2002-VIL-390-KAR-DT

Equivalent Citation: [2003] 264 ITR 124, 180 CTR 87, 127 TAXMANN 605

KARNATAKA HIGH COURT

Date: 19.12.2002

B. RAGHURAMA PRABHU ESTATE

Vs

JOINT COMMISSIONER OF INCOME-TAX (ASSESSMENT).

BENCH

Judge(s)  : G. C. BHARUKA., K. SRIDHAR.

JUDGMENT

The judgment of the court was delivered by

G.C. BHARUKA J.-The assessee as well as the Department, being aggrieved by the order dated July 31, 2000, passed by the Income-tax Appellate Tribunal, Bangalore Bench, have preferred these appeals under section 260A of the Income-tax Act, 1961 (in short the "Act"). These appeals relate to the assessment year 1995-96, the previous year being the financial year ending on March 31, 1995.

The appeals before the Tribunal were heard by a Bench comprising three members, namely, Vice-President and two Judicial Members. The Vice-President by a separate order had dismissed the appeals of the appellants. The two Judicial Members while agreeing with the final conclusion drawn by the Vice-President have written their separate order by giving reasons of their own.

The impugned order of the Tribunal had been passed in eight appeals preferred by the eight assessees. These assessees are the erstwhile partners of a dissolved firm which was carrying on the business of manufacturing beedies under the firm name Mangalore Ganesha Beedi Works (in short the "MGBW"). The firm was comprised of thirteen partners. It stood dissolved on December 6, 1987, by efflux of time. Thereafter, the business was carried on behalf of all the erstwhile partners as an association of persons till the affairs of the firm were finally wound up. The assets of the firm were ultimately sold under the orders of this court in winding up proceedings with effect from November 21, 1994.

Before entering into the facts in detail, we find it advantageous to clarify a basic fact which has led to a certain amount of confusion at all stages of the proceedings. This confusion had arisen primarily because of the name "Mangalore Ganesha Beedi Works" successively adopted by three different taxable entities, namely, the partnership firm, an association of persons consisting of 13 members and another association of persons consisting of 3 members. For the sake of convenience, we will be referring to these taxable entities as "the firm", "AOPs-13" and "AOPs-3". At this very stage, we may state that in the year 1993, the number of members of the AOPs-13 reduced to twelve because one of its members, namely, Sri Vinod Rao, having 7.5 per cent. share, had transferred his interest by a deed of assignment dated July 3, 1993, to 7 out of other 12 members leading to rise in their shares. But, this assignment of interest does not have any material relevance for deciding the legal issues involved herein.

The present assessees had filed their individual returns of income showing income from various sources. But, in the income so declared by them, they did not include their share of profit either in the capital gains arising out of the sale of the assets of the firm or their share in the income of the AOPs-13. The Assessing Officer while making assessment took the view that they are liable to pay tax on these incomes as well and assessed accordingly. While doing so, the Assessing Officer rejected the objections of the assessees that in the facts of the case, no capital gains arose in their hands. He also rejected their claim that the profits from the business could have been assessed only in the hands of the AOPs-13. The Assessing Officer completed the assessment as a protective measure since according to him he had a doubt as to whether the capital gains was to be assessed in the hands of the dissolved firm or its individual partners. He was also not certain about the right hand in which the business income was to be assessed, i.e., in the hands of the assessees or the AOPs-13. The Commissioner of Income-tax (Appeals) as also the Tribunal agreed with the view taken by the Assessing Officer. But the Tribunal while agreeing with the Assessing Officer that the assessee was liable to pay tax on his share of capital gains has given certain directions in relation to computation thereof which, according to the Department, were not permissible in law. It is for this reason that both the assessees and the Department have preferred these appeals.

About the firm:

Some time in 1939, the late S. Raghuram Prabhu started the business of manufacturing beedies. Subsequently, his brother-in-law, Sri Madhav Shenoy also joined him in the business as a partner. Thus, Mangalore Ganesha Beedi Works, the firm, came into existence with effect from March 28, 1940. Thereafter, it was reconstituted from time to time. The last reconstitution of the firm is evidenced by a partnership deed dated June 30, 1982. According to the averments made in the deed, the last reconstitution of the firm became effective from June 6, 1982. According to the deed of partnership, the firm comprised the following 13 partners:

Sl. No.

Name of the partners

Percentage of share

1.

B. Raghurarna Prabhu

14.50%

2.

M. Janardhana Rao 

7.65%

3.

M. Ananda Rao

7.65%

4.

M. Vinoda Rao

7.50%

5. 

M. Pushpalatha, W/o. Subraya Baliga 

12.50%

6. 

Hemalatha, W/o. Raghunath Shenoy

12.50%

7.

M. Suresh Rao

7.55%

8.

M. Vishwanath Rao 

7.55%

9. 

M. Rarnanatha Rao  

2.50%

10.    

Jaganath Shenoy 

2.50%

11.

Vatsala Shenoy, D/o. M. Janardhana Rao

7.55%

12.

M. Gopinath Shenoy

2.50%

13. 

Arathi Shenoy, D/o. M. Janardhana Rao

7.55%

Clause (3) of the partnership deed provided for the duration of the firm. This clause reads as under:

"3. The duration of the partnership shall be five years in the first instance; but by mutual agreement the parties hereto may extend the said duration. If during the subsistence of this partnership any of the partners desire to retire from the partnership he or she can do so, if all the other partners agree to the said retirement. However, if all the other partners do not agree to the said retirement, the partner intending to retire shall give six months' notice in writing of his or her intention to retire and on expiration of the period of the said notice the said partner shall cease to be a partner and subject to para. 14 infra from that date all his or her liabilities and rights as a partner of the firm shall come to art end."

Dissolution of the firm:

According to the above clause (3) of the partnership deed, the partnership was to dissolve on June 5, 1987. But, because of mutual agreement between the partners as provided in the above clause (3) itself, the duration was extended for a further period of 6 months, i.e., up to December 5, 1987. Therefore, in terms of section 39 read with sections 40 and 42(a) of the Partnership Act, 1932, the firm stood dissolved with effect from December 6, 1987. As a consequence of the dissolution of the firm, the affairs of the firm were required to be wound up in the manner provided in clause (16) of the partnership deed.

Clause (16) of the partnership deed had made specific provisions for the manner in which the affairs of the firm were to be wound up after its dissolution. It reads as under:

"16. If the partnership is dissolved, the going concern carried on under the name of the firm Mangalore Ganesh Beedi Works and all the trade marks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefor as a single group at a sale to be then held as among the partners at which sale nobody other than the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deeds, instruments and applications and otherwise aid him/her or them for the registration his/her name or their names of all the said trade marks and do all stich deeds, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners."

Winding up of the firm by sale of its assets:

It is a matter of record that despite dissolution of the firm, because of differences between the erstwhile partners, the affairs of the firm could not be wound up. So two of the partners of the firm filed a petition before this court under the provisions of Part X of the Companies Act, 1956, for winding up of the affairs of the firm in terms of section 583(4)(a) thereof. This petition was numbered as Co. P.No.1 of 1988. By order dated November 3/5, 1988 this court permitted the group of partners (7) having controlling interest to continue the business as an interim arrangement till the completion of winding up proceedings. Subsequently, under order dated June 14,1991, this court framed the scheme for winding up of the affairs of the firm by selling its assets as a going concern. Paragraph 29 of the order contains the scheme. Clauses (i), (iii) and (v) of this scheme are material for the present purposes and accordingly are being reproduced hereunder:

"(i) The dissolved partnership firm-Mangalore Ganesh Beedi Works as a going concern shall be sold to such of its partner/s, who makes an offer of a highest price, the same not being less than the minimum (reserved) price of Rs. 30 crores (Rs. Thirty crores) within July 11, 1991, accepting further liability to pay interest at 15 per cent. per annum towards the amount of the price payable to partner/s from December 6, 1987, till the date of deposit...

(iii) If no offer for purchase of the dissolved partnership firm as a going concern, adverted to in clause (ii) above, is received within the stipulated time or if any of the offers made by the partner/s is not accepted by the court, the official liquidator shall invite offers for purchase of the dissolved partnership firm as a going concern from the public including the partners by giving publicity in three consecutive issues of two English daily national newspapers which have wide circulation in the country and one Kannada daily newspaper having wide circulation in Karnataka, the time allowed for making offers being at least 45 days between the last publication and the date fixed for receipt of the offers....

(v) If the sale of the dissolved partnership firm as a going concern in favour of any partner or partners or an outsider is accepted by the court, such offerer shall, within 60 days from the date of the acceptance of the offer, deposit with the official liquidator the price or such part of the price together with interest on the total amount of the price at 15 per cent. per annum from December 6, 1987, till the date of deposit, which may become liable to be paid to the partner or partners towards their share of the price in the partnership firm together with interest on such amount;"

Some of the partners of the dissolved firm assailed the above order before the Supreme Court by preferring special leave petition in S.L.P. No. 10680 of 1991, but the same was ultimately dismissed as withdrawn on April 8, 1994.

Pursuant to the above scheme framed by this court, several partners either individually or in groups offered their bids. The bid offered by an association of persons comprising three partners, namely, M. Vishwanath Rao, M. Jaganath Shenoy and M. Gopinath Shenoy (hereinafter referred to as the" AOPs-3") was found to be the highest being of Rs. 92 crores. Therefore, it was accepted by this court vide its order dated September 21, 1994. The said order was to the following effect:

"The highest bid amount of rupees ninety two crores is accepted and the group of persons offering the said amount are directed to deposit within 60 days from today with the official liquidator the entire amount of rupees ninety two crores together with actual profits earned from December 6, 1987 till March 31, 1994 and proportionate profit from April 1, 1994, till the date of deposit in terms of the orders of this court earlier issued in C.A. No. 313 of 1994."

At the instance of the three partners offering the highest bid, clause (1) of the order dated September 21, 1994 was amended by a subsequent order dated September 19, 1994. The modified clause (1) of the order dated September 21, 1994 reads as under:

"The highest bid amount of rupees ninety two crores is accepted and the group of partners offering the said amount are directed to deposit that part of the bid amount of rupees ninety two crores which is proportionate to the spares held by the out-going partners together with profits on the same basis from December 6, 1987, till the date of deposit, within a period of 60 days from September 29, 1994, in any of the nationalised banks in the name of the official liquidator. The rest of our order dated September 21, 1994, remains intact."

Pursuant to the above order, the AOPs-3 deposited the bid amount on November 17, 1994 with the official liquidator. As per the order passed by this court, the assets of the firm as a going concern were to be treated as having been sold to the "AOPs-3" with effect from November 21, 1994. It is again a matter of record that the business of the firm along with its assets were handed over by the official liquidator attached to this court to the AOPs-3 on January 7, 1995, vide his report 10 of 1995. The sale proceeds of the assets of the firm along with bank interest accrued thereon were distributed by the official liquidator under the orders of this court amongst the outgoing partners on February 2, 1995.

Continuance of business despite dissolution till winding up:

As already noticed, despite dissolution of the firm, for one or other reason, the business of the firm could not be wound up in terms of clause (16) of the partnership deed and the same was continued even thereafter in the normal manner under the supervision and direction of this court. This fact becomes evident from the order dated April 11, 1990, passed by the Division Bench of this court in O.S.A. No. 2 of 1989 wherein it was, inter alia, held that:

"No doubt, according to the partnership dated June 13, 1982, the partnership was to continue for a period of five years. But, it is not disputed by either side that the partners agreed that the partnership should be continued on the same terms and conditions contained in the deed of partnership for a further period of six months and even after the expiry of the further period of six months, they have continued the business."

This court in the above order had again observed that:

"Further, the business of the partnership is permitted to be continued during the pendency of the winding up proceedings. It is not disputed before us that the business of the partnership had been continued even after June 13, 1987 (sic December 6, 1987) by mutual consent in the same manner as it was being carried on before the expiry of the term of the partnership."

Keeping in view the sequence of the events as noticed above, it is quite clear that after the dissolution of the firm, its business was continued by an association of persons comprised of all the erstwhile 13 partners by using the assets as well as the name of the dissolved firm. Therefore, till the date of dissolution, the name "Mangalore Ganesha Beedi Works" was exclusively of the partnership firm. Whereas, after the dissolution, it became the name of the association of persons (i.e., AOPs-13) comprised of all the erstwhile partners of the dissolved firm, as well.

Assessment of business income:

The income of the business for the period subsequent to dissolution of the firm from December 19, 1987, till up to the assessment year 1994-95 was all through returned as income of the AOPs-13 and was accepted as such by the Department. Despite this fact, the Assessing Officer took the view that (i) the assessees were liable to pay capital gains tax on their respective shares in the sale price of the assets of the firm being Rs. 92 crores, and (ii) they were also liable to be assessed on their shares in the proportionate/notional profit for the period during which the business was run for and on behalf of the AOPs-13.

While dealing with the contentions of the assessee, the Assessing Officer rejected their objections regarding chargeability of the capital gains based on the pleas that (i) the sale was slump in nature, and (ii) the transaction amounted to their retirement from the firm/AOPs or relinquishment of their shares. The first appellate authority and the Tribunal also shared the same view. But the Vice-President of the Tribunal in his separate order gave certain specific directions for computation of capital gains. This according to the Department was contrary to law.

In the backdrop of the foregoing facts, in our opinion, the following substantial questions of law arise for our consideration-

"1. Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that capital gains arising out of the sale of the assets of the firm was assessable in the hands of the individual partners and not in the hands of the firm?

1a. Whether, at any point of time, any association of persons comprised of 7 outgoing partners had come into existence which can be said to have become owner of the assets of the firm and had sold the same to the AOPs-3?

2. Whether, on the facts and in the circumstances of the case, it can be held that the transfer of the business of the firm as a going concern in favour of the AOPs-3 was mere relinquishment of the shares held by the other partners?

3. Whether, in the facts of the present case, the Tribunal was right in concluding that the capital gains arising out of the sale of the business of the firm as a going concern was liable to be assessed in the individual hands of the erstwhile partners, except the three, who as association of persons have purchased the assets of the firm?

4. Whether the sale of the assets of the firm was a slump sale and if so, whether it was liable to capital gains tax?

5. Whether the Vice-President of the Tribunal has committed an error of law in laying down the manner in which the capital gains is to be computed?

6. Whether the Tribunal was right in holding that the income of Rs. 9,57,57,007 earned by the AOPs-13 for 234 days, i.e., till November 20, 1994, was assessable in the hands of its members?"

Question No. 1:

Before proceeding to answer this question, one has to bear in mind that "partnership" as defined in section 4 of the Indian Partnership Act, 1932 is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. This relationship may have many other attributes as agreed between the parties and are recognized under the Partnership Act. So far as relationship in association of persons is concerned, it has not been defined in any statutory provision. But the Supreme Court in the case of N.V. Shanmugham and Co. v. CIT [1971] 81 ITR 310 has held that "association of persons" as used under the Income-tax Act means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one, the object of which is to produce income, profits or gains.

Now the questions that arise are (i) whether the partnership can own properties? and if so, then (ii) whether on its dissolution it ceases to hold the said properties and the partners become owners thereof in specie to the extent of their shares, or (iii) whether despite dissolution the firm by fiction of law it continues to be the owner of the properties till the affairs of the firm are finally wound up?

So far as the right of the firm to own properties is concerned, section 14 of the Partnership Act clearly admits this proposition. This section reads as under:

"The property of the firm.--Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm."

In the case of CIT v. Dewas Cine Corporation [1968] 68 ITR 240, the Supreme Court, in recognition of the concept that a partnership can hold property, has held that:

"Under the Partnership Act, 1932, property which is brought into the partnership by the partners when it is formed or which may be acquired in the course of the business becomes the property of the partnership and a partner is subject to any special agreement between the partners entitled upon dissolution to a share in the money representing the value of the property...."

Further, there cannot be any dispute on the proposition that every dissolution must in point of time be anterior to the final winding up of the affairs of the firm. Generally, there will be a time gap between the two events. This is evident from the facts of the present case as well. The firm was dissolved on December 5, 1987, but the sale of the assets of the firm as a going concern had taken place only on November 20, 1994.

For completion of the process of winding up, the Legislature has engrafted section 47 in the Partnership Act for continuance of the partnership by creating a legal fiction. This section reads as under:

"47. Continuing authority of partners for purposes of winding up.--After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:

Provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent"

In the case of Saligram Ruplal Khanna v. Kanwar Rajnath, AIR 1974 SC 1094, keeping in view section 47 of the Indian Partnership Act the Supreme Court has held that:

"... According to section 47 of the Indian Partnership Act, 1932, after dissolution of a firm, the authority of each partner to bind the firm, and other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution but not otherwise. The word 'transaction' in section 47 refers not merely to commercial transaction of purchase and sale but would include also all other matters relating to the affairs of the partnership. The completion of a transaction would cover also the taking of necessary steps in connection with the adjudication of a dispute to which a firm before its dissolution is a party...."

In Saligram RupIal Khanna's case, AIR 1974 SC 1094, the Supreme Court has further held that:

"The proposition, in our opinion, cannot be disputed that after dissolution, the partnership subsists merely for the purpose of completing pending transactions, winding up the business, and adjusting the rights of the partners; and for these purposes, and these only, the authority, rights, and obligations of the partners continue...."

The Diviston Bench of the Kerala High Court in the case of Paulson Constructions v. CIT [1990] 181 ITR 476, while dealing with the assessment of the dissolved firm has held that:

"Section 47 of the Partnership Act says that on the dissolution of a firm, the authority of each partner to bind the firm and the other mutual rights and obligation of the partners continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution. Therefore, for realisation of the assets, discharging the liability of the firm and settling the accounts of the partners, etc., the firm will continue to exist despite the dissolution...."

Similar view has been taken by the Kerala High Court in the case Joint Receivers of United Film Exhibitors v. CIT [1989] 177 ITR 518.

In view of the above statutory provisions and the law laid down by the Supreme Court it appears reasonable to hold that though the firm stood dissolved on December 5, 1987 but for a limited purpose of winding up of its affairs, it continued to exist till its assets and business was sold as a going concern on November 20, 1994. Therefore, the firm continued to hold its properties as owner till November 20, 1994.

Since the firm remained to be the owner till November 20, 1994, the date of sale, it becomes obvious that on the sale of its assets under the orders of this court, capital gains accrued only in the hands of the firm and not in the hands of its partners. The firm stood finally wound up on February 2, 1995, when the sale proceeds were distributed amongst the partners.

Even at the cost of repetition, we reiterate that that till the sale proceeds of the assets of the firm had been distributed among the partners, the firm continued to be in existence despite its dissolution as envisaged under section 47 of the Partnership Act. Further, the records dearly spell out that none of the partners of the firm had either retired or relinquished their share in the assets of the firm during its subsistence till it was finally wound up.

It is well settled that the firm is treated as an entity distinct from the persons who constituted the firm. In the case of Bist and Sons v. CIT [1979] 116 ITR 131 (SC), it has been held that:

"It may be, as is quite often said, that a firm is merely a compendious description of the individuals who carryon the partnership business. But under the Income-tax Act, a firm is a distinct assessable entity. Section 3 of the Indian Income-tax Act, 1922 treats it as such, and the entire process of computation of the income of a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners: CIT v. A.W. Figgies and Co. [1953] 24 ITR 405 (SC)."

In the above view of the matter, we are of the considered opinion that the capital gains can be assessed only in the hands of the firm, which is a distinct taxable entity from the partners who have constituted the firm.

Re: Question No. 1a:

The assessees numbering 9 being the non-purchasing partners had raised the contention before the Tribunal that the sale was effected by an association of persons comprised of them to another association of persons comprised of the purchasing partners, namely, AOPs-3 and therefore capital gains can be taxed only in the hands of the AOPs of 9 persons. The Vice-President as well as the Judicial Members had rejected the plea by holding that there is no evidence to show the existence of the AOPs of 9 persons as claimed by the appellants which could be said to have transferred any business of the erstwhile firm to the purchasing partners. We agree with the above finding of the Tribunal. As we have already noticed in the foregoing paragraphs the assets of the firm always remained to be those of the firm itself till it was sold under the orders of this court for the purpose of winding up of the affairs of the firm. Further, after the firm was dissolved by efflux of time, the business was carried on by the partners with their mutual consent till November 20, 1994, the date on which the assets of the firm were sold to the association of persons comprised of 3 erstwhile partners. The business of the firm was carried on for the benefit of the partners and they ultimately got their share in the income earned out of such business. Therefore, there was no substance in the plea of the appellants that any association of persons comprised of 9 persons ever came into existence and capital gains in question could have been assessed only in the hands of such an association of persons.

Re: Question No.2:

This question has arisen because of the finding given by the Vice-President in para. 22.26 of his order. He has repelled the contention of the assessees that they received their sale consideration of the assets of the firm as a consequence of their retirement and therefore the same should be deemed to be compensation in lieu of surrender of their interest or rights in the firm and not consideration for sale of their partnership rights. We agree with the Tribunal that this argument is also equally fallacious because at no point of time had they either retired from the firm or surrendered their interest in the assets of the firm during its subsistence till the date of its winding up, i.e., November 20, 1994. In the present case, the firm was dissolved on December 6, 1987 and its affairs were finally wound up on February 2, 1995, when the sale proceeds had been distributed amongst the present assessees. It is not a case of retirement or surrender of interest of any of the partners of the firm.

Re: Question No.3:

From the facts hereinbefore noticed and the law on the subject, it is quite evident that in this case, the assets of the firm had been sold to an association of persons comprised of 3 partners, who were found to be the highest bidders in the auction held by this court. As of fact, the scheme for sale which was formulated by this court, under its order dated June 14, 1991, in Co. P. 1 of 1988, was not strictly in accordance with clause (16) of the partnership deed though care was taken that the right to purchase the assets of the dissolved firm should go to the partners on priority basis. But, clause (3) of the scheme very clearly provided that if the partners' offers are not found to be acceptable then the court may invite offers from the public as well by making publicity in the newspaper. From the scheme framed by this court, it was quite clear that the assets of the firm were to be sold to any intending buyer including persons who may be the partners of the firm and realisation in terms of money and distribution of sale proceeds among the partners was as per their share in the dissolved firm. In winding up proceedings of a dissolved firm, the method adopted by this court is always permissible. Even otherwise, the partners of the firm can also agree that in the event of dissolution, partners will not be entitled to distribution of assets of the firm and will be entitled only to the sale proceeds realised on actual sale of the assets of the firm.

The Supreme Court, in the case of Dewas Cine Corporation [1968] 68 ITR 240, by referring to Lindley on Partnership and relying on its earlier judgment in Addanki Narayanappa v. Bhaskara Krishnappa [1966] 3 SCR 400 has held that:

"A partner may, it is true, in an action for dissolution insist that the assets of the partnership be realised by sale of its assets, but where in satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale property is allotted, the property so allotted to him cannot be deemed in law to be sold to him."

In the present case, admittedly, no property has been allotted to any partner in satisfaction of his share. It is a case of out and out sale effected in the course of winding up proceedings.

For the aforesaid reasons, we hold that the Tribunal was not correct in concluding that the capital gains arising out of the sale of the assets of the firm as a going concern was liable to be assessed in the individual hands of the erstwhile partners except the three who as an association of persons had purchased those assets. As a necessary corollary it falls that capital gains is to be assessed in the hands of the firm for the entire consideration received by it for the sale of its assets.

In the present context itself, we may notice that the three partners, who had jointly purchased the assets of the firm, formed AOPs-3 and had filed Co. A. No. 392 of 1994 in the winding up proceedings seeking permission of the court that they may be permitted not to deposit that part of Rs. 92 crores which, on distribution of sale proceeds, will be falling to their share. The request for non-deposit of the share of the 3 purchasing partners was obviously to avoid repetition exercise of first depositing even their share in the sale consideration and the profits and then seeking repayment of the same. This court accepted the request clearly to avoid multiplicity and catering to the convenience to all concerned. By such an arrangement, no inference can be drawn that there was no sale of assets of the firm to the extent of the shares of the purchasing partners in such assets.

Re: Question No.4:

In the present case, admittedly, the assets of the firm as a going concern were sold for a consideration of Rs. 92 aares without expressly specifying the value of the individual assets of the firm which included lands and buildings, plant and machinery and the goodwill. Therefore, in a traditionally and judicially accepted sense the transaction can be said to be a slump sale. But, neither the Income-tax Act nor any judicial pronouncement declares that where sale of the assets is made for a lump sum consideration, it cannot be subject to tax under the heading "Capital gains". The law is that if individual assets can be reasonably valued for ascertaining their respective cost of acquisition, then by resorting to statutory parameters and mode of calculation devised under the head "Capital gains" in Chapter IV, the gains so computed can always be brought to tax. This aspect of law has been considered and declared to this effect by the Supreme Court in the case of CIT v. Artex Manufacturing Co. [1997] 227 ITR 260.

Keeping in view the law declared by the Supreme Court in Artex Manufacturing Co.'s case [1997] 227 ITR 260, the Tribunal has rightly rejected the contention of the assessee that the transaction in question cannot be assessed for resultant capital gains by holding that all the assets sold were capable of being appropriately valued for the purpose of computation.

Re: Question No.5:

This question has been raised in the appeal of the Department because of certain directions given by the Vice-President in his separate order though the Judicial Members in their majority view have not said anything about it. The Vice-President has dealt with this aspect in paragraphs 22.34, 22.35 and 22.36. In substance the view taken by him is (i) goodwill in reality is a component of many items, such as trade marks, trade name, know-how, etc., and thus have independent identities of their own. According to him goodwill is comprised of other items as well like trade name and copy-right. After so holding, he has directed that for the purpose of ascertaining the value of the goodwill, the Assessing Officer should adopt the following method:

"Adopting the price that has been depicted by the buyers in their balance sheet could be reasonable guide in regard to the market value of the assets at which the transfer took place. By giving a suitable reduction to the value as taken by equating with inflation rates, the value as on 1st April, 1981, could be arrived at. This could be applied even to the goodwill because, it was built up over the years but, in view of the specific definition of items whose initial cost was zero, it shall be taken at nil, the entire amount adopted for goodwill by the buyers not including therein trademarks, trade name and copyrights would be capital gain. We would direct the Assessing Officer to rework the capital gains as indicated above."

We find absolutely no ground to sustain the above direction of the learned Vice-President of the Tribunal. The Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 while dealing with the concept of goodwill has held that:

"A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated.

as the business is carried on and may be augmented with the passage of time."

In the above case, the Supreme Court after closely analysing the provisions of the then existing provisions in the Act for computation of capital gains, came to the conclusion that since the cost of acquisition of goodwill of a business was not possible of being determined because of gradual accretion with no definite date when it can be said to have come into existence, therefore, it cannot be subjected to tax under the heading "Income from capital gains".

In order to overcome the above judicial interpretation of the apex court, by the Finance Act, 1987, which came into force with effect from April 1, 1988, section 55(2)(a) of the Act was amended providing that cost of acquisition in the case of self-generated goodwill will be taken to be nil, see Notes on Clauses of the Amendment Bill). The section so amended reads as under:

"55. (2) For the purposes of sections 48 and 49, 'cost of acquisition',-

(a) in relation to a capital asset, being goodwill of a business,-

(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and

(ii) in any other case, shall be taken to be nil;"

Admittedly, the above amended provisions were applicable to the assessment year 1995-96 to which the present assessment related. Therefore, the Assessing Officer by treating goodwill as long-term capital asset subjected it to tax under the capital gains. On being challenged, the first appellate authority, being the Commissioner of Income-tax (Appeals) confirmed the assessment in this regard.

Though, the Judicial Members in their majority judgment had dismissed the appeal of the assessee in entirety the learned Vice-President has directed the Assessing Officer to compute the capital gains in relation to goodwill in the manner as noticed above.

In the case of Sumat Prasad Jain v. Sheojanan Prasad, AIR 1972 SC 2488, the apex court after referring to the above two definitions of "mark" and "trade mark" as defined in the Trade and Merchandise Marks Act has held that:

"The function of a trade mark is to give an indication to the purchaser or a possible purchaser as to the manufacture or quality of the goods, to give an indication to his eye of the trade source from which the goods come, or the trade hands through which they pass on their way to the market."

Therefore, it is clear that there is intimate relationship between the trade mark used and the product and its manufacturer since a buyer on seeing trademark on the goods decides to purchase the goods taking it to be of required quality as having been manufactured or supplied by the owner of such goods. Therefore, trademark symbolises the business reputation or goodwill of its owner and--becomes an integral part thereof.

Though a catena of decisions have been brought to our notice, like in the case of CIT v. Artex Manufacturing Co. [1997] 227 ITR 260 (SC), CIT v. Electric Control Gear Manufacturing Co. [1997] 227 ITR 278 (SC) and the earlier cases referred to therein which all related to sale of business as a going concern and the sale of assets by way of realisation sale, but in none of these cases, it has been held by the Supreme Court that goodwill cannot be independently valued for the purpose of capital gains.

Shri Udaya Holla, the learned senior advocate, appearing for the interveners, has submitted that the firm was employing specially blended tobacco in manufacturing its beedies and this know-how was an asset of the firm. In our opinion, even if it be taken to be so, this know-how can be presumed to be known to all the partners and the employees assigned with the job of blending of the raw materials. Nothing has been placed before us to show that others could not have sold beedies rolled with similarly blended tobacco. Therefore, the purchasing group of the erstwhile partners as well as the employees who continued to be in service of the purchasing group are supposed to have the full knowledge about raw materials and the preparation in which those are to be used in rolling the beedies which were to be marketed under the registered trademarks. In this view of the matter, the concept of sale and purchase of know-how for manufacturing of beedies which were being marketed by the erstwhile partnership firm is to be held as totally alien to the transfer in question. It appears to have been set up merely as a device to reduce the tax liability without having any real basis for the same.

It cannot be disputed that the goodwill comprises various components including trade mark, brand name, firm name, etc., and some of the components of goodwill can be parted as independent asset. But, at the same time, goodwill as a whole comprised of the said components can also be transferred and in such a situation the components cannot be separated so as to render goodwill into nullity. On the facts of the present case, as we have already noticed in para. 22 of the judgment in CIT v. Mangalore Ganesh Beedi Works [2003] 264 ITR 142 (Karn) (I.T.A. Nos 67-69 of 2001), all through in winding up proceedings before this court in which the sale has taken place, the goodwill was taken as the most valuable asset of the firm and therefore there was a specific direction for assessing the goodwill separately from other assets. The chartered accountants, who were asked to value the assets, had also valued the assets in the same manner. The intending purchasers had also offered their bids, though lump sum in nature, by taking into account the goodwill as the predominant asset of the firm because except for the goodwill the liability of the firm was much more than the tangible assets.

The above being the factual aspect and the concept of goodwill as judicially recognised, in our considered opinion, the learned Vice-President has exceeded his jurisdiction in directing disintegration of goodwill of the firm into various components and with further direction that the value of these components should be taken to be the value assigned to it by the purchaser in their books of account which were certainly made much after the sale in question.

Re: Question No.6:

So far as the proportionate income for 234 days is concerned, it does not require any elaborate consideration because the AOPs-13 had continued to carry on business till up to November 20, 1994 and this being a separate legal entity, proportionate income as worked out pursuant to the order of this court for this period has to be necessarily assessed only in the hands of the AOPs 13.

Accordingly, in view of our foregoing findings, the appeals filed by the assessee as well as the Department are allowed in part. The parties to bear their costs.

 

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