9911796707
TMI Blog2008 (7) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of TFD division by the assessee to ITEL could be termed as a demerger within the meaning of section 2(19AA) of the Act and consequently capital gain, if any, on such transfer is not chargeable to tax in view of the provisions of section 47(vib) of the Act? - HELD THAT:- All the conditions laid down in section 2(19AA) have to be satisfied in a case to be called a demerger for the purpose of section 47(vib) of the Act. As rightly contended by learned DR for the revenue, the Legislature is deemed to have foreseen all possible contingencies and yet has thought it fit to impose the above conditions for qualifying as a demerger for the purpose of section 47(vib) - There cannot be any presumption regarding omission by the Legislature to provide for a situation where the consideration is not in the form of allotment of shares in the resulting company to the shareholders of the demerged company. A matter which should have been, but has not been provided for in a statute cannot be supplied. The intention of the Legislature in such cases is not to confer the benefit of exemption to an assessee u/s 47(vib) of the Act - All the conditions laid down in section 2( 19AA ) have to be satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising from the transfer of the undertaking, no part of consideration was indicated against different and definite items having regard to their valuation on the date of transfer - There is no basis for even apportioning any consideration for various assets comprised in the transfer. Since, individual items of capital assets having not been transferred the aggregate of individual assets in the form of an undertaking was a capital asset which was transferred. The transfer being one of the going concerns, it is not possible to ascertain the profit or gain from transfer of undertaking. Cost of acquisition and the cost of improvement of the undertaking cannot be ascertained. It, therefore, becomes difficult to apply computation under provisions of section 48 - If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern, consideration realized by the assessee would be outside the purview of capital gains u/s 45 - We hold that computation provisions fail in the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in this regard be deleted. This ground of appeal of the assessee is allowed. Computation of income - Non-compete payment - claim of the assessee was not allowed in the relevant assessment year. Without prejudice to the claim that the consideration paid to NELCO must be allowed as deduction in the assessment year 1997-98, the assessee submitted that the period of the agreement was 5 years - HELD THAT:- We are of the view that the additional ground has to be admitted for adjudication as the claim was made in the return of income filed by the assessee. We were informed that the claim for deduction of the entire sum is still pending adjudication in assessment years 1997-98 and 1998-99. In the circumstances, we admit the additional ground for adjudication and remand the matter to learned CIT(A) for deciding the issue in accordance with law after taking into consideration the decision if any, in assessment years 1997-98 and 1998-99. In the result, the appeal by the assessee is partly allowed. - N.V. VASUDEVAN AND V.K. GUPTA, JJ. S.E. Dastur and P.J. Pardiwala for the Appellant. U.K. Shukla for the Respondent. ORDER N.V. Vasudevan, Judicial Membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her that if the directors of TTL and ITEL so desire, all the movable assets comprised in the Tata Fone Division shall not vest in ITEL by virtue of the Court order, which shall not operate as a conveyance but shall be transferred in the manner laid down in clause 4.2 hereunder : The transfer referred to in clause 4.1 shall be carried out as follows : ( i )All the movable assets of the Tata Fone Divisions of TTL including plant and machinery, cash on hand capable of passing by manual delivery or by endorsement and delivery shall be so delivered or endorsed and delivered, as the case may be, to ITEL to the end and intel that the property therein passes to ITEL on such delivery of endorsement and delivery. Such delivery and transfer shall be made on a date mutually agreed upon between the Board of Directors of TTL and the Board of Directors of ITEL within thirty days from the effective date. ( ii )In respect of movable assets other than those specified in sub-clause ( i ) above, including sundry debtors, outstanding loans, recoverable in cash or in kind or value to be received, bank balances and deposits with Government, Semi-Government, Local and other authorities, bodies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee company has not received any consideration upon the demerger of the TFD, the question of assessing any capital gains does not arise. The assessee company has made appropriate adjustments to its block of assets in respect of the assets of the TFD transferred to ITEL Industries Private Limited. A copy of the scheme approved by the Bombay High Court is enclosed with the return of income." 7. There is no dispute that the value of the assets which was taken over by ITEL was less than the liabilities that were taken over by ITEL by Rs. 22.63 crores. The assessee had shown this sum of Rs. 22.63 crores as capital reserve in it s balance sheet. 8. During the course of the assessment, the Assessing Officer required the assessee to explain as to why the transaction between the assessee and ITEL for transfer of TFD should not be considered as transfer under section 2(47) of the Act and why the gain arising from the same should not be charged to tax as capital gains. 9. Under the Income-tax Act, profits or gains arising from the transfer of a capital asset are chargeable to tax under the head "Capital gains.". The word "transfer" has been defined in section 2(47) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on a going concern basis. ( vii )The demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf. 10. According to the assessee, all the conditions referred to in section 2(19AA) viz., conditions ( i ) to ( iii ) were satisfied because all the assets and liabilities of TFD were transferred at the book value to ITEL. Conditions ( iv ) and ( v ) were also satisfied because those conditions will operate and apply only when consideration for transfer exists. The assessee submitted that in its case the value of liabilities exceeded value of assets resulting in negative networth. As such, no consideration was payable to ITEL. In view of the practical impossibility, the conditions stated in clauses ( iv ) and ( v ) should deemed to be considered to be satisfied. 11. Without prejudice to the above, it was submitted that section 2( 42C ) defines the term slump sale to mean the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to individual assets and liabilities in such sales. Under section 50B of the Act, the profits or ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computed. The assessee in this connection, relied on the decision of the Hon ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 , wherein the Hon ble Supreme Court has held that if on the facts of a particular case, computation under section 48 is not possible, the charge under section 45 fails because it cannot be effectuated. Based on the above, it was submitted that the transaction of transfer of TFD to ITEL cannot be charged as slump sale. 12. The Assessing Officer, however, held that the transfer of TFD to ITEL on amalgamation did not constitute a demerger within the meaning of section 2(19AA) of the Act because conditions ( iv ) and ( v ) of section 2(19AA) viz., the shareholders of demerged company should be issued shares of the resulting company in consideration of the demerged and that shareholders holding at least 3/4th of the value of the shares of the demerged company should be holding share to that extent in the resulting company were not satisfied. The Assessing Officer therefore, held that capital gain, was therefore not exempt under section 47( vib ) of the Act. With regard to the transfer not being in the nature of a slump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s determined as under : Consideration being excess of liability Rs. 22.63 crores Over assets transfer and credited to capital reserve Less : Net worth as determined above (-) Rs. 23.32 crores Total profits Rs. 45.95 crores Since, the said division has been held by the assessee company more than 36 months, the gain will be taxed as long-term capital gain." 13. Before learned CIT(A), the assessee reiterated submission as were made before the Assessing Officer. In addition to the above, it was submitted that the decision of Hon ble Madras High Court in the case of S. Natarajan ( supra ) was not applicable to the facts of the case of the assessee. It was submitted that the assessee in that case received consideration from the transferee despite the fact that the value of the liabilities transferred by the assessee was in excess of the assets transferred and that the question was regarding applicability of the provisions of section 41(2) of the Act. The Hon ble Court remanded the issue to the Tribunal to find out what is the amount of sale consideration fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed that in the context of the slump sale, the negative net worth should have been taken as nil . Since, by connotation any thing of any worth would only be positive and cannot be negative to be deducted from any sale consideration. Thus, since, there had been no sale consideration as had been expressly mentioned in the demerger scheme approved by Hon ble High Court, the figure should have been taken as zero and deducting there from zero, as the negative net worth was Nil . As per Mumbai Tribunal in the aforesaid case, the net capital gain should have been computed at zero. In other words, there should have been no capital gains to be taxed. The learned CIT(A) did not agree with the contentions as put forth by the assessee before him. He held as follows : ( a )That the case of the assessee did not satisfy the requirements of a demerger within the meaning of section 2( 19AA ) of the Act. ( b )The transfer of TFD was a slump sale within the meaning of section 2( 42C ) of the Act. The phrase in the definition of slump sale as a result of a sale for a lump sum consideration would also include a situation where excess liabilities are off loaded. The expression lump sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a transfer. Therefore, I am of the view that the Assessing Officer had rightly taken the excess of the liabilities over assets as the sale consideration and for the computation of capital gains the value of the said consideration in terms of rupees. In the case of Zuari Industries relied upon by the assessee, the Tribunal had not considered the full value of consideration because of the following two reasons : ( i )Firstly, it was never the case of Assessing Officer or the learned CIT(A). ( ii )Secondly, no additional ground had been raised by the revenue. But, in the instant case, the Assessing Officer had increased the transferred amount of Nil by the excess liabilities and therefore, I am of the view that she was correct. ( d )With regard to the contention that in any event the Assessing Officer could not have added the excess of liabilities over assets and the negative net worth while computing capital gain and doing so would amount to a double addition, learned CIT(A) held as follows : "I find that the Assessing Officer has applied section 50B which is by its very heading a special provision and has calculated the full value of consideration by concluding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply and consequently no capital gain could be brought to tax ? (5)If the answer to issue No. 4 is in the negative, whether the revenue was justified in adding the excess of liabilities over the assets taken over by ITEL to the negative net worth while computing capital gain? 17. We have heard the submissions of Shri S.E. Dastur, Senior Advocate appearing for the assessee and Shri V.K. Shukla, CIT (DR) for the revenue. On the first issue, which we have formulated for consideration, learned counsel for the assessee submitted that section 2( 19AA ) was introduced in the Income-tax Act vide the Finance Act, 1999. He drew our attention to the Memorandum explaining the provisions in Finance Bill, 1999. The relevant portion of which reads. "3. With a view to recognize demergers, slump sales and to rationalize the existing provisions of amalgamation, a number of amendments have been proposed on the basis of the following broad principles: ( a )Demergers should be tax neutral and should not attract any additional liability to tax. ( b )In demergers, tax benefits and concessions available to any undertaking should be available to the said undertaking on its transfer to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2( 19AA ). One of the condition under section 2( 19AA ) is that resulting company should issue its shares in consideration of the demerger to the shareholders of the demerged company. Another condition is that shareholders holding at least 3/4th of the value of shares of demerged company should be holding shares to that extent in the resultant company. Admittedly both these conditions are not satisfied in the case of the assessee. The contention that the above two conditions will apply only when there is consideration for transfer and in a case where there is no such consideration and if other conditions of section 2( 19AA ) are satisfied then the same must be construed as a demerger under section 2( 19AA ) cannot be accepted. All the conditions laid down in section 2( 19AA ) have to be satisfied in a case to be called a demerger for the purpose of section 47( vib ) of the Act. As rightly contended by learned DR for the revenue, the Legislature is deemed to have foreseen all possible contingencies and yet has thought it fit to impose the above conditions for qualifying as a demerger for the purpose of section 47( vib ). There cannot be any presumption regarding omission by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Sale of Goods Act, 1930 have to be looked into. Under the Transfer of Property Act, the expression sale has been defined as a transfer of ownership in exchange for a price paid or promised or part paid and part promised. Under the Sales of Goods Act, sale has been defined as contract, whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The agreement to sale become a sale when the time elapses or the conditions are fulfilled subject to which the property in goods is to be transferred. Section 2(10) of the Sales of Goods Act, defines price to mean, the money consideration for a sale of goods. 22. Referring to the aforesaid definition of sale, learned counsel for the assessee submitted that sale is always a contract between two persons. He submitted that in the case of the assessee, TFD was transferred to ITEL in a Scheme of amalgamation, which was approved by Hon ble Bombay High Court. He further pointed out that as per the scheme of amalgamation and also the order of the Hon ble High Court, there was no consideration for transfer of the undertaking of TFD. In the circumstances, he submitted that there was no sale of the und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludes several forms of transfer; and sale is only one such form of transfer. Under section 50B any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains. The definition of slump sale in section 2( 42C ) of the Act reads as follows : " Slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation 1. For the purpose of this clause undertaking shall have the meaning assigned to it in Explanation 1 to clause ( 19AA ). Explanation 2. For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities." 27. From the reading of the above definition, it is clear that, it is only a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise then as a result of sale will not qualify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, does not make it a situation of exchange of immovable property, or relinquishment of any right to immovable property so as to make the transaction amenable to section 269UA. In an amalgamation, no consideration in any form much less in the form of money flows from the transferee- company to the transferor company, which was the erstwhile owner of the assets. The shares are issued by the transferee company not to the transferor company, but to the shareholders of the transferee company, who must necessarily be treated as distinct from the transferor company itself. The shareholders of the transferor-company could not be deemed in law to be the owners of the assets of the transferee company, nor can they be said to have held nay interest in the assets of the transferee-company. "Apparent consideration", as defined in clause ( b ) of the section 269UA of the Act, is an inalienable factor which must be reckoned within the application of Chapter XX-C for if the appropriate authority is satisfied that there is undervaluation, then it is empowered to purchase the property for the apparent consideration. In a situation of amalgamation, there is no consideration - apparent or otherwise - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f those assets. The question for consideration before the Tribunal was as to whether there was sale or exchange between assessee and A and assessee could be said to have received any consideration in aforesaid transaction and, thus, amount representing difference between assets and liabilities could be brought to tax as deemed profits under section 41(2). The Tribunal held that transfer in an amalgamation cannot be said to be sale. 30. In the light of the principles laid down in the aforesaid judicial pronouncements, we are of the view that the transfer of TFD by the assessee to ITEL consequent to scheme of amalgamation approved by Hon ble Bombay High Court cannot said to be a sale of undertaking by the assessee. Consequently, the transfer could not be said to be as a result of sale and therefore the provisions of section 2( 42C ) of the Act did not apply. The provisions of section 50B were also not therefore applicable to the facts and circumstances of the present case. 31. The answer to the second issue, which we have formulated for consideration, is in negative. Since, the answer to the second issue is in negative, we shall take up for consideration issue No. 4 which we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as part of organization including the potentiality of the organization to grow. It contains a variety of elements, both tangible and intangible. It remains in insubstantial in form and nebulous in character. A going concern is a dynamic concept characterized by perennial change influenced by socio-economic ecology A going concern is essentially a functioning living organism possessing attributes of vitality, growth and evolution. Obviously, it would not be possible to conceptualize the cost of acquisition of such a going concern as well as date of acquisition thereof. If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern, consideration realized by the assessee would be outside the purview of capital gains under section 45. 34. It has been held by Hon ble Karnataka High Court that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e charge of capital gains in the case of assessee should also be fails for identical reasons. 37. Learned DR for the revenue on the other hand placed strong reliance on the decisions of Hon ble Bombay High Court in the case of Premier Automobiles Ltd. ( supra ). The aforesaid decision relates to the assessment year prior to insertion of section 50B of the Act. The transfer of capital assets in the form of an undertaking was sought to be brought to tax by the revenue. The stand of the revenue was that there was a sale of individualized items of assets; whereas, the stand of the assessee was that there was a sale of the entire undertakings for a lump sum consideration. The Court held that the sale of undertaking was as a whole and that the same would be sale of a capital asset. The Court, therefore, held that it was, slump sale and remanded the matter to the Tribunal for fresh consideration regarding computation of capital gains. According to the learned DR for the revenue, the aforesaid decision is an authority for proposition that even prior to insertion of section 50B of the Act, slump sale of the business undertaking as a whole was liable to tax to charge of capital gain ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital gains under section 45 three ingredients should co-exist: (1) there should be a capital asset; (2) there should be transfer of such capital asset; and (3) profit or gain must arise from the transfer of such capital asset. So far as the first two ingredients are concerned no dispute has been raised on behalf of the assessee that a business undertaking as a whole would constitute a capital asset within the meaning of section 2(14) and further that the agreement dated 31-12-1992 for transfer of the business undertaking as a going concern constitutes transfer of a capital asset as per the definition contained under section 2(47) of the Income-tax Act. However with regard to the third ingredient regarding profits or gains arising from the transfer of the whole business undertaking as a going concern it has been argued that no part of the sale consideration is indicated against different and definite items having regard to their valuation on the date of sale and the agreed price cannot be apportioned on capital assets in specie . What is sold in the case of a slump sale is not individual items of property forming part of the aggregate but the capital asset consisting of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we hold that computation provisions fail in the present case and consequently there can be no capital gain that could be brought to tax. In view of our decision as above 3rd issue, which we have formulated above, is not being taken up for consideration. We may mention that elaborate arguments have been advanced by both parties on this issue also. 42. 5th issue, which we have formulated for consideration also does not require any consideration in view of our decision on issue Nos. 1, 2 4. We may mention that elaborate arguments have been advanced by both parties on this issue also. The first ground of appeal of the assessee is accordingly allowed. 43. 2nd Ground of the appeal reads as follows : Income treated as income from other sources : ( a )The learned CIT(A) erred in confirming that the lease income Rs. 49.28 lakhs earned by the assessee was taxable as income from other sources as against income from business as claimed by the assessee. ( b )He erred in not appreciating in the correct perspective the submissions made by the appellant in this regard. 44. During the previous year relevant to the assessment year 2002-03, the assessee had received Rs. 49,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A), however, did not agree with the decision of his Predecessor in office and he held that the business of the assessee was not earning interest on finance transaction; and therefore, income in question was income from other sources. 48. We have heard the rival submissions. Learned counsel for the assessee submitted that the transaction in question was one mode of selling the assessee s product. It was also submitted that this was done in a systematic and organized manner and would constitute business. He placed reliance on several judicial pronouncements in support of his contention that the income in question was business income. 49. Learned DR of the revenue relied on the order of learned CIT(A). 50. We have considered the rival submissions. In course of hearing, we also posed a question as to whether the main objects clause in the Memorandum of Association of the assessee permits the assessee to indulge in the business of leasing. Copy of memorandum of association containing main object clause was filed before us and we find on perusal of the same that the assessee has, as one of its main objects, the business of leasing. Apart from the above, we are also of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are Associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose. ( iii )Degree of associated organisational change: Similarly the degree of change intended in the way operations are carried out as a result of the computer software, for example, savings in the number, and changes in the location, of staff used to provide services to customers will have a bearing. The more radical the changes, the more likely the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerised. ( iv )It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an assessee would become outdated much earlier than expected. The assessee has therefore to upgrade his software. An element of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of finished goods as per the statement submitted to the bank was Rs. 1,323.65 lakhs. The value of the finished stock as reported in the final accounts was Rs. 1,106.21 lakhs (excluding stock in transit). The major difference is on account of writing off in the annual account the obsolete stock worth Rs. 200 lakhs. (Refer Schedule 15 of Annual Report). The value of the obsolete stock written off in the annual accounts was not excluded from the stock reported to the bank. Further the remaining difference was due to element of overhead cost included in the value submitted to the bank. It was submitted that the difference in the value of the stock of Rs. 373.67 lakhs was mainly attributable to the value of obsolete stock written off Rs. 268 lakhs. The assessee explained that the details in respect of valuation of obsolete stock as follows. The assessee as a measure of good corporate governance follows a policy of determining obsolete stocks on a quarterly basis. The assessee further submits that it was engaged in the business of telecommunication sector, which was very advanced in terms of technology, with products getting outdated very quickly. The assessee reviews the stock and take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete stock written off by the assessee from Rs. 48.49 lakhs to Rs. 2.68 crores. ( b )The assessee submits that the learned CIT(A) erred in enhancing the disallowances without discussion and without providing the appellant an opportunity to submit its explanation. The appellant, therefore, submits that the order passed by the learned CIT(A) in this regard is ultra virus and bad in law and be quashed. ( c )Without prejudice to the above, the learned CIT(A) erred in confirming the disallowance in respect of obsolete stock written off. ( d )The learned CIT(A) erred in not appreciating in the correct perspective the submissions made by the assessee in this regard." 60. The details of the obsolete stock written off i.e., finished goods is at pages 241 to 247 of the assessee s paper book. The same has the caption "stock adjustment note". In respect of details of work-in-progress written off as obsolete stock the list was furnished in the course of hearing. 61. We have heard the rival submissions. Learned counsel for the assessee submitted that the write off in question of obsolete stock was businessman s wisdom and guided by commercial realities and prudence. The Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence is always subject to scrutiny by the revenue and the assessee has to given a satisfactory basis for the write off. The fact that such write off was accepted in the past cannot be the basis to delete the addition. In this regard, it was argued by him that principles of res judicata are not applicable in income-tax assessments. 66. In rejoinder, learned counsel for the assessee submitted that the basis of disallowance was that there was a write off of obsolete stock and there was no question of any shortage of stock. It was also submitted by him that the description in the stock adjustment note as physical shortage is only a head of account but actually represents write off of stock which is obsolete. It was also submitted by him that the burden was on the revenue in the present case to show incorrect valuation of stock by the assessee. Reliance was placed in this regard on the decision of Bombay High Court in the case of CIT v. Acrow India Ltd. [2008] 298 ITR 447 . 67. We have considered the rival submissions. At the outset, we wish to make it clear that the revenue has proceeded to consider the difference in value of stock only as a write off of obsolete stock. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT [1962] 42 ITR 22, the additions made by the ITO on account of obsolete stocks written off by the assessee in its books had to be deleted." 69. The Delhi Bench of ITAT in the case of Pepperit + Fuchs (India) Ltd. ( supra ) has also laid down the principles to be followed in the cases like the present, as follows : "The Apex Court in the case of Chainrup Sampat Ram v. CIT [1953] 24 ITR 481, opined that as the profits of income-tax are to be computed in conformity with the principles of commercial accounting unless such principles stand superseded or modified by a legislative enactment, the loss due to fall in price below cost with respect to the traded goods is allowed even if such loss has not been actually realized in the year itself. Evidently, the emphasis by the Apex Court was to effectuate the theory of prudence underlying the rule that the closing stock is to be valued at cost or market price/realizable value whichever is lower. In the instant case, the assessee, having valued its obsolete stock at its realizable value, being lower of the actual cost, the resultant loss had to be taken into consideration to compute the profits chargeable to tax during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nications equipment in order to facilitate the reorganization of the telecommunications business within the TATA group of companies. Under the above agreement as per clause 1, NELCO agreed to the following : "With effect from the date of this Agreement and subject to the provisions of clause 2 below, NELCO shall cease and desist directly or indirectly carrying on or engaging in India, whether the brand name of NELCO or any other brand name, the manufacture and/or supply/marketing of telecommunication equipment for the territory of India, particularly the activities described in Annexure A ." The Annexure A of the agreement was as under : "NELCO shall cease to manufacture, market, lease or sell any PBX or associated products except to the extent required, the following: ( b )Running down current operations, including liquidating inventories and receivables within 6 months from the date of this Agreement; ( c )Meeting its current outstanding obligations towards customers, including providing committed upgrades. ( d )Providing service support to its customers." Clause 5 of the Agreement referred to the amount payable to NELCO for the above covenant which read as u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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