In order to attract capital gain tax under Section 45, it should be established that the assessee did transfer a capital asset: Kerala High Court
Hon’ble Kerala High court the case of CIT vs F.X. Periera And Sons has made following noteworthy observation which may be relevant for taxpayers in various cases when the year of taxation of capital gain amoun is in disputes. The court has observed as under:
In order to attract Section 45, it should be established that the assessee did transfer a capital asset. A transfer for the purpose of taxation of a capital asset has been defined to “include a sale, exchange or relinquishment” of an asset or extinguishment of any rights therein or the compulsory acquisition thereof under any law. The word “transfer” thus is wide enough to comprehend both a transfer by act of parties or by operation of law. An incidental question, however, would arise and it is this : Is it enough to show that there is a transfer in the literal sense of that expression ? The answer is no ; because, in order to attract Section 45, it should be established that, by the transfer, the title to property stands passed to the purchaser. If what was sold was immovable property, it should further be established that the same was conveyed by a registered deed. It is the date of the execution of the registered deed, and not the delivery of possession that will be relevant in such circumstances, for, on that date alone, the title to property passes (See Alapati Venkataramiah v. CIT [1965] 57 ITR 185 (SC)). This decision, in our view, gives the quietus to the dispute whether a business as a going concern would constitute a capital asset within the meaning of Section 45. It is a capital asset, the Supreme Court observes. Applying this principle to the facts of the case on hand, we are of the view that title to the land and building and the plant and machinery, etc. (the business was sold as a going concern), passed to the State on the date of the execution of the registered deed, namely, April 14, 1971 only, and not on January 12, 1956, the date on which the agreement was executed.
The copy of the order is as under:
Kerala High Court
Commissioner Of Income-Tax vs F.X. Periera And Sons … on 7 December, 1989
Equivalent citations: 1990 184 ITR 461 Ker
Author: R Menon
Bench: K R Menon, B Thulasidas
JUDGMENT Radhakrishna Menon, J.
-
The Revenue is before us. The year of assessment is 1972-73.
-
The questions referred to us for our opinion read :
“1. On the facts and in the circumstances of the case, when did the transfer take place ?
-
Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that ‘the transfer is in 1956 and that the Government has become owner of the business in 1956 itself and that the rights of the assessee have been transferred to the Government or got extinguished even in 1956’ is right in law and fact ?
3. Whether, on the facts and in the circumstances of the case, the assessee is exigible to income-tax on capital gains?
4. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that ‘the industrial undertaking as a whole has been taken over’ ?
5. Whether, on the facts and in the circumstances of the case, the assessment of the profit under Section 41(2)of the Income-tax Act, 1961, is valid under law ?’
3. The facts relevant and requisite to dispose of the disputes covered by the questions lie in a narrow compass. The assessee-company was carrying on business in the extraction and sale of mineral and mineral sands as an agent of the Government as is seen from the agency agreement dated September 24, 1946, executed between the assessee and the Travancore State. The disputes between the assessee-company and the State Government in regard to the running of the business were given the quietus by the assessee-company agreeing to sell the business to the Government and that it is so can be seen from the written agreement for sale the assessee-company entered into with the State on January 12, 1956. As per the said agreement, the State was competent to run the factory as absolute owners and without reference to the assessee-company. It had also been agreed between the parties (Clause 12 of the agreement) that within one month of the report of the valuation committee regarding the price, a formal deed of conveyance is to be executed by the assessee in favour of the Government. The failure on the part of the State to fulfil this and other obligations discernible, from the agreement resulted in the assessee-company instituting a suit O. S. No. 87 of 1958 in the Sub-Court of Quilon for recovery of possession of the properties. The disputes that arose for consideration before the Sub-Court were referred to arbitration. The arbitrator passed an award which was in favour of the assessee-company. The State filed a petition to set aside the award. The order dismissing the said petition was the subject-matter of the appeal (A. S. No. 600 of 1969) the Government had filed. The appeal was decreed in terms of a compromise the parties had entered into. As per the compromise, a sale deed dated April 14, 1971, was executed. The sale deed would show that the assessee-company sold the properties to the Government for a consideration of Rs. 17 lakhs.
4. We shall now extract the following clauses contained in the sale deed :
“10. WHEREAS one of the conditions in the compromise petition is that the vendor shall sell to the purchaser and purchaser shall purchase all the properties mentioned and described in the schedule hereto for a consideration of rupees seventeen lakhs out of which a sum of rupees five lakhs has already been deposited in the High Court as per order in C. M. P. No. 15343 of 1969 in A. S. No. 600 of 1969 and the balance amount of rupees twelve lakhs will be paid by the purchaser when this deed is executed ;
-
AND WHEREAS the parties have agreed to all the terms and conditions herein contained ;
NOW THIS DEED WITNESSETH AS FOLLOWS :
-
In pursuance of the said compromise decree and in consideration of the purchaser agreeing to pay to the vendor a sum of rupees seventeen lakhs in the manner mentioned in Clause 4, the vendor, as owner, hereby transfers to the purchaser by way of sale ALL THAT properties both movable and immovable mentioned and described in the schedule hereunder written together with all the liberties, privileges, easements, advantages and all other appurtenances thereto TO HAVE AND TO HOLD the said movable and immovable properties for ever as absolute owner thereof.
-
For the consideration aforesaid, the vendor also hereby transfers to the purchaser all the beneficial interests of the vendor and goodwill of the vendor in the business of the mining concern, known as ‘F. X. Pereira Minerals’ TO HOLD the same to the purchaser absolutely.
-
The vendor shall not, at any time after the execution of this deed, either solely or as agent for or as partner with any other person or persons or body corporate directly or indirectly carry on the business of mining concern known as ‘F. X. Pereira Minerals’ or in any way use the ‘firm name’ for the said business or similar business.
7. It is hereby expressly agreed and declared that, after the execution of this sale deed, the vendor shall not have any manner of right, title, interest or claim in respect of the properties hereby conveyed or in respect of the business connected with the goodwill hereby transferred.
8. The purchaser shall be at liberty to use the firm name F. X. Pereira Minerals and do the business in any manner the purchaser deems fit.” (emphasis * supplied)
5. It is discernible from the sale deed that the business, as a going concern, has been sold. A question would arise, when did the title to the property pass ; was it on January 12, 1956, the date on which the agreement came into being or on April 14, 1971, the date on which the sale deed was executed ? The answer to the question depends upon the construction of Section 45of the Income-tax Act. In order to attract Section 45, it should be established that the assessee did transfer a capital asset. A transfer for the purpose of taxation of a capital asset has been defined to “include a sale, exchange or relinquishment” of an asset or extinguishment of any rights therein or the compulsory acquisition thereof under any law. The word “transfer” thus is wide enough to comprehend both a transfer by act of parties or by operation of law. An incidental question, however, would arise and it is this : Is it enough to show that there is a transfer in the literal sense of that expression ? The answer is no ; because, in order to attract Section 45, it should be established that, by the transfer, the title to property stands passed to the purchaser. If what was sold was immovable property, it should further be established that the same was conveyed by a registered deed. It is the date of the execution of the registered deed, and not the delivery of possession that will be relevant in such circumstances, for, on that date alone, the title to property passes (See Alapati Venkataramiah v. CIT[1965] 57 ITR 185 (SC)). This decision, in our view, gives the quietus to the dispute whether a business as a going concern would constitute a capital asset within the meaning of Section 45. It is a capital asset, the Supreme Court observes. Applying this principle to the facts of the case on hand, we are of the view that title to the land and building and the plant and machinery, etc. (the business was sold as a going concern), passed to the State on the date of the execution of the registered deed, namely, April 14, 1971 only, and not on January 12, 1956, the date on which the agreement was executed.
6. The finding of the Tribunal, under challenge before us, that the Government had become the owner of the properties in 1956, therefore, is not sustainable. The properties, under no circumstance, can be said to have been sold in 1956, although some of the documents would show that they had been handed over to the State as per the agreement dated January 12, 1956. The decree in the suit in terms of the compromise entered into between the assessee and the State would prove to the hilt that title to the properties in fact passed only on April 14, 1971. The asses-see, therefore, has rightly been assessed to capital gains tax.
7. Our answer to question No. (1), accordingly, is that the transfer took place only on April 14, 1971. Regarding question No. (2), our answer is in the negative and in favour of the Revenue, whereas the answer to question No. (3) is in the aflrmative, in favour of the Revenue. All the three questions, therefore, are answered in favour of the Revenue.
8. Coming to the other two questions : We have already found that the intention of the parties to the sale deed was to have the business sold as a going concern. A capital asset thus has been transferred by the sale deed dated April 14, 1971. There was, therefore, no sale of the building, plant, machinery and furniture separately. Only if the assets which were enjoying depreciation were sold separately, the provisions of Section 41(2)of the Income -tax Act are attracted. It is relevant in this context to note the reason for introducing a fiction by this section. The reason can briefly be stated thus :
“Whenever the sale proceeds of any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purpose of business or profession 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 is chargeable to tax as the income of the business of the assessee in the previous year in which they are sold.”
-
This charge is called the balancing charge. This balancing charge represents the amount the assessee got as depreciation allowance in the earlier years. The reason for treating this difference as profit earned in the previous year is that, to the extent to which the depreciation allowance was granted in the past, the chargeable profit of the business during those past years had been reduced and a lower profit alone was computed for tax. The section applies only to the four types of assets, namely, building, plant, machinery or furniture. The Tribunal, therefore, has rightly held that “….. in any event and under no circumstances can the assets be charged to Section 41(2)assessment. . . .” and, accordingly, directed deletion of the assessment of the same under Section 41(2).
-
Question No. (4), therefore, is answered in the affirmative, that is, in favour of the assessee and question No. (5) is answered in the negative, that is, in favour of the assessee.
-
The income-tax referred cases, accordingly, are disposed of as above. No costs.
-
A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
