2002 (9) TMI 24 - HC - Income Tax

Transfer of business going concern capital gains - assessee has come up in reference against the finding of the Tribunal that the transaction of sale of assets as a going concern is exigible to capital gain tax whereas the Department has come up in reference on the question of deduction available under section 48 in respect of the land and the deletion of the addition on account of the closing stock. The Department has also sought a reference with regard to the interest levied under section 234B - Tribunal ought to have held that as the business as a going concern was the capital asset which was the subject of the transfer and not the individual assets and the gain, if any, on the transfer of the business as a whole had to be computed and brought to tax - Tribunal is right in law and fact in holding that the land must be treated as a long-term capital asset and the assessee is entitled to the deduction under section 48(2)

Issues Involved:
1. Transfer of assets of the firm and capital gains tax liability.
2. Treatment of business as a going concern for capital gains computation.
3. Cost of acquisition and improvement of business as a going concern.
4. Applicability of Section 50(2) to non-depreciable assets like land.
5. Valuation of closing stock and addition of Rs. 6,33,442.
6. Levy of interest under Section 234B and the necessity of a hearing.

Detailed Analysis:

1. Transfer of Assets and Capital Gains Tax Liability:
The court examined whether the transfer of the firm's assets to a company constituted a transfer liable to capital gains tax. The Tribunal had found that the entire assets of the assessee-firm were transferred to the company as a going concern, and the assessee had no business thereafter. The court upheld this finding, stating that the transaction fell within the purview of Section 45(1) of the Income-tax Act due to the provisions of Section 2(47)(v) and Section 53A of the Transfer of Property Act. The court rejected the assessee's reliance on CIT v. Mugneeram Bangur and Co., instead following CIT v. F.X. Periera and Sons (Travancore) Pvt. Ltd. and CIT v. R.R. Ramakrishna Pillai, concluding that the transaction was exigible to capital gains tax.

2. Business as a Going Concern:
The court addressed whether the business as a going concern was the capital asset subject to transfer and how the gain should be computed. The court noted that the business was transferred in its entirety, and the assessee had no claim over the assets post-transfer. The court held that the transfer of business as a going concern did not exempt it from capital gains tax, referencing the decisions in F.X. Periera and Sons and R.R. Ramakrishna Pillai.

3. Cost of Acquisition and Improvement:
The court considered whether the cost of acquisition and improvement of the business as a going concern was ascertainable, and if not, whether it negated capital gains liability. The court did not find merit in the assessee's argument, affirming that the transaction attracted capital gains tax.

4. Applicability of Section 50(2) to Non-Depreciable Assets:
The court evaluated whether Section 50(2) applied to non-depreciable assets like land. The Tribunal had held that land, being a long-term capital asset, was eligible for deductions under Section 48. The court upheld this, noting the absence of evidence that the land's value was included in the block of assets. Thus, the court ruled in favor of the assessee, affirming the Tribunal's decision that the land was a long-term capital asset eligible for deductions.

5. Valuation of Closing Stock and Addition of Rs. 6,33,442:
The court examined the Tribunal's deletion of the addition of Rs. 6,33,442, which the Assessing Officer had added as the difference in the value of the closing stock. The court noted that the entire business was transferred as a going concern, and the firm ceased to exist in the eye of law. Citing A.L.A. Firm v. CIT, the court held that the closing stock should be valued at market price upon dissolution or transfer. The court disagreed with the Tribunal's distinction based on the firm's continuation for debt realization, ruling in favor of the Revenue and reinstating the addition.

6. Levy of Interest under Section 234B:
The court addressed whether the assessee was entitled to a hearing before the levy of interest under Section 234B. Referring to CIT v. R. Ramalingair, the court held that the levy of interest under Section 234B is automatic and does not require a hearing. Therefore, the court ruled against the Tribunal's direction for a hearing, siding with the Revenue.

Conclusion:
The court disposed of the income-tax references, ruling:
- Against the assessee on the applicability of capital gains tax to the transfer of business as a going concern.
- In favor of the assessee on the treatment of land as a long-term capital asset eligible for deductions under Section 48.
- Against the assessee on the addition of Rs. 6,33,442 to the closing stock value.
- Against the assessee on the automatic levy of interest under Section 234B without a hearing.

A copy of the judgment was directed to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

← Previous Next →