1996-VIL-06-ITAT-MUM

Equivalent Citation: [1996] 56 TTJ 504

Income Tax Appellate Tribunal MUMBAI

INCOME-TAX APPEAL NOS. 2633 (BOM.) OF 1989

Date: 31.07.1996

M.R. MUCHHALA

Vs

FOURTH INCOME-TAX OFFICER

For the Appellant : S.E. Dastur, A.V. Sonda & Dr. Pravin P. Shah
For the Respondent : A.K. Sahay

BENCH

O.P. JAIN, JUDICIAL MEMBER AND M.V.R. PRASAD, ACCOUNTANT MEMBER

JUDGMENT

O.P. Jain, Judicial Member - These cross__appeals arise out of the order of the Commissioner (Appeals), dated 27th February, 1989 pertaining to the assessment year 1984-85. After hearing the learned representative of the parties, the appeals are disposed of as under.

Assessee's appeal

2. The first issue relates to the addition sustained by the Commissioner (Appeals) to the tune of Rs. 18,09,893 out of the consideration received on sale of the proprietary concern of the assessee. The assessee, an individual, was carrying out proprietary business under the name and style of M.M.P. International. The business was that of a consulting and indenting agent and import and sale of machinery spare parts. Another business activity of the assessee was shareholding and salary income from a company, Muchhala Consultants Pvt. Ltd., of which he was one of the directors. The proprietary business was started during the period relevant to the assessment year 1982-83. On 23rd March, 1984, the assessee had agreed to sell the said proprietary business with effect from 26th March, 1984, as a going concern with all its assets (including the goodwill and all the import quotas and quota rights as a whole and benefits of tenancy rights in respect of the rented premises at 225 Princess Street, Bombay) and liabilities for a slump price of Rs. 18,50,001 to Muchhala Consultants Pvt. Ltd. An agreement dated 23rd March, 1984, was executed to that effect between the two parties. The assessee had been paid a sum of Rs. 25,000 out of the sale consideration before execution of the agreement and the balance amount was agreed to be paid as specified in the said agreement. On 24th March, 1984, the purchaser company had made a reference to M. Mody & Co., Chartered Accountants to work out the apportionment of the total purchase consideration of Rs. 18,50,001 to the various assets and liabilities of the business of M.M.P. International. The said Chartered Accountants had submitted a report dated 28th March, 1984, to the purchaser company wherein the apportionment was worked out as desired. In the said report, the total value of the assets after taking into consideration the liabilities was worked out to Rs. 19,14,963. Thus, the net value of the assets was more than the lump sum purchase consideration by Rs. 64,962. Thus, it was suggested that a sum of Rs. 50,000 may be set off against the goodwill of the business against the surplus of Rs. 64,962 and the net difference of Rs. 14,962 may be credited to the "Capital Reserve Account". The apportionment of the purchase consideration as suggested by M. Mody & Co., Chartered Accountants, was accepted in the meeting of the Board of the purchaser company held on 30th March, 1984. On 29th March, 1984, another agreement was executed between the assessee and the purchaser company with the intention to assign to the purchaser company the beneficial interest and goodwill of the assessee's proprietary business as also the entire interest in the tenancy of the premises at 225, Princess Street, Bombay. In this agreement, the goodwill has been valued at Rs. 50,000. This agreement also recites that no consideration has been agreed to be paid to the assessee for the transfer of the said tenancy rights.

3. During the course of the assessment proceedings, it was the case of the assessee that whole of the consideration received was a capital receipt and since all cost of acquisition of business as a going concern could not be ascertained, there will not arise any capital gains. The Assessing Officer did not agree with the submissions of the assessee. He took into consideration the break__ up of the various assets as adopted by the purchaser company in its meeting held on 30th March, 1984. He noted that in the said break__up the total value of the assets is indicated at Rs. 23,08,418 and the total liabilities are shown at Rs. 4,58,417. As against this, the assessee's balance sheet as on 24th March, 1984, shows the assets of Rs. 2,47,117 and the liabilities at the same figure. He also noted that the assessee was a debtor to the extent of Rs. 1,71,181 on the date of transfer. He, therefore, opined that for arriving at the sale consideration the assessee has taken into account the following assets, which do not appear in the balance sheet as on 24th March, 1983 :

5. The assessee appealed before the Commissioner (Appeals). It was reiterated that since the entire business was sold as a going concern for a slump price, the sale consideration received by the assessee is not taxable. The Commissioner (Appeals) observed that the reasoning and conclusions drawn by the Assessing Officer are based on misunderstanding of the facts of the case. He, however, disagreed with the stand of the assessee that no taxable income whatsoever arose out of this agreement of sale. He observed that report of the Chartered Accountants was obtained to determine the value of the business for the purpose of arriving at the purchase consideration to be agreed to. He observed that the case of the assessee must fail on the following grounds :

(i) It is not correct to say that in the present case there is a slump sale and it would not be proper to apportion the consideration to various assets sold.

(ii) It is not correct that the sale consideration received by the appellant has to be treated as capital receipt.

Dealing with the above two propositions, the Commissioner (Appeals) opined that even in cases where there is sale of the entire business as a going concern, the rule is to apportion the sale consideration to various assets sold, if such apportionment can reasonably be inferred from the facts of the case. In that connection, he drew support from the decisions of the Supreme Court in Associated Clothiers Ltd. v. Commissioner (1967) 63 ITR 224 (SC) and the case of Commissioner v. Magneeram Bangar & Co. (1965) 57 ITR 299 (SC). Referring to the valuation report of the Chartered Accountants, M. Mody & Co., dated 28th March, 1984, he opined that the same has to be treated as indicative of the market value of the assets and liabilities individually, the aggregate of which has gone into the agreement of the slump price of Rs. 18,50,001. The Commissioner (Appeals) also held that the valuation report dated 28th March, 1984, has to be treated as clarificatory of the price stated in the agreement of sale dated 23rd March, 1984, and even otherwise it serves as a scientific and reliable apportionment of the sale price into various assets. Referring to the second agreement dated 29th March, 1984, whereby goodwill and the tenancy rights were assigned to the purchaser company, the Commissioner (Appeals) noted that in this agreement the value of the goodwill had been fixed at Rs. 50,000. Thus, he concluded that it is not left to imagination to conclude that the contents of the valuation report were in contemplation as the basis of the price agreed upon in the agreement dated 23rd March, 1984, appeared in writing in the report on 28th March, 1984, and further acted upon in the agreement on 29th March, 1984. He, therefore, concluded that the computations in the valuation report are thus interpretative of price recorded in both the agreements. It was also held that the price apportioned to import entitlements in hand and the right to receive import entitlements already accrued has to be treated as trading receipts and not as capital receipts. Referring to the agreement dated 29th March, 1984, the learned Commissioner (Appeals) observed that no part of the sale price of Rs. 18,50,001 is attributable either to the goodwill of the business or the tenancy parted with by the assessee because both of them have been made the subject-matter of the second agreement and a separate consideration of Rs. 50,000 has been placed therefor. Referring to the report of the Chartered Accountants, it was observed that in the report the gross value of the total assets has been placed at Rs. 23,73,380 and out of it only a sum of Rs. 32,759 has been placed on furniture and fixtures and Rs. 7,349 on office equipments. In this view of the matter, the Commissioner (Appeals) held that only the sums of Rs. 32,759 and Rs. 7,349 should be treated as capital receipts in the hands of the assessee and the Assessing Officer was directed to work out profit under section 41(2) of the Income-tax Act and/or capital gains in relation to these amounts with reference to the actual cost/written down value as per the assessment records. The contention of the assessee that the sale consideration of Rs. 18,50,001 should be treated as a capital received was rejected. Thus the addition made by the Assessing Officer amounting to Rs. 22,47,000 (Rs. 15,72,000 + Rs. 6,75,000) was confirmed to the extent of Rs. 18,09,893 resulting in a relief of Rs. 4,37,107 to the assessee.

6. It may be mentioned that during the hearing of the first appeal, an alternative argument was advanced by the assessee that since the assessee was following cash system of accounting, it would not be justified to assess the entire sale consideration during the year under consideration. This stand of the assessee was negatived by the Commissioner (Appeals) with the observations that the question of method of accounting becomes relevant only when there is an on going continuous transaction or business. He has also observed that in the present case with the transfer agreement the business no longer subsisted as the proprietary concern of the assessee and with that went away the question of method of accounting in respect of that business.

7. The above findings are being assailed by the assessee. The submissions advanced by the learned counsel for the assessee can be summarised as follows :

(1) That the entire business of the assessee with all its assets and liabilities was sold and nothing was retained by the assessee. Thus, it was sale of a going concern for a slump price. It has been highlighted that in the agreement of sale, no value was fixed to any asset, that even the goodwill and the tenancy rights were transferred.

(2) That the Commissioner (Appeals) has erred in observing that goodwill of the concern was separately valued at Rs. 50,000. According to the assessee, the goodwill was transferred through the agreement of sale dated 23rd March, 1984, and no value was assigned to the goodwill. It was argued that since goodwill and tenancy rights are intangible assets, another agreement dated 29th March, 1984, was executed with a view to handing over such assets, although those assets already stood transferred. According to the assessee, the legal advice received was that since an agreement is being executed with a view to hand over intangible assets, some value to the transferred assets has to be fixed and for that reason the sum of Rs. 50,000 was mentioned for the goodwill. It was argued that, in fact, no value was fixed for transfer of the goodwill and the assessee did not receive anything over and above the slump price of Rs. 18,50,001. It was highlighted that price of the goodwill is included in the said price. It was also argued that by mentioning the value of the goodwill at Rs. 50,000 in the agreement dated 29th March, 1984, the overall character of the transaction of sale does not stand changed. In that connection, reference was made to the decision of the Bombay High Court in Commissioner v. Markeshari Prakashan Ltd. (1992) 196 ITR 438 (Bom). It was pointed out that the decision of the Supreme Court in Commissioner v. Mugneeram Bangur & Co. (supra), on which great reliance has been placed by the Commissioner (Appeals), was considered in this case.

(3) Since the sale was made for a slump price, the receipt was on capital account and cannot be taxed. It was also argued that the business itself is a capital asset and the sale price cannot be apportioned to various assets. In support this proposition, reliance was placed on the following decisions :

(i) Commissioner v. Narkeshawari Prakashan Ltd. (supra);

(ii) Commissioner v. Mugneeram Bangur & Co. & (Land Department) (1965) 57 ITR 299 (SC);

(iii) Commissioner v. West Coast Chemicals & Industries Ltd. (In Liquidation) (1962) 46 ITR 135 (SC);

(iv) Kastury & Sons Ltd. v. Commissioner (1965) 56 ITR 346 (Mad);

 (v) Delhi Tambaku & Udyog Ltd. v. IAC (1987) 20 ITD 718 (Del); and

(vi) ITO v. Gokul Gas (P) Ltd. (1989) 28 ITD 60 (Bom).

(4) That in the case of sale of a going concern, the difference in the net asset value of the assets transferred and the sale consideration is always adjusted in the accounts of the purchaser by way of goodwill or capital reserve. Since in the instant case, the Chartered Accountants appointed by the purchaser had estimated the value of the different assets at Rs. 19,14,963 as against the sale consideration of Rs. 18,50,001, the difference of Rs. 64,962 was adjusted as suggested by the Chartered Accountants.

(5) That the authorities below had erred in placing reliance on the report of the Chartered Accountants, M. Mody & Co., for apportioning the sale consideration to the various assets. It was pointed out that the said Chartered Accountants were not appointed by the assessee. It was also pointed out that the said Chartered Accountants were appointed by the purchaser company after the agreement of sale was executed and after the sale had become effective.

(6) That the Commissioner (Appeals) has misapplied the undermentioned decisions to the facts of the instant case, whereas the said decisions are clearly distinguishable and provide no assistance to the Revenue :

(i) Josna Bank Ltd. v. Commissioner (1974) 97 ITR 72 (Ker);

(ii) Commissioner v. Pathinen Grama Arya Vysya Bank Ltd. (1977) 109 ITR 788 (Mad);

(iii) Jayantilal Bhogilal Desai v. Commissioner (1981) 130 ITR 655 (Guj).

(7) That the Chartered Accountants, in their report, have valued the import licences on hand at Rs. 1,00,000 and the value of right to receive/apply for import licences in the future based on the part import of machinery has been valued at Rs. 14,72,000. It was contended that there was no asset in existence with regard to the right to receive/apply for import licences and as such the receipt on that account is in the realm of capital asset, i.e., deemed profit. Since the receipt is in the realm of capital field, it cannot be changed into a revenue receipt.

(8) As an argument in the alternative, it was submitted that the assessee was following cash system of accounting and in any event the entire sale consideration cannot be brought to tax during the year in issue. Filing the details of the amount received during the year in issue, available at page 41 of the assessee's compilation, it was contended that only the sum of Rs. 10,25,000 was received during the year. It was also contended that no part of the money received during the year relates to any trade asset. It was submitted that the assessee had no stock-in-trade and, therefore, no part of the amount received by the assessee is taxable.

(9) That the excess received over the value of the assets transferred can be brought to tax as capital gains. In that connection, reference was made to the Circular No. 63, dated 16th August, 1971, issued by the CBDT in connection with the notionalisation of some commercial banks. The said circular has been reproduced at pages 1 to 5 of (1971) 82 ITR (Statute section). Particular attention was invited to question 5. The question was will there be any income liable to tax as "balancing charge" under section 41(2) of the Income-tax Act, in relation to transfer of assets on which depreciation has been allowed to the existing banks in past years. In paragraph 5 of the circular, the Board has issued the following instructions :

"5. Capital gains._The existing banks will be liable to tax on the capital gains arising to them as a result of the transfer of their `undertakings' to the corresponding new banks in pursuance of the Act of 1970. For this purpose, the capital asset which has been transferred is the entire undertaking of the existing bank and not the individual assets comprising that undertaking. The amount of the capital gain will be ascertained by deducting, from the amount of the compensation, the aggregate of the cost of acquisition of the undertaking and the cost of any improvements thereto."

It was argued that since the entire business of the assessee was transferred, the excess received over the value of the assets could be charged to tax as capital gains in the manner provided in the said circular. But this exercise had not been carried out by the Revenue authorities.

8. The submissions of the assessee were opposed by the learned Departmental Representative. He has submitted that while considering the facts of the instant case, it has to be borne in mind as to what was the nature of the business that the assessee was carrying. He has pointed out that the assessee was rendering professional services as a consultant. Rendition of such services needs expertise and it depends on personal contacts and skill of the person concerned. In the course of his business, import entitlements had accrued to the assessee and it does not stand to reason that the value of such entitlements cannot be taxed. Referring to the report of the Chartered Accountants, it was argued that the said report provides a basis for valuation of the assets. He has also argued that the right to receive import entitlements is an asset and, therefore, the value of such entitlements is liable to be taxed. He has also argued that furniture and fixtures, etc. had a nominal value. It was also highlighted that the value of the goodwill was fixed by the assessee himself at Rs. 50,000 and, therefore, the transaction of sale cannot be treated as the sale of a going concern for a slump price. It was also submitted that in view of the provision contained in section 28(iiia), sale price received on transfer of the import entitlements is liable to be taxed as a revenue receipt. The learned Departmental Representative has also placed reliance on the reasons given by the Commissioner (Appeals) as also the decisions referred to by him in his order.

9. We have considered the recital submissions. The basic question that arises for decision in the instant case is whether it is a case of sale of a going concern for a slump price. The agreement of sale dated 23rd March, 1984, recites that the entire business of the assessee was agreed to be sold as a going concern with all its assets and liabilities including goodwill, all import quotas and quota rights as a whole and the tenancy rights for a slump price of Rs. 18,50,001. The assets and liabilities transferred by the assessee to the purchaser have been specified in the schedule to the agreement. In that schedule, no price has been fixed with reference to any individual asset. It may be mentioned that clause (c) of the schedule reads as under :

``(c) Import Licence for Rs. 14,06,400 (Rupees fourteen lacs six thousand four hundred only) bearing No.P/F/2029486 dated 26th March, 1982''.

9.1. Explaining the above recital, the learned counsel for the assessee has submitted that Rs. 4,06,400 is not the value of the import licence but it is the face value of the import licence. It was explained that some imports had already been made by the assessee against such licence and the value of this import licence has been estimated by the Chartered Accountants only at Rs. 1,00,000. In that connection, our attention was invited to the value estimated by the Chartered Accountants appearing at page 20 of the assessee's compilation.

10. On consideration of the agreement of sale and the recitals made therein, we are inclined to agree that it was the sale of a going concern for a slump price. A reading of the agreement of sale goes to indicate that all the assets and liabilities of the concern were transferred by the assessee for a consolidated price of Rs. 18,50,001. No asset was separately valued. This agreement, though executed on 23rd March, 1984, became effective on 26th March, 1984. Any agreement made thereafter, which does not change original conditions, will have little bearing on the transaction of sale. It is true that in the agreement dated 29th March, 1984, the assessee purports to transfer the goodwill of the concern and the tenancy rights to the purchaser and in this agreement the goodwill has been valued at Rs. 50,000. While examining the effect of the agreement dated 29th March, 1984, it has to be borne in mind that the agreement of sale dated 23rd March, 1984, had already been acted upon and had become final. Through the agreement dated 29th March, 1984, the terms of the agreement of sale have not been varied. In the given situation, we are of the opinion that the agreement dated 29th March, 1984, can have no bearing on the agreement of sale dated 23rd March, 1984, and, on the basis of the agreement dated 29th March, 1984, it cannot be held that the assets transferred by the assessee were separately valued. It is worthy of mention here that the agreement dated 29th March, 1984, itself recites that the assessee had agreed for the sale and assignment to the assignee of his business as a going concern with all its assets (including the goodwill and all import quota and quota rights as a whole) and liabilities therein for a lump sum price. It is thus evident that the assessee did not receive anything over and above the sale consideration of Rs. 18,50,001 and the agreement dated 29th March, 1984, was executed only in furtherance of the agreement dated 23rd March, 1984. Taking all these facts into consideration, we are of the considered opinion that the assessee had sold his entire business as a going concern for a slump price of Rs. 18,50,001.

11. Since it is the case of the sale of a going concern for a slump price and no part of the sale consideration is attributable to the stock-in-trade, it is not possible to hold that there was a profit other than what resulted from the appreciation of capital. We stand fortified in this view from the decisions cited on behalf of the assessee. It may be mentioned that the decisions relied by the Commissioner (Appeals) for bringing to tax the sale consideration are clearly distinguishable.

12. The Commissioner (Appeals) has placed strong reliance on the decision reported in (1974) 97 ITR 72 (Ker) (supra), (1977) 109 ITR 788 (Mad) (supra) and (1981) 130 ITR 55 (Guj) (supra). In all these cases it was found by the concerned High Courts that the entire business had not been sold at a slump price. The Commissioner (Appeals) has also placed reliance on the decision of the Supreme Court reported in (1965) 57 ITR 299 (SC) (supra). This decision has been considered by the High Court of Bombay in the case of Narkeshwari Prakashan Ltd. (supra).

13. The contention of the Revenue that in view of the provision contained in section 28(iiia) of the Act, the price received by the assessee on account of the transfer of import entitlements is liable to be taxed cannot be accepted. The said provision relates to the profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports & Exports (Control) Act, 1947. As rightly pointed out by the learned counsel for the assessee in the instant case, the sale of any such licence is not involved. The assessee has transferred the right to receive/apply for import licences in the future based on the past imports made by the assessee. Thus, there was no import licence in existence on the date of sale and the provisions of the said section are not at all attracted.

14. In view of the foregoing discussions, we are of the view that the sale consideration received by the assessee cannot be treated as a business income. We are, however, unable to agree with the alternative stand of the assessee that he was following cash system of accounting and for that reason nothing can be brought to tax in the year in issue. In our view, the Commissioner (Appeals) has given sound reasons for rejecting this stand of the assessee. Hence, the addition sustained by the Commissioner (Appeals) is hereby deleted.

15. Ground No. 2 relates to the addition of Rs. 10,000. In the agreement of sale, the assessee had agreed that for a period of three years from the date of sale of the business, he shall not carry on any other business competing with that of the purchaser. For this convenant, the assessee was to be paid a sum of Rs. 2 lakhs by the purchaser and out of it a sum of Rs. 10,000 was paid to the assessee. During the assessment proceedings it was contended that this payment was in the nature of compensation received by the assessee for restrictive covenant and, therefore, not taxable. The assessee's stand was rejected by the Revenue authorities and the sum of Rs. 10,000 was brought to tax.

16. The stand advanced before the Revenue authorities has been repeated before us and it was contended that the amount received by the assessee on account of a negative covenant is not taxable. In this connection, reference was made to the following decisions :

(1) Gillanders Arbuthnot & Co. Ltd. v. Commissioner (1964) 53 ITR 283 (SC);

(2) Commissioner v. Best & Co. (P.) Ltd. (1966) 60 ITR 11 (SC); and

(3) Commissioner v. Saraswati Publicities (1981) 132 ITR 207 (Mad).

17. The submissions of the assessee were opposed by the learned Departmental Representative.

18. Having considered the rival contentions, we find that the view which is being canvassed on behalf of the assessee is sound. In the above cited decisions it has been held that the amount received by an assessee on account of restrictive covenant is a capital receipt and hence not taxable. We, therefore, delete the addition of Rs. 10,000.

19. Grounds No. 3 and 4 relates to the charge of interest under sections 139(8) and 217 of the Act. The learned counsel for the assessee has stated that the said grounds are consequential. We, therefore, direct the Assessing Officer to grant consequential relief in accordance with law.

20. In the result, the appeal would be treated as allowed.

Revenue's appeal

21. The substantive ground of appeal reads as under :

"On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the sums of Rs. 32,759 and Rs. 7,349 representing the price attributable to the Furniture and Fixture and office equipment should be treated as capital receipt in the hands of assessee and further erred in holding that the Assessing Officer should work out profit under section 41(2) and/or capital gains in relation to this amounts with reference to the actual cost/written down value as per the assessment records."

As already observed above, the Commissioner (Appeals) has directed the Assessing Officer to work out profit under section 41(2) of the Act and/or capital gains with reference to actual cost/written down value of the furniture and fixtures as per the assessment records. The direction issued by the Commissioner (Appeals) is in tune with the legal provisions. We find no infirmity in the direction issued by the Commissioner (Appeals).

22. In the result, the appeal is dismissed.

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