Commissioner of Income Tax Vs Carew Phipson Ltd.

D.K. Seth, J.@mdashThe question to be answered, in this reference u/s 256(1) of the Income Tax Act, 1961, is :

"whether, on the facts and in the circumstances of the case, the Tribunal was justified on facts and in law in deleting the profit of Rs. 21,02,166 u/s 41(2) and capital gains amounting to Rs. 2,06,328 by holding that the transfer was in respect of the whole of the sugar factory as a going concern ?"

2. The assessee sold the whole of the sugar factory as a going concern for a total price of Rs. 53,50,000. The purchaser took over the liability of Rs. 15,90,324 and the balance Rs. 37,59,676 was shown apportioned against the various items of assets. The Assessing Officer held that the individual items of assets were sold and, therefore, the assessee was liable to profit u/s 41(2) of the Income Tax Act, 1961 (the "IT Act") as well as the capital gains tax. The Commissioner (Appeals) confirmed the assessment order. The learned Tribunal held that the sale was of the whole of the going concern. Therefore, the assessee was not liable to profit u/s 41(2) of the Income Tax Act, or capital gains.

3. Section 41(2), of the Income Tax Act, as applicable to the relevant assessment year 1978-79 provided that where any building, machinery, plant or furniture, owned by the assessee and used for the purpose of business and in respect whereof depreciation is claimed, is sold, the money receivable would, in specified cases, be chargeable to Income Tax as income of the business. In this case the ingredients provided are admittedly fulfilled. The deed of transfer referred to the sale of the whole of the sugar factory as a going concern, but had apportioned the balance amount, after setting off the liability, to different items of assets. Now the question is whether this apportionment to itemwise assets will attract the application by Section 41(2) of the Act.

4. In our view, Section 41(2) applies where assets are sold. The Legislature has never intended to apply this provision in a case where the entire business is sold. It is not attracted where transfer was made without indicating any item-wise consideration. Inasmuch as, when the entire concern is sold, the business is no more retained and carried on. Selling of the whole concern or business, so long carried on is not the business. It is the giving up or closing down or cessation of the business. Therefore, the receipt there out cannot be an income from business. It can at best be a capital gain, if on materials itemwise fixation of price of assets can be attributed attracting the application of Section 41(2) of the Income Tax Act. Even if itemwise distribution is indicated, the question will be a little different if the whole of it is sold as a going concern. In such a case, Section 41(2) as coined by the Legislature cannot be attracted. The question is dependent on the facts of each case.

5. This question seems to have already been answered. In Commissioner of Income Tax (Central), Calcutta Vs. Mugneeram Bangur and Co. (Land Department), , it was held that where the sale is in slump without any itemwise earmarking Section 41(2) is not attracted. In Commissioner of Income Tax Vs. Narkeshari Prakashan Ltd., , it was held that where the sale is in slump without any itemwise earmarking, Section 41(2) is not attracted. In Associated Clothiers Ltd. Vs. Commissioner of Income Tax Calcutta, and Pandit Lakshmikanta Jha Vs. Commissioner of Income Tax, , it was laid down that where the entire business is sold as a going concern indicating itemwise consideration for depreciable assets, Section 41(2) can be attracted. In Commissioner of Income Tax, Gujarat Vs. M/s. Artex Manufacturing Co., , it was held that where the entire business was sold but from the information furnished it appears that itemwise consideration was fixed for depreciable assets, Section 41(2) is attracted, but then it will be limited to capital gains only. In Commissioner of Income Tax, Gujarat Vs. Electric Control Gear Mfg. Co., , Section 41(2) could not be applied since there was nothing to indicate any price attributable to itemwise assets.

6. In Commissioner of Income Tax, Gujarat Vs. M/s. Artex Manufacturing Co., , on which learned counsel for the respondent had placed much reliance, the apex court had followed the principle laid down in Commissioner of Income Tax (Central), Calcutta Vs. Mugneeram Bangur and Co. (Land Department), , viz., where there is a slump transaction and the business is sold as a going concern, what is to be seen is whether any portion of the slump price is attributable to the stock-in-trade and if on the basis of the facts, it can be found that a particular price is attributable to a particular item, then the excess amount would be chargeable to tax. Learned counsel for the respondent had attempted to point out that this decision in Commissioner of Income Tax, Gujarat Vs. M/s. Artex Manufacturing Co., has deviated from the principle laid down in Commissioner of Income Tax (Central), Calcutta Vs. Mugneeram Bangur and Co. (Land Department), . But we do not find any such proposition from the reasoning given in the said decision. On the other hand, it had followed the same principle as was laid down in Commissioner of Income Tax (Central), Calcutta Vs. Mugneeram Bangur and Co. (Land Department), and had reaffirmed the said principle. He has also relied on a decision in Commissioner of Income Tax, Gujarat Vs. Electric Control Gear Mfg. Co., to support his contention. But this decision also proceeded on the basis that in the facts and circumstances of the said case, there was nothing to indicate that any of the assets were sold itemwise. Therefore, Section 41(2) was not applicable to the said case. In fact, there is no difference in the view taken by the said decision. He has also relied on a decision in Southern Roadways Ltd. Vs. Commissioner of Income Tax, and attempted to point out that in the present case, Section 41(2) is applicable. But this case also did not deviate from Commissioner of Income Tax (Central), Calcutta Vs. Mugneeram Bangur and Co. (Land Department), or Commissioner of Income Tax, Gujarat Vs. M/s. Artex Manufacturing Co., , which were considered therein. The same principle was reiterated and divergence of opinion in various judgments were noted but the principle laid down is that unless the slump price is attributable to a particular asset itemwise, the principle would not be applicable. In the given facts in Southern Roadways Ltd. Vs. Commissioner of Income Tax, , it was pointed out that the compensation received by the assessee could be attributable to the various items of assets taken over by the Government of Tamil Nadu and it was also possible to attribute the compensation to the particular item of asset taken over by the Government. In Commissioner of Income Tax, Gujarat Vs. B.M. Kharwar, , it is laid down that where the business is sold indicating itemwise consideration for depreciable assets, Section 41(2) is attracted. This case did not deal with a case where the entire business was sold as a going concern. Therefore, it is not possible to find out the answer to the question we are concerned with from the ratio decided in this case.

7. In this case the price of the sugar factory as a going concern was fixed at Rs. 53,50,000. The liability of Rs. 15,90,324 was taken over by the purchaser. The balance Rs. 37,59,676 was apportioned to different items of assets. The question has to be seen in its proper perspective. The assessee had sold the going concern for the whole of the consideration. The liability was set off the consideration. The purchaser had nothing to do with the liability. It had paid the consideration of Rs. 53,50,000 for the whole of the sugar factory as a going concern. It will meet the existing liability of the assessee out of the consideration, which was set off therefrom. The assessee had received the whole consideration for the entire sugar factory. Out of this consideration it had parted with the sum of Rs. 15,90,324 for meeting its liability. To the assessee it was Rs. 53,50,000, which it had received for the entire sugar factory as a going concern. Out of this consideration, it had set off the liability. Therefore, the price of the sugar factory as a going concern is Rs. 53,50,000 not Rs. 37,59,676 as apportioned to different items. Therefore, on the facts the said amount cannot be attributed to itemwise assets. This Rs. 53,50,000 is paid by the purchaser for the whole of the factory as a going concern, which consisted of the said assets. We cannot overlook the said sum of Rs. 15,90,324. It is also part of the consideration but has not been distributed to any of the assets. This is also part of the consideration. Therefore, this apportionment does not make it a sale of the assets when the entire factory is sold as a going concern.

8. Thus, until and unless it is pointed out from the facts that the particular item-wise valuation is attributable, the principle cannot be attracted. In the present case, however, valuation of different items was indicated to make out the price fixed. But, however, Mr. Pal had pointed out that these are the prices as shown in the books of account in respect of those items. However, learned counsel for the respondent has also not been able to show that that price was not the shown price being the written down value in the books of account or that there is any difference between these amounts and the amounts receivable by the assessee as price of those assets. In the absence of any proof showing the difference of the value between the written down value and the price at which it is alleged, there is no scope for application of Section 41(2) in the present case.

9. On the facts, in this case, Section 41(2) cannot be attracted, as rightly held by the learned Tribunal. We, therefore, answer the question referred to in the affirmative in favour of the assessee. The reference is, thus, answered.

10. This appeal, therefore, fails. The question is answered in the affirmative in favour of the assessee. No costs.

11. Xerox signed copy of the operative portion of this judgment, if applied for, be given to the parties.

R.N. Sinha, J.

12. I agree.