Salora International Ltd. Vs. Joint Commissioner of Income-tax - Court Judgment

Excerpt:
1. this appeal, preferred by the assessee, is directed against cit(a)'s order dated 22-02-2001 relating to assessment year 1997-98.2. ground no. 1 raised in this appeal relates to amount of capital gain.2.1 relevant facts giving rise to this ground are that assessee, a widely held public limited company, was engaged in the business of manufacture of television sets, components and in the business of export of garments. the assessee company started panasonic division in 1993 with technical collaboration agreement with matsushita electronic industrial company ltd. ("meicl" in short) for the manufacture of colour television sets in india. during the previous year relevant to assessment year 1997-98, the year under consideration, the assessee decided to restructure and reorganise the company.....

Judgment:
1. This appeal, preferred by the assessee, is directed against CIT(A)'s order dated 22-02-2001 relating to assessment year 1997-98.

2. Ground No. 1 raised in this appeal relates to amount of capital gain.

2.1 Relevant facts giving rise to this ground are that assessee, a widely held public limited company, was engaged in the business of manufacture of television sets, components and in the business of export of garments. The assessee company started Panasonic Division in 1993 with technical collaboration agreement with Matsushita Electronic Industrial Company Ltd. ("MEICL" in short) for the manufacture of colour television sets in India. During the previous year relevant to assessment year 1997-98, the year under consideration, the assessee decided to restructure and reorganise the company by spinning off its "Panasonic Division" to Matsushita Television & Audio India Ltd. ("MTAIC" in short) and moved an application before the Hon'ble High Court of Delhi under Section 394 of the Companies Act seeking approval of the scheme of arrangement which provided that assessee company was to spin off the entire property, rights and powers including the technical assistance and know-how agreement for the manufacture of colour television receivers under the name of "National Panasonic" of Panasonic Division to MTAIC. All the liabilities, duties and obligations of the Panasonic Division of the assessee-company were to be made over to MTAIC. Copy of petition, appearing at pages 1 to 252 of the paper book was submitted before the Hon'ble High Court. A copy of application moved under Section 391 of the Companies Act for holding of separate meeting of the shareholders and secured creditors of Salora International Ltd. and to consider the scheme of arrangements appears at pages 253 to 265 with copy of affidavit at pages 266 to 267 of the appear book. The Hon'ble High Court was pleased to pass an order on 8-5-1996 for convening the meeting of equity share holders of the applicant company on 5-7-1996 and copy of that order is appearing at pages 273 to 274. The assessee convened a meeting accordingly after issuing the required notice and copy of that notice is also appearing at page 278 of the paper book. The assessee also gave explanatory statement under Section 393 of the Companies Act and copy thereof is appearing at pages 279 to 284. It is also on record that after completing of formalities as required under the Companies Act, the Hon'ble High Court considered the application and approved the scheme of arrangement vide order dated 20-9-1996, copy appearing at pages 388 to 391 and accorded approval to the scheme of arrangement and copy of scheme of arrangement is appearing at pages 392 to 397 along with other annexures. It is also not in dispute that Panasonic Division of assessee-company was to be transferred for a total consideration of Rs. 50.12 crores as has been fixed and agreed by assessee-company and MTAIC through their respective boards and Clause 12 of the scheme of administration provided the modes of discharging the amount. Clause 12 is relevant and the same is reproduced below : "12. In consideration of the transfer and investment of the running business of Panasonic Division to MTAIC and upon this Scheme being effective: (a) Every member of SIL holding Equity shares in SIL on the Effective Data or such other date as may be decided by the Board of Directors of SIL and MTAIC respectively (on the scheme becoming final and effective) shall in respect of every fully paid equity shares of Rs. 10 each held by him in SIL be entitled as of right to claim and receive from MTAIC an allotment of Two Equity shares of Rs. 10 each credited as fully paid up and that MTAIC shall so issue and allot two equity shares of Rs. 10 each in its capital for one fully paid equity share of SIL.

Provided that in case any member's shareholding in SIL is such that on the basis of the aforesaid ratio, he becomes entitled to a fraction of a share of MTAIC of a value not less than one half share of MTAIC. Such member shall be entitled as of right to claim and receive from MTAIC an allotment of one equity share of MTAIC of Rs. 10 each credited as fully paid up, and if the shareholding of any member in SIL is such that he would consequent upon the aforesaid exchange ratio be entitled to a fraction of a share of MTAIC of a value of less than one half share of MTAIC then such fraction shall be ignored and such member shall not be entitled to receive any fraction of a share from MTAIC; (b) SIL itself shall be entitled as of right to claim and receive from MTAIC an allotment of Rs. 48,60,000 (forty eight lakhs sixty thousand only). Equity shares of Rs. 10 each credited as fully paid up and MTAIC shall issue and allot the same; (c) SIL shall, in addition, be paid by MTAIC, a sum of Rs. 27,62,00,000 (Rupees twenty seven crores sixty two lakhs only) within a period of 90 days from the effective date or on such date or dates as may be mutually agreed between the Board of Directors of SIL and MTAIC and in the mean while the said amount of Rs. 27,62,00,000 (Rupees twenty seven crores sixty two lakhs only) will stand credited to the account of SIL in the books of account of MTAIC." 2.2 For the assessment year under consideration the assessee filed return at an income of Rs. 1,97,47,720. During assessment proceedings, the Assessing Officer noted that assessee had returned short term capital loss of Rs. 11,14,31,696 which was computed as under: 2.3 The assessee claimed carry forward of this short term capital loss.

The Assessing Officer, after perusal of scheme of arrangement, as approved by the Hon'ble Delhi High Court, noted that total consideration for transfer of Panasonic Division was Rs. 52.12 crores, and assessee instead of disclosing the full value of the consideration had shown total consideration of spinning of Panasonic Division at Rs. 32.48 crores only and not included the consideration of Rs. 17.64 crores which was the value of the shares allotted by the transferee company to the share holders of transferor company. The Assessing Officer was of the views that Rs. 17.64 crores was to be received by the assessee company but by mutual arrangement the assessee company had diverted its income to the shareholders. As assessee company alone had the absolute right to receive sale consideration on transfer of one of its unit, the shareholders had no right what-so-ever, to receive the shares worth Rs. 17.64 crores from the transferee company. In this connection the Assessing Officer had taken note of the Directors' report and noted that part of the consideration for transfer of the said Division accrued to the shareholders of the company as per decision taken by the Board. The Assessing Officer called upon the assessee to explain and it was submitted that assessee-company received Rs. 32.48 crores only and Rs. 17.64 crores worth shares were allotted to the shareholders. Placing reliance on the decision in the case of CIT v. Imperial Chemical Industries India Pvt. Ltd. 74 ITR 17 (SC) and that of CITv. Sital Das Tirath Das 41 ITR 367 it was contended that Rs. 17.64 crores never accrued or arose to the assessee but the same was diverted at the very beginning as over-riding charges on the property being sought to be transferred. The Assessing Officer considered the case laws and noted that ratio of those case laws was not applicable as Their Lordships of Apex Court have clearly held that diversion of income at source must be taken over-riding charges or over-riding title or decree of some court by reasons of which the income does not reach the hands of the assessee-company. While in the case of assessee there was no such over-riding title or over-riding charge or any decree of any court due to which Rs. 17.64 crores was diverted in the form of shares allotted to shareholders. It was noted by the Assessing Officer that it was no account of conscious design of the Board of Directors to divert a part of their income to the shareholders by inserting a clause in the scheme of arrangement. It was also the view of the Assessing Officer that Hon'ble Delhi High Court had not imposed any pre-condition for spin off of the Panasonic Division of the assessec company. It was concluded that shares worth Rs. 17,64 crores given to shareholders was nothing but application of income and total sale consideration which accrued in the hands of assessee was Rs. 50.12 crores as per scheme of arrangement and assessee was liable to pay capital gain on this whole amount of spin off transaction.

2.4 Before CIT(A) learned counsel for the assessee reiterated the same submissions and pointed out that Hon'ble Delhi High Court has approved the payment made to the shareholders and that was important factor for obtaining the approval of shareholders for scheme of arrangement.

Shares were issued to shareholders in their own right and assessee had no right/interest what-so-ever on those shares and thus the value of those shares cannot be considered in the hands of assessee for computing the capital gain. It was submitted further that in the case of K.P. Varghese v. ITO 131 ITR 597 the Hon'ble Supreme Court had observed that capital gains tax was intended to tax the gains of the assessee and not what an assessee might have gained. What is not gain, cannot be computed as gain. All losses, physical or otherwise must be both reasonably and justly interpreted whcn-ever possible. Their Lordships have also opined that capital gains tax is not a tax on what migth have been received or could have been taxed. The same view was taken by the Hon'ble Supreme Court in the case of CIT v. Shivakami Co.

Pvt. Ltd. 159 ITR 71. Other plca of the assessee was that mode of computation of capital gain was provided under Section 48 of the Act and Assessing Officer was not justified in taking transfer consideration to be Rs. 50.12 crores rather than Rs. 32.48 crores which was actually received by the assessee. About diversion of income by over-riding title the assessee submitted that in case of CIT v. Sital Das Tirath Das (supra) Their Lordships have laid down the true test for application of the rule of diversion of income by an over-riding charge. It is to be looked into as to whether the amount sought to be deducted, in truth never reached the appellant as his income.

Obligations, no doubt they are in every case, but it is the nature of the obligation which is decisive fact. There is difference between amount which a person is obliged to apply out of his income and an amount which by the nature of obligation cannot be said to be part of the income of the assessee. The other citation referred to by the assessee was in the case of CIT v. Imperial Chemical Industries India Ltd. (supra).

2.5 The learned CIT(A) called for the report from Assessing Officer who submitted that sale consideration was agreed at a certain figure which was the full value of consideration. The manner of payment should not make any difference to the agreed consideration. Approval of Hon'ble High Court does not bar the position because scheme of arrangement was given by the assessee after negotiation with MTAIC and it was for the Hon'ble High Court to approve such a scheme in case understanding between the parties was proper.

2.6 The learned counsel in reply submitted further that Hon'ble High Court was not working merely a rubber stamp or post office as it was incumbent upon the court to satisfy prima facie that the transaction was bona fide and it was in the interest of creditors, shareholders etc. of the company. The scheme of arrangement was to be passed by minimum 75 per cent of shareholders favouring the scheme otherwise it could not be approved by the Hon'ble High Court.

2.7 Learned CIT(A) considered all the facts and noted that assessee company was to receive Rs. 50.12 crores on account of transfer/spin off of the Panasonic Division. Rs. 17.64 crores were given to shareholders by way of shares and the amount was paid and could not be taken as overriding title/charge on the sale consideration as shareholders did not have any inherent right to receive a part of such consideration till the company goes into liquidation. The right of shareholders was limited to receive the dividend in case the company earns profit. The amount was given to shareholders as per the aforesaid scheme was at the choice of the assessee company. The ratio of decision in the case of CIT v. Sitaldas Tirathdas (supra) was applicable to the facts of the case as there was no over-riding charge for diversion or over-riding of the sale consideration. The view of the CIT(A) was that company was not obliged to pay this amount out of its income and nature of obligation was not such to admit that this amount did not constitute the income of the assessee. The ratio of decision in the case of CITv. Imperial Chemical Industries (India) Pvt. Ltd. (supra) was also applicable as it could not be said that total sale consideration had not accrued to the assessee merely because part of the same was apportioned amongst the shareholders. It did not change the position of accrual of income in the hands of the company. Accordingly, the view of the Assessing Officer was confirmed by the learned CIT(A) against which the assessee is in appeal.

3. Learned counsel for the assessee Shri C.S. Aggarwal had taken to the facts of the case as noted above and submitted that assessee-company had spinned off its Panasonic Division to MTAIC as assessee-company considered it appropriate to enter into a transaction in the interest of business and commercial expediency to spin off its Panasonic Division. Whenever an arrangement of such nature takes place, it is the requirement under Section 394 of the Companies Act that Board of Directors must prepare a proposal and obtain the sanction of the Hon'ble High Court. The assessee company was directed by the Hon'ble High Court to seek approval of the shareholders, creditors, both secured and unsecured under Section 393 of the Companies Act and a general meeting of the shareholders etc. was called. Scheme of arrangement was placed before the shareholders creditors etc. and it was approved. Hon'ble High Court, after going through the same, approved the said scheme of arrangement and allowed the assessee company to spin off Panasonic Division to MTAIC. The learned counsel submitted that assessee company was to receive a sum of Rs. 32.48 crores out of which Rs. 27.62 crores was in cash and remaining amount of Rs. 4.86 crores was in the shape of shares. Further, an amount of Rs. 17.64 crores was given by MTAIC to shareholders. Referring to the provisions of Section 48 of the Income-tax Act, the learned counsel for the assessee submitted that income chargeable under the head "Capital gains" would be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset. The learned counsel submitted that question for consideration was as to what was the "full value of consideration, received or accrued to the assessee company." On this, learned counsel argued that assessee company received Rs. 32.48 crores and it could not be justifiably argued or held that what is accrued to the shareholders as a result of arrangement is a sum which also accrued to the assessee as a result of transaction. The contention is that what accrued to the shareholders would be outside the scope of Section 48 of the Act.

3.1 Next argument from the side of the learned counsel for the assessee was that Assessing Officer and learned CIT(A) did not find favour with the plea of the assessee that Rs. 17.64 crores received by the shareholders was not received by the assessee and while the true position is that it is not a case of diversion of income at a source but it is a clear case of diversion of receipt at source. The amount of Rs. 17.64 crores had accrued to the shareholders but for whose approval the assessee could not have either obtained the permission under Section 394 of the Companies Act or it would have been given permission by the Hon'ble High Court to spin off these units.

3.2 About legal proposition, it was submitted that where an income is applied after it accrued the same results into an application of income but where income is diverted at source before it accrued it could not be regarded as application of income. The case law in favour of this contention is that of CIT v. Imperial Chemical Industries (India) Pvt.

Ltd. (supra); CIT v. Sitaldas Tirathdas (supra), K.P. Varghese v. ITO (supra), CIT v. Shivakami & Co. (supra); and CIT v. Shiv Prakash Janak Raj & Co. (P.) Ltd. 222 ITR 583. Referring to the ratio of last case law, the learned counsel submitted that Hon'ble Apex Court had observed in that case that concept of real income cannot be applied to deviate the provision of the Act and rules and it would not be permissible for the courts of impose the concept of real income, as to whittle down, qualify or deviate the provisions of the Act or the Rules yet the concept of real income is certainly applicable in judging whether there has been income or not and as such, in every case, such a principle must be applied with care and with well recognised limits. The learned counsel submitted that theory of real income is not the only criteria to examine the liability of tax towards income-tax yet the concept of real income cannot altogether ignored. According to learned counsel, the assessee had not received Rs. 17.64 crores which actually had gone to shareholders and it could not be in any case be treated as income of the assessee. About the legal effects of the approval of Hon'ble High Court of the scheme of arrangement, the learned counsel submitted that authorities below had not attached the desired importance to the same while legal position is such that once a scheme of arrangement is approved, the same attains the character of statute as held by the Hon'ble High Court of Bombay in the case of Sadanand S. Varde v. State of Maharashtra 247 ITR 609 wherein Their Lordships after following the decision of Hon'ble Supreme Court in the case of J.K. (Bombay) P. Ltd. v. New Kaiser-I-Hind Spinning & Weaving Co. Ltd. [1970] 40 Comp. Cas.

689 (SC) had laid down that once a scheme becomes sanctioned by the Court, it ceases to operate as a mere agreement between the parties and becomes binding on the company, the creditors and the shareholders and has statutory operation by virtue of the provisions of Sections 391 of the Companies Act. The contention is that once scheme of arrangement about the transaction between assessee and MTAIC was approved by the Hon'ble High Court the same is sacrosanct and binding on all including the department.

3.3 About the observations of the learned CIT(A) that shareholders have right to receive dividend and share on liquidation of the company and no right, it was submitted by the learned counsel for the assessee that scheme of arrangement no doubt provides vide Clause 9 that total consideration would be Rs. 50.12 crores but the amount shall be paid as per Clause 12 and each share holder will be entitled as matter of right to claim and receive from MTAIC allotment of two equity shares of Rs. 10 each. The contention is that each shareholder was given an entitlement as a right to claim and receive two equity shares. The entitlement could only result when each shareholders had an existing right. The shareholders were able to get two shares as a matter of right and to claim and receive shares worth Rs. 17.64 crores from MTAIC. As scheme of arrangement was duly approved by Their Lordships, each share holder was entitled to receive the said two shares each and the amount was received by shareholders, cannot be said to have been received by the assessee or accrued to the assessee-company.

3.4 About observation of Assessing Officer that Hon'ble High Court was bound to accept the scheme of arrangement as entered into between the parties, the learned counsel submitted that it was based on complete misconception as Hon'ble High Court does not act as a rubber stamp. The Hon'ble High Court has to consider under Section 394 of the Companies Act as to whether the arrangement proposed to be entered into between the parties was in the interest of company, its shareholders, creditors, both secured and unsecured and in case the scheme of arrangement was not in the interest of any of the above, Hon'ble High Court could have and would have refused the grant of its approval.

3.5 In the end, the learned counsel submitted that amount of Rs. 17.54 crores was to be assessed in the hands of individual shareholders as capital gain because the cost of acquisition of such shares was to be computed in the manner laid down in Section 55(2)(aa) of the Act and such gain would be assessable in the year in which shares are sold by the share holders as laid down in the case of Ajay Choudhary v. DCIT 74 ITD 350. Learned counsel also submitted that Department has also proceeded in this manner by issuing a notice to the assessee on 30-5-2000, copy appearing at page 500 of the paper book, in which the assessee company was directed to furnish the complete address of the shareholders who received the shares of MTAIC as a result of transfer of Panasonic Division. The contention is that shareholders would suffer the consequence of receiving two shares each and in all worth Rs. 17.64 crores from MTAIC. The assessee cannot be said to have received Rs. 17.64 crores and computation of capital gain by Assessing Officer was not justified.

4. As against it the learned D.R. placed reliance on the order of Assessing Officer as well as CIT(A) and submitted that both the authorities below have discussed the point at length and the conclusion arrived at is correct, fair as well as per law. At the very first point, the learned D.R. submitted that Hon'ble High Court no doubt had approved the scheme of administration but that approval has got nothing to do with the income-tax proceedings which are independent proceedings and have to be proceeded as per provisions of the Act. About the scope of phrase "full value of consideration received or accrued as a result of transfer of the capital asset", used in Section 48, the learned D.R.submitted that words "received" and "accruing" have wide import and it includes, right to receive under law and enforceable under the law. To support this, the learned D.R. had placed reliance on the ratio of decision of Apex Court in the case of E.D. Sarsoon & Co. Ltd v. CIT Bombay 26 ITR 27. Next contention of the learned D.R. was that shareholders have got right to receive dividend on their shares and are entitled to their share in the assets of the company only when company goes in liquidation, shareholders have no right to share as provided under the scheme of arrangement. Once shareholders had no right in assets, Company and MTAIC cannot transfer the same to shareholders. If the assessee-company and MTAIC have transferred shares worth Rs. 17.64 crores to the shareholders without any right of shareholders to receive the same, whatever is received by shareholders, will be treated as received by the assessee-company.

4.1 Inviting our attention to Clause 9 of scheme of administration, the learned D.R. pointed out that Hon'ble High Court has also approved the sale consideration of Rs. 52.12 crores and Clause 12(a) which provides the manner of discharging of sale consideration has got no concern with the amount of Rs. 55.12 crores as it is only way of discharging of sale consideration as in law whatever amount was received by shareholders, shall be treated as received by assessee-company. It was next contended by the learned D.R. that there was no charge of shareholders nor can it be treated as diversion at source. If Clause 9 and 12 of scheme of arrangement are read together the amount received by the shareholders worth Rs. 17.64 crores was application of the sale consideration and it could not be said to be diversion at source. In support of this contention the learned D.R. placed reliance on the decision of Hon'ble Supreme Court in the case of Associated Power Co. Ltd. v. CIT 218 ITR 195 and that of CIT v. Muthubhai C. Patel 238 ITR 403. The contention of the assessee is that whole of the amount received by shareholders by way of share worth Rs. 17.64 crores was diversion of the sale consideration and for this proposition reliance was placed on the decision of CIT v. Smt Kasturi Devi, CITv. P.N. Avasthi 105 ITR 320.

4.2 The learned D.R. has also distinguished the decision cited by the learned counsel for the assessee before Assessing Officer and before CIT(A) and submitted that both the decisions of CITv. Imperial Chemical Industries (India) Pvt. Ltd. (supra) and Seetaldas Tirathdas v. CIT (supra) supported the case of Department and not of assessee.

4.3 Learned D.R. referred to the decision of jurisdictional High Court in the case of CIT v. L. Bansidhar 67 ITR 374 and submitted that the case was decided by Their Lordships in favour of the assessee; but it is a case which is authority on the concept of diversion of income by an over-riding title before it reached the assessee and if we apply the ratio of that decision to the facts of the case, it was not a case of diversion of income at source but it was a mere case of application of the income.

4.4 About binding nature of the sanction accorded by the Hon'ble Delhi High Court about the scheme of administration it was submitted that Income-tax Department was not party to the scheme of arrangement. Had it been a party, Department would have contested the case and stated that whole amount was to be treated as consideration for capital gain.

But as the Department was not contesting party, whatever is in between the two parties viz. assessee and MTAIC, that is not binding on Income-tax Department. Learned D.R. placed reliance on the ratio of decision in the case of Kishan Lal Punja Ram v. CIT 141 ITR 486 wherein it was observed by their Lordships that finding in civil suit was not conclusive and ITO was to form his own opinion. Another citation by learned D.R. is that of V. Dattchimamurlly v. UOI 149 ITR 341 in which it was laid down by their Lordships that decree by Civil Court in litigation between assessee and third party, did not affect ITO's power of enquiry or investigation. On the basis of these legal proposition learned D.R. submitted that Income-tax authorities were free to make their own investigation and taxability or otherwise at their own end.

4.5 In the end the learned D.R. submitted that substance of the matter is to be seen as held by Hon'ble Apex Court in the case of Union of India v. Gosalia Shipping Pvt. Ltd. 113 ITR 307 in which it was laid down that one must have regard to the substance of the matter and if necessary, tear the veil in order to see whether true character of a payment was something other than what by a clear device of drafting it was made to appear. Lastly, it was submitted that assessee and MTAIC chalked out a device to divert the amount of Rs. 17.64 crores by drafting the scheme and the sole purpose was to avoid the payment of tax on capital gains and in such case the ratio enunciated by Their Lordships in the case of Mcdowel 154 ITR 148 was to be applied and by application of that the only conclusion would be that it was a colourable device with the sole purpose to evade the payment of tax.

5. In rejoinder, the learned counsel for the assessee submitted that learned D.R. overlooked the statutory provisions of Sections 391 to 395 of the Companies Act. The aforesaid provisions were introduced as a result of amendment made by the Companies Amendment Act 31/65 to give effect to the recommendation of Daftri Shastri Committee based on the Vivion Ghosh Commission of Enquiry. The said chapter made it obligatory that every company before entering into comprise, arrangement etc. has to obtain the sanction of company Board and Hon'ble Court has to satisfy himself whether such a scheme, as envisaged, is in the interest of shareholders, creditors and company. One the Hon'ble Court is satisfied that the scheme was reasonable and fair and there was no harm to be caused to the interest of creditors, shareholders or employee then only approval is accorded or some modification can be made but it cannot be said that Hon'ble High Court works as a rubber stamp. In the case in hand the assessee had satisfied the Hon'ble Court. Necessary requirement were duly complied with and thereafter going through all factual and legal preposition, the Hon'ble High Court was satisfied and necessary sanction was accorded, it is wrong on the part of Assessing Officer to note that there was some device adopted by assessee-company and MTAIC to defray income-tax authorities.

5.1 About the rights of shareholders the learned counsel referred to the decision of Hon'ble Supreme Court in the case of LIC v. Escorts Ltd. 59 Company cases 548 in which their Lordships have opined at page 617 that shareholders had an undoubted interest in a company, an interest which is represented by his shareholding. Share is movable property, with all the attributes of such property and rights of shareholders included to elect directors and thus to participate in the management through them etc. Referring to Sections 391 to 395 of the Companies Act the learned counsel submitted that these are special provisions. While deciding even the tax liability of an assessee, due regard is to be given to all the acts done in pursuance to the above provisions of Companies Act. Reliance on the decision of Apex Court in the case of Charandas Haridas v. CIT 39 ITR 202 was made to substantiate the plea that provisions of Income tax Law are required to be applied not in isolation but by giving proper and due effect to such statutory provisions which have effect on the transaction as a result of which an income is required to be determined. The contention of the learned D.R. that Income-tax authorities are free to examine any transaction as per provisions of Income tax Act irrespective of provisions of Companies Act is not well founded. Had it been such a case, the assessee company could be entitled to transfer the Division without obtaining the sanction of the Hon'ble High Court. Accordingly sanction is also not a mere formality out necessary requirements are to be carried out. Shareholders have their say in the meetings and they can raise objection etc. to proposed arrangements etc.

5.2 Learned counsel submitted that reliance of learned D.R. on the decision of Associated Powers Co. Ltd. (supra) and CIT v. Mathubai C.Patel 238 ITR 403 is not well founded as ratio thereof is not applicable. The last contention of the learned counsel was that learned D.R. was not justified to argue that courts must look to the interest of Revenue as the same is in public interest. He submitted that every court is supposed to do justice in accordance with law. The Hon'ble Delhi High Court when accorded approval to scheme of arrangement, had acted as per law and while doing so, notice to Central Government was issued and at that time Central Government should have contested the matter. It is wrong on the part of learned DR to argue that no notice to income-tax authorities was given as Central Government is the representative of all the Departments. In the end the learned counsel submitted that Department is not going to lose the revenue as already Department has started proceedings against the shareholders to whom the amount stands paid by the MTAIC as per scheme of administration.

6. We have considered the rival submissions and perused the record carefully. So far as facts of the case relating to the ground are concerned, it is not in dispute that assessee-company intended to spin off its Panasonic Division to MTAIC and as required under the Companies Act, moved an application under Section 391 of the Companies Act for seeking sanction of Hon'ble High Court of Delhi. The Hon'ble High Court as per requirement of Section 391 directed the assessee company to convene a general meeting of the shareholders, creditors secured and unsecured and after going through the scheme of arrangement and hearing the necessary parties, accorded the approval. The contention of the learned D.R. that Department was not a party to the proceedings before the Hon'ble High Court is not tenable in view of the provisions of Section 394A of the Companies Act which provides that notice is to be given to Central Government in respect of application under Sections 391 and 394. The very purpose of issuance of such notice is that Central Government shall also watch its interest and file its objection if any of the provision of scheme of arrangement is prejudicial to the interest of Central Government. It has not come on record that Central Government had filed any objection about the same. After the scheme of arrangement is approved by the Hon'ble High Court, it acquires statutory recognition as laid down by Their Lordships of Bombay High Court in the case of Sadanand S. Varkde (supra) and the same is binding even on creditors and shareholders who might have dissented from it or who might have opposed it being sanctioned. The facts remain that scheme of arrangement once approved is binding on all the parties.

6.1 Now the only question which requires scrutiny is whether the sale consideration of Panasonic Division which is given at Rs. 50.12 crores in Clause 9, should be taken for computation of capital gains as is the case of Department or it should be taken at Rs. 32.64 crores as is the case of the assessee. It is undisputed fact that Clause 12 of scheme of arrangement, as reproduced above, prescribes that each shareholder in possession of one share of Rs. 10 each will be given two shares of equal amount by MTAIC and total amount of shares so given to the sharesholders was Rs. 17.64 crores. The contention of the assessee is that the amount was given to the shareholders and was not received by the assessee nor it accrued to the assessee. It was diversion of receipt at the very source and could not be taken for computation of capital gains. While the case of the Department is that it is application of income and total sale consideration is Rs. 50.12 crores.

6.2 To appreciate the respective arguments of the parties it will be in the fitness of things to reproduce the relevant provisions of Section 48 which provides mode of computation and reads as under:- 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:- (i) expenditure incurred wholly and exclusively in connection with such transfer: (ii) the cost of acquisition of the asset and the cost of any improvement thereto." 6.3 The phrase "full value of consideration received or accruing as a result of the transfer of the capital asset" is crucial for disposal of the issue involved. Admittedly the full value of the consideration is Rs. 50.12 crores which is not disputed by either party. However, the issue does not end there as the words "full value of consideration" is qualified by the words "received" or "accruing" and these two words are important and for that we have to see as to whether assessee had received whole of the amount of Rs. 50.12 crores or it accrued to the assessee-company.

6.4 We have already observed that scheme of arrangement as approved by the Hon'ble High Court acquires statutory binding effect and scheme of arrangement provides that amount of Rs. 32.64 crores was to be given to the shareholders. Whether it is diversion at source or it was application of money is to be looked into. In this connection we may refer to the decision of Hon'ble Supreme Court in the case of Seetaldas Tirathadas (supra) in which concept of rule of diversion of income had been defined by Their Lordships by noting as under : "The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income.

Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied." 6.5 This observation of Their Lordships had further been quoted with approval by Their Lordships of Supreme Court in the case of Imperial Chemical Industries India Pvt. Ltd. (supra) and it has further been observed that application to apply the income in a particular way before it is received by the assessee or before it is accrued or arisen to the assessee results in diversion of income and application to apply income accrued, arisen or received amounts merely to the apportionment of income and the income so applied is not deductible.

6.6 If we apply the above ratio to the facts of the case then admittedly the amount which had been given to shareholders never reached the assessee. As scheme of arrangement was duly sanctioned by the Hon'ble High Court and acquired statutory binding effect then the amount to be given to the shareholders was diversion of the amount of Rs. 17.64 crores at the very source and it could not be said to be application of income because assessee did not receive this amount at all. It is not like that the amount given to shareholders did reach the assessee first and lateron it was applied by the assessee by paying the shares of MTAIC to share-holders.

6.7 The plea of the Department that sharesholders had got no right to get shares or any amount as they were only entitled to get dividend and to get the share in the assets of the company at the time of liquidation is not tenable. The provisions of Companies Act are quite specific as the Hon'ble High Court is supposed to direct the company to convene an extraordinary general meeting of sharesholders, creditors, secured and unsecured as well as other concerned parties for seeking their approval of the scheme of arrangement. This scheme of arrangement is to be approved by more than 75 per cent of the strength and in case sharesholders are not agreeable to the scheme of arrangement the same cannot be thorough and Hon'ble High Court will have to refuse the necessary approval. It means that share holders were having their say in the approval of the scheme of arrangement and if the Board of Directors of assessee-company and MTAIC chalk out the proposition that shareholders may also be given their respective shares out of this, spin off of Panasonic Divisions from assessee-company to MTAIC then it cannot be said that it was with any ulterior motive.

6.8 Not only this, Clause 12 of scheme of arrangement is quite specific as each share-holders were entitled as a right to claim and receive from MTAIC an allotment of two equity shares of Rs. 10 each credited as fully paid. This clause is specific and creates a right in favour of each share holder and this entitlement had existing right. It is also under the provisions of Companies Act that Hon'ble High Court which accorded the permission is to see that scheme of arrangement is enforced as per its provision of Section 392 of the Companies Act. The section is specific on this point and it gives powers to Hon'ble High Court to enforce the terms of arrangement. If a right is created in sharesholders to get two shares of Rs. 10 each that right was enforceable under the scheme of arrangement and Hon'blc High Court would have stepped in if there was any violation. Accordingly, the sharesholders were entitled to get the amount as a matter of right given to them under scheme of arrangement and the same stands duly approved by the Hon'ble High Court.

6.9 The law as pointed out is quiet clear and the amount given to shareholders never reached the assessee nor it was received by the asscssee nor it could be said to have accrued to the assessee. The amount given to the shareholders stand diverted before it reached the assessee and as held in the case of CIT v. Seetaldas Tirathdas (supra), the same is deductible and that part of the money which went to sharesholders cannot be said to have received by the assessee nor it accrued to assessee-company.

6.10 The obligation to give the amount of Rs. 17.64 crores to sharesholders was under scheme of arrangement which had got statutory binding effect and thus the amount so given to sharesholders cannot be said to be part of income of the assessee as it stands diverted at the source.

6.11 It is also important to take note of the fact that Department is also alive to this proposition that this amount had gone to sharesholders and its shareholders would be responsible to pay the amount of capital gain as and when they will dispose off the shares and for that the value of the shares so received under scheme of arrangement will be worked out as per provisions of Section 55(2)(aa) of the Act. The Department has also issued a notice to the assessee as early as on 20-5-2000 (copy appearing at page 500 of the paper book) and assessee company was directed to furnish the complete the address of the shareholders who received the shares of MTAIC as a result of transfer of Panasonic Division. This notice is on record and the very purpose of issue of this notice was that Department was in look out to charge capital gain in respect of these shareholders who received two shares each out of scheme of arrangement so arrived at between the assessee company and MTAIC and duly approved by the Department. The Department is not going to loose the tax as the amount of tax will be recovered from the shareholders.

6.12 The argument of the learned D.R. that there had been collusion between assessee company and MTAIC in chalking out a device to reduce the extent of tax on capital gains and ratio of Their Lordships of Supreme Court in the case of Mcdowell (supra) is applicable has got no force as it is not a case of Assessing Officer nor CITA) has applied that.

6.13 Both the parties have placed reliance on the decision of Shivaprakash Janakraj P. Ltd. (supra) where Their Lordships have observed as under : "The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room - nor would it be permissible for the court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules, the principles applicable are : (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation, (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue, (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed, (4) Where the Act applies the concept of real income should not be so real as to defeat the provisions of the Act; (5) If there is any diversion of income at source under any statute or by overriding title then there is no income to the assessee, (6) the conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not, (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee, (8) The concept of real income is certainly applicable in judging whether there has been income or not but in every case, it must be applied with care and within well recognised limits".

6.14 The concept of real income is also not going to help the case of Revenue as in the case in hand there has been diversion of Rs. 17.64 crores at source under scheme of arrangement which was having statutory binding effect and this is also helping the case of the assessee because assessee did not receive the amount but the amount of Rs. 17.64 crores was diverted at source out of total consideration of sale.

Further Rs. 50.12 crore was the amount of purchase consideration and so far as the amount is concerned the assessee received the amount of sale consideration less by Rs. 17.64 crores as this amount has been diverted to shareholders at source and thus it cannot be said that the assessee had received this amount or it ever accrued to assessee-company and thus this amount of Rs. 17,64 crores which was given to sharesholders will be outside the scope of computation for capital gains. Ground is decided in favour of the assessee.

7. In Ground No. 2 the assessee has challenged the finding of the CIT(A) to the effect that for the purposes of working out short term capital gains the written down value of the fixed assets should be worked out as per Income-tax Act 7.1 As stated in ground No. 1 in computing the short term capital gains the assessee, adopted the cost of fixed assets at Rs. 59,94,36,171.

However, the AO/CIT(A) have adopted the cost of acquisition of fixed assets at Rs. 41,09,32,331. The assessee is before us against such cost of acquisition of fixed assets worked out by the AO/CIT(A).

8. Learned counsel for the assessee submitted that learned CIT(A) has erred in adopting the written down value of the fixed assets as cost of acquisition for computing the short-term capital gain. It was contended that the capital gains has to be computed in accordance with the provisions contained in Section 48 of the Income-tax Act, 1961. It was, therefore, submitted that under Sub-clause (ii) of Section 48 of the Act the "cost of acquisition of the asset" and the "cost of any improvement" thereto, is only required to be deducted from the full value of consideration received or accruing as a result of the transfer of the capital asset. It was, therefore, stated that in the instant case, since the full value of consideration received or accruing as a result of the transfer aggregated to Rs. 32,48,00,000 and the cost of acquisition of fixed assets, as reflected in the balance sheet (see page 485 of the paper book), aggregated to Rs. 59,94,36,171 and, the net value of the assets transferred on the basis of the book value aggregated to Rs. 43,62,31,696 therefore there was a loss suffered of Rs. 11,14,31,696 (Rs. 43,62,31,696 less Rs. 32,48,00,000 and as such there was no capital gain liable for assessment under Section 45 of the Income-tax Act.

8.1 Learned counsel submitted that the Assessing Officer in the assessment order had not disputed the figures so far as the cost of fixed assets as reflected in the balance sheet is concerned, but he has instead of adopting the cost of the fixed assets, as shown in the balance sheet, adopted the "written down value" of such fixed assets which aggregated to Rs. 41,09,32,331 to work out the purported capital gain and thus instead of having adopted the net value of the assets transferred as shown by the assessee at Rs. 43,62,31,696, he had erroneously proceeded to compute the capital gain under Section 48 of the Act by adopting the net value of the fixed assets at Rs. 24,77,27,856.

8.2 He submitted that from the details given below, and as submitted during the course of hearing, it will be seen that the dispute on the instant issue, is only as to what should be the value adopted of the fixed assets for the purposes of cost of acquisition in accordance with the provisions of Section 45 read with Section 48 of the Income-tax Act.

COMPARATIVE METHOD ADOPTED BY THE ASSESSEE AND THE LEARNED JCIT FOR COMPUTING THE CAPITAL LOSS/GAIN Consideration received or accruing to the assessee, as a result of transfer Rs. 32,48,00,000 Consideration alleged to have been received or accruing to the assessee as a result of spinning off. Rs. 50,12,00,000 WDV of fixed assets of Panasonic Division Rs. 41,09,32,331 (See page 364 of the paper book) Cost ofFixed assets Rs. 59,94,36,171 (as per balance sheet at page 485 of the paper book) (See Note 1) Add: Current assets, loans and advances Rs. 42,29,63,886 Rs. 83,38,96,217 Net value of assets transferred On the basis of book Value Rs. 43,62,31,696 The difference between the book value of the unit and the amount received thus represents the loss of Rs. 1 1,41,31,696 which was claimed.

8.3 Learned counsel submitted that so far as the net value of the assets transferred on the basis of the book value, claimed by the assessee and adopted by the learned DCIT is concerned, it will be seen that the same will have only consequential effect. It other words, the value of the fixed assets, if adopted at Rs. 59,94,36,171, there will be a capital loss of Rs. 11,14,31,696 and if the same is adopted at Rs. 41,09,32,331, there would be a capital gain of Rs. 7,70,72,144 (Rs. 32,48,00,000 minus Rs. 24,77,27,856).

8.4 He further submitted that there is absolutely no justification in having adopted the written down value of the fixed assets instead of having adopted the cost of the fixed assets as reflected in the balance sheet in view of the clear and unambiguous provisions contained in Section 48 read with Section 45 of the Act and as interpreted by Their Lordships of the Hon'ble Delhi High Court in the case of P.N.B. Finance v. CIT252 ITR 491.

8.5 Learned counsel further submitted that the very marginal note to Section 50 of the Act would show that the same was required to be applied or invoked which was made applicable only for the purposes of computation of capital gains in the case of depreciable assets. It was submitted that in the instant case there was no dispute that the assets of Panasonic Division were transferred by the assessee company to M/s MTAIC as a going concern and the price realised or accruing to it, as a result of such transfer, was slump price i.e. lump sum or an ad hoc amount which was fixed for the transfer of the entire division without identifying and ascertaining the value of each asset transferred to MTAIC. According to learned counsel, undisputedly Panasonic Division had been transferred lock, stock and barrel i.e. the entire assets and liabilities belonging to the division had been transferred as a whole, including all privileges and benefits of contracts, agreements, deeds, bonds, insurance policies and other rights, licenses, powers and facilities of every kind, nature and description relating to the Panasonic Division as specified and detailed in Schedule C to the scheme of arrangement, in fact, lease rights, tenancy rights, industrial licenses, trademarks of every kind pertaining to the division had been transferred in accordance with the Scheme of Arrangement which had been approved by their Lordships of the Hon'ble Delhi High Court under Section 394 of the Companies Act. It is, therefore, evident that what has been transferred is the undertaking as such which includes all assets and liabilities whether forming part of the financial statements or not forming part of the financial statements and in such a situation it was submitted that it is not possible to determine the value of depreciable assets under the scheme of arrangement approved by Court and it cannot be thus held that the value of each and every asset transferred by the assessee company to MTAIC is identifiable or asccrtainable. It was pointed out that neither any such effort had in fact ever been made either by the learned Assessing Officer or by the learned CIT(A) while sustaining the addition made on this count.

8.6 It was further contended that even from the perusal of the balance sheet it would be seen that one of the assets forming part of the spinning up off the Panasonic Division, consisted of land on which no depreciation was either claimed or allowed. So far as all other assets are concerned, which have been described and have been duly inventoried in the Schedules are also such of assets which are not forming part of the financial statements. Nonetheless they have been transferred under the scheme of arrangement. In fact, all other current assets and liabilities have been also transferred, which too form part of the financial statements. In such a situation and only for the purpose of determining the capital gain, the assessee company, without considering the value of the depreciable assets, as it was not possible to determine the value thereof adopted the value of the assets being the cost of acquisition, as reflected in the balance sheet.

8.7 Ld. Counsel submitted that in the case in hand the learned DCIT while framing the assessment did not get the value of even the land evaluated so as to have adopted the WDV of the fixed assets only at Rs. 41,09,32,331 let alone to have evaluated or have estimated the value of all other assets which had been transferred and did not form part of financial statement, but nonethe less the assets were having substantial value. In other words, if the value of the land would have been higher the WDV of the fixed assets including the value of the land would have been obviously of a sum in excess of the value adopted by him of Rs. 41,09,32,331 besides the value of other assets. It was, therefore, clear that there had been no attempt to find out the market value of the land much less of other assets which have been transferred by the assessee company and in respect of which there was no value as shown in the balance-sheet. It was contended that since in the instant case the sale consideration received on the transfer of Panasonic Division was not earmarked or identifiable with individual assets, the invocation of Section 50 was not only improper but was not in accordance with law and on facts and in any case under Section 48 of the Act, it was the cost of acquisition of the assets that was required to be deducted from the gross value of sale consideration of the division and as such it was submitted that the gross value of fixed assets represented the cost of acquisition of such assets for the purpose of the assets transferred for Rs. 32,48,00,000 and it did not represent the value of only depreciable assets.

8.8 According to assessee's counsel, learned DCIT has also failed to appreciate that the current assets and liabilities had also been taken over by MTAIC and the DCIT has himself adopted the book value thereof for the purpose of computation of capital gain instead of the market value of such other current assets and liabilities. It is submitted that if the learned DCIT has accepted and adopted such value for the purpose of determining the capital gain under Section 45 of the Act, there was no justification to have disregarded the value of the fixed assets as had been reflected in the balance sheet, even without considering the value of other assets which have been transferred. It was thus submitted that the provisions of Section 50 of the Act were inapplicable wherein the transfer included transfer of non-depreciable assets.

8.9 Learned counsel also relied on the judgment of Hon'ble Supreme Court in the case of CIT v. Electric Control Gear Mfg. Co. 227 ITR 278 in support of the submission that unless there is something to indicate that the price is attributable to the assets like machinery, plant or building for which a consideration was paid, no income could be brought to tax under Section 45 of the Act by invoking the provisions of Section 50 of the Act.

8.10 Further, the learned counsel relied on the judgment of Apex Court in the case of CIT v. Mungeeram Bangar Co. (Land Department) 57 ITR 299 wherein it was held by Their Lordships that where the sale was the sale of a going concern and no part of sale price was attributable to the cost of the land, no part of slump price was taxable. According to learned counsel, on examination of Scheme of Arrangement, in the instant case, it cannot be held that the amount received by the assessee or accruing as a result of transfer, could be said to be specifically attributable to any asset transferred including depreciable asset. He submitted that on the authority of Hon'ble Supreme Court, supra, which had followed the ratio of decision reported in 46 ITR 135 (West Coast Chemicals & Industries Ltd.), no capital gain arose to the assessee as a result of such transfer.

8.11 It was further stated that Section 50A of the Income-tax Act was introduced by the Finance (No. 2) Act, 1998 w.e.f. 1-4-1998 wherein it was clearly provided that the said amendment will take effect prospectively from 1-4-1998 and would accordingly apply in relation to assessment year 1998-99 and subsequent assessment years. In view thereof, there is no justification to have invoked the provisions of Section 50A of the Income-tax Act for the purpose of determining the cost of acquisition in respect of depreciable asset and so far as the instant year is concerned, the cost of the depreciable asset will remain the same as shown in the balance-sheet and cannot be taken to be the WDV. The finding of the CIT(A) that the aforesaid provision is merely clarificatory is thus based on misconstruction of the aforesaid provision. The provisions introduced were not clarificatory but are substantive provision and cannot therefore be applied retrospectively.

8.12 It is further submitted that in order to bring to tax the gain, accruing or arising to an assessee, Section 50B of the Act has been introduced by the Finance Act, 1999 w.e.f. 1-4-2000 in respect of computation of capital gain in the case of slump sale. It is submitted that had the instant transaction taken place in financial year 1999-2000 relating to assessment year 2000-01 the learned DCIT would have been perfectly correct in computing the capital gain. Ld. Counsel therefore pleaded that it is the cost of acquisition of assets and not the WDV which should be considered for working out capital gains.

Sections 50A & 50B are substantive provisions and are applicable for the assessment year in which they were introduced and cannot be retrospectively applied. It is, therefore, submitted that Section 50B of the Act have no role to play while computing the capital gain under Section 48 of the Act for the instant assessment year particularly since the section under which the computation of the gain is to be made is not in dispute.

9, On the other hand, learned D.R. contended that the written down value of the fixed assets is required to be adopted in view of the provisions contained in Section 50 of the Income-tax Act. It was submitted by him that as a result of amendment in law when Section 41(2) of the Act was deleted w.e.f. 1-4-1988, simultaneously an amendment was made to amend Section 50 of the Act.

9.1 Placing reliance on the ratio of decision of Hon'ble Supreme Court in the case of CIT v. Artex Manufacturing Co. 227ITR 260, the learned D.R. contended that the difference between the book value and the written down value was chargeable to tax under Section 41(2) of the Act and further, since Section 50 of the Act was merely an extension of Section 41 (2), as the same had been brought on the statute book as a replacement of Section 41(2), the said amount could be assessed to tax even under Section 50 of the Act though the same may not be strictly applicable.

9.2 It was submitted that though there were various items in the block of assets the Assessing Officer had distrubed the value of fixed assets only. It was stated that for the purposes of working out the cost of fixed assets the written down value has to be adopted. Section 48 was a general section and Section 50 is like a proviso to Section 48 which was applicable to the depreciable assets. It was stated that existence or non-existence of Section 41(2) on the statute was irrelevant. What was the written down value will be considered under Section 50 of the Act. It was also stated that it was not the company as a whole but only one division of the assessee which was being spinned off. The division as fixed assets as well as other assets. Admittedly there were certain depreciable assets and non-depreciable assets, as per provisions of Section 50, the bifurcation of block of assets has to be done in respect of depreciable assets and non-depreciable assets. It was also stated that assessee was not justified in stating that it was the case of slump sale. In case of slump sale it is the whole business which is to be sold off. But in the case in hand only one division of the assessee has been spinned off. While relying on the decision of Hon'ble Bombay High Court in the case of Anand Electrical Co. reported in 237 ITR 587 the learned D.R. submitted that in assessee's case it could not be said to be a case of slump sale.

9.3 Learned D.R. also relied upon the ratio of decisions reported in 227 ITR 260(SC); 235 ITR 21; and 231 ITR 776 (Mad.). Learned D.R. also stated that the profit earned by the assessee on the transfer of fixed assets has to be considered in view of the cases reported in 109 ITR 788 (Mad.); 228 ITR 1 (SC); and 227 ITR 759 (Mad.). In nut shell the learned D.R. supported the order of the CIT(A). In his counter reply the ld. Counsel reiterated his earlier arguments.

10. We have considered the rival submissions. From the figures furnished by the assessee it is seen that the assessee had transferred its Panasonic Division for which it received a consideration of Rs. 32.48 crores. As per balance-sheet it had the fixed assets of Rs. 59,94,36,171 and the current assets of Rs. 42,29,63,886 aggregating Rs. 1,02,24,00,057. The assessee has also transferred the liabilities to the extent of Rs. 58,61,68,361. Thus the net value of assets spinned off amounted to Rs. 43,62,31,696 against which the consideration received by the assessee was Rs. 32.48 crores. Thus, the assessee has incurred short term capital loss of Rs. 11,14,31,696. But while working out the capital gains the Assessing Officer made two adjustments. He adopted the sale consideration at Rs. 50.12 crores which is already discussed in ground No. 1 earlier. He also disturbed the value of fixed assets. As against the value of Rs. 59,94,36,171 declared by the assessee the Assessing Officer adopted the value of transferred fixed assets at Rs. 41,09,32,331. While doing so the Assessing Officer relied upon the provisions of Section 50 of the Act which provided for adopting the written down value in respect of depreciable assets. He did not make any adjustment in the figures of current assets and liabilities transferred. The Assessing Officer felt that as the fixed assets transferred by the assessee was depreciable assets, its written down value should be adopted as the cost of acquisition. But while doing so the Assessing Officer clearly omitted the fact that Section 50 of the Act was a special provision for computation of capital gains in the case of depreciable assets only. The general provisions regarding the mode of computation of capital gain are provided in Section 48 of the Act. Section 50 on which the reliance is placed by the learned D.R.reads as under : "50. Special provision for computation of capitalgains 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." 10.1 Reading of the above section makes it clear that this section applied where a capital asset forms part of the block of assets and the same was transferred. But in the case of the assessee by spinning off of the Panasonic Division the assessee has transferred all the assets and liabilities of this division. It was not a case of transferring of asset forming block of assets. Such spinning off was a clear case of slump sale. When the assessee transferred a going concern there were many intangible assets like goodwill, non-computation etc. These are not depreciable assets. Similarly, the land is also transferred which is not a depreciable asset. Thus, it was not a case of transfer of any depreciable asset only. Hon'ble Supreme Court in the case of CIT v.Mungeeram Bangar Co. (Land Department) 57 ITR 299 has held that when the going concern is sold as a whole then it was a case of slump sale and the provisions of Section 50(1) were not applicable.

10.2 It may be mentioned that now slump sale has also been brought within the purview of Section 50B of the Act which has been brought on the statute w.e.f. 1-4-2000. While presenting the Finance Bill, 1999 which is reported in 236 ITR 126 (Stat.) The Hon'ble Finance Minister had stated that Clause 36 seeks to insert new Section 50B in the Income-tax Act relating to a special provision for computation of capital gains in the case of slump sale. The proposed new section provides that any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long term capital assets and shall be deemed to be the income of the previous year in which the transfer took place. The Hon'ble Finance Minister had also stated that this new section will take effect from 1-4-2000 and will accordingly apply in relation to the assessment year 2000-01 and subsequent year. From the reading of the above provisions it is clear that Section 50B of the Act cannot be made applicable to the assessee's case during the assessment year 1997-98. Such provision being not retrospective in nature cannot, therefore, be relied upon. Similarly Section 50A of the Act which provides for special provision for cost of acquisition in case of depreciable asset has been brought on the statute w.e.f 1-4-1998. As this section has also not been made operative from retrospective effect this provision was also not applicable in the year under consideration.

10.3 Similar issue was considered by Ahmedabad Bench of the Tribunal in the case of Industrial Machinery Associates v. CIT [2002] 81 ITD 482 (Ahd.), wherein the bench observed as under : "In the definition of 'section 2 of the Act' a new Clause (42C) has been introduced defining slump sale with effect from 1-4-2000. In the backdrop of the aforesaid a mandatory provision is introduced by the Legislature to levy capital gain on slump sale, and keeping in view the intrinsic nature and character of the newly introduced provision as a self-contained code, there is no hesitation in holding that the provisions as to operate prospectively with effect from 1-4-2000 and would not apply for the assessment year 1993-94 under appeal." 10.3-1 The Bench also considered the issue of slump sale. While holding that slump sale will be outside the purview of Section 45 the Bench observed as under : "A business undertaking as a going concern includes all rights, assets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as part of organisation including the potentiality of the organisation to grow.

It contains a variety of elements, both tangible and intangible. It remains insubstantial in form and nebulous in character. A going concern is a dynamic concept characterised by perennial change influenced by socio-economic ecology. A going concern is essentially functioning living organism possessing attributes of vitality, growth and evaluation. Obviously, it would not be possible to conceptualise the cost of acquisition of such a going concern as well as data of acquisition thereof. If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of Section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern, in the instant case, the slump sale consideration realised by the assessec would be outside the purview of capital gains under Section 45." "The Assessing Officer had sought to overcome the difficulty by treating the surplus realisation as attributable to stock-in-trade and treating the same as short term asset. The entire approach of the Assessing Officer was contrary to computation provisions contained under Sections 48 and 49 and amply demonstrated the inherently unworkable nature of these provisions in relation to slump sale. What had been sold was the entire business undertaking as a going concern. Cost of acquisition, cost of improvement as well as date of acquisition of the going concern were not capable of determination. Hence, computation provisions failed and no capital gain could be chargeable under Section 45. If the law fails to being the subject within the latter, the department cannot succeed with the argument that the subject falls within the spirit of the law. In the absence of the three essential ingredients, namely, cost of acquisition, cost of improvement and date of acquisition which are fundamental to the computation provision under Section 48, the slump sale is outside the purview of Section 45." 10.3-3 We find that the AO/CIT(A) have adjusted the cost of acquisition of the fixed assets only. They have not disturbed the value of other assets. Section 48 which provides for the computation of capital gains in such cases, reads as under; "48. Mode of computation.--The income chargeable under the head "Capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:- (i) expenditure incurred wholly and exclusively in connection with such transfer; (iz) the cost of acquisition of the asset and the cost of any improvement thereto." 10.4 The above section provides for deduction of the amount of cost of acquisition of assets and cost of any improvement thereto. Phrase "cost of acquisition" has been defined in various judicial pronouncements and it has been consistently held that same represents the gross value of assets. Hon'ble Delhi High Court in the case of P.N.B. Finance Ltd. reported in 252 ITR 491 has observed as under : "Sub-section (2) of Section 55 defines the expression 'cost of acquisition' in relation to a capital asset for the purposes of Sections 48 and 49 of the Act. Normally, the cost of acquisition of a capital asset is the consideration paid for its acquisition by the assessee,. However, Clauses (i) and (ii) of Section 55(2) enact an exception to the normal rule--Section 55(2)(i) provides that for the purpose of Sections 48 and 49 the cost of acquisition in relation to a capital asset, other than goodwill of the business, where the capital asset became the property of the assessee before January 1,1954, would mean the cost of acquisition of the asset at its original price to the assessee or the fair market value of the asset on January 1, 1954, at the option of the assessee. In other words, the said provisions gives an option to the assessee to take advantage of the appreciation in price as on January, 1, 1954 and claim the cost of acquisition at such appreciated value or, choose to compute the cost of acquisition at its original price. If the property has depreciated since its purchase. From a plain reading of the provision it is clear that the right of choice is conferred on the assessee solely for its benefit and unless there is anything in the enactment to the contrary, which we do not find to be there, the right of the assessee so conferred, to choose one of the modes to determine the cost of acquisition, cannot be curtailed. The freedom of chose is available to the assessee till the income chargeable under the head 'Capital Gains' is computed. In our opinion, therefore, the assessee can justifiably contend that he can exercise his option only after both the figures, namely, the original cost and the fair market value of the asset as on January, 1, 1954, are available. In this view of the matter, our answer to the fourth question is in the affirmative i.e. in favour of the assessee and against the Revenue." 10.5 We have also noted the submissions of the learned D.R to the effect that Section 50(1) of the Act was extension of Section 41(2) of the Act which was omitted from the statute. Section 41(2) of the Act operated in different field as under the aforesaid provisions, whereas a result of transfer, any excess sum was realised to the W.D.V. the difference between the sale value and the W.D.V. only to the extent of the depreciation allowed could be brought to tax, whereas, Section 50 of the Income-tax Act is applicable only in respect of taxability of the entire difference resulting from the transfer of depreciable assets, irrespective of the fact that the depreciation that might have been allowed to an assessee, was lower than the amount of gain, arising from the transfer of the asset. In such a situation, as per the provisions contained in Section 50 of the Income-tax Act, as amended from 1-4-1998, the entire difference between the sale consideration and the WDV in respect of the depreciable asset only has been made liable for short term capital gain.

10.6 We have also perused the ratio of decision in the case of Artex Manufacturing Co. 227 ITR 269 (SC), heavily relied upon by the learned D.R. In that case the assessee was carrying on the business of manufacturing art silk cloths. Another company was formed to take over this running concern. While considering the provisions of Section 41(2) of the Act, the Hon'ble Supreme Court, on the authority of another decision of Hon'ble Supreme Court in the case of CIT v. B.M.Kharwar[1969] 72 ITR 603 had held that the tax was payable under Section 41 (2) of the Act on the surplus amount i.e. the difference between the written down value of plant and machinery of dead stock as per the assessee's books and the value of the same as revalued by Hargovandas Girdharlal. In the present case, it will be seen that there has been no attempt to value separately the depreciable assets nor any other assets, forming part of the Panasonic Division, which has been transferred. The assets transferred were neither valued or revalued. In such a situation it cannot be said that even on the basis of the authority of the Hon'ble Supreme Court, any such sum was liable to be taxed through it has not been disputed by the learned DR that the provisions of Section 41(2) of the Act are not applicable for the instant year.

10.7 Even in the case of Anand Electrical Co. 237 ITR 587 (Bom.) the taxability of income was held under Section 41(2). The Hon'ble Supreme Court in the case of CIT v. Electric Control Gear Mfg. Co. 227 ITR 278 has held that unless there is something to indicate that the price is attributable to the assets like machinery, plant or building for which a consideration was paid no income can be brought to tax under Section 45 of the Act by invoking the provisions of Section 50 of the I.T. Act.

10.8 In view of above, we hold that cost of acquisition of fixed assets as declared by the assessee has to be accepted. We order accordingly.

11. Ground No. 3 relates to the disallowance of Rs. 1,83,420 out of vehicle maintenance expenses. It is argued by the learned counsel that the assessee is a company and in the case of a company there could not be any personal user of the vehicles. Hence the disallowance sustained by the CIT(A) is not justified.

11.2 We have considered the rival submissions. The issue is squarely covered in favour of the assessee by the decision of Delhi Bench of Tribunal reported in 76 ITD 32; and by the decision of Hon'ble Gujarat High Court reported in 172-CTR 339. Respectfully following the same we hold that the addition sustained by the CIT(A) is not justified and the same is deleted.

12. Ground No. 4 relates to the sustenance of the addition of Rs. 2,00,020 on account of irrecoverable advances.

12.1 Briefly, the facts of the case are that assessee-company had written off a sum of Rs. 2,00,020 as irrecoverable expenses under the head misc. expenses. Details of these expenses are as under:-(a) Kartikeya Engineering Co.

Rs. 1,00,020 12.2 The Assessing Officer observed that the complete details of these advances were not submitted before him. He stated that the advances given by assessee to some persons were not debts in the normal course of carrying on the business activities. The loans and advances were not business transactions and therefore the same could not be allowed as deduction under Section 36(1)(vii) of the Act. On appeal, the same was confirmed by the CIT(A) against which the assessee is in appeal before us.

12.3 It is argued by the learned counsel that the advances to the above two concerns were made by the assessee-company during the course of its business activities for various items to be supplied by those parties.

As these parties did not supply the items the same were treated as irrecoverable and written off during the year. It was stated that the AO/CIT(A) have misunderstood it to be a bad debt. It was stated that as the advances were given in the normal course of his business activities and if the goods in exchange were not received by the assessee, the same was a business loss and allowable deduction. On the other hand, learned DR supported the order of the CIT(A).

12.4 We have considered the rival submissions. We find that advances to these parties were given by the assessee for supply of certain goods.

Thus admittedly these advances were made during the course of carrying on of the business activities. If the assessee could not receive the good in exchange of such advances the amount has to be treated as a business loss. We, therefore, direct the Assessing Officer to allow the amount claimed by the assessee as business loss. The addition sustained by the CIT(A) is, therefore, deleted.

13. The assessee has also raised an additional ground against charging of interest under Section 234B of the Act. In the assessment order the Assessing Officer has directed to charge interest as per law. While relying on the decision of Hon'ble Supreme Court in the case of Ranchi Club, which in turn has affirmed the decision of Hon'ble Patna High Court in the case of Udai Misthan Bhandar, the Ld. counsel stated that levy of interest under Section 234B was illegal.

13.1 On the other hand, learned DR stated that the levy of interest under Section 234B was mandatory as has been held by the Hon'ble Supreme Court in the case of Anjum Ghaswala reported in 252 ITR 1. Same view was taken by Hon'ble Punjab & Haryana High Court in the case of Vinod Khurana.

13.2 We have considered the rival submissions. After the decision of Hon'ble Supreme Court in the case of Ranchi Club, the Hon'ble Supreme Court had occasion to consider this issue in the case of Anjum Ghaswala (supra). The Hon'ble Supreme Court held, though in relation to the proceedings before the Settlement Commission, that the levy of interest under Section 234B was mandatory. Respectfully following the same, we hold that ground of appeal, though admissible, has to be held as consequential. The Assessing Officer is directed to recalculate interest under the aforesaid section, if any, on the basis of income determined as per our order.