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TMI Blog2001 (3) TMI 1042X X X X Extracts X X X X X X X X Extracts X X X X ..... s under :- 2.1 Karamchand Premchand Pvt. Ltd. (hereinafter referred to as "KPP") was a Private Limited Company which maintained its accounts on the basis of the financial year ending 31st March and on that basis its assessments were completed upto A.Y. 1973-74. KPP was amalgamated with Shahibaug Entrepreneurs Pvt. Ltd. (hereinafter referred to as "SEP" or "the assessee") with effect from 1.1.1974. 2.2 On 30.3.1970 the assessee sold the Wadala unit of one of its divisions called Swastik Oil Mills to Vegoll Pvt. Ltd., a wholly owned subsidiary of the assessee for a consideration of ₹ 1 Crore. This was made up of ₹ 7.55 lacs for land and building, ₹ 6.45 lacs for plant and machinery at book value and ₹ 10 lacs for technical knowledge etc. and ₹ 76 lacs for goodwill. The assessee did not declare any income chargeable to tax but the ITO included a sum of ₹ 86 lacs relating to sale of technical knowledge and goodwill as profits from an adventure in the nature of goodwill. He further held that as the fixed assets were sold at WDV there was no profit under section 41(2). 2.3 In appeal, the AAC held that all the relevant f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt wholly owned subsidiary Companies of the assessee are as under :- 2 Sarabhai Chemicals Sarabhai Chemicals 6.95 Crores 7.50 Crores 4.34Cr res 3.40 Crores Sarabhai Common P. Ltd. Service Dvn. Sarabhai Mktg. Dvn. 3 Sarabhai Machinery Fabriquip Pvt.Ltd. 1.36 Crores 40 lacs Nil 4 Sarabhai Glass Dvn Packart Pvt. Ltd. 54 lacs 10 lacs 03.60 lacs 3.3 All the above transactions were with effect from 30.6.1973. The assessee did not offer any income as chargeable in its assessment for A.Y. 1974-75 in relation to the aforesaid transactions. The ITO, however, held that in respect of each transaction there was a chargeable income which was includible in the assessment. The ITO firstly held that on sale of Swastik Oil Mills there was an adventure in the nature of trade and that the business did not have any goodwill and, therefore, the amount of ₹ 2 crores (determined as goodwill of the business) was charged under the head "business income" being income from an adventure in the nature of trade. He further held that the value of the goodwill of the business of the other undertakings was not as much as adopted by the assessee and to that extent the consideration had passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat since the transaction in question was a case of slump sale of each of the divisions as a going concern, there was no question of assessing the profits under Section 41(2) in the hands of the assessee (a holding Company) to its 100% subsidiary Company. In this view of the matter, the Tribunal, by a majority of 2:1, held that the AAC was not right in setting aside the assessment and in requesting the ITO to reframe the assessment after holding inquiries regarding the value of the goodwill and the other assets. From the aforesaid decision dated 4.1.1982 of theTribunal based on the majority view, Income-tax Reference No. 243 of 1985 has been made under Section 256(2) of the Act at the instance of the revenue in respect of A.Y. 1974-75. 4. Since both the references pertain to the same assessee and raise common questions of law, with the consent of the learned counsel for the parties, the two references were heard together and are being disposed of by this common judgment. 5. We have heard Mr BB Naik, learned counsel for the revenue, instructed by M/s M.R. Bhatt & Co. We have also heard Mr RK Patel, learned counsel for the assessee. Both the learned counsel have taken us through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any asset is not equivalent to itemwise value of that particular asset. (b) Deeds of Assignment relating to all the transfers indicate only aggregate values of assets and in the corresponding schedules no itemwise value by way of break-up value of aggregate value is available. (c) All transfers are as going concerns by assessee, as a holding Company to 100% wholly owned Indian subsidiary companies and all assets are transferred at book value. (d) The Tribunal's order, particularly the order of the third learned Member of the Tribunal, gives an undisputed finding of fact that the transactions are transactions of slump sales and each undertaking is sold as a whole. On this limited aspect, there is no difference of opinion between the Members of the Division Bench. The Tribunal further states that the appellant has not entered into sales of different items of the undertakings in question, but has sold the entire undertaking in each case. The parties have not put the valuation on the different assets and liabilities involved before coming to the net price in computing the slump price. Strong reliance has been placed on the decision of the Apex Court in CIT vs. Electrical C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same as income u/s. 41(2) because of several important factors like varying rates of depreciation for different assets. Strong reliance is placed on the decision of the Apex Court in Sunil Siddharthbhai vs. CIT, (1985) 156 ITR 509. III Lastly, in any case, the taxable event is applicable only to the building, machinery, plant and furniture and, therefore, no other assets can be included within the scope of section 41(2) for taxability of difference between written down value and the actual cost. 8. Before dealing with the rival contentions, it will be necessary to make a brief reference to the findings given by the Income-tax Officer in the assessment order, by the Assistant Appellate Commissioner in appeal and by the Members of the Tribunal regarding valuation of the goodwill as the said findings would assume considerable importance while deciding the rival contentions. 9.0 FINDINGS GIVEN BY THE ITO 9.1 Swastik Oil Mills Ltd. was a separate Company from 1930 onwards and it was under the managing agency of Sarabhai Sons (P) Ltd., a sister concern of the assessee. Earlier the shares of Swastik Oil Mills Ltd. were held by three groups including Sarabhai group and as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lgamation with the assessee Company. (c) When the Swastik Oil Mills Ltd. was incurring losses it was sold to the assessee by its shareholders. (d) Even after the assessee assumed its control it could not make any profits and it incurred losses to the tune of ₹ 54.92 lakhs as stated above. (e) As discussed above, the Swastik Oil Mills had two divisions - one of its divisions i.e. Wadala Unit has already been sold by the assessee in the accounting year 1969-70 to Vegoils (P) Ltd. and a goodwill of ₹ 76,00,000/- had already been charged. When a goodwill of ₹ 76,00,000/- had already been charged then where is the possibility of any further goodwill and that too to the extent of ₹ 2 Crores. (f) Goodwill in its present form means the business is better than normal return of profitability. But here the case is reverse. So there is no goodwill. The business is also not of a monopolistic nature. (g) It is pertinent to mention here that the Swastik Oil Mills division was sold to Swastik Household and Industrial Products (P) Ltd. on 30.3.1973 whereas the above valuation report is dated 25.6.1975. It means whole of the story of goodwill is an after thought coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt assets (including sundry debtors) and cash and bank balance, raw material, stock-in-process, strock-in-trade, spares, stores and other articles and current liabilities available in the books of accounts as noted by the ITO in the assessment order and reproduced at page 203 of the paper book are as under : Sr. No Divisions Sarabhai. Machinery Chemicals, Glass Rs. (in lacs) Sarabhai Common Services Rs. (in lacs) Sarabhai Mktg. Dvns. Rs. (in lacs) 1 Land & building 23.00 91.00 6.00 2 Machinery & equipments, loans and advances, current assets, cash and bank balances 28.00 372.00 21.00 3 Raw materials 74.00 838.00 26.00 4 Goodwill 40.00 750.00 10.00 5. Total 165.00 2051.00 63.00 6. Less : Current Liabilities 29.00 1356.00 18.00 7. Net Amount 136.00 695.00 45.00 The ITO noted that the transferees/wholly owned subsidiaries to which the shares were sold were floated only on 20/22.6.1973 pursuant to the Board of Directors' resolution dated 14.6.1973 and the assessee Company resolved to subscribe their entire share capital by resolutions passed by the Board of Directors of the assessee Company. The ITO noted that the valuation report dated 25. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid amount was worked out by the ITO and placed in Annexure "A" to the assessment order by working out the average net profits after tax as taken by the valuer for Sarabhai Chemicals Division, Sarabhai Marketing Division and Sarabhai Common Services Division for the A.Y. 1974-75 as under : ANNEXURE 'A' Sarabhai Chemicals Division Sarabhai Marketing Division Sarabhai Common Services Division 1) Average Net Profits after tax as taken by the value Rs.95,00,000/ Less: Managerial remuneration Rs.2,50,000/ Rs.92,50,000/- 2) Average purchase price equal to 2 years Rs.1,85,00,000/ Super Profits Net average profits Rs.92,50,000/- Multiple of 10 i.e. 10% Rs.9,25,00,000/ Less: Net Worth Rs.2,42,00,000/- Rs.6,83,00,000/ 3) Average purchase price Rs.1,85,00,000/- Add: Super profits Rs.6,83,00,000/- Rs.8,68,00,000/- Average Rs.4,34,00,000/- So goodwill Rs.4,34,00,000/- The ITO, therefore, came to the conclusion that the difference between the value of the goodwill claimed by the assessee at ₹ 7.50 Crores and the value of the goodwill as worked out by the ITO at ₹ 4.34 Crores i.e. the balance amount of ₹ 3.16 Crores include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng charge or as a business profit when what was sold was the entire undertaking in a nature of 4 divisions and not individual assets of those undertakings. The assessee also stated that it has no information about the market valuer of the assets. 9.6 After considering the aforesaid objections and negativing them, the ITO placed the valuation of the goodwill as stated in the chart in para 3.1 of this judgment as worked out as per the details given in the annexure to the assessment order and which is reproduced in para 9.4 hereinabove. The Assessing Officer came to the conclusion that the assessee had tried to avoid furnishing the of the details called for in order to conceal the fair market value of its assets so as to prevent the difference between the fair market value and the books value of the assets other than goodwill as business profits or as balancing charge. The ITO also considered the minutes of the meeting of the Central Direct Taxes Advisory Committee held on 16.8.1971 and held that the same was applicable only where a parent company had transferred the assets at the written down value, but the said Committee had no occasion to discuss the situation where a Company tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset is not taxable when the sale is to be subsidiary but after considering all the relevant evidence and circumstances and the arguments advanced on behalf of the assessee and the departmental representative, the Assistant Commissioner came to the broad conclusions in favour of the revenue on the following issues : "(i) the fallacy of creating a goodwill while other assets are transferred at book value or WDV especially when the transfer is to a subsidiary. (ii) the motive behind creating the so called goodwill which is primarily intended to circumvent the taxation laws and the consequent need for a through scrutiny as to whether it had been devised to escape taxation of profits u/s. 41(2) and other profits, and (iii) on the non acceptability of the arguments of the assessee that when an undertaking is sold as such the Income Tax Officer has no right to determine the profits on individual items of assets transferred. The Assistant Commissioner noticed how the ITO had determined the goodwill of the units in question after pointing out the deficiency in the valuation of the goodwill as given by the assessee and the Assistant Commissioner gave the following detailed reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represent the appreciated value of the assets. In fact in the case of valuation of Wadala unit goodwill created by the assessee was including the enhanced value of lease hold land. (viii) There has been kaleidoscopic changes in the pattern of companies and the shareholdings and as well be discussed in the later paragraph the underlying motive in the reorganization was tax planning and avoidance. This leads to the obvious inference that the assessee wanted to avoid tax by transferring the assets at book value and at the same time roap other benefits by creating the so called goodwill which really represented the enhanced value of assets, and at the same time it could avoid tax by resorting to this method of entry. (ix) The Income-tax Officer has therefore the right to examine the nature of the staim of goodwill and if it is found to be incorrect, he is justified in treating it or a portion of it as representing the enhanced in value of other assets." However, the Assistant Commissioner held that the Assessing Officer had committed mistakes in the calculation of the goodwill. By a general scheme of reorganization the assessee Company alongwith Kalindi Investments P. Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he question of goodwill had been given at an exaggerated figure. Even while holding that there was need for inquiry for purposes of ascertaining the correct figure of goodwill as accepted by the principles of accountancy, the Assistant Commissioner came to the conclusion that the inquiries conducted by the ITO were incomplete and, therefore, the Assistant Commissioner came to the conclusion that in the interest of justice the assessee should be provided with one more opportunity to furnish its estimate of the market value of assets transferred on which the profits can be taxed. The Assistant Commissioner accordingly set aside the assessment with the following directions to be observed by the ITO while reframing the assessment : "(i) Computation of goodwill of all the four units transferred to subsidiaries should be properly enquiry into taking also into account Shri Ghatalia's report, in the light of the discussion in the appellate order. (ii) The Income-tax Officer should re-ascertain the market value of the depreciable assets transferred and also the market values closing stock, raw materials, spare-parts, etc. as has been done in the assessments, after giving adequa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed the appeal of the assessee after holding that the undertakings as a whole were sold and, therefore, there was no question of assessing profits under Section 41(2) of the Act. It was also held that the Assistant Appellate Commissioner did not have jurisdiction to direct the ITO to reframe the assessment including therein the balancing charge and profits from the sale of stocks, if any, in respect of the transaction of the sale of the Swastik Oil Mills division at Ambarnath and that even if it is assumed that he had such jurisdiction, since there was no scope for including in the total income any income by way of balancing charge under Section 41(2) and profit from the sale of stocks, spares etc. the Appellate Assistant Commissioner was not right in setting aside the assessment and requiring the ITO to reframe the assessment. DISCUSSION 13. In view of the above controversy, the moot question is - whether the sales of the undertakings in question were slump sales or sales of individual assets. The learned counsel for the assessee has obviously tried to contend that since the agreements in question did not themselves give value of the assets which are set out in the schedules to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written down value of plant, machinery and dead stock, according to the assessee's books, was ₹ 4,36,896. The difference between ₹ 15,87,296, the value of plant, machinery and dead stock as revalued, and ₹ 4,36,896, the written down value of plant, machinery and dead stock, according to the assessee's books, came to ₹ 11,50,400. The Income-tax Officer held that the written down value of plant, machinery and dead stock according to the income-tax records was ₹ 3,32,276. After deducting the same from the amount of ₹ 15,87,296 for which the plant, machinery and dead stock were transferred to the company, the Income-tax Officer held that tax was payable under section 41(2) on the income of ₹ 12,56,020. The Tribunal held that the surplus was taxable as business profit under section 41(2) and that the assessee was assessable in the status of a registered firm. On a reference, the High Court held that Section 41(2) was not applicable. On appeal by the revenue to the Supreme Court, it was held that in the agreement of sale, there was no reference to the value of the plant, machinery and dead stock. But on the basis of the information that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was liable to be taxed as balancing charge under Section 41(2). 16. We have not gone into details of the valuation made by the ITO as the question is left open by the Appellate Assistant Commissioner for determining the correct value of the goodwill. 17. We may point out that the principle in Electric Control Gear Mfg. Co. is not applicable. The facts in the said case were as under : The assessee was a partnership concern consisting of 13 partners. On March 31, 1966, it entered into an agreement whereby it transferred the entire assets of the business together with the liabilities as a going concern to a limited company, for a consideration of ₹ 8 lakhs. The erstwhile partners of the assessee firm were allotted share in the company of the same value in their profit sharing proportion. The Income-tax Officer held that depreciation allowed to the assessee firm amounting to ₹ 3,32,863 in respect of the assets transferred by the firm to the said company, was chargeable to tax under the provisions of Section 41(2) of the Income-tax Act, 1961. He also brought to tax capital gains of ₹ 8 lakhs, being the sum of ₹ 5,000 as basic exemption, included the sum of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll 76,00,000/- Even the said amount of ₹ 76 lakhs has been found to be an exaggerated figure as per the concurrent findings given by the ITO and the AAC. 18. In view of the aforesaid facts, we are satisfied that the order of remand passed by the Appellate Assistant Commissioner did not warrant any interference at the hands of the Tribunal. 19. As regards the contention of Mr Patel for the assessee that the actual machinery for computation would fail in arithmetical terms. We are unable to accept the said contention. If the difference between the actual cost and the written down value of the assets is taxable under Section 41(2), the same will have to be taxed. The decision of the Supreme Court in Sunil Siddharthbhai vs. CIT, (1985) 156 ITR 509 pertained to consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital. The facts in the instant case are entirely different. Hence, the principle laid down therein is not applicable. 20. Before concluding, we must note that even while not accepting the major arguments urged on behalf of the assessee, there is some substance in the contention of Mr RK Patel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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