2015 (2) TMI 204 - HC - Income Tax

Capital gain tax - Excess on sale of the business undertaking realized on sale of fixed asset - whether be taxed as gains? - whether as cost of the undertaking was incapable of determined, the computation of gain was impossible and, therefore, tax was leviable on the alleged surplus ? - Held that - Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. The asset must be one which falls within the contemplation of Section 45. It is further held that, the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions cannot apply, such a case would not fall within Section 45. On a plain reading of Section 41(2) of the Act it becomes clear that for the purpose of invoking the said section it is necessary that each individual asset, be it a building or plant or machinery, has to be (a) owned by the assessee, (b) used for the purpose of business of the assessee, (c) should have written down value and actual cost, and (d) there should be excess which does not exceed the difference between the actual cost and the written down value which shall be chargeable to tax as income of the business of the previous year in which monies payable for such building, machinery, plant or furniture became due. Therefore, for each asset which is sold the Assessing Officer must have with him the actual cost, WDV and the sale consideration. In absence of the same, Section 41(2) of the Act cannot be applied. Also to take note of the fact that Supreme Court itself has in similar fact situation in the case of CIT vs. Electric Control Gear Mfg. Co. (1997 (7) TMI 8 - SUPREME Court) distinguished its own decision in Artex Manufacturing Company 1997 (7) TMI 7 - SUPREME Court by holding that there was nothing to indicate that the price attributable to the assets like machinery, plant or building out of the total consideration amount and merely because depreciation had been allowed, it could not be said that the balance was the excess amount between the price and the written down value. Thus considering the above subsequent principle laid down in the case of PNB Finance Ltd (2008 (11) TMI 7 - SUPREME COURT) and Garden Silk Weaving Factory (2005 (6) TMI 32 - GUJARAT High Court ), we are of the considered opinion that the questions posed in this appeal are required to be answered in favour of the assessee. Charge of interest under Section 243B and 243C does not arise for the purpose of capital gain. Therefore, the same is also required to be answered in favour of the assessee

Issues Involved:
1. Taxability of the excess on sale of a business undertaking as gains.
2. Computation of gains when the cost of the undertaking is indeterminable.
3. Treatment of a business as an independent asset for capital tax purposes.
4. Validity of interest charged under Sections 234B and 234C without specific mention in the assessment order.

Detailed Analysis:

Issue 1: Taxability of the Excess on Sale of Business Undertaking as Gains
The Tribunal initially upheld the Assessing Officer's decision that the appellant was liable for short-term capital gains on the sale of Mahavir Rolling Mill. The appellant contended that the sale proceeds should be treated as long-term capital gains since the business was sold as a going concern without itemized asset sales. The Tribunal relied on the Supreme Court's decision in Commissioner of Income v. Artex Manufacturing Co., which held that surplus from the sale of assets should be taxed as capital gains. However, the High Court, referencing the Supreme Court's later decision in PNB Finance Ltd., concluded that the charging section and computation provisions of Section 45 are inextricably linked. Since item-wise allocation of the sale price was not possible, the High Court ruled in favor of the assessee, holding that the sale proceeds should not be taxed as short-term capital gains.

Issue 2: Computation of Gains When the Cost of the Undertaking is Indeterminable
The appellant argued that the computation of gains was impossible because the cost of the entire undertaking could not be determined. The High Court agreed, citing the Supreme Court's decision in PNB Finance Ltd., which emphasized that the computation provisions must apply for the charging section to be effective. Since the business included intangible assets like goodwill and tenancy rights, whose costs were indeterminable, the High Court held that the surplus from the sale could not be taxed under Section 45.

Issue 3: Treatment of a Business as an Independent Asset for Capital Tax Purposes
The appellant contended that a business is an independent asset distinct from the individual assets comprising it. The High Court supported this view, noting the Supreme Court's distinction between an undertaking and its components. The Court held that the sale of the business as a going concern, without item-wise allocation of the sale price, aligned with the principles established in PNB Finance Ltd. and Garden Silk Weaving Factory. Consequently, the High Court ruled that the business's sale proceeds should not be treated as capital gains.

Issue 4: Validity of Interest Charged Under Sections 234B and 234C
The appellant challenged the interest charged under Sections 234B and 234C, arguing that it was not specifically mentioned in the assessment order. Given that the High Court ruled in favor of the assessee on the first three issues, it concluded that the interest charges for capital gains did not arise. Therefore, the High Court held that the interest under Sections 234B and 234C was not applicable.

Conclusion:
The High Court allowed the appeal, answering all the questions of law in favor of the assessee and against the revenue. The orders of the Assessing Officer, CIT(A), and Tribunal were quashed and set aside.

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