2001-VIL-164-ITAT-AHM
Equivalent Citation: ITD 081, 482, TTJ 078, 434,
Income Tax Appellate Tribunal AHMEDABAD
Date: 23.01.2001
INDUSTRIAL MACHINERY ASSOCIATES.
Vs
COMMISSIONER OF INCOME TAX.
BENCH
Member(s) : T. N. CHOPRA., T. K. SHARMA.
JUDGMENT
Per Shri TN. Chopra, Accountant Member-This appeal filed by the assessee is directed against the order of the CIT(A) dated 10-2-2000 for assessment year 1993-94.
2. The main ground involved is against the addition of Rs. 1,02,97,689 on account of short-term capital gain on the sale of business undertaking of the assessee as a going concern.
3. The assessee firm was engaged in the business of manufacture of components for pharmaceuticals equipments upto 31-12-1992 and w.e.f. 1-1-1993 it sold the entire business undertaking as a going concern, lock stock and barrel, at a slump price of Rs. 1.25 crores to Shah & Parikh Agency Pvt. Ltd. as per agreement dated 31-12-1992 entered into by the assessee firm with the said company. Clause (1) of the agreement dated 31-12-1992 reads as under:
"1. The vendor shall sell and purchaser shall purchase the entire business undertaking of the vendor under the name Industrial Machinery Associates as a going concern including leasehold land, buildings, plants and machinery, goodwill, electrical fittings and equipments, furniture and fixtures and dead stock and vehicles, located at 87/P, Green Space Between 87/P, 88,96 & 107, GIDC Industrial Estate, Odhav, Ahmedabad 382 415.
The intention between the parties is that the entire undertaking with all its assets and liabilities, rights and obligations secured and unsecured loans, current assets and current liabilities except certain liabilities stipulated hereinafter shall in terms of this agreement be transferred to the purchaser. The sale and purchase shall be together with present arrangement and obligations, licences, quotas etc., relating to the undertaking to be transferred."
4. Clause 3 of the agreement provides for payment of sale consideration of Rs. 1.25 crores agreed as under:
"The consideration payable in respect of the above shall be as under:
(a) Allotment of 10,000 equity shares of the face value Rs. 100 at a premium of 400 per share in the capital of the purchaser.
(b) Allotment of 3500 8% Non-Cumulative Redeemable preference shares of face value of Rs. 100 each Redemption to be effected in 5 yearly instalments.
(c) Issue of 4000 special Promissory Notes of Rs. 100 cash, repayable between 6th to 12th year of its issue at a premium".
The purchaser company Shah & Parikh Agencies Pvt. Ltd. is incorporated on 25-10-1985 and took over the business undertaking of the assessee as a going concern along with tangible and intangible assets as well as liabilities of the undertaking. The Assessing Officer proceeded to compute the capital gain on the slump sale amounting to Rs. 1,02,97,689 and added the said amount to the total income. The computation of capital gain has been made by the Assessing Officer on the basis of the balance sheet of the business undertaking of the assessee-company as on 31-12-1992 as under:
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Liabilities
Loans (secured & unsecured) Rs. 34,35,839.00
Creditors Rs. 52,75,647.00
Other liabilities Rs. 7,02,088.00
Advance received from customers Rs. 22,09,443.00
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1,16,23,018.00
Assets
Stock Rs. 1,07,12,874.00
Fixed assets Rs. 14,43,603.00
Debtors Rs. 3,78,014.00
Cash & bank balances Rs. 64,170.00
Loans &,advances Rs. 11,43,667.00 Rs. 1,37,42,329.00
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Net asset value Rs. 21,19,31 1.00
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The Assessing Officer observed that the aforesaid net asset value of the undertaking is attributable to stock in trade held by the assessee firm as on 31-12-1992. Treating the stock-in-trade as a short-term capital asset, the Assessing Officer computed the short-term capital gain on the slump sale as under:
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Sales consideration on sale of
Indl. undertaking as a going
concern Rs. 1,25,00,000
Less: Cost of acquisition of
asset (Net assets value) Rs. 21,19,311
Less: Expenses incurred
on sale of it
(stamp duty) Rs. 83,000 Rs. 22,02,311
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Short-term capital gain Rs. 1,02,97,689
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Aggrieved the assessee carried the matter in appeal before the CIT(A). The ld. CIT(A) endorsed the view taken by the Assessing Officer and held that the computation of capital gain is in accordance with the computation provision contained under section 48 of the Income-tax Act and the decision of Hon'ble Supreme Court in the case of CIT v. B.C Srinivasa Setty [1981] 128 ITR 294 is not applicable in the instant case. The CIT(A) observed that there was no difficulty regarding the determination of cost of acquisition of the business undertaking as a going concern since the same is ascertainable from the balance sheet at an amount of Rs. 21,19,311. With regard to the date of acquisition of the asset the CIT(A) observed that since the capital gain arising in the transaction is attributable to stock in trade, it has correctly been treated as short-term capital gain by the Assessing Officer.
5. Aggrieved with the order of the CIT(A) the assessee has come up in appeal before us. Shri J.P. Shah, the ld. counsel the assessee argued that once the revenue has accepted that the business undertaking has been sold by the assessee as a going concern and it is a case of slump sale as per the definition contained under section 2(42C) introduced w.e.f. 1-4-2000 the transaction in question would be beyond the purview of taxation under section 45. The ld. counsel argued that section 50B introduced by the Finance Act, 1999 w.e.f. 1-4-2000 brought the transaction of slump sale within the purview of capital gains under section 45 w.e.f. assessment year 2000-01 and since the transaction in question pertains to assessment year 1993-94, no capital gains tax would be chargeable by invoking the provisions of section 50B. According to the ld. counsel section 50B constitutes a self contained code for levy and computation of capital gains on the transaction of slump sale for assessment year 2000-01 onwards. Referring to Board's Circular No. 779, dated 14-9-1999 which explained the provisions of Direct Taxes inserted by the Finance Act, 1999 the ld. counsel referred to paras 56.4 and 56.5 of the circular which indicate that the amendments concerning amalgamation-demerger and slump sale inserted by the Finance Act, 1999 would take effect from 1-4-2000 and will accordingly apply to the assessment year 2000-01 and subsequent years. The ld. counsel further argued that a business undertaking as a going concern constitutes integrated amalgamation of tangible and intangible elements and the going concern, even though it is admittedly a capital asset, is characterised by consent evolution and growth and it is not possible to compute cost of acquisition, cost of improvement as well as date of acquisition which are the basic and fundamental factors for applying the computation provision contained under section 48. The ld. counsel, placing reliance upon the Supreme Court decisions in B.C. Srinivasa Shetty's case and Sunil Sidharthbhai v. CIT [1985] 156 ITR 509 argued that since computation provisions failed in the instant case, the transaction falls outside the scope and ambit of capital gains taxation. The ld. counsel further placed reliance on the following decisions in support of his contentions:
1. Evans Fraser & Co. Ltd. v. CIT [1982] 137 ITR 493 (Bom.).
2. CIT v. K.P. V Shaikh Mohammed Rowther & Co. 1995 Tax LR 675 (Mad.).
3. Syndicate Bank Ltd v. Addl CIT [1985] 155 ITR 681 (Kar.).
4. Kishorechand K Bansal v. Dy. CIT [IT Appeal No. 5108 (Ahd.) of 1996]. Assessment year 1993-94 Ahmedabad Bench.
5. CIT v. Artex Mfg. Co. [1997] 227 ITR 260 (SC).
6. CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (SC).
The ld. counsel strongly urged that de hors section 50B, slump sale would be outside the purview of capital gains tax under section 45. In the written submissions submitted during the course of hearing it has been further argued by the ld. counsel that the sale consideration of Rs. 1.25 crores has been paid by way of allotment of 10,000 equity shares of the face value of Rs. 100 per share at a premium of Rs. 400 per share in the capital of the purchaser M/s. Shah & Parikh Agencies Pvt. Ltd. as well as preference shares and promissory notes. It is argued that the actual value of the consideration received by the assessee would be considerably less than the value indicated in the agreement as above particularly looking into the fact that the purchaser company Shah & Parikh Agencies Pvt. Ltd. has been incorporated on 25-10-1985 and the premium of Rs. 400 per share in the case of a private limited company does not represent real and substantial value of the share. On this ground it is argued that the sale value of the consideration adopted at Rs. 1.25 crores does not represent the real value. The ld. counsel argued that the action of the CIT(A) in sustaining the computation of short-term capital gain is factually and legally unjustified and deserves to be deleted.
6. Shri S.M. Dubey, the ld. D.R. supporting the order of the ld. CIT(A) strongly urged that section 50B is retrospective in nature and would apply for assessment year 1993-94 under appeal. According to the ld. D.R. section 50B is merely a procedural section and section 45 brings to charge the profit realised on transfer of a capital asset. Relying upon the decision of Supreme Court in the case of Rustom Cavasjee Cooper v. Union of India AIR 1970 SC 564 the ld. D.R. argued that the business undertaking as a going concern is a capital asset in terms of the provision contained under section 2(14) and excess realisation in transfer thereof is therefore liable to capital gains under section 45. The ld. D.R. placed reliance on the decision of Kerala High Court in the case of CIT v. EX Periera & Sons (Travancore) (P.) Ltd [1990] 184 ITR 461 in support of his contention that profit realised on sale of a going concern is liable to capital gains.
7. The main thrust of the argument made by the ld. D.R. is that section 50B is merely a clarificatory and declaratory provision and has been introduced to remove difficulties regarding computation of capital gain in respect of slump sale and the provision is therefore retrospective in character. He pressed into service the decision of Gujarat High Court in the case of CIT v. Chandulal Venichand [1994] 209 ITR 7 wherein it has been held that a statutory provision must be so construed as to avoid absurdity and mischief and that a clarificatory and explanatory provision should normally be interpreted to have retrospective effect. The ld. D.R. argued that adopting the aforesaid rule or interpretation, the proviso to section 43B of the Income-tax Act, 1961, introduced w.e.f. 1-4-1988 has been given effect retrospectively w.e.f. 1-4-1984 which is the date when section 43B came into operation. The ld. D.R. added that the interpretation has been upheld by the Hon'ble Supreme Court in the case of Allied Motors (P.) Ltd v. CIT [1997] 224 ITR 677. Concluding his arguments the ld. D.R. urged that the action of the CIT(A) in upholding the levy of short-term capital gain in the instant case deserves to be sustained.
8. We have given our thoughtful consideration to the rival contentions made by the Id. representatives of both sides and also gone through carefully the various judicial pronouncements cited before us. The basic issue which arise for consideration before us are two fold, (i) Firstly whether section 50B, introduced w.e.f. 1-4-2000 is retrospective. If the answer is yes, the assessee would obviously be liable to capital gains under section 45 r.w.s. 50B, (ii) If section 50B is held to be prospective, it would not apply for assessment year 1993-94 under appeal. In that case the question would arise whether the slump sale of a going concern would be chargeable to capital gains tax and whether capital gains could be computed by applying the computation provision contained under section 48.
9. Before we consider the aforesaid questions, it may be pointed out that it is common ground in the instant appeal that the business undertaking of the assessee firm has been sold lock, stock and barrel by way of a slump sale and no part of the lump sum sale consideration is attributable to specified assets of the business undertaking. This is admittedly not the case of a disjunctive sale inasmuch as the business undertaking has not been sold by any itemised value or item by item price fixed for the different assets of the firm. The entire business of the undertaking together with the assets and liabilities are sold for a lump sum consideration of Rs. 1.25 crores to be paid by the vendor company in the form of shares and pronotes as detailed in the clause 3 of the agreement. Under these circumstances, applying the ratio of Supreme Court decision in Artex Mfg. Co.'s case and Electric Control Gear Mfg. Co.'s case cited at the Bar the surplus realised by the slump sale was not assessable under section 41(2) and the issue of levy of capital gains under section 45 would have to be decided on the basis of the slump price for the entire business undertaking as a going concern.
10. Now coming back to the first basic question concerning the retrospective operation of section 50B arising in the present appeal it would be useful to reproduce the provision of section SOB introduced by the Finance Act, 1999, w.e.f. 1-4-2000:
(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place:
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the 'net worth' of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288 indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the-case may be, has been correctly arrived at in accordance with the provisions of this section.
Explanation 1--For the purposes of this section, 'net worth' shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account: provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing net worth.
Explanation 2--For computing the net worth, the aggregate value of total assets shall be-
(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (c) of item (i) of sub-clause (c) of clause (6) of section 43; and
(b) in the case of other assets, the book value of such assets.
Explanations 1 and 2 above have been substituted in place of the earlier Explanation, by the Finance Act, 2000, w.e.f. the same date on which section 50B comes into force i.e., April 1, 2000. With the introduction of section 50B, the legislature simultaneously inserted clause (42C) after clause (42B) of section 2 by the Finance Act, 1999 containing the definition of slump sale which reads as under:
"(42C) 'Slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale."
Amendments were correspondingly made by the Finance Act, 1999 by introducing sub-item (C) after sub-item (B) of item (i) of sub-clause (c) of clause (6) of section 43 providing for computation of written down value in the case of a slump sale. From the aforesaid set of provisions it clearly emerges that section 50B along with the ancilliary sections has been introduced by the Legislature by the Finance Act, 1999 by way of a special provision for levy and computation of capital gains in case of slump sale. In our judgment section 50B is a substantive provision which specifically brings to charge profits arising from the slump sale and enacted a deeming provision which lays down that such profits arising from the slump sale would be deemed to be the income of the previous year in which the transfer took place. The provision essentially deals with substantive rights of the subject and imposes new burdens. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. In the instant case the provision has been expressly enacted by the Legislature prospectively w.e.f. 1-4-2000. Board's Circular No. 779, dated 14-9-1999 specifically indicated in para 56.5, as reproduced above, that the amendments in relation to amalgamation, demerger and slump sale would apply to the assessment year 2000-01 and subsequent years.
11. We have already mentioned above that Explanations (1) and (2) below section 50B have been substituted in place of the earlier Explanation originally inserted by the Finance Act, 1999 which read as under:
"For the purposes of this section, 'net worth' means the net worth as defined in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986)."
Under the Sick Industrial Companies Act section 3(1)(ga) defines the expression 'net worth' as the sum total of the paid up capital and free reserves. This definition of 'net worth' had to be modified since the slump sale may be of a unit or division which has no separate share of capital or reserves and further the definition of net worth appearing in SICA will have no application to non-corporate entities effecting slump sale. To overcome these difficulties definition of 'net worth' has been modified by the Finance Act, 2000. The Circular No. 794, dated 9-8-2000 issued by the Central Board of Direct Taxes for explaining the various amendments deals with the modification in the definition of 'net worth' in case of slump sale in para 29 of the circular and sub-para (3) thereof reads as follows:
"This amendment takes effect retrospectively from the 1st day of April, 2000, and shall apply in relation to the assessment year 2000-01 and subsequent years."
From the aforesaid circulars issued by the CBDT it is thus manifestly clear that section 50B introduced by the Legislature for levy and computation of capital gains in slump sale is effective from assessment year 2000-01 and subsequent years and would not apply for the earlier assessment years. The contention of the ld. D.R. regarding retrospective operation of section 50B and its applicability to assessment year 1993-94 under appeal is therefore contrary to express legislative intendment and is liable to be rejected. In our opinion section 50B would not apply for assessment year 1993-94 under appeal.
11. Apart from the aforementioned Board Circulars expressly providing for retrospective operation of section 50B, in our considered opinion section 50B is intrinsically a charging section which provides that 'any profit or gain arising from the slump sale....................... shall be chargeable to income-tax as capital gains . ...................... The phraseology used by the legislature while enacting section 50B(i) is strikingly similar to the language used in section 45 which is undoubtedly a charging section. If section 45 had already brought within its sweep the slump sale, there was obviously no occasion for the legislature to enact a fresh provision namely section 50B providing for treating the profits on slump sale as chargeable to income-tax as capital gains. We are not inclined to attribute tautology to the Parliament by treating the above provision as a mere superfluity. It is relevant to mention here that the legislature has in fact brought into the statute by the Finance Act, 1999 a set of provisions for levy and computation of capital gains on slump sale. Sub-section (1) of section 50B providing for charging of profits of slump sale as capital gain, is followed by sub-section (2) which is a deeming provision treating the net worth of the business undertaking as the cost of acquisition and cost of improvement for the purposes of sections 48 and 49. It further provides that benefits of indexing as per second proviso to section 48 would not be given for computing capital gain on slump sale. Both the Explanations appended to section 50B with retrospective effect from 1-4-2000 define the net worth of the undertaking as the difference between the total assets and liabilities of the undertaking on the date of sale. In the definition section 2 of the Income-tax Act, 1961 a new sub-section (42C) has been introduced defining slump sale w.e.f. 1-4-2000. In the back drop of the aforesaid a mandatory provision introduced by the legislature to levy capital gain on slump sale, and keeping in view the intrinsic nature and character of the newly introduced provision as a self contained code, we have no hesitation in holding that the provisions are to operate prospectively w.e.f. 1-4-2000 and would not apply for the assessment year 1993-94 under appeal. The ld. D.R. has cited the Supreme Court judgment in Allied Motors (P.) Ltd.'s case, renders in the context of section 43B, in support of his contention that section 50B is a clarificatory provision and has retrospective operation. The contention of the ld. D.R. is entirely misconceived. The Supreme Court held in Allied Motors (P.) Ltd 's case that second proviso to section 43B is a curative amendment introduced by the legislature to remove procedural difficulties in effectuating the provisions of 43B and hence has retrospective effect. Section 50B on the other hand, has the trappings of a charging section and brings the slump sale within the tax net. Therefore it is legally impermissible to infer retrospectivity about such provision particularly when the Board Circulars No. 779, dated 14-9-1999 and No. 794, dated 9-8-2000 quite categorically state that the section would be operative from assessment year 2000-01. The contention of the ld. D.R. is therefore rejected.
12. Now coming to the second question whether slump sale would be liable to capital gains under section 45, we have considered the rival submissions. For the levy of capital gains under section 45 three ingredients should coexist. (1) There should be a capital asset. (2) There should be transfer of such capital asset and (3) profit or gain must arise from the transfer of such capital asset. So far as the first two ingredients are concerned no dispute has been raised on behalf of the assessee that a business undertaking as a whole would constitute a capital asset within the meaning of section 2(14) and further that the agreement dated 31-12-1992 for transfer of the business undertaking as a going concern constitutes transfer of a capital asset as per the definition contained under section 2(47) of the Income-tax Act. However with regard to the third ingredient regarding profits or gains arising from the transfer of the whole business undertaking as a going concern it has been argued that no part of the sale consideration is indicated against different and definite items having regard to their valuation on the date of sale and the agreed price cannot be apportioned on capital assets in specie. What is sold in the case of a slump sale is not individual items of property forming part of the aggregate but the capital asset consisting of the business of the whole concern or undertaking. The provisions concerning computation of capital gains as contained under section 48 contain three basic elements viz., cost of acquisition and cost of improvement as well as date of acquisition for working out the capital gains. In the case of sale of a going concern, these essential ingredients are not ascertainable and therefore computation provisions would be incapable of computing the capital gains. The charging section and the computation provisions together constitute an integrated fiscal code. In the present case computation provisions contained under section 48 fail and therefore slump sale is not intended to fall within the purview of charging section.
14. Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act whereunder each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. Referring to the fundamental integrality of the statutory scheme provided for capital gains, the Supreme Court observed in B.C Srinivasa Setty's case at page 299 of the report:
"The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. An ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head."
15. A similar proposition has been reiterated by the Hon'ble Supreme Court in the case of Sunil Sidharthbhai wherein it has been observed that the provision of section 48 is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45 and where section 48 cannot be effectuated, such a case must be regarded as falling outside the scope of capital gains taxation altogether.
16. A business undertaking as a going concern includes all rights, assets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as part of organization including the potentiality of the organization to grow. It contains a variety of elements both tangible and intangible. It remains in-substantial in form and nebulous in character. A going concern is a dynamic concept characterised by perennial change influenced by socioeconomic ecology. A going concern is essentially a functioning living organism possessing attributes of vitality, growth and evolution. Obviously it would not be possible to conceptualise the cost of acquisition of such a going concern as well as date of acquisition thereof. If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains.
17. We may at this stage refer to the decision of the Bombay High Court in Evans Fraser & Co. Ltd.'s case, where the ratio of the decision in B.C Srinivasa Setty's case has been extended to the goodwill which had been acquired by the assessee on payment of consideration. The Bombay High Court held that sale of such a goodwill would be outside the purview of section 45 since its cost of improvement cannot be determined. Of course the decision has been dissented from by the Hon'ble Kerala High Court in Parthas Trust v. CIT [1988] 173 ITR 615 wherein it has been held that the goodwill was purchased from a previous owner of the business for a known consideration and a known date, the surplus realised on the sale of goodwill is to be assessed as capital gains under section 45. Be that as it may be looking to the nature and character of the capital asset being the going concern in the instant case we feel that the slump sale consideration realised by the assessee would be outside the purview of capital gains under section 45. The two decisions cited by the Id. counsel, Syndicate Bank Ltd.'s and K.P. V Shaik Mohammed Rowther & Co.'s case are direct authorities in support of the proposition that slump sale of a going concern is beyond the purview of section 45.
18. The ld. D.R. has cited the decision of Kerala High Court in F.X. Periera & Sons (Travancore) (P.) Ltd's case. The facts and issues involved in the said decision are distinguishable. The main question involved in the said case was the date of transfer of the business undertaking and the year in which transfer has taken place. The assessee-company in that case executed an agreement on 12-1-1956 whereunder the Government was competent to run the factory as absolute owner. On the failure on the part of the Government to fulfil certain obligations under the agreement, the assessee instituted a suit for recovery of the properties. Finally the matter was compromised and sale deed was executed on 17-4-1971. The High Court held that the business was sold as a going concern to the Government on April 14, 1971 and not on 12-1-1956. The issue regarding levy and computation of capital gains under sections 45 and 48 was not involved and nor it was considered by the Kerala High Court. The decision therefore does not help the revenue.
19. Lastly we may refer to computation of capital gains as made by the Assessing Officer in the instant case. The Assessing Officer has broadly applied the provisions of section 50B and worked out the net worth of the company on the basis of the balance sheet as on 31-12-1992 the date of slump sale. The capital gain has been arrived at an amount of Rs. 1,02,97,689 as short-term capital gain on the ground that it relates to stock-in-trade. The computation is on the face of it factually and legally erroneous. Stock-in-trade, as pointed out by the ld. counsel, is not a capital asset as per the provisions of section 2(14). In any case the net value of the undertaking worked out by the Assessing Officer on the basis of the balance sheet as on 31-12-1992 cannot be construed as cost of acquisition as per the provisions of section 48. Balance sheet of the business undertaking as on the date of transfer viz., 31-12-1992 reflects the book value of tangible assets and tangible liabilities which include inter alia WDV of depreciable assets. Such computation of cost of acquisition would obviously be contrary to the computation provisions contained under sections 48 and 49. Regarding date of acquisition, this essential facts is truly unascertainable and understandably no attempt has been made by Assessing Officer to identify the same. The Assessing Officer has sought to overcome the difficulty by treating the surplus realisation as attributable to stock-in-trade and treating the same as short-term asset. The entire approach of the Assessing Officer is contrary to computation provisions contained under sections 48 and 49 and amply demonstrate the inherently unworkable nature of these provisions in relation to slump sale. What has been sold is the entire business undertaking as a going concern. Cost of acquisition, cost of improvement as well as date of acquisition of the going concern are not capable of determination. Hence computation provisions fail and no capital gain would be chargeable under section 45. If the law fails to bring the subject within its letter, the department cannot succeed with the argument that the subject falls within the spirit of the law. We have already discussed herein before that in the absence of the three essential ingredients namely cost of acquisition, cost of improvement and date of acquisition, which are fundamental to the computation provision under section 48, the slump sale is outside the purview of section 45.
20. Regarding the reliance placed by the ld. D.R. on the decision of Supreme Court in Artex Mfg. Co.'s case, we may point out that this decision has been cited by the ld. counsel also in support of assessee's case. In this case the main question which fell for consideration was whether section 41(2) can be held to be applicable in the facts of the case whereunder the assessee firm sold the business undertaking as a going concern to\a private limited company. The Hon'ble Supreme Court relying upon the decision of the Privy Council in Doughty v. Commissioner of Taxes [1927] AC 327 and its earlier decisions in CIT v. West Coast Chemicals & Industries Ltd. [1962] 46 ITR 135 and CIT v. Mugneeram Bangur & Co. (Land Apartment) [1965] 57 ITR 299 held that the sale transaction was not a slump sale in the facts of the case and the difference between the actual cost and WDV of assets was assessable as business income under section 41(2) and excess of sale consideration over the cost price of the assets was assessable as capital gains. The Supreme Court further held that the assessment is to be made in the status of Body of Individuals and not as a registered firm. In the instant case before us the transaction is admittedly a slump sale and the issue whether surplus realisation on the slump sale is to be assessed in the hands of the registered firm or Body of Individuals as held by the Hon'ble Supreme Court has not been raised before us by either side. The Supreme Court decision therefore, rendered in the context of its own facts and circumstances does not help the case of the revenue before us.
21. For the reasons discussed above, we hold that no capital gains is exigible under section 45 and therefore the addition of Rs. 1,02,97,689 made by the Assessing Officer as short-term capital gains is hereby deleted.
22. The next effective ground raised vide ground No. 9 is against the disallowance of 1/5th of the car expenses. No arguments have been addressed on this ground before us. The disallowance upheld by the CIT(A) is fair and reasonable and is confirmed. This ground is dismissed.
23. Ground No. 10 is against the addition of Rs. 6,500 under section 68 being the credit in the account of Shri Dinesh C. Majumdar. The CIT(A) has confirmed the addition on the ground that no confirmation from the creditor has been furnished. The assessee has merely filed a copy of account signed by Shri K.D. Majumdar, son of the assessee. No arguments have been addressed before us by either side regarding the ground. We see no good reason to interfere with the conclusion of the CIT(A) on the issue.
24. The next ground being ground No. 11 is against the disallowance of the claim of depreciation of Rs. 3,32,951. The claim of depreciation has been disallowed by the revenue authorities on the ground that the entire block of assets had been sold during the year and in view of the, definition of WDV, as contained under section 43(6) since the assets have been sold away there is no occasion for allowing any depreciation to the assessee. The ld. representative of the assessee in fact conceded the position before the ld. CIT(A). This ground is therefore dismissed.
25. In the result, the appeal is partly allowed as above.
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