Ita/195/2010 Of The Commissioner Of Income Tax,Cochin v. Sri.t.j.george,Kothamangalam

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY MONDAY, THE 10TH JANUARY 2011 / 20TH POUSHA 1932 ITA.No. 195 of 2010() --------------------- AGAINST THE ORDER IN ITA.132/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT --------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): RESPONDENT ------------------------- SRI.T.J.GEORGE,THEKKUMPURATHU HOUSE, KOTHAMANGALAM. ADV. SRI.P.BALAKRISHNAN (E) FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10/01/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ.---------------------------------- ITA No.195 of 2010 --------------------------------- Dated, this the 10[th] day of January, 2011 J U D G M E N T Ramachandran Nair, J. This appeal filed by the Revenue arises from the orders of the Tribunal disposing of the appeal arising from the block assessmentcompleted on the respondent assessee under Section 158 BC of theIncome Tax Act (hereinafter referred to as the Act for short) for theblock period 01/04/1996 to 18/12/2002. During search, theDepartment unearthed sale agreement between the respondentassessee and two others for the sale of a petroleum outlet as agoing business concern for a total consideration of Rs.82 lakhs, outof which Rs.5 lakhs was retained by the purchasers to be paid afterthe dealership is transferred by the petroleum Company to thepurchasers. It is the admitted fact that the assessee was carrying onthe business as dealer of the Indo-Burma Petroleum CompanyLimited at a place called Kothamangalam in Ernakulam district. Thebusiness concern as a whole with land and building, improvements,fittings and even electricity and telephone connections etc. was sold by the respondent assessee as a going concern to the purchaserswith effect from 27/05/1998. The transaction is reflected in thesale agreement dated 23/09/1998 and in another agreement dated20/12/2000. Since the sale with effect from 27/05/1998 fallswithin the block period i.e. 01/04/1996 to 18/12/2002 for whichassessment was made pursuant to search made on 18/12/2002, thetax liability on capital gains on the sale of the petroleum outlet as agoing concern was considered, and for making assessment theAssessing Officer bifurcated the sale consideration of Rs.82 lakhsbetween the value of land and building and the value of thedealership licence separately and assessed entire receipts towardscapital gains. When the assessee filed appeal challenging theassessment on capital gains on the sale of the petroleum outlet, thefirst appellate authority held that the transaction is really sale ofbusiness which attracts tax on capital gains only by virtue of thelater introduced amendment in Section 55(2) of the Act, by FinanceAct, 2002 with effect from 01/04/2003. Since the sale in this caseby way of execution of agreement, transfer of possession andreceipt of consideration happened prior to the amendment inSection 55(2), the CIT (Appeals) allowed the appeal cancelling the assessment on capital gains. On the second appeal filed by theRevenue, the Tribunal confirmed the order of the CIT (Appeals),against which the Revenue has come up in appeal before us. 2.We have heard Shri.P.K.R.Menon, learned Senior counselappearing for the Revenue and Shri.P.Balakrishnan, learned counselappearing for the respondent assessee. assessment on capital gains. On the second appeal filed by theRevenue, the Tribunal confirmed the order of the CIT (Appeals),against which the Revenue has come up in appeal before us. 2.We have heard Shri.P.K.R.Menon, learned Senior counselappearing for the Revenue and Shri.P.Balakrishnan, learned counselappearing for the respondent assessee. 3.Before proceedings to consider the correctness orotherwise of the orders of the lower authorities, we should considerthe relevant statutory provisions systematically introduced in the Actproviding for assessment on the sale of business assets. None ofthe authorities have considered the scope of Sections 50B and 2(42C) of the Act introduced by Finance Act, 1999 with effect from01/04/2000, which provides for assessment on capital gains on“slump sale” defined under Section 2(42C) of the Act, for which aspecial scheme of assessment was provided under Section 50B ofthe Act. The provision next introduced was in Section 55(2) byFinance Act, 2002 with effect from 01/04/2003, which provides fordetermination of capital gains on sale of business with reference to“cost of acquisition”, the definition of which was introduced throughthe said amendment. On the face of it, the transaction involved in Before proceedings to consider the correctness or this case, i.e. sale of petroleum outlet by assessee to other personswith land and building, equipments, fittings etc. as a going concern,that is sale “lock, stock and barrel”, is a slump sale falling underSection 2(42C) of the Act assessable under Section 50B of the Actwhich came into force with effect from 01/04/2000. Similarly,Section 55(2) of the Act defining “cost of acquisition” on the sale ofright to carry on business was introduced by Finance Act, 2002 witheffect from 01/04/2003. Since these provisions providing for levyof tax on capital gains on slump sale and on sale of right to carry onbusiness were introduced in the Act after the relevant period duringwhich the respondent sold the business as a going concern,certainly these provisions have no application and assessment couldnot be made under these provisions subsequently introduced in thestatute. However, the question raised for our decision is whetherthe first appellate authority as well as the Tribunal rightly cancelledthe assessment on capital gains treating the transaction just as saleof business which cannot be subject to tax for capital gains for anyperiod prior to the introduction of amendment to Section 55(2) ofthe Act. The learned Senior counsel for the Revenue brought to ournotice the admission made by the assessee in the course of search that the sale consideration for right to carry on business, which wassubject to approval by the petroleum Company which granteddealership licence to the respondent, was only Rs.5 lakhs and thebalance Rs.77 lakhs out of Rs.82 lakhs represents sale considerationfor the assets including land and building and equipments.Consideration received for transfer of business as such cannot beassessed during the block period, which is prior to the amendmentto Section 55(2) of the Act. However the question is whether thesale consideration attributable to sale of land, building and otherbusiness assets could be assessed to tax on capital gains. 4.Learned counsel for the Revenue relied on two decisionsof this Court, one is a Full Bench decision in Commissioner ofIncome Tax, Kerala v. Ramakrishnan,reported in 73 ITR 356 andanother is a Division Bench decision in Commissioner of IncomeTaxv. F.X.Periera & Sons (Travancore) Pvt.Ltd.reported in 184 ITR461, wherein this Court held that sale of business attracts tax forcapital gains. Assessee's counsel, on the other hand, relied on thedecision of the Supreme Court in Commissioner of Income Taxv.B.C.Sreenivasa Setty, reported in 128 ITR 294, and contended thatprior to the introduction of the new definition on cost of acquisition for assessing transfer of right to carry on business in Section 55(2)with effect from 01/04/2003, this position is covered by thedecision of the Supreme Court above referred, and so much so, theCIT (Appeals) and the Tribunal rightly held that the considerationreceived for sale of business as a whole cannot be assessed to tax. 5.After hearing both sides and after going through therecords and the orders of the lower authorities, we feel that theorder of the CIT (Appeals), which is confirmed by the Tribunal,cannot be sustained for the simple reason that they have notconsidered the relevant provisions of the statute with reference towhich the legality of the assessment should have been considered.In the first place, under the terms of sale agreement, and asadmitted by the assessee in the sworn statement furnished underSection 132(4) pursuant to search it clearly stated that theconsideration paid is for the sale of the land and building,equipments, electricity and telephone connections and also thebusiness as a going concern, which is obviously subject to approvalof transfer of dealership by the petroleum Company which granteddealership licence to the respondent assessee. The considerationfor the transfer of the dealership licence separately agreed was only Rs.5 lakhs and the same was in fact withheld by the purchaser oncondition that the same will be paid to the assessee only on thepetroeum Company approves the transfer of business. So much so,out of Rs.82 lakhs, Rs.77 lakhs represents sale consideration fortransfer of land, building and equipments. There is no contentionthat the transfer was conditional or that the petroleum Companyever denied approval for transfer of dealership licence to thepurchaser. In other words, the transfer of land and building andassets have been taken place pursuant to the agreement executedbetween the parties and payment made by the purchasers to theassessee. 6.The question in these circumstances, to be considered iswhether the sale of the land and building and business assets andservice installations like electricity and telephone connectionsattract tax on sale of capital assets for periods prior to theamendment to Section 55(2), which only introduces the newdefinition for "cost of acquisition" in respect of right to carry onbusiness. In this context, we have to refer the relevant provisions ofthe Act, which in Section 2(14) defines "capital assets" as follows :- "S.2(14) : "capital asset" means property of any kind heldby an assessee, whether or not connected with hisbusiness or profession, but does not include-(i)any stock-in-trade, consumable stores or rawmaterials held for the purposes of his business orprofession;----- -----" What is clear from the above is that capital asset includes property of any kind held by an assessee whether or not connected withbusiness or profession. This obviously means that business assetssold by the assessee is assessable to tax. In this case land, building,equipments and fittings in the petrol pump falls within thedescription of capital asset. 7.Section 50 provides for special provision for computationof capital gains in case of depreciable assets. What is providedunder this Section is that capital asset is an asset forming part ofblock of assets in respect of which depreciation has been allowedunder the Act, and since sale of the same attracts tax, the saleproceeds has to be assessed under the said provision of the Act. Somuch so, in our view, the value of land, building and depreciableassets are to be separately estimated and assessed for capital gains.However, the value of the licence, which constitutes considerationfor sale of business, cannot be assessed to capital gains by applying Section 55(2) in this case, as the said provision came into force afterthe sale was made by the assessee. 7.Section 50 provides for special provision for computationof capital gains in case of depreciable assets. What is providedunder this Section is that capital asset is an asset forming part ofblock of assets in respect of which depreciation has been allowedunder the Act, and since sale of the same attracts tax, the saleproceeds has to be assessed under the said provision of the Act. Somuch so, in our view, the value of land, building and depreciableassets are to be separately estimated and assessed for capital gains.However, the value of the licence, which constitutes considerationfor sale of business, cannot be assessed to capital gains by applying Section 55(2) in this case, as the said provision came into force afterthe sale was made by the assessee. 8.Learned counsel for the assessee contended that Section50B which provides for assessment of capital gains on slump saleand Section 55(2) which provides for assessment of sale of right tocarry on business, are independ charging Sections, and thereforethe sale of land and building including depreciable assets formingbusiness assets cannot be treated separately for assessment. Weare unable to accept this contention because Section 50B wasintroduced to provide for special provisions for assessment in thecase of slump sale, which is nothing but sale of an industrial unit ora business enterprises as a whole without bifurcating considerationon each and every item. The fact that special provision wasintroduced for assessment of capital gains on slump sale with effectfrom a particular date does not mean that the sale of assetsincluding depreciable assets for the period prior to introduction ofthe provision for assessment of capital gains on slump sale cannotbe assessed under other provisions of the Act. So much so, in ourview, so long as items sold answer the description of “capital asset”within the meaning the definition clause contained in Section 2(14) of the Act, assessment of capital gains is permissible on the sale ofsuch assets. However, after the introduction of Section 2(42C) andSection 50B, slump sale has to be assessed strictily in accordancewith the provisions of Section 50B. In other words, until the specialprovision is introducted, land and building and depreciable assetsare assessble under other provisons of the Act, particularly Section50. In view of our above findings, we are of the view that theorders of the Tribunal confirming the orders of the CIT (Appeals) isnot sustainable. The sale of the capital assets like land, buildingand depreciable assets are assessable separately. However, thiscould be done by bifurcating the sale consideration in a realisticmanner between the value attributable to land, builiding and fixedassets and the value fixed for the transfer of the business, which isessentially the transfer of dealership licence by the manufacturingCompany. It is stated that Rs.5 lakhs was retained by thepurchasers towards consideration for the transfer of licence fromthe assessee. However, it is not known whether this is spent by theassessee to get the licence or whether it is an estimated amountfixed between the parties. In any case, the eligibility for a petroleum dealership licence itself is availability of all theinfrastructural facilities and equipments and experience. Therefore,it is for the Assessing Officer to examine, after giving opportunity tothe assessee as to whether what exactly is the consideration i.e.attributable for transfer of the business rights as an intangibel assetincluding licence. We, therefore, allow the appeal by setting asidethe orders of the Tribunal and the CIT (Appeals) and restore thematter back to the Assessing Officer for considering assessment onthe value of land and building and depreciable assets as statedabove. (C.N.RAMACHANDRAN NAIR, JUDGE) jg (BHABANI PRASAD RAY, JUDGE)