Weikfield Products Co. (I)(P) Ltd. vs Dy. Cit

This appeal by the assessee is directed against the order of the Commissioner (Appeals)-II, Pune.

2. The first and the main grievance of the assessee is that the authorities below are not justified in rejecting the assessee's claim of long-term capital gains on the sale of its chemical unit and thereby denying deduction under section 54E of the Income Tax Act, 1961. The assessee-company is engaged in the manufacture of food products and chemicals. During the year under appeal, it sold its Chemical Division to M/s. Hindustan Polyamides and Fibres Ltd. for a lumpsum consideration of Rs. 58 lakhs. The assessee declared the long-term capital gain at Nil amount as investment of Rs. 58,00,380 had been made in UTI as per the provisions of section 54E of the Act. The assessing officer held that profit on sale of assets is to be considered under section 50 of the Act which prescribes a special provisions for computation of capital gains in case of depreciable assets. The provision was introduced by Taxation Laws (Amendment) Act, 1986, with effect from 1-4-1988. The assessing officer noted that the WDV of the assets sold was Rs. 25,06,672. Applying the provisions of section 50, he assessed a sum of Rs. 32,93,028 (Rs. 58 lakhs minus Rs. 25,06,672) as short-term capital gains. Consequently, he denied deduction under section 54E of the Act.

3. On appeal, the learned Commissioner (Appeals) confirmed the action of the assessing officer holding that special provisions of section 50 which were brought on the statute book with effect from 1-4-1988, were applicable to the case of the assessee. According to the Commissioner (Appeals), the assessee had only sold block of assets pertaining to Chemical division. The current assets and liabilities had not been transferred to M/s. Hindustan Polyamides & Fibres Ltd. as the same had been taken over by the Food division of the assessee-company. Therefore, according to the learned Commissioner (Appeals), it could be said to be a case covered by section 50 of the Act. He further held that the mere fact that the assessee had given a consolidated price of Rs. 58 lakhs does not take the case out of the ambit of section 50 of the Act. The assessee had already claimed depreciation on the assets of Chemical division to the extent of Rs. 43,44,875 upto 30-4-1988. Holding that there was no merit in the contention that it was a slump sale of Chemical unit as a whole and not sale of individual assets or block of assets and relying upon the judgment of the Hon'ble Bombay High Court in CIT v. Narkeshwari Prakashan Ltd. (1992) 196 ITR 438 (Bom), he dismissed the ground raised by the assessee.

4. Shri C.V. Khandelwal, the learned counsel for the assessee, submitted that the assessee had sold its manufacturing unit of bulk chemicals as a going concern situated at Koregaon Bhima to Hindustan Polyamides & Fibres Ltd. vide agreement dated 21-4-1988, for a lumpsum price of Rs. 58 lakhs. He drew our attention to the terms of the agreement placed at pp. 27 to 38 of the paper-book and submitted that the salient features of the agreement included as under :

(a) M/s. Hindustan Polyamides (hereinafter referred to as the "HP") agreed to purchase from Weikfield Products Co. (I) (P) Ltd. (hereinafter referred to as the "WP") the said chemical plant, the structure and the land.

(b) The word unit to include all fixed assets of the plant.

(c) WP was to transfer all the know-how, documents, licences and agreed to a negative covenant namely not to manufacture OPB at any time in the future.

(d) The transfer shall be effected as 'lumpsum sale' without assigning any specific values to any particular items.

5. According to Shri Khandelwal, the sale was of the entire unit as a going concern and not of the land or particular machinery in specie. In other words, the unit was sold which was capable of being used for the purpose of production immediately on purchase by the buyer. It was sold along with all electricity connections, technical know-how, non-complete and other non-tangible assets like registrations, permissions, quotas, eligibility for incentives, etc. Shri Khandelwal further submitted that it was never the case of the revenue that the said agreement was sham in nature and, therefore, it was stressed that the agreement must be read and concluded as a whole without vitiating any terms or matter pertaining to such agreement. The activity of the unit did not stand suspended till the date of transfer of the unit. Further, there is no direct or indirect relation/connection between WP and HP. The deal was on principal to principal basis and at arms length.

6. Shri Khandelwal relied upon the judgment of the Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681 (Karn) for emphasising the proposition that if the entire undertaking is transferred, then such undertaking itself is a capital asset distinct and separate from the assets comprised in the said undertaking. According to the learned counsel, admittedly the undertaking of the assessee to manufacture OPI) was held for more than three years and, therefore, it was long-term capital asset within the meaning of section 2(42A) read with section 2(29A) of the Act. The learned counsel further emphasised that what was sold by the assessee in the given case was not individual items forming part of the aggregate unit but the capital asset consisting of business of the whole undertaking. According to the learned counsel, the assessee had sold the unit or undertaking as a whole which is a capital asset as a whole, such asset was not a depreciable asset and no depreciation had been allowed on this particular asset and, therefore, provisions of section 50 are not applicable. According to the learned counsel, section 50 creates a fiction as it uses the word "such excess shall be deemed to be the capital gains. " And that section is limited to the purpose for which it is created and cannot be extended beyond the legitimate field. In support of this contention, he relied upon CIT v. Ajax Products Ltd. (1965) 55 ITR 741 (SC) and Bengal Immunity Co. Ltd. v. State of Bihar AIR 1958 SC 660. He drew our attention to the definition of 'slump sale' in section 2(42C) of the Act and submitted that the case of the assessee perfectly fits in that definition.

7. Coming to the provisions of section 54E, the learned counsel submitted that section 54E is not controlled by any other section and is not subjected to the provisions of section 50 and must be read independently. If long-term capital asset is sold and if other provisions of section 54E are fulfilled, the benefit conferred under the said section will have to be granted to the assessee. He emphasised that the benefit granted by section 54E cannot be rejected as it operates by way of saving clause and before capital gain is computed. Assuming but not admitting, the learned counsel submitted that if the assessee fails on all issues referred hereinabove, section 50 will not come into play unless the sale price exceeds the total aggregate amount in a particular block. Such event must happen in the case of the assessee and not with respect to a particular block of asset of a particular unit. In the case of the assessee considering the value of the assets of the Food division and the additions made in the relevant assessment year, the sale price does not exceed the value of the various assets pertaining to various blocks. He relied upon the decision of the Bombay Tribunal in the case of ACE Builders (P) Ltd. v. Asstt. CIT (2001) 22 DTC 294 (Mum-Trib) : (2001) 76 ITD 389 (Mum-Trib) and submitted that this is a direct decision on the issue. In the light of above submissions, the learned counsel submitted that the findings of the authorities below deserve to be reversed.

8. Shri Naresh Kumar, the learned senior Departmental Representative strongly supported the orders of the authorities below. He submitted that the agreement of sale is not an agreement for slump sale, but the sale of certain assets. The sale was not of the entire unit as a going concern as has been argued by the learned counsel of the assessee. He drew our attention to the Letter No. PN/DCSR 3/95-96, dated 19-2-1996, as under, of the Dy. Commissioner, Special Range, 3 Pune, as per which the agreement to sale of the Chemical unit was concluded on 18-6-1988 :

"During the year, assessee-company disposed of its Chemical unit to one M/s. Hindustan Polyamidas & Fibres Ltd. Agreement was executed on 18-6-1988, As per Director's report attached with the Annual report for the year, it is seen that : During the month of June, 1988, the current assets and liabilities of the erstwhile Chemical division were transferred to the Food division of the company. Chemical division's accounts including bank account have been closed. "

Further, as per the details submitted by the assessee during the assessment proceedings, the written down value of the assets sold was Rs. 25,06,672. Thus, according to the learned senior Departmental Representative the Chemical division was sold not as a going concern, but only some of the current assets of the Chemical division were sold. He further submitted that even though there was no sale value pertaining to each fixed asset, yet it is not a pre-condition for evoking the provisions of section 50. Since only the fixed assets of the Chemical division had been sold during the year and current assets and liabilities had been retained with the Food division of the company and no employee of the Chemical division had been transferred to the new buyer, therefore, it is not a case of slump sale of a going concern but sale of some of the assets and, accordingly, the transaction is hit by the provisions of section 50. Relying upon the judgment of the Hon'ble Supreme Court in CIT v. Mugneeram Bangur & Co. (Land Department) (1965) 57 ITR 299 (SC), he drew our attention to the definition of 'slump sale' on p. 304 of the said decision as follows :

"The Appellate Tribunal held in this case that the sale was a sale of business as a going concern. The sale was of the entire assets, including goodwill, the consideration being paid shares and an agreement by the company to discharge all the liabilities."

Further, on p. 305, it has been observed by the Hon'ble Supreme Court in the case of CIT v. West Coast Chemicals & Industries Ltd. (1962) 46 ITR 135 (SC) as under :

"This case shows that where a slump price is paid no portion is attributable to the stock-in-trade, it may not be possible to hold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly be said that there was a trading from which a long profits can arise in business.

It follows from the above that once it is accepted that there was a slump transaction in this case, i.e., that the 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. "

Thus, according to the learned Senior Departmental Representative the Hon'ble Supreme Court relying upon Doughty v. Commr. of Taxes (1927) AC 327 has held that when the entire assets including the goodwill are sold and there is an agreement to discharge all the liabilities of the business sold, only then such sale can be called to be a slump sale. He submitted that same view has been expressed again by the Hon'ble Supreme Court in CIT v. Artex Manufacturing Co. (1997) 227 ITR 260 (SC). He further relied upon the judgment of the Hon'ble Gujarat High Court in Jayantilal Bhogilal Desai v. CIT (1981) 130 ITR 655 (Guj).

9. Relying upon the above judgments, the learned Senior Departmental Representative submitted that once it is held that it was not a slump sale of the going concern, but sale of certain assets, there is no escape from the conclusion that the provisions of section 50 being specific provisions would apply. As to the argument of the learned counsel that since the entire sale proceeds had been deposited in the assets as specified in section 54E and, therefore, no capital gain can be levied on the assessee, the learned Senior Departmental Representative submitted that as per section 50 of the Act, capital gains have to be treated as short-term capital gains and hence the provisions of section 54E are not available to the assessee. In support of this contention, he placed reliance on the judgment of the Supreme Court in Commonwealth Trust Ltd. v. CIT (1996) 220 ITR 1 (SC). As regards the reliance placed by the learned counsel on the direct decision of Bombay Tribunal in the case of ACE Builders (P) Ltd. v. Asstt. CIT (supra), the learned Senior Departmental Representative submitted that 'With due respect, I have to submit that the Hon'ble Tribunal has not considered the decision of the Supreme Court in Commonwealth Trust Ltd. (supra), in its right perspective. The true significance of section 50 has not been properly understood by the members while deciding the said issue. Once it is found that the provisions of section 50 are applicable, then the capital gains, if any, earned by the assessee have to be treated as short-term capital gain." He also relied upon the decision of the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. (supra) relied upon by the learned Commissioner (Appeals). In the light of above arguments, the learned Senior Departmental Representative concluded that the. findings of the authorities below deserve to be upheld.

10. We have considered the rival submissions and perused the facts on record. We do not find any force in the contention of the learned counsel that the sale of Chemical unit of the assessee-company was "slump sale" and accordingly, provisions of section 50 of the Act are not applicable. In our opinion, the transfer of a going concern means transfer by lock, stock and barrel where nothing is left with the vendor. It includes not only the transfer of each asset, tangible or intangible, but also the transfer of each debt and liability including any obligation.

11. In the case of Syndicate Bank Ltd. (supra) relied upon by the learned counsel for the assessee, there was a complete transfer of the banking business including all liabilities whatsoever. There was also transfer of employees carrying on that undertaking. Similarly, in the case of Mugneeram Bangur & Co. (supra) also, there was a complete transfer of assets as well as liabilities. No case has been brought before us to point out that mere transfer of assets amounts to transfer of a going concern. The reliance placed by the learned counsel on the definition of 'slump sale' in section 2(42C) which was brought on the statute book by Finance Act, 1999, with effect from 1-4-2000 is also of no assistance to the assessee, because according to the definition 'slump sale' means the transfer of one or more undertakings as a result of the sale for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sales." The definition talks of both assets and liabilities, but in the case of the assessee only assets were transferred and the liabilities were retained.

12. In the present case, the Chemical unit of the assessee was a loss-making undertaking with accumulated losses of more than Rs. 97 lakhs. It had a liability to discharge of more than a crore of rupees as is apparent from the balance sheet appearing at p. 80 of the paper-book. Even the entire assets were not transferred inasmuch as current assets were kept by the assessee itself. This fact is corroborated by the report of the Directors wherein it has been clearly stated that "the current assets and liabilities of the chemical unit were transferred to Food division." Had there been a sale of going concern, no prudent businessman would have purchased it, even for a consideration of Re. 1 in view of the huge liability in the balance sheet of the Chemical division. Further, there was no transfer of goodwill in the sense that the name and style under which the Chemical unit was being carried on was kept with the assessee and not transferred to the vendee. Therefore, in our opinion, the present case cannot be considered as transfer of going concern and the case does not fall within the definition of 'slump sale'. We accordingly reject the first contention of the learned counsel.

13. We, however, find force in the first alternative contention of the learned counsel that section 54E is not controlled by any other section and is not subjected to the provisions of section 50 and accordingly, the assessee is entitled to deduction under section 54E. Section 45 provides for the charge of capital gains. It states that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D, 54E, 54F and 54G, be chargeable to income-tax under the head 'capital gains' and shall be deemed to be income of the previous year in which the transfer took place. Mode of computation and deduction is provided in section 48. Section 49 deals with the cost with reference to certain modes of acquisition where the capital asset became the property of the assessee not by purchase, but otherwise. It deems the cost of acquisition of such asset to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

14. Section 50, which is the core issue before us. provides for a special provision for computation of capital gains in case of depreciable assets. It reads as under :

"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 1992), 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."

There is no dispute in this case that the capital asset, namely, the Chemical unit held by the assessee was a depreciable asset within the meaning of section 50. This section provides, as aforesaid, for a special treatment for the depreciable asset and as the title of the section indicates, the speciality is only for computing the capital gains. The provisions of this section are made notwithstanding anything contained in clause (42A) of section 2. This means that irrespective of the period of holding the asset, the provisions of this section would apply, i.e., whether the asset is a long-term capital asset or a short-term capital asset. On a further reading of this section, it becomes evident that by this section, the provisions of sections 48 and 49 are to be read with some modification stated therein. One such modification is regarding determination of the cost of acquisition of the asset and the second is of the deductions to be allowed in computing capital gain. The income received or accruing as a result of such transfers is deemed to be the capital gains arising from the transfer of short-term capital asset irrespective of the period of holding of a particular asset or assets.

15. From the above, it may be noted that there are many provisions in the Income Tax Act which makes a difference between the two, and provide for a differential treatment for the two. Firstly, there is a difference in the tax payable in respect of the two; the short-term capital gain is chargeable to the normal rates whereas the special rate is provided for taxing the long-term capital gain under section 112. Secondly, there are different provisions for set off and carry forward of the losses incurred under the capital gains for the two types of assets. Losses arising from the transfer of short-term capital asset are set off against the other income of the assessee in the previous year, whereas the losses arising from the transfer of long-term capital asset is to be set off only against the income arising from the transfer of long-term capital asset in that year and in absence thereof, it is carried forward to be so set off against the income arising from the transfer of long-term capital asset in the years to come. Thirdly, there are many provisions providing for exemptions for capital gains arising from the transfer of long-term capital asset. These are sections 48, 53, 54, 54B, 54D, 54E, 54F, 54G and 54H, etc. It is noted that neither the provisions of section 50 are made 'subject to' or notwithstanding the other provisions of the Act' excepting the provisions of sections 48 and 49: nor the provisions of section 54E are so made 'subject to' or notwithstanding the other provisions of the Act.

16. We do admit that section 50 contains a special provision for computing capital gain in case of depreciable asset and, therefore, it has to override the general provisions for computing the capital gains under section 48 of the Act, but that does not mean that it overrides all other provisions of the Act. The language used in section 50 states that the provisions of sections 48 and 49 shall be subject only to certain modifications contained therein. Section 48, as seen earlier, provides for certain deductions to be made from the full value of consideration received or accruing as a result of transfer and these are, as aforesaid, the expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition of the asset and the cost of improvement thereto. If the gain arises from the transfer of a long-term capital asset, then sub-section (2) thereof provides for certain other deductions for computing the income chargeable under the head 'capital gain'. Section 49, on the other hand, provides for the determination of cost of the acquisition in cases where the capital asset has been acquired otherwise than purchase by the assessee. There is no dispute in this case as regards the cost of acquisition either under section 48 or under section 49. The fiction thus created under section 50 for deeming any gain arising on transfer of a depreciable asset as short-term capital gain is for the purposes of section 48 only. In our view, it cannot extend to other provisions dealing with the exemptions provided in charging the long-term capital gain by prescribing a different method for computing the capital gains on fulfilment of certain conditions and one such exemption is in section 54E. Accordingly, we hold that notwithstanding the special provisions of section 50, the assessee is entitled to exemption under section 54E as after the sale of the asset, i.e., Chemical division the assessee had made an investment of Rs. 58,00,380 in UTI. This view of ours gets support from the decision of Mumbai Bench D' in the case of ACE Builders (P) Ltd. (supra). We, therefore, delete the addition sustained by the learned Commissioner (Appeals).

17. As regards the second alternative contention of the learned counsel that section 50 will not come into play unless the sale price exceeds the total aggregate amount in a particular block and such event must happen in the case of the assessee and not with respect to a particular block of asset of a particular unit, since the assessee has succeeded on the first alternative contention that section 54E should be applied independent of the provisions of section 50, we do not deem it fit to consider the same as the same has become of academic nature in view of the decision of Nagpur Special Bench to which one of us (A.M.) was party in the case of Rahulkumar Bajaj v. ITO (1999) 11 DTC 187 (Nag-Trib) (SB) : (1999) 69 lTD 1 (Nag-Trib) (SB). This ground accordingly succeeds.

18. The next grievance of the assessee is that the authorities below are not justified in holding that expenses of Rs. 10,575 incurred on felicitation celebration on the birthday of the chairman of the assessee-company Shri S.P. Malhotra are not in the nature of business expenditure. During the year under appeal, the assessee-company felicitated its chairman Shri S.P. Malhotra on his 60th birthday and incurred an expenditure of Rs. 10,575. The assessing officer held that these expenses were in the nature of personal expenses and disallowed the same. On appeal, the Commissioner (Appeals) confirmed the action of the assessing officer.

19. Before us, it has been submitted that the expenses were incurred out of business expediency and for the purpose of business and are accordingly admissible under section 37 of the Act. Reliance has also been placed on the following decisions :

(i) Amarjothi Pictures v. CIT (1968) 69 ITR 755 (Mad);

(ii) CIT v. Tata Sons P. Ltd. (1978) 111 ITR 290 (Bom);

(iii) Andhra Sugars Ltd. v. CIT (1988) 171 ITR 209 (AP);

(iv) S.P. Jaiswal Estates (P) Ltd. v. CIT (1994) 209 ITR 298 (Cal); and

(v) CIT v. Aditya Mills Ltd. (1994) 209 ITR 933 (Raj)

The learned Departmental Representative strongly supported the orders of the authorities below.

20. We have considered the rival submissions. In our opinion, it was the 60th birthday of the chairman of the company Shri S.P. Malhotra who is also the founder of the company. The assessee held a get-together to which its constitutents, distributors and stockists were also invited. Therefore, we hold that the get-together was not only to felicitate the chairman Shri S.P. Malhotra, but also to promote the business. Accordingly, we hold that such expenses were in the nature of business expenses and deserve to be allowed in view of the above decisions. This ground accordingly succeeds.

21. The next grievance of the assessee is that the authorities below are not justified in disallowing Rs. 37,914 as entertainment expenses under section 37(2A).

The assessee incurred expenses of Rs. 37,914 on account of club bills of the directors. The assessing officer disallowed the same as entertainment expenses. On appeal, the Commissioner (Appeals) went through details of these expenses and noted that these bills were of Poona Club and Diners Club. He noted that some of the expenses were reimbursed by the directors, but he confirmed the action of the assessing officer.

22. Shri Khandelwal, the learned counsel for the assessee, drew our attention to the details of these expenses placed at pp. 18 to 26 of the paper-book and submitted that expenses pertaining to all the club bills as mentioned in the expenses had been incurred towards visits of various distributors and stockists of the company's product visiting Pune from time to time.

23. We have gone through the details of expenses and find that some of the expenses incurred by the directors had been reimbursed and most of the expenses pertain to visits of various distributors and stockists of the company's products visiting Pune from time to time. Further, the directors are entitled to membership of the clubs and accordingly, we see no element of entertainment in these expenses. The same are dictated by business expediency and accordingly, the addition of Rs. 37,914 is deleted.

24. Ground No. 3 reads as under :

"On facts and circumstances prevailing in the case and as per provisions of law it be held that amount of excise duty and that of sales-tax will not form part of the turnover for the purpose of determining the claim in terms of provisions of section 80HHC of the Act. It further be held that the deduction in terms of provisions of section 80HHC is allowable at Rs. 5,79,885 as is claimed by the appellant company in place of Rs. 5,63,747 allowed by the assessing officer. Just and proper relief be granted to be appellant-company in this respect."

This issue stands covered in favour of the assessee and against the department by the decision of this Tribunal in the case of Sudarshan Chemical Industries Ltd. v. Dy. CIT (1997) 60 ITD 629 (Pune-Trib). Accordingly, the issue is decided in favour of the assessee.

25. In the result, the appeal is allowed in part.