1988 (4) TMI 93 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 41(1) of the Income-tax Act, 1961.
2. Applicability of Section 41(2) of the Income-tax Act, 1961.
3. Assessee's claims for depreciation and short-term capital loss.

Detailed Analysis:

1. Applicability of Section 41(1) of the Income-tax Act, 1961:
The primary issue was whether the provisions of Section 41(1) were applicable to the amount of Rs. 4,01,00,975, which the Income-tax Officer (ITO) considered as "deemed profit" due to the "cessation" of liabilities following the nationalization of the assessee's business.

The tribunal noted that the first condition for the applicability of Section 41(1) is that a deduction or allowance should have been made in any prior year in respect of loss, expenditure, or trading liability incurred by the assessee. The tribunal observed that the liabilities amounting to Rs. 5,79,14,487 represented deposits from customers, agents, and distributors, and current liabilities. It was established that no deduction or allowance had been allowed in any previous year for these liabilities.

The second condition for the applicability of Section 41(1) is that the assessee must have obtained some benefit in respect of the trading liability by way of remission or cessation. In this case, the liabilities had not been remitted or ceased; they were to be discharged by the Central Government. Thus, both conditions for the applicability of Section 41(1) were not satisfied.

2. Applicability of Section 41(2) of the Income-tax Act, 1961:
The tribunal examined whether the provisions of Section 41(2) were applicable. Section 41(2) pertains to cases where the sale of assets like buildings, machinery, plant, or furniture results in an amount that exceeds the written down value, which then becomes chargeable to income-tax.

The tribunal found that the business was acquired as a whole for a slump price, with no specific price allocated to individual assets. The compensation of Rs. 10,000 provided under Section 8 of the Kosangas Company (Acquisition of Undertaking) Act, 1979, was symbolic and did not reflect the value of individual assets. Therefore, it was not possible to attribute any specific price to individual assets.

The tribunal emphasized that when an entire business is transferred for a slump price, no balancing charge under Section 41(2) can be levied, as no individual item of assets is sold for a particular price. This view was supported by various judicial decisions, including those of the Supreme Court and the Gujarat High Court.

3. Assessee's Claims for Depreciation and Short-term Capital Loss:
The assessee raised two grounds in the cross-objection:
1. The claim for depreciation amounting to Rs. 1,10,793 on buildings owned and used by the assessee.
2. The claim for a short-term capital loss of Rs. 2,39,71,106 arising from the transfer of the L.P. Gas business as a slump sale.

The tribunal noted that these grounds were not considered by the Commissioner of Income-tax (Appeals). Therefore, the matter was restored to the Commissioner of Income-tax (Appeals) to consider these grounds and decide them in accordance with the law after giving an opportunity of being heard to both the assessee and the Income-tax Officer.

Conclusion:
The departmental appeal was dismissed, and the assessee's cross-objections were allowed for statistical purposes. The tribunal concluded that neither Section 41(1) nor Section 41(2) of the Income-tax Act, 1961, was applicable in this case, and the matter regarding the assessee's claims for depreciation and short-term capital loss was remanded back to the Commissioner of Income-tax (Appeals) for reconsideration.