High Court Of Calcutta
Kwality Ice Creams (India) Ltd. vs. CIT, WB-IV, Calcutta
Assessment Year : 1996-97
Section : 50
Kalyan Jyoti Sengupta And Kalidas Mukherjee, JJ.
IT Appeal No. 19 Of 2002
January 21, 2011
JUDGMENT
K.J. Sengupta, J. – The above appeal has been admitted against the judgment and order dated 15-10-2001 passed by the learned Income-tax Appellate Tribunal in relation to assessment year of 1996-97. It was admitted by this Court by an order dated 31-7-2002 on the following substantial question of law :-
(1) Whether the amount received by the appellant for transfer of its entire marketing undertaking by way of slump sale in terms of the agreement was a capital receipt to which the provisions of section 50(1) of the Income-tax Act, 1961 had no application and no capital gains could be assessed and the purported findings of the Tribunal rejecting the said contention of the appellant have been arrived at by ignoring the relevant materials and/or by taking into consideration irrelevant and/or extraneous materials and/or is otherwise arbitrary, unreasonable and perverse?
(2) In the event of it being held that there was any liability to tax in respect of transfer of the marketing undertaking, whether the consideration of Rs. 3 crores received for transfer of the said undertaking had to be apportioned between the physical depreciable assets and other assets and only the amount referable to physical depreciable assets less the written down value could be subjected to tax as short-term capital gains, the rest being capital receipt was not chargeable to tax and the purported findings of the Tribunal rejecting the said contentions of the appellant have been arrived at by ignoring the relevant materials and/or by taking into consideration irrelevant and/or extraneous materials and/or are otherwise arbitrary, unreasonable and perverse?
(3) Whether the entirety of Rs. 3 crores is exempt in law from the incidence of capital gains tax by reason of the consideration thereof being of a compendious and joint nature, as a whole not attracting capital gains tax?
(4) If the answer to the question (3) is given against the assessee and in favour of the Revenue, then whether the whole of Rs. 3 crores and if not, which part of it is liable to the incidence of capital gains tax and at what rate?
2. The short fact for which the present appeal has been preferred and being admitted for hearing are stated hereunder :
The appellant above-named at all material times carried on the business of manufacturing and marketing ice creams. The marketing undertaking of the petitioner comprised of physical depreciable assets such as cabinets, vans, pushcarts etc., as also the entire dealership network built over several years, management and non-management employees with complete marketing data and know-how and developed by the appellant over the years, vending, licenses, sales contracts, relationship with franchisees.
3. On 2-6-1995 the appellant entered into a strategic alliance agreement and several other agreements with M/s. Brooke Bond Lipton (India) Limited (subsequently amalgamated with Hindustan Lever Limited) [hereinafter referred to as (Brooke Bond)]. By the said agreements the appellant transferred its ice cream business and agreed not to compete, and to function merely as a job worker of Brooke Bond. In substance, the appellant by the said agreements was merely to manufacture, and supply the ice creams agreed to Brooke Bond’s instructions and requirements as its employed contractor. The agreements had the effect of depriving the appellant of its main business. The particulars of said agreements are as under :-
(i) Assignment of self-generated trade marks for consideration of Rs. 3.25 crores.
(ii) Assignment of marketing undertaking as a going concern comprising physical depreciable assets like cabinets, vans, pushcarts, etc., as also the entire dealership network, management and non-management employees, complete marketing data and know-how vending licences, sales contracts, relationship with franchisees, etc., for a sum amount of Rs. 3 crores.
(iii) Non-competition agreement wherefrom the appellant gave up its ice cream business and agreed not to compete with Brooke Bond for a consideration of Rs. 4 crores.
(iv) Acquisition of franchisees’ marketing assets by Brooke Bond for a consideration of Rs. 15 crores. The strategic alliance agreement further provided for termination of franchisees’ operations for which a fund of Rs. 1 crore was to be created with equal contributions from the petitioner and Brooke Bond. The fund was to be held by Brooke Bond for settlement of all claims of the franchisees.
(v) Sourcing agreement under which Brooke Bond undertook to source its ice cream requirements from the appellant. The said agreement provided for interest-free deposit of Rs. 3.5 crores by Brooke Bond.
4. Pursuant to the agreements as above Brooke Bond paid to the appellant an aggregate sum of Rs. 13.75 crores. The amount for acquisition of franchisees’ marketing assets was agreed to be settled directly between the franchisees and the Brooke Bond. The appellant therefore paid its contribution of Rs. 50 lakhs towards the fund for termination of franchisees’ operation.
5. Thereafter, the differences and disputes arose between the appellant and the Brooke Bond during the previous year ended on 31-3-1996 itself leading to initiation of legal proceedings. The case of the appellant in the legal proceedings was that the agreements were void as having been obtained by fraud/misrepresentation and fraudulent concealment of facts and agreements be so adjudged.
6. In the circumstances, the amounts received by the appellant under the said agreements were shown in appellant’s accounts for the year ended 31-3-1996 as advances. The appellant did not claim or assert any title to the money received pursuant to the said agreement and treated the same as mere advance which it offered to refund back to Brooke Bond.
7. A settlement was arrived at between the parties on 27-4-1998 which led to termination of all the legal proceedings and the original agreements after substantial modifications were given effect to. In terms of the settlement, the sourcing agreement was cancelled against a consideration of Rs. 6.5 crores and the deposit of Rs. 3.5 crores was refunded by the appellant. Furthermore the appellant agreed to transfer its manufacturing undertaking for a consideration of Rs. 10 crores.
8. The return of the appellant for the assessment year under consideration was assessed by the Assessing Officer and after deciding all the contentions raised by the appellant the Assessing Officer held that the receipts were required to be considered in the assessment year 1996-97 in terms of the said agreements, since the parties had acted on the basis of the agreement and the disputes arose for the first time in January 1996 after a lapse of seven months and concerned non-fulfilment of the terms of the agreement. It was further held that the entire sum of Rs. 3 crores received pursuant to the agreement for transfer of the marketing undertaking attracted to the provisions of section 50(1) and was liable to be taxed as a short-term capital gain after deducting the written down value of the marketing assets appearing in the books of account. The Assessing Officer further sought to subject to tax the amount received for the trade marks and in terms of the non-competition agreement.
9. The appellant being aggrieved by the said order of Assessing Officer carried this matter in appeal to the First Appellate Authority, the Commissioner of Income-tax (Appeals) and by an order dated 25-10-1999 granted part relief to the assessee. It appears from the said judgment and order that the Appellate Authority rejected the appellant’s contention as to assessability of the amounts in question and held that the same had to be considered in the assessment year 1996-97. He however held that the amounts relating to trade marks and non-competition are capital receipts and are not liable for taxation. He refused to accept the appellant’s contention that the amount received for marketing undertaking was also a capital receipt to which the provisions of section 50(1) had no application. He upheld the action of the Assessing Officer in subjecting the entire sum of Rs. 3 crores less the written down value of the depreciable assets to tax as short-term capital gains and did not give any direction for apportionment of the lump sum consideration of Rs. 3 crores between the physical depreciable assets and other assets and for treatment of the consideration referable to other assets as a capital receipt not liable for tax. The Commissioner (Appeals) did not decide some of the grounds urged before him including the ground that in any event the payment of Rs. 50,00,000 made by the appellant to Brooke Bond for termination of franchisees’ operation was required to be deducted in computing the alleged income attributable to the transfer of marketing undertaking.
10. Being aggrieved by the said order of the Commissioner of Income-tax (Appeals) the appellant preferred further appeal before the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”). The Revenue also preferred an appeal before the Tribunal insofar as the relief having been granted to the appellant by the Commissioner (Appeals). Both the said appeals were heard together and decided by the impugned judgment and order.
11. By the impugned judgment learned Tribunal dismissed the revenue’s appeal. The learned Tribunal by the said order granted part relief to the appellant remanding the matter to the extent of the points which are not decided by the Commissioner of Income-tax (Appeals), with a direction to look into the same afresh and decide on merits after granting an opportunity of being heard.
12. Mr. Bajoria, learned Senior Counsel in support of the appeal submits that the said marketing undertaking was transferred with composite assets both tangible and intangible. The tangible assets are depreciable in nature. He submits that intangible assets are distributorship agreements and arrangements with retail outlets including user of assets not belonging to the assessee, benefits of tenancies, advertisement contracts, refrigeration, storage and other facilities etc.
13. He further submits that in the statute there is no provision for bifurcation of the consolidated consideration arising out of the said agreement for sale of the entire undertaking as a going concern and further its allocation to different assets. Accordingly it is not permissible to do so.
14. He further submits while explaining legal proposition that charging and computation provisions for levy of capital gains are integrated code, and in case the computation provisions fail the charge also fails and no tax can be imposed. In support of his legal contention he has sought reliance on the Supreme Court decisions in case of PNB Finance Ltd. v. CIT [2008] 307 ITR 75 , CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294.
15. He reminds us that though aforesaid decisions were not rendered in the context of provisions of section 50 of the said Act, the principle laid down therein is equally applicable for assessing amount of tax in respect of depreciable assets which were earlier assessable under section 41(2) of the Act and now assessable under section 50 of the Act after introduction of the concept of block assets. He has relied for the above proposition of law on the decision of the Supreme Court in case of CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 . He has also relied on the Division Bench judgment of this Court in relation to the aforesaid legal principles, in the case of CIT v. Carew Phipson Ltd. [2003] 260 ITR 668 and that of the Hon’ble Gujarat High Court in the case of CIT v. Garden Silk Wvg. Factory [2005] 279 ITR 136 .
16. He submits further drawing our attention to the balance sheet for the purpose of section 50 of the Act, that the cost of depreciable assets is ascertainable and while written down value could be from the assessment records. Apart from the depreciable assets only manpower was transferred.
17. He submits that entire composite sale consideration could not be taken into consideration and it should be apportioned. He further submits that section 50 of the Act has no manner of application as far as intangible assets is concerned. It has application for determination of capital gains in case of depreciable assets and for such purpose it allows deduction of the written down value of such depreciable assets as their costs from the sale consideration received therefor.
18. He further contends that in the instant case it is not possible to determine sale consideration in respect of the depreciable assets since the sale consideration is a composite one for the entire marketing undertaking.
19. His further contention is that composite consideration cannot be allocated item-wise unless it was so done by the parties and that principle would equally be applicable whether it is a case under section 41(2) or section 50 of the Act. The provisions of section 41(2) are the predecessor provisions of section 50 of the present Act and the principles applicable for its interpretation would be equally applicable to section 50 of the Act.
20. He submits further that in any event there can be no justification or basis at all for treating the entire consideration received in lump sum for depreciable assets and various other intangible assets as consideration for depreciable assets only under section 50 of the Act.
21. Learned counsel for the respondent while supporting the judgment and order of the learned Tribunal submits that section 50 is a special provision and it would have effect over other sections 48 and 55 of the Act. In this connection he has placed reliance on the decision of the Supreme Court in the case of Commonwealth Trust Ltd. v. CIT [1997] 228 ITR 1 , the decision of this Court in case of India Jute Co. Ltd. v. CIT [1982] 136 ITR 597, the decision of the Gujarat High Court in case of Mihir Textiles Ltd. v. CIT [1997] 225 ITR 327 and the decision of Madras High Court in case of CIT v. Peirce Leslie & Co. Ltd. [1997] 227 ITR 759 .
22. It is also submitted that apart from depreciable assets only manpower has also been transferred. The learned Tribunal therefore has correctly held that it was a composite consideration and it is absolutely the income of the nature of the capital gain and the same was received while transferring the entire marketing undertaking of the appellant to Brooke Bond.
23. We have heard the respective contention of the learned counsel and gone through the records. It appears that in order to decide this appeal on the admitted question of law we find only point involved is whether the consideration amount of Rs. 3 crores received under the deed of assignment dated 2-6-1995 from the BBL is exigible to tax or not and further whether it is partly exigible to income-tax or not under section 50(1) of the aforesaid Act. Therefore, we need to set out the section 50 then prevailing.
“50. Special provision for computation of capital gains in case of depreciable assets.—Notwithstanding anything contained in clause ( 42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :
(1)where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :-
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;
(2)where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.”
The very heading of the said section appears to be a special provision for computation of capital gains in case of depreciable assets which form part of a block of assets. Even the method of computation of such capital gains has been provided therein. Before we proceed further on fact in this matter on face of challenge to judgment on the ground of perversity we need to examine law laid down by the Supreme Court regarding applicability of the section 50 in relation to the tax on capital gains.
24. In case of PNB Finance Ltd. v. CIT [2008] 307 ITR 75 (SC) at page 81 of the report while discussing the decision of the same Court in case of CIT v. Artex Mfg. Co. [1997] 227 ITR 260 and also the Electric Control Gear Mfg. Co.’s case (supra) has held that in principle the three tests are required to be applied as regards applicability of section 45 of the said Act. 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 be applied (supplied by us), it is evident that such a case was not intended to fall within the charging section. The second test which needs to be is the test of allocation/attribution. This test applies to a slump transaction. The object behind this test is to find out whether the slump price is capable of being attributable to individual assets, which is also known as item-wise earmarking. The third test is that there is a conceptual difference between an undertaking and its components. Plant, machinery and dead stock are individual items of an undertaking. A business undertaking can consist of not only tangible items but also intangible items like, goodwill, manpower, tenancy rights and value of banking licence. However the cost of such items is not determinable.
25. In the case of B.C. Srinivasa Setty (supra) the Supreme Court held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the compu- tation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. In this case Supreme Court while dealing with the question as to whether goodwill, capital assets and transfer thereof and/or sale thereof constitute any capital gain for the purpose of income-tax. The Supreme Court held in that case that the goodwill is an intangible asset and it cannot be said to be a capital in the sense. It is held specifically that when goodwill generated in a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is material factor in applying the computation provisions pertaining to capital gain, but in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence.
26. The Division Bench of this Court in case of Carew Phipson Ltd. (supra) relying on amongst others Artex Mfg. Co.’s case (supra) the court held that the provisions of section 41(2) of Income-tax Act, 1961 will not apply to a case where the entire business is sold. It was also held in substance that the provision is not attracted where transfer was made without indicating any item-wise consideration, inasmuch as when the entire concern is sold, the business is no more retained and carried on. Selling the whole concern or business, so long carried on is not the business. It is the giving up or closing down or cessation of the business. Therefore, the receipt therefrom cannot be an income from business. It can at best be a capital gain, if on materials item-wise fixation of price of assets can be attributed attracting the application of section 41(2). Even if item-wise distribution is indicated, the question will be a little different if the whole of it is sold as a going concern. In such a case, section 41(2) cannot be attracted.
27. In the case of Garden Silk Wvg. Factory (supra) the Division Bench of the Gujarat High Court has found several conditions are to be fulfilled in order to attract section 41(2) of the Income-tax Act. Those conditions are as follows :—
(a) Each and individual assets be it a building or plant or machinery, has to be owned by the assessee,
(b) assets are used for the purpose of business of the assessee,
(c) the assets should have written down value and actual cost, and
(d) there should be excess which does not exceed the difference between the actual cost and the written down value which shall be chargeable to tax as income of the previous year in which monies payable for such building, machinery, plant or furniture became due.
28. In this matter basic point for consideration is whether section 50 of the said Act has any application in relation to transfer of its entire marketing undertaking or not. We think, this section really also provides for compu- tation method of capital gain which is chargeable basically under section 45 of the Act. All the authorities below including learned Tribunal has considered the receipt of Rs. 3 crores for consideration of assignment of marketing undertaking together with strategic alliance agreement. We have also examined the two documents and we feel that all the authorities below have rightly taken into consideration of both the documents to understand the nature of the receipt. Learned Tribunal as well as the Commissioner of Income-tax (Appeals) have found while reading both the documents, that transfer of marketing undertaking, consist of both tangible and intangible assets. It is true the officers and staff of the undertaking is not an asset for taxation sense but network of working system undoubtedly has significant utility and it has some value. The learned Tribunal as well as the Commissioner of Income-tax (Appeals) have rightly held section 50 of the said Act has full application in this transfer. It is not specifically discussed and decided by both the authorities how the intangible assets could be brought within the purview of section 50(1) of the said Act.
29. We are of the view that the section 50 has application as far as the tangible assets are concerned and it does not have any application in case of intangible assets, for in case of tangible assets the depreciation can be worked out whereas in case of intangible assets there is no scope of depreciation. Precondition for pressing section 50 for computation is that the capital asset must be an asset forming part of block asset in respect of which the depreciation has been allowed under this Act. The depreciation is allowed in the present Act in case of tangible assets. Hence, we find considerable force in the submission of Mr. Bajoria that both the authorities had erroneously clubbed the intangible assets with the tangible assets for holding the entire consideration amount being capital gain. At the same time, we are unable to accept the submission of Mr. Bajoria that the consideration received under the said deed of assignment of marketing undertaking is not exigible to income-tax because there is no specific provision for charging and computation of receipt from transfer of block assets, because segregation of tangible assets from entire consideration in this case is factually possible. The decision of Supreme Court relied on by Mr. Bajoria in case of Punjab National Bank Finance Ltd. (supra) has got impact in this case in two directions. This decision has specifically said by necessary implication where item-wise earmarketing of the assets transferred, is possible charging provision viz., section 45 read with section 50 being computation provision can be pressed into operation. In that case it was found on fact that item-wise earmarketing was not possible. As such the entire compensation of Rs. 10.20 crores was not allocable item-wise. Indeed in case of Artex Mfg. Co. (supra) the Supreme Court has specifically held if item-wise allocation is possible then charging section can be brought into operation.
30. Accordingly, we are unable to accept the contention of Mr. Bajoria that in this case, section 50 cannot be applied.
31. In view of the aforesaid discussion we hold that the assets and properties which are tangible in nature and for which depreciation was allowed should be apportioned from the other intangible assets and to that effect section 45 read with section 50 shall be made applicable.
32. We, therefore direct the Assessing Officer concerned to apportion and/or segregate the amount of consideration received by way of transfer of assets, out of total consideration of Rs. 3 crores to pick up the amount of consideration of tangible assets for assessment of tax under the heading ‘Capital gain’ under section 45 read with section 50 of the said Act. Thus we allow the appeal partly.
[Citation : 336 ITR 100]
