1. In its present appeal, the assessee has impugned the order dated 14-2-2000 of CIT(A), Hubli mainly on the following grounds : (i) The ld. CIT(A) ought to have appreciated that the sale under consideration is a slump sale and accordingly being incapable of assigning any specific values to individual assets, the said transaction is not liable to capital gains tax.
(ii) The ld. CIT(A) failed to appreciate the ratio decidendi in the Hon'ble Supreme Court judgments in the case of CIT v. Artex Mfg. Co.
[1997] 227 ITR 2601 and CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 2782 and accordingly erred in bifurcating the slump sale consideration amongst various assets.
(iii) The ld. CIT(A) failed to appreciate that the unabsorbed depreciation can be carried forward and set off against any income even when the business has been discontinued.
(iv) The ld. CIT(A) ought to have allowed the carry forward and set off of unabsorbed losses as claimed by the appellant, and (v) Without prejudice, the disallowances as confirmed by the ld. CIT(A) is excessive and ought to be reduced substantially.
2. Sri Parthasarathi, the ld. counsel for the assessee while reiterating the grounds of appeal submits that the assessee-firm had gone into liquidation, it was slump sale which does not suffer capital gain tax; the consideration paid was for long term capital gain; the provision of Section SOB of the Income-tax Act were prospective in nature before that corresponding provision of Section 40 of the Act were in operation; land price was much higher than the price taken; Section SOB of the Act has been introduced for such a situation of slump sale; an advertisement for out right sale was given and tender was called for in response to which maximum offer of Rs. 8.01 crores came forward; since it was a slump sale, no capital gain can be assessed; it was cost and not a sale price; the assets were not being sold in piecemeal but entire set up was sold; the business as a whole was asset, which was in existence for 20 years and in such a case long term capital gain is the only answer; the Assessing Officer had bifurcated land and other assets which was not correct method in slump sale; entire carry forward loss of assessee should have been set off; the prevailing market rate of the land was Rs. 20,000 per acre as it is apparent from page Nos. 25,26 & 32 of the paper book; land had no value for others than the assessee since thorough fare was available through the factory of assessee only and before the CIT(A) the assessee had given exact market rate as Rs. 18,333 which is evident from page No. 36 of the paper book. The ld. counsel cites the judgments of the Supreme Court and High Courts reported in : (c) CIT v. Mugneeram Bangur & Co. (Land Department) [1965] 57 ITR 299 (SC),Syndicate Bank Ltd. v. Addl CIT 3. The ld. DR on the contrary banks upon the order of the CIT(A) and submits that assets were sold in piece-meal; it was not slump sale therefore the judgments of the Supreme Court and High Court cited by the ld. counsel are not applicable; determining the value of the land the Assessing Officer had taken into consideration the comparative sales. The ld. counsel in rejoinder to the reply of the ld. DR draws out attention to the Clause 15 of the sale agreement placed at page 91 of the paper book and submits that the actual value of each assets was not practicable to assess; the CIT(A) has deviated from the crux of the issue; purchaser had taken the liabilities of the assessee as well; and the CIT(A) has discussed Clause 14 of the sale agreement only.
4. We have considered the rival submissions, materials on record and gone through the order impugned as well as the judgments cited by the parties. The facts in nutshell are that the assessee was running a sugar mill which came under liquidation, wherein the liquidator has been appointed; after calling a tender he had sold the assets of the assessee-factory to one Sri M.V. Subba Rao of Hyderabad vide agreement dated 18-3-1996; vide Clause 16 of the agreement the purchaser was informed of the proposed formation of a company in the name and style of Sundari Sugars Ltd., which would takeover the assets of the assessee in due course; the possession of the factory assets was handed over to the said purchaser on 12-4-1996 on the basis of which revenue consequence of the transaction has arisen in the assessment year 1997-98; as per Clause-1 of the said agreement, the purchaser agreed to pay for the sugar factory together with all the assets of the factory, movable and immovable which have been mentioned in brief note in Annexures 1 to 6 and in the schedule of machinery enclosed to the agreement makes the liquidator responsible for all the liabilities of the factory up to the date of entry into the factory by the purchaser; Clause-14 provides that while it was agreed to transfer the entire assets of the factory, the deposits made by the assessee with banks, Karnataka Electricity Board and the Water and domestic gas authorities and investment in the shares of the BDCC Bank, Bellary may be retained by the erstwhile factory and a discussion shall be held on this subject between the liquidator and the purchaser for an amicable settlement; thus the price of Rs. 8.01 crores did not include the price of these deposits and investment, the transfer thereof would be settled separately.
5. The reliefs claimed by the assessee are based on the contention that the aforesaid sale of the assets of the assessee-factory was slump sale of business as a whole giving rise to long term capital gains alone.
The Assessing Officer had bifurcated the sale consideration in two parts viz., in respect of consideration attributable to land was determined by him by applying the prevailing market rate and thus he had computed long term capital gains by adopting fair market value of the land as on 1-4-1981 as deemed cost in terms of Section 55(2)(&) and giving the benefit of indexation; on the balance consideration, he had computed the short term capital gains by deducting the written down value of depreciable assets, the Assessing Officer had accordingly rejected the claim of the assessee in the revised return filed on 18-2-1999 that the transaction, being a slump sale of business as a whole gave rise to long term capital gains only. The Assessing Officer while denying the claim of the assessee has banked upon the decision of the Supreme Court in the case of Artex Mfg. Co. (supra). The CIT(A) has affirmed the order of the Assessing Officer in this regard with observation that in the computation of long term capital gains enclosed with the revised return, no capital loss has been worked out by the assessee despite the result of this computation if made as per law, being loss which is eligible for carry forward and set off against the capital gains of subsequent years by virtue of Section 74(1) of the Act, the assessee has ignored the excess indexed cost of assets over the full value of consideration and shown as the income from capital gains as nil which is not in conformity with law. We agree with the view of the CIT(A) that the decisions of the Supreme Court in the case of Artex Mfg. Co. (supra) and Electric Control Gear Mfg. Co. (supra) deal with the sale of business as a running concern i.e., taking over of business as a whole comprising assets as well as liabilities which is not the case of the assessee herein. A careful reading of Clauses 1 and 13 of the agreement reveals that liabilities do not enter into this transaction and what is sold is the assets, movables and immovables, comprised in the Annexures and not the liabilities (Annexure-5) to Clause-1 of the agreement. Clause-13 of the agreement makes it more clear that the liabilities will be the responsibility of the liquidator. Thus it was not a slump sale, rather only the assets excluding investment and deposits was sold and the liabilities remained with the assessee. In the cited cases of the Supreme Court, the sale of business as a running concern had involved both assets and liabilities.
We agree with the view of the CIT(A) that in a case of slump sale of running business, there is always been a difficulty in applying the provision of Section 41(2) as well as those of capital gains in respect of depreciable assets, it is because in such cases of sale of assets with liabilities, to determine precisely what asset was sold and what consideration was attributable to that asset posed a moot point and when the business is sold as a running concern what possess on is the assets tagged with liabilities i.e., the net worth. This net worth is the benefit comprising the excess of assets over the liabilities which may or may not be a positive figure unless the assets are revalued upward. The Legislature has now removed this difficulty by inserting w.e.f. 1 -4-2000, Section SOB of the Act providing for the levy of capital gains in case of slump sale and also Section 2(42C) defining "slump sale". According to the Section 2(42C), slump sale means the transfer of one more undertakings for a lump sum consideration without values being assigned to the individual assets and liabilities. And what Section SOB makes chargeable to capital gains, is the difference between slump price and the net worth of the undertaking without giving the benefit of indexation and the net worth for this purpose is defined as the sum total of paid up capital and free reserves by importing the definition of Section 3(1)(ga) of the Sick Industrial Companies (Special Provisions) Act, 1985. We are thus of clear view that the transaction in the present case of the assessee, is entirely different from the transaction of slump sale i.e., the sale of a running business as a whole and prior to insertion of Section SOB of the Act w.e.f.
1-4-2000, no Court had given verdict that in case of such slump sale of running business, long term capital gains ..will have to be computed with reference to the entire assets. Where no part of consideration could be attributed to particular assets, depreciable or otherwise, no amount would be chargeable either under Section 41(2) of the Act or as capital gains. The CIT(A) has rightly observed that the aforesaid agreement dated 18-3-1996 and its Annexures details different assets that were sold and the components of the consideration at Rs. 8.01 crores attributable to depreciable and non-depreciable assets can easily be found out on proportionate basis and Section 50(2) can be applied; out of these only the land was not a depreciable assets, hence the consideration attributable to land will give rise to long term capital gains under Section 45 of the Act and the consideration attributable to the depreciable assets will give rise to deemed short term capital gains under Section 50(2) of the Act. Only the consideration attributable to intangibles i.e., self-generated assets having no cost cannot be taxed in view of the ratio settled in the decision of the Supreme Court in the case of CITv. B.C. Srinivasa Setty [1981] 128 ITR 2941, only exception being in respect of the assets specifically mentioned in the deeming clause of Section 55(1)(a). The assessee has however not claimed the expenses of any such intangible assets for being part of sale transaction. We thus find no infirmity in the order of the CIT(A) in this regard.
6. So far disallowance of unabsorbed depreciation and unabsorbed business loss pertaining to earlier years as quantified in the assessment year 1996-97 against the assessee's income of this year is concerned, the contention of the assessee that unabsorbed loss and depreciation should have been allowed against the total income including capital gains computed in this year because business as a whole was sold, does not hold water, as business losses cannot be set off against capital gains and deeming capital gain under Section 50 of the Act is only regarding the capital gain being short term capital gain and business income is not deemed as capital gains under Section 50 of the Act. We agree with the view of the CIT(A) that capital asset as defined under Section 2(14) of the Act means property of any kind whether or not connected with business. Thus business assets are also capital assets giving rise to capital gains on their sale under the charging Section 45 of the Act which refers to transfer of a capital asset. Prior to 1-4-1988 and also after 1-4-1998 in respect of assets power sector, a component of capital gains arising from the sale of business assets was made business profit by the legal fiction of Section 41(2), while Section 50 charges the whole amount under the head 'capital gains' where it substantively belongs.
7. We thus find no reason to interfere with the order of the CIT(A) who has rightly held that no business loss can be allowed to be set off against short term capital gain under Section 50 of the Act. The Assessing Officer has allowed set of floss of the assessment years 1989-90, 1990-91 and 1991-92 to the extent of profit from business of this year. There remaining no more profit of this year, no unabsorbed depreciation can be allowed to be set-off by virtue of Section 72(2) of the Act which give precedence to unabsorbed business loss over unabsorbed depreciation in the matter of set off. The provisions of Section 32(2) applicable w.e.f. 1-4-1997 are not available in the case of the assessee to impose the limit of eight years only in relation to the depreciation pertaining to the assessment year 1997-98 and onwards and not to the depreciation of earlier years which became part of the depreciation of the assessment year 1997-98 under the unamended provisions of Section 32(2). Likewise, the unabsorbed depreciation of earlier years could not take the character of current year's depreciation in the assessment year 1997-98 so as to be set off against the income from other than business head as amended provisions of Section 32(2) came in force w.e.f. 1-4-1997. The decision of the Supreme Court in the case of Reliance Jute & Industries Ltd. v. CIT [1979] 120 ITR 921 also supports this view interpreting amendment brought about in Section 24(2)(iii) of the old Act regarding carry forward of business losses limiting the period of set off to eight years and holding that there was no vested right of carry forward. We thus find no infirmity in the order of the CIT(A), in this regard as well.