2008 (11) TMI 7 - SC - Income Tax

Whether transfer of Banking Undertaking gave rise to taxable capital gains u/s 45 - in this case, it was not possible to allocate the full value of compensation (sale consideration) received between various assets of the undertaking - it was not possible to determine the cost of acquisition & cost of improvement - since computation was inextricably linked with the charging provisions u/s 45 it was not possible to tax the surplus u/s 45 decision of SC in Artex Manufacturing Co. not applicable

Summary

Issues Involved:
1. Taxability of capital gains under Section 45 of the Income Tax Act, 1961.
2. Applicability of Section 41(2) of the Income Tax Act, 1961.
3. Computation of capital gains and the applicability of Section 55(2) of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Capital Gains under Section 45:

The primary issue was whether the transfer of the Banking Undertaking resulted in taxable capital gains under Section 45 of the Income Tax Act, 1961. The appellant, PNB Finance Ltd., received compensation of Rs. 10.20 crores upon nationalization of Punjab National Bank. The appellant argued that the cost of acquisition was not computable, and thus, capital gains could not be calculated. The AO, however, computed capital gains based on the capitalization of the last five years' profits, resulting in a figure of Rs. 1,65,34,709. The Supreme Court held that the computation provisions and the charging section are inextricably linked, and since the computation provisions could not apply, Section 45 was not applicable. The Court concluded that it was not possible to compute capital gains for the assessment year 1970-71, and thus, the amount of Rs. 10.20 crores was not taxable under Section 45.

2. Applicability of Section 41(2):

The Delhi High Court had relied on the judgment in CIT v. Artex Manufacturing Co. to hold that the surplus arising from the transfer was taxable under Section 41(2). However, the Supreme Court clarified that Section 41(2) applies only to the sale of depreciable assets where the amount received exceeds the written down value. The Court noted that Section 41(2) and Section 45 operate in different fields, and in this case, Section 41(2) was not applicable as the transaction involved a slump sale without item-wise earmarking of consideration. The Court emphasized that the judgment in Artex Manufacturing Co. was not applicable, and instead, referred to CIT v. Electric Control Gear Manufacturing Co., which held that Section 41(2) does not apply in the absence of evidence on how the slump price was arrived at.

3. Computation of Capital Gains and Applicability of Section 55(2):

Section 55(2) allows for the substitution of the fair market value as of 1.1.1954 for the cost of acquisition. The appellant had exercised this option but argued that the cost of acquisition was not computable. The Supreme Court noted that Section 55(2) did not operationalize in this case because both the "cost of acquisition" and the "fair market value as on 1.1.1954" were not ascertainable. The letter dated 30.9.1970 from the assessee did not indicate a clear choice, and the AO's computation based on the last five years' profits provided the Enterprise Value rather than the cost of acquisition. Consequently, Section 55(2) was not applicable.

Conclusion:

The Supreme Court set aside the impugned judgment of the Delhi High Court, holding that it was not possible to compute capital gains for the assessment year 1970-71. Therefore, the compensation amount of Rs. 10.20 crores received by the appellant was not taxable under Section 45 of the Income Tax Act, 1961. The civil appeal filed by the assessee was allowed with no order as to costs.