1991 (12) TMI 40 - HC - Income Tax

Summary

Issues:
The judgment involves issues related to the application by the Commissioner of Income-tax under section 256(2) of the Income-tax Act, 1961, regarding the deletion of addition under section 41(2) of the Income-tax Act, 1961, on the grounds of business transfer and profits arising from the sale of branches.

Issue 1 - Addition under section 41(2):
The assessee, a publishing house, sold branches as going concerns. The Income-tax Officer added a sum as profit under section 41(2), which was confirmed by the Commissioner of Income-tax. However, the Tribunal allowed the second appeal, stating that section 41(2) was not attracted as the entire business activity of each branch was sold for a slump price, following the decision in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299. The Tribunal concluded that the excess amount was a capital gain, not business profit.

Issue 2 - Applicability of section 41(2) to profits from branch sales:
The Tribunal held that the provisions of section 41(2) were not applicable to tax the profits arising from the sale of branches, as the sale was of the concern as a whole for a slump price, aligning with the decision in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299. The Tribunal emphasized that the excess amount from the sale was a capital gain chargeable to tax, not business profit.

Issue 3 - Interpretation of Board's Circular and agreements:
The Tribunal relied on the Board's Circular No. 23-D (XXIII-6) of 1965, which clarified the taxability of surplus amounts from the sale of a business as a going concern. The Revenue contended that each branch did not have independent goodwill and the sales were not of going concerns as a whole for a slump price. However, the Tribunal rejected these contentions, emphasizing that the sales were of the entire branch business as a whole, as indicated in the agreements and supported by the Supreme Court decision in CIT v. Mugneeram Bangur and Co. [1965] 57 ITR 299.

The Tribunal correctly concluded that no question of law arose for reference, rejecting the application by the Commissioner of Income-tax.