THE COMMISSIONER OF INCOME TAX vs M/S. NUTRINE CONFECTIONERY CO. P. LTD.,

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.364/2007

BETWEEN :

The Commissioner of Income-tax, Central Circle, C.R.Building, Queens Road, Bangalore.

The Joint 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. Nutrine Confectionery Co. P.Ltd., No.88, “Shell House”, J.C.Road, Bangalore …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

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Tax Appellate Tribunal, Bangalore, in I.T.A. No.224/Bang/2002 dated 22.09.2006 confirm the order of the Appellate Commissioner confirming the order passed by the Joint 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 was one of the companies under the Nutrine Group. The assessee is the manufacturer of confectionery items only whereas M/s. Nutrine Biscuits Ltd., a sister concern of the assessee was manufacturing biscuits under the name “Nutrine Biscuits”. The marketing of all confectionery and biscuits products were carried on by the sister concern M/s. B.V.Reddy P. Ltd. M/s. Sara Lee Bakery India (P) Ltd., took over all the three business. The aggregate of all the consideration payable to all the three companies

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was fixed at Rs.33 crores. The consideration paid for taking over the assessee Company is Rs.4.50 crores. The said amount was bifurcated as Rs.275 lakhs towards Trademarks and technical know-how, Rs.75 lakhs towards Copyrights and Rs.100 lakhs towards Non-compete compensation. The Assessing Officer asked the assessee to justify its claim. Assessee gave a reply. The Assessing Officer was of the view that the allocation of the transfer amounts under various heads was not based on any scientific basis or commercial principles. He taxed the assessee on the ground that it amounts to sale of trade-mark and good will and non- compete fee, which amounts to capital gains. Aggrieved by the said order, the assessee preferred an appeal. The Appellate Authority held that it is a case of slump sale and sale has taken place prior to 01.04.2000, which is not taxable. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal, which came to be dismissed. It is against the said order, the present appeal is filed.

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The substantial question of law which arises for consideration in this appeal is as under: “Whether the Tribunal was correct in holding that the consideration received for the transfer of trade marks, patent rights, logo etc. by the assessee from M/s. Sara Lee Bakery India (P) Ltd., cannot be his long term capital gains sustainable under Section 65 of the Act?

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 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

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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 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

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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 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

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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

SPS

THE COMMISSIONER OF INCOME TAX vs. M/S. NUTRINE CONFECTIONERY CO. P. LTD.,