R.S. Syal (AM):
1. These two appeals by the assessee are directed against the separate orders dated 12.10.2009 passed by the ld. CIT(A) in relation to the A.Ys. 2003-04 and 2004-05. Since some common issues are involved in these appeals, we are therefore, proceeding to dispose them off by this consolidated order for the sake of convenience. A.Y. 2004-05:-
2. First ground of this appeal is against upholding the action of the Assessing Officer (AO) in disallowing the brought forward loss of Bayer TPU Pvt. Ltd. (amalgamating company)(hereinafter called as BTPU) amounting to Rs. 7,73,00,414/- u/s. 72A of the Act.
3. Briefly stated the facts of this ground are that two separate companies - BTPU and Bayer Specialty Products Pvt. Ltd. (BSPPL) - got amalgamated with the assessee-company in the year under consideration. Initially, the assessee claimed a set off of loss of Rs. 12.53 crore u/s.72A of the Act. However, in the revised computation of income, the amount of brought forward loss was reduced to Rs. 7.73 crore on account of amalgamation of BTPU alone. The Assessing Officer considered the provisions of section 72A and came to the conclusion that no set off of such loss was permissible due to the reasons, which can be summarized as under :-
(i) The condition laid down in section 72A(2)(b)(i) requiring the amalgamated company to hold continuously for a minimum period of five years from the date of amalgamation at least three-fourth of the book value of fixed assets of the amalgamating company was not satisfied. It can be seen that the A.O. has drawn a table on page No. 9 of his order by which he computed 43.79% representing the disposal of assets of the amalgamating company by the assessee in the very first year of the amalgamation.
(ii) The assessee-company was not able to substantiate that the Scheme of Amalgamation was with a view to revive the business of the amalgamating company and amalgamation was for a genuine business purposes. This, in his opinion, was violation of section 72A(2)(b)(iii).
(iii) The assessee-company did not achieve the level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation and that it further failed to demonstrate that it continued to maintain the said minimum level of production till the end of five years from the date of amalgamation, as laid down in Rule 9C(a) of Income-tax Rules, 1962. Since amalgamation took place as on 1.4.2003 and a period of three years and nine months had already expired from that date till the passing of the assessment order, the Assessing Officer came to hold that the assessee was not eligible to claim set off of brought forward loss.
(iv) The assessee-company also failed to furnish a certificate in the prescribed Form No. 62 duly verified by an Accountant showing particulars of production, which is one of the pre-requisite conditions for availing the allowance u/s.72A, as laid down in Rule 9C(b).
4. Considering these facts, the Assessing Officer held that the assessee was not entitled to claim set off and/or the carry-forward of the accumulated losses and/or unabsorbed depreciation of the amalgamating company as per section 72A of the Act. The assessee failed to convince the learned CIT(A) on its line of reasoning about the satisfaction of all the vital conditions for claiming benefit u/s 72A.
5. We have heard the rival submissions and perused the relevant material on record. It is observed that the fact of amalgamation of BTPU with the assessee-company during the previous year relevant to the assessment year under consideration and the further fact of the amount of brought-forward business losses and/or unabsorbed depreciation of such amalgamating company are not in dispute. Section 72A(1) provides that where there has been an amalgamation of a company owning an industrial undertaking etc. with another company then, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. As the amalgamation took place in the relevant previous year, the accumulated loss of BTPU is to be deemed as the brought forward loss of the assessee company eligible for set off and carry forward. Sub-section (2) of section 72A sets out some conditions to be fulfilled before claiming set off or carry forward of accumulated loss and unabsorbed depreciation of the amalgamating company as per sub- section (1) of section 72A. Such conditions are required to be fulfilled by the amalgamating company and also the amalgamated company. The Assessing Officer has not disputed the compliance of conditions by the amalgamating company, being BTPU, as given in clause (a) of sub-section (2) to section 72A. Controversy has been raised in relation to the fulfillment of conditions by the amalgamated company as given under clause (b) of section 72A(2) of the Act. The first objection of the Assessing Officer is that the assessee-company ought to have held continuously for a minimum period of five years from the date of amalgamation at least three fourths of the book value of the fixed assets of the amalgamating company. As per the AO's calculation, the assessee disposed of 43.79% of the assets of BTPU which violated the requisite condition. It has been observed in an earlier part of this order, which is also apparent from the assessee's submission as recorded on page No. 3 of the impugned order that two companies, namely, BTPU and BSPPL amalgamated with the assessee-company in the relevant previous year. The assessee claimed set off of brought forward loss of BTPU alone. From page No. 60 of the paper book, which was also filed before the authorities below, it can be seen that the assessee got assets of BTPU on amalgamation worth Rs. 15,53,42,000/-. Assets worth Rs. 32.67 lakhs of BTPU were disposed in the previous year relevant to assessment year under consideration. Similar disposals of the assets of BTPU were effected in subsequent two years as well, thereby making such total disposal in three years at Rs. 1,56,55,000/-. What to talk of disposal of assets during the relevant previous year at 43.79%, it is evident that the disposal of assets by the assessee in all the three years combined is around 10% of the book value of total assets of BTPU. We find that the Assessing Officer, while calculating percentage of 43.79%, erred in including the disposal of assets of BSPPL also along with the disposal of asset of BTPU. The requirement for continuously holding at least 75% of the book value of the fixed asset of the amalgamating company for a minimum period of five years is qua the amalgamating company whose accumulated loss and unabsorbed depreciation are sought to be taken by the amalgamated company in its hands for set off and carry forward. Thus what is required to consider on one hand is the percentage of disposal of assets of amalgamating company and on the other the brought forward loss and unabsorbed deprecation of such company. It is not as if the disposal of fixed assets of all the amalgamating companies should be considered cumulatively for allowing set off and carry forward of accumulated loss and unabsorbed depreciation of one of such amalgamating companies. It is up to the amalgamated company to distinctly establish the satisfaction of these conditions in respect each amalgamating company. Obviously, if there are two or more amalgamations in a year, then the amalgamated company is required to prove satisfaction of these conditions in respect of such companies one by one as a pre- requisite for availing benefit u/s 72A in respect of each such company separately. Benefit u/s 72A(1) is allowed to the amalgamated company for the number of amalgamating companies in respect of which it succeeds in satisfying the conditions u/s 72A(2)(b). If, say, out of three amalgamations, the amalgamated company proves the fulfillment of conditions as per section 72A(2)(b) in respect of one or two amalgamating companies, then it shall be entitled to the benefit u/s 72A(1) in respect of such one or two companies. It is not the case that the benefit u/s 72A(1) shall be allowed or denied for all the amalgamating companies taken together as one unit on the cumulative satisfaction of the requisite conditions of section 72A(2)(b) in respect of such companies. Reverting to the facts of the present case, it is observed that there were two amalgamations with the assessee company, viz. of BTPU and BSPPL. The assessee claimed set off and carry forward of business losses and unabsorbed depreciation of BTPU alone. In order to claim such benefit, it was incumbent upon the asseessee not to dispose of more than 25% of the assets of BTPU alone. Disposal of assets of BSPPL could have been included in the total disposal of assets, as has been done by the AO, if the assessee had claimed set off and carry forward of the accumulated loss and unabsorbed depreciation of BSPPL as well. As the assessee claimed set off and carry forward of the brought forward business loss and unabsorbed depreciation only of BTPU, it was required to limit the disposal at 25% of assets of BTPU alone. The objection of the Assessing Officer for not granting set off and carry forward of accumulated loss and unabsorbed depreciation of BTPU that the assessee disposed more than 25% of the assets of BTPU is, therefore, not sustainable. Contention of the ld. DR reiterating the reasons recorded by the lower authorities for jettisoning the assessee's claim in this regard, is therefore, bereft of any force. Such argument advanced on behalf of the Revenue is liable to be and is hereby repelled.
6. The other point considered by the authorities below marring the benefit u/s 72A(1) is that the assessee company failed to lead evidence that the amalgamation was to ensure the revival of the business of the amalgamating company. Objections of the AO in points nos. (iii) and (iv) of para 3 of this order about the violation of the conditions prescribed in Rule 9C are also related to this very aspect of the matter. The case of the AO is that the assessee failed to substantiate the steps taken by it to revive business of BTPU and further it did not satisfy the twin conditions as per rule 9C, being, achieving the stipulated level of production of at least fifty percent of the installed capacity of BTPU and furnishing certificate in Form no.
62. Before examining this aspect, it would be apt to note that section 72A(2)(b)(iii) provides that the accumulated loss of the amalgamating company shall not be set off or carried forward and unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company if the amalgamated company fails to fulfill such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. The âprescribed' conditions as referred to in this provision have been set out in Rule 9C. This Rule has two clauses. First clause provides that the amalgamated company shall achieve level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation. The second clause states that the amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62 duly verified by an Accountant showing particulars of production along with return of income "for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for the subsequent assessment years relevant to previous years falling within five years from the date of amalgamation". On going through clause (a) of Rule 9C, we find that the amalgamated company is required to achieve the level of production of at least 50% of the installed capacity of the undertaking of the amalgamating company âbefore the end of four years from the date of amalgamation'. A cursory perusal simply divulges that the requirement of achieving production of at least 50% of the installed capacity of the undertaking is to be fulfilled before the end of four years from the date of amalgamation. This production level may be achieved in the first year or second year or third year or even before the end of the fourth year. There is nothing in the phraseology of the Rule that the said level of production must be achieved in the very first year of amalgamation as has been held by the AO in the extant case. The Assessing Officer noticed that the amalgamation took place on 1.4.2003 and from that date a period of three years and nine months had already passed till the passing of the assessment order, but the assessee failed to produce and submit any details relating to production to substantiate its claim. In principle, we do not approve the view canvassed by the Assessing Officer as approved in the first appeal to press for enforcing compliance of achieving desired production before the end of stipulated period. Going even by the standard of the Assessing Officer himself, the period of four years had not expired at the time of completion of the assessment. The Assessing Officer is required to restrict himself only to the year before him for considering as to whether there is any violation of section 72A(2). As the previous year relevant to assessment year under consideration is not the fourth year from the date of amalgamation, the Assessing Officer was not required to examine this aspect at that stage.
7. The further opinion of the Assessing Officer that the assessee failed to place on record any material indicating the revival of business of the amalgamating company, in our considered opinion, is unwarranted in the year in question. The mention of ensuring the revival of the business of the amalgamating company in section 72A(2)(b)(iii) is only with reference to fulfillment of the conditions as prescribed in Rule 9C. Meaning of the revival of business of the amalgamating company is âprescribed' in clause (a) of rule 9C itself, which talks of achieving the desired level of production of the undertaking within the specified period. In other words, there is no other stipulation for establishing that the amalgamated company took steps to revive the undertaking of the amalgamating company independent of clause (a) of rule 9C. On satisfaction of the condition of achieving the desired level of production of the amalgamating company, the condition of ensuring revival of the business of the amalgamated company automatically gets satisfied. Ex consequents, revival of the business of the amalgamated company can be adversely viewed only at the end of fourth year from the date of amalgamation. We, therefore, hold that it is pre-mature to require the material for demonstrating efforts taken by the amalgamated company for reviving the business of amalgamating company.
8. The last requisite condition which, in the opinion of the Assessing Officer, was not fulfilled is about the failure of the assessee to furnish the certificate in the Form No. 62. It is axiomatic that the same is not applicable in the previous year relevant to assessment year under consideration. The language of clause (b) of Rule 9C is categorical in stating that the amalgamated company has to "furnish to the Assessing Officer a certificate in Form No. 62 ....... along with the return of income for the assessment year relevant to previous year during which prescribed level of production is achieved................".
Thus, it is manifest that the requirement of furnishing Form No. 62 will arise for the first time only when the amalgamated company fulfills the condition of achieving the level of production of at least 50% of the installed capacity of the undertaking of the amalgamating company within four years from the date of amalgamation. As the assessee admittedly did not achieve the production at the desired level of the installed capacity and it is not the fourth year from the date of amalgamation, the said requirement of furnishing certificate in Form No. 62 is pre-mature.
9. Here it is interesting to note the prescription of sub-section (3) of section 72A, which provides that:
âIn a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with'. Sub-section (3) is a correcting provision and gives logical meaning to consequences flowing from the failure to comply with the requirements within the specified number of years as set out in sub-section (2) after having availed the benefit of set off and carry forward of accumulated loss of the amalgamating company as per sub-section (1) of section 72A. It transpires on a conjoint reading of sub-sections (2) and (3) of section 72A that the amalgamated company is entitled to set off and carry forward the brought forward business losses and unabsorbed depreciation of the amalgamating company from the very first year of the amalgamation. If, however, the conditions given in clause (b) of section 72A(2) are not fulfilled within the prescribed time, then the set off as allowed in the earlier year(s) shall be deemed to be the income of the amalgamated company of the last year stipulated for compliance of such conditions.
10. Thus it can be seen that amalgamated company is required to achieve the level of production of at least 50% of the installed capacity of the amalgamating company before the end of four years from the date of amalgamation. After availing the benefit of set off and carry forward of the brought forward business losses and unabsorbed depreciation of the amalgamating company by the assessee company in the very first year of the amalgamation as per sub-section (1) of section 72A, if it fails to achieve the desired level of production up to the end of the fourth year from the date of amalgamation, the benefit of set off claimed and allowed in the first year shall become income of such later year. We do not find any problem with the claim of set off and carry forward of accumulated loss etc. of the amalgamating company during the interregnum.
11. In view of the foregoing discussion, we are of the considered opinion that there is no failure on the part of the assessee to fulfill the requisite conditions for claiming set off of brought forward business losses and unabsorbed depreciation of BTPU in year under consideration. This impugned order is overturned on this issue and this ground is allowed.
12. Second issue in this appeal is against considering income from sale of shares of Bayer (India) Ltd. as âBusiness income' instead of âCapital gains' as claimed by the assessee.
13. The facts apropos this issue are that the assessee lodged a claim during the course of assessment proceedings that profit on sale of investment was shown twice, viz., firstly, by crediting a sum of Rs. 66,57,463/- to the profit and loss accounts and secondly, by including a sum of Rs. 63,10,102/- under the head âCapital gains' as long term capital gain. The AO found correct the assessee's contention and permitted withdrawal of Rs.63.10 lac as long term capital gain. The assessee contended before the ld. CIT(A) that such profit arose from sale of shares held as investment and hence the amount of capital gain should have been retained by reducing the amount of business income. The ld. CIT(A) upheld the assessment order on this issue by observing that no material was placed before the Assessing Officer or him to prove that the assessee's claim was on account of investment in shares resulting into long term capital gains and not as business income. Nutshell of the controversy is that the assessee sold certain shares and offered for taxation the resultant profit twice, that is, a sum of Rs. 66.57 lakhs as business income and long term capital gains at Rs. 63.10 lakhs. The assessee's request of doubly offering of one income under two different heads was accepted by the Assessing Officer by deleting the long term capital gains of Rs. 63.10 lakhs from inclusion in the total income thereby allowing to continue a sum of Rs. 66.57 lakhs as business income. The claim of the assessee is that the converse should be done. In other words, the amount of Rs. 66.57 lakhs included in the business income ought to have been excluded by retaining the amount of long term capital gains of Rs. 63.10 lakhs.
14. The learned AR contended that the shares of the company were held as investment since long and hence profit from their transfer should have been charged to tax under the head âCapital gains'. From the impugned order as well the assessment order, it is clear that no material has been considered or referred to verify as to whether such shares were held as âInvestment' or âStock in trade'. Without going into the merits of the ground, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of the Assessing Officer. We order accordingly and direct him to determine as to whether such shares were held by the assessee as stock-in-trade or investment. If such verification divulges that the shares were held as investment, then the income from their transfer should be considered under the head 'Capital gains' otherwise 'Business income'. This ground is allowed for statistical purposes.
15. Next issue raised through ground nos. 3and4 of the appeal is against not accepting the assessee's contention of loss of Rs. 2,10,26,593/- on account of transfer of HandR business as a business loss but instead determining and including a sum of Rs. 3,28,81,141/- on this score in the total income for the A.Y.2003-04 by reopening the assessment of such earlier year.
16. Briefly stated the facts of this issue are that the assessee initially claimed a sum of Rs. 2,10,26,593/- as long term capital loss on sale of Harmer and Reimmer (HandR) Business. The assessee was required to furnish details of the sale of the aforesaid business and valuation of assets. The assessee furnished the details in the following form :-
Particulars Amount Amount Sale consideration 71241450 Less: Assets transferred
WDV of fixed assets 214791 transferred
Loan of HRFFPL 17400000
Miscellaneous 6792902 receivable
Bayer Cropscience (1180) 92268043 Ltd.
Loss - 21026593
17. The assessee submitted that HandR Business was forming a part of the assessee's undertaking which was sold on 31.3.2004. Decision to sell HandR Business was taken as a part of global decision by the Bayer group of companies. It was explained that the business was transferred to M/s Symrise for a lump sum consideration of Rs. 7,12,41,450/- resulting into loss of Rs. 2,10,26,593/-. The assessee elaborated that the fixed assets, debtors, investors, loan to HRFFL and miscellaneous receivables relating to business of HandR Business were also transferred. Apart from that, the transferee assumed and agreed to discharge liabilities of HandR Business except all the trade payables for services rendered or supplies delivered prior to the closing date. As it received a lump sum consideration which was offered by the assessee under the head âCapital gains', the assessee contended that the provisions of section 50B were applicable. Alternatively, it was contended that if the assessee's contention of slump sale was not to be accepted by the AO, then the loss of Rs. 2.10 crore should be allowed under the head 'Profit and gains of business or profession'. The assessee also stated before the Assessing Officer vide its letter dated 27.11.2006 that the HandR Business which was sold on 30.9.2002 could not be implemented due to pendency of legal compliance in India in respect of the aforesaid global decision. It submitted that in view of the pending legal compliance in India, "it was decided to allow Bayer Material Science Ltd. to carry out business on behalf of the buyer as their custodian in India with the clear understanding that any profit/loss arising out of the operations would belong to the buyer". The Assessing Officer observed that the transfer of HandR Business was not covered within the meaning of section 50B as it was not a case of slump sale. Considering certain other deficiencies in this regard, the Assessing Officer held that the above transaction was not a slump sale transaction and hence capital gain was required to be worked out as per normal provisions of the Act. The AO observed from the chart as reproduced above that all assets other than inventories, that is, debtors, loans, miscellaneous receivables etc. did not have any profit element. Only Inventory was found to be containing profit ingredient. The Assessing Officer, therefore, held that the transfer of all others assets, that is, debtors amounting to Rs. 3.5 crore, loan to HRFFPL amounting to Rs. 1.74 crore and miscellaneous receivables at Rs. 67.92 lakh etc. was effected on book value alone. He worked out the total book value of all other assets transferred except stock at Rs. 5.97 crores. Thus book value of stock transferred was adopted as such at Rs. 3.24 crores. From the total sale consideration of Rs. 7.12 crore towards HandR business, the Assessing Officer reduced a sum of Rs. 5.97 crore, being the consideration for transfer of all other item of assets at their book value. That is how he worked out difference of Rs. 1.18 crore by holding that the inventory valuing Rs.3.24 crore was transferred to the transferee only at Rs.1.18 crore. Relying on the judgment of Hon'ble Supreme Court in the case of ALA Firm Vs. CIT (1991) 189 ITR 285 (SC) holding that closing stock should be valued at market price at the time of closure of business, the Assessing Officer held that the closing stock was required to be valued at the market rate. Considering the GP rate of 36.50% as declared by the assessee for the year in question, the Assessing Officer computed market value of inventories at Rs. 4.43 crore w.r.t. the book value of Rs.3.24 crore. By considering this market value at Rs. 4.43 crore vis-Ã -vis the actual value of transfer of inventories at Rs. 1.18 crore, the Assessing Officer came to hold that the assessee suppressed the income of Rs. 3.28 cores. Taking into consideration the fact that the HandR Business was transferred on 30.09.2002 and thereafter it was carried out by the assessee as a custodian of the transferee, the Assessing Officer held that the income of Rs. 3.28 crore was required to be included in the total income for the A.Y. 2003-04. He, therefore, disallowed assessee's claim of loss of Rs. 2.10 crore made in the year under consideration and initiated reassessment proceedings for A.Y. 2003- 04 on the ground that the assessee failed to disclose income of Rs. 3.28 crore computed by him on the transfer of shares in the earlier year.
18. At this stage, it is relevant to note that the assessment for the A.Y.2003-04 was completed accordingly. When the appeals for both the years came up before the learned CIT(A), he upheld the action of the Assessing Officer in computation of profit of Rs. 3.28 crore on inventories and also approved the view that income was rightly taxable in the previous year relevant to A.Y. 2003-04. Second appeal of the assessee for the A.Y. 2003-04 is also before us. Main grievance raised in the appeal for such earlier year is that no computation on account of HandR Business was called for in A.Y. 2003-04. As the transfer of business took place on 31.03.2004, the assessee contends the profit or loss on transfer of stock be considered in the A.Y. 2004-05 as was rightly declared by it.
19. We have heard the rival submissions and perused the relevant material on record. The ld. counsel for the assessee was fair enough not to press application of section 50B. It is noticed that there are two major issues requiring adjudication at our end. The first controversy is about the determination of the year in which such transaction of transfer of HandR business should be considered and second is about the computation of figure of loss or profit from transfer of inventories of HandR Business.
20. Year of transfer.
The first issue is against the determination of the year in which such income or loss from the transfer HandR Business should be considered. The stand point of the assessee is that it transferred its business in March 2004, and hence, the loss from transfer of HandR Business should be considered in the previous year relevant to A.Y. 2004-05. On the other hand, the Revenue is contending that the transaction of transfer of HandR Business got completed in the previous year relevant to A.Y. 2003-04.
21. There is no dispute on the fact, as also admitted by the assessee during the course of assessment proceedings, that its HandR Business was transferred to Symrise Ltd. on 30.9.2002. The sale of the business was effected pursuant to the decision of Bayer Group in Germany to hive off this business globally. Pending certain legal formalities, the assessee agreed to carry out the business on behalf of the buyer i.e. Symrise Ltd., as their custodian in India with the clear understanding that "any loss/profit arising out of the operations would belong to the buyer". This is what the assessee gave in writing to the AO, which has been reproduced on page 4 of the assessment order itself. The above narration of the facts leads us to irresistible conclusion that the business of HandR division was transferred by the assessee to Symrise Ltd. on 30.9.2002. The assessee agreed to and, in fact, carried out business on behalf of the Symrise Ltd. as their custodian in India from 1.10.2002 till 31.3.2004 and transferred profit/loss arising out of such operations to the buyer. It is a clear cut case of transferring the business on 30.09.2002 and carrying on the business from 1.10.2002 for and on behalf of the Symrise Ltd., who acquired the status of owner of HandR Business from the date of transfer in the year 2002. We fail to comprehend as to how the assessee can blow hot and cold in the same breath. On one hand it is claiming to have transferred the business on 30.09.2002 and thereafter carried it as custodian of Symrise Ltd. and on the other it is claiming that the transfer of business took place on 31.03.2004. It is obviously irreconcilable. The assessee cannot be considered simultaneously as agent of the buyer and also the owner of the business between 1.10.2002 to 31.30.2004. It is vivid that when the assessee conducted the HandR business during this period for and on behalf of Symrise Ltd. and also transferred income from such operations to them, then it cannot turn around and claim itself as owner of the business after 30.09.2002. The natural corollary which, thus, follows is that the transaction of transfer of business took place in the previous year relevant to the A.Y. 2003-04 and accordingly income from such transfer of business is required to be considered in such year alone. We, therefore, approve the view taken by the learned CIT(A) on this issue in considering the transaction having taken place in the previous year relevant to A.Y. 2003-04.
22. Computation of gain/loss
Now we espouse the second issue, being the computation of amount of gain or loss from transfer of HandR business. We have noticed above that the assessee did not transfer its HandR Business as a slump sale, which is why the ld. AR has fairly agreed not to contest the application of section 50B. Therefore, it follows that it was rather a case of transfer of individual assets. The assessee has not disputed the assignment of market value by the AO equal to the book value of Debtors, Loan of HRFFPL, Miscellaneous receivables and Fixed assets, thereby resulting into no profit or loss on transfer of such assets. The entire dispute rotates around the valuation of inventories. Book value of the inventories is admittedly Rs. 3.24 crore. Total sale consideration of HandR Business is at Rs. 7.12 crore, which has also not been disputed by the AO. After adjustment of the value of all other assets, the AO has computed the figure of Rs. 1.18 crore, being the consideration received by the assessee from the buyer towards the transfer of stock of HandR business. If we go by this figure of stock as representing the consideration for the transfer of stock in trade as against its book value, there results a loss of Rs. 2.10 crore which the assessee is claiming as deduction as per table reproduced above. The Assessing Officer has computed income of Rs.3.28 crore from the transfer of stock by relying on the decision of the Hon'ble Summit Court in the case of A.L.A Firms (supra), as against a claim of loss by the assessee. This judgment has been pressed into service by the AO to drive home the point that the inventories at the time of closure of business should be valued at the market rate, which he computed at Rs. 4.43 crore, by adding mark up to the book value of inventories. The crux of the Assessing Officer's opinion is that the inventories should be valued by applying the market rate in view of the judgment of Hon'ble Supreme Court in the case of ALA Firm (supra). Per contra, the ld. AR strongly urged that the correct judgment to be applied in the facts and circumstances of the present case is Sakthi Trading Co. VS. CIT (2001) 250 ITR 871 (SC) and not A.L.A. Firm (supra) which has been wrongly followed by the authorities below.
23. We would examine the facts and ratio of A.L.A Firm VS. CIT (1991) 189 ITR 285 (SC), which forms the bedrock of the decision of the authorities below. The assessee in that case was a partnership firm carrying on in Malaya a money lending business and, as part of and incidental to the said business, a business in the purchase and sale of house properties, gardens and estates. It was reconstituted under a deed dated March 26, 1960. The firm's accounts for the year 1960- 61, which commenced on April 13, 1960, would normally have come to a close on or about April 13, 1961. The firm closed its accounts as on March 13, 1961, with effect from which date it was dissolved. Along with its income-tax return for the assessment year 1961-62, the assessee filed Profit and loss account in which a sum of $ 101,248 was shown as "Difference on revaluation of estates, gardens and house properties" on the dissolution of the firm on March 13, 1961. However, in the memo of adjustments for income-tax purposes, the above sum was deducted on the ground that it was not assessable either as revenue or capital. A statement was also made before the Officer that partner Ramanathan Chettiar forming one group and the other partners forming another group were carrying on business separately with the assets and liabilities that fell to their shares on the dissolution of the firm. For the subsequent assessment year 1962-63, the assessee filed a return showing nil income along with a letter pointing out that the firm had been dissolved on March 13, 1961. The Income-tax Officer opined that the revaluation difference of $ 101,248 should have been brought to tax in the assessment year 1961-62. He called for the basis for the valuation and also for the assessee's objections. The assessee sent a reply stating that no profit or loss could be assessed on revaluation of assets. Action u/s 147 was taken for the A.Y. 1961-62 and a sum of Rs. 1,58,057 (equivalent of $ 101,248) was assessed as income. The assessee remained unsuccessful before the Appellate Assistant Commissioner and the Appellate Tribunal and the Hon'ble High Court. The Hon'ble Supreme Court observed that the principle of valuing the closing stock of a business at cost or market price at the option of the assessee is a principle that would hold good only so long as there is a continuing business and that where a business is discontinued, whether on account of dissolution or closure or otherwise by the assessee, then the profits cannot be ascertained except by taking the closing stock at market value. It was also noticed that the settlement of account of partners must not be on a notional basis but on a real basis, that is every asset of the partnership should be converted into money at its market value and the account of each partner should be settled on that basis. It was, therefore, held that in order to arrive at the correct picture of the trading results of the partnership on the date when it ceases to function, the valuation of the stock in hand should be made on the basis of the prevailing market price. Once this principle is applied and the stock-in-trade is valued at market price, the surplus, if any, has to get reflected as the profits of the firm and charged to tax.
24. The ld. AR argued that the authorities below were not justified in applying the judgment in the case of A.L.A. Firm (supra), which was not germane to the issue under consideration. He strongly accentuated on the judgment in Sakthi Trading Co. VS. CIT (2001) 250 ITR 871 (SC) to buttress his contention that the stock was not required to be valued at market price.
25. Let us examine the facts of Sakthi Trading Co. (supra) in which the assessee a registered firm with six partners was dissolved on February 6, 1984 due to death of one partner. The said firm was reconstituted with effect from the next day, that is, February 7, 1984, with the remaining five partners. The Commissioner of Income-tax made an order under section 263 of the Income-tax Act, 1961, as according to him the assessment order made by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue in valuing the stock in trade as on February 6, 1984 on the basis of cost or market rate, whichever is lower. Relying upon the decision of the Madras High Court in A. L. A. Firm v. CIT  102 ITR 622, the Commissioner of Income-tax came to the conclusion that the Income-tax Officer ought to have valued the closing stock at its market rate as on February 6, 1984. He, therefore, set aside the assessment order and directed the Income-tax Officer to pass a fresh order. The Tribunal set aside the revision order by holding that if on the dissolution of a firm, the business is also discontinued and the value of the stock realized, it may be possible for the ITO to insist that the value realized shall be taken as the value of the closing stock instead of any notional value on the regular principle of cost or market value, whichever is less. But where the business of the firm is continued, then the ratio in A.L.A. Firm (supra) cannot apply and as such the stock cannot be valued at market price. The High Court answered the question in favour of the Revenue. When the matter came up before the Hon'ble Supreme Court, it was observed that that the business of the firm was not discontinued. It noticed that in A. L. A. Firm's case (supra), the Supreme Court was considering the question of valuation of closing stock at market value in a case where there was dissolution and also discontinuance of the business of the firm. As in the present case, albeit there was dissolution on account of the death of one of the partners, the Hon'ble Supreme Court noticed that there was no discontinuance of the business and hence the view taken by the tribunal was correct.
26. The position which emerges on a parallel reading of the above discussed two decisions rendered by the Hon'ble Apex Court is that where a business is discontinued, whether on account of dissolution or closure or otherwise by the assessee, then the profit cannot be ascertained except by taking the closing stock at market value. If however, the business of the firm is not discontinued but there is dissolution of the firm due to death of the partner or otherwise, and the business is continued by the reconstituted firm, then the stock need not be valued at market price in preference to the regular method of valuation. Continuation of the business by the firm itself is a guiding criterion. Where the business is discontinued by the firm, then stock is invariably required to be valued at market price. If however, the business is continued by the firm then the stock should be valued as per the regular method of valuation irrespective of the fact that there was a change in constitution or dissolution or otherwise. The decisive factor is the continuation of business by the firm itself.
27. When we advert to the facts of the instant case, it comes to the fore that the business of HandR unit with all its assets including stock in trade was transferred by the assessee to Symrise Ltd., which is an altogether a different concern. Accordingly, all the ties between the assessee company as owner and the business were ceased. In such a situation, it is difficult to hold that the case of the assessee is covered by the judgment in the case of Sakthi Trading (supra) as has been contended by the ld. AR. After dealing with this argument raised by the ld. AR, we are left with no other argument on behalf of the assessee to consider. Accordingly we are left with the view taken by the authorities below that the case of A.L.A. Firm (supra) shall govern the facts of the present case as the assessee discontinued the business of HandR unit, thereby necessitating the valuation of stock at market price.
28. Once again coming to the core of the judgment in A.L.A. Firm (supra), we find that where a business is discontinued, whether on account of dissolution or closure or otherwise by the assessee, then the profits cannot be ascertained except by taking the closing stock at market value. It is evident that the reference in this case is to the valuation of stock at market value and not on some hypothetical value computed mechanically by applying a particular gross profit rate. Adverting to the facts of the instant case we find that the assessee agreed to sell the assets of its HandR unit including stock in trade for a total sum of Rs. 7.12 crore. Out of such total consideration, the AO has assigned a sum of Rs1.18 crore as the sale consideration received by the assessee towards stock in trade, which fact has not been disputed by the assessee. It is further relevant to note that the AO computed the market value of stock in the assessment order for the A.Y. 2004-05 by applying the gross profit rate of 36.50% for that year. He, however, made addition in the year relevant to the A.Y. 2003-04 by holding that the transaction of transfer of stock in trade of HandR business along with assets took place in such earlier year. After reopening the assessment, the addition in question was made in the earlier year by adopting the figure from the assessment order for the A.Y. 2004-05.
29. We have held above that the transaction of transfer of HandR business including stock in trade actually took place on 30.09.2002, which is relevant to the A.Y. 2003-04, thereby approving, in principle, the view taken by the AO of the transaction of transfer of HandR business taking place in such earlier year. Now the question is about the computation of profit or loss from such transaction. We find that there are two major reasons necessitating the rejection of the opinion of the AO as upheld by the ld. CIT(A) on this count. First is that the calculation of market value of the stock at Rs.4.43 crore on the date of transfer of such stock is not correct and second, even if such a value is presumed to be correct, still no addition can be eventually made.
30. As far as the first reason goes, it is seen that the AO applied the GP rate for the A.Y. 2004-05 for valuing the stock in trade for the A.Y. 2003-04 as on the date of transfer, which patently is unsustainable. Even if the AO is presumed to be correct that stock is to be valued at market value on the date of transfer of business on 30.09.2002, still the actual price of the stock realized, that is, Rs 1.18 crore will have to be considered as market value of the stock on that date. The authorities below have no where held that such value of stock actually realized by the assessee is concocted or in any manner does not represent its true market price.
31. The case of A.L.A. Firm (supra) should be seen in the light of its own facts. The question about the difference in valuation of stock arose as there was evidence to show that the market price of the stock was more than that recorded in its books. This fact is noticeable from that assessee recording higher market value in its books by showing certain profit on revaluation of stock but choosing to claim it as not taxable. It was under such circumstances that the value so computed by the assessee itself was held to be the market value of stock as on the date of dissolution. On the contrary, we find that there is no such material available in the facts of the instant case to show that the market value of stock was more than what was actually realized from the buyer of the HandR business. The ld. AR stated that it was only left over stock, which was correctly valued by both the parties to the agreement at its market rate. This contention has not been controverted by the ld. DR. When a sum of Rs 1.18 crore has been considered as the market value of the stock and also realized from the buyer, we fail to understand as to how a different market value can be perceived on a mathematical exercise. Before discarding the value received by the assessee for stock in trade, it was for the Revenue to show that the market value of the stock was more than the one which was actually realized from the buyer pursuant to the agreement. Both the transferor and transferee companies are unrelated to each other. It is not a case of the AO that there was some colorable arrangement between two independent parties to the agreement as the genuineness of the agreement has not been questioned. In such circumstances, the only conclusion which can be logically drawn is that the assessee transferred its stock at the market value recorded in the agreement at Rs. 1.18 crore. When the transferee company has paid total sale consideration of Rs. 7.12 crore, which includes a sum of Rs. 1.18 crore towards the value of inventories, then it is beyond our comprehension as to how the Assessing Officer can presume the market value of such inventories at Rs. 4.43 crore without any cogent reason.
32. The second reason for not approving the stand point of the authorities below is that the transfer of HandR business including stock in trade took place on 30.09.2002. The AO has computed the market value of stock at Rs.4.42 crore as on the date of transfer and as such made addition of Rs.3.28 crore. In this exercise, the AO lost sight of an important factor. He was computing total income of the assessee for the year ending 31.03.2003. Even if we presume that such incorrect figure should be considered as the correct market value of the stock as on the date of transfer of stock on 30.09.2002, then we will have to see the actual value realized on the transfer of such stock to Symrise Ltd. It is not possible to make addition of Rs.3.28 crore by taking the market value of stock transferred as on the date of transfer without considering the second part of the transaction, being the transfer of stock at actual price realized, which event also took place in the relevant year. When we consider the actual sale price of stock at Rs.1.18 crore, it comes to the fore that there is net loss as claimed by the assessee on the composite transaction of firstly valuing the stock at market price on 30.09.2002 and then its sale during the year. The AO considered only first part of the transaction overlooking the second part, which also ought to have been considered. We, therefore, overturn the impugned order on this issue by which the Assessing Officer's computation of income of Rs. 3.28 crore from the transfer of inventories was accepted by the ld. CIT(A).
33. In the result, the appeal is partly allowed.
34. First ground of the appeal regarding initiation of reassessment proceedings was not pressed by learned AR. The same is accordingly dismissed.
35. The second issue is against the determination of income at Rs.3.28 crore on account of transfer of inventories of HandR Business as chargeable to tax under the head âCapital gains'. The assessee has also challenged the considering of transaction on transfer of inventories of HandR Business in this assessment year as against A.Y. 2004-05 claimed by it.
36. These issues have been dealt with by us supra in the order for the A.Y. 2004-05. We have held that the computation of income of Rs. 3.28 crore is wrong and there should be business loss of Rs. 2.10 crore on account of transfer of inventories of HandR Business. We have also held that the transaction is required to be considered in the previous year relevant to the A.Y. 2003-04.
37. Next issue in this appeal is against the consideration of the amount of profit or loss from the transaction of transfer of stock of HandR business under the right head. The claim of the assessee is that it should be considered under the head âProfits and gains of business or profession' as against the CIT(A) echoing the AO's decision on its inclusion under the head âCapital gains'. It has been noticed above that the AO took item wise value of assets (both fixed and current) of the HandR business. He considered all other assets of HandR business as having been transferred by the assessee at book value. In that view of the matter, it was held that no chargeable income arose from the transfer of other assets. Thereafter, he computed income from the transfer of stock in trade by assigning some market value to it. The resultant profit was held to be chargeable to tax as capital gain.
38. Now the question arises as to whether any profit or loss from the transfer of stock in trade can be considered under the head âCapital gains'. There is hardly any need to wander here and there in search of reply to this question. The answer is self evident. Section 45, the substantive provision of the income under the head âCapital gains', unequivocally provides through sub-section (1) that:
"Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections ......, be chargeable to income-tax under the head âCapital gains', and shall be deemed to be the income of the previous year in which the transfer took place."
Thus it is manifest that profit or gain chargeable under the Chapter IV-E can arise only on the transfer of capital asset. Section 2(14) defines âcapital asset' to mean:
"property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-- (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession .....".
When we consider the provisions of section 45 in juxtaposition to section 2(14), it becomes abundantly clear that stock in trade is not a âcapital asset'. Resultantly, no profit or gain from the transfer of stock can be charged to tax under the head âCapital gains'. The view canvassed by the lower authorities on this issue, is therefore, set aside.
39. We sum up our conclusion that the loss from the transfer of stock amounting to Rs.2.10 crore is deductible under the head âProfits and gains of business or profession' in relation to the A.Y. 2003-04.
40. Other grounds, about the initiation of penalty proceedings and levy of interest u/s 234D were not pressed. Ground about charging of interest u/s 234B and 234C is consequential.
41. In the result, the appeal is partly allowed.
Order pronounced on this 13th day of February, 2013.