High Court Of Calcutta
East India Electric Supply & Traction Co. Ltd. vs. CIT
Sections 41(2)
D.K. Seth & R.N. Sinha, JJ.
IT Appeal No. 365 of 2000
13th May, 2003
Counsel Appeared
Satyabrata Bagchi & K.L. Bhowmik, for the Appellant : P.K. Mallick & S.N. Dutta, for the Respondent
ORDER
D.K. SETH, J. :
The undertaking of the assessee was acquired by the West Bengal State Electricity Board. The cost of such acquisition was to be valued under s. 7A of the Indian Electricity Act. The said s. 7A of the Indian Electricity Act provides that if there is an agreement between the parties the undertaking would be treated to have been valued at the fair market price, in default, the matter has to be referred to an arbitrator and then the award would be treated to be the fair market value of the undertaking. There was no agreement between the parties. The matter was referred to the arbitrator. An award was passed. This award was subjected to litigation that went up to the apex Court. Ultimately, the apex Court appointed an arbitrator. The arbitrator awarded a sum of Rs. 1,02,82,000. This was subjected to assessment, which went up to the Tribunal. The Tribunal assessed the said amount both to capital gains and to income from business, having regard to s. 41(2) of the IT Act, 1961. The undertaking was valued at Rs. 88 lakhs by an order of the learned Tribunal passed on 15th May, 2000. Subsequently, the assessee filed an application under s. 254 (2) of the IT Act, 1961. Relying on CIT vs. West Coast Chemicals & Industries Ltd. (1962) 46 ITR 135 (SC) and CIT vs. Mugneeram Bangur & Co. (1965) 57 ITR 299 (SC), the assessee contended that the undertaking having been sold at a slump price and no amount being attributable to depreciable and non- depreciable assets, distinctly, the decision of the learned Tribunal was a mistake apparent from record that required to be corrected. This application under s. 254(2) having been dismissed, the present appeal has been filed under s. 260A of the IT Act. This appeal has since been admitted. Now we are called upon to answer the question as to whether this slump price would be subjected to tax under the head “income from business” having regard to s. 41(2) of the IT Act, 1961. Mr. S. Bagchi, learned counsel for the appellant had contended that in view of the decisions in CIT vs. Mugneeram Bangur & Co. (supra), CIT vs. West Coast Chemicals & Industries Ltd. (supra) and CIT vs. Electric Control Gear Manufacturing Company (1997) 141 CTR (SC) 302 : (1997) ITR 278 (SC), the moneys payable on account of transfer of the undertaking at a slump price cannot be subjected to tax under the head “income from business” with the aid of s. 41, sub-s. (2). According to him, there is nothing to indicate as to what amount was attributable to non-depreciable assets to exclude the same from the total price for arriving at a figure attributable to depreciable assets. The balance sheet does not indicate the amount payable on transfer or acquisition. It might be the book value or other value but is not indicative of the amount payable on any one of the heads. Therefore, the order of the learned Tribunal rejecting the application under s. 254(2) should be set aside.
However, he has not disputed the finding with regard to the chargeability of the receipt under the head “capital gains”. Mr. P.K. Mallick, learned counsel for the Revenue, on other hand, had pointed out that the amount payable on acquisition is ascertainable from the provisions contained in s. 7A of the Indian Electricity Act, which prescribes the mode of valuation of the undertaking acquired. The market value has to be determined on the basis of the components provided therein as factors to be taken into account for arriving at the market price. He then contends that the price of the land can be ascertained from the balance sheet as at p. 48 of the paper book an amount admitted by the assessee itself. Having admitted the valuation, the assessee is estopped from contending that the valuation is different from what has been shown in the balance sheet. According to him, the value of the land has been indicated therein. Therefore, if that amount is deducted from the price received, the balance would be the amount received on account of depreciable assets and then the calculation is to be followed by computing the difference between the book value and the written down value. The excess receipt comprising the book value would be chargeable to capital gains and the difference between the written down value and the book value would be treated to be an income within the meaning of s. 41(2) for being charged under the head “income from business”. He had relied on the decision in CIT vs. Artex Manufacturing Co. (1997) 141 CTR (SC) 290 : (1997) 227 ITR 260 (SC) and CIT vs. B.M. Kharwar (1969) 72 ITR 603 (SC), in order to support his contention. He had distinguished Mugneeram Bangur (supra), Electric Control Gear Manufacturing Company (supra) and West Coast Chemicals & Industries Ltd. (supra). According to him, there being materials available on record to indicate the amount attributable to non-depreciable assets, the decisions in Mugneeram Bangur (supra), Electric Control Gear Manufacturing Company (supra) and West Coast Chemicals & Industries Ltd. (supra) would not be applicable. On the other hand, the ratio laid down in Artex Manufacturing Co. (supra) would be attracted.
The question has to be looked into according to the scheme of the Act itself. The Act deals with taxes on income. It is income, which is being taxed. In order to tax an income, the assessment of the income is to be computed and then on the basis of the computation of the income the tax is to be assessed. The IT Act has provided for six different heads (now five) under which the different kinds of income can be charged. The law of income-tax is well settled. An income is to be charged under a particular head. If an income cannot be charged under a particular head, it cannot be charged under a different head. Each head has been dealt with differently comprising of method of computation of income under each particular head. The charging sections are followed by computing sections, which are held to be integral part of the charging section. An income, which is incapable of being computed under the computing provisions, cannot be charged under that head. If an income fulfils the characteristics of a particular head, in that event, it has to be charged under that particular head in the manner provided for computing such income under that head. If it cannot be so done, in that event, such income cannot be charged. On this principle the question of slump price has been laid down by the apex Court in West Coast Chemicals & Industries Ltd. (supra) and Mugneeram Bangur & Co. (supra). In order to charge the moneys payable on acquisition of the undertaking, it has to be computed under a particular head. Admittedly, the articles transferred are capital assets subject to depreciation as well as capital assets non-depreciable in nature. Receipt against a capital asset can be charged under s. 45 as capital gains if the cost of acquisition can be determined. In this case, cost of acquisition is determinable. This is not in dispute. Therefore, it was rightly subjected to capital gains. This has not been disputed by the assessee, and rightly.
But in order to compute the income from business, the cost of non-depreciable asset is to be excluded since s. 41(2) relates to depreciable assets alone. If there are materials from which it can be ascertained that a particular figure or amount is attributable to depreciable assets or to non-depreciable assets and by calculation the figure attributable to depreciable assets could be arrived at, then there would be no difficulty in computing the income from business by deducting the book value or the written down value, as the case may be, for the purpose of assessment. An income can be assessed only after computation. Unless the computation can be made, no tax can be assessed. In this case, this undertaking was transferred and the market value was determined by the arbitrator, who had awarded a slump price without attributing any part of the amount to any particular head. What amount was payable on account of non-depreciable asset and what amount was payable on account of depreciable assets cannot be determined unless there are some means to indicate the value with regard to the value of the depreciable, or non-depreciable assets. The balance sheet might be the value with regard to the value of the undertaking in respect of different items mentioned therein, but when the amount is exactly the amount shown in the balance sheet, then it may be a case where there are materials to determine the different heads to which the price could be attributable according to the balance sheet. But when the moneys payable is more or less than the figures shown in the balance sheet, in that event, unless there is other material to indicate what amount was attributed to depreciable or non-depreciable assets, it is not possible to determine the same simply by guessing or by any such other method. The deduction of the price of the land shown in the balance sheet would not help us in the present case since the land is not depreciable asset but an appreciable asset. It is not possible to ascertain what amount was attributed for the land in arriving at the component of the award. Therefore, until and unless there are materials to determine the value of the land component attributable from the award itself, the value of the going concern, when awarded by a slump price, cannot be subjected to tax on income from business.
This view is supported by the decisions in Mugneeram Bangur & Co. (supra), Electric Control GearManufacturing Company (supra) and West Coast Chemicals & Industries Ltd. (supra). The decision in Artex Manufacturing Co. (supra) does not help Mr. Mallick, since it had not deviated from the principle laid down in Mugneeram Bangur (supra). On the other hand, it had distinguished the decision in B.M. Kharwar (supra). At the same time, the Artex Manufacturing was concerned with a case where the particular items which were transferred were all depreciable assets and were also valued by a valuer appointed by the assessee himself, and from the report of the valuer, the valuation was determinable in respect of the depreciable assets. Therefore, the decision in Artex Manufacturing Co. (supra) cannot be attracted in the present case to support Mr. Mallick’s contention. In B.M. Kharwar (supra), the apex Court had found that in the books of accounts different items were shown against different heads of plant, machinery and dead stock, etc. in the assessee’s books of accounts. The cost of acquisition and the written down value were reflected therein. These were revalued by Hargovandas Girdharlal at the time of transferring the assessee to private limited company. In the said revaluation, the valuation of each item was shown separately. This revaluation was made by the assessee itself. Thus, from the fact, it was clearly ascertainable as to what amount reflected the difference between the written down value and the valuation at which it was transferred enabling the authority to determine the profit/income out of it. Upon such specific facts, the apex Court in B.M. Kharwar (supra) had held that s. 41(2) was applicable on the surplus amount, namely, the difference between the written down value of the plant, machinery and dead stock as per the assessee’s books and the value of the same as revalued by Hargovandas Girdharlal. In Doughty vs. Commr. of Tax (1927) AC 327, the Privy Council was concerned with the facts that there was a sale of entire assets including goodwill in lieu of allotment of fully paid shares with an agreement by the company to discharge all the liabilities. The nominal value of the shares being more than the sum to the credit of the capital account of the partnership in its last balance sheet, a new balance sheet was prepared showing a larger value for stock-in-trade. The increase in value so shown was treated as profit on the sale of the stock-in-trade under the Land and Income-tax Act, 1916, of New Zealand and thus tax was imposed on all profits or gains derived from any business. With these facts, the Privy Council had held the transaction was a sale.
There was no separate sale of the stock. No value of the stock as an item forming part of the aggregate, which was sold. The Privy Council observed that income-tax is a tax upon income. It is well-established that the sale of a whole concern showing to be a sale at a profit with the price given for the business, or at which it stands in the books does not give to a profit taxable to income-tax. It is only when an item could be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with a sale of the whole concern might conceivably by treated as taxable income. In CIT vs. West Coast Chemicals and Industries Ltd. (supra) had referred to the decision in Doughty (supra). The apex Court in West Coast Chemicals (supra) had held that if the slump price does not show any portion attributable to stock-in-trade, then it would not be possible to hold that there is a profit other than what results from the appreciation of capital. If it can be ascertained that there was a trading from which alone the profit had arisen in the business, then only the same can be taxed. In Mugneeram Bangur (supra) referring to Doughty (supra) and West Coast Chemicals (supra) had held that when a business was sold as a going concern, the only question that remains is whether any portion of the slump price is attributable to the stock- in-trade. Unless it can be so ascertained, it cannot be chargeable to tax under the head it comes “income from business”. In the said case, though land was also included among what was sold, but there was no attempt to evaluate the land on the date of the sale. What was shown in the books was the cost price as it stood in the books of the vendors. If on the basis of the materials a particular price can be attributable to a particular item, then the excess amount would be chargeable to tax under the head it comes. Until it can be so done, the same cannot be charged to tax on income from business since it would include some profits, which were not income from business. With these observations in Artex Manufacturing (supra), Mugneeram Bangur (supra) was distinguished where price attributable to a particular item was indicated attracting the application of s. 41(2). In the circumstances, the appeal is allowed to the extent that the slump price would not be subjected to tax under the head “income from business” under s. 41(2). In these circumstances, we hereby set aside the order dt. 31st Aug., 2000, passed in MA No. 49 (Cal) of 2000 in ITA No. 77 (Cal) of 1996, and allow the said application under s. 254(2) to the extent it relates to tax on income from business. We, however, confirm that part of the order, which deals with the principle relating to capital gains and hold that the income on account of slump price in this case is subject to chargeability under the head “capital gains”. The decision dt. 4th June, 1988, in ITA No. 77 (Cal) of 1996 for the asst. yr. 1979-80 is modified to that extent. The matter is remitted to the learned Tribunal to determine the question afresh in the light of the observation made in this decision for deciding the amount of capital gains chargeable on the slump price in accordance with law, if necessary. It is expected that this decision would be arrived at within a period of six months from the date of receiving a copy of this order. The appeal is thus allowed. R.N. SINHA, J. : I agree.
[Citation : 263 ITR 243]
