9911796707
TMI Blog1987 (11) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... search Group, in 1974, transfer the industrial undertakings and businesses of Swastik Household and Industrial products division, business of operation Research group and the Sarabhai research centre to its subsidiary company M/s. Ofisade Pvt. LTD. The income tax officer in para 6 of his order, refers to this transfer as a going concern to its subsidiary company.". 3. In the earlier transfer, goodwill of the businesses was transferred at Rs. 2 crores. Scanning the details regarding the present transfer, the ITO came to the conclusion that the transfer did not represent in its terms the correct position. The value ascribed to goodwill, the other assets, etc. was not realistic. In effect, he come to the conclusion that on account of the transfer the assessee had gained substantial amounts taxable under section 41(2). Read with the order of the Inspecting Asst. Commissioner under section 144B, the order of the ITO reveals that he found that the assets have been transferred at their written down value without having any regard to their present market value. The fact that an amount of Rs. 6 crores had been shown as the value of goodwill without substantial reasons went to show that a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written down value in the hands of the previous owner, namely, M/s. Karamchand Premchand Ltd. If no particulars were to be filed, the ITO was to treat the sum of Rs. 4 crores as profit assessable under section 41(2). It effect, the CIT (A). In effect, the CIT (A) upheld the addition on this account made by the ITO. 5. The learned counsel for the assessee has pointed out that the whole exercise gone through by the department was a futile one. There was no profit taxable under section 41(2) in the present case. There was a simple slump sale of the entire undertaking in the present case. The business belonged earlier to M/s. Karamchand Premchand which transferred the same as a running concern to the assessee. The question of section 41(2) profit came up for consideration even in that transfer, the matter having come up on appeal before the Tribunal in ITA No. 752 (Ahd.) / 78-79 dated 28-2-1981. The tribunal held therein that the undertaking was sold as a whole and there was no question of assessing the profit under section 41(2). The position is exactly the same here also. The assessee has sold the undertaking to its own whole subsidiary. Section 47 ruled out of consideration any cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch group, Sarabhai Technical services Division and Sarabhai Research Centre of the Vendor as going concerns on and with effect from the 1st. day of March, 1977". The details of the assets were specified in the agreement only for the purpose of identifying the assets included in the undertaking. Even the computation of the consideration was made on the basis of a single transfer of the entire undertaking. As regards goodwill, the assessee had purchased the goodwill from the earlier vendor at Rs. 2 Crores. The goodwill of the business at the time of the present transfer was computed on expert advice after taking into account all the facts of the case. 7. For the department, stress is laid on the orders of the authorities below. It is pointed out that the factual position in the case does not indicate a slump sale. The subject matter of the transfer was not the sale of the entire business. In the first place, assets like land have been omitted from the transfer. Even if it is assumed that there is a slump sale, the valuation of the assets has been made item wise. There was a specific ascertainment of the existence and the valuation of several individual items comprised in the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , rejected the department's stand. By the agreement of 28-2-1977, the assessee had transferred the asset earlier it got from its holding company along with one or two businesses developed in the interim to its 100 per cent subsidiary, M/s. Ofisade Pvt. Ltd. The transform was effected under the agreement referred to above. The preamble to the agreement recites the nature of the businesses carried on the assessee which cover four times, i.e. Swastik Oil mills, operation Research Group, Sarabhai Technical services and Sarabhai research centre. The assessee is also in possession of several agreements relating to services, leases such as the HRO Agreement, the PACKART Agreement, the STDS Agreement, etc., which give the assessee substantial rights etc. These are also detailed in the transfer agreement. The operative part of the agreement is as under : "The vendor shall transfer and assign and the purchaser shall purchase and accept the transfer and assignment of the industrial understanding and business of Swastik Oil Mills Division and the Businesses and Activities of Operations Research Group, Sarabhai Technical Services Division and Sarabhai Research centre of the Vendor as going con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in the books of account of the vendor, etc. The schedules attached to the agreement detail the assets comprised in the undertaking and transfer. 10. By an agreement dated 28-6-1977, certain modifications and clarifications were made including the specification in figures of the considerations. Clause C of the preamble to this agreement is as under : "In the light of the above, by an agreement for sale dated the 28th day of February 1977 and made between the parties hereto, the vendor has agreed to transfer and assign on and with effect from the 1st day of March, 1977 the industrial undertaking and businesses of its Swastik Oil Mills Sarabhai Technical Services Division and Sarabhai Research Center of the vendor as going concerns together with all the assets thereof including benefit of the contracts, agreements, arrangements and understandings as also the goodwill of the said business along with the liabilities relating thereof or arising out of the said industrial and activities and in particular...." Clauses X, Y and Z of this agreement detail the manner of payment of the consideration. Accordingly, the movable assets capable of passing by delivery had already been deliver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; Rs. Ps. (a) The book-value of the said Machinery and Equipment. 2,29,99,335.17 (b) The book-value of the said current Assets 6,69,61,115.93 (c) The book-value of the said Investment 35,414.39 (d) Value of the said Goodwill as certified in the Report dated the 24th February, 1977 of M/s Ghatalia & Co., Chartered Accounts, Bombay 6,00,00,000.00 (e) Value of the right to receive royalty income from the said `Technical Assistance Fees & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; -------------- -------------- Net aforesaid 8,32,24,726.40" -------------- -------------- the balance of Rs. 4,09,71,751.75 was to be paid : Rs. 80,00,000.00 - When demanded by the assessee-balance of Rs. 3,29,71,751.75 to be paid in eight equal annual installments carrying interest at 11 per cent per annum. 12. A detailed analysis of the agreement as above leads to two clear conclusions. The assessee has transferred the entire undertaking to the subsidiary company as a whole. The fact that an item like land and buildings was not transferred would not, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be a correct proposition. On the contrary, having regard to these details, the vendor and the purchaser would normally come to a figure of purchase price. 14. The department has set mush store by the value given to the goodwill at Rs. 6 crores. The assessee's valuer has valued this asset and put its value at Rs. 6 crores. The department sought to work out the value of the goodwill with the aid of a chartered accountant and came to the conclusion that what was put by the assessee at Rs. 6 crores would at best be worth Rs. 2 1/2 crores. The excess, according to the department, represented the increased value of the other assets. It is on this basis that the increased value was brought to tax under section. 41(2). The method of working out a super profit for the purposes of determining the goodwill of a business is certainly a good method but it is subject to several limitations. For instance, if the business has to be closed down for lack of custom or impossibility of selling goods, to work out the super profits on the basis of the preceding five year's receipts and treat the same as the goodwill would simply be absurd. While a super profit would be indicative of goodwill, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value content these items would have. For instance, an industrial license can be obtained in certain cases only by a person who has conducted an activity of type for some time. An import entitlement is available only to a person who has made stipulated exports, know-how, trade marks, etc., of considerable value to those interested but to the producer of these will remain unevaluated assets. What we want to point out is that even though the working of the consideration has taken into account assets of the business as rightly pointed out by the department, there are several assets of considerable value which have not been included. Apart, therefore, from even a goodwill worked out on the super profit method, substantial value will have to be ascribed to these intellectual properties, intangible assets, etc. We are not sure, if a proper consideration is taken of all these aspects of the transfer the figure put down by the assessee under the head 'goodwill' at Rs. 6 crores would not be a proper figure; it could be even more, The name utilised 'goodwill' (sic), If these assets are considered as assets, may be wrong. If the existence of these assets is taken into computation for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of depreciation computation, the assessee must necessarily retain with him details and office copies. If he does not do so, he should be penalised. This appears to be a strange approach. If there were items for which the details are only with the assessee and not with the department, even in discharging its burden of proof as to assessability, the department might place the burden on the assessee to produce those details and on their non-production decide against him. We are unable to understand how when all the details necessary to work out the profit under/section. 41(2) are with the department, instead of taking the trouble of ascertainment of the factual position, it throws the burden on the assessee, which does not fall on him, and makes an addition of an amount of Rs. 4 crores. 17. It is clear even from the stand of the department that capital gains in respect of depreciable assets are not taxable in view of section 47. The items of plant and machinery, for which a profit under/section. 41(2). is computed, if individually considered, may give rise to a profit under/section. 41(2) an obsolescence allowance or a capital gain - all of which have to be evaluated for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in that case would equally apply to the present case : "22. Both in Mugneeram's and Kharwar's cases the transaction were between partners of a firm and a company. A company is a difference entity from the individuals composing it. The decision in the above two cases went on the basis of slump sale and a legal effect of a sale respectively. In the present case what has happened is transfer of certain assets by a parent company to its 100 per cent subsidiary company. The assets and liabilities were transferred at the book values obtaining in the parent company's book, a certain amount was raised calling it goodwill, all of which was added to constitute the consideration. A 100 per cent subsidiary of a parent company is in fact a creature of the parent company and the relation between the two is not of the same nature as that of shareholders of a company and the company itself. When a shareholder makes a sale to a company it cannot be stated that he is making a sale to himself. The shareholder cannot also claim that he has any right in a particular asset or liability of the company of which he is a shareholder. In the case of the parent and subsidiary company the parent company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal consideration received by the parent company will be set off by the same amount of consideration given up by the subsidiary company to the parent company which in term reduced the value of the assets or even the share value of the subsidiary company. As a matter of fact, part from any gloss of law whether the goodwill stipulated in these transactions is the correct value of the goodwill or not even if the market value of the assets is taken for analysing the transaction rather than book value there could be no section. 41(2) profit or even business profit available to the parent company." 20. From any point of view, therefore, we hold that no profit under section 41(2) can be computed or included in the total income of the assessee. Addition of Rs. 4,38,789 : 21. The assessee-company had to receive a sum of Rs. 21,93,944 from M/s P. T. Kamaltex (Indonesia) in terms of the agreement entered into with them. Out of the above amount, a sum of Rs. 4,38,789 was deducted as withheld tax in Indonesia and only the balance of Rs. 17,55,155 was remitted to India. The assessee returned as its income a sum of Rs. 17,55,155 on which also it claimed exemption under section 80-0. The ITO tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities below. The entire amount of 250,000 Dollars accrued to the assessee outside India and is taxable in India. It was explained that 50,000 Dollars have been deducted therefrom. According to the learned counsel, even this is not supported by evidence. As regards the application of section 80-0, it is clear that the assessee has brought in India by way or foreign exchange as required by section 80-0 only a sum of 200,000 Dollars. Section 80-0 would apply only to this amount brought in and not for any amount not brought into India. In fact, no permission for non-remittance of the balance of 50,000 Dollars has been obtained even from the Reserve Bank Of India. As regards the relief under section 91, according to the learned counsel, that comes up for consideration only if the relevant facts are looked into, the necessary procedure is gone through and a final decision made on the application of the section. In fact, the assessee has not put in any claim under sec. 91 at all. 25. On a consideration of the facts, we see no reason to sustain the addition. The decision is Y. N. S. Hobbs' case and Shaw Wallace & Co. Ltd.'s case directly support the assessee's case. What is taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole amount of 50,000 Dollars. Since we are allowing the claim on the other ground, we do not express any opinion on this claim of the assessee. We would, however, state that if the assessee is entitled to relief under section 91, it can put an application for getting the same even if it has not already done so. Gifts of Rs. 4,256 & Sales-tax penalty of Rs. 2,401 : 27. These two grounds are not pressed. Exchange difference of Rs. 1,20,387 : 28. This is covered by the full Bench decision of the Tribunal in Poysha Industrial Co. Ltd. v. ITO (1979) 1 SOT 206 (Bom.) against the assessee. Payment of Rs. 25,000 to S. V. Ghatalia & Co. : 29. The assessee claimed the above expenditure for getting a valuation of the goodwill done as a business expenditure. Both the ITO and the CIT (A) disallowed the claim. After hearing the parties, we uphold the disallowance. The expenditure has nothing to do with the running business of the company. Interest under section 139 & 215 : 30. The assessee's claim challenging the levy of the above interest was rejected by the CIT (A) on the ground that no appeal lay in respect of it. Before us, the learned counsel for the department has relied on CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 41(2) are not applicable. He further submitted that capital gain also cannot be charged as there is a transfer from a holding company to subsidiary company. According to him, the land and building could not be transferred as there was some statutory difficulty and otherwise, it was a transfer of the undertaking as a going concern. He submitted that, therefore, the question of application of section 41(2) does not arise. He placed reliance on the following decisions : (i) West Coast Chemicals & Industries Ltd.'s case, (ii) Mugneeram Bangur & Co.'s case, (iii) Sarabhai M. Chemicals (P.) Ltd. v. P. N. Mittal, Competent Authority (1980) 126 ITR 1 (Guj.), and (iv) Artex Mfg. Co. v. CIT (1981) 131 ITR 559 (Guj.). Shri Palkhivala also submitted that a similar issue has been considered by the Tribunal (Ahmedabad Bench 'A') in the case of Shahibag Entrepreneurs (P.) Ltd. v. ITO (IT Appeal No. 752 (Ahd.) of 1978-79). a copy of which is placed at page 82 of the assessee's compilation. Sri S. P. Mehta has also joined Shri Palkhivala in favour of the assessee and supported the case of the assessee. He contended that when the intention of the assessee was to trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual items and clarified in clause 'Y' that " the said lands and buildings and the tenancy/occupancy rights in respect of the various premises as referred to hereinabove are not to be transferred by these present". These facts are apparent from the contents of the relevant portion of the Deed as under : Rs. Ps. (a) The book-value of the said Machinery and Equipment. 2,29,99,335.17 (b) The book-value of the said current Assets 6,69,61,115.93 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank Of India 12,00,000.00 7,19,01,139.09 -------------- -------------- Net aforesaid 8,32,24,726.40" -------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the cost of the land and no part of the price was taxable. It was further held that in the schedule to the agreement the price of the land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold, and what was given in the schedule was the cost price of the land as it stood in the books of the vendor and even if the price attributed to goodwill could be added to the cost off the land, there was nothing to show that it represented the market value of the land. As stated somewhere above, in view of the fact that the land and buildings have not been transferred by the assessee in the case on hand, the issue before the Supreme Court in the aforesaid case cannot be compared with the case under consideration. 8. In Sarabhai M. Chemicals (P.) Ltd.'s case, the issue before the Gujarat High Court was concerning acquisition of immovable property. In that case there was a transfer of an industrial undertaking as a going concern together with goodwill and all other assets thereof by a holding company to its wholly-owned subsidiary at a slump price and the valuation which was mentioned was the book value (i.e., written down value) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r laid down there in that the burden of proving that the consideration for the sale of the property was less than what it purported to be, lay upon the company. In the said case, their Lordships distinguished the earlier decision of the Supreme Court in the case of Mugneeram Bangur & Co. The facts discussed by their Lordships in the aforesaid case appear to be akin to the facts of the case on hand. Therefore, in my view, it would be proper to apply the ratio laid down by their Lordships in this case to the facts of the case on hand. 11. In B. M. Kharwar's case, the issue before their Lordships of the Supreme Court was also to the same effect, i.e., when the assessee transferred its assets to a company, whether the excess realised over the written down value is liable to be taxed under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. Their Lordships held in that case that by virtue of the amendment made in the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 by section 11 of the Taxation laws (Extension to Merged States and Amendment) Act, 1949, even under a "realisation sale", the excess over the written down value not exceeding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and building were not sole and transferred due once the assessee has not done so, which is an admitted fact, it cannot be said that there was transfer of the undertaking as a whole including all the assets and liabilities. Here, I and Shri Mehta my be right that the land and buildings could not be transferred due to certain statutory difficulties but once it is prohibited under the statutes and the a assessee was not allowed to transfer the land and building the fact remains that the a assessee has not transferred the undertaking as a whole, as already said. When there is some statutory prohibition, the assessee is not allowed to go beyond that and to enter into agreements contrary to the statutes or otherwise. However, on a consideration of the relevant facts and circumstances of the case, I am of the opinion that the inference that could be drawn in this case is that the undertaking as a whole was not transferred and, hence, it cannot be said that there was a slump sale. 14. In view of the above discussions, I hold that the sale in question was not a slump sale. 15. Now the only question remains whether the authorities below were justified in taxing the difference of goodwill, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not at all give the true picture of the real value of the goodwill and, in fact, the appreciation in the value of the goodwill is nothing but the appreciated value of the machinery which is transferred by the assessee. He also produced before us the valuation of goodwill given by Sri Khare, who is also a senior Chartered Accountant. 16. We have heard the rival submissions and considered the material on record. Basically, it is seen that the valuation of goodwill as given by Sri Ghatalia is not a true glue of the goodwill. That appear after taking into account the report of Sri Khare and Sri Ghatalia. But, at the same time, the difference between the value of the goodwill which was taken by the assessee in 1973 and the value transferred in 1977, i.e., Rs. 4 crores cannot be taken straightway as the appreciated value of the machinery for taxing it under section 41(2). In my view, both the authorities have gone on the wrong footing by adding the difference of the goodwill straightway as the appreciated value though basically it is true that there was a rise in the price of machinery all over and while the profits are not extraordinarily increased, the value of the goodwill in thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember reference. The relevant facts may be seen first. 2. The assessee is a private limited company. During the relevant previous year (which ended on 30-6-1977) it was carrying on various business activities. These were (i) manufacture and sale job synthetic detergents, soaps, cosmetics, etc., in the name of Swastik Oil Mills Division; (ii) research and development in drugs and pharmaceuticals in the name of Sarabhai Research Centre; (iii) market research, E. D. P. systems analysis, etc., in the name of Operations Research Group; and (iv) supply of technical know-how, information for fabrication of plant and machinery (for manufacture of detergents, soaps, etc.) and rendering technical advice and services to ventures in India and abroad, in the name of Sarabhai Technical Services Division. In June 1973, the assessee had purchased the business in the name of Swastik Oil Mills Division supra from Karamchand Premchand Pvt. Ltd., of which the assessee was then a 100 per cent subsidiary. The total consideration for the purchase was Rs. 2,45,80,616.71 including goodwill valued at Rs. 2 crores not shown in the books but which was valued separately. 3. Under an agreement dated 28-2-1977 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings were excluded (See Clause 'Y' of the Preamble to deed at p. 233 of Paper Book I). Clause 'Y' reads as under : "Y. The said Lands and Buildings and the Tenancy/Occupancy Rights inrespect of the various premises as referred to here in above are not to be transferred by these presents." The deed of 28-6-1977 after reciting the facts relating to the agreement for sale of 28-2-1977 went on to list the various assets and liabilities covered by it, viz., the deed of 28-6-1977. Total of the assets so covered (machinery and equipment, current assets, investments, goodwill and right to royalty, technical assistance fees and agreements) came to Rs. 15,51,25,865.49. Total of the liabilities so covered (current liabilities and previous liabilities under the Cash Credit and Packing Credit arrangements, Term loan due to ICIC and Term loan due to State Bank of India) amounted to Rs. 7,19,01,139.09. The net value of the assets was thus out at Rs. 8,32,24,726.40). Over and above the aforesaid items of assets are liabilities, movable of the book value of Rs. 70,65,847.11 were separately mentioned as being part of the assignment and as representing movable assets which were capable of passing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 94,63,924.15 - - 94,63,924.15 LIABILITIES UPP (Old) 45,22,410.00 - - 45,22,410.00 Investment Companies 22,26,119.93 - - 22,26,119.93 Current Liabilities Provisions 25,34,215.98 - - 25,34,215.98 ------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee on the transfer was as under : "Statement showing how the final Purchase Price was received from Ofisade Private Limited. Rupees I. Net purchase Price Receivable From Ofisade Private Limited on transfer of undertaking on 28-2-1977 (excluding Land and Building at Ambarnath and certain liabilities in relation thereto) 8,52,49,448 II. Mode of Receipt of Purchase Price (a) Amounts received/adjusted in year ended 30-6-1977 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; -----------" It was further clarified by the assessee as under : "This is to confirm that the Net Worth of the entire business and undertakings of Swastik Household and Industrial Products Private Limited based on the Provisional Books of Accounts, amounted to Rs. 9,04,41,751.75 as recorded in Deed of Assignment dated 28th June, 1977. This provisional net worth included value of Land and Buildings at Ambernath and certain liabilities. In accordance with Clause S of the said Deed of Assignment, the final Net Worth and consideration for all assets and liabilities excluding value of Land and Building at Ambernath and certain liabilities allocated there against (which were not transferred), was determined at Rs. 8,52,49,448 based on the Audited Books of Account. We further confirm that net value of said Land and Building at Ambernath was never included in the final Purchase Price and was never paid for an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivate Limited. According to the guidelines laid down by the Corporation, such consent can be granted subject only to payment of additional premium equal to the difference calculated at the prevailing rate minus the premium already paid by you at the time of allotment of the plots. The amount payable by you works out to Rs. 42,07,486.81. 3. We would request you kindly to arrange to pay the above amount where after a letter of consent permitting you to transfer your leasehold interests in the above plots in favour of M/s Ofisade Private Limited will be issued. Yours faithfully, Sd/- (Y. S. BHAVE) Chief Executive Officer." The assessee then wrote to MIDC on 9-6-1979 asking for a review of MIDC's decision. On 28-1-1980 MIDC declined to review its decision and insisted on the payment of about Rs. 42 lakhs by way of additional premium so that it could issue an order of consent to the proposed transfer. 8. Another fact to be noticed here is that the vendee, viz., Ofisade Pvt. Ltd., carried on the business of the above industrial undertaking and the other business transferred to it under the deed of assignment of 28-6-1977, only up to 30-6-1977. Under an agreement dated 29-6-1977 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; Date " (i) Ofisade Pvt. Ltd., transferred its under- takings to its 100 per cent subsidiary, Ambalal Sarabhai Enterprises Pvt. Ltd. 16-5-1978 (ii) Ambalal Sarabhai Enterprises Pvt. Ltd. became a widely held public company March 1981 (iii) Shareholders of the assessee-company approved the scheme of amalgamation of the assessee-company with Ambalal Sarabhai Enterprises Ltd. June 1982 (iv) The Bombay High Court approved the scheme with effect from 1-7-1982 &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending transfer would be automatically transferred and thereafter effectively from part of the respective undertaking of Swastik and Telerad and be utilised for the purpose and industrial activities for which they were allotted and/or acquired. " The Lands and buildings for the transfer of which MIDC had demanded Rs. 42 lakhs and old from the assessee (for transfer to Ofisade Pvt. Ltd.) stood automatically transferred, not to Ofisade Pvt. Ltd, but to Ambalal Sarabhai Enterprises Ltd., with effect from 1-7-1982. 11. The Income-tax Officer following the directions of the Inspecting Assistant Commissioner, Companies Range III, issued (under section 144B of the act) held as under : (a) The assessee created goodwill as a new asset in its books (assessment year 1975-76) when it tool over the business of "oil division" as a going concern from Karamchand Premchand Pvt. Ltd. For this assessment year (1978-79) the assessee raised the goodwill value buy Rs. 4,00,00,000. Thus the total value of the goodwill stood at Rs. 6,00,00,000 As a result, the assessee "has charged Rs. 6,00,00,000 over and above the assets transferred by it at book value to Ofisade Pvt. Ltd." Goodwill was a valuable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch information, the profit under section 41(2) of the Act would have to be estimated at Rs. 4,00,00,000. (h) There was no capital gains to be taxed in view of section 47(iv) of the Act. The assessee appealed. 12. The Commissioner of Income-tax (Appeals) confirmed the ITO's action and held as under : (a) The assessee's claim was that the above transfer represented a slump sale by the assessee and hence section 41(2) of the Act was not applicable. This was not a correct proposition in law. In Akbar Mfg. & Press.Co. Ltd. v. CIT (1957) 31 ITR 99 (Bom.) it was held that section 41(2) of the Act would be applicable in the case of a slump also. (b) The facts also show that there was no slump sale here. Page 24 of the Deed of Assignment of 28-6-1977 very clearly mentioned that all the assets excluding lands and buildings and the tenancy/company rights, were being transferred, i.e., lands and buildings and tenancy/occupancy rights were not transferred. Hence, it was not a slump sale of assets and liabilities as a going concern. (c) Even as late as 4-6-1982 the assessee entered into a scheme of amalgamation with Ambalal Sarabhai Enterprises Ltd., proposing to transfer lands and immovab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Rs. 30,23,071 Rs. 3,39,79,248 Thus, in the latest available year the capital and the reserves of Rs. 340 lakhs yielded a distributable profit of Rs. 30 lakhs. This is less than 10 per cent of the capital reserves, i.e., there was no element of super profit whatsoever. Hence, it could not be said that there was any goodwill, much less goodwill which could be valued at Rs. 6,00,00,000. (f) Scientific Research assets which had been fully written of had been transferred by the assessee at 'nil' value. In the absence of any goodwill it has to be inferred that the surplus received in the name of goodwill would only represent the price for which the other assets were transferred. All the same, the Income-tax Officer took the goodwill value at Rs. 2,00,00,000 and has brought to tax only Rs. 4,00,00,000 as the profit on sale of assets assessable under section 41(2) of the Act. The Commissioner of Income-tax (Appeals) then went on to dispose of the issue as under : "... I do not want to further interfere in the matter and enhance the assessment but would sustain the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... several assets and liabilities. Each and every item of assets and liability need not always be transferred. In the transfer of the whole undertaking, some items might be incapable of being transferred, some items may be unacceptable to the purchaser because of their onerous nature. Some other assets may not be transferee doubt of sentimental attachment, e.g., where the business is carried on by a Hindu undivided family or an individual, a house belonging to the family or the individual may be kept back and it would still be a transfer of the entire business undertaking. The mere fact threat the lands and buildings were not transferred was irrelevant in deciding the issue of slump sale. If, for example, a vendee had his own premises to carry on his newly purchased business more advantageously, it would be odd to hold that the business was not transferred merely because the vendor's premises were also not purchased. (iii) The second conclusion is : merely because individual items have been included at a particular valuation in the sale consideration, it could not be inferred that the transfer was not of the entire business but of the individual items. Even in evaluating the over al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , know-how, trade marks, etc. Apart, therefore, from even a goodwill worked out on the super profit method, substantial value will have to be ascribed to these intellectual proprieties, intangible assets, etc. In such a context, the goodwill estimated at Rs. 6 crores would be an underestimate. If there was no "perceivable excess" in the consideration over and above the book values or the written down values of the existing assets, no question of application of section 41(2) would arise. The addition made by the Department on this account should be straightway deleted for this reason alone. But, there are other aspects also which support the assessee's claim. (v) Factual details for the computation of profit under section 41(2) are available to the Department by way of assessment records, e.g., details of the plant and machinery originally acquired, additions made thereto, depreciation allowed thereon and their written down value. In spite of this information being available, how could the Income-tax Officer conclude that the re was an excess assessable as profit under section 41(2) without examining the said details. In any case, the burden of proof was on the Department to establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerns but in the deed of Assignment of 28-6-1977, the lands and buildings and tenancy and occupancy rights in respect of various premises were specifically stipulated as not transferred by the assessee. (ii) Neither the two decisions of the Supreme Court (West Coast Chemicals & Industries Ltd.'s case or Mugneeram Bangur & Co.'s case) was applicable here. Both these cases were of cases of slump sales, the business having been sold as going concerns. That was not the case here because the lands and buildings remained to be transferred by the assessee. (iii) Sarabhai M. Chemicals (P.) Ltd.'s case also was of no assistance to the assessee. That again was a case of transfer of an industrial undertaking as a going concern to its wholly owned subsidiary at a slump price. The Court held there was no material to show that consideration had not been truly stated in the instrument of transfer. The ratio of this decision cannot be straightway applied to the instant case as the basic issue before the Court there was regarding the acquisition of an immovable property under section 269C. Nor was the decision in the case of Artex Mfg. Co. of any assistance to the assessee because that was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual items. (vi) There might have been difficulties in the ways of transfer of the lands and buildings but the fact remains that the assessee did not transfer them. That means there was no transfer of the undertaking as a whole, i.e., of all the assets and liabilities. There was a statutory prohibition against the assessee transferring the lands and buildings. In such a context, the assessee cannot be allowed to go beyond that and enter into an agreement contrary to the statute or otherwise. In other words, there was no slump sale here. (vii) The question that remained was whether "taxing the difference of goodwill" (Rs. 4 crores) as the appreciated value of the machinery, was justifiable. The Income-tax Officer and the Commissioner of Income-tax (Appeals) have no doubt recorded their reasons for taxing such an amount. It was, however, submitted before the Tribunal that all the materials relevant to the issue were with the Department. There was nothing new to be supplied to the Department and the valuation of the Chartered Accountant (Ghatalia & Co.) was also on the right lines. But, it was seen that the valuation of goodwill by the assessee's valued was not acceptable. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". The noun "slump" means : "a gross amount, a lump". Similarly, "slump sum" means a "lump sum" (Chambers 20th Century Dictionary, 1983 Edn., p. 1220). A slump sale or a slump transaction would, therefor, means a sale or a transaction which has a lump sum price for consideration. It is in this sense the term "slump transaction" is used by the Privy Council in Doughty v. CIT (1927) Ac 327, at p. 335. Learned counsel for the assessee, Shri Palkhivala, rightly stressed this aspect. Doughty's case was, in fact, referred to with approval, by the Supreme court in Mugneeram Bangur & Co.'s case. This latter was a case of a firm which carried on the business of buying land, developing it and then selling it. Pursuant to an agreement it sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities, development expenses and liability in respect of deposits made by the intending purchasers. The consideration of Rs. 34,99,300 was paid by allotment of shares of the face value of Rs. 34,99,300 to the partners or their nominees. The schedule to the agreement indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 36,21,029 0 9 9 Less liabilities 1,21,729 0 9 --------- -- -- 34,99,300 0 0" --------- -- -- The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me partners. 18. In an earlier decision in West Coast Chemicals & Industries Ltd'. s case the Supreme Court had held that the question whether a sale was a realisation sale or a sale in the course of business had to be decided on the facts of the case; that the fact that the business of the assessee-company was sold as a going concern and was in fact worked by the assessee (the vendor) on behalf of the vendee till the entire consideration was paid made no difference as the business was kept going on behalf of the vendee. The facts of this case being different in some important respects, e.g., the sale agreement was entered into with a view to close down the business, the only assistance offered by this decision is to the above principle stated by the Supreme Court, i.e., in a winding up sale with a view to realising the capital assets, not being a sale in the course of business operations, no tax an be levied on the profits, if any, on such sale. 19. So the question is : was the sale here a slump transaction ? The parties clearly intended it to be so under the agreement of 28-2-1977. See Clause Z-C (i) and Clauses Z-C (vii) (b) of the Preamble to that deed at pp. 145/146 of Paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (The opposite school of thought is of course equally committed. It refuses to see any distinction between avoidance and evasion and look upon both as evil. The debate goes on with unabated acrimony). 21. The assessee's learned counsel pointed out that only because of impediments in transferring legal title to the vendee for the lands and building no consideration therefor was received by the assessee, i.e., out of the total consideration of Rs. 9,04,71,751.75 (based on unaudited book values) what was received was only Rs. 8,52,49,448 (based on audited book values) excluding the value of the lands and buildings and liabilities referable thereto. He also contended that even if some assets or liabilities were left out it could still be a sale of a going concern. I do not find this acceptable. The lands and building (as also the tendency occupancy rights) were not an insignificant part of the undertaking transferred. They reflected the core of the undertaking. The book value of the lands and building as on 28-2-1971 stood at Rs. 94,63,924.15 - see p. 215 of Paper Book I. There was a liability of Rs. 45,22,410 against the properties as unpaid purchase price. Thus the assets and the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee were sold by it to another limited company, that there was no separate sale of different items but the consideration of each item of property sold was expressly mentioned in the agreement of sale, i.e., the property in question (building) was sold for a stated consideration which was not shown to be notional and since the consideration was in excess of the original cost of the building, the difference was profit assessable under section 10(2) ( vii), second proviso of the old Act of 1922 (Section 41(2) of the new Act). But, this case seems to have turned on its special facts. In facts no conveyance was executed for the transfer of the said building and yet on the facts found by the Tribunal the Supreme Court held that the" entire assets" were sold by the assessee. It could certainly enable the assessee before me to rely on this decision for its claim that the sale was of a going concern. Perhaps the learned Standing Counsel for the Revenue relied on this decision to claim that once the items are individually valued, section 41(2) would be attracted even it is a sale of all the assets and liabilities. 24. There is no authority for such a claim. See Mugneeram Bangur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vendee but that by itself is of no legal consequence so far as title is concerned. Shri Palkhivala urged that what remained with the assessee was the mere husk of title. But the Supreme Court observed in Nawab Sir Mir Osman Ali Khan's case after pointed out that the vendee was in rightful possession - full consideration having passed - only against the vendor : "Even though the assessee had a mere husk of title and as against the vendee no reality of title, as against the world he was still the legal owner and the real owner." In the instance case, even the consideration had not passed. This much was common ground. A fortiori, the assessee has continued to be the owner and the real owner of the lands and buildings even after 28-6-1977. 27. I have tried to tread both the deeds of 28-2-1977 and 28-6-1977 together as urged by the learned counsel for the assessee. Even so, I find it difficult to describe the impugned transaction as a slump transaction. The lands and buildings were excluded "by these presents" under the deed of 28-6-1977. See Clause 'Y' of the Preamble to the deed of 28-6-1977 at p. 233 of paper Book I as also at p. 236 where the following recital occurs : "And in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s discernible even otherwise. 30. Two decisions remain to be noticed. Much emphasis was laid on them to support the assessee's claims. These are : Sarabhai M. Chemicals (P.) Ltd.'s and Artex Mfg. Co.'s case. In the first case, the question before the Court was regarding the validity of a notice of acquisition issued by the Competent Authority under Chapter XX-A of the Income-tax Act, 1961. In that case it was seen that there was a transfer of an industrial undertaking as a going concern together with goodwill and all other assets thereof by a holding a company to its 100 per cent subsidiary at a slump price. The valuation mentioned was the book value (written down value) so far as lands, buildings, plant and machinery and other assets were concerned. The Court held that when the sale was of the whole concern, particularly at book values and was to a connected party, what is sold is not the individual itemised property but the capital asset consisting of the business of the undertaking. This case was relied upon for the assessee to argue that mere listing of individual assets at book values in the transfer deed did not mean such individuals assets were separately sold. There is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt keep these aspects also in view. 33. One of the points made by the learned Vice-President was that in evaluating the goodwill transferred one had to take into account also the" intangible or intellectual properties" transferred. But such a claim was never made by the assessee before the authorities below. The learned Judicial Member also does not record any such claim. Nor, among the many contentions raised before me. such a claim was ever made. Quite apart from this, perhaps one has to go by the document of transfer, first to see what was transferred and for how much. If thereafter, the contracting parties lead evidence to show that something more was transferred and the consideration stated in the document also related to such additional asset (s) then a finding could be given on that aspect, But no such claim, as I said before, was ever made by the assessee. I shall leave it at that. 34. I have not considered it necessary to comment on the order of the Tribunal dated 28-2-1981 supra in the case of Karamchand Premchand (P) Ltd. The central issue for decision here was whether the business was sold as a going concern. That had to be answered independently on the relevant f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, remitted the issued to the ITO for finding out the profit under section 41(2) with a direction to make fresh enquiry. On all other issues, the learned Judicial Member agreed with the learned Accountant Member who had written the leading order. 4. On the difference between the Members, there was a reference to Third Member. The learned Third Member, in his order dated 24-7-1987, has agreed with the conclusions of the learned Judicial Member. In view of the conclusions reached by the learned Third Member, we proceed to pass a final order in the appeal as hereunder. 5. With regard to the first issue relating to addition of Rs. 4,38,789 being the tax deduction at source in Indonesia while paying royalty, the unanimous opinion is that the addition made in this regard should be deleted. We accordingly hold the issue in favour of the assessee. However, as observed by the learned Accountant Member in para 26 of his leading order, if the assessee is entitled to relief under section 91, it can put in an application for getting the same even if it has not already done so. With this remark, we conclude this issue in favour of the assessee. 6. Grounds (ii) and (iii), relating to gi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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