Vildirect: IncomeTax-caselaws-1992-VIL-162-ITAT-AHM

1992-VIL-162-ITAT-AHM

Equivalent Citation: ITD 041, 537 TTJ 044, 383

Income Tax Appellate Tribunal AHMEDABAD

Date: 10.03.1992

INCOME-TAX OFFICER.

AHMEDABAD ENGINEERING AND SERVICES CO-OPERATIVE SOCIETY.

BENCH

Member(s) : R. L. SANGANI.

JUDGMENT

1. Out of these two appeals relating to assessment year 1984-85, ITA No. 231/Ahd./1989 which has been filed by the department is directed against the order dated 7-10-1989 passed by the Deputy CIT (Appeals), AR.I, Ahmedabad while ITA No. 2053/Ahd./89 which has been filed by the assessee is directed against the order dated 23-3-1989 passed by the CIT, Gujarat I, Ahmedabad in exercise of powers under section 263 of the Income-tax Act, 1961.

2. ITA No. 231/Ahd./1989

In this departmental appeal the following two grounds have been raised :

" (1) The learned Dy. CIT (Appeals) has erred in law and on facts in deleting the capital gains of Rs. 1,57,988.

(2) The learned Dy. CIT (Appeals) has also erred in law and on facts in deleting the unpaid sales-tax of Rs. 52,600. "

3. As regards ground No. 2 the facts are that the assessee was following mercantile system of accounting and maintained separate sales-tax account in which sales-tax collected was credited and sales-tax paid to the Government was debited and the balance was taken to the balance sheet and not to P & L A/c. There was a credit balance of Rs. 52,600 which represented unpaid sales-tax liability. The ITO disallowed this liability by resorting to the provisions of section 43B of the Act and made addition to the total income. The Dy. CIT (Appeals) has deleted the said addition and the department is now in appeal before the Tribunal.

4. The point in controversy is covered in favour of the assessee and against the department by the decision of the Tribunal in the case of Chandulal Venichand v. ITO [1991] 38 ITD 138 (Ahd.) which was based on the decision of the Patna High Court in the case of Jamshedpur Motor Accessories Stores v. Union of India [1991] 189 ITR 70. It has been held therein that the proviso inserted w.e.f. 1-4-1988 by the Finance Act, 1987 in section 43B was retrospective in operation and applied to assessment years 1984-85 to 1987-88 also. I follow said decisions and direct the ITO to verify whether sales-tax liability in question had been discharged by actual payment before due date of filing the return and then allow deduction in accordance with the principles laid down in those decisions.

5. As regards the first ground the facts are that the assessee is a co-operative society and the main business carried on by the assessee was that of purchase and distribution of molasses, coke, coal and pig iron from outside Gujarat State. The accounting year of the assessee for assessment year 1984-85 ended on 30-6-1983. The above mentioned business was carried on at Dudheshwar, Ahmedabad. In May 1980 the assessee purchased Silicate Factory situated in Industrial area, Odhav, Ahmedabad for Rs. 3,25,000 consisting of land, office building, factory, machineries and certain movables, from Ahmedabad Silicate Utpadak Sahakari Mandali Ltd. which was a co-operative society under liquidation and which acted through its liquidator in the said transaction. The vendor co-operative society had been sustaining loss and for that reason it had gone in liquidation and was required to sell the said factory. The said factory was run by the assessee in accounting years relevant to assessment years 1982-83 & 1983-84 but the assessee also sustained loss. The assessee then sold the said factory along with raw materials and unfinished products for Rs. 9,11,151 to M/s. Saraswati Chemical Industries in the accounting year relevant to assessment year 1984-85.

6. In the books of account of the assessee ending on 30-6-1981 the amount of Rs. 3,25,000 was distributed amongst several items of capital assets purchased as follows :

Rs.

(1) Land 81,500

(2) Office Building,

godown etc. 98,000

(3) Factory Building 77,000

(4) Machineries 65,000

(5) Dead stock 1,500

--------------------

3,25,000

--------------------

The written down value in the books of account on the last day of the accounting year relevant to assessment year 1983-84 came to Rs. 3,00,278. The depreciation that had been allowed by the Assessing Officer during intervening years came to Rs. 24,722. The assessee appropriated sale consideration of Rs. 9,11,151 received by the assessee on sale of capital assets to various items and the surplus, according to the assessee, was Rs. 1,57,980. According to the assessee this surplus represented value of goodwill and as such was not assessable to capital gains. The Assessing Officer did not accept the submission of the assessee. He held that the said amount represented capital gains on sale of the factory by the assessee and brought the said amount to tax as capital gains. The assessee filed appeal before the Dy. CIT (Appeals) who deleted the addition on the basis of decisions in the cases of CIT v. Mugneeram Bangur & Co. [1965] 57 ITR 299 (SC), Sarabhai M. Chemicals (P.) Ltd. v. P.N. Mittal, Competent Authority, IAC [1980] 126 ITR 1 (Guj.), Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.). According to him, these decisions laid down that when there was a slump sale, no capital gains could be assessed. The department is now in appeal before the Tribunal, and above mentioned ground No. 1 has been raised.

7. It was submitted on behalf of the department that the amount of Rs. 1,57,980 represented capital gains and had been rightly brought to tax by the ITO. It was submitted that decisions on which the Dy. CIT (Appeals) had relied, pertained to balancing charge under section 41(2) and were not applicable when the question to be considered was that of capital gains and not balancing charge. It was pointed out on behalf of the department that in some of those decisions it has been expressly stated that in a situation like the present one, capital gains would be chargeable.

8. The submission on behalf of the assessee, on the other hand, was that what was transferred by the assessee was the business as a whole which was capital asset but capital gains would not be chargeable because of the fact that the computation provisions contained in section 48 would not become applicable because of the fact that the surplus amount represented value of goodwill for which no cost of acquisition could be conceived. Reliance was placed on the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294.

9. I have considered the rival submissions and facts on record. The assessee has filed copy of document evidencing transfer of assets for Rs. 9,11,151. In fact in this document three parties have been mentioned viz. Ahmedabad Silicate Utpadak Sahakari Mandali Ltd. (in liquidation) from whom the assessee had purchased the assets in question, the assessee and M/s. Saraswati Chemical Industries (purchaser). In the opening portion of this document there is a recital to the effect that the society in liquidation had originally owned the property in question and that the said society had sold the said property along with certain movables for Rs. 3,25,000 to the assessee in May 1980 and that the assessee had sold the said property along with certain movable properties to above-mentioned purchaser M/s. Saraswati Chemical Industries for Rs. 9,11,151. In one of the clauses it has been expressly mentioned that Rs. 5,11,151 out of sale consideration of Rs. 9,11,151 represented the price of the property that has been earlier purchased by the assessee from the society in liquidation and had been sold to the purchaser ---- M/s. Saraswati Chemical industries. It is not clear from the document as to how this figure was arrived at. The learned counsel for the assessee has stated that figure in that clause should have been Rs. 9,11,151. This cannot be accepted.

In the context of the recital in that clause, the figure could not have been Rs. 9,11,151. Nothing more need be stated in that connection. It is mentioned in the agreement that the society in liquidation had received the purchase price of Rs. 3,25,000 from the assessee and that the assessee had also received Rs. 9,11,151 from the purchaser and that the liquidator of the co-operative society in liquidation and the assessee company were confirming the sale in favour of the purchaser. Thereafter there are other clauses which pertain to obligation of the liquidator as well as the assessee to co-operate the purchaser in execution of further documents if necessary and to take further action which would be necessary regarding the said transaction.

10. It is clear from the above-mentioned document that the entire factory which had closed down had been purchased by the assessee from the society in liquidation for lump sum consideration of Rs. 3,25,000. The assets which were purchased consisted of land, office building, godown etc. factory building, machineries and some dead stock for which the assessee made entries in its account books. (The value of dead stock was very negligible i.e. Rs. 1,500). The same factory consisting of land, office bldg., godown, factory bldg., machinery along with certain raw materials and/or unfinished products had been sold to the purchaser. The value of the raw materials and/or unfinished products was, according to the assessee, Rs. 3,90,554.15. It is clear that the balance of Rs. 5,20,597 (Rs. 9,11,151 less Rs. 3,90,554) represented the price of the factory which had been purchased earlier by the assessee from the society in liquidation. The transfer fees of Rs. 65,000 which was paid to GIDC and which is mentioned in the computation by the assessee has not been doubted by the ITO and was certainly deductible. The balance would come to Rs. 4,55,597 from which cost of acquisition of Rs. 3,25,000 was deductible for as certaining capital gains. The capital gains thus came to Rs. 1,30,597. The surplus has been worked out by the assessee at Rs. 1,57,980 and the assessee has claimed that it represented value of goodwill. The submission of the assessee that this amount represented value of goodwill cannot be accepted. This is because the society in liquidation from whom the assessee had purchased, was sustaining loss when that society was owner of the factory and the assessee also sustained loss after the assessee became owner thereof. The appreciation in value is not because of introduction of element of goodwill but because of appreciation of the value of the assets themselves. It is for this reason that the surplus represented capital gains. It was submitted on behalf of the assessee in the alternative that the surplus would represent value of invisible or intangible assets which were transferred. This submission also cannot be accepted in view of the fact that in the documents which were executed by the parties there is no mention of any invisible or intangible asset. No material has been brought on record to indicate that any assets other than the assets referred to above had been transferred by the assessee. A vague assertion of this nature that the surplus represented value of certain intangible or invisible assets cannot be accepted. On the facts and circumstances of the case the surplus would represent capital gains derived by the assessee from sale of assets which had been earlier purchased by the assessee.

11. Even when the present transaction is regarded as that of slump sale, the assessee cannot escape from the liability for capital gains. When there is a slump sale, the provisions of section 41(2) may not be attracted. However the provisions regarding the capital gains would certainly be attracted. This is because the business of the undertaking which is sold together with its assets and liabilities represent capital asset. It is only when the assessee can show that the cost of acquisition cannot be conceived in respect of assets which are subject-matter of transfer that the principle laid down by the Supreme Court in the case of B.C. Srinivasa Setty would be applicable. The decision in the case of Artex Mfg. Co. on which the assessee has relied, is an authority for the proposition that when the entire business of the undertaking is sold together with its assets and liabilities for a slump price, and when price is not fixed item-wise of the assets comprised in the business, provisions regarding balancing charge under section 41(2) would not be attracted. This decision is not an authority for the proposition that in the case of slump sale, provisions regarding capital gains would not be attracted. In fact, it is made clear in said decision that provisions regarding capital gains would be attracted. I accordingly hold that the surplus of Rs. 1,30,597 mentioned above would represent capital gains on transfer of capital assets mentioned in the document in question. The order of the Dy. CIT (Appeals) on this point is set aside and the order of the ITO bringing capital gains of Rs. 1,57,597 to tax is modified and ITO is directed to adopt Rs. 1,30,597 as capital gains.

12. and 13. [These paras are not reproduced here as they involve, minor issues]

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