On the facts and in the circumstances of the case, the CIT(A) has erred in allowing assessee's claim of duty draw back of Rs. 18,21,510 and cash assistance of Rs. 3,14,279 on the grounds that they are in the nature of realisation of assets and cannot be taxed under Section 28(iiib) & 28(iiic) of the Act as revenue receipts.
2. The assessee is a private limited company and is engaged in the manufacture of Special Purpose Machines. It took over the entire undertaking from Mr. B.H. Teli as a going concern for a lump-sum consideration of Rs. 93 lakhs on 10-10-1989. The lump-sum consideration was apportioned as under in the books of the assessee Company:Goodwill 3.00Technical know-how 5.00Excise Refunds & Export Incentives 50.00Import Licence 35.00 ---------- 3. During the relevant previous year ending on 31-3-1990, the assessee-company received the following claims of Export Incentives filed by the predecessor-in-business Mr. B.H. Teli:Refund of Excise Duty Rs. 23,21,247Excise Duty Drawback Rs. 3,14,279Cash Assistance Rs. 18,21,510 ----------------- In the books of the Company, the above sums of Rs. 44, 57, 036 received by the Company in respect of sales executed by the proprietary concern were credited to the aforesaid duly apportioned assets account, i. e.
Excise Refunds and Export Incentives as the sums received were in the nature of realisation of above current assets.
4. The assessee-company filed its return of income disclosing loss of Rs. 7,63,400 on 31-12-1989. The Assessing Officer vide his order under Section 143(3) dated 4-3-1991, determined the loss at Rs. 5,43,670, thus accepting the above claim and treatment given by the assessee.
5. Later on, the CIT Pune, vide his order dated 30-3-1993 under Section 263 set aside the entire assessment order and directed the Assessing Officer to pass a fresh assessment order and consider the taxability of Excise Duty Refund of Rs. 23.21 lakhs as income under Section 41 (1) of the Income-tax Act and Cash Assistance and Excise Duty Drawback of Rs. 18.21 lakhs and Rs. 3.14 lakhs respectively under Section 28(iiib) and 28(iiic) of the Act.
6. During the course of proceedings in pursuant to the order of the CIT(A) under Section 263, before the Assessing Officer it was submitted by the assessee that the character of the above receipts of Rs. 44.57 lakhs in the assessee company's hands was in the nature of realisation of assets viz. claims. Hence, the receipt of the above claims was not in the nature of revenue receipts, but was in the nature of realisation of assets taken over as part of going concern. It was further submitted that in view of the decision of the Hon'ble Supreme Court in the case of Saraswati Syndicate Ltd. v. CIT [1990] 186 ITR 2781, Excise Duty refunds of Rs. 23,21,247 received by the assessee-company in the capacity of successor-in-business cannot be taxed under Section 41(1) of the Act.
7. The Assessing Officer accepted the fact that the provisions of Section 41(1) were not applicable to Excise Duty refund. However, he treated the Cash Assistance of Rs. 18,21,510 and Duty Drawback of Rs. 3,14,279 as business income in view of Section 28(iiib) and 28(iiic) of the Act.
8. The assessee-company appealed to the learned CIT(A) and submitted that the company had apportioned a sum of Rs. 50 lakhs towards the various Excise refunds and Export Incentives claims receivable which constitute an asset being actionable claims. Hence, the receipt of Cash Assistance and Excise Duty Drawback is in the nature of realisation of the above actionable claims and is not in the nature of revenue receipts in the hands of the assessee-company. The assessee relied upon the decision of the Delhi High Court in the case of CITv. Minerals & Metals Trading Corporation of India Ltd. [1986] 157 ITR 3711 and of the Allahabad Tribunal in the case of Trackpart of India Ltd. v. IAC [1983] 3 ITD 489.
9. As regards the applicability of Section 28(iiib) and 28(iiic) of the Act, it was submitted that the sums in question (Duty Drawback Rs. 3.14 lakhs and CCS Rs. 18.21 lakhs) were received by the assessee-company only in the nature of realisation of assets of going concern taken over by the company. The above receipts were not in the nature of 'income' in the hands of the company and hence, do not fall within the provisions of Section 228(iiib) and 28(iiic) of the Act. It was argued that the Assessing Officer had rejected this submission only on the ground that there was no apportionment of consideration at the time of acquisition and that apportionment was subsequent to acquisition.
10. It was further submitted before the CIT(A) that in terms of the Agreement to acquire the undertaking, the Company had acquired all its assets, including actionable claims and amounts in question were received as realisation of said assets. The fact that apportionment of consideration was subsequent does not alter the nature of receipt, viz.
realisation of assets. It was therefore submitted that the amounts of Rs. 3.14 lakhs and Rs. 18.21 lakhs received were not income of the Company.
11. The learned CIT(A) accepted the assessee's above contentions that the above receipts were not the result of any business activity carried on by the Company and were really in the nature of realisations of assets taken over by the Company. She also accepted the assessee's contention that Section 28(iiib) and 28(iiic) were not applicable to the above receipts, as the above receipts were in the nature of capital receipts. Further, as the amount received was lesser than the amount apportioned by the assessee-company towards the above claims, hence, there was no taxable net surplus.
12. Shri A.M. Muntode, the learned D.R. relied on the order of the Assessing Officer. He argued that in the Agreement for transfer of business by B.H. Teli to HYT Engineering Co. (P.) Ltd. there is no apportionment of consideration paid towards the various assets taken over including actionable claims. He further argued that apportionment of Rs. 50 lakhs was towards "Export Incentives" and not Cash Assistance etc. When the Bench pointed out that Cash Assistance etc. were Export Incentives, the learned D.R. stated that he had no objection if that be the case.
13. Shri S.N. Inamdar, the learned counsel for the assessee, submitted that Mr. B.H. Teli had been carrying on a proprietary business of manufacture and sale of import substitute Special Purpose Machine Tools since 1977 under the name and style of HYT Engineering Corporation (HEC) in a profitable manner. When Mr. B.H. Teli approached Bank of Baroda, Pune, for renewal and revision of the borrowing limits in 1988, the Bank stipulated a condition in its sanction letter that M/s. HEC shall be converted into a Private Limited Company within a short time and that the revision in borrowing limits will be sanctioned only upon Mr. B.H. Teli agreeing to this condition.
14. In view of the aforesaid condition stipulated by the Bank of Baroda, Mr. B.H. Teli decided to convert his existing running business "M/s. HYT Engineering Corporation" to the assessee-company "M/s. HYT Engineering Co. (P.) Ltd. " vide Agreement dated 4-10-1989 with effect from 10-10-1989 for a lump-sum consideration of Rs. 93 lakhs. The value of the various assets like goodwill, technical know-how and the actionable claims like Excise Refunds and Export Incentives was embedded in the above sale consideration. The learned counsel referred to the following Clauses of the Agreement for Transfer of Business which is enclosed as page Nos. 10 to 16 of the compilation: 1. The VENDOR has agreed to sell and the VENDEE has agreed to purchase the entire running business of HEC of manufacture and sale of import substitute Special Purpose Machine Tools etc. and more particularly described in Annexure 'A' (which business hereinafter is referred to as the "said business") with all its rights, privileges, benefits, actionable claims, loans, liabilities and obligations, pending orders, etc. w. e. f. 10 October 1989 (hereinafter referred to as the "Effective Date").
3. It is agreed that the VENDEE shall on the Effective Date takeover the entire running business on going concern basis including all the assets of the said business whether shown in the statement of affairs or not and all the liabilities and obligations whether shown in the statement of affairs or not. It is specifically agreed that the VENDEE shall takeover all the pending orders/contracts, actionable claims of the tangible and intangible assets, movable and immovable properties including goodwill, tenancy rights, import licences and other licences, quota rights, refund and incentive claims and designs and drawing and assets of the said business of every description.
5. In consideration of the sale of the said business, the VENDEE has agreed to pay a lump-sum price of Rs. 93 lakhs (Rupees Ninety Three lakhs only) to the VENDOR. The price shall be payable within a period of six months from the effective date in such suitable instalments as may be mutually agreed by the parties herein.
According to the learned counsel, Mr. B.H. Teli offered the entire sum of Rs. 93 lakhs to tax under the head "income from capital gains" on slump sale of proprietary concern and the capital gain was computed after allowing the exemptions allowable as per the provisions of the Income-tax Act.
15. In the hands of the assessee-company, the sale consideration of Rs. 93 lakhs had to be bifurcated over the various assets taken over by the company. For the above purpose, the company appointed M/s. R.M.Khadilkar & Co. Chartered Accountants to apportion the consideration over the various assets taken over. As per the report of M/s. R.M.Khadilkar & Co. (copy placed at pages 17 to 23 of the compilation), the consideration was apportioned as under in the books of the company:Goodwill 3.00Technical know-how 5.00Excise Refunds & Export Incentives 50.00Import Licences 35.00 ----------Total: 93.00 ---------- 16. The learned counsel submitted that when the Excise Duty Drawback of Rs. 3,14,279 and Cash Assistance of Rs. 18,21,510 was received by the company in respect of sales executed by the proprietary concern, the said amounts were credited to the aforesaid duly apportioned assets accounts in the books of the company for the reason that the company had already paid consideration of Rs. 50 lakhs for the above assets and that the sum received was in reality in the nature of realisation of above current assets.
17. In support of his contentions, the learned counsel relied upon the following authorities:CIT v. Minerals & Metals Trading Corporation of India Ltd. [1986] 157 ITR 371,New Cawnpore Flour Mills (P.) Ltd. v. ITO [1986] 19 ITD 360 (All.).
18. In response to the query raised by this Bench that nowhere in the Agreement the amount of Rs. 50 lakhs was mentioned towards Export Incentives and Excise Duty refunds, the ld. counsel submitted that the business was sold for lump-sum consideration and it was a slump sale and, therefore, no separate break up could be mentioned in the Agreement as such. He stated that the company (ie., the transferee) was aware of the amounts receivable for Export Incentives and that the amount of Rs. 93 lakhs was fixed keeping in mind the Export Incentives & Excise refunds receivable.
19. As regards the query of the Bench whether Mr. B.H. Teli was a shareholder holding atleast 25 per cent of stake in the assessee-company, the ld. counsel replied that B.H. Teli was a shareholder and his exact stake details were placed before this Bench, and according to the information supplied the percentage of share holding of Mr. B.H. Teli in the Company is around 54 per cent to the query from the Bench as to whether the above transaction is collusive in nature, the learned counsel submitted that: (a) The above case has been already discussed in detail in the original order under Section 143(3) by the CIT in the order under Section 263, by the subsequent Assessing Officer in order under Section 143(3) read with Section 263 and by the CIT(A) in her appeal order. At no stage it has been the case of the department that the transaction is not genuine or is collusive.
(b) Further the transfer of business was in compliance of the condition laid down by the proprietary concern's bankers - Bank of Baroda.
(c) The amount of Rs. 93 lakhs has been offered to tax as capital gains by Mr. B.H. Teli.
20. After the hearing was concluded on 4-7-2001, the learned counsel filed a gist of submissions on the case, i. e. written submissions.
Copy of these written submissions was forwarded to the Assessing Officer and the case was refixed for hearing on 12-9-2001. On 19-9-2001 the learned D.R. submitted that he had no objection to the written submissions filed by the Company and reiterated the Revenue's contention that the relief allowed by the ld. CIT(A) by treating the realisation of Rs. 18,21,510 and Rs. 3,14,279 as realisation of assets is incorrect. At this stage, the Bench directed the learned counsel to file the following documents/evidences: (a) The balance sheet as at 9-10-1989 of HYT Engg. Corporation the proprietary concern of B.H. Teli.
(b) The opening balance sheet as at 10-10-1989 of HYT Engg. Co. P. Ltd. (c) The complete year-wise shareholding pattern of HYT Engg. Co. P. Ltd. beginning from date of incorporation of the Company and ending upto 31-3-2001.
(d) The valuation of land and building and the documents pertaining to transfer of land and building from HYT Engg. Corporation to HYT Engg. Co. P. Ltd. (e) The valuation of plant and machinery and other assets taken over.
21. As per the directions of the Bench, the learned counsel filed the requisite information on 17-10-2001 when the case was re-heard and at this stage, Shri Rajkumar, the ld. CIT (Sr. D.R.), after perusing the above documents, reiterated the submissions made earlier by Shri A.M.Muntode, who had earlier argued the case for the Revenue.
22. We have carefully gone through the orders of the authorities below, contents of the paper book and the written submissions of the learned counsel as also documents filed by him on 4-10-2001 and also considered the arguments of both the Departmental Representatives. From the facts of the case and the plain perusal of clauses 1, 3 and 5 of the Agreement dated 4-10-1989 reproduced supra in para 14, it is amply clear that the assessee had agreed to purchase the entire running business with all the rights, privileges, benefits, actionable claims, loans, liabilities, pending orders etc. with effect from 10-10-1989".
The receipts in question were received by the assessee in the process of realisation of assets, i. e. actionable claims and realisation of actionable claim is capital realisation and not revenue realisation. In CIT v. Minerals & Metals Trading Corporation of India (supra), MMTC took over the business and trade in mineral ores, concentrated metals and allied commodities from 1-10-1983 which was formerly carried on by State Trading Corporation. MMTC paid a sum of Rs. 2 crores as consideration for transfer and there was a stipulation in the Scheme/ Agreement for transfer that the excess of transferred assets less the total value of liabilities and Rs. 2 crores would be treated as loan under the account "Bifurcation Suspense Account". Now, there arose a surplus due to MMTC having to pay lesser amount for settlement of liabilities. The Assessing Officer assessed this surplus in the hands of MMTC. When the case reached the High Court, the High Court held that assuming that the excess/surplus in the Bifurcation Suspense Account was not to go to STC but was to be retained by the assessee, the surplus was on appreciation of the assets purchased by the assessee. In the hands of the assessee, the gains resulting from the realisation of the assets or adjustment of liability were gains resulting from the realisation of capital assets purchased by the assessee for a sum of Rs. 2 crores. The receipts could only be capital receipts in the hands of the assessee and were not the result of any business activity carried on by the assessee, but were the result of activities carried on by the STC prior to the purchase and were capital appreciation, (emphasis supplied). Similarly, if there resulted a shortfall, that would be a capital loss and not a revenue loss.
23. In the case before us, the actual amount realised was lesser than the amounts apportioned towards the above claims and hence the case clearly stands covered by the aforesaid judgment of the Delhi High Court.
24. As regards the applicability of Section 28(iiib) and 28(iiic), the decision of the Allahabad Bench in the case of New Cawnpore Flour Mills P. Ltd. (supra) will apply where on similar facts, the Tribunal held as under: 3. The ITO was of the view that the above amount represented the assessee's income under Section 41(1) of the Income-tax Act, 1961 (the Act) as it was in the nature of a revenue receipt. According to him, the amount was also taxable as business income under Section 28 and 28(iv) of the Act. He, therefore included the amount in the total income of the assessee.
6. In this connection, we will also like to refer to an old decision of the Bombay High Court which was also relied on by the ld. counsel of the assessee before us. The decision is in the case of CIT v. Agarwal & Co. [1952] 21 ITR 293. It was held in this case that in order to attract the provisions of the Act, and in order to levy income tax, it is not enough to enquire when a particular income accrues. What is more important, and what is more pertinent, is to enquire whose income it is, which is sought to be taxed. Receipt by itself is not sufficient to attract tax, it is only receipt as income which can attract tax. If an income is assigned by a person to another, in respect of that income it is not the assignee, who is liable to pay tax but the assignor. The assignee receives the income not by reason of the fact that it is his income, but he receives it by virtue of the assignment. His title to the income arises, not by reason of the fact that he has earned it, but by reason of the fact that there is an assignment in his favour. This principle applies to the present case also. The assessee is a successor of the firm of New Cawnpore Flour Mills. It has received the refund of the sales-tax by virtue of the fact that it has taken over the business of the former and not because it is its own income. Section 20 cannot, therefore, be attracted to such an income. A similar view was taken by the Delhi High Court in a recent case of CITv. Minerals and Metals Trading Corporation of India Ltd. [1985] 23 Taxman 143.
In this case, the decision of the Supreme Court in Hukumchand Mohan Lal's case (supra) was relied on.
25. Further even in the case of Trackpart of India Ltd. (supra) (a case on exactly similar facts), the assessee-company took over the business carried on by a firm for a consideration discharged by issue of shares.
In this case, the said company received certain amounts from foreign supplier towards damages and shortages in articles originally indented by the firm. The Tribunal held that the company had fixed and paid the consideration of Rs. 15 lakhs (in the form of issue of shares) not only for the immovable and movable properties, but also for the actionable claim. This case also was that of conversion of business of a firm into company and in this case also no specific quantification of damages receivable was contained in the Agreement to surrender the business.
26. In the light of above discussion, we see no infirmity in the order of the ld. CIT(A) and decline to interfere.
28. I have gone through the proposed order of the learned Accountant Member but despite my best persuasion of myself, I have not been able to agree with the findings and conclusions arrived at by him and my reasons for being so, are given hereunder.
29. The relevant facts are that the assessee is a private limited company and is engaged in the manufacture of Special Purpose Machines.
It took over the entire undertaking from Mr. B.H. Teli as a going concern for a lump sum consideration of Rs. 93 lakhs on 10-10-1989 without apportioning any part with any item whatsoever.
30. During the relevant previous year ended on 31-3-1990, the assessee-company received the following claims of Export Incentives filed by the erstwhile proprietor of the concern:Refund of Excise duty Rs. 23,21,247Excise duty drawback Rs. 3,14,279Cash Assistance Rs. 18,21,510 ---------------- In the books of the company, the assessee apportioned the lumpsum consideration after taking over the business of erstwhile concern as under:Goodwill 3.00Technical know-how 5.00Excise refunds and export incentive 50.00Import License 35.00 -------- The receipts of Rs. 44,57,036 in respect of the sales executed by the proprietary concern were credited to the apportioned assets account.
31. The assessee-company filed its return of income disclosing loss of Rs. 7,63,400 on 31-12-1989. The Assessing Officer vide order dated 4-3-1991 under Section 143(3) determined the loss at Rs. 5,43,670 without disturbing the above claim of the assessee thus accepting the above claim and treatment give by the assessee. Later on, the CIT vide his order dated 30-3-1993 under Section 263 set aside the entire assessment order and directed the Assessing Officer to pass a fresh assessment order and consider the taxability of excise duty refund of Rs. 23.21 lakhs as income under Section 41(1) of the Act and Cash assistance and excise duty drawback of Rs. 18.21 lakhs and Rs. 3.14 lakhs respectively under Section 28(iiib) and 28(iiic) of the Act.
32. During the course of proceedings in pursuance to the order of the CITR under Section 263, before the Assessing Officer it was submitted by the assessee that the character of the above receipts of Rs. 44.57 lakhs in the assessee-company's hands was in the nature of realization of assets viz. claims. Hence, the receipt of the above claims was not in the nature of revenue receipts, but was in the nature of realization of assets taken over as part of going concern. Excise Duty refunds of Rs. 23,21,247 received by the assessee-company in the capacity of successor-in-business cannot be taxed under Section 41(1) of the Act.
33. The Assessing Officer accepted the plea of the assessee that the provisions of Section 41(1) were not applicable to Excise Duty refund.
However, he treated the Cash Assistance of Rs. 18,21,510 and Duty Drawback of Rs. 3,14,279 as business income in view of Section 28(iiib) and 28(iiic) of the Act against which the assessee preferred an appeal before the learned CIT(A).
34. It was submitted before the first appellate authority that the assessee-company had apportioned a sum of Rs. 50 lakhs towards the various Excise refunds and Export Incentives claims receivable which constitute an asset being actionable claims. Hence the receipt of Cash Assistance and Duty Drawback is in the nature of realization of the above actionable claims and is not in the nature of revenue receipts in the hands of the assessee-company. The assessee relied upon the decision of the Delhi High Court in the case of CIT v. Minerals & Metals Trading Corporation of India Ltd. [1986] 157 ITR 371 and of the Allahabad Bench of the Tribunal in the case of Trackpart of India Ltd. v. IAC [1983] 3 ITD 489 and it was submitted that the sums in question (CCS Rs. 18.21 lakhs and Duty Drawback Rs. 3.14 lakhs) were received by the assessee only in the nature of realization of assets of going concern taken over by the assessee. The above receipts were not in the nature of income in the hands of the company and hence do not fall within the provisions of Section 28(iiib) and 28(iiic) of the Act so far as assessee is concerned. It was further argued that the Assessing Officer had rejected this submission only on the ground that there was no apportionment and that apportionment was subsequent to acquisition.
It was next submitted before the learned CIT(A) that in terms of the agreement to acquire the undertaking, the company had acquired all its assets, including actionable claims and amounts in question were received as realization of said assets. The fact that apportionment of consideration was subsequent does not alter the nature of receipt, viz.
Realization of assets. It was, therefore, submitted that the amounts of Rs. 3.14 lakhs and Rs. 18.21 lakhs received were not income of the company.
35. The learned CIT(A) accepted the contention of the assessee to the effect that the above receipts were not the result of any business activity carried on by the company and were really in the nature of realizations of assets taken over by the company. She also accepted the assessee's contention that Section 28(iiib) and 28(iiic) were not applicable to the above receipts as the above receipts were in the nature of capital receipts. Further as the amount received was lesser than the amount apportioned by the assessee-company towards the above claims, hence, there was no taxable net surplus.
36. Aggrieved by this order of the learned CIT(A), the revenue is in appeal and it was argued that in the agreement for transfer of business by B.H. Teli to HYT Engineering Co. (P.) Ltd., there is no apportionment of consideration paid towards the various assets taken over including actionable claims. He further argued that apportionment of Rs. 50 lakhs was towards "Export Incentives" and not cash assistance etc. It was further submitted that Export Incentives are with respect to exports conducted in the earlier period by the erstwhile proprietor Shri B.H. Teli who has discontinued the business by selling it for a lumpsum consideration of Rs. 93 lakhs and since the business has been taken over by the assessee-company and these incentives are received during the year under consideration, it would have otherwise been the income of the erstwhile proprietor had this concern/business been not sold. Therefore, the aforesaid incentives received by the assessee which is taxable under Section 28(iiib) and 28(iiic) are taxable in the hands of the assessee and the learned CIT(A) is unjustified in treating this amount either as capital receipt or taking it out of the ambit of taxation. So far as the case law relied upon by the learned CIT(A) is concerned, the same is distinguishable and not applicable to the facts of the case.
37. The learned Counsel for the assessee submitted that Mr. B.H. Teli had been carrying on a proprietary business of manufacture and sale of import substitute Special Purpose Machine Tools since 1977 under the name and style of HYT Engineering Corporation (HEC) in a profitable manner. When Mr. B.H. Teli approached Bank of Baroda, Pune, for renewal and revision of the borrowing limits in 1988, the Bank stipulated a condition in its sanction letter that M/s. HEC shall be converted into a Private Ltd. Company within a short time and that the revision in borrowing limits will be sanctioned only upon Mr. B.H. Teli agreeing to this condition.
38. In view of the aforesaid condition stipulated by the Bank of Baroda, Mr. B.H. Teli decided and disposed off his existing running business known as "M/s. HYT Engineering Corporation" to the assessee-company "M/s. HYT Engineering Co. (P.) Ltd. " vide Agreement dated 4-10-1989 with effect from 10-10-1989 for a lump sum consideration of Rs. 93 lakhs. The value of the various assets like goodwill, technical know-how and the actionable claims like Excise Refunds and Export Incentives was embedded in the above sale consideration. The learned counsel referred to the following clauses of the Agreement for Transfer of Business, which is enclosed as page Nos.
10 to 16 of the compilation: 1. The VENDOR has agreed to sell and the VENDEE has agreed to purchase the entire running business of HEC of manufacture and sale of import substitute Special Purpose Machine Tools etc. and more particularly described in Annexure 'A' (which business hereinafter is referred to as the 'said business') with all its rights, privileges, benefits, actionable claims, loans, liabilities and obligations, pending orders, etc. w.e.f. 10-10-1989 (hereinafter referred to as the "Effective Date").
3. It is agreed that the Vendee shall on the Effective Date take over the entire running business on going concern basis including all the assets of the said business whether shown in the statement of affairs or not and all the liabilities and obligations whether shown in the statement of affairs or not. It is specifically agreed that the VENDEE shall takeover all the pending orders/contracts, actionable claims of the tangible and intangible assets, movable and immovable properties including goodwill, tenancy rights, import licenses and other licenses, quota rights, refund and incentive claims and designs and drawing and assets of the said business of every description.
5. In consideration of the sale of the said business, the VENDEE has agreed to pay a lumpsum price of Rs. 93 lakhs (Rupees Ninety-three lakhs only) to the VENDOR. The price shall be payable within a period of six months from the effective date in such suitable instalments as may be mutually agreed by the parties herein.
According to the learned counsel, Mr. B.H. Teli offered the entire sum of Rs. 93 lakhs to tax under the head 'Income from capital gains' on slump sale of proprietary concern and the capital gain was computed after allowing the exemptions allowable as per the provisions of the Income-tax Act.
39. Next it was contended that in the hands of the assessee-company, the sale consideration of Rs. 93 lakhs had to be bifurcated over the various assets taken over by the company. For the above purpose, the company appointed M/s. R.M. Khadilkar and Co., Chartered Accountants to apportion the consideration over the various assets taken over. As per the report of M/s. R.M. Khadilkar and Co. (copy placed at pages 17 to 23 of the compilation), the consideration was apportioned as under in the books of the Company:Goodwill 3.00Technical know-how 5.00Excise refunds and export incentive 50.00Import Licence 35.00 ---------- 40. The learned counsel submitted that when the Excise Duty Drawback of Rs. 3,14,279 and Cash Assistance of Rs. 18,21,510 was received by the Company in respect of sales executed by the proprietary concern, the said amounts were credited to the aforesaid duly apportioned assets accounts in the books of the company for the reason that the Company had already paid consideration of Rs. 50 lakhs or the above assets that the sum received was in reality in the nature of realization of above current assets.
41. In support of his contentions, the learned counsel relied upon the following authorities:CIT v. Minerals & Metals Trading Corporation of India Ltd. [1986] 157 ITR 371New Cawnpore Flour Mills (P.) Ltd. v. ITO [1986] 19 ITD 360 (All.) 42. Both the parties have been heard and orders of the authorities below as well as documentary evidence to which attention of the Bench was drawn, have been perused and the case law as relied upon has also been considered.
43. After careful consideration of arguments of both sides, the orders of the authorities below, the relevant provisions of laws and the documentary evidence, I find that one Mr. B.H. Teli who was earlier sole proprietor of the concern known as "HYT Engineering Corporation" sold the same to the assessee-company M/s. HYT Engineering Co. (P.) Ltd. vide agreement dated 4-10-1989 with effect from 10-10-1989 for a lumpsum consideration of Rs. 93.00 lakhs and that the said sole proprietorship business of Mr. B.H. Teli was discontinued and came to an end. The assessee-company, which is an independent taxable entity and is a juristic person, after buying the running concern, succeeded the business which is now being run and owned by the assessee-company with effect from 10-10-1989 and Mr. B.H. Teli in his individual capacity has got nothing to do with the said business and for him the business has discontinued. The assessee-company during the year under consideration has received the duty draw back of Rs. 3,14,379 and cash assistance of Rs. 18,21,510 aggregating to Rs. 21,35,789 with respect to exports conducted by Mr. B.H. Teli as a proprietor of the erstwhile concern, when he was running the business as the sole proprietor. Had such discontinuance of the said business by erstwhile proprietor not been done, these amounts would have specifically been taxable under Section 28(iiib) and 28(iiic) of the Income-tax Act, 1961, in the hands of Mr.B.H. Teli as the sole proprietor. In order to take care of such type of situation, Section 176(3A) of the Act was brought on the statute book with effect from assessment year 1976-77, which reads as under: 176(3A): Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
This Sub-section (3A) as well as Sub-section (4) of Section 176 are an exception to the general Rule under Section 28 the profits or gains of business or profession are chargeable only if the business or profession is carried out in the relevant previous year. It provides that any sum received after the discontinuance of any business shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
44. In the case before the Bombay High Court in CITv. Vockandart [1995] 215 ITR 793 (Bom.), the assessee was incorporated in the year 1973 as a private limited company. It's business was that of manufacture of pharmaceuticals. It's accounts were closed every year on 31st December.
The assessee-company became a partner in the firm of M/s. Wockardt Pharmaceuticals on 1-1-1975. On 31-12-1975, by an Agreement between the partners, all the other partners of the said firm retired and the assessee-company became the sole proprietor of the business. The assessee took over the partnership business as a running concern on 1-1-1976. The ITO included in the income of the assessee-company a sum of Rs. 8,43,460 being the provision for excise duty in respect of which a demand had been raised by the Excise Authorities against the predecessor firm. Deduction was claimed and allowed in respect thereof in the computation of its income of the relevant assessment year. This liability became unenforceable against the assessee-company during the calendar year 1976 relevant to the assessment year by virtue of a decision of the High Court rendered during the said year. The High Court held that all the conditions of Section 41(1) were fulfilled and the assessee-company obtained a benefit in respect of a trading liability by way of cessation of the same. The value of such benefit so accruing to him, therefrom has to be deemed to be profits and gains of the assessee and chargeable to income tax as his income of the assessment year under consideration. Section 176(3A) provides that any sum received after discontinuance of a business is to be treated as income of the recipient in the year of receipt, if it would have been included in the total income of the person who carried on the business had it been received before such discontinuance.
45. The Bombay High Court held in CITv. Star Andheri Estate [1994] 208 ITR 573 (Bom.) that the business of the assessee firm was discontinued from 31-3-1975, when the firm was disallowed. A sum of Rs. 9,80,000 in connection with a transaction for purchase of land entered into during the existence of the firm was received after the discontinuance of the business. The recipient was, however, the assessee firm itself. That is so because by virtue of Section 189, the firm continued for the purpose of assessment despite its dissolution. There is no dispute that the income from the above receipts would have been included in the income of the firm had the income been received before discontinuance. The only objection to its chargeability to tax in the hands of the firm is on the ground that at the time of receipt, the firm had discontinued its business. This objection, however, is no more valid after the incorporation of Sub-section (3A) in Section 176, which is intended specifically to meet such objections. Sub-section (3 A) clearly provides that any sum received after the discontinuance of the business shall by deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if the same would have been chargeable as income had it been received before such discontinuance.
This sub-section constitutes an exception to the Rule that business receipts are chargeable only if the business or profession is carried on in the year of receipt. In that view of the matter the amount, of Rs. 9,80,000 was assessable in the hands of the assessee firm in the year of receipt despite dissolution and discontinuance of its business by virtue of Sub-section (3A) of Section 176 read with Section 189.
46. Yet, in another case before the Kerala High Court in United Construction Contractors v. CIT [1994] 208 ITR 9141 the assessee was a contractor under the public works department. He was mainly engaged in the construction of sea wall near Kayamkulam. He estopped his work by April, 1974. At that time, a sum of Rs. 3,00,556 was due to the assessee from the department. Payment was also due for some work done, for which bills were pending. An award was passed by the arbitrator on 20-4-1977 and the assessee became entitled to: Amounts by a of interest were received by the assessee during the accounting period relevant to assessment year 1979-80. These amounts were brought to tax by the ITOs as revenue receipts. The assessee had loan facility from the Federal Bank for carrying out the contract work.
Even after the termination of the contract work, the assessee was paying interest on the amount due to the bank, and such interest was disallowed by the ITO. The High Court held that the assessee discontinued his business in 1974. He received the amount from the Public Works Department after the said discontinuance. The amounts so received should be deemed to be the income of the assessee. It is to be charged to tax as income in the year of receipt. It is to be so assessed if the sum received by the assessee would have been included in the total income had such sum been received before the discontinuance. The statutory provision in Sub-section (3A) is clear, that the income so received should be charged to tax accordingly in the year of receipt. The words "charged to tax accordingly", are indicative of the head of income under which the receipt is to be charged to tax.
In other words, the income should by deemed to be income falling under the head "profits and gains of business or profession". When it is specifically provided that the sum received after the discontinuance of the business should be, deemed to be the income of the recipient and charged to tax accordingly, it can only mean that the said amount received should be treated as income from business and should be taxed accordingly. This is made more clear by the latter half of Sub-section (3 A), which states that the sum received should be charged to tax, if such sum would have been included in the total income of the person who carried on the business had such sum been received* before discontinuance.
47. In another case before the Delhi High Court in CIT v. Bhagat & Co.
[1990] 182 ITR 212, the High Court held that it is clear from a bare reading of Section 189(1) that what can be taxed is the income of the firm. The income, when it accrues and arises, must belong to the firm which is in existence. Section 189(1) only provides, that if at the time of assessment, the firm has been dissolved, then, notwithstanding the said dissolution, the assessment can be made as if the firm had not been dissolved. The fiction has limited application and it is only meant for completing the assessment. There was this lacuna in the Act which has since been rectified with the insertion of Sub-section (3A) in Section 176. The amendment is with effect from April 1, 1976, and the provision being substantive in character, the question of it being given retrospective effect cannot arise. It cannot also be said to be classificatory in nature because it is a substantive provision which has been brought in with a view to plug a loophole which existed in the Act.
48. The Rajasthan High Court in the case of CITv. Foresole Ltd. [1985] 153 ITR 3492 and the Delhi Bench of the Tribunal in the case of ITO v.Dipson & Co. [1994] 49 ITD 125 (Delhi) (AT) have supported the above views.
49. Yet in another case, the Kerala High Court in United Construction Contractors v. CIT [1994] 208 ITR 9143, while interpreting the provisions of Section 176(3A) has opined as under: The assessee in the instant case discontinued his business in 1974.
He received the amount, with which we are concerned in these references, after the said discontinuance. The amounts so received should be deemed to be the income of the assessee. It is to be charged to tax as income in the year of receipt. It is to be so assessed if the sum received by the assessee would have been included in the total income had such sum been received before the discontinuance. Section 176(3A) therefore, lays down that where any business is discontinued in any year any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt. Any sum received after the discontinuance of the profession shall be deemed to be the income of the recipient. Will it be the income of the recipient arising out of business? The statutory provision in Sub-section (3A) is clear that the income so received should be charged to tax accordingly in the year of receipt. The words "charged to tax accordingly", 'according to us, are indicate of the head of income under which the receipt is to be charged to tax. In other words, the income should be deemed to be income falling under the head "Profits and gains of business or profession", Le. head 'D' coming under Section 14 of the Act. When it is specifically provided that the sum received after the discontinuance of the business should be deemed to be the income of the recipient and charged to tax accordingly, it can only mean that the said amount received should be treated as income from business and should be taxed accordingly. This is made clearer by the latter half of Sub-section (3A). The latter half of Sub-section (3A) states that the sum received should be charged to tax, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. It means that the said income shall be charged to tax in the year of receipt if such sum would have been included in the total income of the person had it been received before the discontinuance. "Total income" has been defined in Section 2(45) of the Act as "the total amount of income referred to in Section 5 computed in the manner laid down in the Act". So as per the fiction incorporated in Sub-section (3A) the sum received after the discontinuance of business shall be deemed to be income and charged to tax accordingly if it would have been included in the total income of the person during the year of receipt. This means that the entire receipt is not to be taken as the income of the recipient exigible to tax. Only that portion of the receipt which would have been included in the total income of the person during the accounting year as computed in the manner laid down in the Act can be charged to tax. The expenditure incurred after the year of discontinuance to earn that income should be deducted.
50. Having regard to the nature of the receipts in the hands of the assessee, the ratio of the decisions as noted above and relevant provisions of law, I am of the considered opinion that in view of the facts and circumstances, as both the receipts of Cash Assistance and Duty Draw Back are includible in the income of the assessee under Section 28(iiib) and 28(iiic) read with Section 176(3A), therefore, the action of the Assessing Officer was legally correct in taxing the amount of duty draw back as well as Cash Assistance received by the assessee in the year under consideration and the learned CIT(A) was not correct in allowing the relief to the assessee. Therefore, while reversing the order of the learned CIT(A), I restore the order of the Assessing Officer.
51. As regards the case law as relied on by the assessee's counsel viz.
Trackpari of India Ltd. v. IAC [1983] 3 ITD 489 (All.), CIT v. Minerals & Metals Trading Corporation of India Ltd.(Delhi) and New Cawnpore Flour Mills (P.) Ltd. v. ITO [1986] 19 ITD 360 (All.), it is found that said cases do not relate to Section 176(3A), Section 2&(iiib) and/or 28(iiic) but they are all relatable to either Section 41 (1) or period prior to assessment year 1976-77 when Sub-section (3 A) of Section 176 was not on the statute book. Apart from this, in view of the ratio laid dowry by jurisdictional High Court on the point at issue, as discussed above, these cases cannot be said to be relevant for the proposition in hand so far as this assessee's case is concerned.
52. As a result, the appeal of the revenue is allowed. Order under Section 255(4) of the Income-tax Act, 1961 1. As there is a difference of opinion between the Accountant Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire: Whether on the facts and in the circumstances of the case, receipts of Duty Drawback of Rs. 3,14,279 and cash assistance of Rs. 18,21,510 are in the nature of realisation of actionable claims and hence in the nature of capital receipts, in the hands of the assessee? 1. As there is a difference of opinion between the Members on the Bench, following point of difference is being referred to Hon'ble President for hearing on such point/s or for nominating the Third Member or to pass such orders as the Hon'ble President may deem fit and proper: Whether on the facts and in the circumstances of the case, receipts of Cash Assistance of Rs. 18,21,510 and Duty Drawback of Rs. 3,14,279 are includible in the income of the assessee under Section 28(iiib) and 28(iiic) read with Section 176(3A) of the Income-tax Act, for the year under consideration which are relatable to the export conducted by the erstwhile proprietor of the business as being recipient of these amounts when the said proprietary business came to an end/ discontinued on having been sold to the assessee.
Such receipts are in the nature of realisation of actionable claims and hence capital receipts in the hands of the assessee.
1. This appeal came before me as a Third Member, to express my opinion on the following question: - Whether on the facts and in the circumstances of the case, receipts of Duty Drawback of Rs. 3,14,279 and Cash Assistance of Rs. 18,21,510 are in the nature of realization of actionable claims and hence in the nature of capital receipts or are assessable under Section 28(iiib) and 28(iiic) read with Section 176(3A) of the Income-tax Act in the hands of the assessee? 2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee is a Private Limited Company. It is engaged in the manufacture of special purpose machines.
It took over the entire undertaking from Shri B.H. Teli as a going concern for a lump sum consideration of Rs. 93.00 lakhs on 10-10-1989.
Vide terms of the agreement dated 4-10-1989, as it was a case of slump sale, reference was made to the valuer, M/s. R.M. Khadilkar & Company, Chartered Accountants to apportion the consideration over the various assets taken over. The valuer submitted its report on 20-12-1989. The consideration was apportioned as under in the books of the company: -Goodwill 3.00Technical know-how 5.00Excise Refunds and Export Incentive 50.00Import Licences 35.00 ----------Total 93.00 ---------- 3. Indisputably, at the time of assignment of the business, specific price to specific asset was not being allotted. Now the slump sale is defined under Section 2(42C) of the Income-tax Act, 1961 (hereinafter called the Act) as under: - 2(42C) "slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
4. The cleavage of opinion crept in regard to the assessability of receipts of duty drawbacks and cash assistance. The controversy is in regard to the question that whether these receipts are in the nature of realization of actionable claims and in the nature of capital receipts or assessable under Section 28(iiib) and 28(iiic) read with Section 176(3A) of the Act.
5. It is pertinent to note that Section 28 of the Act requires that profits and gains of business could be taxed in the hands of the assessee if the business was carried on by the assessee. It was argued in the present case that the duty drawback and cash assistance was not the result of the business carried on by the assessee in question. The assessee did purchase actionable claim for a consideration of Rs. 50.00 lakhs. Assuming the income is exigible to tax, the cost of acquisition ought to be deducted. What the assessee purchased is only an actionable claim, as such it could be taxed only under the head "Capital gains" and not as "Business income".
6. Adverting to the provision of Section 176(3 A), my attention was invited on the prescription of the Act, which reads as under: - 176(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
7. It was argued that if there is change of ownership but the business is continued by a successor, then it is not a case of discontinuance of business. In order to discontinue, complete cessation of business is a sine qua non. For this proposition reliance was placed on the decision of the Privy Council rendered in the case of CITv. P.E. Poison [1945] 13 ITR 384 (PC). In this case it was held that the word 'discontinued' means only a complete cessation of the business and does not include the case of discontinuance of the business by the person formerly carrying it on as the result of the transfer or assignment of that business to another person who thereafter carries it on. In the case of CITv. A.W. Piggies & Co. [1953] 24 ITR 405 (SC) it was held that mere change in the Constitution of a partnership does not necessarily bring into existence a new assessable unit or a distinct assessable entity and in such a case there is no devaluation of the business as a whole.
In the case of CITv. Merwanji Kola & Co. [1968] 68 ITR 663 (Bom.) it was held that the requirement for granting relief under Sub-section (3) of Section 25 of the Indian Income-tax Act, 1922, is that the business should be discontinued and not that the proprietor of the business or the proprietary body which owns the business must be discontinued.
8. It is palpable from the perusal of the records that the proprietor of the firm did offer the entire amount for capital gains. Clauses 1 and 3 of the agreement refers to actionable claims and incentive claims for which the assessee did pay consideration. It appears that the learned Judicial Member assumed that the business was discontinued by the proprietor, while factual and legal position is that the business was not discontinued. It was taken by the assessee-company as a going concern only. There was only change of partnership.
9. There is no dispute on the point that the transaction in question was not a collusive transaction or a subterfuge and colourable device to evade the incidence of tax. At the time of hearing the assessee was asked to submit whether the transaction could be construed to be collusive in nature. It was pointed out that at no stage the Department treated the transaction as not genuine or collusive. The transfer of business was effected in compliance of the condition laid down by the proprietary concerns, bankers and the amount of Rs. 93.00 lakhs was offered to tax as capital gains by Shri B.H. Teli. The, assessee agreed to purchase the entire running business with all the rights, privileges, benefits, actionable claims, loans, liabilities, pending orders, etc. The receipts in question were received by the assessee in the process of realization of assets; as such these were treated as capital gains. The actual amount realized was lesser than the amounts apportioned towards the above claim. Even the learned JM did not doubt the genuineness of the transaction. Therefore, at this stage, the object of the learned Departmental Representative as to the applicability of principles laid down in the case of McDowell & Co.
Ltd. v. CTO [1985] 154 ITR 148 (SC)1 are not tenable.
10. The business continued to be the same. Only the ownership was changed. The Hon'ble Apex Court in the case of Saraswati Industrial Syndicate Ltd. v. CIT [1990] 186 ITR 2782 has held that in order to attract the provisions of Section 41 (1) of the Act, the identity of the assessee in the earlier year in which deduction was granted in relation to a trading liability and in the subsequent year in which benefit is derived must be the same. If there is change in the identity of the assessee, there would be no tax liability under Section 41 of the Act. If the assessee to whom the trading liability may have been allowed as business expenditure in the earlier year ceases to be in existence or if the assessee has changed on account of the death of the earlier assessee, the benefit received in the subsequent year cannot be treated as income received by the assessee.
11. It is important to note that the present case is governed by the old law. Section 41(1) was amended by the Finance Act, 1992, with effect from 1st April, 1993. This case relates to the assessment year 1990-91. Under the provisions of Section 41(1) of the Act, where an assessee who was allowed deduction in respect of any loss, expenditure or trading liability in any year obtains any amount in respect of such loss or expenditure or any benefit in respect of trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him was deemed to be the profits and gains of business or profession. However, it was held in the case of Saraswati Industrial Syndicate Ltd. (supra), that such an amount or benefit can be charged to tax only if the assessee who receives the amount or benefit is the same person who was allowed the deduction earlier: - 12. With a view to ensuring that there is no loss of revenue and undue enrichment, Sub-section (1) of Section 41 was substituted by the Finance Act, 1922, so as to bring to tax the amount or benefit, as the case may be.
13. In this case I find that there is no undue enrichment to the assessee. The person who sold the business did pay capital gains tax.
Besides, the year in question is governed by the law laid down by the Apex Court and this amendment is not applicable to the facts of the present case. My attention was also invited on the decision of the Hon'ble Gujarat High Court rendered in the case of CITv. Saurashtra Packaging (P.) Ltd. [2003] 259 ITR 520. In this case the Hon'ble High Court has followed the decision of the Apex Court rendered in the case of Saraswati Industrial Syndicate Ltd. (supra). It was held that Section 176(3A) can be applied only when there was discontinuance of business. Since the business was continued even after the same was taken over by the assessee-company, the provisions of Section 176(3 A) of the Act were not applicable.
14. In the present case I find that the business continued; as such the decisions relied upon in the context of discontinuance are not relevant to the context. In view of this, I am inclined to agree with the decision taken by the learned Accountant Member.
15. The matter will now go before the Regular Bench for deciding the appeal in accordance with the opinion of the majority.
1. The learned Third Member by his opinion dated 1-9-2004 having concurred with the view of the ld. Accountant Member and in accordance with the majority view, the. appeal is dismissed.