COMMISSIONER OF INCOME TAX Vs. POLYCHEM LTD

JUDGEMENT

(1.) This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 arises from an order of the ITAT dated 22 May 2007 in relation to the Assessment Year 1994 1995. The appeal gives rise to the following substantial question of law:2 Whether in the facts and circumstances of the case and in law, the Tribunal is right in holding that the capital gains are not applicable in view of the fact that the IMFL business has been transferred as going concern and therefore a slump sale

(2.) The assessee is a company which at the material time was inter alia engaged in the business of manufacture and sale of liquor. An agreement was entered into by the assessee on 24 March 1994 with International Distillers (India) Pvt. Ltd. by which the assessee agreed to sell to the purchaser the undertaking / business together with its assets and liabilities as a running business / going concern on as is where is basis. The Undertaking / business which formed the subject matter of sale was the business of manufacturing, blending, bottling, distribution, storage and sale of Indian Made Foreign Liquor. The Assessing Officer noted that the assessee having transferred its IMFL division as a going concern / running business, it was stated in the Notes forming part of the computation of income that the written down value of the assets transferred was shown as a deduction for the purpose of computing depreciation from the block of assets. The assessee stated that the excess of the cost of IMFL business amounting to Rs.6.90 corers was not taxable and was not deducted from the respective block of assets. The assessee was called upon to justify this claim in response to which the assessee stated that it had transferred its IMFL business as a going concern for a total consideration of Rs.10.38 Crores. According to the assessee the profit arising on the transfer of the undertaking was not chargeable to tax. The Assessing Officer in the course of his computation deducted from the total sale price of Rs.10.38 Crores the written down value of the fixed assets and the value of the stores, raw materials and finished goods which was worked out at Rs.3.48 crores. The difference of Rs.6.90 Crores was held to be chargeable under the head of capital gains. The Assessing Officer proceeded on the basis that what was transferred by the assessee was the entire business as a slump sale but came to the conclusion that the profit arising on such transfer of business as a going concern would be chargeable to tax under the head of capital gains.

(3.) The order of the Assessing Officer was challenged in appeal by the assessee. The Commissioner (Appeals) by his order dated 5 July 2002 affirmed the order passed by the Assessing Officer and upheld the addition in the amount of Rs.6.90 crores. The Commissioner (Appeals) came to the conclusion that the agreement between the assessee and the purchaser made it clear that a lump sum consideration was in fact arrived at on the basis of the assets of the assessee. This was sought to be fortified by a communication addressed to the Assessing Officer by the purchaser, furnishing a valuation of the land, building and fixed assets and a communication addressed by the assessee stating that the book value of the assets transferred to the purchaser was Rs.3.48 crores. The Commissioner held that the net worth of the unit was ascertained by evaluating each asset and liability and the sale price being determined on the basis of each asset and liability it could not be asserted that the assets were not acquired at any cost. In appeal before the Tribunal the case of the assessee was that what was transferred to the purchaser was the entire business and undertaking of the IMFL unit on the basis of a slump sale. On this basis, reliance was sought to be placed on a judgment of a Division Bench of this Court in Premier Automobiles Ltd. v. Income Tax Officer, 2003 264 ITR 193. The Tribunal accepted the submission of the assessee that in the present case the entire business of the undertaking was transferred as a going concern together with all fixed assets and intangibles for a lump sum consideration without a separate valuation of the assets sold. The Tribunal held that this was, therefore, not a sale of itemized assets. The Tribunal came to the conclusion that it was not possible to ascertain the cost of the capital asset viz. the IMFL undertaking / business or the cost of the improvements thereto and it was hence not possible to compute any chargeable capital gain on the sale of the undertaking as a going concern. In holding thus, Tribunal relied upon its own decision in the case of Coromandel Fertilizers Ltd. Vs. DCIT.