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Section 2 in The Companies Act, 1956
The Companies Act, 1956
Section 45 in The Companies Act, 1956
Section 47 in The Companies Act, 1956
Section 48 in The Companies Act, 1956
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Income Tax Appellate Tribunal - Mumbai
Avaya Global Connect Ltd. vs Acit Range 7(3) on 29 July, 2008
Bench: N Vasudevan, V Gupta

ORDER N.V. Vasudevan, Judicial Member

1. This is an appeal by the assessee against the order dated 20.11.2006 of learned CIT(A)-XXIII, Mumbai relating to A.Y. 2002-03.

2. First dispute that arises for consideration in this appeal is as to whether the revenue authorities were justified in holding that a capital gain arose on transfer of TFD by the assessee to ITEL, in computing such capital gain on transfer at Rs. 45.9S Crores and bringing the same to tax.

3. The facts and circumstances giving rise to the above issue are as follows:

The Assessee is a company. It is engaged in the business of providing solutions in the field of voice communications and manufacture of telephone instruments, EPBAX systems etc. It was earlier known as Tata Telecom Ltd. (TTL). The Assessee had two divisions viz. Business Communications Divisions (BCD) and the Tata Fone Division (TFD), The BCD provided communication solutions and the TFD was engaged in the manufacture of EPBAX and telephone instruments. During the previous year relevant to the assessment year 2002-03, the assessee transferred the TFD to ITEL industries Private Limited (ITEL). A scheme of arrangement ("scheme") between the assessee and ITEL for the transfer of the TFD to ITEL was filed in the Bombay High Court. The scheme was approved by the Bombay High Court vide order dated June 29, 2001. The appointed date for the transfer of TFD to ITEL was April 1, 2001. The salient features of the scheme were as follows:

The scheme of Arrangement is for vesting of the Tata Fone Divisions of Tata Telecom Limited having its registered office at Matulya Centre, 'A' Block, 249, Senapati Bapat Marg, Lower Parel (West), Mumbai 400 013, as a going concern to and in ITEL industries Private Limited having its registered office at Bombay House, 24 Homi Mody Street, Mumbai-400 001 pursuant to the relevant provisions of the Companies Act, 1956.

4. Clause 4 & 5 of the Scheme provides as follows:

Vesting of Tata Fone Division of TTL in ITEL:

With effect from April 1, 2001 being the appointed date the entire Tata Fone Divisions of TTL shall without any further Act, instrument or deed be and the same shall stand vested in and/or deemed to be vested in ITEL as a going concern, free from all encumbrances, but subject to the subsisting charges, pursuant to the provisions of Section 391/394 and other relevant provisions of Provided further that if the directors of TTL and ITEL so desire, all the movable asses comprised in the Tata Fone Division shall not vest in ITEL by virtue of the Court order, which shall not operate as a conveyance but shall be transferred in the manner laid down in Clause 4.2 hereunder:

The transfer referred to in Clause 4.1 shall be carried out as follows:

(i) All the moveable assets of the Tata Fone Divisions of TTL including plant and machinery, cash on hand capable of passing by manual delivery or by endorsement and delivery shall be so delivered or endorsed and delivered, as the case may be, to ITEL to the end and intel that the property therein passes to ITEL on such delivery of endorsement and delivery. Such delivery and transfer shall be made on a date mutually agreed upon between the Boarad of Directors of TTL and the Board of Directors of ITEL within thirty days from the Effective Date.

(ii) In respect of movable assets other than those specified in Sub-clause (i) above, including sundry debtors, outstanding loans, recoverable in cash or in kind or value to be received, bank balances and deposits with Government, Semi Government, Local and other authorities, bodies and customers, etc. the following modus operandi shall be followed:

TTL shall give notice in such form, as it may deem fit and proper to each party, debtor or depositee as the case may be, that pursuant to the High Court of Bombay having sanctioned the Scheme, the said debt, loan, advance, etc. be paid or made good or held on account of ITEL as the person entitled thereto the end and intent that the right of TTL to recover or realize the same stands extinguished. ITEL shall also give notice in such form as it may deem fit and proper to each person, debtor or depositee that pursuant to High Court of Bombay has sanctioned the Scheme, the said person, debtor or depositee should pay the debt, loan or advance or may good the same or hold the same to its account and that the right of ITEL to recover or realize is in substitution the right of TTL.

(iii) With effect from the appointed date, all debts, liabilities, duties and obligations of TTL appertaining to the Tata Fone Division as on the close business on the day prior to the Appointed date (herein after referred to the said liabilities), shall also, without any further act, instrument or deed be and stand vested in and/or deemed to be vested in ITEL pursuant to the provisions of Section 391/394 of the Act so as to become as and from the appointed date the debts, liabilities, duties and obligations of ITEL and further that it shall not be necessary to obtain the consent of a third party or other person who is a party to any contract or arrangement by virtue of which such debts, liabilities duties and obligations have arisen, in order to give effect to the provisions of this clause.

Consideration:

Upon the demerger of the Tata Fone Division of TTL into ITEL, ITEL would not pay any consideration either to TTL or the shareholders of TTL.

5. The Hon'ble Bombay High Court vide order dated 296.2001 sanctioned the aforesaid scheme of arrangement.

6. In the computation of income, the assessee in note No. 11 to the statement of total income submitted as follows:

The Company under a scheme of arrangement approved by the Bombay High Court vide order dated June 29, 2001 has demerged its Tata Fone Divisions (TFD) to ITEL Industries Private Limited. Under the scheme as approved by the Bombay High Court, no consideration is payable either to the assessee company or to its shareholders. On this basis as the assessee company has not received any consideration upon the demerger of the TFD, the question of assessing any capital gains does not arise. The assessee company has made appropriate adjustments to its block of assets in respect of the assets of the TFD transferred to ITEL Industries Private Limited. A copy of the scheme approved by the Bombay High Court is enclosed with the return of income.

7. There is no dispute that the value of the assets which was taken over by ITEL was less than the liabilities that were taken overe by ITEL by Rs. 22.63 crores. The assessee had shown this sum of Rs. 22.63 crores as 'capital reserve' in it's balance sheet.

8. During the course of the assessment, the Assessing Officer required the assessee to explain as to why the transaction between the assessee and ITEL for transfer of TFD should not be considered as transfer under Section 2(47} of the Act and why the gain arising from the same should not be charged to tax as capital gains.

9. Under the Income tax Act, profits or gains arising from the transfer of a capital asset are chargeable to tax under the head 'Capital Gains'. The Word "transfer" has been defined in Section 2(47) of the Act to include sale, exchange or relinquishment of the asset by an assessee. In the instant case, the assessee has demerged the TFD to ITEL Thus, the de-merger of TFD to ITEL would be transfer' as defined Section 2(47) of the Act. Section 2(14) of the Act provides the definition of 'capital asset' to mean property of any kind held by an assessee. An undertaking (such as TFD) would be regarded as property and would therefore be a 'capital asset'. Under Section 45 of the Act. Any profits or gains arising from transfer of a capital asset shall be chargeable to tax under the head 'capital gains'. Section 47(vii) provides that nothing contained in Section 45 shall apply to a transfer in a demerger of a capital asset by the demerged company to a resulting company, if the resulting company is an Indian Company. Section 2(19AA) defines 'Demerger', in relation to companies, to mean the transfer, pursuant to a scheme of arrangement under Section 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that:

(i) All the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger.

(ii) All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger.

(iii) The Property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger.

(iv) The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis.

(v) The shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) becomes shareholders of the resulting company or companies by virtue of the demerger.

Otherwise than a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company.

(vi) The transfer of the undertaking is on a going concern basis.

(vii) The demerger is in accordance with the conditions, if any, notified under Sub-section (5) of Section 72A by the Central Government in this behalf.

10. According to the assessee, all the conditions referred to in Section 2(19AA) viz., condition (i) to (iii) were satisfied because all the assets and liabilities of TFD were transferred at the book value to ITEL. Condition (iv) and (v) were also satisfied because those conditions will operate and apply only when consideration for transfer exists. The assessee submitted that in it's case the value of liabilities exceeded value of assets resulting in negative networth. As such, no consideration was payble to ITEL. In view of the practical impossibility, the conditions stated in Clause (iv) and (v) should deemed to be considered to be satisfied.

11. Without prejudice to the above, it was submitted that Section 2(42C) defines the term 'slump sale' to mean the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to individual assets and liabilities in such sales, Under Section 50-B of the Act, the profits or gains arising from a slump sale are chargeable to tax as capital gains. Such capital gain is required to be computed by reducing from the lump sum consideration the net worth of the undertaking that is transferred as laid down in Explanation 1 and 2 below Section 50B, which provides as follows:

Explanation 1:- For the purpose of this section, 'net worth' shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account.

Provided that any charge in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.

Explanation 2.- For computing the net worth, the aggregate value of the assets shall be

(a) in case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of Sub-clause (c) of Clause (6) of Section 43; and

(b) in case of other assets, the book value of such assets.

It was submitted that in the case of the assessee, there has been no sale for a lump sum consideration. Consequently, the provisions of 50B read with Section 2(42C) of the Act would not be applicable. Apart from the above, it was submitted that since no consideration has been received by the assessee, the question of sale being for a lump sum consideration without values being assigned to the individual assets will not arise. In view of the above, it was submitted that the provisions of Section 50B of the Act are also not applicable to the case of the Assessee. Without prejudice to the above, it was submitted that as no sale consideration has been received by the assessee, the question of computing any capital gain (sic) respect of the said transfer will therefore not arise. It was submitted that since the consideration and consequently the gain thereon (sic)incapable of being computed, the question of charging the same to (sic) as capital gains does not arise. In this regard the Assessee submitted that the TFD is an undertaking and is transferred as a going concern to ITEL. As such the transaction of transfer of business assets and liabilities has to be viewed as one transaction and cannot be split. The cost of acquisition, full value of consideration received cannot be split and capital gain computed. The assessee in this connection, relied on the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Shetty 128 ITR 294, wherein the Hon'ble Supreme Court has held that if on the facts of a particular case, computation under Section 48 is not possible, the charge under Section 45 fails because it cannot be effectuated. Based on the above, it was submitted that the transaction of transfer of TFD to ITEL cannot be charged as slump sale.

12. The Assessing Officer, however, held that the transfer of TFD to ITEL on amalgamation did not constitute a demerger within the meaning of Section 2(19AA) of the Act because condition (iv) and (v) of Section 2(19AA) viz. the shareholders of demerged company should be issued shares of the resulting company in consideration of the demerged and that shareholders holding at least 3/4th of the value of the shares of the demerged company should be holding share to that extent in the resulting company were not satisfied. The Assessing Officer therefore, held that capital gain, was therefore not exempt Under Section 47(vib) of the Act. With regard to the transfer not being in the nature of a slump sale within the meaning of Section 50B, the Assessing Officer held that there was a slump sale. He held that though the assessee has not received any monetary consideration for the transfer, yet it had transferred liabilities much in excess of the assets by a sum of Rs. 22.63 crores and had credited the same to a capital reserve account and reflected it in it's balance sheet. This was consideration received on account of the transfer. The Assessing Officer in this regard had relied on the decision of the Hon'ble Madras High Court in the case of CIT v. S. Natarajan 236 ITR 472 (Mad), wherein it was observed that when a business is taken over including the liabilities and when such liabilities taken over are in excess of the value of the assets, the value of the liabilities arrived at by the parties would be part of the consideration for the transfer. The court has also observed that when the business is sold as a going concern it is impermissible to ignore the liabilities taken over and disregard the same as not forming part of the consideration. The Assessing Officer, therefore, held that excess of liabilities over assets viz. 22.63 crores was consideration received for transfer. The Assessing Officer thereafter, determined capital gain as follows:

However, since the transfer has been made without values being assigned to individual assets and liabilities, the transfer is in the nature of slump sale as defined Under Section 2(42C) of the IT. Act and accordingly the computation of capital gain on such transfer will be as per the provisions of Section 50B. Accordingly, the profits from the said transaction will be the total consideration received as reduced by the net worth of the company, as provided under Explanation 1 to Section 50B. In this case, the assessee company has provided the net worth of the division as on the date of transfer as under:

------------------------------------------------------------------

Particulars                        Amount (Rs. in Lakhs)

------------------------------------------------------------------
Fixed assets (book value)          453.47
------------------------------------------------------------------
Net current assets                 4,76.42
------------------------------------------------------------------
Total assets (A)                   929.89
------------------------------------------------------------------
Secured loan                       706.83
------------------------------------------------------------------
Unsecured loan                     2,555.00
------------------------------------------------------------------
Total liabilities (B)              3,261.83
------------------------------------------------------------------
Net worth (A-B)                    2,331.94 
------------------------------------------------------------------

 

Accordingly, the net worth of the division as on the date of transfer is (-) Rs. 23.32 crores and as such, the profits from the transaction is determined as under:
 Consideration being excess of liability           Rs. 22.63 crores
Over assets transfer and credited to
capital reserve

Less : net worth as determined above          (-) Rs. 23.32 crores

          Total profits                           Rs. 45.95 crores

 

Since, the said division has been held by the assessee company more than 36 months, the gain will be taxed as long term capital gain.
 

13. Before learned CIT(A), the assessee reiterated submission as were made before the Assessing Officer. In addition to the above, it was submitted that the decision of Hon'ble Madras High Court in the case of S. Natarajan (supra) was not applicable to the facts of the case of the assessee. It was submitted that the assessee in that case received consideration from the transferee despite the fact that the value of the liabilities transferred by the assessee was in excess of the assets transferred and that the question was regarding applicability of the provisions of Section 41(2) of the Act. The Hon'ble Court remanded the issue to the Tribunal to find out what is the amount of sale consideration for the transfer and whether it is possible to attribute the sale consideration to any of the assets transferred attracting provisions of sections 41(2) of the Act and if Section 41(2) is not attracted, whether there was any liability arising under capital gains. It was reiterated that the issue was not concluded by the court at all. It was submitted that the Assessing Officer erred in not correctly computing the capital gains. He erred in not appreciating that since the amount credited to the capital reserves account represented the excess of the liabilities over the assets, he ought not to have again added the negative net worth also and by doing so he computed the capital gains, which resulted in making a double addition of the same amount. It was submitted that the capital gain tax liability, if any, cannot exceed Rs. 23.32 crores being the excess value of the liabilities over the assets of TFD. It was submitted that the excess of liability over the assets would not fall within the ambit of Section 41(1) of the Act also. It was argued that the said provisions were applicable only where 'an allowance or deduction has been made for the assessment in any year in respect of loss, expenditure or trading liability incurred by the assessee'. Reliance was placed on various judicial decisions as under:

Mahindra & Mahindra 261 ITR 501 (Bom) AVM Ltd., 146 ITR 355 (Mad) Lal Textile Finishing Mills, 180 ITR 45 (Punj) Phoolchand Jivan Ram 131 ITR 37 (Del)

14. It was also argued that the differential amount between the liability and assets could not be also taxed Under Section 28(iv) of the Act, since no benefit had arisen from the business or exercise of a profession. Relying on a decision of the Hon'ble Mumbai Tribunal in the case of Prism Cement Ltd., 101 ITD 103. It was claimed that similar to the forfeited amount (due to non-payment of call money) credited as the amount written back and set off against expenditure in that case which had been held to be not chargeable to tax, the assessee's crediting of the excess of liability over asset to the Capital Reserve Account was also not chargeable to tax.

15. Finally, relying on a decision of Mumbai Tribunal in the case of Zuari Industries Ltd., 9 SOT 563(MUM), the assessee claimed that in the context of the slump sale, the negative net worth should have been taken as NIL. Since, by connotation any thing of any worth would only be positive and cannot be negative to be deducted from any sale consideration. Thus, since, there had been no sale consideration as had been expressly mentioned in the demerger scheme approved by Hon'ble High Court, the figure should have been taken as zero and deducting there from zero, as the negative net worth was Nil. As per Mumbai Tribunal in the aforesaid case, the net capital gain should have been computed at zero. In other words, there should have been no capital gains to be taxed. The learned CIT(A) did not agree with the contentions as put forth by the assessee before him. He held as follows:

(i) That the case of the assessee did not satisfy the requirements of a 'demerger' within the meaning of Section 2(19AA) of the Act.

(b) The transfer of TFD was a slump sale within the meaning of Section 2(42C) of the Act. The phrase in the definition of slump sale 'as a result of a sale for a lump sum consideration' would also include a situation where excess liabilities arc oil loaded. The expression Tump sum consideration' would include such consideration also. The definition did not use the expression lump sum amount'; but only lump sum consideration' and therefore, the case of the assessee fell within the definition of 'slump sale'. He held that the Hon'ble Bombay High Court in the case of Premier Automobiles Ltd., 264 ITR 193 (Bom) has laid down that the transfer of an undertaking in a slump sale would attract liability to capital gains tax.

(c) With regard to the contention of the assessee that the manner of computation of capital gain Under Section 50B of the Act requires a positive net wroth and since the consideration in the case of the assessee was negative, there can be no capital gain that can be brought to tax in view of the decision of the Mumbai ITAT in the case of Zuari Industries (supra), the learned CIT(A) held as follows:

It is seen that the Assessing Officer has applied Section 50B that came into effect only from 1.4.2000 inserted by the Finance Act, 1999. Besides, the section is a special provision for computation of capital gains in the case of slump sale. Thus, the normal provisions for capital gains computation would naturally not apply. Further, there is an in built formula given in the said section itself to compute the gain by deducting (and not by reducing) the net worth from the sale consideration. The net worth has also been explained in the said section. I intend to emphasize on two phrases:

(i) full sale consideration as against sale amount.

(ii) deduction of net worth as distinguished from reduction of net worth.

Firstly, the term 'consideration' is obviously different from the word 'amount'. It could be anything other than a mere monetary amount. None ever hands over a division or an undertaking for nothing. I do agree that there was no express monetary amount mentioned in the so called demerge scheme. But, in effect TTL (the assessee) had offloaded its excess liability and precisely that was the first consideration received on such transfer. The assessee cannot and it requires an exercise to be made from day one with regard to the transferred out company's acquisition of assets and liabilities to find out which portion of the liabilities had stood excess over the assets. Besides, in a slump sale, by definition, no specific value is assigned to the individual assets and liabilities in such a transfer. Therefore, I am of the view that the Assessing Officer had rightly taken the excess of the liabilities over assets as the sale consideration and for the computation of capital gains the value of the said consideration in terms of rupees. In the case of Zuari Industries relied upon by the assessee, the Tribunal had not considered the full value of consideration because of the following two reasons:

i) Firstly, it was never the case of Assessing Officer or the learned CIT(A).

ii) Secondly, no additional ground had been raised by the Revenue.

But, in the instant case, the Assessing Officer had increased the transferred amount of Nil by the excess liabilities and therefore, I am of the view that she was correct.

(d) With regard to the contention that in any event the Assessing Officer could not have added the excess of liabilities over assets and the negative net worth while computing capital gain and doing so would amount to a double addition, learned CIT(A) held as follows:

I find that the Assessing Officer has applied Section 50B which is by its very heading a special provision and has calculated the full value of consideration by concluding that the transferor company TTL (the assessee) had gained on two counts.

 i)  It had off loaded the excess
    liability                               Rs. 22.63 crores.
ii) It had off loaded also its
    negative net worth                      Rs. 23.32 crores.

 

Thus, in all it had gained in a way the sum of the above two which had also been precisely computed by her. Again, I find that the "net worth' had not been quantified by any qualified person and had not been furnished in the prescribed form 3CEA as per the provisions of Sub-section (3) of Section 50B; but however, the Assessing Officer had computed the same applying the Explanation 1 provided within the said section itself. Therefore, I am of the view that no interference is called for in the Assessing Officer's computation. In the result, the ground is totally dismissed.

16. Aggrieved by the order of learned CIT(A), the assessee is in appeal before the Tribunal. We have heard the submissions of learned Counsel for the assessee and the learned OR for the revenue. Five issues arise for consideration regarding the chargeability to tax of the capital gain on transfer of TFD division of the assessee to ITEL.

(1) Whether the transfer of TFD division by the assessee to ITEL could be termed as a demerger within the meaning of section 2(19AA) of the Act and consequently capital gain, if any, on such transfer is not chargeable to tax in view of the provisions of Section 47(vib) of the Act?

(2) If the answer to issue No. 1 is in the negative, whether the transfer in question could be said to a slump sale within the meaning of Section 2(42C) of the Act attracting the provisions of section 50B of the Act for computation of capital gain?

(3) If answer to issue No. 2 is in the affirmative, whether there is no capital gain, since there was negative net worth in the present case and since there was no consideration received by the assessee there was no capital gain which could be brought to tax?

(4) If the answer to issue No. 2 is in the negative whether the computation provisions of Section 48 would fail because of the inability to identify the full value of consideration for the different assets comprised in the transfer, inability to bifurcate the cost of acquisition or cost of improvement for the different assets comprised in the transfer and therefore the ruling of the Hon'ble Supreme Court in the case of B.C. Srinivasan Setty 128 ITR 294 (SC) would apply and consequently no capital gain could be brought to tax?

(5) If the answer to issue No. 4 is in the negative, whether the Revenue was justified in adding the excess of liabilities over the assets taken over by ITEL to the negative net worth while computing capital gain?

17. We have heard the submissions of the Shri S.E. Dastur, Senior Advocate appearing for the assessee and Shri V.K. Shukla CIT (DR) for the revenue. On the first issue, which we have formulated for consideration, learned Counsel for the assessee submitted that Section 2(19AA) was introduced in the Income Tax Act vide the Finance Act, 1999. He drew out attention to the Memorandum explaining the provisions in Finance Bill, 1999. The relevant portion of which reads.

3. With a view to recognize demergers, slump sales and to rationalize the existing provisions of amalgamation, a number of amendments have been proposed on the basis of the following broad principles:

(a) Demergers should be tax neutral and should not attract any additional liability to tax.

(b) In demergers, tax benefits and concessions available to any undertaking should be available to the said undertaking on its transfer to the resulting company.

(c) Transfer to such business reorganizations should be limited to the transfer of business as a going concern and not to the transfer of specific assets which would amount to sale of assets and not a business reorganization.

(d) ...

It was submitted that the demerger provisions were introduced in order to recognize the reorganizations in the form of demerger being taken by the corporate sector. The intention was to ensure that reorganizations in the form of demerger are tax neutral. It was submitted that as there was negative networth in TFD, and therefore, no consideration could have been paid to the shareholders. In view of the legislative intention the conditions stated in (iv) and (v) of Section 2(19AA) should be considered as satisfied in the case of the assessee. It was agreed that Clause (iv) and (v) of the Section 2(19AA) would apply only when there is consideration and not to a case where there is no consideration.

18. Learned DR for the revenue submitted that merely because the scheme of Amalgamation and the order of Hon'ble High Court sanctioning the same mentions that there is no consideration for the transfer, it is not conclusive when provisions of Section 2(19AA) are to be applied in a given case. According to him the assessee in the process of amalgamation could get rid of liabilities worth Rs. 22.32 crores and this was consideration in law for the transfer. The plea of impossibility of complying with the provisions of Section 2(19AA), according to him will be irrelevant. It was argued by him that the legislature while enacting provisions of Section 2{19AA) would have been fully conscious of an amalgamation where there is no consideration. Yet it has thought it fit to restrict the case of demerger Under Section 2(19AA) of the Act, only to cases where consideration for transfer is in the form of allotment of shares. The legislature while enacting provisions of Section 2(19AA) is deemed to have foreseen all contingencies and there cannot be any presumption that a casus omissus exists.

19. We have considered the rival submissions. Section 47(vib) lays down that there shall be no charge to tax a capita] gain on any transfer, in a demerger, of a capital asset by the demerged company to the resulting company. For the purpose of Section 47(vib), the term Demerger" has been defined in Section 2(19AA). One of the condition Under Section 2(19AA) is that resulting company should issue it's shares in consideration of the demerger to the shareholders of the demerged company. Another condition is that shareholders holding at least 3/4th of the value of shares of demerged company should be holding shares to that extent in the resultant company. Admittedly both these conditions are not satisfied in the case of the assessee. The contention that the above two conditions will apply only when there is consideration for transfer and in a case where there is no such consideration and if other conditions of Section 2(19AA) are satisfied then the same must be construed as a demerger Under Section 2(19AA) cannot be accepted. All the conditions laid down in Section 2(19AA) have to be satisfied in a case to be called a demerger for the purpose of Section 47(vib) of the Act. As rightly contended by learned DR for the revenue, the legislature is deemed to have foreseen all possible contingencies and yet has thought it fit to impose the above conditions for qualifying as a demerger for the purpose of Section 47(vib). There cannot be any presumption regarding omission by the legislature to provide for a situation where the consideration is not in the form of allotment of shares in the resulting company to the shareholders of the demerged company. A matter which should have been, but has not been provided for in a statute cannot be supplied. The intention of the legislature in such cases is not to confer the benefit of exemption to an assessee Under Section 47(vib) of the Act. We therefore, reject the plea on behalf of the assessee in this regard and hold that the transfer in the present case cannot be regarded as a 'demerger' within the meaning of Section 2(19AA) of the Act. The answer to the First issue is, therefore, in the negative.

20. The second issue that arises for consideration is as to whether the transaction in question can be said to be slump sale within the meaning of Section 2(42C) of the Act attracting the provisions of Section 50B of the Act.

21. Learned Counsel for the assessee submitted that the revenue authorities have construed the transfer of TFD by the assessee to ITEL as slump sale which is chargeable to tax as capital gain under Section 50B of the Act. Drawing our attention to the provisions of Section 50B of the Act, learned Counsel for the assessee submitted that it is only a profit or gain arising from a slump sale effected in the previous year that can be brought to tax as capital gain. He then drew our attention to the definition of slum sale as given in Section 2(42C) of the Act and submitted that the definition contemplate transfer of one or more undertakings as a result of sale for a lump sum consideration. He laid emphasis on the fact that the transfer of the undertaking should be as a result of sale. In this regard, he also submitted that expression transfer in relation to the capital asset has been defined under Section 2(47) of the Act to include many forms of transfer like exchange, relinquishment, conversion of the capital assets into stock in trade etc. His submission was that the transfer of capital asset could be in several forms; but Legislature while defining slump sale has thought it fit to include only transfer by way of sale and not any other mode of transfer. It was submitted by him that expression sale has not been defined in the Act; and therefore, the definition of term 'sale' as appearing in Section 54 of the Transfer of Property Act 1882 and Section 4 of the Sale of Goods Act, 1930 have to be looked into. Under the Transfer of Property Act, the expression 'sale' has been defined as a transfer of ownership in exchange for a price paid or promised or part paid and part promised. Under the 'Sales of Goods Act, sale has been defined as contract, whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The agreement to sale become a sale when the time elapses or the conditions arc fulfilled subject to which the property in goods is to be transferred. Section 2(10) of the Sales of Goods Act, defines price to mean, the money consideration for a sale of goods.

22. Referring to the aforesaid definition of sale, learned Counsel for the assessee submitted that sale is always a contract between two persons. He submitted that in the case of the assessee, TFD was transferred to ITEL in a Scheme of amalgamation, which was approved by Hon'ble Bombay High Court. He further pointed out that as per the scheme of amalgamation and also the order of the Hon'ble High Court, there was no consideration for transfer of the undertaking of TFD. In the circumstances, he submitted that there was no sale of the undertaking; and therefore, the transfer of undertaking of TFD on amalgamation could not said to be a slump sale. For the proposition that transfer of undertaking pursuant to the orders of Court cannot said to be a sale, learned Counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of CIT v. Motors and General Stores (P) Ltd. 66 ITR 692 (SC), wherein it has been laid down that the expression 'sale' not having been defined in the Income Tax Act, 1922; the meaning of the words have to be construed by reference to other enactments.

23. Reference was also made to the decision of Hon'ble Bombay High Court in the case of Sadanand S. Varde and Ors. v. State of Maharashtra and Ors. 247 ITR 609, wherein it has been held that transfer of the property in an amalgamation is not a contractual transfer; and therefore, the provisions of Chapter XX-C of the IT. Act is not applicable in the case of amalgamation of Companies.

24. Reference was also made to the decision of the Bombay Bench of ITAT in the case of Oudh Sugar Mills Ltd. v. ITO 35 ITD 76(Bom), wherein it has been laid down that the transfer of asset of one company to another company in the scheme of arrangement approved by Hon'ble Bombay High Court; where consideration for transfer of asset and liability was received by share holders of the transferor company, it could not be said there was a sale. Learned Counsel for the assessee therefore prayed that the transfer in the present case does not satisfy the definition of slump sale; and therefore, provisions of section SOB will nor apply.

25. Learned DR for the revenue on the other hand submitted that for a contract of sale, four ingredients were required to be satisfied namely (i) Parties to the contract (ii) Subject matter of contract (iii) Transfer of property (iv) Consideration for transfer. It was submitted by him that all four conditions were satisfied in the case of the assessee; and therefore, there was a sale by the assessee of TFD to ITEL. In the circumstances, it was submitted by him that the sale by the assessee was of an undertaking for a lump sum consideration without values being assigned to individual assets and liabilities and the same should be considered as a slump sale.

26. We have considered the rival submissions. The expression transfer as defined in Section 2(47) of the Act, includes several forms of transfer; and sale is only one such form of transfer. Under Section 50-B any profits on gains arising from the slump sale effected in the previous year shall be chargeable to income tax as capital gains. The definition of slump sale in Section 2(42C) of the Act reads as follows:

'Slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Explanation 1:- For the purpose of this clause 'undertaking' shall have the meaning assigned to it in Explanation 1 to Clause 119AA.

Explanation 2:- For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.

27. From the reading of the above definition, it is clear that, it is only a transfer as a result of sale that can be construed as a slump sale Therefore, any transfer of an undertaking otherwise then as a result of sale will not qualify as a slump sale. The question that arises for consideration is as to whether transfer of TFD by the assessee to ITEL could be construed as a sale. We have already noticed that the transfer was as a result of scheme of amalgamation, which has been duly approved by Hon'ble Bombay High Court. The question whether transfer of the property consequent to amalgamation could be construed as a sale or not has been considered by Hon'ble Bombay High Court in the case of Sadanand S. Varde and Ors. (supra), the question arose before Hon'ble Court in the context of the provisions of Chapter XX-C of the I.T. Act under which, the Government had a right of pre-emptive purchase of property. For the purpose of Chapter XX-C of the Act, expression transfer' means transfer by way of sale or exchange or lease for a term of not less than 12 years. The question for consideration before the Court was as to whether provisions of Chapter XX-C can be invoked when there is transfer of property on amalgamation of companies. The court held as follows:

A scrutiny of the definitions of 'apparent consideration' given in Clause (b) and transfer' given in Clause (1) of Section 269UA of the Income Tax Act, 1961, would unmistakably indicate that the transfer to which the provisions of Chapter XX-C are intended to apply, are transfers under agreements or contractual transfers and not statutory transfers or transfers effected by orders of the court or by operation of law. A scheme of amalgamation has statutory operation when sanctioned by the company court under the relevant provisions of the Companies Act and is distinct and different from a mere agreement signed by the necessary parties. Even if the scheme is approved by all concerned parties by consensus, merely because it is so agreed upon, the court is not obliged to put its imprimatur on it. The court has the discretion and power to reject a scheme even if all the shareholders and creditors have agreed to it. But, once the scheme is scrutinized by the company court and sanctioned by an order made by it under Section 391 of the Companies Act, 1956, it ceases to retain the character of contract and operates by force of the statute.

In a case of amalgamation, there is a share exchange ratio prescribed according to which, the shareholders of the transferor-company would be entitled to shares in the transferee-company This, however, does not make it a situation of exchange of immovable property, or relinquishment of any right to immovable property so as to make the transaction amenable to Section 269UA. In an amalgamation, no consideration in any form much less in the form of money flows from the transferee- company to the transferor company, which was the erstwhile owner of the assets. The shares are issued by the transferee company not to the transferor company, but to the shareholders of the transferee company, who must necessarily be treated as distinct from the transferor company itself. The shareholders of the transferor company could not be deemed in law to be the owners of the assets of the transferee company, nor can they be said to have held nay interest in the assets of the transferee- company. "Apparent consideration", as defined in Clause (b) of the Section 269UA of the Act, is an inalienable factor which must be reckoned within the application of Chapter XX-C for if the appropriate authority is satisfied that there is undervaluation, then it is empowered to purchase the property for the apparent consideration. In a situation of amalgamation, there is no consideration- apparent or otherwise-nor it is payable in respect of any specific immovable property.

28. In the case of Motor General Stores Pvt. Ltd. (supra) Hon'ble Supreme Court was concerned with a case, where the assessee transferred all assets of Cinema House to one 'A' and in, exchange got preference shares in a Sugar Company in consideration of transfer of assets. Under the provisions of Section 10(2)(vii) of the I.T. Act, 1922, profits or gains on sale of building where the amount of sale consideration exceeds the written down value of the assets can be brought to tax as business income. The contention of the assessee was that there was no sale and the transaction in question was only an exchange; and therefore, the same cannot be brought to tax. Hon'ble Supreme Court held as follows:

Sale is a transfer of property in goods or of the ownership in immovable property for a money consideration. But, in exchange there is a reciprocal transfer of interest in immovable property, a corresponding transfer of interest in movable property being denoted by the word 'barter'. The difference between a sale and an exchange is this that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter.

The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale.

29. In the case of Oudh Sugar Mills Ltd. (supra), the question arose in the context of provisions of Section 41(2) of the Act. The assessee, a public limited company engaged in the manufacture and sale of sugar, during accounting year ended on 30.6.1981, transferred one of its units to A, another limited company, as per scheme of arrangement approved by Bombay High Court. As per Scheme certain assets of assessee became property of A from 1.7.1980, some assets were given on lease and employees of assessee became employees of A and all liabilities of assessee were taken over by A. Consideration for transfer of assets and liabilities was received by each of shareholders of assessee company in form of equity shares and face value of these shares was equal to amount debited to general reserve account of assessee. Assets were transferred...by assessee to A at book value and there was a difference between book value and written down value of those assets. The question for consideration before the Tribunal was as to whether there was sale or exchange between assessee and A and assessee could be said to have received any consideration in aforesaid transaction and, thus, amount representing difference between assets and liabilities could be brought to tax as deemed profits under Section 41(2). The Tribunal held that transfer in an amalgamation cannot be said to be sale.

30. In the light of the principles laid down in the aforesaid judicial pronouncements, we are of the view that the transfer of TFD by the assessee to ITEL consequent to scheme of amalgamation approved by Hon'ble Bombay High Court cannot said to be a sale of undertaking by the assessee. Consequently, the transfer could not be said to be as a result of sale and therefore the provisions of Section 2(42C) of the Act did not apply. The provisions of Section 50B were also not therefore applicable to the facts and circumstances of the present case.

31. The answer to the second issue, which we have formulated for consideration, is in negative. Since, the answer to the second issue is in negative, we shall take up for consideration issue No. 4 which we have formulated for consideration.

32. Issue No. 4 is as to whether the transfer of TFD by the assessee to ITEL results in capital gain Under Section 45 of the Act; but nevertheless cannot be brought to tax because of impossibility of computing capital gains Under Section 48 of the Act.

33. Having held that provisions of Section 50-B are not applicable, we have to now examine as to whether any capital gain could be brought to tax under the other provisions of the Act under the head capital gain. Under Section 45 of the Act, any profit or gain arising from the transfer of a capital asset shall be chargeable to income tax under the head capital gains. Under Section 48 of the Act, the mode of computing capital gains has been prescribed. It is laid down therein that capital gain shall be computed by deducting from the full value of the consideration received as result of transfer of capital asset the expenditure incurred in connection with such transfer and the cost of acquisition of the asset and the cost of improvement thereto. Thus, for imposing charge on capital gain legislature has indicated detailed provisions in order to compute profits or gains under the head capital gains. In the present case, what was transferred by the assessee was the TFD undertaking as a whole. It is a capital asset within the meaning of Section 2(14) of the Act. The process by which, this undertaking was transferred to ITEL is transfer of capital asset. With regard to other ingredients, which is required for levy of capital gains namely profits or gains arising from the transfer of the undertaking, no part of consideration was indicated against different and definite items having regard to their valuation on the date of transfer. There is no basis for even apportioning any consideration for various assets comprised in the transfer Since, individual items of capital assets having not been transferred the aggregate of individual assets in the form of an undertaking was a capital asset which was transferred. The transfer being one of the going concerns, it is not possible to ascertain the profit or gain from transfer of undertaking. Cost of acquisition and the cost of improvement of the undertaking cannot be ascertained. It, therefore, becomes difficult to apply computation under provisions of Section 48. A business undertaking as a going concern includes all rights, assets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as part of organization including the potentiality of the organization to grow. It contains a variety of elements, both tangible and intangible. It remains in insubstantial in form and nebulous in Character. A going concern is a dynamic concept characterized by perennial change influenced by socio-economic ecology. A going concern is essentially a functioning living organism possessing attributes of (sic) growth and evolution. Obviously, it would not be possible to concernalize the cost of acquisition of such a going concern as well as date of acquisition thereof. If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of Section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern, consideration realized by the assessee would be outside the purview of capital gains under Section 45.

34. It has been held by Hon'ble Karnataka High Court that and Hon'ble Madras High Court in the case of Syndicate Bank Ltd. v. Addl. CIT 155 ITR 681 and CIT v. K.P.V. Shaikh Mohammed Rowther 115 ITR 243 (Mad) that, where there is a transfer of whole concern and no pan of the agreed price is indicated against different and definite items having regard to their valuation and consideration where cannot be apportioned on capital assets in specie, then in such cases, consideration realized by an assessee would outside the purview of capital gains Under Section 45. Hon'ble High Courts in coming to the above conclusion followed the decision of Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty 128 ITR 294. (SC).

35. Pointing out to the aforesaid position of law, learned Counsel for the assessee submitted that when once, it is held that the transfer in the present case does not fall within the ambit of Section 50B of the Act, the same would have to be tested in the light of the parameters laid down in Section 45 and Section 48 of the Act. The sale in the present case being of a going concern, it was not possible to ascertain cost of acquisition and the cost of improvement. Apart from the above, there was also no consideration received on transfer. In view of the above, since, computation provisions cannot be applied in the present case, charge of capital gain to tax should also fail. In support of the above proposition, learned Counsel for the assessee relied on the following decisions:

Industrial Machinery Associates v. CIT 81 ITD 482 (Ahd) JCIT v. Steri Sheets Ltd. 106 TTJ (Del) 460 Salora International Ltd. v. JCIT 88 TTJ 53(Del)

36. The aforesaid decision relied up by the learned Counsel for the Assessee relates to the computation of capital gain in the case of sale of a going concern. The aforesaid cases also related to the period prior to insertion of Section 50B of the Act. In the aforesaid decisions the principle that in the absence of provisions of section SOB of the Act, sale of business undertaking (transfer) as going concerns will not attract charge of tax under the head 'capital gains' for the reason that it was not possible to conceptualized cost of acquisition as well as date of acquisition, has been laid down. The submission of learned Counsel for the assessee was that the charge of capital gains in the case of assessee should also be fails for identical reasons.

37. Learned DR for the revenue on the other hand placed strong reliance on the decisions of Hon'ble Bombay High Court in the case of Premier Automobile Ltd. v. ITO 264 ITR 193 (Bom). The aforesaid decision relates to the assessment year prior to insertion of Section 50B of the Act. The transfer of capital assets in the form of an undertaking was sought to be brought to tax by the revenue. The stand of the revenue was that there was a sale of individualized items of assets; whereas, the stand of the assessee was that there was a sale of the entire undertakings for a lump sum consideration. The Court held that the sale of undertaking was as a whole and that the same would be sale of a capital asset. The Court, therefore, held that it was slump sale and remanded the matter to the Tribunal for fresh consideration regarding computation of capital gains. According to the learned DR for the revenue, the aforesaid decision is an authority for proposition that even prior to insertion of section SOB of the Act, slump sale of the business undertaking as a whole was liable to tax to charge of capital gain tax.

38. Learned Counsel for the assessee on the other hand, submitted in the facts in the case of Premier Automobile Ltd. (supra) are clearly distinguishable in as much as the transfer in the aforesaid case was in the form of a sale; whereas, in the case of the assessee, it was a transfer consequent to scheme of amalgamation. The next aspect which was pointed out by learned Counsel for the assessee was the fact that the Court was not called upon to decide the question of computation of capital gains or charge of capital gains in respect of transaction; but was only called upon to decide as to whether the sale in question was sale of individualized items or sale as a slump sale i.e. sale of the undertaking for lump sum consideration without values being assigned to the individual asset and liabilities. The Court answered the aforesaid question holding that the transaction was a slump sale. With regard to question whether the same was chargeable to tax Under Section 45, the Court remanded the matter to the Assessing Officer to decide whether any capital gain lax liability arises. It was therefore submitted that in respect of the assessment year prior to insertion of Section 50B of the Act, there can be no charge of capital gain, when there is transfer of an undertaking in the form of slump sale.

39. We have considered the rival submissions. In our view, the decisions of the Tribunal relied upon by learned Counsel for the assessee are authority for the proposition that prior to insertion of Section 50B of the Act in the event of transfer of business undertaking as a going concern, there was impossibility of computation of cost of acquisition, date of acquisition etc.; and therefore, computation provisions could not be applied. Consequently, levy of capital gains would also fail. The decisions of the Tribunal referred to above have followed the ratio laid down in the decision rendered by Hon'ble Karnataka High Court and Hon'ble Madras High Court in the case of Syndicate Bank Ltd. (supra) & K.P.V. Shaikh Mohammed Rowther (supra). These decisions in turn have been rendered by following the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). We may in this regard refer to the ratio laid down by the Ahamedabad Bench of ITAT in the case of Industrial Machinery Associates (Supra):

For the levy of capital gains under Section 45 three ingredients should co-exist: (1) there should be a capital asset; (2) there should be transfer of such capital asset; and (3) profit or gain must arise from the transfer of such capital asset So far as the first two ingredients are concerned no dispute has been raised on behalf of the assessee that a business undertaking as a whole would constitute a capital asset within the meaning of Section 2(14) and further that the agreement dt. 31st Dec, 1992 for transfer of the business undertaking as a going concern constitutes transfer of a capital asset as per the definition contained under Section 2(47) of the IT Act. However with regard to the third ingredient regarding profits or gains arising from the transfer of the whole business undertaking as a going concern it has been argued that no part of the sole consideration is indicated against different and definite items having regard to their valuation on the date of sale and the agreed price cannot be apportioned on capital assets in specie. What is sold in the case of a slump sale is not individual items of property forming part of the aggregate but the capital asset consisting of the business of the whole concern or undertaking. The provisions concerning computation of capital gains as contained under Section 48 contain three basic elements viz., cost of acquisition and cost of improvement as well as date of acquisition for working out the capital gains. In the case of sale of a going concern, these essential ingredients arc not ascertainable and, therefore computation provisions would be incapable of computing the capital gains. The charging section and the computation provisions together constitute an integrated fiscal code. In the present case computation provisions contained under Section 48 fail and, therefore, slump sale is not intended to fall within the purview of charging section.

The aforesaid decision of the Tribunal has since been affirmed by the Honourable Gujarat High Court. The department's appeal by special leave to the Honourable Supreme Court against the judgment of the Hon'ble Gujarat High Court has also been dismissed as reported in 264 ITR (Statutes) page-141.

40. With regard to the submission of learned DR of the revenue by placing reliance on the decision of Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra), we are of the view that the same cannot be accepted. In the case of Premier Automobiles Ltd. (supra) the issue before the Hon'ble Bombay High Court was whether there was a slump sale of business as going concern or was it a case of an (sic)zed sale of assets and their Lordships held, in the facts and circumstances of that case, that entire business was sold by the assessee as a going concern without any intention of sale of itemized assets. As regards the computation of capital gains arising from the sale of a going concern, Hon'ble Bombay High Court, however, did not render my verdict and sent back the matter to the Assessing Officer with a direction to decide whether any capital gains tax liability arises from such sale and if so, to compute the quantum of capital gains under Section 45 to 50. Thus, the issue pertaining to the chargeability of profit arising from slump sale of business as a going concern to tax as capital gains was nut decided by Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra) and the said decision cited by learned DR for the revenue is, therefore, of no help to support the Revenue's case on the said issue.

41. In view of the above, we hold that computation provisions fail in the present case and consequently there can be no capital gain that could be brought to tax. In view of our decision as above, 3rd issue, which we have formulated above, is not being taken up for consideration. We may mention that elaborate arguments have been advanced by both parties on this issue also.

42. 5th issue, which we have formulated for consideration also does not require any consideration in view of our decision on issue No. 1,2 & 4. We may mention that elaborate arguments have been advanced by both parties on this issue also. The first ground of appeal of the assessee is accordingly allowed.

43. 2nd Ground of the appeal reads as follows:

Income treated as income from other sources:

a) The learned CIT(A) erred in confirming that the lease income Rs. 49,28 lakhs earned by the assessee was taxable as 'income from other sources' as against 'income from business' as claimed by the assessee.

b) He erred in not appreciating in the correct perspective the submissions made by the appellant in this regard.

44. During the previous year relevant to the AY. 2002-03, the assessee had received Rs. 49,28,000/- net lease rental income. The AO during the course of assessment requested the assessee to submit as to why the said income should not be charged under the head "income from other sources". The assessee submitted that the company per se does not lease any equipment. The assessee facilitates the leasing of the equipment to the end customer. The procedure followed in this regards was explained by the Assessee as follows:

a) The customer places an order with the company for the equipment.

b) The company sells the equipment to the leasing company and then obtain the same equipment on lease back from the leasing company with a right to sub-lease the equipment to the end customer.

c) The company then sub-leases the equipment to the end customer. The company has only a marginal mark-up between the lease rentals paid by the company to the leasing company and charged by the company to the end customer.

The difference between the lease rentals received and lease rentals paid is offered for taxation under the head 'Profits and gains of business and profession.

45. It was submitted that the income earned from the above transactions is in the nature of business income and therefore taxable under the head "income from business and profession".

46. The AO was however of the view that the transaction of sale and thereafter sub-lease of the equipment are two separate transactions. The AO was of the view that the first transaction (of sale) was a business transaction and the income from the same was to be taxed under the head profits and gains from business or profession'. However, the second transaction was purely a finance transaction. On this reasoning, the AO held that the leasing activity can be business of a leasing company but not of the assessee. The AO also held that the transaction undertaken by the assessee cannot be regarded as being adventure in the nature of trade and therefore cannot be taxed under the head 'profits and gains of business or profession'.

47. On appeal by the assessee, learned CIT(A) confirmed the order of the Assessing Officer. Before learned CIT(A), it was brought to his notice that in A.Y. 2001-02 on identical issue, Predecessor in office of learned CIT(A) had held that income in question was income from business. Learned CIT(A), however, did not agree with the decision of his Predecessor in office and he held that the business of the assessee was not earning interest on finance transaction; and therefore, income in question was income from other sources.

48. We have heard the rival submissions. Learned Counsel for the assessee submitted that the transaction in question was one mode of selling the assessee's product. It was also submitted that this was done in a systematic and organized manner and would constitute business. He placed reliance on several judicial pronouncements in support of his contention that the income in question was business income.

49. Learned DR of the revenue relied on the order of learned CIT(A).

50. We have considered the rival submissions. In course of hearing, we also posed a question as to whether the main objects clause in the Memorandum of Association of the assessee permits the assessee to indulge in the business of leasing. Copy of memorandum of association containing main object clause was filed before us and we find on perusal of the same that the assessee has, as one of its main objects, the business of leasing. Apart from the above, we are also of the view that the transaction in question is only a method of selling the assessee's product. Had the assessee sold the product directly, income in question would have been treated as business income. Arrangement was only to provide the finance to the customers to enable buyers to buy the assessee's product. Such arrangement in the business world of today is directed only towards increasing profitability of the assessee. It has been done in systematic and organized method. The Assessing Officer has accepted first part of the transaction as business transaction and treated the second part as leasing transaction and not business transaction. This approach of the Assessing Officer was not correct in law. The learned CIT(A) while deciding similar issue in A.Y. 2001-02 has rightly approached the issue. For the reason stated above, we direct that the income in question has to be treated as income from business. Second ground of appeal is allowed.

51. 3rd ground of the appeal of the assessee is with regard to treating expenditure on computer software as capital in nature.

52. On the question whether expenditure on computer software is capital or revenue, the Special Bench, ITAT, Delhi in the case of Amway India Enterprises v. DOT 2008 21 SOT 1 (Delhi) (SB) (URO) has laid down the following principles:

The advantage which an Assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the Assessee's trading operations or enabling the management and conduct of Assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account.

The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field.

i) Nature of Business of the Assessee: It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment.

ii) As a general rule it may be stated that the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are Associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose.

iii) Degree of associated organisational change: Similarly the degree of change intended in the way operations arc carried out as a result of the computer software, for example, savings in the number, and changes in the location, of staff used to provide services to customers will have a bearing. The more radical the changes, the more likely the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerised.

iv) It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an Assessee would become outdated much earlier than expected. The Assessee has therefore to upgrade his software. An element of upgrading does not automatically make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital.

53. On perusal of the orders of the revenue authorities and on application of the principles laid down by the Special Bench referred to above, we are of the view that the expenditure on computer software in the present case is capital expenditure. We, therefore, confirm the orders of the revenue authorities and dismiss ground No. 3 of the assessee.

54. Ground No. 4 raised by the assessee is with regard to disallowance in respect of obsolete stock written off by the assessee.

55. The Assessing Officer had made the addition of Rs. 48.49 lakhs which was enhanced by learned CIT(A) to Rs. 2.68 crores. The facts and circumstances giving rise to the aforesaid ground are as follows. There was a difference between the quantity and value of stock as per the statement furnished by the assessee to the banks and as per the books of account, the difference in this regard was as follows:

------------------------------------------------------------------

Particulars       Amount as per      Amount as per    Difference
                  statement          books of
                  submitted to       account of the
                  bank (Rs. in       assessee (Rs. in
                  lakhs)             lakhs)
------------------------------------------------------------------
Work-in-progress     1,659.87            1568.32        91.55
------------------------------------------------------------------
Finished Goods       1,313.65            1,106.21       207,44
------------------------------------------------------------------

 

In the course of assessment proceedings, the Assessing Officer called upon the assessee to reconcile the difference. The assessee vide reply dated 3.3.2005 explained the difference as follows:
  

 Work-in-progress:

The work in progress as per the statement submitted to the bank was Rs. 1,659.87, lakhs. The work in progress considered for valuation of closing stock Rs. 1,568.32 lakhs. The major difference in the valuation of work in progress was due to writing off in the annual accounts the obsolete stock of Rs. 68 lakhs (Refer Schedule-15 of Annual Report). The value of the obsolete stock written off in the annual accounts was not excluded from the stock reported to the bank. Further the difference also arises on physical verification of the stock which is not completely finished by the time the statement is provided to the banks. Also year end dispatches also have a difference in the valuation of stock.

Finished Goods:

The value of finished goods as per the statement submitted to the bank was Rs. 1,323.65 lakhs. The value of the finished stock as reported in the final accounts was Rs. 1,106.21 lakhs (excluding stock in transit). The major difference is on account of writing off in the annual account the obsolete stock worth Rs. 200 lakhs. (Refer Schedule 15 of Annual Report). The value of the obsolete stock written off in the annual accounts was not excluded from the stock reported to the bank. Further the remaining difference was due to element of overhead cost included in the value submitted to the bank. It was submitted that the difference in the value of the stock of Rs. 373.67 lakhs was mainly attributable to the value of obsolete stock written off Rs. 268 lakhs. The assessee explained that the details in respect of valuation of obsolete stock as follows. The Assessee as a measure of good corporate governance follows a policy of determining obsolete stocks on a quarterly basis. The Assessee further submits that it was engaged in the business of telecommunication section which was very advanced in terms of technology, with products getting outdated very quickly. The Assessee reviews the stock and takes a business decision as to whether the particular item should be considered as obsolete or not. The Assessee thus submitted that on ground of commercial expediency and prudent business practices, the deduction should be allowed for the obsolete stock written off.

56. In Schedule 15 to the balance sheet in the form of a note, it has been explained as to how there was a difference in the closing stock of finished goods and work-in-progress as follows:

Closing stock is valued after considering material obsolescence of Rs. 200.00 lakhs from finished goods and Rs. 68 lakhs for work-in-progress.

57. The assessee had apart from the above debited in the profit and loss account a sum of Rs. 48.49 lakhs under the heading 'obsolete fixed assets written off. This sum of Rs. 48.49 lakhs has however been added to the profit as per profit and loss account in the computation of income for the purpose of income for the purpose of income tax; and thus no claim for deduction of this sum was made while computing total income for the purpose of the Act.

58. In the order of assessment, the Assessing Officer has referred to the letter of the assessee dated 3.3.2005 explaining the discrepancy in the stock between the statement given to the bank and as per books of account of the assessee and finally concluded that the assessee failed to establish by producing evidence that stocks have become obsolete and rejected the claim of the assessee. The Assessing Officer by mistake has referred to the sum of Rs. 4849 lakhs being 'obsolete fixed assets written off and made an addition of Rs. 48.49 lakhs while computing total income of the assessee.

59. The assessee was also conscious of this mistake committed by the Assessing Officer. Before learned CIT(A), the assessee submitted that the write off of obsolete stock should be allowed on grounds of commercial expediency and prudent practices. The learned CIT(A), however, did not agree with the claim of the assessee. He substituted the disallowance of Rs. 48.49 lakhs made by the Assessing Officer to the correct figure of Rs. (sic) lakhs written off by the assessee as obsolete stock. The assessee aggrieved by the order of learned CIT(A) has preferred ground No. 4 the Tribunal which reads as follows:

Disallowance of obsolete stock:

a) The learned CIT(A) erred in enhancing the disallowance in respect of obsolete stock written off by the assessee from Rs. 4S.49 lakhs to Rs. 2.68 crores.

b) The assesses submits that he learned CIT(A) erred in enhancing the disallowances without discussion and without providing the appellant an opportunity to submit its explanation. The appellant, therefore, submits that the order passed by the learned CIT(A) in this regard is ultra virus and bad in law and be quashed.

c) Without prejudice to the above, the learned CIT(A) erred in confirming the disallowance in respect of obsolete stock written off.

d) The learned CIT(A) erred in not appreciating in the correct perspective the submissions made by the assessee in this regard.

60. The details of the obsolete stock written off i.e. finished goods is at page 241 to 247 of the assessee's paper book. The same has the caption "stock adjustment note. In respect of details of work-in-progress written off as obsolete stock the list was furnished in the course of hearing.

61. We have heard the rival submissions. Learned Counsel for the assessee submitted that the write off in question of obsolete stock was businessman's wisdom and guided by commercial realities and prudence. The Assessing Officer cannot sit in Judgement over the same. It was also submitted that except in the present assessment year and in the next assessment year i.e. 2003-04, there has been no such addition made by the Revenue. The Revenue has accepted such write off in the past. It was submitted that even the Auditors in their report have not qualified on the practice adopted by the assessee. A chart indicating the percentage of write off on each component of closing stock from A.Y. 1998-99 till A.Y. 2007-08 has been filed before us. It has been contended that the percentage of write off keeps varying in different years indicating that there has been proper application of mind.

62. It was argued that a consistently followed method of accounting cannot be interfered with. Reliance was placed on the decision of the ITAT Mumbai Bench decision in the case of IAC v. Consolidated Pneumatic Tool Co. (India) Ltd., 15 ITD 564 (Mumbai) for the proposition that in the circumstances of the case the burden was on the Revenue to show that the method of write off was not bonafide. Reference was made to the decision of the Delhi ITAT in the case of Pepperi + Fuchs (India) Ltd. v. DCIT. Volume 6 SOT 10 (Delhi) for the proposition that accounting policy followed by an assessee which is accepted in the commercial world not doubted by the Revenue when followed cannot be disregarded.

63. It was alternatively contended that if the plea of the assessee is not accepted then a direction to revalue the opening stock of the succeeding assessment year should be given.

64. The learned DR for the revenue drew out attention to the details of obsolete finished stock of Rs. 200 lakhs filed by the assessee and pointed out that the accounting sub-head thereon is shown as "Excess or Shortage'. According to him the plea of the assessee that the write off was of obsolete stock was in contradiction with the details furnished. It was therefore submitted by him that the addition to the extent of Rs. 200 lakhs in any event has to be sustained on this basis because there was to proof of actual shortage. It was submitted that though this was not the basis on which the addition was made, the Tribunal can take note of the above while deciding the issue.

65. It was further submitted by him that the write off of obsolete stock even if (sic) to be based on commercial prudence is always subject to scrutiny by the Revenue and the assessee has to given a satisfactory (sic) the write off. The fact that such write off was accepted in the past cannot be the basis to delete the addition. In this regard, it was argued by him that principles of res judicata are not applicable in Income Tax assessments.

66. In rejoinder, learned Counsel for the assessee submitted that the basis of disallowance was that there was a write off of obsolete stock and these was no question of any shortage of stock. It was also submitted by him that the description in the stock adjustment note as 'physical shortage' is only a head of account but actually represents write off of stock which is obsolete. It was also submitted by him that the burden was on the Revenue in the present case to show incorrect valuation of stock by the assessee. Reliance was placed in this regard on the decision of Bombay High Court in the case of CIT v. Acrow (India) Ltd. 298 ITR 447 (Bom).

67. We have considered the rival submissions. At the outset, we wish to make it clear that the Revenue has proceeded to consider the difference in value of stock only as a write off of obsolete stock. It is therefore not possible to consider the difference in stock as shortage of stock. The argument of the learned DR of the revenue in this regard is therefore not accepted. The issue that needs to be adjudicated is as to whether the write off of stock as obsolete has to be accepted or not.

68. The inventory of finished stock which was considered as obsolete to the extent of Rs. 200 lakhs and written off is at page 241 to 247 of the assessee's paper book. The inventory of work in progress written off as obsolete to the extent of Rs. 68 lakhs has also been furnished before us. Perusal of the same reveals that complete details and break up of items and value has been furnished by the assessee before the Assessing Officer. The Assessing Officer and learned CIT(A) have proceeded on the basis that evidence regarding the stock having become obsolete has not been produced and therefore the claim of the assessee should be rejected. It is also not disputed that the method followed by the assessee was the same as in the past. In such circumstances, the burden to show that the write off of obsolete stock was not bonafide is on the Revenue as held by the Mumbai Bench of the ITAT, in the case of Consolidated Pneumatic Tool Co (India) Ltd. (supra) where the facts were identical to the case of the assessee. The Tribunal held as follows:

In the instant case, no material had been placed by the Revenue to show that the method of valuing the obsolete stocks and writing them off in its accounts, followed by the assessee in the three relevant assessment years, was not bonafide and that that method had not been followed by the assessee in the subsequent years. The department had been unable to point out anything wrong in the approach of the assessee in arriving at the value of the obsolete stocks or suggest any other better on appropriate and scientific method of valuation of such obsolete stocks. It was not the case of the revenue that the inventories of obsolete stocks prepared by the assessee in these three years were neither correct nor represented the true state of affairs nor had the department placed any material which would show that the findings reached by the Commissioner (Appeals) are not based on any material but on mere surmises and conjectures. In these circumstances, in view of the decision of Madras High Court in Indo-Commercial Bank Ltd. v. CIT (1962) 42 ITR 22, the additions made by the ITO on account of obsolete stocks written off by the assessee in its books had to be deleted.

69. The Delhi Bench of ITAT in the case of Pepprit Fuchs (India) Ltd. (supra) has also laid down the principles to be followed in the cases like the present, as follows:

The Apex Court in the case of Chainrup Sampat Ram v. CIT , opined that as the profits of income tax are to be computed in conformity with the principles of commercial accounting unless such principles stand superseded or modified (sic) legislative enactment, the loss due to fall in price below cost with respect to the traded goods is allowed even if such loss has not been actually realized in the year itself. Evidently, the (sic) by the Apex Court was to effectuate the theory of (sic) underlying the rule that the closing stock is to be valued (sic) cost or market price/realizable value whichever is lower. In the instant case, the assessee, having valued its obsolete stock at its realizable value, being lower of the actual cost, the resultant loss had to be taken into consideration to compute the profits chargeable to tax during the year under consideration. The objection of the Revenue that the actual sale, which had resulted in the infliction of such loss look place in the subsequent year, was in significant in the light of the aforesaid principles enunciated by the Apex Court in the case of Chainrup Sampat Ram (supra). Therefore, once the accounting policy of the assessee which was generally accepted in the commercial world, was not doubted by the Revenue, the loss resulting on account of its application could not be disallowed merely on the ipse dixit of the Assessing Officer. The assessee's claim with regard to the provisions of loss in respect of obsolete items of stock was accordingly allowed.

70. Applying the above principles to the facts of the present case, we find that the Assessing Officer in the present case without pointing out as to how the write off in question was not correct or bonafide, when ail facts and details were placed before him, could not have made the impugned addition. We, therefore, direct that the addition made in this regard be deleted. The 4th ground of appeal of the assessee is allowed.

71. In the 5th ground of appeal, the assessee has raised 2 additional grounds. The first ground raised by the assessee is as follows:

The learned CIT(A) erred in not admitting the following additional grounds of appeal filed by the assessee:

Non-compete payment:

a) The learned Assistant Commission erred in not considering the claim made by the assessee vide Note No. 1 of the notes forming part of the return of income.

b) Without prejudice to the appeal preferred in the earlier years, the learned Assistant Commissioner may be directed to allow deduction for an amount of Rs. 57,60,000 representing 1/5* of the total non-compete expenditure of Rs. 2.88 crores paid by the assessee to the National Radio & Electronics Company Ltd.

72. The assessee had entered into an agreement dated 29 March 1997 with NELCO. The assessee was engaged in the activity of telecommunication. NELCO was also engaged in the activity of manufacture and supply of telecommunication equipment, data communication equipment and systems, V-SAT equipment and systems, drives, automation and SCADA systems. The assessee and NELCO were affiliated with the TATA group of companies. The assessee proposed to NELCO to withdraw from the manufacture and supply of some of the telecommunications equipment in order to facilitate the reorganization of the telecommunications business within the TATA group of companies. Under the above agreement as per Clause 1, NELCO agreed to the following:

With effect from the date of this Agreement and subject to the provisions of Clause 2 below, NELCO shall cease and desist directly or indirectly carrying on or engaging in India, whether the brand name of NELCO or any other brand name, the manufacture and/or supply/marketing of telecommunication equipment for the territory of India, particularly the activities described in Annexure "A".

The Annexure A of the agreement was as under:

NELCO shall cease to manufacture, market, lease or sell any PBX or associated products except to the extent required, the following:

b) Running down current operations, including liquidating inventories and receivables within 6 months from the date of this Agreement;

c) Meeting its current outstanding obligations towards customers, including providing committed upgrades'

d) Providing service support to its customers.

Clause 5 of the Agreement refered to the amount payable to NELCO for the above covenant which read as under:

In consideration of the negative covenants agreed to by NELCO, TTL shall make payment to NELCO of Rs. 2,88,00,000/-.

73. The assessee paid the consideration of Rs. 2.88 crores to NELCO for (sic) engaging the activity of manufacture, supply or marketing of the telecommunication equipment as discussed in the agreement. According to the Assessee, the consideration paid to NELCO should have been allowed as revenue expenditure in the AY. 1997-98 itself. However, the claim of the assessee was not allowed in the relevant A.Y Without prejudice to the claim that the consideration paid to NELCO must be allowed as deduction in the A.Y. 1997-98, the assessee submitted that the period of the agreement was 5 years. Accordingly, one fifth of the consideration must be allowed as deduction in the current assessment year. In the notes of computation of income, the aforesaid claim was made by the assessee. The Assessing Officer did not consider the same. Before learned CIT(A), the claim for deduction of 1/5th of the expenditure was made in the form of an additional ground, which was not entertained by learned CIT(A). We are of the view that the additional ground has to be admitted for adjudication as the claim was made in the return of income filed by the assessee. We were informed that the claim for deduction of the entire sum is still pending adjudication in A.Y. 1997-98 and 1998-99. In the circumstances, we admit the additional ground for adjudication and remand the matter to learned CIT(A) for deciding the issue in accordance with law after taking into consideration the decision if any, in A.Y. 1997-98 and 1998-99.

74. 2nd additional ground was not pressed and the same is dismissed as not pressed.

75. In the result, the appeal by the assessee is partly allowed.

Order has been pronounced on 29th Day of July, 2008.