was really the excess value of the land, which was its stock-in-trade, and that although the sale was that of a business as a going concern, the value of its stock-in-trade could be traded ; but that the transaction was a mere adjustment of the business position of the partners and the department was not entitled to take the book-keeping entries as evidence of any profit. The Supreme Court hold that the sale was the sale of a whole concern and no part of the price was attributable to the cost, of the land and, no part of the price was taxable. The fact that in the schedule to the agreement the price of the land was stated did not lead to the conclusion that part at the slump price was necessarily attributable to the land sold. What was given in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. He further observed that 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 realisation 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 stocks 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 realisation sale, if there were an item which could be treated as representing the stock sold, the profit obtained by that sale, though made in conjunction with the sale of the whole concern, might conceivably be treated as taxable income. Lord Phillimore concluded with the following observations : 'If a business be one of purely buying and selling, like the present,prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to distinguish 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. 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 land, it is nobody's case that this represented the market value of the land. In our view the sale was the sale of the whole concern and no part Of the slump price is attributable to the cost of land. If this is so, it is clear from the decision of this court in Commissioner of Income-tax v.West Coast Chemicals and Industries Ltd. [1962] 46 ITR 135 (SC) and Doughty's case [1927] AC 327 (PC) that no part of the slump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness as a whole as on January 1, 1939, was more than the full value of the consideration which it had received in 1948, and in support of its claim the assessee placed considerable material before the I.T. authorities. At page 258 of the report, V. S. Desai J., speaking for the Division Bench of the Bombay High Court, referred to question No. 2,which was as follows : " Whether, on the facts and in the circumstances of the case, the assessee-firm is liable to pay capital gains tax in respect of profits and gains arising from the sale of its assets to the limited companies ? " and the answer of the Bombay High Court was that the assessee was not saved from paying capital gains tax in respect of the profits and gains arising from the sale of its assets to the limited companies by reason of the provisions of the third proviso to s. 12B(1), as it then stood.The third proviso to s. 12B(1) dealt with a situation where the assets of a partnership were distributed in species, amongst the partners on the dissolution of the firm. The Supreme Court has pointed out in James Anderson v. CIT [1960] 39 ITR 123 that the distribution of capital assets under the third proviso to s. 12B(1) meant dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 41(2). At page 610 of the report, it has been pointed out by Shah J. : " This court pointed out in Commissioner of Income-tax v. R. R. Ramakrishna Pillai [1967] 66 ITR 725, that a transaction by which a person carrying on business transfers the assets of that business to another assessable entity may take different forms and may have different legal effects.The assets of a business may be sold at a fixed price to a company proofed by a person who carried on the business; if the price paid for or attributable to an asset exceeds the written down value of the asset, proviso (ii) to section 10(2)(vii) of the Indian Income-tax Act, 1922, would ex facie be attracted. Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange, and not of sale, and the true nature of the transaction will not be altered, because for the purpose of stamp duty or other reasons the value of the assets transferred is shown as equivalent to the face value of the shares allotted. A person carrying on business may agree with company that the assets belonging to him shall be transferred to the company for a certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is another aspect on the basis of which the principal questions can be approached. It is well settled that business is property and the undertaking of a business is a capital asset of the owner of the undertaking. When an undertaking as a whole is transferred as a going concern together with its goodwill and all other assets, what is sold is not the individual itemised property but what is sold is the capital asset consisting of the business of the undertaking and any tax that can be attracted to such a transaction for a slump price at book value would be merely capital gains tax and nothing else but capital gains tax. Plant or machinery or any fixture or furniture is not being sold as such. What is sold is the business of the undertaking for a slump price. If the capital asset, namely, the business of the undertaking, has a greater value than its original cost of acquisition, then, capital gains may be attracted in the ordinary case of sale of an undertaking and that is precisely what has been indicated in Doughty's case [1927] AC 327 (PC) and in Mugneeram Bangur's case [1965] 57 ITR 299 (SC). In Kharwar's case [1969] 72 ITR 603 (SC), in our opinion,relied upon by Mr. Desa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the reduction or evasion of the liability of the transferor to pay the tax under this Act in respect of any income arising from the transfer." The learned Advocate-General pointed out that prior to the decision of this court in CIT v. Vimlaben [1979] 118 ITR 134, the department proceeded on the footing that the presumption under s. 269C(2) would be available even at the stage of initiation of proceedings. In Income-tax Circular No. 96 dated November 25, 1972, which dealt with the provisions of the Taxation Laws (Amendment) Act, 1972,and the newly added Chap. XX-A, in para. 11, it was observed : " The competent authority will have the power to initiate proceedings for the acquisition of any immovable property which has been transferred by way of sale or exchange on or after 15th November, 1972, only if the following three distinct conditions are fulfilled, namely :- (i) he has reason to believe that the immovable property is of a fair market value exceeding Rs. 25,000 ; (ii) he has reason to believe that the fair market value of such property exceeds the apparent consideration therefor by more than 15% of such apparent consideration and (iii), he has reason to believe th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e open to the competent authority to draw an inference on the same lines as the presumption set out in cls. (a) and (b) of s. 269C(2). We are unable to accept that contention of Mr. Desai and it must be held that in the instant case, in the light of what has been stated in the reasons recorded by the competent authority and in the light of the affidavit-in-reply, there was nothing before the competent authority to show that the consideration for the transfer as agreed to between the parties had not been truly stated in the instrument of transfer with the object as mentioned in s. 269C(1)(a). In view of the valuer's report, which was before him, the competent authority could say that the apparent consideration was less than the fair market value of the property. The property which was involved in this transaction was of a fair market value exceeding twenty-five thousand rupees and, therefore,two other conditions precedent were in fact satisfied but, in the absence of the presumption arising under s. 269C(2)(a), there was no material to show that the consideration for such transfer as agreed to between the parties had not been truly stated in the instrument of transfer. Mr. Desai for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration declared by the assessee in respect of the transfer of such capital asset by an amount of not less than fifteen per cent. of the value so declared the full value of the consideration for such capital asset shall, with the previous approval of the IAC, be taken to be its fair market value on the date of its transfer. Though the provisions of s. 52(2) deal with situations similar to the situations or identical with the situations which Chap. XX-A deals with, the prespective of Chap. XX-A, as pointed out by this High Court in Vimlaben's case [1979] 118 ITR 134, is penal as levying a penalty and that being, the case, we have refrained from deriving any support from the authorities dealing with s. 52(2) of the I.T. Act. We may point out that the Karnataka,Madras, Andhra Pradesh and Bombay High Courts have taken one view of these provisions of s. 52(2), whereas a Full Bench of the Kerala High Court and a Division Bench of the Punjab and, Haryana High Court have taken a contrary view regarding s. 52(2), but it is not necessary for us to enter into that controversy. In view of our conclusions set out hereinabove, we hold that the conditions precedent for the exercise of jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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