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TMI Blog2004 (9) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------ Goodwill 3.00 Technical know-how 5.00 Excise Refunds & Export Incentives 50.00 Import Licence 35.00 ---------- 93.00 -------------------------------------------------------- 3. During the relevant previous year ending on 31-3-1990, the assessee-company received the following claims of Export Incentives filed by the predecessor in-business Mr. B.H. Teli: -------------------------------------------------------- Refund of Excise Duty Rs. 23,21,247 Excise Duty Drawback Rs. 3,14,279 Cash Assistance Rs. 18,21,510 ------------------ Rs. 44,57,036 -------------------------------------------------------- In the books of the Company, the above sums of Rs. 44,57,036 received by the Company in respect of sales executed by the proprietary concern were credited to the aforesaid duly apportioned assets account, i.e. Excise Refunds and Export Incentives as the sums received were in the nature of realisation of above current assets. 4. The assessee-company filed its return of income disclosing loss of Rs. 7,63,400 on 31-12-1989. The Assessing Officer vide his order under section 143(3) dated 4-3-1991, determined the loss at Rs. 5,43,670, thus accepting the above cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs and CCS Rs. 18.21 lakhs) were received by the assessee-company only in the nature of realisation of assets of going concern taken over by the company. The above receipts were not in the nature of 'income' in the hands of the company and hence, do not fall within the provisions of section 28(iiib) and 28(iiic) of the Act. It was argued that the Assessing Officer had rejected this submission only on the ground that there was no apportionment of consideration at the time of acquisition and that apportionment was subsequent to acquisition. 10. It was further submitted before the CIT(A) that in terms of the Agreement to acquire the undertaking, the Company had acquired all its assets, including actionable claims and amounts in question were received as realisation of said assets. The fact that apportionment of consideration was subsequent does not alter the nature of receipt, viz. realisation of assets. It was therefore submitted that the amounts of Rs. 3.14 lakhs and Rs. 18.21 lakhs received were not income of the Company. 11. The learned CIT(A) accepted the assessee's above contentions that the above receipts were not the result of any business activity carried on by the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to purchase the entire running business of HEC of manufacture and sale of import substitute Special Purpose Machine Tools etc. and more particularly described in Annexure 'A' (which business hereinafter is referred to as the "said business") with all its rights, privileges, benefits, actionable claims, loans, liabilities and obligations, pending orders, etc. w.e.f. 10 October 1989 (hereinafter referred to as the "Effective Date"). 3. It is agreed that the VENDEE shall on the Effective Date takeover the entire running business on going concern basis including all the assets of the said business whether shown in the statement of affairs or not and all the liabilities and obligations whether shown in the statement of affairs or not. It is specifically agreed that the VENDEE shall takeover all the pending orders/contracts, actionable claims of the tangible and intangible assets, movable and immovable properties including goodwill, tenancy rights, import licences and other licences, quota rights, refund and incentive claims and designs and drawing and assets of the said business of every description. 5. In consideration of the sale of the said business, the VENDEE has agreed to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m consideration and it was a slump sale and, therefore, no separate break up could be mentioned in the Agreement as such. He stated that the company (i.e., the transferee) was aware of the amounts receivable for Export Incentives and that the amount of Rs. 93 lakhs was fixed keeping in mind the Export Incentives & Excise refunds receivable. 19. As regards the query of the Bench whether Mr. B.H. Teli was a shareholder holding atleast 25 per cent of stake in the assessee-company, the ld. counsel replied that B.H. Teli was a shareholder and his exact stake details were placed before this Bench, and according to the information supplied the percentage of share holding of Mr. B.H. Teli in the Company is around 54 per cent to the query from the Bench as to whether the above transaction is collusive in nature, the learned counsel submitted that: (a) The above case has been already discussed in detail in the original order under section 143(3) by the CIT in the order under section 263, by the subsequent Assessing Officer in order under section 143(3) read with section 263 and by the CIT(A) in her appeal order. At no stage it has been the case of the department that the transaction is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect from 10-10-1989". The receipts in question were received by the assessee in the process of realisation of assets, i.e. actionable claims and realisation of actionable claim is capital realisation and not revenue realisation. In CIT v. Minerals & Metals Trading Corpn. of India, MMTC took over the business and trade in mineral ores, concentrated metals and allied commodities from 1-10-1983 which was formerly carried on by State Trading Corporation. MMTC paid a sum of Rs. 2 crores as consideration for transfer and there was a stipulation in the Scheme/Agreement for transfer that the excess of transferred assets less the total value of liabilities and Rs. 2 crores would be treated as loan under the account "Bifurcation Suspense Account". Now, there arose a surplus due to MMTC having to pay lesser amount for settlement of liabilities. The Assessing Officer assessed this surplus in the hands of MMTC. When the case reached the High Court, the High Court held that assuming that the excess/surplus in the Bifurcation Suspense Account was not to go to STC but was to be retained by the assessee, the surplus was on appreciation of the assets purchased by the assessee. In the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour. This principle applies to the present case also. The assessee is a successor of the firm of New Cawnpore Flour Mills. It has received the refund of the sales-tax by virtue of the fact that it has taken over the business of the former and not because it is its own income. Section 20 cannot, therefore, be attracted to such an income. A similar view was taken by the Delhi High Court in a recent case of CIT v. Minerals and Metals Trading Corpn. of India Ltd. [1985] 23 Taxman 143. In this case, the decision of the Supreme Court in Hukumchand Mohan Lal's case was relied on." 25. Further even in the case of Trackpart of India Ltd. (a case on exactly similar facts), the assessee-company took over the business carried on by a firm for a consideration discharged by issue of shares. In this case, the said company received certain amounts from foreign supplier towards damages and shortages in articles originally indented by the firm. The Tribunal held that the company had fixed and paid the consideration of Rs. 15 lakhs (in the form of issue of shares) not only for the immovable and movable properties, but also for the actionable claim. This case also was that of conversion of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to pass a fresh assessment order and consider the taxability of excise duty refund of Rs. 23.21 lakhs as income under section 41(1) of the Act and Cash assistance and excise duty drawback of Rs. 18.21 lakhs and Rs. 3.14 lakhs respectively under section 2S(iiib) and 28(iiic) of the Act. 32. During the course of proceedings in pursuance to the order of the CITR under section 263, before the Assessing Officer it was submitted by the assessee that the character of the above receipts of Rs. 44.57 lakhs in the assessee-company's hands was in the nature of realization of assets viz, claims. Hence, the receipt of the above claims was not in the nature of revenue receipts, but was in the nature of realization of assets taken over as part of going concern. Excise Duty refunds of Rs. 23,21,247 received by the assessee-company in the capacity of successor-in-business cannot be taxed under section 41(1) of the Act. 33. The Assessing Officer accepted the plea of the assessee that the provisions of section 41(1) were not applicable to Excise Duty refund. However, he treated the Cash Assistance of Rs. 18,21,510 and Duty Drawback of Rs. 3,14,279 as business income in view of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the amount apportioned by the assessee-company towards the above claims, hence, there was no taxable net surplus. 36. Aggrieved by this order of the learned CIT(A), the revenue is in appeal and it was argued that in the agreement for transfer of business by B.H Teli to HYT Engineering Co. (P.) Ltd., there is no apportionment of consideration paid towards the various assets taken over including action able claims. He further argued that apportionment of Rs. 50 lakhs was towards "Export Incentives" and not cash assistance etc. It was further submitted that Export Incentives are with respect to exports conducted ii the earlier period by the erstwhile proprietor Shri B.H. Teli who ha discontinued the business by selling it for a lumpsum consideration of Rs. 93 lakhs and since the business has been taken over by the assessee company and these incentives are received during the year under consideration, it would have otherwise been the income of the erstwhile proprietor had this concern/business been not sold. Therefore, the aforesaid incentives received by the assessee which is taxable under section 28(iiib) and 28(iiic) are taxable in the hands of the assessee and the learned CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifically agreed that the VENDEE shall takeover all the pending orders/contracts, actionable claims of the tangible and intangible assets, movable and immovable properties including goodwill, tenancy rights, import licenses and other licenses, quota rights, refund and incentive claims and designs and drawing and assets of the said business of every description. 5. In consideration of the sale of the said business, the VENDEE has agreed to pay a lumpsum price of Rs. 93 lakhs (Rupees Ninety-three lakhs only) to the VENDOR. The price shall be payable within a period of six months from the effective date in such suitable instalments as may be mutually agreed by the parties herein." According to the learned counsel, Mr. B.H. Teli offered the entire sum of Rs. 93 lakhs to tax under the head 'Income from capital gains' on slump sale of proprietary concern and the capital gain was computed after allowing the exemptions allowable as per the provisions of the Income-tax Act. 39. Next it was contended that in the hands of the assessee-company, the sale consideration of Rs. 93 lakhs had to be bifurcated over the various assets taken over by the company. For the above purpose, the company app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company with effect from 10-10-1989 and Mr. B.H. Teli in his individual capacity has got nothing to do with the said business and for him the business has discontinued. The assessee-company during the year under consideration has received the duty draw back of Rs. 3,14,379 and cash assistance of Rs. 18,21,510 aggregating to Rs. 21,35,789 with respect to exports conducted by Mr. B.H. Teli as a proprietor of the erstwhile concern, when he was running the business as the sole proprietor. Had such discontinuance of the said business by erstwhile proprietor not been done, these amounts would have specifically been taxable under section 28(iiib) and 28(iiic) of the Income-tax Act, 1961, in the hands of Mr. B.H. Teli as the sole proprietor. In order to take care of such type of situation, section 176(3A) of the Act was brought on the statute book with effect from assessment year 1976-77, which reads as under: "176(3A): Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded in the total income of the person who carried on the business had it been received before such discontinuance. 45. The Bombay High Court held in CIT v. Star Andheri Estate [1994] 208 ITR 573 (Bom.) that the business of the assessee firm was discontinued from 31-3-1975, when the firm was disallowed. A sum of Rs. 9,80,000 in connection with a transaction for purchase of land entered into during the existence of the firm was received after the discontinuance of the business. The recipient was, however, the assessee firm itself. That is so because by virtue of section 189, the firm continued for the purpose of assessment despite its dissolution. There is no dispute that the income from the above receipts would have been included in the income of the firm had the income been received before discontinuance. The only objection to its chargeability to tax in the hands of the firm is on the ground that at the time of receipt, the firm had discontinued its business. This objection, however, is no more valid after the incorporation of sub-section (3A) in section 176, which is intended specifically to meet such objections. Sub-section (3A) clearly provides that any sum received after th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt. The words "charged to tax accordingly", are indicative of the head of income under which the receipt is to be charged to tax. In other words, the income should by deemed to be income falling under the head "profits and gains of business or profession". When it is specifically provided that the sum received after the discontinuance of the business should be deemed to be the income of the recipient and charged to tax accordingly, it can only mean that the said amount received should be treated as income from business and should be taxed accordingly. This is made more clear by the latter half of sub-section (3A), which states that the sum received should be charged to tax, if such sum would have been included in the total income of the person who carried on the business had such sum been received before discontinuance. 47. In another case before the Delhi High Court in CIT v. Bhagat & Co. [1990] 182 ITR 212, the High Court held that it is clear from a bare reading of section 189(1) that what can be taxed is the income of the firm. The income, when it accrues and arises, must belong to the firm which is in existence. Section 189(1) only provides, that if at the time of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g under section 14 of the Act. When it is specifically provided that the sum received after the discontinuance of the business should be deemed to be the income of the recipient and charged to tax accordingly, it can only mean that the said amount received should be treated as income from business and should be taxed accordingly. This is made clearer by the latter half of sub-section (3A). The latter half of sub-section (3A) states that the sum received should be charged to tax, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. It means that the said income shall be charged to tax in the year of receipt if such sum would have been included in the total income of the person had it been received before the discontinuance. "Total income" has been defined in section 2(45) of the Act as "the total amount of income referred to in section 5 computed in the manner laid down in the Act". So as per the fiction incorporated in sub-section (3A) the sum received after the discontinuance of business shall be deemed to be income and charged to tax accordingly if it would have been included in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the President may desire: "Whether on the facts and in the circumstances of the case, receipts of Duty Drawback of Rs. 3,14,279 and cash assistance of Rs. 18,21,510 are in the nature of realisation of actionable claims and hence in the nature of capital receipts, in the hands of the assessee?" Order under section 255(4) of the Income-tax Act, 1961 Per U.B.S. Bedi, J.M. - As there is a difference of opinion between the Members on the Bench, following point of difference is being referred to Hon'ble President for hearing on such point/s or for nominating the Third Member or to pass such orders as the Hon'ble President may deem fit and proper: "Whether on the facts and in the circumstances of the case, receipts of Cash Assistance of Rs. 18,21,510 and Duty Drawback of Rs. 3,14,279 are includible in the income of the assessee under section 28(iiib) and 28(iiic) read with section 176(3A) of the Income-tax Act, for the year under consideration which are relatable to the export conducted by the erstwhile proprietor of the business as being recipient of these amounts when the said proprietary business came to an end/ discontinued on having been sold to the assessee. Or Such receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under section 28(iiib) and 28(iiic) read with section 176(3A) of the Act. 5. It is pertinent to note that section 28 of the Act requires that profits and gains of business could be taxed in the h ands of the assessee if the business was carried on by the assessee. It was argued in the present case that the duty drawback and cash assistance was not the result of the business carried on by the assessee in question. The assessee did purchase actionable claim for a consideration of Rs. 50.00 lakhs. Assuming the income is exigible to tax, the cost of acquisition ought to be deducted. What the assessee purchased is only an actionable claim, as such it could be taxed only under the head "Capital gains" and not as "Business income". 6. Adverting to the provision of section 176(3A), my attention was invited on the prescription of the Act, which reads as under: - "176(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concern bankers and the amount of Rs. 93.00 lakhs was offered to tax as capital gains by Shri B.H. Teli. The assessee agreed to purchase the entire running business with all the rights, privileges, benefits, actionable claims, loan liabilities, pending orders, etc. The receipts in question were received b the assessee in the process of realization of assets; as such these were treated as capital gains. The actual amount realized was lesser than the amounts apportioned towards the above claim. Even the learned JM did not doubt the genuineness of the transaction. Therefore, at this stage, the object of the learned Departmental Representative as to the applicability of principles laid down in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) are not tenable. 10. The business continued to be the same. Only the ownership was changed. The Hon'ble Apex Court in the case of Saraswati Industrial Syndicate Ltd. v. CIT [1990] 186 ITR 278 has held that in order to attract the provisions of section 41(1) of the Act, the identity of the assessee in the earlier year in which deduction was granted in relation to a trading liability and in the subsequent year in which benefit is deriv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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