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TMI Blog2017 (4) TMI 1640X X X X Extracts X X X X X X X X Extracts X X X X ..... ee vide his letter dated 10.02.2004. The assessee along with the original return of income filed a letter dated 24.02.2000, wherein the assessee itself has admitted that the tax liability if any would only be on account of long term capital gains. However, no working of this transaction was shown under any head in the computation of income. 2.1 Further, the assessee firm stopped production in its undertaking with effect from 27.10.1998. Further the assessee entered into a contract packing agreement on 15.11.1998 in terms of which the assessee agreed to sale its business assets relating to bottling business at Gangangar to M/s. Hindustan Coca Cola Bottling North West Pvt. Ltd., Gurgaon, Haryana and further the Coca Cola Company allowed the assessee to work as a Contract Packer for preparing and packaging the beverages. 3. This Court while admitting the appeal on 24.01.2006 has framed the following substantial questions of law: "1. Whether on the facts and circumstances of the case, the ITAT was right and justified in deleting the addition of Rs. 9,26,19,881/- by holding that the sale of business assets was not an itemised sale and thus is not exigible to tax? 2. Whether on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,96,979/- is enclosed. The assessee enclosed a copy of account of "Net amount of slump sales account" as appearing in its books of account. The assessee opened 'Net Amount of Slumps Sales Account' in its books of accounts which is reproduced as under: From To Sriganganagar Bottling Co. Net amount of Jaipur slump sales a/c Debit Credit" 6. He has also referred to Clause D of the agreement dated 15.11.1998 which reads as under: "Clause 'D' at page 1 of the agreement dated 15-11-1998 "The Contract Packer has entered into a memorandum of agreement dated August 31, 1998 with the Bottler (hereinafter the "MOA") in terms of which he has agreed to sell his business assets relating to the bottling business at Ganganagar including the bottling plant situated at Chack 7-Z Mirzawala Road Sriganganagar 335001, Rajasthan, India (hereinafter said "Plant") to the Bottler". There was absolutely no intention on the part of the assessee firm to close this business. The objection was to transfer the business assets only and the agreement dated 15-11-1998 was reached to define the conditions under which the company authorized the bottler to contract with the contract packer and the condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r: 26. Section 2(42)C defines 'slump sale' and reads as under: "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 purposes 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. As per the aforesaid definition, sale in question could be treated as slump sale only if there was no value assigned to the individual assets and liabilities in such sale. This has obviously not happened. It is stated at the cost of repetition that not only value was assigned to individual assets, even the liabilities were taken care of when the amount of sale was apportioned among the outgoing partners, i.e. the Assessees herein. Once we hold that the sale in question was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as may be necessary to wind up the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution. Therefore, for realisation of the assets, discharging the liability of the firm and settling the accounts of the partners, etc., the firm will continue to exist despite the dissolution and not for any other purpose. The material on record in the instant case would clearly show that after dissolution of the firm on 06.12.1987, the firm has never filed any return and in view of the order of this Court permitting the partners to carry on the business in the interest of employees, return was filed by AOP-13 consisting of erstwhile 13/12 partners for accounting profits and seeking depreciation in the assets of the firm and continued to do business in view of the order of this Court that there was no agreement among the partners to continue the business during the pendency of the winding up proceedings. Further having regard to Clause 16 of the Partnership Deed of the dissolved firm, it is clear that the partners intended that the assets of the firm should not be sold to an outsider. It is well settled that every act of the partner would be binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is vested with all assets in favour of 3 partners have received the value of their net asset which has been distributed by the Official Liquidator and AOP 3 who have purchased the business of the old firm, succeeded to it and constituted a new firm in the same name (vide order Defendant (sic-dated) 14.06.1991 in the Company Petition) and therefore it is clear that the order passed by the Assessing Authority confirmed in the first appeal and by the Income Tax Appellate Tribunal (Special Bench) holding that the Appellants as erstwhile partners are liable to pay capital gain on the amount received by them towards the value of their share in the net assets of the firm are liable for payment of capital gains Under Section 45 of the Act. The said finding is justified and accordingly we answer the substantial question of law in favour of the Revenue and against the Assessee. 34. The upshot of the aforesaid discussion would be to allow the appeals partly only to the extent that business income/revenue income in the Assessment Year in question is to be assessed at the hands of AOP-3, in terms of the orders of the High Court, as AOP-3 retained the tax amount from the consideration w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires". We must therefore enquire whether contextually Section 45, in which the expression "capital asset" is used, excludes goodwill. Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings Section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head, "Capital gains". Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of original cost and fair market value of the asset as on 1.1.1954 was available. In short, it is only after 1.4.2000 that computation machinery came to be inserted in Section 48 which deals with mode of computation. 12. The question which arises for determination in this civil appeal is whether judgment of this Court in Artex Manufacturing Co. (supra) is applicable to the present case. In that case, the assessee, a partnership firm, entered into an agreement with the company to sell its business as a going concern for a consideration of Rs. 11,50,400. From the information supplied by the assessee to the AO, it was evident that the sale consideration stood arrived at after taking into account the value of plant, machinery and dead stock as computed by the valuer. The Tribunal held that, the surplus arising on the sale was taxable under Section 41(2) of the Act and not as capital gains. The High Court reversed that finding of the Tribunal and held that the surplus was taxable as capital gains under Section 45 and not under Section 41(2). At the instance of the Revenue, this Court on an appeal held that on the facts and in the circumstances of the case Section 41(2) was applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given by the same Bench which decided the case of Artex Manufacturing Co. In fact, both the judgments are reported one after other in MANU/SC/0773/1997 : [1997]227ITR260(SC) respectively. In the present case, as can be seen from the impugned judgment of the Delhi High Court, the judgment of this Court in Electric Control Gear Manufacturing Co. (supra) is missed out. That judgment has not been considered by the High Court. As stated above, this Court has clarified its judgment in Artex Manufacturing Co. (supra) in its judgment in the case of Electric Control Gear Manufacturing Co.. Therefore, Section 41(2) has no application to the facts of the present case. 17. As regards applicability of Section 45 is concerned, three tests are required to be applied. In this case, Section 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated Code. Therefore, where the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also taken us to the decision of Bombay High Court in the case of Commissioner of Income Tax vs. Polychem Ltd. [2012] 343 ITR 115 (Bom) and more particularly to the following paras: "6. In the present case, while we deal with the submissions which have been urged on behalf of the Revenue and the assessee it would, at the outset, be necessary to advert to the salient provisions of the agreement dated 24 March 1994 in pursuance of which the IMFL undertaking came to be transferred by the assessee. The agreement makes it clear both in its recitals and in clause 1.1 of the contract that the assessee was transferring to the purchaser the undertaking / business as a running business / going concern together with its assets and liabilities. The undertaking / business which was sought to be transferred was the business of manufacturing, blending, bottling, distribution, storing and sale of Indian Made Foreign Liquor. The undertaking / business consisted besides immovable property and movable property (including plant and machinery); current assets including raw materials, stock in trade and book debts; the benefits of all pending contracts, engagements and orders; all licenses and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. It must be emphasized that in the present case the Court is dealing with the position as it existed prior to the insertion of the provisions of Section 50B by the Finance Act of 1999. As a result of the provisions of Section 50B which have been inserted with effect from 1 April 2000 any profits or gains arising on a slump sale effected in the previous year are to be chargeable to income tax as capital gains arising from the transfer of long term capital assets and are to be deemed to be the income of the previous year in which the transfer took place. Under the Proviso capital gains are to be treated as arising from a transfer of short term capital assets in the case of an undertaking owned and held by an assessee for not more than thirty six months. Subsection (2) of Section 50B provides that in such case the net worth of the undertaking or the division shall be deemed to be the cost of acquisition and the cost of improvements for the purposes of Sections 48 and 49. Under subsection (3) every assessee in the case of a slump sale has to furnish along with the return of income, a report of an accountant indicating the computation of the net worth of the undertaking or division. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applied, the object being to determine whether the slump price was capable of being attributable to individual assets. Third, there is a conceptual difference between the undertaking and its components. In that context the Supreme Court held as follows: ...there is a conceptual difference " between an undertaking and its components. Plant, machinery and dead stock are individual items of an Undertaking. Business Undertaking can consist of not only tangible items but also intangible items like, goodwill, man power, tenancy rights and value of banking licence. However, the cost of such items (intangibles) is not determinable. In the case of CIT v. B.C. Srinivasa Setty reported in MANU/SC/0285/1981 : (1981) 128 ITR 294, this Court held that Section 45 charges the profits or gains arising from the transfer of a capital asset to income tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, this Court held that the "asset" must be one which falls within the contemplation of Section 45. It is further held that, the charging section and the computation provisions together con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997 : 1997(6) SCC 437 CIT]. 14. In Premier Automobiles Ltd. v. Income Tax Officer and Anr., MANU/MH/0314/2003 : 264 ITR 193 (Bombay) also, the Division Bench of the Bombay High Court examined this question in detail on somewhat similar facts and has taken the same view. The Learned Judge S.H. Kapadia - (as His Lordship then was as Judge of the Bombay High Court and later became CJI) speaking for the Bench aptly explained the legal position to which we concur as it correctly summarized the legal position applicable to such facts." 15. However, Mr. Singhi has referred to para 11 of the same judgment which reads as under: "11. In our considered opinion, the case of the Respondent (Assessee) does not fall within the four corners of Section 50 (2) of the Act. Section 50 (2) applies to a case where any block of assets are transferred by the Assessee but where the entire running business with assets and liabilities is sold by the Assessee in one go, such sale, in our view, cannot be considered as "short-term capital assets". In other words, the provisions of Section 50 (2) of the Act would apply to a case where the Assessee transfers one or more block of assets, which he was using i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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