2004 (3) TMI 327 - AT - Income Tax

Capital Gains - slump sale or itemized sale - cost of acquisition - Short-term capital gain on sale of building and plant and machinery - Applicability of section 50 - HELD THAT - While computing the short-term capital gain tax the Assessing Officer has taken this value and deducted the cost of land and the WDV arrived at the figure of Rs. 35,57,295, computation already reproduced in above paras, which was accordingly taxed. The approach of the assessee indicates that to settle the sale consideration help of professional was sought and thereafter a final figure was arrived at. Our fourth observation in this sequence is that one M/s. Mehta Padamse, registered valuer was also appointed, though claimed to be by the purchaser who has valued the fair market value of plant and machinery including electrical installation. As per the valuation given the fair market value of plant and machinery was determined at Rs. 1,64,75,000. The Assessing Officer has adopted this figure for the purpose of calculation of short-term capital gain on sale of plant and machinery, the computation already reproduced in above paras. So undisputedly the appellant was aware before hand distinctly about the value of plant and machinery and the value of land and building. Hence it is not a case of lump sum price for the business as a whole but the price was fixed in respect of the identifiable assets. At this juncture we would like to mention that from the side of the revenue it was argued that the broken up figure were accounted for in its books of account by the purchaser M/s. HIL, however, this argument is not in the right perspective. The reason is that the buyer has to claim certain deduction in its income-tax matter and for the purpose the seller has its own independence. But the situation in the instant appeal is that the appellant was very much aware about the sale price of each and every assets and therefore, on that basis a figure was arrived at Rs. 150.63 lakhs as surplus on sale of industrial undertaking in its books of account. In view of the above observation based upon the factual matrix we can arrive at a conclusion that it was not a case of transfer of undertaking as a whole but it was a transfer of the assets of the undertaking excluding the liability. It is an admitted fact that the liability was not transferred to the buyer, hence cannot be termed as an instance of slump sale. Applicability of section 50 - The two units of the appellant company were part of the total business of the assessee and they were not segregated for the purpose of taxation, therefore, should also not have been segregated while computing short-term capital gain. Moreover, as far as the business operation of the assessee is concerned, there is a factual finding that the Ahmednagar unit was operating as a feeder unit for Pimpri unit. Though the Ahmednagar unit was an independent unit but it was a part and parcel of the entire business venture of the appellant company. So the block of assets of particular unit should not be segregated from the entire WDV of an assessee for the limited purpose of computation of short-term capital gain. The newly substituted sub-section (2) provides that in a case where any block of assets ceases to exist for the reason that all the assets in that block are transferred during the previous year then in such a case the cost of acquisition of the block of assets shall be the written down value of the block at the beginning of the previous year. Once the capital asset that has been transferred is found to form part of a block of assets in respect of which depreciation has been allowed the surplus, if any, computed in the section will be treated as short-term capital gain. The emphasis thus is that such block of assets should cease to exist. In terms of this section, in our opinion surplus arising on transfer of capital assets is taxable as short-term capital gain when the written down value of a block of assets is reduced to 'nil' even though all the assets falling within that block are not transferred. Thus where an assessee has obtained a deduction on account of depreciation in previous years, the provision of sections 48 and 49 shall have to be subjected to the modifications indicated in section 50. Both the depreciation as well as the block of assets belongs to an assessee and for all purposes has to be taken into account as a whole. There is no indication in the language of section 50 that while computing the short-term capital gain of a particular asset is to be segregated from the block of assets. The view taken by the revenue authorities was thus ipso jure wrong. Resultantly, in solido, first limb of Ground No. 1 is hereby decided against the assessee and second limb is decided in favour of the assessee. Before we part with we may mention a word of appreciation to Shri Khare and Shri Sunil Agarwal ld. representatives of both the sides for their valuable assistance in deciding this ground.

Summary

Issues Involved:

1. Short-term capital gain on sale of building and plant and machinery.
2. Deduction of productivity amount received from ICICI in computing depreciation u/s 32.
3. Inclusion of Excise Duty and Sales Tax in total turnover for computing relief u/s 80HHC.

Summary:

Issue 1: Short-term capital gain on sale of building and plant and machinery

The assessee challenged the computation of short-term capital gain of Rs. 35,57,295 on the sale of building and Rs. 1,59,74,715 on the sale of plant and machinery. The assessee argued that no capital gain could be computed as per section 45 and alternatively, long-term capital gain should be computed after deducting the cost of acquisition as on 1-4-1981. Another alternate ground was that the sale consideration of depreciable assets should be deducted from the entire block of assets of the company in terms of section 50 of IT Act, not just from the Ahmednagar Unit.

The CIT(A) upheld the Assessing Officer's decision to tax the sale as short-term capital gain u/s 50, concluding that the transfer was not a slump sale but a sale of various assets. The ITAT agreed, noting that the sale consideration was attributable to individual identifiable assets, not a lump sum for the business as a whole. However, the ITAT found that the revenue authorities erred in not setting off the sale consideration from the entire block of assets of the company, as required by section 50.

Issue 2: Deduction of productivity amount received from ICICI in computing depreciation u/s 32

The Assessing Officer's action of deducting the productivity amount received from ICICI in computing depreciation was contested. The ITAT noted that this issue had already been decided in the assessee's favor for the assessment year 1989-90, following the precedent set by CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830 (SC). Consequently, this ground was decided in favor of the assessee.

Issue 3: Inclusion of Excise Duty and Sales Tax in total turnover for computing relief u/s 80HHC

The assessee contested the inclusion of Excise Duty and Sales Tax in the total turnover for the purpose of computing relief u/s 80HHC. The ITAT referred to the Jurisdictional High Court's decision in CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 (Bom.), which held that Excise, Sales Tax, Octroi, etc., do not constitute a part of total turnover. Following this precedent, the ground was allowed in favor of the assessee.

Conclusion:

The appeal of the assessee was partly allowed, with the first issue decided partly in favor of the revenue and partly in favor of the assessee, and the second and third issues decided in favor of the assessee.