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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 2nd DAY OF DECEMBER 2013
PRESENT
THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MRS. JUSTICE RATHNAKALA
I.T.A. NO.353/2007
BETWEEN :
The Commissioner of Income-tax, C.R.Building, Queens Road, Bangalore.
The Deputy Commissioner Of Income-Tax (Asst.), Special Range – 6, C.R.Building, Queens Road, Bangalore. ...APPELLANTS
(By Sri.K.V.Aravind & Sri.N.Padmabhushan, Advs.)
AND :
M/s. B.V.Reddy Marketing P. Ltd., No.88, Sheel House, I Floor, J.C.Road, Bangalore – 560 002. …RESPONDENT
(By Sri.Ashok A.Kulkarni, Adv. for M/s. K.R.Prasad, Adv.) . . . .
This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal, Bangalore Bench in I.T.A.
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No.104/Bang/2003 dated 22.09.2006 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Special Range–6, Bangalore.
This I.T.A. coming on for hearing, this day, N.Kumar J., delivered the following:
JUDGMENT
This appeal is by the Revenue challenging the order passed by the Tribunal holding that the sale consideration of a going concern cannot be subjected to tax under the capital gain.
The assessee company was earlier known as Nutrine Marketing P. Ltd., and was one of the Companies under the Nutrine group. The assessee is the marketing division of Nutrine Biscuits Ltd., that was manufacturing biscuits under the name “Nutrine Biscuits”. The Nutrine Group was in the business of manufacturing mainly confectionery items and biscuits. The confectionery items were manufactured by Nutrine Confectionery Ltd., and biscuits were manufactured by Nutrine Biscuits Ltd. The marketing of all the products
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were carried on by the assessee company. M/s. Sara Lee Bakery India (P) Ltd., a concern from Chennai was interested to take over the entire business of manufacture of confectionery items and biscuits along with all the marketing facilities of the manufacturing company and the assessee company and with this view in mind they entered into agreements dated 18.03.1998 with Nutrine Confectionery Ltd., Nutrine Biscuits Ltd., and the assessee. The aggregate of the consideration payable to all the three companies was fixed at Rs.33 crores. There were as many as twelve agreements in total out of which, four were entered with Nutrine Confectionery Ltd., five with Nutrine Biscuits Ltd., and three with the assessee company. In addition, M/s.Sara Lee entered into one more agreement with the assessee at its book value, including sundry debtors and fixed assets. There is also a tripartite agreement entered into with the employees of the assessee, assessee and M/s.Sara Lee, for absorption of the employees of the assessee by M/s. Sara Lee. The Assessing Officer noted that out of a total sum of Rs.23.05 crores, the assessee
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received on the basis of various agreements, the assessee had offered under the head long-term capital gains Rs.1 crore that is received as good will. The claim of the assessee was, the remaining Rs.22.05 crores was received in the nature of capital and hence, could not be subjected to tax. The Assessing authority did not agree with the stand of the assessee. It treated the entire consideration towards good will that the assessee has built up in the course of its existence for a period exceeding 12 years and brought the aforesaid amount to tax. However, he recorded a finding that it is a slump sale.
Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Appellate Authority held that before the introduction of Section 50B with effect from 01.04.2000 which will be relevant for the assessment period 2000-01, the consideration received in slump sale was not liable to tax and therefore, he allowed the appeal and set-aside the order of the Assessing Authority. Aggrieved by the same, the Revenue
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preferred an appeal in the Tribunal. The Tribunal upheld the order of the Appellate Authority and declined to interfere. It is against the said order, the Revenue has preferred this appeal.
The substantial question of law which arises for consideration in this appeal is as under: “Whether the Appellate Authorities were correct in holding that the sale consideration of Rs.23.05 crores (less Rs.1 crore towards goodwill) received from M/s. Sara Lee for sale of the assessee company is not liable to capital gain tax as held by the Assessing Officer?
The Apex Court in the case of PNB Finance Ltd. V/s. Commissioner of Income-Tax reported in
(2008) 307 ITR 75(SC) has held as under: “17. As regards applicability of Section 45 is concerned, three tests are required to be applied. In this case, Section 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated Code. Therefore, where the
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computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is Section 45. That section contemplates that any surplus accruing on transfer of capital assets is chargeable to tax in the previous year in which transfer took place. In this case, transfer took place on 18.7.1969. The second test which needs to be applied is the test of allocation/attribution. This test is spelt out in the judgment of this Court in Mugneeram Bangur & Co. (Land Department) [1965] 57 ITR 299.. This test applies to a slump transaction. The object behind this test is to find out whether the slump price was capable of being attributable to individual assets, which is also known as item-wise earmarking. The third test is that there is a conceptual difference between an undertaking and its components. Plant, machinery and dead stock are individual items of an Undertaking. A Business Undertaking can consists of not only tangible items but also intangible items like, goodwill, man power, 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 (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
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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 crores was not allocable item- wise as was the case in Artex Manufacturing Co. [1997] 227 ITR 260.”
From the aforesaid judgment, it is clear that a charging section and the computation provisions together constitute an integrated code. When in a case, the computation provisions do not apply, such a case would not come within the ambit of Section 45. It is because of these pronouncements, now the law has been amended introducing Section 50B, which has come into effect from 01.04.2000. The material on record discloses that it is a case of slump sale. The said
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sale has taken place prior to the aforesaid amendment. As the law stood then, it was not taxable. Merely because the assessee has given split up figures of how he has claimed and received the consideration from the purchaser, it would not take the goods out of slump sale. In that view of the matter, the authorities were justified in holding that Section 45 of the Act is not attracted. Accordingly, the substantial question of law is answered in favour of the assessee and against the revenue. Hence, there is no merit in this appeal. Appeal stands dismissed.
Sd/- JUDGE
Sd/- JUDGE
SPS