TMI Blog2004 (4) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 1998 for Rs. 3,40,39,332 and capital profit of Rs. 1,95,18,130 arising on such sale is transferred to capital reserve as per the decision of the Board of Directors. As per legal experts opinion such a slump sale is not taxable and hence, requires no provision for taxation." The assessee-company had claimed the profit of this sale of going concern was a non-taxable capital receipt. 3. The AO did not accept the claim of the assessee. According to the AO this transfer includes both tangible and intangible assets. Tangible assets include land, building, structures and directors (sic), the plant and machinery etc., and intangible assets include valid licenses, permits and sanctions, benefit of all pending contract and more importantly 'non-competition'. The AO did not accept the claim of the assessee, according to him all the assets sold are depreciable assets and the written down value should be the cost of acquisition and the sale consideration is already known. Therefore, he computed the capital gains under s. 50 of the IT Act. On first appeal, the learned CIT(A) granted relief to the assessee considering the submissions and the facts. The learned CIT(A) in his order held a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the fact that capital gains is all exigible since the assets transferred include depreciable assets and the capital gains computable is short-term capital gains under s. 50 in the light of Hon'ble Delhi High Court judgment in the case of P.N.B. Finance Ltd. vs. CIT (2001) 168 CTR (Del) 509 : (2001) 252 ITR 491 (Del)." 5. The learned Departmental Representative Shri Amitabh Kumar, vehemently contended that the claim of the assessee about the slump sale was totally incorrect. The AO held that as three of the assets namely, sundry debtors at Rs. 12,97,150, land at Rs. 97,000 and vehicle at Rs. 4,35,029 were not sold as part of the going concern, it could not be said that the agreement entered into with the buyer was a sale of an undertaking as a going concern and therefore, was not a slump sale. The learned Departmental Representative crystallised the issue on the following four points: 1. Whether there is a slump sale. 2. If there was a slump sale, whether s. 50B is retrospective and applicable. 3. If there was no slump sale, whether the sale of assets is taxable. 4. If the sale of assets is taxable what is the cost of acquisition, what is the cost of sale and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te fee being payable in an open environment and even if such a fee was payable, it could have no value as anyone was entitled to manufacture CO2. 7. The learned Departmental Representative summarised the findings of the CIT(A) as under: (1) That there was a slump sale. (2) That also included in the slump sale price was consideration for non compete for a period of 10 years. (3) That there was no revaluation of assets either by the seller or buyer prior to 9th Feb., 1998. (4) That there was no apportionment possible between tangible and intangible assets. (5) That after setting aside the order of the AO in Syndicate Bank Ltd., effect has not been given to the order of the High Court even after 17 years due to practical difficulties faced by the Department. 8. The learned Departmental Representative thereafter highlighted certain features of the agreement. The learned Departmental Representative drew our attention to recital of the agreement under which it was noted that the assessee carried on business of manufacture, sale and distribution of CO2 at various places in India including inter alia, at Mangalore in the State of Karnataka, where MGCL was established a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this agreement (as defined in cl. 13.1), to provide to Praxair, all supplier and customer lists and other pertinent information and data pertaining to their suppliers and customers in respect of any of the products, past, present and prospective, and, to the extent possible, to introduce the concerned Praxair personnel to all such suppliers and customers and generally to assist Praxair in their dealings with such customers. MGCL agrees and undertakes that it will not, after the transfer date, deal in any manner with such customers, in respect of products, other than at the request and for the benefit of Praxair. 4.4 MGCL agrees and undertakes not to render consultancy or advisory or other services of any kind to any others, for or in any manner connected with, the manufacture, sale or distribution of products, in India. 4.5 Notwithstanding anything in the foregoing sub-clauses, it is agreed and understood, that the promoters/shareholders/directors of MGCL will be entitled to continue to carry on the following business activities: Design and sale of CO2 manufacturing plant; Design and sale of CO2 storage vaporiser systems; Design and sale of CO2 cylinder manifold a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er groups concerns referred to in cl. 2.1 above, are in a position to and shall transfer to Praxair, at no extra cost to Praxair, absolute title to an aggregate 1,590 (one thousand five hundred and ninety) CO2 gas cylinder of a capacity of 22.5-31 Kgs which are "acceptable cylinders" duly tested as per the Gas Cylinder Rules, 1981. In addition, MGCL is in a position and shall make available perpetually to Praxair, on lease/rental basis, 2,410 (two thousand four hundred and ten) "acceptable cylinders" of 22.5 to 31 Kgs capacity, duly tested as per the Gas Cylinders Rules, 1981, on an annual lease/rental of Rs. 3,41,000 (Rs. Three lakhs forty one thousand), for which purpose, the parties will enter into a separate appropriate agreement. All such cylinders so transferred or made available, will be free of any encumbrances, whatsoever, other than any such as relate to those specific liabilities specified in Annex. 4 to this agreement which are taken over by Praxair. 6.2 If and to the extent it is found by physical verification, within 6 (six) months after the transfer date, that there is any shortfall in the number of such "acceptable cylinders", sold or made available on lease/rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment which relates to inventory. He argued that cl. 9.1 provides for a joint inspection and due diligence reports. According to the learned Departmental Representative, this contradicts the finding of the learned CIT(A) with the valuation taken. Similarly, our attention was drawn to cl. 12.1(b). The learned Departmental Representative submitted that according to this clause, i.e., 12.1(b) clearly indicates that nothing was required for intangible assets. It was further submitted that land valued at Rs. 97,000 was not transferred. He also drew our attention to p. 77 of the paper book and stated that the land was adjacent to the land on which the undertaking was operating. 12. The learned Departmental Representative submitted on the following lines: (i) It would not be considered as a slump sale because land valued at Rs. 97,000 was not transferred. (ii) Only 1,190 cylinders were transferred and 2400 cylinders were taken on lease were sub-leased to Praxair. (iii) The security deposits of Rs. 1.5 crores were not transferred. (iv) Only certain liabilities listed in Annex. IV were transferred as follows: Rs. 1. Karnataka State Finance Corpn. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot taxable. It was submitted that proposition that the cost of acquisition or full value of consideration was not attributable to various assets merely presented a difficulty and the mere fact that a difficulty existed cannot lead to the conclusion that estimation was impossible. Attention was invited to Calcutta High Court decision in Hindustan Co-operative Insurance Society (1992) 107 CTR (Cal) 323 : (1993) 201 ITR 716 (Cal) wherein the case of a life insurance business which was nationalised, it was argued for the assessee that it was not possible to determine the cost of improvement. It was submitted that despite any difficulty faced in determination of either cost of acquisition or full value of the consideration or cost of the improvement the Tribunal should itself determine any or all the components thereof. 14. The learned CIT/Departmental Representative thereafter referred to the decision of the Supreme Court in CIT vs. Artex Manufacturing Co. (1997) 141 CTR (SC) 290 : (1997) 227 ITR 260 (SC). That was the case dealing with the sale of entire business of a firm to the company and the question which arose was whether the provisions of s. 41(2) brings to tax the differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being transferred goodwill could not be transferred and in this case the name MGCL had not been transferred. It was submitted that there could be no value for the list of suppliers and as the right to manufacture had not been transferred, there could be no value for that right and even assuming that the right to receive raw gas could be considered as having value, it was on revenue account. It would, therefore, be proper to submit that the matter be sent back to the AO to value each item and bring to tax the surplus. Insofar as the restrictive covenant given to MGCL was concerned, it was submitted that not only MGCL but also its three directors/promoters had received non-compete fees and therefore, there could be no attribution of any part of the consideration towards the restrictive covenant and even assuming for the sake of argument, there was a restrictive covenant, the amount attributable or apportioned to the restrictive covenant must be apportioned out and the balance brought to tax as consideration for the transfer of assets. Insofar as the restrictive covenant was concerned, it was submitted that it was nothing but deferred revenue and should be brought to tax on that acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that insofar as the land was concerned, a perusal of p. 77 of the paper book indicated that the land was physically distinct and unbuilt on and in fact the land which was retained by the assessee was not part of the gas plant and nothing was constructed on the said land. The land retained by the assessee was never used in the business of manufacturing, selling and distribution of CO2 at any time. In fact, there was no access to the retained land. Between the land on which the factory was situated and the common approach road referred to by the Departmental Representative was a private road belonging to the BWSSB and the assessee had to take special permission to use the road and also to construct a culvert across the pipeline carrying water to the treatment work which ran between the road and the factory land. Therefore, it is submitted that in order to have access to the retained land a separate culvert would have to be constructed after getting the permission from the BWSSB. Such permission had in fact not been obtained nor had the culvert been built. As such the land was even today inaccessible on account of the road built by the BWSSB. Therefore, it was submitted that land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h other concerns in the group. Attention was invited to p. 137 of the paper book under current liabilities and provisions, security deposits (cylinders) which showed nil as on 31st March, 1998 and as on 31st March, 1999. Therefore, it was submitted that this contention was baseless. 21. Insofar as the sundry debtors appearing in the balance-sheet as of 31st March, 1999 were concerned, it was submitted that these represented the amounts owned by Praxair as a result of the transaction itself and therefore, this could not be considered as assets relating to the going concern inasmuch as these were amounts owed to MGCL as a result of the transaction. With regard to the reference to Annex. 4 and liabilities transferred therein by the CIT/Departmental Representative, it was submitted that the liabilities as of 31st March, 1998 was Rs. 83.66 lakhs and as on 31st March, 1999 was nil. The transfer of the undertaking had taken place on 1st April, 1998. Thus, entire liability of the undertaking had been transferred. In the circumstances, it was submitted that on a factual basis the transfer encompassed all asset and liabilities relating to manufacturing and distribution of CO2 business. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appens to live close by and it would be more trouble to go elsewhere. These categories serve as a reminder that the goodwill of a business is a composite thing referable in part to its locality, in part to the way in which it is conducted, and the personality of those who conduct it and in part to the likelihood of competition, many customers being no doubt actuated by mixed motives in conferring their custom.'" The learned counsel submitting as above contended that the mere name of MGCL would not constitute the goodwill of the going concern which was transferred by the assessee to Praxair. It would encompass within its fold the potentiality of retaining its customers, the benefit of raw material contracts, benefit of licences, the benefit of the quality of its plant, the benefit of its network distribution, the quality of trained employees, the low temperature technology of the plant and such other components of the business. Secondly and in any view of the matter, it could hardly be said that the value of the name MGCL was greater than the value of name Praxair keeping in view of the fact that MGCL had capacity of 18 tonnes per day and Praxair was a giant leading manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... barrel to a new purchaser. As regards cl. 11.1 which required a conveyance to be executed, reference was invited to the decision of the Bombay High Court in Premier Automobiles Ltd., wherein a similar conveyance was required to be executed and the Bombay High Court pointed out that the object and purpose of conveyance being executed was the legal transfer of the land and for Stamp Act purposes and question of the conveyance detracting from a slump sale did not arise. Accordingly, it was submitted that having regard to the conspectus of facts the transfer of the undertaking, manufacturing and distributing CO2 was a transfer of an undertaking as a going concern and would constitute a slump sale. 24. The learned counsel vehemently contended that the submission of the learned CIT/Departmental Representative that the decision of the Supreme Court in Mugneeram Bangur Co. was not applicable to the assessee, was incorrect. The submission of the CIT/Departmental Representative that the decision of the Supreme Court was on account of there being no capital gains in asst. yr. 1949-50 was erroneous. Counsel for the assessee submitted that the question before the Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vendors were transferring the concern to a company constituted by the vendors themselves what was put in the schedule was the book value and therefore, even if a sum of Rs. 2,50,000 attributable to goodwill was added to the cost of land, it was nobody's case that this represented the market value of the land. Therefore, the Supreme Court concluded that the sale was a sale of the whole concern and no part of the slump price was attributable to the cost of the land and accordingly no part of the slump price was taxable. Therefore, it is submitted that the submission of the learned Departmental Representative that the decision of Supreme Court in Mugneeram Bangur Co., is irrelevant as it does not deal with capital gains is erroneous. What Mugneeram Bangur Co., lays down are the ingredients necessary to constitute a sale of an undertaking as a slump sale. The most important ingredient is that the business is transferred as a going concern lock, stock and barrel. If that ingredient is satisfied, the sale constitutes slump sale. 25. The learned counsel went on to distinguish the Kampli Co-operative Sugar Factory Ltd. vs. Jt. CIT (ITA No. 375(B)/2000) case. This case was cited by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the assessee's case. 28. We have heard the rival submissions and perused the records. We have taken note of the entire facts as available on records as submitted by both the parties. First of all let us deal with the decision cited by both the sides, in the decision of the Hon'ble Supreme Court in the case of CIT vs. Mugneeram Bangur Co.. The questions that stood for consideration were: "1. Whether, on the facts and circumstances of this case, the sum of Rs. 2,50,000 represented the surplus on the sale of lands which was the stock-in-trade of the assessee-company or was the goodwill alleged to have been transferred. 2. Whether, on the facts and circumstances of this case by the sale of the whole business concern, it could be held that there was taxable profit in the sum of Rs. 2,50,000." In this case, the sum of Rs. 34,99,300 was arrived at in the schedule as under: Rs. As Ps 1. Land 12,68,628 7 7 2. Goodwill 2,50,000 0 0 3. Motor car lorries 25,886 8 6 4. Furniture, fixtures, etc., 5,244 5 6 5. Mortgage secured 17,62,367 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Syndicate Bank Ltd. (Syndicate Bank) had been nationalised and its banking business was taken over by the Government of India by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1961 (BCATU). Under the Act all the assets, rights, powers, privileges and all property investments together with all liabilities, borrowings, obligations than subsisting in the undertaking were taken over for a consideration of Rs. 3.6 crores. Syndicate bank filed a return for asst. yr. 1970-71 and submitted that no amount was taxable under s. 41(2) and capital gains. The ITO did not accept the contention and in his view the undertaking was capital asset and therefore, the surplus taxable. The High Court noted that it appeared that the assessee had opted to substitute the fair market value as on 1st Jan., 1954 for the cost of acquisition but later imposed a condition stating that it would exercise the option only if it was beneficial to it. The AO took the value of the undertaking as a whole as on 1st Jan., 1954 and into that he added the paid up capital and reserves and profits upto the date of nationalisation and deducted this from the compensation amount and arrived at long-term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king. The first part of the question was answered in the affirmative and the Court held that the undertaking constituted the capital asset. Insofar as the apportionment of compensation amount to various items or components in question, the High Court held at p. 687. "Mr. Srinivasan, learned counsel for the Revenue submitted that it would be factually and legally impossible to apportion the compensation to various items constituting undertaking. The counsel, in our opinion, is right in his submission. Besides, there are other properties, which are inherent in such undertaking like the secret reserves which are also called "hidden reserves and inner reserves" not disclosed in the balance sheet of the business undertaking. It includes also rights contingent or definite, tangible or intangible and all interests and advantages partial or total, present or future. In the very nature of these kinds of properties comprising the business undertaking taken over by the Government of India, it is neither possible nor desirable to apportion the lump sum compensation of Rs. 3.6 crores on itemwise basis. The BCATU Act does not give any indication to that effect. It may be, as the Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st at all can be conceived. (ii) the cost of acquisition mentioned in s. 48 implies a date of acquisition. And (iii) if the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be described it as "asset" within the meaning of s. 45 and, therefore, its transfer is not subject to income-tax under the head "capital gain". By setting out the following principles, the High Court then referred to the decision of the Supreme Court in Srinivasa Shetty, the Bombay High Court in Evans Fraser Co. Ltd. vs. CIT, the Delhi High Court in Bawa Shiv Charan Singh vs. CIT (1985) 47 CTR (Del) 12 : (1984) 149 ITR 29 (Del), Kolkata High Court in CIT vs. Satya Paul where the principle laid down by the Supreme Court in Srinivasa Shetty was applied to not only self generated goodwill but to acquired goodwill (Evans Fraser Co. Ltd.) loom hours (Clive Mills Co. Ltd. sale of import entitlements (Satya Paul) and transfer of tenancy rights (Bawa Shiv Charan Singh). The Court has thereafter sent back the matter to the Tribunal in the following words at p. 693: "Of course, if the cost of acquisition of the business undertaking acquired by the Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... improvement of the business undertaking is not ascertainable capital gains cannot be brought to tax. 31. The learned Departmental Representative referred to CIT vs. Hindustan Co-operative Sugar Factory for the proposition that merely because difficulty is experienced in estimating an amount does not mean that estimating is impossible. It is submitted that the context in which these observations were made have to be kept in view. The Tribunal in that case found that improvement in the capital asset of the assessee could not be estimated at less than Rs. 3,98,000 and the only finding it gave was having regard to the facts that the total income assessed in 1954 and 1955 was over Rs. 36,00,000. The cost of improvement could never be less than Rs. 3,98,000 and therefore, on the date of acquisition thereof there would be no surplus at all which could be taxed. This case, therefore, entirely turned on its own facts that a precise computation was not required as it was nobody's case that the estimation was less than Rs. 3,98,000 and it was enough to determine that the estimate was greater than Rs. 3,98,000 for the case to be decided. 32. The decision of Gujarat High Court in CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s book 4,36,896 Surplus of assets over liabilities 11,50,400 Net 11,50,400 Thus, quite clearly the entire surplus arose because of the revaluation of the assets by the assessee which determined the purchase consideration. The Court noted that the valuation of Rs. 15,87,296 was determined on the basis of the information furnished by the assessee p. 276: "It is no doubt true that in the agreement, there is no reference to the value of the plant, machinery and dead stock. But, on the basis of the information that was furnished by the assessee before the ITO, it became evident that the amount of Rs. 11,50,400 had been arrived at by taking into consideration the value of the plant, machinery and dead stock as assessed by the valuer at Rs. 15,87,296. This is not a case in which it cannot be said that the price attributed to the items transferred is not indicated and, hence, s. 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that s. 41(2) of the 1961 Act is not applicable. Question No. 2 referred to the High Court is, therefore, answered in the affirmative, i.e., in favour of the Revenue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-firm, it could not be said, that was the excess amount between the price and the written down value. Question No. 2 was, therefore, rightly answered against the Revenue by the High Court. On question No. 4 the High Court has taken the same view as was taken by it while answering question No. 4 in Artex Manufacturing Co.'s case. The said view has been affirmed by us in our judgment (1997) 141 CTR (SC) 290 : (1997) 227 ITR 260 (SC) in that case question No. 8 is similar to question No. 5 in Artex Manufacturing Co.'s case. The view of the High Court with regard to that question has been reversed by us in our judgment (1997) 141 CTR (SC) 290 : (1997) 227 ITR 260 (SC) in the case and for the same reasons question No. 8 must be answered in the affirmative, i.e., in favour of the Revenue and against the assessee". The question No. 2 reads as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of s. 41(2) were applicable?" Therefore, it is submitted that the question which is principally to be considered is whether the business undertaking transferred is a slump sale or not? The Delhi High Court in P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain creditors were not transferred nor were certain loans transferred. It was submitted before the Bombay High Court that when deciding the question as to whether the sale was a slump sale or a sale of itemised assets, one has to look at the overall transaction and ascertain whether the basic structure of the unit was transferred or not transferred and that one cannot go by individual items of assets being transferred unless that particular assets goes to the root of the matter i.e., cars could not have been manufactured without such an item like the gear box unit. The Court referred to its earlier judgment in Narkeshari Prakashan Ltd. and agreed that this would be the correct approach and the mere fact that a separate conveyance was executed or that a few assets which did not relate to the basic structure of the going concern were not transferred or certain deposits were returned or certain book debts were not transferred or there was no transfer of some liabilities cannot be destructive of the position that the transfer was of a going concern. The Court held that one has to adopt commercial principles for interpreting the arrangement. Applying those principles, the Bombay High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the AO would have to determine the cost of the undertaking (if determinable) for the purposes of computing capital gains in the light of ss. 45, 48, 55 and then determine whether any capital gains are exigible. 36. The learned Departmental Representative had next submitted that the sale consideration can be determined aliunde. There were three components to this submission: (a) that the so called intangibles had no value; (b) that goodwill had no value as the name had not been transferred; (c) that non-compete clause was meaningless, because the product name CO2 was a generic one. The first two issues have been dealt with above. Insofar as the question of non-compete is concerned, it is submitted that the learned Departmental Representative has failed to appreciate that a brand value and the value of technology is different from the ubiquitous availability of a product. The fact that salt is freely available and can be made easily does not detract from the value of technology which Tata Salt has to manufacture salt. Similarly, the fact that soap can be manufactured by anybody does not detract from the value of technology which Hindustan Lever has. In the case ..... 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