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 10th 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 assessment completed on the respondent assessee under Section 158 BC of the Income Tax Act (hereinafter referred to as the Act for short) for the block period 01/04/1996 to 18/12/2002. During search, the Department unearthed sale agreement between the respondent assessee and two others for the sale of a petroleum outlet as a going business concern for a total consideration of Rs.82 lakhs, out of which Rs.5 lakhs was retained by the purchasers to be paid after the dealership is transferred by the petroleum Company to the purchasers. It is the admitted fact that the assessee was carrying on the business as dealer of the Indo-Burma Petroleum Company Limited at a place called Kothamangalam in Ernakulam district. The business concern as a whole with land and building, improvements, fittings and even electricity and telephone connections etc. was sold ITA No.195/2010 -2- by the respondent assessee as a going concern to the purchasers with effect from 27/05/1998. The transaction is reflected in the sale agreement dated 23/09/1998 and in another agreement dated 20/12/2000. Since the sale with effect from 27/05/1998 falls within the block period i.e. 01/04/1996 to 18/12/2002 for which assessment was made pursuant to search made on 18/12/2002, the tax liability on capital gains on the sale of the petroleum outlet as a going concern was considered, and for making assessment the Assessing Officer bifurcated the sale consideration of Rs.82 lakhs between the value of land and building and the value of the dealership licence separately and assessed entire receipts towards capital gains. When the assessee filed appeal challenging the assessment on capital gains on the sale of the petroleum outlet, the first appellate authority held that the transaction is really sale of business which attracts tax on capital gains only by virtue of the later introduced amendment in Section 55(2) of the Act, by Finance Act, 2002 with effect from 01/04/2003. Since the sale in this case by way of execution of agreement, transfer of possession and receipt of consideration happened prior to the amendment in Section 55(2), the CIT (Appeals) allowed the appeal cancelling the ITA No.195/2010 -3- assessment on capital gains. On the second appeal filed by the Revenue, 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 counsel appearing for the Revenue and Shri.P.Balakrishnan, learned counsel appearing for the respondent assessee. 3. Before proceedings to consider the correctness or otherwise of the orders of the lower authorities, we should consider the relevant statutory provisions systematically introduced in the Act providing for assessment on the sale of business assets. None of the authorities have considered the scope of Sections 50B and 2 (42C) of the Act introduced by Finance Act, 1999 with effect from 01/04/2000, which provides for assessment on capital gains on “slump sale” defined under Section 2(42C) of the Act, for which a special scheme of assessment was provided under Section 50B of the Act. The provision next introduced was in Section 55(2) by Finance Act, 2002 with effect from 01/04/2003, which provides for determination of capital gains on sale of business with reference to “cost of acquisition”, the definition of which was introduced through the said amendment. On the face of it, the transaction involved in ITA No.195/2010 -4- this case, i.e. sale of petroleum outlet by assessee to other persons with land and building, equipments, fittings etc. as a going concern, that is sale “lock, stock and barrel”, is a slump sale falling under Section 2(42C) of the Act assessable under Section 50B of the Act which came into force with effect from 01/04/2000. Similarly, Section 55(2) of the Act defining “cost of acquisition” on the sale of right to carry on business was introduced by Finance Act, 2002 with effect from 01/04/2003. Since these provisions providing for levy of tax on capital gains on slump sale and on sale of right to carry on business were introduced in the Act after the relevant period during which the respondent sold the business as a going concern, certainly these provisions have no application and assessment could not be made under these provisions subsequently introduced in the statute. However, the question raised for our decision is whether the first appellate authority as well as the Tribunal rightly cancelled the assessment on capital gains treating the transaction just as sale of business which cannot be subject to tax for capital gains for any period prior to the introduction of amendment to Section 55(2) of the Act. The learned Senior counsel for the Revenue brought to our notice the admission made by the assessee in the course of search ITA No.195/2010 -5- that the sale consideration for right to carry on business, which was subject to approval by the petroleum Company which granted dealership licence to the respondent, was only Rs.5 lakhs and the balance Rs.77 lakhs out of Rs.82 lakhs represents sale consideration for the assets including land and building and equipments. Consideration received for transfer of business as such cannot be assessed during the block period, which is prior to the amendment to Section 55(2) of the Act. However the question is whether the sale consideration attributable to sale of land, building and other business assets could be assessed to tax on capital gains. 4. Learned counsel for the Revenue relied on two decisions of this Court, one is a Full Bench decision in Commissioner of Income Tax, Kerala v. Ramakrishnan, reported in 73 ITR 356 and another is a Division Bench decision in Commissioner of Income Tax v. F.X.Periera & Sons (Travancore) Pvt.Ltd. reported in 184 ITR 461, wherein this Court held that sale of business attracts tax for capital gains. Assessee's counsel, on the other hand, relied on the decision of the Supreme Court in Commissioner of Income Tax v. B.C.Sreenivasa Setty, reported in 128 ITR 294, and contended that prior to the introduction of the new definition on cost of acquisition ITA No.195/2010 -6- for assessing transfer of right to carry on business in Section 55(2) with effect from 01/04/2003, this position is covered by the decision of the Supreme Court above referred, and so much so, the CIT (Appeals) and the Tribunal rightly held that the consideration received for sale of business as a whole cannot be assessed to tax. 5. After hearing both sides and after going through the records and the orders of the lower authorities, we feel that the order of the CIT (Appeals), which is confirmed by the Tribunal, cannot be sustained for the simple reason that they have not considered the relevant provisions of the statute with reference to which the legality of the assessment should have been considered. In the first place, under the terms of sale agreement, and as admitted by the assessee in the sworn statement furnished under Section 132(4) pursuant to search it clearly stated that the consideration paid is for the sale of the land and building, equipments, electricity and telephone connections and also the business as a going concern, which is obviously subject to approval of transfer of dealership by the petroleum Company which granted dealership licence to the respondent assessee. The consideration for the transfer of the dealership licence separately agreed was only ITA No.195/2010 -7- Rs.5 lakhs and the same was in fact withheld by the purchaser on condition that the same will be paid to the assessee only on the petroeum Company approves the transfer of business. So much so, out of Rs.82 lakhs, Rs.77 lakhs represents sale consideration for transfer of land, building and equipments. There is no contention that the transfer was conditional or that the petroleum Company ever denied approval for transfer of dealership licence to the purchaser. In other words, the transfer of land and building and assets have been taken place pursuant to the agreement executed between the parties and payment made by the purchasers to the assessee. 6. The question in these circumstances, to be considered is whether the sale of the land and building and business assets and service installations like electricity and telephone connections attract tax on sale of capital assets for periods prior to the amendment to Section 55(2), which only introduces the new definition for "cost of acquisition" in respect of right to carry on business. In this context, we have to refer the relevant provisions of the Act, which in Section 2(14) defines "capital assets" as follows :- ITA No.195/2010 -8- "S.2(14) : "capital asset" means 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; ----- -----" What is clear from the above is that capital asset includes property of any kind held by an assessee whether or not connected with business or profession. This obviously means that business assets sold by the assessee is assessable to tax. In this case land, building, equipments and fittings in the petrol pump falls within the description of capital asset. 7. Section 50 provides for special provision for computation of capital gains in case of depreciable assets. What is provided under this Section is that capital asset is an asset forming part of block of assets in respect of which depreciation has been allowed under the Act, and since sale of the same attracts tax, the sale proceeds has to be assessed under the said provision of the Act. So much so, in our view, the value of land, building and depreciable assets are to be separately estimated and assessed for capital gains. However, the value of the licence, which constitutes consideration for sale of business, cannot be assessed to capital gains by applying ITA No.195/2010 -9- Section 55(2) in this case, as the said provision came into force after the sale was made by the assessee. 8. Learned counsel for the assessee contended that Section 50B which provides for assessment of capital gains on slump sale and Section 55(2) which provides for assessment of sale of right to carry on business, are independ charging Sections, and therefore the sale of land and building including depreciable assets forming business assets cannot be treated separately for assessment. We are unable to accept this contention because Section 50B was introduced to provide for special provisions for assessment in the case of slump sale, which is nothing but sale of an industrial unit or a business enterprises as a whole without bifurcating consideration on each and every item. The fact that special provision was introduced for assessment of capital gains on slump sale with effect from a particular date does not mean that the sale of assets including depreciable assets for the period prior to introduction of the provision for assessment of capital gains on slump sale cannot be assessed under other provisions of the Act. So much so, in our view, so long as items sold answer the description of “capital asset” within the meaning the definition clause contained in Section 2(14) ITA No.195/2010 -10- of the Act, assessment of capital gains is permissible on the sale of such assets. However, after the introduction of Section 2(42C) and Section 50B, slump sale has to be assessed strictily in accordance with the provisions of Section 50B. In other words, until the special provision is introducted, land and building and depreciable assets are assessble under other provisons of the Act, particularly Section 50. In view of our above findings, we are of the view that the orders of the Tribunal confirming the orders of the CIT (Appeals) is not sustainable. The sale of the capital assets like land, building and depreciable assets are assessable separately. However, this could be done by bifurcating the sale consideration in a realistic manner between the value attributable to land, builiding and fixed assets and the value fixed for the transfer of the business, which is essentially the transfer of dealership licence by the manufacturing Company. It is stated that Rs.5 lakhs was retained by the purchasers towards consideration for the transfer of licence from the assessee. However, it is not known whether this is spent by the assessee to get the licence or whether it is an estimated amount fixed between the parties. In any case, the eligibility for a ITA No.195/2010 -11- petroleum dealership licence itself is availability of all the infrastructural facilities and equipments and experience. Therefore, it is for the Assessing Officer to examine, after giving opportunity to the assessee as to whether what exactly is the consideration i.e. attributable for transfer of the business rights as an intangibel asset including licence. We, therefore, allow the appeal by setting aside the orders of the Tribunal and the CIT (Appeals) and restore the matter back to the Assessing Officer for considering assessment on the value of land and building and depreciable assets as stated above. (C.N.RAMACHANDRAN NAIR, JUDGE) (BHABANI PRASAD RAY, JUDGE) jg