Delhi High Court

Pnb Finance Ltd. vs Cit on 27 April, 2001

Equivalent citations: (2001) 168 CTR Del 509

Author: D Jain

JUDGMENT

D.K. Jain, J.

On being moved for reference under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act), the Income Tax Appellate Tribunal, Delhi Bench-E (hereinafter referred to as the Tribunal), has referred the following questions for opinion of this court :

"1. Whether, on the facts and in the circumstances of the case, the Undertaking of the assessed-company acquired by the Government of India under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, was a capital asset, within the meaning of section 2(14) of the Income Tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the undertaking as a composite unit was different from its components and as such the aggregate of the value of different components of the unit will not be the value of the unit ?

3. Whether, on the facts and in the circumstances of the case, the capital gain arising out of the transfer of the undertaking of the assesseds banking company is determinable ?

4. Whether, on the facts and in the circumstances of the case, the assessed having exercised the necessary option for adoption of the fair market value as on 1-1-1954, within the meaning of section 55(2) of the Act, could justifiably contend that such option should be effective only if the cost of acquisition was determined and found to be lower than the fair market value as on 1-1-1954 ?"

The dispute relates to the assessment year 1970-71.

2. The assessed was originally known as Punjab National Bank Ltd. It was carrying on banking business, which was acquired by the Government of India under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, with effect from 19-7-1969. The said acquisition was, however, quashed by the Supreme Court in R.C. Cooper v. Union of India AIR 1970 SC 564 on the ground that it violated Art. 31(2) of the Constitution of India and compensation payable was not equivalent to the market value of the property acquired. Taking note of the said decision, the Parliament enacted Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (hereinafter referred to as the Banking Companies Act). Second Schedule to this Act provided for lump sum compensation in respect of each of such undertakings taken over. The assessed was paid a compensation of Rs. 10.20 crores for acquisition of its undertaking under the said Act.

3. During the course of assessment proceedings for the assessment year in question, the question arose whether any capital gain had accrued to the assessed on account of acquisition of its banking business under the Banking Companies Act. Stand of the assessed was that no amount was chargeable to income-tax as capital gains under the provisions of section 45 of the Act because its undertaking had been acquired as a going concern, which was not a capital asset within the meaning of section 2(14) of the Act. In the alternative, it was pleaded that assuming the provisions of section 45 were applicable, the assessed could exercise its option for substitution of the fair market value of such undertaking as on 1-1-1954, in accordance with the provisions of sections 49 and 55 of the Act. In fact, vide assesseds letter dated 17-7-1972, the fair market value of the undertaking as on 1-1-1954, was disclosed at Rs. 10,41,51,625 besides the cost of improvement at Rs. 6,81,21,621. Without discussing the question whether the assesseds undertaking was a capital asset, the assessing officer computed the capital gain in the hands of the assessed at Rs. 1,65,34,709 by taking the fair market value of the undertaking as on 1-1-1954, at Rs. 1,91,93,670, adding thereto the cost of improvement at Rs. 6,62,71,621 and deducting the same from the total compensation received.

4. The assessed preferred appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner found that "undertaking" being a property held by the assessed was a capital asset within the meaning of section 2(14) of the Act and, further, compulsory acquisition of the undertaking by the government amounted to "transfer", within the meaning of section 2(47) of the Act. He, however, held that since it was not possible to evaluate the cost of acquisition and the increase in value of various intangible rights, powers and privileges and the allocation of the compensation with respect thereto, no capital gain could be determined. The Appellate Assistant Commissioner, thus, held that since no capital gain could be computed under section 45 of the Act, liability to pay tax on the same did not arise.

Being aggrieved of the order of Appellate Assistant Commissioner, the revenue took the matter in further appeal to the Tribunal. The Tribunal took the view that an "undertaking" is different from its components; though, the undertaking includes all its assets, rights, powers, authorities, privileges, liabilities, etc., but when an undertaking" is acquired as a composite or a compact unit, it cannot be said that its different ingredients are separately acquired; what is acquired in such a case is the "undertaking" as a composite unit and, therefore, merely because it includes stock-in-trade and goodwill, it cannot be held that it is not a capital asset as defined in section 2(14) of the Act. The Tribunal observed that a capital asset means the property of any kind held by an assessed, whether or not connected with its business or profession, and, therefore, the "undertaking" of the assessed acquired by the government was a capital asset within the meaning of section 2(14) of the Act. The Tribunal also noted that it was not disputed before it by the assessed that the compulsory acquisition of a capital asset was not a "transfer" within the meaning of section 45 of the Act. Dealing with the question whether it was possible to determine the capital gains arising to the assessed from the acquisition of its undertaking and whether the fair market value of the undertaking was determinable, the Tribunal observed that even on assesseds own showing, vide letter dated 17-7-1972, the fair market value of the undertaking as on 1-1-1954, was determinable. According to the Tribunal the valuation has to be of the entire business enterprise of the undertaking as a unit. The Tribunal finally set aside the order of the Appellate Assistant Commissioner and remanded the matter to the assessing officer to recompute the capital gains. It granted opportunity to the assessed to urge all arguments relevant to the determination of the fair market value of the undertaking as on 1-1-1954. On being moved, the Tribunal has referred the questions set out hereinabove.

5. We have heard Mr. G.C. Sharma, learned senior counsel for the assessed, and Mr. Sanjiv Khanna, learned senior standing counsel for the revenue. It is vehemently contended by Mr. Sharma that the business undertaking of the assessed being a self-generated asset, neither has any date of acquisition nor any cost of acquisition, insofar as the assessed is concerned. It is urged that an undertaking has no cost of acquisition when it is established because initially the undertaking is only set up with or without employment of ones own capital. Thus, the submission is that since the cost of acquisition of assesseds undertaking is inconceivable, the computation provisions under the Act cannot apply at all and as such section 45 of the Act is not attracted. In support of the contention, learned counsel has relied heavily on the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC). He has also referred us to a decision of this court in Bawa Shiv Charan Singh v. CIT (1984) 149 ITR 29 (Del). It is also submitted by Mr. Sharma that the option exercised by the assessed under section 55(2) of the Act, to substitute the fair market value of the undertaking as on 1-1-1954, on the basis of a valuation report, does not debar it from pleading at any subsequent stage that there was no cost of acquisition and hence the assessed was not assessable for capital gains, as the right to exercise the option is conferred on the assessed solely for its benefit. It is asserted that conditional exercise of the option and declaration of value of the undertaking as on 1-1-1954, was immaterial insofar as the question of determination of cost of acquisition of the asset was concerned.

6. On the other hand, Mr. Sanjiv Khanna has contended that assesseds undertaking was a capital asset., the compensation payable for its acquisition is slump compensation; it would not be possible to apportion the compensation to various items/assets constituting the "undertaking" and the same cannot be attributed to cost of various individual assets, as is being pleaded by the assessed in order to show that it is not possible to evaluate the cost of acquisition of various individual assets of the undertaking. With reference to assesseds letters dated 30-9-1970, and 17-7-1972, it is pointed out that it was never the case of the assessed before the Income Tax Officer that it was not possible to compute and calculate the cost of acquisition of the undertaking. The entire case of the assessed was that section 45 of the Act was not attracted as undertaking of the assessed was not a capital asset within the meaning of section 2(14) of the Act. It is asserted that the assessed having exercised its option under section 55(2) of the Act to substitute fair market value of the undertaking as on 1-1-1954, instead of cost of acquisition, it cannot be now permitted to wriggle out of its earlier stand and contend that option was effective only if the cost of acquisition could be determined and it was more beneficial to the assessed. In support of the first proposition, learned counsel has referred to the decisions of the Apex Court in CIT v. Artex Manufacturing Co. (1997) 227 ITR 260 (SC) and in CIT v. Electric Control Gear Mfg. Co. (1997) 227 ITR 278 (SC). In support of the contention that banks undertaking is a capital asset and the compensation fixed in the Second Schedule of the Banking Companies Act is a slump compensation and the same cannot be bifurcated and attributed to cost of various individual assets, learned counsel has relied on the decisions of the Madras High Court in Indian Bank Ltd. v. CIT (1985) 153 ITR 282 (Mad) and Karnataka High Court in Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681 (Karn).

7. Insofar as the first question is concerned, the term "capital asset" has been defined in section 2(14) as amended from time to time, so as to mean

property of any kind held by an assessed, whether or not connected with his business or profession,

but not to include

(i) any stock in trade, consumable stores or raw materials held for the purposes of his business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessed or any member of his family dependent on him;

(iii) agricultural land in India;

(iv) six and half per cent Gold Bond, 1977 or seven percent Gold Bonds, 1980 or National defense Gold Bonds, 1980, issued by the Central Government.

The all inclusive definition of the term "capital asset" brings within its ambit property of any kind held by the assessed, except what has been expressly excluded by clauses (i) to (iv) there under. Thus, the expression "capital asset" has a wide connotation. But for the exemptions statutorily provided, the exempted properties would also otherwise fall within the defined meaning. The term "property", though has no statutory meaning but is of widest import and subject to any limitations which the context may require, it signifies every possible interest which a person can acquire, hold or enjoy Ahmed G.H. Ariff v. CWT (1970) 76 ITR 471 (SC). According to Strouds Judicial Dictionary of Words and Phrases (6th Edn.), "Property" is a comprehensive term indicative of every possible interest which a party can have. In R.C. Coopers case (supra) it was also observed that the expression "property" has a wide connotation and "it includes not only assets, but the organisations, liabilities and obligations of a going concern as a unit". In view of the wide meaning of the expression "capital asset" in section 2(14) of the Act and "property" as understood in its ordinary wide connotation, we have no hesitation in holding that the business undertaking of the assessed was a "capital asset". In fact, learned counsel for the assessed did not dispute before us that the "undertaking" of the assessed was a "capital asset" within the meaning of section 2(14) of the Act. The question is, accordingly, answered in the affirmative.

8. In order to answer the second question, it would be necessary to ascertain as to what constituted the "undertaking" which was sought to be acquired under the Banking Companies Act. Section 5 of the Banking Companies Act provides for the general effect of vesting of undertaking of existing bank in the corresponding new bank and reads as follows, insofar as it is relevant for the present purpose :

"5. General effect of vesting :(1) The undertaking of each existing bank shall be deemed to include all assets, rights, powers, authorities and privileges and all property, movable and immovable, cash balances, reserve funds, investments and all other rights and interests in, or arising out of, such property as were immediately before the commencement of this Act in the ownership, possession, power or control of the existing bank in relation to the undertaking, whether within or without India and all books of accounts, registers, records and all other documents of whatever nature relating thereto and shall also be deemed to include all borrowings, liabilities, and obligations of whatever kind then subsisting of the existing bank in relation to the undertaking.

xxxxxxx",

Section 5 covers all rightscontingent or definite; tangible or intangible; and all liabilities and obligations which are attached with the existing bank. In other words, it covers all possible assets and liabilities, hidden or otherwise. Section 6 of the Banking Companies Act provides for payment of such compensation by the Central Government in respect of the transfer, as is specified against each bank in the Second Schedule. As noted above, the Second Schedule specifies a lump sum amount payable as compensation. The compensation is not apportioned item/asset-wise. From a plain reading of the Second Schedule, it is not possible to find out what particular price has been attributed to a particular item. From a conjoint reading of sections 5 and 6 it is clear that what is sought to be acquired is not an individual item of a property forming part of the aggregate but the capital asset consisting of business of the "undertaking" as a whole. This is also clear from para 40 of the judgment in R.C. Coopers case (supra). The Apex Court observed that expression "undertaking" in section 4 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1969, clearly means a going concern with all its rights, liabilities and assets as distinct from the various rights and assets which compose it. In Halsburys Laws of England, it is said that "Although various ingredients go to make up an undertaking, the term describes not the ingredients but the completed work from which the earnings arise". Support is lent to this view by the decision of the Karnataka High Court in Syndicate Banks case (supra), wherein, following the observations of the Supreme Court in CIT v. Mugneeram Bangur & Co. (Land Department) (1965) 57 ITR 299 (SC), the court held that if the sale is of a whole concern and no part of the agreed price is indicated against different and definite items having regard to their valuation on the date of sale, the aggregate price cannot be apportioned of capital assets in specie. We, accordingly, answer the second question in the affirmative, in favor of revenue and against the assessed.

9. We now take up the most crucial question in the reference namely, whether on the acquisition of the assesseds undertaking for a lump sum amount of Rs. 10.20 crores, no capital gains was assessable in the hands of the assessed because, according to the assessed, its cost of acquisition is inconceivable and indeterminable. The expression "cost of acquisition" of capital asset appears in section 48 of the Act, which lays down the mode of computation and deduction for computing the income chargeable under the head "capital gains". Section 55 of the Act defines the cost of acquisition to mean the cost of acquisition of the asset to the assessed where the capital asset became the property of the assessed before the 1-1-1954, or the fair market value of the asset as on 1-1-1954, at the option of the assessed. The section also implies the date of acquisition of the asset. Unless the date of acquisition of capital asset is found, the cost of acquisition of the asset cannot be determined and in the process computation of income derived by the transfer of such capital asset would not be possible. In Sreenivasa Settys case (supra), strongly relied upon by learned counsel for the assessed, while dealing with the question whether the transfer of the goodwill of a newly commenced business can give rise to a capital gain taxable under section 45 of the Act and answering the question in the negative, the Supreme Court held that (i) neither the charging section nor any of the computation provisions as contained in sections 45, 48, 49, 50 and 55(2) of the Act suggest the inclusion of an asset under the head "capital gains" in the acquisition of which no cost at all can be conceived; (ii) the date of acquisition" of the asset is a material factor in applying the computation provisions pertaining to capital gains, and (iii) in the case of self-generated asset, like goodwill in that case, it is not possible to determine its cost of acquisition. Thus, for subjecting the transfer of an asset to income-tax under the head "capital gains" it is imperative to ascertain the "cost of acquisition" of the asset because if there is no cost of acquisition then there is no question of computation of income chargeable under the head "capital gain" under section 45 of the Act.

10. Therefore, it needs consideration as to whether assesseds undertaking had any cost of acquisition within the meaning of section 48 of the Act. As noted above, the stand of the assessed is that the undertaking being a self-generated asset, it is not possible to conceive its cost of acquisition. On the contrary, the stand of the revenue is that the assessed having itself determined the fair market value of its undertaking as on 1-1-1954, shows that the cost of acquisition is determinable. Though a similar issue did arise before the Karnataka High Court is Syndicate Banks case (supra) and Madras High Court in Indian Banks case (supra), both the High Courts did not answer this question because the Tribunal had not recorded any finding on that aspect. It is common ground that transfer and vesting of assesseds entire undertaking under the Banking Companies Act took place as a going concern, with all its rights, liabilities and assets, for a total sum of Rs. 10.20 crores, as specified in the Second Schedule. It was a slump sale for a lump sum amount.

11. The precedent nearest to the point is found in a recent decision of the Supreme Court in Artex Manufacturing Companys case (supra) wherein a question arose whether section 41(2) or section 45 of the Act would be attracted in a case of slump sale in the sense that the entire business was transferred for a lump sum amount. Referring to its earlier decisions in Mugneeram Bangurs case (supra) and in CIT v. B.M. Kharwar (1969) 72 ITR 603 (SC) the court observed that where there is a slump transaction and the business is sold as a going concern, what has to be seen is whether any portion of the slump price is attributable to the stock-in-trade and if on the basis of the facts, it is found that a particular price is attributable to a particular item, then the excess amount would be chargeable to tax under section 41(2) of the Act. While holding so, their Lordships observed that the liability under section 41(2) was limited to the amount of surplus to the extent of difference between the written down value of the actual cost. But if the amount of surplus exceeded the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess will have to be treated as capital gain for the purpose of taxation. Therefore, these observations of the Apex Court make it abundantly clear 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, viz., the cost of acquisition, even though, in a given case, it may be a self-generated asset. Had that been so, even the balancing charge under section 41(1) or 41(2) could not be determined and charged to tax. Thus, we do not find much substance in the contention of learned counsel for the assessed that conceptually there is no cost of acquisition which could be attributable to the assesseds undertaking acquired under the Banking Companies Act. We find it equally difficult to accept that the date of acquisition of the undertaking is only the first day of its incorporation, on which day the assessed has not spent any amount to acquire it and, therefore, it has no cost of acquisition. The date(s) and cost of components, constituting the undertaking and acquired as a unit, are definitely known. The question of determination of cost of acquisition is primarily a question of fact to be determined by the Income Tax Officer in each case on the basis of available evidence. It may be a difficult exercise but nevertheless is capable of evaluation. We express no opinion on the aspect as to what is the actual cost of acquisition because none of the authorities below having undertaken that exercise, the issue is neither raised nor does it arise out of the order of the Tribunal. This issue has to be re-examined by the Tribunal or at its instance by the Income Tax Officer in the light of the decisions of the Apex Court in Artex Manufacturing Companys case (supra) and the settled principles of valuation. The decision of the Supreme Court in Sreenivasa Settys case (supra) and of this court in Bawa Shiv Charan Singhs case (supra), we respectfully feel, are distinguishable on facts inasmuch as in the case of the goodwill generated in a new business it is not possible to determine the date when it comes into existence and in the case of tenancy rights its value fluctuates from day-to-day, depending upon the uncertain demand and supply of the comparable premises and a host of other unpredictable factors, which, as noted above, is not the case here.

12. Coming to the last question, to appreciate the controversy involved, it would be useful to notice the relevant provisions. Sub-section (2) of section 55 defines the expression "cost of acquisition" in relation to capital asset, for the purposes of sections 48 and 49 of the Act. Normally, cost of acquisition of a capital asset is the consideration paid for its acquisition by the assessed. However, clauses (i) and (ii) of section 55(2)(b) enact an exception to the normal rule. Section 55(2)(b)(i) provides that for the purpose of sections 48 and 49 the cost of acquisition in relation to a capital asset, other than goodwill of the business, where the capital asset became the property of the assessed before 1-1-1954, would mean the cost of acquisition of the asset at its original price to the assessed or the fair market value of the asset on the 1-1-1954, at the option of the assessed. In other words, the said provision gives an option to the assessed to take advantage of the appreciation in price as on 1-1-1954, and claim the cost of acquisition at such appreciated value or, choose to compute the cost of acquisition at its original price, if the property has depreciated since its purchase. From a plain reading of the provision it is clear that the right of choice is conferred on the assessed solely for its benefit and unless there is anything in the enactment to the contrary, which we do not find to be there, the right of the assessed so conferred, to choose one of the modes to determine the cost of acquisition, cannot be curtailed. The freedom of choice is available to the assessed till the income chargeable under the head "Capital gains" is computed. In our opinion, therefore, the assessed can justifiably contend that he can exercise his option only after both the figures, namely, the original cost and the fair market value of the asset as on 1-1-1954, are available. In this view of the matter, our answer to the fourth question is in affirmative, i.e., in favor of the assessed and against the revenue.

For the foregoing reasons, our answers to all the questions referred are in the affirmative, i.e., first three questions are answered in favor of the revenue and against the assessed and the fourth question is answered in favor of the assessed and against the revenue. In the circumstances of the case, there will be no order as to costs.