C I T vs. M/S GANGANAGAR BOTTLING CO LTD

Judgment Per Hon’ble Jhaveri, J. 24/04/2017

“1. Whether

on the facts

and circumstances of the case, the ITAT was right and justified in deleting the addition of Rs.9,26,19,881/- by holding that the sale of business assets was not an itemised sale and thus is not exigible to tax?

on the facts

and circumstances of the case, the finding of the ITAT is perverse, contrary to the record and untenable in the eye of law?”

(3 of 22) [ITA-6/2006]

“16. The assessee was asked to furnish a list of the assets and liabilities transferred to M/s Hindusthan Coca Cola Bottling NorthWest Pvt Ltd. Gurgaon. Vide its letter dated 19-08-03 the assessee has furnished a list of assets and liabilities transferred to M/s Hindusthan Coca Cola Bottling on 25-03-99. List is reproduced below:

(4 of 22) [ITA-6/2006]

(5 of 22) [ITA-6/2006]

1,28,500,000 ADD Goodwill Non-Compete Inventory Additional assets (Assumed to be 65 Lacs) 48,73,627 5,85,46,607 Total payable

(6 of 22) [ITA-6/2006] 1,67,046,607 Less: Deposit liablility as per Deal structure (50,00,000) (50,00,000) Net payable as per deal (Assumed to be 16.50 Crore)

162046607 Difference is no account of excess estimation of delivery of additional asses I.e Rs. 65 lacs to 40 lacs. Additions over & above Deal structure Inventory over & above the estimated Preoperative expenses 7,75,000 Based on letter sent by Mr. Mukesh Bhawnani (Hindusthan Coca Cola Ltd March 2nd 2000 to Mr. Jaipuria. illegible 25-05-2000 This schedule also shows that only business assets of the assessee firm were transferred to M/s Hindustan Coca Cola Bottling NorthWest Pvt. Commissioner of Income Tax (Assessment), Mysore [2016] 389 ITR 519, wherein it has been held as under:

(8 of 22) [ITA-6/2006] the dissolution, that too under the orders of the High Court with clear stipulation that proceeds thereof shall be distributed among the partners. Insofar as the firm is concerned, after the dissolution on December 06, 1987, it had not filed any return as the same had ceased to exist. Even in the interregnum, it is the AOP which had been filing the return of income earned during the said period. The High Court has touched upon this aspect in greater detail in para 30 of its judgment. Since we agree with the same, we reproduce below the discussion in the said para:

continue

notwithstanding

the dissolution so far as may be necessary to wind up the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution. Therefore, for realisation of the assets, discharging the liability of the firm and settling the accounts of the partners, etc., the firm will continue to exist despite the dissolution and not for any other purpose. The material on record in the instant case would clearly show that after dissolution of the firm on 06.12.1987, the firm has never filed any return and in view of the order of this Court permitting the partners to carry on the business in the interest of employees, return was filed by AOP-13 consisting of erstwhile 13/12 partners for accounting profits and seeking depreciation in the assets of the firm and continued to do business in view of the order of this Court that there was no agreement among the partners to continue the business during the pendency of the winding up proceedings. Further having regard to Clause 16 of the Partnership Deed of the dissolved firm, it is clear that the partners intended that the assets of the firm should not (9 of 22) [ITA-6/2006] be sold to an outsider. It is well settled that every act of the partner would be binding on the firm and also the partners inter-se and Clause 16 of the Partnership Deed which has been culled out supra clearly shows that if Partnership is dissolved, the going concern carried on under the name of the Firm MANGALORE GANESH BEEDI WORKS and all the trade marks used in course of the said business by the said firm and under which the business of the Partnership is carried on shall vest in and belong to the Partner who offers and pays or two or more Partners who jointly offer and pay the highest price therefor as a single group at a sale to be then held as among the Partners shall be entitled to bid. The other Partners shall execute and complete in favour of the purchasing Partner or Partners at his/her or their expense all such deed, instruments and applications and otherwise aid him/her or them for the registration his/her name or their names of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee Partner or Partners. The final order passed by this Court to wind up the affairs of the firm would clearly show that the property of the firm is purchased by the association of 3 partners who submitted their highest bid and that other partners had to given an undertaking that they may not interfere with the carrying on business which is vested in the name of MGBW and all the trademarks used in the course of said business and therefore it is clear that the Appellants who are erstwhile partners were not successful bidders for continuation of business in the individual capacity of the MGBW and in view of Clause 16, all tangible and intangible assets vested with Association of 3 partners whose highest bid of Rs. 92 crores was accepted and admittedly after the passing of the order of this Court on 20.11.1994, all the Appellants herein and other out-going partners have given requisite undertaking as per the order of this Court and the MGBW as a going concern under the name and style MGBW and all trademarks used in the course of said business by the said firm and all tangible and intangible assets of the firm vested with the purchasers erstwhile 3 partners who paid the highest bid and the Appellants have received consideration of the conveyance and their respective share in the sale of net assets of the firm after their undertaking that they cannot

(10 of 22) [ITA-6/2006] interfere with the business of MGBW which is vested with all assets in favour of 3 partners have received the value of their net asset which has been distributed by the Official Liquidator and AOP 3 who have purchased the business of the old firm, succeeded to it and constituted a new firm in the same name (vide order Defendant (sic-dated) 14.06.1991 in the Company Petition) and therefore it is clear that the order passed by the Assessing Authority confirmed in the first appeal and by the Income Tax Appellate Tribunal (Special Bench) holding that the Appellants as erstwhile partners are liable to pay capital gain on the amount received by them towards the value of their share in the net assets of the firm are liable for payment of capital gains Under Section 45 of the Act. The said finding is justified and accordingly we answer the substantial question of law in favour of the Revenue and against the Assessee.

“12. We have heard the arguments of both the parties’ orders of the lower authorities with reference to the case laws relied by them as well as the written submissions placed on record. In our considered opinion, the following issues emerge out of the same. (i) Whether the sale of undertaking amounts to transfer of asset chargeable u/s 45. (ii) Whether such transfer is chargeable to tax

(11 of 22) [ITA-6/2006] itemized sale of assets of the undertaking.”

(12 of 22) [ITA-6/2006] contextually Section 45, in which the expression "capital asset" is used, excludes goodwill. Section 45 charges the profits or gains arising from the transfer of a capital asset to income- tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings Section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head, "Capital gains". Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is (13 of 22) [ITA-6/2006] pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head. We are of opinion that the goodwill generated in a newly commenced business cannot be described as an "asset" within the terms of Section 45 and therefore its transfer is not subject to income-tax under the head "Capital gains". “ 12. [2008] 307 ITR 75 (SC) and more particularly the following para: “However, no such formula existed during assessment year 1970-71. At that time, assessee had to deduct either cost of acquisition or fair market value as on 1.1.1954 from the sale price (compensation) of Rs. 10.20 cr. [see Section 55(2)(i)]. This option was conferred on the assessee solely for its benefit. However, Section 55(2) only triggered if there existed the figures of "cost of acquisition" and "fair market value" as on 1.1.1954 so that the choice could be exercised. At that time, it was open to the assessee to contend that he would exercise the option only after both the figures of original cost and fair market value of the asset as on 1.1.1954 was available. In short, it is only after 1.4.2000 that computation machinery came to be inserted in Section 48 which deals with mode of computation.

(14 of 22) [ITA-6/2006] The High Court reversed that finding of the Tribunal and held that the surplus was taxable as capital gains under Section 45 and not under Section 41(2). At the instance of the Revenue, this Court on an appeal held that on the facts and in the circumstances of the case Section 41(2) was applicable as the amount of Rs. 11,50,400, being the consideration, stood arrived at by taking into consideration the value of the plant, machinery and dead stock. It was further held that, the surplus resulting from transfer of plant, machinery and dead stock was either taxable as income under Section 41(2) or as capital gains under Section 45. It was held that since income was chargeable to tax under Section 41(2), the impugned decision of the High Court that such income was chargeable to tax as capital gains was erroneous.

Bangur

&

Co. MANU/SC/0162/1965

: reported

in [1965]57ITR299(SC) this Court held that where the entire business of the undertaking together with its assets including the depreciable assets and liabilities was sold for a composite price without any item-wise earmarking, Section 41(2) was not attracted. But, where the transfer of the entire business as a going concern is involved and the contract indicates item-wise consideration, Section 41(2) would stand attracted with regard to the amount of surplus to the extent of the difference between the written down value of the depreciable asset(s) so transferred and the actual cost thereof.

11,50,400. 00. Therefore,

the sale consideration had been 0 arrived at after taking into account the value of plant, machinery and dead stock as computed by the valuer and, consequently, it was held that the surplus arising on the sale was taxable under Section 41(2) of the Act and not as capital gains. In the circumstances, the judgment of this Court in the case of Artex Manufacturing Co. (supra) was not applicable to the present case. Further, this Court in the case of CIT v. Electric Control Gear Manufacturing Co. MANU/SC/1245/1997 : [1997]227ITR278(SC) has held that whether the (15 of 22) [ITA-6/2006] business of the assessee stood transferred as a going concern for slump sale price, in the absence of evidence on record as to how the slump price stood arrived at, Section 41(2) had no application. It is interesting to note that the judgment in the case of Electric Control Gear Manufacturing Co. (supra) is given by the same Bench which decided the case of Artex Manufacturing Co. In fact, both the judgments are reported

one

after

other

in MANU/SC/0773/1997 : [1997]227ITR260(SC) respectively. In the present case, as can be seen from the impugned judgment of the Delhi High Court, the judgment of this Court in Electric Control Gear Manufacturing Co. (supra) is missed out. That judgment has not been considered by the High Court. As stated above, this Court has clarified its judgment in Artex Manufacturing Co. (supra) in its judgment in the case of Electric

Control

Gear Manufacturing Co.. Therefore, Section 41(2) has no application to the facts of the present case.

v.

B.C.

Srinivasa

Setty MANU/SC/0285/1981

: reported

in [1981]128ITR294(SC) , this Court held that Section 45 charges the profits or gains arising from the transfer of a capital asset to income- tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, this Court held that the "asset" must be one which falls within the contemplation of Section 45. It is further held that, the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions cannot apply, such a case would not fall within Section 45. In the present case, the Banking Undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On facts, we find that item-wise earmarking was not possible. On facts, we find that the compensation (sale consideration) of Rs. 10.20 cr. was not allocable item- wise as was the case in Artex Manufacturing Co. (supra).

“6. In the present case, while we deal with the submissions which have been urged on behalf of the Revenue and the assessee it would, at the outset, be necessary to advert to the salient provisions of the agreement dated 24 March 1994 in pursuance of which the IMFL undertaking came to be transferred by the assessee. The agreement makes it clear both in its recitals and in clause 1.1 of the contract that the assessee was transferring to the purchaser

(17 of 22) [ITA-6/2006] the undertaking / business as a running business / going concern together with its assets and liabilities. The undertaking / business which was sought to be transferred was the business of manufacturing, blending, bottling, distribution, storing and sale of Indian Made Foreign Liquor. The undertaking / business consisted besides immovable property and movable property (including plant and machinery); current assets including raw materials, stock in trade and book debts; the benefits of all pending contracts, engagements and orders; all licenses and other permissions and approvals required from the State and Central Government) to carry on liquor business; the distribution network, marketing strategies, plans, advertising information and customer list; and the use of intangible assets referable to the undertaking / business including trade marks. Schedule IV to the agreements sets out the pending contracts, Schedule V the licenses which the assessee held and Schedule VI the trade marks which the assessee was transferring to the buyer. The Agreement does not contain an itemized valuation in respect of the land, building and fixed assets transferred. Under the agreement the assessee transferred to the purchaser the entire undertaking / business at and for a consideration of Rs.10.60 Crores. Under Clause 5.2 the consideration as determined was subject to a due diligence audit of the assets and liabilities as reflected in the Closing Accounts and was subject to adjustment to be made in the following manner: (1) if any machinery was missing it was to be replaced by the vendor; and (2) if there was any variance in the current assets or liabilities it was liable to be adjusted from the price. Possession of the undertaking was to be handed over by the assessee to the purchaser on the Closing Date. Under Clause 6 the assessee transferred its employees involved in the undertaking / business as part of the undertaking / business as a going concern to the purchaser.

(18 of 22) [ITA-6/2006] consideration of Rs.10.6 crores that is determined under the agreement was for the transfer of the business and undertaking as a whole comprising of but not limited to the land, building and fixed assets. Among the assets that were transferred included the benefit of the existing contracts, licenses which the assessee held entitling it to manufacture and sell Indian Made Foreign Liquor, intangibles including the right to utilize trade marks and the labor force which was being transferred to the purchaser. The transaction involved a slump sale. There was no itemized valuation of the fixed assets and other assets which formed part of the undertaking. What was sold comprised of the undertaking and the business as a whole.

(20 of 22) [ITA-6/2006] tenancy rights and value of banking licence. However, the cost of such items (intangibles) is not determinable. In the case of CIT v. B.C. Srinivasa Setty reported in MANU/SC/0285/1981 : (1981) 128 ITR 294, this Court held that Section 45 charges the profits or gains arising from the transfer of a capital asset to income tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, this Court held that the "asset" must be one which falls within the Setty MANU/SC/0285/1981 : 1981 128 ITR 294 that the charging section and the computation provisions constitute an integrated code and when in a case the computation provisions cannot apply, such a case would not fall within Section 45. The facts of the present case are squarely within the principle which has been laid down by the Supreme Court in PNB Finance.”

(21 of 22) [ITA-6/2006]

“13. Our view finds support with the law laid down by this Court in Commissioner of Income Tax, Gujarat v. Artex Manufacturing Co. [MANU/SC/0773/1997 : 1997(6) SCC 437 CIT].

“11. In our considered opinion, the case of the Respondent (Assessee) does not fall within the four corners of Section 50 (2) of the Act. Section 50 (2) applies to a case where any block of assets are transferred by the Assessee but where the entire running business with assets and (22 of 22) [ITA-6/2006] liabilities is sold by the Assessee in one go, such sale, in our view, cannot be considered as "short- term capital assets". In other words, the provisions of Section 50 (2) of the Act would apply to a case where the Assessee transfers one or more block of assets, which he was using in running of his business. Such is not the case here because in this case, the Assessee sold the entire business as a running concern.”