[2008] 15 S.C.R. 556

PNB FINANCE LTD. """'-- v ..

COMMISSIONER OF INCOME TAX-I, NEW DELHI

(Civil Appeal No. 3721 of 2002)

NOVEMBER 6, 2008 B

[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]

Income Tax Act, 1961 - s.49 - Assessment Year 1970- 71 - Compensation received by Banking Undertaking on its c transfer under Banking Companies Act of 1970 - Taxability of - Held: The Banking Undertaking, inter alia,· included intangible assets like goodwill, tenancy rights, manpower and value of banking licence - Compensation was not allocable item-wise - Hence, it was not possible to compute capital

D gains and, therefore, the amount of compensation received by the Banking Undertaking on its transfer was not taxable under s.45 - Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

E The Banking Undertaking in question received compensation on its .transfer under the Banking Companies {Acquisition 1 and Transfer of Undertakings) Act, 1970.

The question which arose for consideration in the ..

F present appeal is whether transfer of the said Banking Undertaking in the facts and circumstances of the case, which concerned the Assessment Year 1970-71, gave rise to capital gains taxable under s.45 of the Income Tax Act, 1961.

G Allowing the appeal filed by the assessee, the Court

HELD:1.1. For applicability of s.45, three tests are .,.__

required to be applied. The first test is that the charging section and the computation provisions are inextricably H 556

PNB FINANCE LTD v. COMMISSIONER OF INCOME 557

TAX-I, NEW DELHI

linked. The charging section and the computation A provisions together constitute an integrated Code.

Therefore, where the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is s.45. That section contemplates that any surplus

accruing on transfer of capital assets is chargeable to tax in the previous year in which transfer took place. In this case, transfer took place on 18.7.1969. The second test

is the test of allocation/attribution. This test applies to a slump transaction. The object behind this test is to find c out whether the slump price was capable of being attributable to individual assets, which is also known as item-wise earmarking. The third test is that there is a conceptual difference between an undertaking and its components. Plant, machinery and dead stock are 0 individual items of an Undertaking. Business Undertaking can consist of not only tangible items but also intangible items like, goodwill, man power, tenancy rights and value of banking licence. However, the cost of such items (intangibles) is not determinable. [Para 17]

[564-H; 565-A-E] E

1.2. In the present case, the Banking Undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, manpower and value of banking licence.

On facts, item-wise earmarking was not possible. The F compensation (sale consideration) of Rs. 10.20 er. was not allocable item-wise. For the aforestated reasons, on the facts and circumstances of the present case, which concerns assessment year 1970-71, it was not possible to compute capital gains and, therefore, the said amount G of Rs. 10.20 er. was not taxable under s.45 of the Income Tax Act, 1961. [Paras 17 and 18] [565-G-H; 566-A, B]

CIT v. Artex Manufacturing Co., {1997) 227 ITR 260, held inapplicable.

A CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294; CIT v.

Mugneeram Bangur & Co. (1965) 57 ITR 299 and CIT v.

Electric Control GearManufacturing Co. (1997) 227 ITR 278, referred to.

Case Law Reference:

(1997) 227 ITR 260 held inapplicable Para 11

(1965) 57 ITR 299 referred to Para 15

(1997) 227 ITR 278 referred to Para 16

(1981) 128 ITR 294 referred to Para 17

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3721 of 2002. o From the final Judgment and Order dated 27.4.2001 of the High Court of Delhi at New Delhi in ITR No.12 of 1979.

Ajay Vohra, Bhargava V. Desai, Kavita Jha, Sandeep S.

Karhail, Rahul Gupta and Reema Sharma for the Appellant.

E Mohan Parasaran, ASG., D.L. Chidananda, Gaurav Dhingra, Naresh Kaushik, B.V. Balaram Das for the Respondent.

The Judgment of the Court was delivered by

F S.H. KAPADIA, J. 1.This civil appeal is directed against the judgment of Delhi High Court in Income tax Reference under Section 256(1) of the Income Tax Act, 1961 ("1961 Act") for the assessment year 1970-71.

2. The issue which arises for determination in this civil G appeal is whether transfer of Banking Undertaking on the facts and circumstances of this case gave rise to taxable capital

/ ..

gains under Section 45 of the 1961 Act. .__

3. Punjab National Bank Ltd. was set up in 1895 in an area H which now falls in Pakistan. It was nationalized as Punjab

National Bank (PNB) by Banking Companies (Acquisition and A > Transfer of Undertakings) Act, 1970. On 19.7.1969 PNB Lt~. on nationalization vested in Punjab National Bank. PNB Finance Ltd. is the appellant herein. On nationalization jt received compensation of Rs. 10.20 er. This compensation was calculated on the basis of capitalization of last 5 years profits. 8 The said compensation was received during the accounting year ending 31.12.1969 corresponding to the assessment yea~ 1970-71.

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4. During the assessment year 1970-;:1, appellant had to compute capital gains under Section 48 by deducting from the c

sale con_sideration the cost of acquisition as increased by the' cost of improvement and expenses incurred in connection with the transfer. Under the law then prevailing, assessee could index the cost of acquisition by applying cost inflation index which became indexed cost of acquisition.

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5. Incidentally, it may be noted that by an amendment to, Section 508 inserted by the Finance Act, 1999 w.e.f. 1.4.2000, cost of acquisition is now notionally fixed in case of "slump" sale. Under the said arrangement, assessee is required to E draw up his Balance Sheet as on the date of transfer for its undertaking and net worth of that date is now required to be taken into account. Under the said amendment, net worth consists of written down value (WDV) of depreciable assets and the book value of the current assets minus liabilities taken over.

F i Therefore, after 1.4.2000 cost of acquisition is notionally fixed in case of slump sale. However, no such formuln existed during assessment year 1970-71. At that time, assessee had to deduct either cost of acquisition or fair market value as on 1.1.1954 from the sale price (compensation) of Rs. 10.20 er.

G [see Section 55(2)(i)]. This option was conferred on the assessee solely for its benefit. However, Section 55(2) only .. triggered if there existed the figures of "cost of acquisition" and

...&-.J "fair market value" as on 1.1.1954 so that the choice could be exercised. At that time, it was open to the assessee to contend H

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A that he would exercise the option only after both the figures of \-

original cost and fair market value of the asset as on 1.1.1954 ....(_ <

was available. In short, it is only after 1.4.2000 that computation machinery came to be inserted in Section 48 which deals with ;.-

mode of computation.

6. Any surplus on transfer of capital asset is chargeable to tax under Section 45 in the previous year in which the transfer took place (i.e. in this case on 18-.7.1969). This is the mandate of Section 45. The full value of consideration received by the

-~ assessee in this case was Rs. 10.20 er.

;/ c

7. A Return was filed in this case by the assessee showing an income of Rs. 2,03,364. In the covering letter with which the Return of Income was filed by the assessee it was noticed by the AO that the assessee had opted for having the value D ascertained of the banking undertaking as on 1.1.1954. The .----

letter was dated 30.9.1970. In para 5 of that letter, the assessee stated as follows: )-- "Assuming, while denying, that the provisions of Section

E 45 are applicable, the Company exercises its option for substitution of the fair market value of such Undertaking as on 1st January, 1954 in accordance with Section 49 & 50 of the Income Tax Act, 1961."

8. It was argued by the assessee before th~ AO that the F option under Section 55(2)(i) was to be exercised only if it was advantageous to the assessee. The assessee submitted that }'-

he had an option under Section 55(2)(i) of having the value of the undertaking ascertained either on the basis of historical cost of acquisition of the capital asset (banking undertaking) G or having its value ascertained as on 1.1.1954, whichever is higher but could not exercise it as the cost of acquisition in this case was not computable. In the alternative, appellantassessee herein submitted fair market value of the undertaking

~ . as on 1.1.1954. By letter dated 30.9.1970, assessee claimed '-'"-

H a capital loss. The AO held that since the assessee had

submitted its own computation of the fair market value of the A

~ undertaking as on 1.1.1954 the only question he was required -

to consider was the correctness of the figure of capital loss submitted by the assessee vide its covering letter dated 30.9.1970. In this connection, it may be noted that compensation of Rs. 10.20 er. was paid to the assessee from B which assessee claimed deduction of Rs. 17,22, 73,246 (market value of the undertaking as on 1.1.1954 fixed at Rs.

10,41,51,625 plus cost of improvement fixed at Rs.

~ 6,81,21,621). This is how the assessee contended that it had in the above transaction suffered a capital loss of Rs. 7.02 er. !C This calculation was not accepted by the AO who proceeded to hold on the basis of capitalization of last 5 years profits the capital gains of Rs. 1,65,34, 709 (see page 42 of the Paper Book).

9. Aggrieved by the decision of the AO, the matter was D

carried in appeal by the assessee to the Appellate Assistant

--'( Commissioner who by his order dated 16.10.197 4 came to the ' conclusion that, in this case, it was not possible to allocate the ,.

full value of the consideration received (compensation) amounting to Rs. 10.20 er. between various assets of the E I undertaking and, consequently, it was not possible to determine the cost of acquisition and cost of improvement under the provisions of Section 48 of the 1961 Act and since computation was inextricably linked with the charging provisions under Section 45 of the said Act it was not possible to tax the surplus, F

"< if any, under Section 45 of the 1961 Act.

10. Aggrieved by the decision of the Commissioner, the Department went by way of Reference to the Tribunal which took the view that, in this case, since the assessee had .G exercised its option for substitution of fair market value of the undertaking as on 1.1.1954 it was not open to the assessee .. to contend that cost of acquisition was not computable and, ' .L therefore, the AO was riGht in arriving at the figure of capital gains fixed by him at Rs. 1,65,34,709.

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11. At this stage, it may be noted that on the request of the assessee the Tribunal referred the matter to the High Court under Section 256(1) of the 1961 Act in which the impugned judgment had been given by Delhi High Court. In the impugned judgment, the High Court relied upon the decision of this Court B in CIT v. Artex Manufacturing Co. reported in (1997) 227 ITR

260 to hold that "in the case of a slump transaction when the business is sold as a going concern, it is not impossible to determine the actual cost, namely, the cost of acquisition, even though, in a given case, it may be a self-generated asset." c

12. The question which arises for determination in this civil appeal is whether judgment of this Court in Artex Manufacturing Co. (supra) is applicable to the present case. In that case, the assessee, a partnership firm, entered into an agreement with the company to sell its business as a going concern for a D consideration of Rs. 11,50,400. From the information supplied by the assessee to the AO, it was evident that the sale consideration stood arrived at after taking into account the value of plant, machinery and dead stock as computed by the valuer.

The Tribunal held that, the surplus arising on the sale was E taxable under Section 41 {2) of the Act and not as capital gains.

The High Court reversed that finding of the Tribunal and held that the surplus was taxable as capital gains under Section 45 and not under Section 41 (2). At the instance of the Revenue, this Court on an appeal held that on the facts and in the F circumstances of the case Section 41 (2) was applicable as the amount of Rs. 11,50,400, being the consideration, stood arrived at by taking into consideration the value of the plant, machinery and dead stock. It was further held that, the surplus resulting from transfer of plant, machinery and dead stock was either G . taxable as income under Section 41 (2) or as capital gains under Section 45. It was held that since income was chargeable to tax under Section 41 (2), the impugned decision of he High Court that such income was chargeable to tax as capital gains was erroneous.

I ' .,

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~ A the written down value of the depreciable asset(s) so transferred and the actual cost thereof.

16. In the case of Artex Manufacturing Co. (supra) this Court found, that a valuer was ai:; pointed, that valuer submitted

B his valuation report in which itemized valuation was carried out and on that basis the consideration was fixed at Rs. 11,50,400.00. Therefore, the sale consideration had been arrived at after taking into account the value of plant, machinery and dead stock as computed by the valuer and, consequently, c it was held that the surplus arising on the sale was taxable under

Section 41 (2) of the Act and not as capital gains. In the circumstances, the judgment of this Court in the case of Artex Manufacturing Co. (supra) was not applicable to the present case. Further, this Court in the case of CIT v. Electric Control

D Gear Manufacturing Co. ( 1997) 227 ITR 278 has held that whether the business of the assessee stood transferred as a ~- going concern for slump sale price, in the absence of evidence on record as to how the slump price stood arrived at, Section 41 (2) had no application. It is interesting to note that the judgment in the case of Electric Control Gear Manufacturing E Co. (supra) is given by the same Bench which decided the case of Artex Manufacturing Co. In fact, both the judgments are reported one after other in 227 ITR at pp. 260 and 278 respectively. In the present case, as can be seen from the impugned judgment of the Delhi High Court, the judgment of ',- F this Court in Electric Control Gear Manufacturing Co. (supra) is missed out. That judgment has not been considered by the High Court. As stated above, this Cout .as clarified its judgment in Artex Manufacturing Co. (supra) in its judgment in the case of Electric Control Gear Manufacturing Co ..

G Therefore, Section 41 (2) has no application to the facts of the present case.

17. As regards applicability of Section 45 is concerned, three tests are required to be applied. In _this case, Section 45

applies. There is no dispute on that point. The first test is that

the charging section and the computation provisions are A inextricably linked. The charging section and the computation provisions together constituted an integrated Code. Therefore, where the computation provisions cannot apply, it is evident that such a case was not intended to fall within the charging section, which, in the present case, is Section 45. That section contemplates that any surplus accruing on transfer of capital assets is chargeable to tax in the previous year in which transfer

took place. in this case, transfer took place on 18.7.1969. The second test which needs to be applied is the test of allocation/ attribution. This test is spelt out in the judgment of this Court in c .

Mugneeram Bangur & Co. (supra). This test applies to a slump transaction. The object behind this test is to find out whether the slump price was capable of being attributable to individual assets, which is also known as item-wise earmarking. The third test is that there is a conceptual difference between an undertaking and its components. Plant, machinery and dead stock are individual items of an Undertaking. Business Undertaking can consist of not only tangible items but also intangible items like, goodwill, man power, tenancy rights and value of banking licence. However, the cost of such items

(intangibles) is not determinable. In the case of CIT v. B.C.

Srinivasa Setty reported in (1981) 128 ITR 294, this Court held that Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, this Court held that the "asset" must be one which falls within the contemplation of Section 45. It is further held that,

the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions cannot apply, such a case would not fall G within Section 45. In the present case, the Banking Undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On facts, we find that item-wise earr.iarking was not possible. On facts, we find that the compensation (sale consideration) of Rs. 10.20 er.

A was not allocable item-wise as was the case in Artex Manufacturing Co. (supra).

18. For the aforestated reasons, we hold that on the facts and circumstances of this case, which concerns assessment

8 year 1970-71, it was not possible to compute capital gains and, therefore, the said amount of Rs. 10.20 er. was not taxable under Section 45 of the 1961 Act. Accordingly, the impugned judgment is set aside. ~

19. Before concluding, we may state that in this case, C Section 55(2)(i) did not operationalize. Under Section 55(2), fair market value as on 1.1.1954 could have substituted the figure of cost of acquisition provided the figures of both "cost of acquisition" and "fair market value as on 1.1.1954" were ascertainable. The letter dated 30.9.1970 does not indicate the D choice. Even the working done by the AO based on capitalization of last 5 years' profits would give the Enterprise Value of the Undertaking and not the cost of acquisition. Hence, Section 55(2) was not applicable.

20. Consequently, the civil appeal filed by the assessee stands allowed with no order as to costs.

B.B.B.

Appeal allowed.