1995 (1) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 3.68 crores liability for pension payable under the Voluntary Retirement Scheme (VRS).
2. Assessment of Rs. 52,33,740 under section 41(2) of the Income Tax Act for the sale of Rallis Chemicals Factory.

Detailed Analysis:

Issue 1: Disallowance of Rs. 3.68 crores liability for pension payable under VRS

Background:
The assessee, a public limited company, offered a Voluntary Retirement Scheme (VRS) to its employees to reduce costs and improve profitability. Under this scheme, 430 employees retired, and the company's liability for pension was actuarially determined at Rs. 3.68 crores. The claim for this liability was disallowed on two grounds: it was not entered in the books of account and was considered contingent due to a clause in the VRS allowing the company to stop pension payments under certain conditions.

Assessee's Arguments:
- The liability was definite and certain as 430 employees had retired under the VRS.
- The present discounted value of the liability should be a proper charge on the profits of the year.
- The absence of book entries is irrelevant for the validity of the claim.
- The contingency mentioned in clause 9 of the VRS is insignificant and accounted for by the actuarial valuation.

Department's Arguments:
- The liability did not arise in the year of account.
- Proper entries in the books of account are necessary to validate the claim.
- Clause 9 of the VRS makes the liability contingent.

Tribunal's Decision:
The tribunal held that the disallowance could not be upheld. The liability to pay pension was real, definite, and ascertained, not contingent. Clause 9 only made the payment contingent on the employee's good behavior, not the liability itself. The existence of the VRS and the retirement of 430 employees were undisputed facts. The actuarial valuation had accounted for the contingency. The tribunal referenced the Supreme Court's decision in Indian Molasses Co. (P.) Ltd. v. CIT, which supported the view that the liability was definite and certain. The tribunal also dismissed the objection based on the absence of book entries, citing that bad accounting cannot nullify substantive law principles. Consequently, the disallowance of Rs. 3.68 crores was deleted.

Issue 2: Assessment of Rs. 52,33,740 under section 41(2) of the Income Tax Act for the sale of Rallis Chemicals Factory

Background:
The assessee sold the Rallis Chemicals Factory for Rs. 2.95 crores and contended that the sale was a slump sale, not attracting section 41(2). The Assessing Officer found that the land and business premises were valued separately at Rs. 78 lakhs, inferring that the sale was not a slump sale and assessed profits under section 41(2).

Assessee's Arguments:
- The sale was of the entire undertaking for a slump price, not itemized.
- Cited the Supreme Court's judgment in CIT v. Mugneeram Bangur & Co., which held that no part of the surplus could be assessed under section 41(2) for a slump sale.

Department's Arguments:
- There was an apportionment of the sale consideration towards immovable assets.
- The assessment of profits representing depreciation on machinery should be upheld.

Tribunal's Decision:
The tribunal found that the sale was indeed a slump sale. The agreement and conveyance deed indicated that the entire undertaking was sold for a consolidated price without itemized consideration for individual assets. The tribunal distinguished the present case from the Gujarat High Court's decision in Jayantilal Bhogilal Desai v. CIT, where an itemized sale was evident. Instead, it aligned with the Gujarat High Court's later decision in Artex Mfg. Co. v. CIT, applicable to the present facts. The tribunal directed the Assessing Officer to exclude the profits assessed under section 41(2) and clarified that the assessee was willing to pay capital gains tax under section 45 for the slump sale.

Conclusion:
The tribunal ruled in favor of the assessee on both issues, deleting the disallowance of Rs. 3.68 crores for pension liability under VRS and excluding the profits assessed under section 41(2) for the sale of Rallis Chemicals Factory, confirming it as a slump sale.