2001 (3) TMI 1042 - HC - Income Tax

Summary

Issues Involved:
1. Whether profits under Section 41(2) of the Income-tax Act, 1961, can be assessed in the hands of a holding company when the sale is made to its 100% subsidiary company.
2. Whether the Appellate Assistant Commissioner (AAC) was right in setting aside the assessment and requiring the Income-tax Officer (ITO) to reframe the assessment.

Issue-Wise Detailed Analysis:

1. Assessment of Profits under Section 41(2):
Facts and Background:
- The assessee sold its Swastik Oil Mills division to its wholly owned subsidiary, Vegoll Pvt. Ltd., for Rs. 1 Crore.
- The ITO included Rs. 86 lakhs from the sale of technical knowledge and goodwill as profits from an adventure in the nature of trade but found no profit under Section 41(2) as the fixed assets were sold at written down value (WDV).
- The AAC set aside the assessment for further inquiry.
- The Tribunal held that it was a slump sale, thus no profits could be assessed under Section 41(2).

Contentions:
- Revenue: Argued that the sale was an adventure in the nature of trade and the goodwill was overvalued, citing the Supreme Court decision in CIT vs. Artex Manufacturing Co.
- Assessee: Claimed the transactions were slump sales, and the provisions of Section 41(2) did not apply, relying on CIT vs. Electrical Control Gear Mfg. Co.

Findings:
- The Court noted that the facts in Artex Mfg. Co. were similar, where the sale consideration included an inflated value for plant, machinery, and dead stock, making Section 41(2) applicable.
- The Court found that the AAC was justified in remanding the matter to the ITO for determining the correct valuation of goodwill, as the goodwill determined by the assessee was exaggerated.
- The Tribunal's interference with the AAC's remand order was unwarranted.

Conclusion:
- The Court held that the AAC's order to reframe the assessment was correct and necessary to ascertain the correct value of the goodwill and other assets.
- The Court answered the first question in the negative, in favor of the revenue, and against the assessee.

2. Setting Aside the Assessment by AAC:
Facts and Background:
- The AAC set aside the assessment due to incomplete inquiries by the ITO regarding the valuation of goodwill and other assets.
- The Tribunal held that the AAC did not have jurisdiction to direct the ITO to reframe the assessment.

Contentions:
- Revenue: Supported the AAC's decision to reassess, arguing that the valuation of goodwill was inflated.
- Assessee: Argued that the transactions were slump sales, and the AAC's direction was unwarranted.

Findings:
- The Court found that the AAC's directions were justified, as the ITO's inquiries were incomplete, and proper valuation of goodwill was necessary.
- The Court noted that the AAC's order was only a remand for determining the correct valuation and did not warrant the Tribunal's interference.

Conclusion:
- The Court held that the AAC was right in setting aside the assessment and requiring the ITO to reframe the assessment.
- The Court answered the second question in the affirmative, in favor of the revenue, and against the assessee.

Final Judgment:
- The references were disposed of with no order as to costs, with the Court ruling in favor of the revenue on both issues.