1. The Income-tax Appellate Tribunal, Delhi Bench 'B', hereafter referred to as 'the Tribunal', has referred the following three questions for the opinion of this court:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that a part of the consideration received by the assessee on the transfer of the business as a going concern was referable to the plant and machinery ?
2. Whether, on the facts and in the circumstances of the case, profit under Section 41(2) on the transfer of such plant and machinery was rightly assessed ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee had no right of appeal against the levy of interest under Section 215 of the Income-tax Act, 1961 ?'
2. Question No. 3 stands covered by the decision of a Full Bench of this court in CIT v. Geeta Ram Kali Ram : 121ITR708(All) . In view of that decision the Tribunal was right in holding that the assessee had no right of appeal against the levy of interest under Section 215 of the I.T. Act, 1961, hereafter 'the Act '.
3. The material facts which have given rise to questions Nos. 1 and 2may now be stated. The respondent-assessee, M/s. Chandra Katha Industries, Najibabad, a partnership firm, carries on business in manufactureand sale of katha. For the assessment year 1972-73, the correspondingaccounting period for which was August 1, 1970, to July 31, 1971, theassessee returned an income of Rs. 1,00,000 which was arrived at in thefollowing circumstances. It had entered into an agreement to sell all itsassets and liabilities to M/s. Subhash Chand Dinesh Chand Katha & AlliedIndustries Private Ltd. on July 31, 1970, i.e., the last date of thepreceding accounting year. The consideration was agreed to be the bookvalue of the assets and liabilities, the details being as under :
Plant & machinery
Stores,stock-in-trade, book debts, investments, cash in hand, etc.
Less liabilities :
Loans due to banks, others, development rebate,etc.
4. This agreement was followed by a sale deed executed on August 1, 1970, in respect of land, building, plant and machinery, the consideration being, as noted above, Rs. 5,84,704.50 ; the book value of plant and machinery transferred was Rs. 4,08,278 and thereby the assessee earned a profit of Rs. 1,00,000 on the balancing charge and this amount was disclosed by it in its return as income under Section 41(2) of the I.T. Act. Subsequently, by a letter dated April 26, 1973, the assessee claimed that this amount was not taxable, since no such profit had accrued to it. It was also contended that the assessee had ceased to do any business on and from August 1, 1970, and hence there was no entity on which tax could be levied for this assessment year. The ITO did not accept these contentions and brought to tax the said amount of Rs. 1,00,000. The assessment was made in the status of an unregistered firm.
4. The assessee appealed and on its behalf the following contentions were raised before the AAC : (a) the assessee's business stood transferred as a going concern on the very first day of the relevant accounting year and thereafter the firm did not carry on any business. There could be no partnership without a business. If at all, the assessment could have been made in the status of an association of persons but that had not been done. Apart from that the members of this association having been assessed on their share in the profits of Rs. 1,00,000, a separate assessment on this association of persons also could not be made; (b) the benefit of profit under Section 41(2) of the Act having been realised by persons as individuals, the assessment of this amount in the hands of the firm was bad in law ; (c) the transaction was not a sale but only an exchange because the consideration was paid by allotment of shares of the vendee-company to the partners of the assessee-firm and acknowledgment of indebtedness ; and (d) that it was a case of transfer for a slump price and no particular sale consideration could be attributed to any particular asset. These sub-missions did not find favour with the AAC and he dismissed the appeal.
5. Still aggrieved, the assessee took up the matter in further appeal to the Tribunal. The same submissions were reiterated on its behalf before the Tribunal but they were not accepted and the appeal was dismissed. Now, at the assessee's instance, the questions, indicated above, have been referred to this court.
6. Two submissions were made before us on behalf of the assessee by its learned counsel, Sri R.K. Gulati : firstly, since the transaction was of a business as a whole, no part of the consideration could be attributed to the plant and machinery and it was only for purposes of executing a document of sale and stamp duty that the consideration of Rs. 5,84,704.50 was mentioned in the deed. The intention was to transfer the business as a whole and the net consideration was arrived at after setting off the liabilities from the book value of the different items transferred and hence Sub-section (2) of Section 41 of the Act will not be attracted. Sri Gulati also urged that it was a sale for a slump price also and for that reason also no part of the price could be attributed to any one particular item. It was also claimed that the consideration for the transfer was paid by the allotment of shares in the vendee-company to the partners of the firm. Thus, it was a case of exchange and not of sale and for that reason also Section 41(2) of the Act was not attracted. The second contention urged was that the transaction having taken place on 31st of July, 1971, i.e., during the accounting year preceding to the one under consideration, the profit, if any, could not be taxed in the year under consideration.
7. We shall take up these contentions one by one. Chapter IV of the Act deals with computation of total income. Section 14 enumerates the six heads under which the income of an assessee falls to be charged. Head D provides for 'profits and gains of business or profession'. The provisions for computing the income under this head are contained in Sections 28 to 44D. Section 41 enumerates receipts which are deemed to be income under the head 'Business' or 'Profession'. Sub-section (1) of this section provides that where an allowance or deduction is granted in any year in respect of a loss, expenditure or trading liability and subsequently during any previous year the assessee received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure, or the assessee is benefited by the remission or cessation of the trading liability, the amount received or the amount of the liability which is extinguished is chargeable as business profits of that previous year. Sub-section (2) provides for the balancing charge. It reads :
'Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture, became due :
Provided that where the building sold, discarded, demolished or destroyed is a building to which Explanation 5 to Section 43 applies, and the moneys payable in respect of such building, together with the amount of scrap value, if any, exceed the actual cost as determined under that Explanation, so much of the excess as does not exceed the difference between the actual cost so determined and the written down value shall be chargeable to income-tax as income of the business or profession of such previous year. Explanation.--Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year.'
8. The principle underlying this provision is that where a building, machinery, plant or furniture owned by the assessee is sold, discarded, demolished or destroyed, the depreciation allowance and the balancing allowance under Section 32(1) would recoup to the assessee the entire capital loss on the asset. If the assessee is able to recover more than the written down value out of the 'moneys payable' in respect of the asset together with the amount of scrap value, if any, a balancing charge is levied by this sub-section on the excess recovered to the extent of the total of depreciation allowances granted in the past. In other words, the Revenue takes back what it had given by way of depreciation allowance in the earlier years. Thus, to attract this provision, there must be sale, discarding, demolition or destruction ; such sale, discarding, demolition or destruction should be of a building, machinery, plant or furniture. Such asset should be owned by the assessee and the moneys payable in respect of such asset together with the amount of scrap value, if any, should exceed the total of the depreciation granted on such asset in the past. If it is so, the excess to the extent of the total of depreciation allowances granted in the past is deemed to be income liable to tax. For our purposes what is required to be seen is the scope of the expressions 'sold' 'moneys payable' and the 'asset sold'. The word 'sold' which occurs in this sub-section includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force and the expression 'moneys payable 'includes the sale price or insurance, salvage or compensation moneys as provided in Clause (iii) of Sub-section (1) of Section 32 read with the Explanation. In our opinion, an analysis of these provisions furnish a clear answer to the two contentions urged on behalf of the assessee. Here, there was a sale of all the assets and liabilities of the assessee including land, building, plant and machinery. In respect of land, building, plant and machinery, which constitutes immovable property, the sale was effected by a sale deed executed on August 1, 1970, i.e., within the previous year under consideration. The agreement to sell which was executed on July, 31, 1970, i.e., which fell within the preceding accounting year, would not create any right in favour of the vendee in respect of immovable property. In respect of immovable property of the value exceeding Rs. 100 unless the transaction is evidenced by a written instrument duly registered, the transfer does not become complete in the eye of law. Section 53A of the Transfer of Property Act would not be attracted because it has not been found by the Appellate Tribunal that the possession over the immovable property was transferred as a result of the agreement to sell. At any rate, such transaction would become complete in the eye of law only when a proper sale deed is executed and registered.
9. The Revenue is seeking to bring to tax the profit which the assessee earned on the sale of plant and machinery only. The consideration represented the book value of this asset. It was in excess of the written down value by Rs. 1,00,000. There is no dispute regarding these facts. There is no question of artificially attributing any part of the consideration to any one particular item of the asset sold. In the schedule attached to the agreement the book value of the different assets was separately specified, and there is no question of entering into an exercise of finding out the consideration of the different items separately. Apart from this, it was certainly not a case of an exchange because it has been found by the Tribunal that the amount of consideration was agreed to be credited to the account of the vendors in the books of the limited company. In other words, payment of consideration was made by passing debit and credit entries in the books of the company in the accounts of the vendors. There is no mention in the agreement or the sale deed that the payment of consideration was to be made by the issue of shares of the company in favour of the vendors.
10. It is also not correct to say that the money became payable under the agreement. Whatever amount is paid under an agreement to sell is only by way of earnest money. Just as the vendee cannot claim title to the property on the basis of the agreement to sell, the vendor does not acquire right to claim payment of the consideration from the vendee. If and when the vendee files a suit for specific performance, in case the vendor refuses to execute the sale deed, the question of payment of consideration by him arises. Apart from this as provided in the Explanation to Sub-section (4) of Section 41, the expression 'moneys payable' and the expression 'sold' in Sub-sections (2) and (3) shall have the same meaning as in Sub-section (1) of Section 32. We have already mentioned above that under the Explanation to Clause (iii) of Sub-section (1) of 32, 'moneys payable' in respect of any building, machinery, plant or furniture includes any insurance, salvage or compensation moneys payable in respect thereof. Where the building, machinery, plant or furniture is sold, the price for which it is sold, is the money payable. Clause (2) of this Explanation contains the definition of the word 'sold'. It says that the expression 'sold' includes a transfer by way of exchange or a compulsory acquisition. In other words, a transfer by way of exchange now stands included within the scope of the expression 'sold'. It is not necessary to refer to the meaning given to the word 'paid' in Clause (2) of Section 43. The word is 'payable' and when there is a specific meaning of this word given in the Act itself, it would not be correct to treat it as co-extensive with the word 'paid'. Any how not much turns on it because it is not disputed that the Revenue is seeking to bring to charge the excess of price of plant and machinery over its written down value, the book value being in excess of the written down value by Rs. 1,00,000.
11. Further, in view of the Explanation to Sub-section (2) of Section 41 of the Act, the fact that the business, for the purpose of which this plant or furniture was being used, was no longer in existence in the relevant previous year, would not make much of a difference, because under this Explanation, where the moneys payable in respect of such asset become due in a previous year in which the business or profession for the purpose of which such plant or furniture was being used, is no longer in existence, the provisions of this sub-section shall apply as if the business or profession is in existence in that previous year. This provision, thus, deems the existence of the business even though factually it may not have been there.
12. Sri Gulati placed reliance on certain decisions in support of his contentions. In our opinion, they are all distinguishable. The first case relied upon is that of CIT v. Mugneeram Bangur & Co. : 57ITR299(SC) . The facts of that case were that the assessee, a partnership firm, carried on business of buying land, developing it and then selling it. Pursuant to an agreement, it sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm. The company undertook to discharge all debts and liabilities, development expenses, and liability in respect of deposits made by the intending purchasers. The consideration of Rs. 34,99,300 was paid by the allotment of shares of the face value of that very amount to the partners or their nominees. The schedule to the agreement indicated the details of the consideration and one such item was goodwill, the value of which was taken at Rs. 2,50,000. The Revenue sought to assess this amount as the excess value of the land.
13. It would be seen that the facts of that case differ from those of the present case in essential particulars. There, the vendee-company was promoted by the partners of the vendor-firm. The consideration was paid by the allotment of shares of the face value representing the consideration to the partners or their nominees. The Revenue did not seek to bring to tax any balancing charge, i.e., the excess between the actual cost and the written down value. It was not in respect of a building, machinery, plantor furniture which had been used by the assessee for the purposes of bust-ness and in respect of which depreciation has been allowed to it. It was in respect of land which was the assessee's stock-in-trade. That decision, therefore, cannot be applied to the present case.
14. As many as four questions had been referred by the Income-tax Appellate Tribunal to the High Court. Out of those four questions the Supreme Court gave its answers to question No. 3 only, which was :
'Whether, on the facts and in the circumstances of the case, by the sale of the whole business concern it could be held that there was taxable profit in the sum of Rs. 2,50,000 ?'
15. The court laid down at pp. 305-306 :
'It seem to us that in the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land as on the date of sale. As the vendors were transferring the concern to a company, constituted by the vendors themselves, no effort would ordinarily have been made to evaluate the land as on the date of sale. What was put in the schedule was the cost price, as it stood in the books of the vendors. Even if the sum of Rs. 2,50,000 attributed to goodwill is added to the cost of land, it is nobody's case that this represented the market value of the land.'
16. We do not think that in every case where a concern carrying on the business is sold as a whole it can be assumed that the transfer is for a slump price. In that case it had been found as a fact that the vendors had incurred debts and liabilities for development expenses and hence transfer on book value was treated as transfer for slump price. Further, the transfer was by the vendors to a company which they themselves had promoted. Such facts have not been found in the present case. This decision, therefore, is of no help to the assessee.
17. We may refer to a later decision of the Supreme Court which would be certainly applicable to the instant case. In CIT v. B.M. Kharwar : 72ITR603(SC) , it was laid down that it is now well settled that the taxing authority is first bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. However, the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. It was further laid down that where the machinery of a factory belonging to a firm is transferred to a private limited company, assuming that thereby readjustment of the business relationship was intended, the liability to be taxed in respect of the readjustment had to be determined according to the strict legal form of the transaction. The company was a legal entity distinct from the partnership under the general law. Transfer of the machinery was by the firm to the company ; and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. If the transaction results in excess realization over the written down value of the machinery to the firm, the liability to tax, if any, arising under the Act could not be avoided merely because, in consequence of the transfer, the interest of the partners in the machinery is substituted by an interest in the shares of the company which owned the machinery.
18. Apart from this, as noted above, now the expression 'sold' includes a transfer by way of exchange also. Therefore, even if in the case of an exchange, any excess realisation over the written down value of the plant or machinery results, it is liable to be taxed under Section 41(2).
19. In support of his contention that the transfer had been effected by the agreement to sell itself and the execution of the sale deed was only a formal matter, reliance was placed on a Division Bench decision of this court in Addl. CIT v. U. P. State Agro Industrial Corporation Ltd. : 127ITR97(All) . We have already given our reasons for not agreeing with the submission. This decision also does not support it. There the Corporation claimed depreciation under Section 32 of the Act in respect of the buildings, possession of which had been transferred to it by the State Govt. No formal instrument of transfer had been executed and for that reason the ITO and the AAC had disallowed the assessee's claim. The Appellate Tribunal took a different view and allowed the claim but in respect of buildings only and not land. On a reference, the view taken by this court was that in pursuance of the agreement the State Govt. had put the Corporation in possession over the disputed properties. The Corporation had performed its part of the contract and it was only for the State Govt. to execute a registered sale deed and convey the entire title in the property to the Corporation. Since under the agreement the State Govt. had not reserved to itself any rights over the property, which it had agreed to convey to the Corporation, and the latter was free to deal with it in any manner it liked, it was entitled to depreciation under Section 32 on the buildings which it had purchased from the State Govt. It would be seen that the question for consideration in that case was entirely different and that decision has no application to the present case.
20. Lastly, according to Sri Gulati, the decision of the Gujarat High Court in Artex Manufacturing Co. v. CIT : 131ITR559(Guj) , is closer to his case.We do not agree. What has been held there is that on the conversion of a firm as a going concern into a company, if at all there is any surplus, in the sense of an excess of the consideration for the transfer of the business of the undertaking, within the meaning of Section 45 of the Act, there would be a capital gain and such capital gain would be taxable in the hands of the assessee-firm. There cannot be any question of any balancing charge arising under Section 41(2). It has been laid down that a balancing charge arises only when any building, plant, machinery or furniture is sold or transferred. It would be seen that this decision helps the Revenue and not the assessee. As noted above, the Revenue is seeking to tax the excess realization over the written down value in respect of the plant and machinery. It is not seeking to tax any excess of the consideration for the transfer of the business on conversion of a firm into a company. Both questions Nos. 1 and 2, therefore, have to be answered in favour of the Revenue.
21. We, therefore, answer all the three questions in the affirmative, in favour of the Revenue and against the assessee. The Revenue is entitled to costs which we assess at Rs. 250.