2003 (1) TMI 95 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was justified on facts and in law in deleting the profit of Rs. 21,02,166 under section 41(2) and capital gains amounting to Rs. 2,06,328 by holding that the transfer was in respect of the whole of the sugar factory as a going concern? - respondent has also not been able to show that that price was not the shown price being the written down value in the books of account or that there is any difference between these amounts and the amounts receivable by the assessee as price of those assets. In the absence of any proof showing the difference of the value between the written down value and the price at which it is alleged, there is no scope for application of section 41(2) in the present case. - On the facts, in this case, section 41(2) cannot be attracted, as rightly held by the learned Tribunal. We, therefore, answer the question referred to in the affirmative in favour of the assessee. The reference is, thus, answered.

Summary

Issues:
Interpretation of section 41(2) of the Income-tax Act, 1961 regarding the sale of a business as a going concern.

Analysis:
The case involved the sale of a sugar factory as a going concern for a total price, with an apportionment of the balance amount against various assets. The Assessing Officer held the individual assets were sold, leading to profit under section 41(2) and capital gains tax. The Commissioner (Appeals) upheld this decision, but the Tribunal ruled that the sale was of the whole going concern, absolving the assessee from liability under section 41(2) and capital gains tax.

The court analyzed section 41(2) which applies when specific assets are sold, not the entire business. The legislative intent was clarified that section 41(2) does not apply when the entire business is sold as a going concern without itemwise consideration. Various precedents were cited to support this interpretation, emphasizing the importance of itemwise valuation for depreciable assets to trigger section 41(2).

In this case, the price for the sugar factory as a going concern was fixed, with the liability taken over by the purchaser and the balance apportioned to different assets. The court emphasized that unless specific itemwise valuations are attributable, section 41(2) cannot be applied. The court noted that the apportionment in this case did not indicate a sale of individual assets, as the entire factory was sold as a going concern.

The court further highlighted that the valuation of different items in the books of account did not prove a difference between the written down value and the price received, negating the application of section 41(2). Consequently, the court upheld the Tribunal's decision that section 41(2) was not applicable in this case, ruling in favor of the assessee.

In conclusion, the court affirmed the Tribunal's decision, answering the reference in favor of the assessee. The appeal was dismissed, and no costs were awarded. The judgment was signed by both judges, and parties could obtain a xerox copy of the operative portion if requested.