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TMI Blog1990 (2) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... 02,620 being contribution to Molasses Alcohol Reserve Fund. This issue had come for consideration before the CIT (Appeals) for the assessment years 1979-80 and 1980-81, and for the reasons stated by the first appellate authority in those orders, which was decided against the appellant, the first ground of appeal is rejected. 4. The second ground is that the CIT (Appeals) erred in confirming the disallowance of Rs. 24,003 being bad debts written off during the year. The ITO has devoted considerable attention to the claim of deduction of bad debts of Rs. 12,63,952. After rejecting this claim for the detailed reasons stated by the ITO, the ITO proceeded to consider the additional claim of the following debts which were also claimed as bad debts: i. Om Prakash Puri : 14,016 ii. Radhey Shyam Oberoi : 3,450 iii. Dalla Miyam : 6,537 ----------------- 24,003 ----------------- According to the ITO, no reasons or evidence for claiming these debts as bad debts had been filed by the company though such details were specifically asked for. The company had not discharged the onus to establish that the debts had become bad and that they were, therefore, admissible discharge. Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany called Akola Oil Industries Ltd. as per the scheme of arrangement approved by the Bombay High Court in terms of its order dated 24-6-1981. As per the scheme, certain assets of Berar Oil Industries became the property of Akola Oil Industries from 1-7-1980. Some assets were given on lease. Employees of Berar Oil Industries ('BOI' for short) became the employees of Akola Oil Industries Ltd. ('AOIL' for short) and all the liabilities of BOI were taken over by AOIL. The ITO held that since the assets of the assessee were sold during the previous year, there was a profit assessable under sec. 41(2) which he computed at Rs. 26,93,099. Objecting to this stand, the assessee stated that there was no sale within the meaning of sec. 41(2) and that therefore no profit would be brought to tax u/s. 41(2). This argument was rejected by the ITO. He held that there was no itemisation of the assets transferred, that the assets which had been given on lease had been shown in Annexure 'A' and that the other assets had been transferred to AOIL. The ITO also observed that there was consideration involved. The consideration had been received by thing the shareholders of the assessee-company in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moneys paid when the above scheme of amalgamation was finalised. In terms of the scheme of amalgamation, which was approved by the High Court, certain assets such as plant and machinery of one industrial unit called Berar Oil Industries in Maharashtra vested in AOIL with effect from 1-7-1980. The liability of this industrial unit also vested in AOIL with effect from that date. The total assets of BOI which stood at Rs. 4,10,97,283 were transferred at book value, i.e., the value appearing in the books of BOI and they were vested with AOIL. The liabilities of BOI which were to the tune of Rs. 3,24,01,483 were also taken over by AOIL and the difference between the assets and liabilities which amounted to Rs. 86,95,800 was to be met by Akola Oil Industries by issue of shares which were to be allotted not to the company called Oudh Sugar Mills Ltd., but to the shareholders of Oudh Sugar Mills Ltd., Shri Toprani then referred to sections 391 and 394 of the Companies Act. These relate to provisions for facilitating reconstruction and amalgamation of companies. He referred to Ramaiya on Companies Act, 1988 Edition, pages 1052 (for discussion on section 391) and pages 1069 and 1073 (for his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , trust, covenant, agreement, or arrangement. According to Shri Toprani, the definition of the term "transfer" contained in sec. 63 was relevant for the purpose of sections 60, 61 and 62 and was not contemplated for the purpose of sec. 41(2). The expressions used in section 41(2) were "sold", "discarded", "demolished" or "destroyed" and these terms for the interpretation of sec. 41 had to be given only that definition which was contained in Explanation (4) of sec. 41 which specifically defined the expressions "moneys payable" and "sold". The Explanation to section 41(1) clearly stated what the expression "moneys payable" meant in respect of any building, plant or furniture. It was clear that 'moneys payable' would mean cash towards insurance, salvage or compensation or where building, machinery or plant was sold, the price thereof. In the present case, no cash amount or cash consideration had passed hands. Shri Toprani's next argument was that such section 41(2) was a charging section and it also provided for machinery for computation of profit. He relied on a decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 at page 295 to argue that there was no prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustries to Akola Oil Industries Ltd. as per the scheme of arrangement approved by the Bombay High Court in terms of its order dated 29-6-1981. A copy of the original order of the Court dated 29-6-1981 along with the scheme of arrangement between Oudh Sugar Mills Ltd., and AOIL has been filed before us and is on record. The appellant herein, Oudh Sugar Mills Ltd., was incorporated under the provisions of the Indian Companies Act and had its registered office at Industry House, Bombay. This company had sugar factories, oil mills, solvent extraction plant in Uttar Pradesh and vanaspati oil and solvent extraction plant at Akola in the State of Maharashtra. AOIL is also incorporated under the provisions of the Companies Act and had its registered office at Akola, Maharashtra. It was a new company and was registered on 5-5-1980. Since the activities of Oudh Sugar Mills were spread over both in Maharashtra and Uttar Pradesh, it found it desirable and expedient to separate BOI so that the activities in Maharashtra and Uttar Pradesh could be looked independently making for a more effective and efficient management. Therefore, the appellant-company proposed to segregate its Berar unit and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cence basis. Whatever assets that had been transferred were transferred, as stated above, at book value. There was a difference in the book value and the written down value of the assets because the assessee was providing for depreciation in its books on straight line basis and such difference was brought to tax by the ITO as profit under section 41(2). Although it was argued before the CIT(Appeals) that there was no sale of assets and that no consideration had been paid by AOIL to the assessee, the CIT(A) rejected these arguments. He observed that there were three parties to the transaction of the scheme of arrangement, namely, the assessee-company, AOIL and the preference and ordinary shareholders of the assessee-company. The CIT(A) admitted that the assessee had not been given any shares of AOIL and what had actually happened, as far as the assessee was concerned, was that some of the accounts representing some assets and liabilities of BOI had been closed and the amounts representing the excess of assets over liabilities which had been taken over by AOIL had been debited to the general reserve account. The shareholders of the assessee-company got shares of AOIL in consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no consideration had been paid by the AOIL in respect of the assets acquired by it. He, therefore, confirmed the action of the ITO of invoking the provisions of sec. 41(2) and bringing to tax what he described as the excess of the moneys payable in respect of the assets acquired by it. He, therefore, confirmed the action of the ITO invoking the provisions of sec. 41(2) and bringing to tax what he described as the excess of the moneys payable in respect of the assets acquired by it over the written down value of such assets as business income in the hands of the assessee. 11. For resolving the controversy before us, we have to deal with three aspects of the issue : (i) was there a sale in this transaction within the meanings of section 41(2); (ii) was any consideration paid which could fall within the connotation of the term "moneys payable"; and (iii) whether the appellant company could be said to have received any consideration which could be said as moneys payable consequent to this transaction. We will try and deal with these three issues in an effort to arrive at a solution to the controversy raised before us. As we have seen, the word 'sold' which occurs in this sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the transaction between the respondent company and the Zamindar and Zamindarini was one of exchange and there was no sale of assets of the cinema house for any money consideration and that, therefore, the provisions of section 10(2)(vii) (of the old Act) did not apply. In B.M. Kharwar's case, the Supreme Court was dealing with the taxability of profit u/s 10(2)(vii) and laid down the principle that in determining whether a receipt is liable to be taxed the taxing authorities are not entitled to ignore the legal character of the transaction and proceed on what they regard as "the substance of the transaction". The Supreme Court held that the company is a legal entity distinct from the partnership. In the light of these crucial pronouncements, it is very difficult to hold on the basis of facts of the present case, that there has been any sale of assets in the arrangement arrived at between the assessee-company and the AOIL. Now, section 394 of the Companies Act, which was cited before us and with reference to which certain arguments were addressed, reads as under :---- " S. 394. Provisions for facilitating reconstruction and amalgamation of companies ---- (1) where an applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act, 1988 Edition). Now, the expression "sold" for the purpose of section 41(2) is to be given the same meaning as is contained in Explanation to sub-section (3) of section 41. Clause (2) of this Explanation provides that the expression "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company. [Emphasis provided.] Now, in the present case, there is no exchange inasmuch as the parties to the transaction are not two persons who have mutually exchanged the ownership of one thing for the ownership of another. This, as explained by the CIT(Appeals), is a tripartite agreement where the shareholders of the company constitute the third party along with the assessee-company and AOIL. As we have already seen, there cannot be an exchange if the parties are not the same and, therefore, in our opinion, the present arrangement does not constitute 'exchange' for the reason that this is not a bipartite agreement but it is a tripartite agreement. Secondly, the scheme of arrangement under which the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classes and an assignment of such shares singly or numerously to different persons. The Calcutta High Court in Calcutta Stock Exchange Association Ltd., In re [1957] 27 Com. Cases 559 held that allotment means the appropriation out of the previously unappropriated share capital of a company, of a certain number of shares to a person. Till such allotment, the shares do not exist as such. It is on allotment in this sense that the shares come into existence. The allotment of shares was probably made in terms of clause (ii) of section 394(1) of the Companies Act and the receipt of shares on allotment by the shareholders of the assessee-company cannot take the form of the expression "moneys payable". Firstly, the difference between assets and liabilities was paid in the form of allotment of shares and secondly such allotment was made to the shareholders of the assessee-company and not to the company as such. In this process, the assessee-company could not be said to have received any consideration or price for the plant machinery transferred and in that case what was received by the shareholders could not be said to be a consideration in the form of "moneys payable", being the price o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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