income-tax Officer Vs. Jifri and Kareem - Court Judgment

Excerpt:
1. this is a departmental appeal. the main issue is whether the commissioner of income-tax (appeals) was justified in holding that no capital gains would be leviable in respect of the transfer of a coffee estate along with the accessories, buildings, etc.2. the assessee is a registered firm. this firm had purchased in 1970 a coffee estate known as kuppamudi estate. the total consideration was rs. 25 lakhs. there were several rosewood trees standing in that estate. after the purchase of the estate, the assessee cut and sold several rosewood trees and realised a sum of rs. 13,86,714. .3. during the accounting year under consideration the assessee sold the estate for a total consideration of rs. 35 lakhs. in the deed of assignment the consideration is allocated among the various assets as follows : land and estate 17,00,000(ii) value of buildings, structures, etc. therein 1,50,000(iii)value of articles of machinery, furniture, stock-in-trade and other movable properties 50,000(iv) value of coffee bushes as they are 16,00.000 ------------ 4. the assessee-firm had not admitted any capital gains from this sale.the income-tax officer, however, was of opinion that capital gains arose from the transfer. for this purpose, he had to ascertain the cost of the estate when it was purchased in 1970. it may be recalled that rosewood trees standing in the estate were cut and removed and sold for rs. 13 lakhs. the cost of these rosewood trees will have to be deducted from the original cost of rs. 25 lakhs paid for the estate inclusive of these trees. the ito found that the rest of the estate other than the rosewood trees could be valued at rs. 9,40,540. this is based on a valuation report given by an approved valuer. since the property was sold for rs. 35 lakhs, the capital gains arising therefrom was rs. 25,59,460. the assessee had taken certain objections against the proposal for including capital gains but the i.t.o. did not accept those objections as valid. we will deal with the objections at a later stage. the actual computation of the capital gains was worked out under four different heads. these are given below : sale price as discussed above 13,06,000 less : cost as discussed above 3,44,000 ---------- sale price 16,00,000 less : cost as discussed above 4,38,940 ---------- sale price 1,50,000 less : cost 1,00,000 ---------- sale price 50,000 less : cost 34,127 ---------- 5. the assessee appealed. it was contended before the cit (appeals) that the asset which 'was transferred was a running business of a coffee estate as a whole which was an agricultural property and, therefore, there was no question of any capital gains arising therefrom. it was true that the consideration was divided among the various assets but irrespective of that the substance of the transaction was to transfer the estate as a whole. the c.i.t. (a) accepted this contention and he held that in the sale of the coffee estate by the assessee there cannot be any capital gains in respect of the coffee bushes and standing trees. these have to be treated as an integral part of the estate which cannot be severed or segregated from one another.6. with regard to the transfer of the buildings and machineries, however, he held that this gives rise to capital gains. so he held that the computation of capital gains made by the assessee in respect of these items is correct.7. it was also contended before the cit(a) that the transfer was not effected by the firm but by the partners individually and, therefore, no capital gains would arise in the hands of the firm. this contention was rejected by the cit (appeals).8. the next issue is to be considered was the cost of acquisition of the assets. he found that on re-working the cost would come to rs. 16,15,730 in respect of the estate as a whole.9. the final question before the cit (appeals) was whether the assessee would be entitled to the exemption under section 54e. he found that the partners had deposited rs. 18 lakhs on 21-2-1979 for a period of 63 months. admittedly the deposits have been made out of the sale proceeds of the estate. he accepted the contention that in respect of the firm the deposits can be in the names of the partners and, therefore, the requirements of section 54e are satisfied. he, therefore, held that the assessee would be entitled to the exemption under section 54e.10. against these findings, the department has now come on appeal. the first contention of the department is that the coffee estate, shade trees and the growing crop thereon should not be considered as agricultural and, therefore, the levy of capital gains thereon should have been upheld. now, this would take us to a consideration of the question whether the coffee estate as a whole has been sold or whether the various items alone are sold. if the coffee estate as a whole has been sold, then, it may not be proper to segregate the various items and consider these items, for the purpose of capital gains. in this connection, shri warrier, appearing for the assessee had referred to the decision of the kerala high court in the case of cit v. alanickal co. ltd. [1986] 158 itr 630. that was a case where the assessee had sold rubber estate. the department drawing inspiration from the decision in travancore tea estates co. ltd. v. cit [1974] 93 itr 314 (ker.), contended that the standing rubber trees in the estate did not form part of the land and were capital assets. therefore, the value of the trees could be subjected to capital gains. in the case of alanickal co. ltd. (supra) the high court has distinguished in travancore tea estates co. ltd.'s case (supra). it was pointed out that in travancore tea estates co. ltd.'s case (supra) the assessee sold shade trees separately from the land. where the land is sold along with the trees, the ratio laid down in travancore tea estates co. ltd.'s case (supra) would not be applicable. we find in this case the facts are identical.the assessee company had sold the coffee estate, i.e., the land along with the coffee crop and the shade trees. the shade trees are not sold separately. therefore, they are sold along with the land as an accretion of the land. they have to be treated as agricultural only since coffee estate is agricultural.11. we may also cite in this connnection another kerala high court decision in cait v. george varghese & co. [1973] 90 itr 496. there the high court was considering the sale of old rubber trees standing in a rubber estate. the question before the high court was whether the sale of these rubber trees represented agricultural income or not. the tribunal had held that there was no intention that the trees which were to be cut and removed should continue to draw sustenance from the land.at page 499 the high court observed as follows : we think that in substance what the tribunal has held is that under the agreement there has been no intention on the part of the contracting parties that the trees which were permitted to be slaughter-tapped, cut and removed, should derive sustenance from the land and continue to afford income to the transferee, the assessee before us. the provisions in the agreement that we have read would clearly show that the definite intention was to have the trees annihilated. there was an out and out sale of the trees and considering the extent of the land on which the trees stood, 303 acres, it is quite conceivable that the removing of the trees would take considerable time and the provisions in the agreement that the assessee had three years time to remove them does not at all imply any intention that the trees should continue to receive nourishment from the land and afford agricultural income to the assessee. the most apt passage that we have been able to find which can be applied to the facts of the case is that contained in marshall v. green. the passage is in these terms : the principle of these decisions appears to be this, that wherever at the time of the contract it is contemplated that the purchaser should derive a benefit from the further growth of the thing sold, from further vegetation and from the nutriment to be afforded by the land, the contract is to be considered as for an interest in land ; but where the process of vegetation is over, or the parties agree that the thing sold shall be immediately withdrawn from the land, the land is to be considered as a mere warehouse of the thing sold, and the contract is for goods'.this is the principle to be applied in this case. the assessee sold the coffee estate in its entirety. it is, therefore, reasonable to conclude that it was contemplated that the purchaser should derive a benefit from, the further growth of the thing sold, i.e., of the coffee estate sold and from further vegetation and from the nutriment to be afforded by the land. therefore, the standing trees in the estate has to be treated as part of the land and since they are agricultural it cannot be brought to tax for capital gains.12. there is ample evidence from the deed of assignment that the entire estate is being transferred as a going concern. in the operative part of the deed it is stated as follows : ... the vendors hereby grant, convey and assign unto the purchasers their right, title and interest as aforementioned in all these pieces or parcels of land comprising the kuppamudi (coopamudy) and arattupara estate more particularly described in the schedule below together with the plantations, buildings, bungalows, stores, outhouses, cooly lines, coffee lines, electric fittings, plant, machinery, fixtures, vehicles, tools,, implements and equipments, shrubs, trees and other properties, both movable and immovable and all hedges, ditches, ways, waters, watercourses, easements, advantages, appurtenances whatsoever to the said properties thereto and all the estate, right, title, interest, property, claims and demands of the vendors unto or upon the same ; it is also further stated that the vendors have paid and discharged all wages, bonus and other emoluments payable to the staff workers and other employees. such a clause is unnecessary if the intention was not for the buyers to continue the coffee estate as a business.13. the next question is whether the fact that separate consideration is mentioned to the land, buildings and coffee bushes would make any difference. in this connection, we would refer to the supreme court decision in the case of associated clothiers ltd. v. cit [1967] 63 itr 224. this case is an exception to the rule that where a going concern is transferred in a slump sale the separate assets should not be considered individually for the purpose of ascertaining whether capital gains arises or not. the case of cit v. mugneeram bangur & co. [1965] 57 itr 299 (sc), which is the authority for slump sale is distinguished in associated clothiers ltd.'s case (supra). in this associated clothiers ltd.'s case (supra) the assessee was carrying on a business of clothiers and tailors. they had transferred the assets and liabilities to another company in consideration of allotment of shares and some cash. under the terms of agreement the assessee purported to transfer 7 items of property described in the schedules annexed to the deed. in the agreement the properties sold were allotted specific values. the consideration for a building transferred was in excess of its original cost and the question was whether the difference between the original cost of the building and its written down value would be deemed profits under section 10(2)(vii) of the old act corresponding to section 41(2) of the new act. it was submitted before the supreme court that this was a slump sale and there was no separate sale of each of the property comprised in the business. the decision in the case of mugneeram bangur & co. (supra) was relied on. the supreme court observed as follows : that principle has however no application here. in the present case it is true that the entire assets of the appellant-company were sold to messrs. phelps & co. ltd. there was no separate sale of different items, but the consideration of each item of property sold was expressly mentioned in the agreement of sale. the contention that the transaction of sale was a mere attempt to readjust the business position of the transferor was never raised before the tribunal and does not arise out of the order of the tribunal.now, it will be seen therefrom that under certain circumstances even when a business is sold as a going concern it would be possible to separate individual assets for consideration of capital gains. we have to see, therefore, whether this ' principle laid down in associated clothiers ltd.'s case (supra) would be applicable to the facts here. in our opinion, this will riot be applicable. now, the main asset we have to consider is the coffee bushes and the shade trees. now, the coffee bushes has value only so long as it is part of the land and is a growing crop. once it is severed from land it has no value. in this respect, it is different from the rubber estates where the old rubber trees can be cut and sold because it has a value in the market. coffee crop when severed from land has no such value. therefore, its value arises only because of its attachment to the land. therefore, even though the coffee bushes are separately valued at us. 16 lakhs it has no meaning. this value has to be considered along with the value of the land. similarly, the shade trees are also as much part of the rubber estate as the coffee crop. therefore, the fact that separate value has been given to the shade trees and the coffee crop does not make the decision any the different.14. we have held that there would be no capital gains in respect of the coffee estate, shade trees and coffee bushes. let us assume that this decision is not final. then, it would be necessary to find out the cost of acquisition of this estate. the ito had fixed the cost of acquisition at us. 9,40,540 only. now, it is seen that from the estate purchased in 1970, only rosewood trees have been removed. these rosewood trees were sold for rs. 13 lakhs and odd. what we have to see is the cost of these trees sold for rs. 13 lakhs. the issue of the cost for which these trees were acquired had figures in the assessment of the assessee for the year 1971-72. in that assessment the ito after going into the issue, gave a finding that cost of the rosewood trees would be rs. 10,09,270. it is this figure which had been accepted by the cit(a). we are of opinion that this figure is the reasonable figure and is based on the assessment order for the year 1971-72. therefore, if at all capital gains have to be computed, the figure fixed by the cit(a) should be taken as the cost of acquisition.15. the next question is whether the assessee is entitled to deduction under section 54e. now, we have held earlier that capital gains will not accrue on the sale of the land, shade trees and coffee bushes.there are two other types of assets still left, i.e., the building structures on which a capital gains of rs. 50,000 had been computed and machineries, vehicles, etc., on which a capital gains of rs. 15,873 is fixed. the cit(a) has upheld this and the assessee had not come on appeal thereon. in respect of these capital gains the assessee is claiming exemption under section 54e. it is not disputed that the assessee had deposited rs. 18 lakhs on 21-2-1979 for a period of 63 months. however, this deposit is in the names of the partners of the assessee. the department's contention is that the deposit must be in the name of the assessee, i.e., the firm, itself. this contention is not very valid, and as the cit(a) has pointed out, the assets of the firm can stand in the names of the partners. what is to be seen is whether the partners hold the asset on behalf of the firm or on their own behalf.

Judgment:
1. This is a departmental appeal. The main issue is whether the Commissioner of Income-tax (Appeals) was justified in holding that no capital gains would be leviable in respect of the transfer of a coffee estate along with the accessories, buildings, etc.

2. The assessee is a registered firm. This firm had purchased in 1970 a coffee estate known as Kuppamudi Estate. The total consideration was Rs. 25 lakhs. There were several rosewood trees standing in that estate. After the purchase of the estate, the assessee cut and sold several rosewood trees and realised a sum of Rs. 13,86,714. .

3. During the accounting year under consideration the assessee sold the estate for a total consideration of Rs. 35 lakhs. In the Deed of Assignment the consideration is allocated among the various assets as follows : land and estate 17,00,000(ii) Value of buildings, structures, etc. therein 1,50,000(iii)Value of articles of machinery, furniture, stock-in-trade and other movable properties 50,000(iv) Value of coffee bushes as they are 16,00.000 ------------ 4. The assessee-firm had not admitted any capital gains from this sale.

The Income-tax Officer, however, was of opinion that capital gains arose from the transfer. For this purpose, he had to ascertain the cost of the estate when it was purchased in 1970. It may be recalled that rosewood trees standing in the estate were cut and removed and sold for Rs. 13 lakhs. The cost of these rosewood trees will have to be deducted from the original cost of Rs. 25 lakhs paid for the estate inclusive of these trees. The ITO found that the rest of the estate other than the rosewood trees could be valued at Rs. 9,40,540. This is based on a valuation report given by an approved valuer. Since the property was sold for Rs. 35 lakhs, the capital gains arising therefrom was Rs. 25,59,460. The assessee had taken certain objections against the proposal for including capital gains but the I.T.O. did not accept those objections as valid. We will deal with the objections at a later stage. The actual computation of the capital gains was worked out under four different heads. These are given below : Sale price as discussed above 13,06,000 Less : Cost as discussed above 3,44,000 ---------- Sale price 16,00,000 Less : Cost as discussed above 4,38,940 ---------- Sale price 1,50,000 Less : Cost 1,00,000 ---------- Sale price 50,000 Less : Cost 34,127 ---------- 5. The assessee appealed. It was contended before the CIT (Appeals) that the asset which 'was transferred was a running business of a coffee estate as a whole which was an agricultural property and, therefore, there was no question of any capital gains arising therefrom. It was true that the consideration was divided among the various assets but irrespective of that the substance of the transaction was to transfer the estate as a whole. The C.I.T. (A) accepted this contention and he held that in the sale of the coffee estate by the assessee there cannot be any capital gains in respect of the coffee bushes and standing trees. These have to be treated as an integral part of the estate which cannot be severed or segregated from one another.

6. With regard to the transfer of the buildings and machineries, however, he held that this gives rise to capital gains. So he held that the computation of capital gains made by the assessee in respect of these items is correct.

7. It was also contended before the CIT(A) that the transfer was not effected by the firm but by the partners individually and, therefore, no capital gains would arise in the hands of the firm. This contention was rejected by the CIT (Appeals).

8. The next issue is to be considered was the cost of acquisition of the assets. He found that on re-working the cost would come to Rs. 16,15,730 in respect of the estate as a whole.

9. The final question before the CIT (Appeals) was whether the assessee would be entitled to the exemption Under Section 54E. He found that the partners had deposited Rs. 18 lakhs on 21-2-1979 for a period of 63 months. Admittedly the deposits have been made out of the sale proceeds of the estate. He accepted the contention that in respect of the firm the deposits can be in the names of the partners and, therefore, the requirements of Section 54E are satisfied. He, therefore, held that the assessee would be entitled to the exemption Under Section 54E.10. Against these findings, the department has now come on appeal. The first contention of the department is that the coffee estate, shade trees and the growing crop thereon should not be considered as agricultural and, therefore, the levy of capital gains thereon should have been upheld. Now, this would take us to a consideration of the question whether the coffee estate as a whole has been sold or whether the various items alone are sold. If the coffee estate as a whole has been sold, then, it may not be proper to segregate the various items and consider these items, for the purpose of capital gains. In this connection, Shri Warrier, appearing for the assessee had referred to the decision of the Kerala High Court in the case of CIT v. Alanickal Co. Ltd. [1986] 158 ITR 630. That was a case where the assessee had sold rubber estate. The department drawing inspiration from the decision in Travancore Tea Estates Co. Ltd. v. CIT [1974] 93 ITR 314 (Ker.), contended that the standing rubber trees in the estate did not form part of the land and were capital assets. Therefore, the value of the trees could be subjected to capital gains. In the case of Alanickal Co. Ltd. (supra) the High Court has distinguished in Travancore Tea Estates Co. Ltd.'s case (supra). It was pointed out that in Travancore Tea Estates Co. Ltd.'s case (supra) the assessee sold shade trees separately from the land. Where the land is sold along with the trees, the ratio laid down in Travancore Tea Estates Co. Ltd.'s case (supra) would not be applicable. We find in this case the facts are identical.

The assessee company had sold the coffee estate, i.e., the land along with the coffee crop and the shade trees. The shade trees are not sold separately. Therefore, they are sold along with the land as an accretion of the land. They have to be treated as agricultural only since coffee estate is agricultural.

11. We may also cite in this connnection another Kerala High Court decision in CAIT v. George Varghese & Co. [1973] 90 ITR 496. There the High Court was considering the sale of old rubber trees standing in a rubber estate. The question before the High Court was whether the sale of these rubber trees represented agricultural income or not. The Tribunal had held that there was no intention that the trees which were to be cut and removed should continue to draw sustenance from the land.

At page 499 the High Court observed as follows : We think that in substance what the Tribunal has held is that under the agreement there has been no intention on the part of the contracting parties that the trees which were permitted to be slaughter-tapped, cut and removed, should derive sustenance from the land and continue to afford income to the transferee, the assessee before us. The provisions in the agreement that we have read would clearly show that the definite intention was to have the trees annihilated. There was an out and out sale of the trees and considering the extent of the land on which the trees stood, 303 acres, it is quite conceivable that the removing of the trees would take considerable time and the provisions in the agreement that the assessee had three years time to remove them does not at all imply any intention that the trees should continue to receive nourishment from the land and afford agricultural income to the assessee. The most apt passage that we have been able to find which can be applied to the facts of the case is that contained in Marshall V. Green. The passage is in these terms : The principle of these decisions appears to be this, that wherever at the time of the contract it is contemplated that the purchaser should derive a benefit from the further growth of the thing sold, from further vegetation and from the nutriment to be afforded by the land, the contract is to be considered as for an interest in land ; but where the process of vegetation is over, or the parties agree that the thing sold shall be immediately withdrawn from the land, the land is to be considered as a mere warehouse of the thing sold, and the contract is for goods'.

This is the principle to be applied in this case. The assessee sold the coffee estate in its entirety. It is, therefore, reasonable to conclude that it was contemplated that the purchaser should derive a benefit from, the further growth of the thing sold, i.e., of the coffee estate sold and from further vegetation and from the nutriment to be afforded by the land. Therefore, the standing trees in the estate has to be treated as part of the land and since they are agricultural it cannot be brought to tax for capital gains.

12. There is ample evidence from the Deed of Assignment that the entire estate is being transferred as a going concern. In the operative part of the deed it is stated as follows : ... the Vendors hereby grant, convey and assign unto the purchasers their right, title and interest as aforementioned in all these pieces or parcels of land comprising the KUPPAMUDI (COOPAMUDY) and ARATTUPARA Estate more particularly described in the Schedule below TOGETHER with the plantations, buildings, bungalows, stores, Outhouses, cooly lines, Coffee lines, Electric fittings, Plant, machinery, fixtures, vehicles, tools,, implements and equipments, shrubs, trees and other properties, both movable and immovable and all hedges, ditches, ways, waters, watercourses, easements, advantages, appurtenances whatsoever to the said properties thereto and all the estate, right, title, interest, property, claims and demands of the Vendors unto or upon the same ; It is also further stated that the vendors have paid and discharged all wages, bonus and other emoluments payable to the staff workers and other employees. Such a clause is unnecessary if the intention was not for the buyers to continue the coffee estate as a business.

13. The next question is whether the fact that separate consideration is mentioned to the land, buildings and coffee bushes would make any difference. In this connection, we would refer to the Supreme Court decision in the case of Associated Clothiers Ltd. v. CIT [1967] 63 ITR 224. This case is an exception to the Rule that where a going concern is transferred in a slump sale the separate assets should not be considered individually for the purpose of ascertaining whether capital gains arises or not. The case of CIT v. Mugneeram Bangur & Co. [1965] 57 ITR 299 (SC), which is the authority for slump sale is distinguished in Associated Clothiers Ltd.'s case (supra). In this Associated Clothiers Ltd.'s case (supra) the assessee was carrying on a business of clothiers and tailors. They had transferred the assets and liabilities to another company in consideration of allotment of shares and some cash. Under the terms of agreement the assessee purported to transfer 7 items of property described in the Schedules annexed to the deed. In the agreement the properties sold were allotted specific values. The consideration for a building transferred was in excess of its original cost and the question was whether the difference between the original cost of the building and its written down value would be deemed profits Under Section 10(2)(vii) of the old Act corresponding to Section 41(2) of the new Act. It was submitted before the Supreme Court that this was a slump sale and there was no separate sale of each of the property comprised in the business. The decision in the case of Mugneeram Bangur & Co. (supra) was relied on. The Supreme Court observed as follows : That principle has however no application here. In the present case it is true that the entire assets of the appellant-company were sold to Messrs. Phelps & Co. Ltd. There was no separate sale of different items, but the consideration of each item of property sold was expressly mentioned in the agreement of sale. The contention that the transaction of sale was a mere attempt to readjust the business position of the transferor was never raised before the Tribunal and does not arise out of the order of the Tribunal.

Now, it will be seen therefrom that under certain circumstances even when a business is sold as a going concern it would be possible to separate individual assets for consideration of capital gains. We have to see, therefore, whether this ' principle laid down in Associated Clothiers Ltd.'s case (supra) would be applicable to the facts here. In our opinion, this will riot be applicable. Now, the main asset we have to consider is the coffee bushes and the shade trees. Now, the coffee bushes has value only so long as it is part of the land and is a growing crop. Once it is severed from land it has no value. In this respect, it is different from the rubber estates where the old rubber trees can be cut and sold because it has a value in the market. Coffee crop when severed from land has no such value. Therefore, its value arises only because of its attachment to the land. Therefore, even though the coffee bushes are separately valued at Us. 16 lakhs it has no meaning. This value has to be considered along with the value of the land. Similarly, the shade trees are also as much part of the rubber estate as the coffee crop. Therefore, the fact that separate value has been given to the shade trees and the coffee crop does not make the decision any the different.

14. We have held that there would be no capital gains in respect of the coffee estate, shade trees and coffee bushes. Let us assume that this decision is not final. Then, it would be necessary to find out the cost of acquisition of this estate. The ITO had fixed the cost of acquisition at Us. 9,40,540 only. Now, it is seen that from the estate purchased in 1970, only rosewood trees have been removed. These rosewood trees were sold for Rs. 13 lakhs and odd. What we have to see is the cost of these trees sold for Rs. 13 lakhs. The issue of the cost for which these trees were acquired had figures in the assessment of the assessee for the year 1971-72. In that assessment the ITO after going into the issue, gave a finding that cost of the rosewood trees would be Rs. 10,09,270. It is this figure which had been accepted by the CIT(A). We are of opinion that this figure is the reasonable figure and is based on the assessment order for the year 1971-72. Therefore, if at all capital gains have to be computed, the figure fixed by the CIT(A) should be taken as the cost of acquisition.

15. The next question is whether the assessee is entitled to deduction Under Section 54E. Now, we have held earlier that capital gains will not accrue on the sale of the land, shade trees and coffee bushes.

There are two other types of assets still left, i.e., the building structures on which a capital gains of Rs. 50,000 had been computed and machineries, vehicles, etc., on which a capital gains of Rs. 15,873 is fixed. The CIT(A) has upheld this and the assessee had not come on appeal thereon. In respect of these capital gains the assessee is claiming exemption Under Section 54E. It is not disputed that the assessee had deposited Rs. 18 lakhs on 21-2-1979 for a period of 63 months. However, this deposit is in the names of the partners of the assessee. The department's contention is that the deposit must be in the name of the assessee, i.e., the firm, itself. This contention is not very valid, and as the CIT(A) has pointed out, the assets of the firm can stand in the names of the partners. What is to be seen is whether the partners hold the asset on behalf of the firm or on their own behalf.