ORDER
A.D. Jain, J.M.
1. This is Department’s appeal for the asst. yr. 1998-99 against the order dt. 16th Aug., 2002 passed by the learned CIT(A)-I, Ludhiana. The following grounds have been taken:
The learned CIT(A) has erred both in law and on the facts of the case in holding that the sale of Betalactum Division by the assessee company is a slump sale on which Sections 50 and 50A are not applicable and long-term capital gain has to be computed by indexing the cost of acquisition. In consequence, he has deleted the addition made by the AO on account of disallowance of depreciation of Rs. 5,81,99,106 as a result of reduction of block of assets by Rs. 25,02,69,344 and holding the long-term capital loss of Rs. 12,67,69,823 against the capital gain assessed at Rs. 4,39,64,437 by the AO.
The learned CIT(A) has erred both in law and on the facts of the case in deleting the disallowance of Rs. 5 lacs paid for securing the membership of club for Mr. Ashwani Windlass, Jt. Managing Director, which was otherwise of the nature of a personal benefit.
The learned CIT(A) has erred both in law and on the facts of the case in deleting the addition on account of expenses of Rs. 4,22,084 incurred for revaluation of fixed assets. The expenses on valuation required for the purpose of sale of that division was not incidental to business.
The learned CIT(A) has erred both in law and on the facts of the case in holding that the non-compete fee of Rs. 5 crores received by the assessee company from M/s Max GB Ltd. is a capital receipt not liable to tax and is not capital gain, whereas, this amount was self-declared by the assessee as capital gain during the assessment proceedings, where a revised computation of income was filed. dt. 29th May, 2000. The assessee transferred its right to manufacture for a definite period and in turn the amount received as its gain liable to be taxed. Even if it is accepted that no right is extinguished permanently as held by the learned CIT(A) then those receipts of Rs. 5 crores should be treated as revenue receipts earned by lending of rights and taxed as income.
The learned CIT(A) has erred both in law and on the facts of the case in treating the amount of Rs. 50 lacs received by. the assessee on assignment/sale of trademark from M/s Rhone Poulene (India) Ltd. and declared by the assessee as capital gain in its return of income.
The learned CIT(A) has erred both in law and on the facts of the case in allowing the project development expenses amounting to Rs. 29,25,019 which were carried forward as deferred revenue expenditure. The assessee is following mercantile system of accounting and these expenses were required to be claimed in the relevant year.
The learned CIT(A) has erred both in law and on the facts of the case in allowing deductions under Section 35D.
2. Apropos ground No. 1, the AO observed that in the return filed, the assessee had claimed loss of Rs. 12,67,69,823 under the head “Long-term capital gains”, regarding the sale of its Betalactum Division w.e.f. 1st July, 1997, on a slump sale basis, for a sale consideration of Rs. 30 crores. The assessee had reduced from such sale proceeds, indexed cost of acquisition and improvement amounting to Rs. 42,67,69,823, thereby showing therein the loss of Rs. 12,67,69,823. The production in the Betalactum Division had been started on 1st Feb., 1985. The AO required the assessee to explain the basis of the claim and the application of indexed cost of acquisition as per Annex, in attached to the return for working out the income from the sale. The assessee submitted that the indexed cost of the acquisition/improvement had been claimed by relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Mugneeram Bangui & Co. (Land Department) and on CBDT Circular No. 23-D (LXXV III-6) of 1965 as referred by the Pune Tribunal in the case of Mrs. Mangla S. Paianjape and Ors. v. ITO (1994) 48 TTJ (Pune) 78 : (1994) 116 CTR (Pune)(Trib) 312. The AO pointed out to the assessee that the case law and the Board’s circular cited by the assessee related to the law as it existed before the insertion of Sections 50 and 50A in the IT Act, laying down that in the case of the sale of depreciable assets forming part of the block of assets, the indexed cost of acquisition was not admissible. The AO pointed out to the assessee that the Betalactum Division of the assessee comprised such assets along with lands and other assets, etc., and that according to the special provisions of Sections 50 and 50A of the IT Act, where sale of any or all of depreciable assets was involved, the excess of the sale consideration and the WDV of such assets would amount to short-term capital gain. It was also pointed out that upto the asst. yr. 1999-2000, there existed no special provision in the IT Act for computation of income in the case of slump sale and it was only w.e.f. 1st April, 2000, that a special provision for computation of capital gain in the case of a slump sale had been inserted in the Act by way of Section 50B and that dealing with the case of the assessee, the provisions of Sections 50 and 50A of the Act would come into play. The assessee was, in this manner, asked to show cause as to why the income in respect of the depreciable assets of the sold Betalactum Division of the assessee be not computed on the said basis.
3. The assessee submitted before the AO that the sale of its Betalactum Division was a slump sale of the undertaking as a whole, as a going concern, including land, building, plant and machinery, inventory, stock, intellectual property, right contracts and employees registration along with liability.
4. The AO, however, observed that a perusal of the terms and conditions of the Mou, dt. 30th June, 1997 between the assessee and Max GB Ltd., regarding the sale of the assessee’s Betalactum Division showed that the assessee company had sold its Betalactum Division on 30th June, 1997, whereas the intellectual property and know-how including technical know-how pertaining to the Betalactum Division, which was an inseparable part of the undertaking, had not been transferred on the said date; and that rather, it had been agreed that it would be transferred by the seller to the purchaser on a future date, i.e., 1st July, 2000, which fell much after the asst. yr. 1998-99. The AO observed that as per Section 2(47) of the IT Act, transfer in relation to a capital asset includes the extinguishments of any rights in a capital asset. It was observed that the same was the case in respect of the technical know-how developed and improved by the assessee company and constituting business activities of the assessee’s betalactum division, which had not been transferred during the assessment year under consideration; that in this background, the prerequisite for the transfer of Betalacum Division as a whole, as a going concern in a slump sale, did not get fulfilled, as all the interests in the betalactum division belonging to the assessee company had not been transferred to the buyer during the year under consideration. The AO thus asked the assessee to elaborate its claim of the transfer of the Betalacum Division in a slump sale and to justify the basis of working out the loss of Rs. 12,67,69,830 under the head “Long-term capital gain”.
5. The AO further noted that before the transfer of the Betalactum Division, the assets thereof were got revalued by the assessee. The assessee, in this regard, submitted that the revaluation of the reserve of Rs. 1,11,95,525/74 was created in consequence of the assets relating to the Betalactum Division, which was revalued on 31st March, 1997; that the revaluation reserve was created for amounts of difference between the peak value of the assets and the amount as per the revaluation report; that the details of the break-up of the assets as on 31st March, 1997, as per the revaluation report, had been furnished, according to which, revaluation of various blocks of assets had been shown at an aggregate amount of Rs. 27,01,39,328/17, as on 31st March, 1997; that similarly, the revaluation of the various blocks of assets had been shown at Rs. 25,96,95,009/79, after claim of depreciation as on 30th June, 1997, the date when the C&BC unit was transferred; that the copies of the source of fund and assets and liabilities statement of the Betalactum Division as on 31st March, 1997 and 30th June, 1997 had also been filed. The AO noted that the revaluation of the various assets of the Betalacum Division was a solitary exercise conducted by the assessee company amongst the various divisions/units owned by it and that too, earlier to the transfer of the said unit; that the purpose of such revaluation was apparent, i.e., to have a basis of the value of the various assets of the said division in view, before arriving at the figure of the total consideration for transfer of the unit and the extent of revaluation of these assets, giving appreciation by about Rs. 11,10,95,525 which, added to the existing value of various assets, nearly, amounted to the final consideration agreed to at Rs. 30 crores, which showed a wide gap between the consideration received and the book value of the assets; that the assets had been revalued block-wise, based on the revaluation of various assets as per the revaluation reports which finally determined the sale consideration; that so, the sale consideration had apparently been received by evaluating the assets forming part of the undertaking and the variation in the consideration received and the net worth may be attributable to the goodwill, which had been admitted as a part of the Betalactum Division sold as per the MoU, for the purpose of computing the income/loss from the transfer of the said unit.
6. In response, the assessee submitted that what had been sold by the assessee company was the undertaking and not the depreciable assets per se and that accordingly, the special provisions dealing with the sale in the case of depreciable assets had no application on the sale of assets as depreciable assets; that undisputedly, the assessee company had never claimed any depreciation on the undertaking; that the various case law cited by the assessee continued to have applicability in the case of a slump sale; that apropos the judgment relating to the pre-1988 period also, there were provisions in the Act relating to profit/loss arising on sale of depreciable assets, like Section 41(2) and that despite such provisions, it had been held in various decisions that an undertaking is a separate asset and it is not permissible to break-up the consideration, etc.; that Section 50 only seeks to change the manner of computation and the head regarding the excess/surplus arising on sale of depreciable assets and not the undertaking and it does not affect the concept/principle/settled law relating to sale of an undertaking on a slump sale basis; that apropos the observation that Section 50 should apply in the case of a slump sale also, for the reasons that Section 50B had been inserted only w.e.f. 1st April, 2000, Section 50 is a special provision dealing with a particular subject-matter and if that special provision were to apply to a slump sale, there was no need to introduce any special provisions in the Act; that had the legislature been of the view that a slump sale was covered by Section 50, but a different mechanism was to be provided regarding the computation of capital gain/loss, a suitable amendment would have been made in Section 50 itself, instead of inserting a new provision without providing any exclusion in the existing Section 50; that if it were to be taken that Section 50 covers a slump sale also, it would lead to an unharmonious interpretation that the two special provisions had parallel jurisdiction over a subject-matter; that this was not the intention of the legislature and the only harmonious interpretation would be that Section 50 does not have any applicability to a slump sale; that Section 50 does not get attracted in the case of a slump sale and the assessee company was eligible to deduct indexed cost of acquisition and the indexed cost of improvement and thus, the loss of Rs. 12,67,69,823, as computed by the assessee company, was allowable in the computation under the head “Capital gain”; that Clause 1.1(i) of the MoU, dt. 30th June, 2000 defined ‘Betalactum business’; that vide sub-para (c) thereof, “All intellectual property and know-how including technical know-how pertaining to the Betalactum Division” was included; that Clause (n), which dealt with the sale, provided that the sale or transfer of Betalactum Division shall be of a going concern/running business or an ‘as is where is’ basis, together with all intangible rights comprising of all licences, permits, registrations, approvals, quotas, consents and benefits pertaining thereto and shall be completed on or before the effective date, except for the technical know-how developed and improved by the seller, which shall be transferred by the seller to the purchaser on 1st July, 2000, however, the purchaser shall be entitled to use such technical know-how from the effective date till 30th June, 2000; that Clause 3(a) of the MoU dealt with purchase consideration and royalty, while para (1) thereof dealt with purchase consideration on a slump price basis; that para (2) dealt with royalty for use of know-how; that Clause 3(b) further clarified that the purchase consideration as referred to in Clause (a)(1) had been mutually agreed between the parties as a slump price and the parties accepted the same as final; that Clause 4, which dealt with the effective date, which had been defined in Clause 1.1(iii) as 1st July, 1997, provided that from the effective date, the sale shall become irrecoverable, irrespective of whether the formal transfer/sale of various assets comprised in the Betalactum business has been completed by the effective date or not; that thus, the sale of the Betalactum business, including the know-how was on a slump sale basis; and that the fact that the know-how developed and improved by the assessee company was transferred not on 1st July, 1997, but on 30th June, 2000, with a right to the purchaser to use the same for the intervening period, would not have affected the same being a slump sale. The assessee also filed a copy of CBDT. Circular No. 23-D of 1965, wherein, the CBDT referred to the Supreme Court decision in the case of Mugneeram Bangui & Co. (supra) in which it was held that where the sale was concerned as a whole and a lump sum price was paid, no portion of this price was attributable to the stock-in-trade and therefore, it was not possible to hold that there was a profit other, than what resulted from the appreciation of capital. The CBDT noted that, therefore, where a business was sold as a going concern, the excess which may not be the business profit, would be capital gain chargeable to tax, and this view was also supported from the decision in the case of R.B. Lachman Das Mohanlal & Sons v. CIT .
7. The AO, however, observed that the assessee had itself assigned the entire consideration of Rs. 30 crores to the cost of the land, plant and machinery, furniture, building, etc., belonging to the Betalactum Division exclusively, while working out the capital gain on the sale of Betalactum Division; that in doing so, the special provisions of Sections 50 and 50A of the IT Act, as relevant to the assessment year under consideration were not taken into account; that these provisions deal with the manner of computation of income in the cases of depreciable assets and do not permit application of indexed cost of acquisition in respect of such assets; that the special provisions of law have precedence over the general provisions, including Section 48 of the Act and its proviso; that further, in view of these special provisions of Section 50 of the IT Act having come into force subsequent to the decision of the Hon’ble Supreme Court in the case of Mugneeram Bangui & Co. (supra), the sale consideration pertaining to the depreciable assets would fall under the provisions of these sections which do not provide for working out indexed cost of acquisition for the purpose of arriving at the short-term capital gain or reduced WDV in the case of sale of such assets forming part of block of assets in the case of the assessee; that further, the CBDT circular referred to by the assessee also reiterates that where the business is sold as a going concern, the profit is chargeable under the head ‘Capital gain’ and not as business profit; and further that, no portion of the price is attributable to stock-in-trade; that this was what the assessee had done by assigning the entire consideration received entirely to the land and other depreciable assets like plant and machinery, vehicles and furniture, etc., and therefore, the provisions of Section 50 of the Act were applicable; that the loss declared by the assessee company in respect of sale of various depreciable assets by applying indexed cost of acquisition was not appropriate in view of the special provisions of Section 50 of the Act; that further, the sale of Betalactum Division as a whole was not complete since the interest of assessee in the intellectual property forming part of the Betalactum Division, as per the MoU, did not pass on to the buyer during the asst. yr. 1998-99 but much later; that the purpose of getting revaluation of various depreciable assets, i.e., land building, plant and machinery, furniture and vehicles, etc, belonging to the Betalactum Division, as a solitary case, before the execution of the MoU for sale of the unit was that the sale consideration apparently had been arrived at by evaluating these assets and the variation in the consideration received and the cost of the assets after revaluation may be fairly attributable to the goodwill which had been admitted as part of the Betalactum Division sold as per the MoU for the purpose of computing the income from the transfer; that the expenses regarding revaluation of the various assets, i.e., machinery land, plant, building, furniture, etc. had been debited round the date of execution of the MoU regarding sale of the Betalactum Division; that as such, the AO was of the opinion that the assessee had undertaken to assign values to various assets of the Betalactum Division by resorting to revaluation of the same and the transfer of assets without relinquishment of assessee’s rights in the technical know-how developed and improved forming part of the Betalactum Division, during the asst. yr. 1998-99, did not constitute sale of the Betalactum Division as a whole; and that as such, the method of computation of loss from sale of the Betalactum Division was not acceptable and the same was being computed keeping in view the mandatory provisions of Section 50 of the IT Act. The AO observed that the assessee had itself assigned the sale consideration of Rs. 30 crores to the cost of land, building, machinery, vehicles and furniture; that the assessee had worked out the WDV of the various assets by getting the same revalued before the sale; that, therefore, the same value was being taken as forming part of the consideration received aggregating to Rs. 30 crores and the balance related to the goodwill which had been admitted to be part of the business, but for which no valuation had been assigned by the assessee. The AO thus arrived at a figure of Rs. 5,81,99,106 representing excessive depreciation claimed. This amount was disallowed and added to the total income of the assessee. The long-term capital gain on the land was worked out at Rs. 35,89,446. Apropos goodwill, the AO reduced from the total sale consideration of Rs. 30 crores, an amount of Rs. 25,96,25,009 representing consideration received in respect of other assets. The long-term capital gain in this regard was thus worked out at Rs. 4,03,74,991. The total long-term capital gain was hence worked out at Rs. 4,39,64,437 which was added to the income of the assessee against the loss declared by the assessee from the sale of its Betalactum Division, at Rs. 12,67,69,823.
8. The learned CIT(A) observed, inter alia, that he agreed with the contention of the assessee that the valuation of its fixed assets had been made by the AO himself and not by the assessee; that the revaluation of the fixed assets of the Betalactum Division was got done on 31st March, 1997, whereas the sale was made w.e.f. 1st July, 1997 and the depreciable valuation of the assets could not be equated with the market value; that there being nothing in the MoU filed by the assessee during the assessment proceedings to suggest that the sale was not on a slump sale basis, it was acceptable that the sale was on a slump sale basis; that the decision of the Hon’ble Supreme Court in the case of CIT v. Electric Control Gear Mfg. Co. clearly applied to the facts of the assessee’s case, since the assessee had never disclosed the break-up of the sale consideration; that the AO was not right in assigning the slump price over various assets and that too, selectively, at his own discretion; that in any case, the AO was not justified in assigning the values to hold that the sale was not a slump sale; that Section 50 does not have any applicability in the case of a slump sale; that the Betalactum. Division of the assessee constituted a separate asset of the assessee; that the Betalactum Division was a long-term asset of the assessee; that the sale of the Betalactum Division was completed during the previous year ending on 31st March, 1998; that the sale was on a slump sale basis, to which Section 50 did not apply; that the capital gain was to be computed by deducting indexed cost of acquisition and indexed cost of improvement from the sale consideration as computed by the assessee; and that only the WDV of the assets pertaining to the Betalactum Division be reduced from the respective blocks. With these observations, the learned CIT(A) held that:
(a) The disallowance of depreciation of Rs. 5,81,99,106 would stand deleted. Consequently, the reduction of block of assets by Rs. 25,02,69,344, as done by the AO would also be deleted. The block of assets will be reduced by Rs. 8,04,93,280 only, as done by the assessee in the return filed;
(b) The capital gain arising out of sale of the Betalactum Division would result in a loss of Rs. 12,67,69,823 instead of gain of Rs. 4,39,64,437 as worked out by the AO.
9. Before us, the learned Departmental Representative has argued, challenging the impugned order, that the assessee sold its Betalactum Division; that the sale was claimed to be that of a going concern; that it was claimed to be a slump sale; that, however, for computing the capital gain, the assessee took into account the cost of all assets and worked out loss of Rs. 42,67,69,823; that the AO held that the sale was not a slump sale because the assessee got its assets revalued as on 31st March, 1997 and appropriate valuation was shown in the details filed with the return; that taking the cost of acquisition, the unit having started in 1985, the same cost was indexed, after taking for the depreciation, etc. The learned Departmental Representative, arguing that the capital gain does arise in a slump sale, has relied on 66 ITR 764 (SC) (sic) and 59 ITR 690 (Mad) (sic). The learned Departmental Representative has next argued that just because the sale was stated to be a slump sale, loss has been worked out by the assessee against capital gain. It has been submitted that the CIT(A) has mainly stated that from the evidence on record, the sale was, in fact, a slump sale. According to the learned Departmental Representative, even so, the capital gain has to be worked out.
10. The learned Counsel for the assessee, on the other hand, reiterating the stand taken by the assessee before the taxing authorities, has submitted that as per the definition of slump sale under Section 2(42C) of the IT Act, as applicable from 1st April, 2000, if an undertaking is transferred as a going concern with all its assets, liabilities, rights, obligations and personnel, without values being assigned to the individual assets, it would be regarded as a slump sale; that “undertaking” is defined in Expln. 1 to Section 2(19AA) of the Act to include any part of the undertaking, or a unit or division of an undertaking, or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof, not constituting a business activity; that it thus follows that where assets and liabilities of the undertaking or the assets of the undertaking are sold as a group lumped together, such a sale would qualify as a slump sale; that the undertaking is a distinct capital asset capable of being transferred by itself; that Section 2(14) of the Act defines ‘capital asset’ to mean property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade, stores, raw materials, etc. held for the purpose of business; that the Hon’ble Gujarat High Court in the case of Sarabhai M. Chemicals (P) Ltd. v. P.N. Mittal has held that the undertaking of the business is a capital asset; that the Hon’ble Madras High Court in West Coast Electric Supply Corporation Ltd. and Anr. v. CIT has held that the word “property” is comprehensive enough to include an undertaking; that the undertaking per se is a distinct capital asset separate from the assets composing it; that the sale of an undertaking as a whole would comprise of land, building. and plant and machinery, furniture, fixtures, spares, licenses, goodwill, trademark, non-compete and many such privileges and rights accruing to the undertaking over a period of time, etc., and also the trained and experienced work force including executives; that when an undertaking is transferred as a composite unit, it cannot be said that its different ingredients are separately acquired; that what Is required is the undertaking as a composite unit, which is wholly different from this component; that where the undertaking is sold as a going concern for a slump price without values being assigned against different and definite items, the agreed price cannot be apportioned on capital assets in specie; that what is sold is not an individual item of property forming part of the aggregate, but the capital asset consisting of the business of the whole concern or undertaking; that in order to constitute slump sale, it is not necessary that all assets and liabilities must be transferred; that even if some assets and liabilities are retained by the transferor, the same would nevertheless be a slump sale, so long as the transfer is on a going concern basis and the transferee is in a position to carry on the business without any intervention or interruption; that in the present case, the assessee granted to the transferee, the right to use the technical know-how developed by the assessee, against the payment of separate consideration, while retaining proprietary rights therein upto 30th June, 2000; that thus, what the transferee acquired was the going concern and carried on business without any disruption; that Section 50B inserted in the IT Act, by the Finance Act, 1999, w.e.f. 1st April, 2000 does not have retrospective operation; and that in case these submissions were not to be accepted, the AO be directed to work out the capital gain by allocating the slump price over the assets comprising non-depreciable assets such as land, depreciable assets, use of intangible assets, such as trademark, goodwill and trained work force, etc.
11. We have heard the parties and have perused the material on record. The assessee claimed loss of Rs. 12,67,69,823 under the head ‘Long-term capital gain’. This loss was claimed regarding the sale by the assessee, of its Betalactum Division, w.e.f. 1st July, 1997. The assessee claimed that this sale was made on a slump sale basis, for a sale consideration of Rs. 30 crores. From such sale proceeds of Rs. 30 crores, the assessee reduced indexed cost of acquisition and improvement, amounting to Rs. 42,67,69,823. In this manner, the loss of Rs. 12,67,69,823 was shown. The AO was of the opinion that the Betalactum Division of the assessee comprised depreciable assets forming part of the block of assets, along with the loans and other assets. It was his view that the sale of these assets attracted the provisions of Sections 50, 50A and 50B of the IT Act. The submission of the assessee that the sale in question was a slump sale of the undertaking as a whole as a going concern, was rejected by the AO, observing that the assessee company had sold its Betalactum Division on 30th June, 1997, whereas the intellectual property and the know-how had not been transferred on the said date, but they were agreed to be transferred on 1st July, 2000, which date fell beyond the asst. yr. 1998-99. The AO observed that, as such, the technical know-how developed and improved by the assessee company and constituting the business activities of the assessee’s Betalactum Division had not been transferred during the year under consideration and, therefore, the transaction did not comprise a “transfer” within the meaning of Section 2(47) of the IT Act, which lays down “transfer”, in relation to a capital asset, to include the extinguishment of any rights in such capital asset. The AO also observed that the revaluation of the various assets of the Betalactum Division by the assessee was a solitary exercise conducted by the assessee amongst its various divisions and that this revaluation was also prior to the transfer of the Betalactum Division. According to the AO, this revaluation was done in order to assess the total consideration for the transfer of the unit. The AO further noted that this revaluation gave an appreciation by about Rs. 11,10,95,525; and that this added to the existing value of the various assets, which amounted to roughly about the final sale consideration of Rs. 30 crores. The AO observed that the provisions of Sections 50 and 50A of the Act do not permit application of indexed cost of acquisition in respect of capital assets and where the business was sold as a going concern, the profit was chargeable as capital gain and not as business profit, no portion of the price being attributed to the stock-in-trade. The AO observed that by assigning the entire consideration to the cost of land and other depreciable assets like plant and machinery, furniture and vehicles, etc., the assessee had attributed the price to its stock-in-trade and that therefore, the provisions of Section 50 of the Act were applicable, and in view of this, the loss declared by the assessee regarding the sale of various depreciable assets by applying indexed cost of acquisition, was not proper. The AO observed that as such, the method of computation of loss from the sale of the Betalactum Division was not acceptable. The learned CIT(A) accepted the stand of the assessee that the assessee had not disclosed the break-up of the sale consideration and that the assignment of the value had been done by the AO. The learned CIT(A) held that the revaluation of the fixed assets of the Betalactum Division was done on 31st March, 1997, whereas the sale was made w.e.f. 1st July, 1997. It was also be held that the depreciated value of any asset could not be equated with its market value. That the sale made was on a slump sale basis was also accepted by the learned CIT(A), holding that there was nothing in the MoU nor in any papers filed by the assessee during the assessment proceedings to suggest otherwise. The learned CIT(A) held that the decision of the Hon’ble Supreme Court in the case of CIT v. Electric Control Gear Mfg. Co. (supra) was squarely applicable to the facts of the assessee’s case, since the assessee had never disclosed the break-up of the sale consideration The learned CIT(A) held the AO to be incorrect in assigning the slump price over various assets and that also, selectively. Further, the learned CIT(A) held that Section 50 of the IT Act had no applicability in the case of a slump sale, like that in the case of the assessee; that the Betalactum Division of the assessee constituted a separate identifiable asset of the assessee; that this asset was a long-term asset of the assessee; that the slump sale was completed during the previous year ended on 31st March, 1998; that the capital gain was to be computed by deducting the indexed cost of acquisition and the indexed cost of improvement from the sale consideration as computed by the assessee; and that only the WDV of the assets pertaining to the Betalactum Division were to be reduced from the respective losses.
12. The issue before us is as to whether the learned CIT(A) has correctly held the sale to be a slump sale, to which Sections 50 and 50A of the Act are not applicable. First of all, it is to be seen as to what a “slump sale” is. Section 2(42C) of the IT Act, which is applicable from 1st April, 2000, defines “slump sale” to mean the transfer of one or more undertakings as a result of sale for a lump sum consideration, without values being assigned to the new assets and liabilities in such sale. In other words, if an undertaking is transferred as a going concern, with all its assets and liabilities, without valuations having been assigned to individual assets, such a transaction is to be regarded as a “slump sale”. As per Expln. 1 to Section 2(42C) of the Act, “undertaking” shall have the meaning assigned to it in Expln. 1 to Section 2(19AA) of the Act.
13. Explanation 1 to Section 2(19AA) states that for Section 2(19AA), “undertaking” shall include any part of the undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
14. From the above, it is amply clear that where the assets and liabilities of an undertaking are sold as a group, lumped together, such a sale would qualify as a slump sale.
15. As per Clause 1.1(i) of the MoU, dt. 30th June; 1977, the Betalactum undertaking (Division) of the assessee comprised of the following assets of the Betalactum business:
(a) The plant and equipment to manufacture betalactum antibiotics in bulk located at Bhai Mohan Singh Nagar, Toansa, Tehsil Balachaur, District Nawan Shahr-144533 (Punjab);
(b) Freehold land admeasuring 244 Kanal 08 Marias 03 Sirsai or thereabout together with hereditaments thereof situated in Bhai Mohan Singh Nagar, Toansa, Tehsil Ballachaur, District Nawan Shahr-144533 in the State of Punjab, more particularly described in Annex. 1 hereof together with all buildings and structures constructed thereon;
(c) Leasehold land admeasuring 27 Kanal 09 Marlas situated at Bhai Mohan Singh Nagar, Toansa, Tehsil Balachaur, District Nawan Shahr-144533 in the State of Punjab, more particularly described in Annex. 2 hereof, together with all buildings and structures constructed thereon.
Further, the Betalactum Division, as per the said Clause 1.1(i) of the MoU also means the following:
(a) Raw material, stores, spares, tools, office furniture, vehicles and equipment;
(b) All intellectual property and know-how (including technical know-how pertaining to the Betalactum business);
(c) All workers and employees engaged in the manufacture, marketing and sale of betalactum antibiotics manufactured at the plant of the seller situated at Bhai Mohan Singh Nagar, Toansa, Tehsil Balachaur, District Nawan Shahr-144533 (Punjab);
(d) All licenses, permits, approvals, registrations, incentives, utility connections with respect to Betalactum business and which are capable of being transferred;
(e) All arm’s length contracts with clients and suppliers relating to the Betalactum business;
(f) Any and all liabilities (whether or not contingent) and bank/other guarantees extended by the seller for the continuance of the business.
16. Undisputedly, the above was transferred by way of sale w.e.f. 1st July, 1997. Clause 2 of MoU specifically provided that the sale of the Betalactum business shall be on a ‘going concern/running concern’ and ‘as is where is’ basis, together with all intangible rights comprising of all licenses, permits, registrations, approvals, quotas, consents and benefits appertaining thereto, except for the “technical know-how developed and improved by the seller, which shall be transferred by the seller to the purchaser on Is July, 2000”.
17. The intention of the assessee thus is entirely clear from the above clauses of the MoU dt. 30th June, 1997. The assets and liabilities of the undertaking were sold together as a group and this sale entirely fell in line with the idea of a slump sale, as provided under the Act, as discussed hereinabove. Though the aforesaid definition of the slump sale is not applicable to the assessment year under consideration, i.e., the asst. yr. 1998-99, it was only such sale which was envisaged by the legislature to be a slump sale and none other.
18. The learned CIT(A) has held that the undertaking comprising the Belalactum Division of the assessee was a distinct and separate identifiable asset of the assessee. Is such conclusion correct?
19. Section 2(14) of the IT Act lays down that a “capital asset” is property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade, stores and raw materials, etc., held for the purposes of his business; personal effects like movable property, held for personal use by the assessee or any member of his family dependent on him. The undertaking, it is seen, as correctly held by the learned CIT(A), is a capital asset distinct and separate from the assets constituting it. It was sold by the assessee as a business activity, taken as a whole. It was sold including land, building, plant and machinery, furniture and fixtures, office equipment, motor vehicles, capital WIP, inventories, sundry debtors, and loans and advances as assets and bank overdrafts, sundry creditors and other liabilities as liability. The Betalactum Division of the assessee comprised of licenses, permits, approvals, registrations, incentives, utility connections, all arm’s length contracts with clients and suppliers, workers and employees and contingent liabilities. All these were sold in the sale. The undertaking was sold as a going concern at a slump price.
20. In CIT v. West Coast Chemicals & Industries Ltd. (In Liquidation) , the facts were that on 9th May, 1943, the assessee company entered into an agreement for the sale of the lands, buildings, plant and machinery of a match factory belonging to it for Rs. 5,75,000, with a view to close down this business. The purchaser made default in payment. On 9th Aug., 1953, a fresh agreement was entered into between the parties for the sale of the properties mentioned in the first agreement and also chemicals and papers used for manufacture which had not been included in the first agreement, for a sum of Rs. 7,35,000. Since the memorandum of association of the assessee company allowed the assessee to manufacture and sell chemicals, and even after the sale, the company carried on manufacture on behalf of the purchaser, the Department sought to assess the profit derived from the sale of the chemicals and paper, viz., Rs. 1,15,259 as profits from business. The assessee stated that it was a realisation sale and that this amount was not liable to tax. The Hon’ble Supreme Court held that the question whether a sale was a realisation sale or a sale in the course of business is not easy to decide and depends upon the facts. On the facts of that case, it was held that the sale of the chemicals and material used in the manufacture of matches was only a winding up sale to close down the business and to realise all the assets; and that the fact that the memorandum gave power to the company to sell chemicals was not of much significance, especially as this power was rarely exercised. It was also held that the fact that the business of the company was sold as a going concern and was, in fact, worked by the assessee on behalf of the buyer till the entire consideration was paid, made no difference, as the agreement clearly indicated that the assessee was keeping the factory going, not on his own behalf but entirely on behalf of the buyer and that, as such, it could not be fairly said that the sale of the chemicals and raw materials for match manufacture was anything more than a winding up sale, not with a view to trading in chemicals and raw materials, except by comparing the two prices offered to be paid by the buyer, i.e., the price without the chemicals and raw materials and the price with them; and that, however, from that alone, it was impossible to infer that the chemicals and raw materials were sold in the ordinary way of business or that the assessee company was carrying on a trading business.
21. In CIT v. Mugneeram Bangur & Co. (Land Department)(supra), a firm, which carried on the business of buying land, developing it and then selling it, pursuant to an agreement, sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities, development expenses, and liability in respect of deposits made by intending purchasers. The consideration of Rs. 34,99,300 was paid by the allotment of shares to the partners or their nominees. The Tribunal held that the firm had no goodwill and that the sum of Rs. 2,50,000 allocated towards goodwill was really the excess value of the land, which was the stock-in-trade of the company and that although the sale was that of a business as a going concern, the value of this stock-in-trade could be traced, but that the transaction was a mere adjustment of the business position of the partners and the firm was not entitled to take the book keeping entries as evidence of any profits. The Hon’ble Supreme Court held that the sale was the sale of a whole concern and no part of the price was attributable to the cost of the land and no part of the price was taxable; that the fact that in the schedule to the agreement, the price of the land was stated, did not lead to the conclusion that a part of the slump price was necessarily attributable to the land sold; and that what was given in the schedule was the cost price of the land as it stood in the books of the vendor, and even if the sum of Rs. 2,50,000 attributed to goodwill could be added to the cost of the land, there was. noting to show that this represented the market value of the land.
22. In Syndicate Bank Ltd. v. Addl. CIT (1985) 45 CTR (Kar) 68 : (1985) 155 ITR 687 (Kar), it was held that the term “capital asset”, as defined in Section 2(14) of the IT Act, 1961, has a wide meaning and includes every kind of property as generally understood, except those expressly excluded in the definition; that a business undertaking as a whole would constitute a capital asset within the meaning of Section 2(14); that however, in deciding whether income-tax could be levied on the capital gains, it has to be kept into account–(i) that there are assets of different nature, those involving cost in the acquisition and those which could be acquired by way of production in which the cost element cannot be identified, but none of the provisions pertaining to the “capital gains” suggests that they include an asset in the acquisition of which no cost at all can be conceived; (ii) the cost of acquisition mentioned ins. 48 of the Act implies a date of acquisition; and (iii) if the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then, it cannot be described as an “asset” within the meaning of Section 45 and, therefore, its transfer is not subject to income-tax under the head “Capital gains”; that if there is a transfer of the whole concern and no part of the agreed price is indicated against different and definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets in specie; that what is sold in such a case 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; and that what would arise for consideration from the point of view of taxation is only the gain in respect of that transaction, and nothing else.
23. In CIT v. F.X. Periera & Sons (Travancore)(P) Ltd. , it was held that transfer of business as a going concern would constitute transfer of a capital asset.
24. In CIT v. Narkeshari Prakashan Ltd. , the assessee was a publishing house, having two branches. The branches were sold along with their assets and liabilities. The Tribunal found that the entire branch businesses were sold as a whole as going concerns, for a slump price, that the value of liabilities stood adjusted against the value of the assets and that the inventory was made for identification and value was indicated against each item. The Hon’ble Bombay High Court held that the overwhelming character of the transaction did not stand changed and that the Tribunal was justified in deleting the addition made as profit on sale of the branches and that no question of law arose.
25. In CIT v. Kar Valves Ltd. , it was held, inter alia, that business undertaking is a capital asset.
26. In Premier Automobiles Ltd. v. ITO and Anr. , it was held that where the entire undertaking of manufacture and sale of motor cars was sold as a going concern, where the business was continuing and there was no sale of items of assets, the transaction amounted to a slump sale.
27. In Asstt. CIT v. Raka Food Products , it was held that in the case of transfer of the entire business undertaking as a whole, including land, bifurcation of sale consideration of a particular asset was not possible and that the entire gains were to be treated as long-term capital gains.
28. In Modi Electric Supply Co. Ltd. v. ITO (1986) 17 ITD 1057 (Chd), the Tribunal held that where the assessee was running an undertaking carrying on generation and supply of electricity, which was taken over by the State Electricity Board as a whole together with its depreciable assets and liabilities and the arbitrator’s award fixed the slump price without itemisation of different items of assets, profits could not be assessed under Section 41(2) of the IT Act.
29. From the above, it is evident that for a sale to be termed as a ‘slump sale’, it is not essential that all the assets and liabilities must be transferred. Even if some assets and liabilities are retained by the transferor, the sale would not lose the character of being a slump sale, if the transfer is of a going concern, on that basis and the transferee is in a position to carry on the business without any interruption. In the present case, the right to use the technical know-how developed by the assessee was granted by the assessee to the transferee against the payment of a separate consideration. The proprietary rights therein were retained till 30th June, 2000. On facts, in view of the above numerous judicial pronouncements, it cannot be said that what the transferee acquired was not a going concern. Rather, after the transfer, the transferee carried on the business without any disruption therein. In CIT v. West Coast Chemicals & Industries Ltd. (In Liquidation)(supra), CIT v. F.X. Periera & Sons (Travancore) (P) Ltd. (supra), Premier Automobiles Ltd. v. ITO and Anr. (supra), and Asstt. CIT v. Raka Food Products (supra) amongst Ors., it has been held that in the case of a sale of an undertaking as a whole, on a going concern basis, if some assets are retained by the transferor or some liabilities are not taken over by the transferee, this fact does not render the slump sale as not a slump sale. A similar view has been expressed by the Delhi Bench of the Tribunal in ITA Nos. 2584/Del/2003, for asst. yr. 1999-2000 and 5507/Del/2003, for asst. yr. 2000-01, in the case of ECE Industries Ltd., vide order dt. 29th Sept., 2006 (copy placed on record). Therefore, the findings of the learned CIT(A) in this regard are upheld.
30. Further, Section 50B of the IT Act has correctly been held by the learned CIT(A) as having no applicability to a slump sale, as in the present case. It is significant that this section was inserted in the Act by the Finance Act, 1999 w.e.f. 1st April, 2000. It has not been stated to be applicable retrospectively. In the absence of any such specific statement, it can only apply prospectively.
31. In view of the above, we hold that there is no force in the grievance of the Department, by way of ground No. 1, that the CIT(A) has erred in holding that the sale of the Betalactum Division of the assessee company was a slump sale and Sections 50 and 50A of the Act are not applicable and that the long-term capital gain has to be computed by indexing the cost of acquisition. Ground No. 1 is therefore, rejected.
32. According to ground No. 2, the learned CIT(A) erred in deleting the disallowance of Rs. 5 lacs paid for securing the membership of club for Shri Ashwani Windlass, Jt. Managing Director of the assessee company, and that this membership was of the nature of a personal benefit. Before the AO, it had been submitted by the assessee that the payment had been made towards individual membership not transferable to any member. The AO, however, observed that it had not been explained as to how the amount of Rs. 5 lacs had been adjusted in the books of the assessee’s account when Shri Ashwani Windlass left the assignment as Dy. Managing Director; and that since the expenditure in question was not a revenue expenditure, it could not be allowed. The learned CIT(A), deleting the addition made, held that the membership of a club does not bring into existence any benefit of an enduring nature and that the expenditure in question was of a revenue expenditure; and that the mere fact that the sum of Rs. 5 lacs was not a periodic fee, but an entrance fee, did not lead to the presumption that the expenditure was not of a revenue account.
33. The learned Departmental Representative has argued that the expense under consideration is not with regard to this year itself; that this benefit is regarding a particular person, i.e., Shri Ashwani Windlass, but the benefit would accrue over a period and so, it cannot be termed as a revenue expenditure.
34. The learned Counsel for the assessee, on the other hand, supporting the impugned order in this regard, has relied on the decision of the Hon’ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT and that of the Hon’ble Gujarat High Court in the case of Gujarat State Export Corporation Ltd. v. CIT (1996) 131 CTR (Guj) 23 : (1994) 209 ITR 649 (Guj). It has been argued that it is not a personal expenditure, rather, it is only an entrance fee for a club.
34A. This issue is squarely covered in favour of the assessee by the decision of the Hon’ble Bombay High Court wherein the club membership fee has been held to be an allowable business expenditure. CIT v. Sundaram Industries Ltd. , Gujarat Petrosynthese Ltd. v. Dy. CIT (2001) 71 TTJ (Ahd) 349 : (2001) 76 LTD 257 (Ahd), Dy. CIT v. Hindustan Dorr Oliver Ltd. (1994) 48 TTJ (Bom) 552, Apollo Tyres Ltd. v. Dy. CIT (1992) 44 TTJ (Coch) 534 and ITO v. Soya Production & Research Association (1985) 22 TTJ (Del) 594 also carry the same ratio. In Anarkali Chit Fund (P) Ltd. v. ITO (1988) 32 TTJ (Hyd) 134 : (1989) 43 Taxman 292 (Hyd)(Mag), it was held that life term membership of a club taken by the managing director of the company is a business expenditure and not a personal expenditure of the managing director. It was held therein that it might be that the membership of the club gave some personal benefits to the managing director also, but so far as the assessee was concerned, it was an allowable business expenditure. In Gujarat State Export Corporation Ltd. v. CIT (supra), it has been held that payment of entrance fee for a sports club is not made with the intention of acquiring any capital asset or advantage for enduring benefit of the business of the business and the same being for running the business or for bettering the conduct of the business, is a deductible revenue expenditure. In view of the above, ground No. 2 is rejected.
35. Ground No. 3 states that the learned CIT(A) has erred in deleting the addition on account of expenses of Rs. 4,22,084 incurred for revaluation of the fixed assets. According to the Department, the expense on valuation required for the purpose of sale of the Betalactum Division of the assessee were not incidental to its business. The AO observed that as per the legal and professional expenses filed, a sum of Rs. 4,22,084 had been claimed as expenditure for revaluation report as on 31st March, 1997 for fixed assets of the Betalactum Division on 1st July, 1997. The AO was of the view that since the expenditure claimed related to the valuation of items of plant and machinery, furniture, land and vehicles, etc., belonging to the Betalactum Division of the assessee, which was transferred on 30th June, 1997, this expenditure related to the transfer of a capital asset and did not constitute a revenue expenditure, but the same had been incurred in connection with the same, it was to be considered by recomputing the capital gain. This expenditure was disallowed and added to the total income of the assessee with the observation that the sale took place on 1st July, 1997. The learned CIT(A) deleted the addition.
36. Supporting the assessment order in this regard, the learned Departmental Representative has argued that even otherwise, a revenue expenditure can be that which has a nexus with the assessee’s business or profit-making processes, whereas the revaluation under consideration had nothing to do with either the assessee’s business or its profit-making process. It has further been argued that just because the valuation was carried out since the unit was to be sold by the assessee, it cannot be said that it did not relate to the transfer of the assets.
37. On the other hand, the learned Counsel for the assessee has submitted that this expenditure does not relate to the transaction of slump sale; that the revaluation was carried out on 31st March, 1997, whereas the sale took place on 1st July, 1997; that the revaluation was necessary to obtain bank loans; that the revaluation was with regard to the fixed assets of the Betalactum Division; that this revaluation was not carried out for the purpose of the transfer of the undertaking; and that the revaluation exercise is carried out in routine, whenever the assessee company approaches financers/fihancial institutions to secure finance for its business needs; and that the expenditure was thus incurred wholly and exclusively for the purpose of the assessee’s business. It has been argued, without prejudice to these arguments, that if it is considered that the expenditure was connected with the transfer of the Betalactum Division, the same may be allowed to be deducted in computing the capital gain/loss on transfer of the undertaking as expenditure incurred in connection with the said transfer.
38. We have considered the rival submissions in this regard. The facts are that the revaluation was got done on 31st March, 1997 and the sale took place on 1st July, 1997. It is evident that the assessee got the revaluation done for the purpose of the sale. The assessee has contended that this exercise was carried out in routine in order to secure finance from financers/financial institutions, for the business needs of the assessee. However, it is seen that such revaluation is not a regular feature of the assessee. At least no other such instance of revaluation, at any other point of time, has come on record. Moreover, the assessee has also not placed on record any material to show that any finance was secured from the financial institutions/financers in pursuance of the said revaluation. Anyhow, the alternative contention of the assessee appears to be right and is accepted as such. This expenditure will be allowed to be deducted in computing the capital gain/loss on the transfer of the Betalactum Division, since this expenditure was incurred in connection with the said transfer. Ground No. 3 is, as such, accepted in the above terms.
39. As per ground No. 4, the learned CIT(A) has erred in holding that non-compete fee of Rs. 5 lacs received by the assessee company from M/s Max GB Ltd. is a capital receipt not liable to tax and is not capital gain. The Department contends that this amount was declared by the assessee itself as capital gain during the assessment proceedings, where the revised computation of income was filed on 29th May, 2000. The assessee transferred its right to manufacture for a definite period and in terms, the amount received was its capital gain, liable to be taxed. It is further contended that even if it is accepted that no right is extinguished permanently, as held by the learned CIT(A), Rs. 5 lacs should be treated as revenue receipt earned by the assessee by lending of rights and the same be taxed as income.
40. Before the AO, the assessee’s case was that this receipt of Rs. 5 lacs had been declared as capital gain, for selling its right to manufacture or produce any article or thing and trading in betalactum antibiotics, including any service connected with the said business; that the amount represented a receipt of capital nature, in view of the provisions of Section 55(2)(ii) of the Act, as per which, the right to manufacture, produce or process any article or thing is a capital asset and which provides that the cost thereof shall be taken as ‘nil’; that a suitable part of the said consideration represented long-term capital gain and the balance was exempt from tax, being a capital receipt; that in view of the specific definition contained in Section 55(2)(ii), fee received had been shown as capital gains; that the amount received also included an arrangement binding on the company not to carry out other activity, i.e., trading, etc., in the medicines produced by the Betalactum Division, which did not fall in the definition of ‘asset’ as per Section 55(2)(ii); and that a reasonable amount be exempted from being considered as capital receipt.
41. The AO observed that this issue had not been pressed by the assessee. As such, the AO took the entire amount of Rs. 5 crores declared as capital gain, as such capital gain.
42. The assessee, however, challenged this finding of the AO before the learned CIT(A). It was argued that as per assessment proceedings, the assessee was required to show cause as to why the non-compete fee could not be treated as business income; that after detailed deliberations on the subject-matter, the AO had agreed that the said fee represented a capital receipt and not business receipt; that the question, therefore, was as to whether the said capital was liable to tax as capital gain; that under Section 45 of the Act, it was only profits and gains arising on the transfer of a capital asset, which could be taxed; that in the present case, since the signing of the negative covenants, i.e., undertaking not to carry out the manufacturing or trading was a self-imposed restriction, there was no transfer whatsoever and, therefore, the amount of Rs. 5 crores was not liable to tax, as provided by Section 45 of the Act.
43. The learned CIT(A) decided this issue in favour of the assessee holding that undisputedly, the right to manufacture constituted a capital asset, but Section 45 of the Act could be invoked only if there was a transfer and not otherwise; that he agreed with the assessee’s contention that there had been no sale, since no profit had been passed on to the other party, nor was it a case of exchange, since no property had passed on from the signing of the negative covenants; that nor was it a case of relinquishment of asset, since the person signing the negative covenants did not relinquish anything, it had already retained the right to manufacture or trade, it had agreed to restrain for a limited period; that nor was it a case of extinguishment of any right, since the right to manufacture or trade was made intact after the period for which the negative covenants had been signed; that as pointed out by the assessee, in Saroj Kumar Poddar v. Jr. CIT (2001) 72 TTJ (Cal) 120 : (2001) 77 ITD 326 (Cal), non-compete fee is not taxable for the reason that there is not a transfer; that as also pointed out by the assessee, this line of reasoning has been cancelled by the legislature while inserting Clause (viii) in Section 28 of the Act, to treat the amount received or receivable under an agreement for not carrying out any activity in relation to the assessee’s own business, as business income, such amendment taking effect from the asst. yr. 2003-04 only, exempting from taxation such amounts received upto and including the asst. yr. 2002-03.
44. Aggrieved, the Department has raised ground No. 4 before us.
45. Before us, the learned Departmental Representative has submitted in this regard that a perusal of the impugned order shows that the learned CIT(A) has not taken into account the fact, as noted in the assessment order, that this issue was not pressed before the AO; and that this being so, the learned CIT(A) erred while going into the merits of the case.
46. The learned Counsel for the assessee, on the other hand, has submitted that even if the issue was not pressed before the AO, there was no estopple in law to press such claim before the learned CIT(A); that moreover, before the learned CIT(A) the Department was duly represented by the AO, who raised no objection to the matter being proceeded with on merits; that the learned CIT(A) has powers co-terminus with those of the AO and, therefore, he was justified in deciding the issue as he did; that further, the issue as to whether non-compete fee is or is not taxable, is a legal issue which can be raised at any time; that the non-compete fee in question arose from the same agreement as is in question regarding the other issues; that this agreement was already before the AO and he could well decide the issue on merits, taking into consideration the said agreement; that this being so, nothing remained to be examined afresh by the AO and so, the learned CIT(A) was not obliged to remit the issue back to the AO and so, the findings recorded by the learned CIT(A) on this count are well sustainable. On the merits of the issue, the learned Counsel for the assessee has submitted that the non-compete fee received for undertaking a negative covenant for not carrying on the business is in the nature of a capital receipt not liable to tax; and that the amendment in Section 28(va) of the Act, w.e.f. 1st April, 2003, further fortifies the statement that prior to asst. yr. 2003-04, non-compete fee was not liable to tax.
47. We have heard the parties and have perused the material on record. The first dispute here is as to whether the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee, in view of the fact that as recorded in the assessment order, the assessee had not pressed the issue before the AO. In this regard, we find that the assessee is correct when it contends that the issue of taxability of non-compete fee being a legal one, even if the assessee did not press it before the AO, it could well have been pressed before the learned CIT(A), as was done. Further, it is also correct that all the facts being before the AO, the CIT having powers co-terminus with those of the AO, was not incorrect in not remitting the issue to the AO for decision. Moreover, evidently, the AO duly represented the case of the Department before the learned CIT(A) and no objection was raised regarding the assessee having not pressed the issue before the AO.
48. On merits, evidently, there has been no transfer of assets as envisaged under Section 45 of the Act r/w Section 2(47) of the Act. The AO, pertinently, had agreed that the fee in question represented a capital receipt and not a business receipt. By signing the negative covenant, the assessee undertook not to carry out manufacture or trade of the products for a period of time. That being so, this act amounted only to a self-imposed restriction and not a transfer within the meaning of the Act. It was neither the sale or exchange or relinquishment of the asset, nor was any right therein extinguishable, the right to manufacture or trade remaining intact after the period for which the negative covenants were signed. In CIT v. Saroj Kumar Poddar (supra), which also appears at , besides in a host of other decisions, including the following, it has been held that non-compete fee is not taxable, since there is no transfer involved in the transaction:
1. CIT v. A.S. Waidekai (2005) 199 CTR (Cal) 255;
2. CIT v. Milk Food Ltd. ;
2. T.S. Manocha v. Dy. CIT (2006) 5 SOT 277 (Asr).
Further, as rightly pointed out, the amendment in Section 28(va) of the Act, w.e.f. 1st April, 2003 also supports the submission that before the asst. yr. 2003-04, non-compete fee was not liable to tax. This amendment defines the intention of the legislature in this regard.
49. In view of the above, we hold that the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee. Such finding of the learned CIT(A) is, therefore, hereby upheld. Ground No. 4 is thus rejected.
50. As per ground No. 5, the learned CIT(A) has erred in treating the amount of Rs. 50 lacs received by the assessee on assignment/sale of trademark from M/s Rhone Poulenc (India) Ltd. and declared by the assessee as a capital gain in its return of income. The facts in this regard are that in its return of income, the assessee had offered capital gains of Rs. 50 lacs on the sale of self-generated trademarks, taking the cost of acquisition thereof as ‘nil’. On the basis of the amount offered by the assessee, the AO added the same in the assessment. Before the learned CIT(A), the assessee contended that the business of the pharmaceutical formulations constituted a source of income for the assessee; that the brands were self-generated assets of the assessee; that, therefore, the consideration received without assignment of such trademarks/brand names constituted a capital receipt in the hands of the assessee, not liable to tax; that since the cost of the trademarks/brand names, being self-generated assets of the assessee, could not be determined, the computation provisions failed and so, the amount could not be taxed, as held by the Hon’ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty ; that the amendment in Section 55(2)(a) of the Act w.e.f. 1st April, 2002, providing that the cost of acquisition of trademarks or brand names associated with a business shall be ‘nil’, is prospective, being applicable only from the asst. yr. 2002-03, and, as such, it was not applicable to the case of the assessee; and that in ICI India Ltd. v. Dy. CIT (2002) 75 TTJ (Cal) 932 : (2002) 81 ITD 348 (Cal), it has been held that right to use a trademark “cannot be treated at par with goodwill” and, as such, the provisions relating to computation of cost of acquisition and cost of improvement in case of self-generated goodwill” will not apply in the case of trademarks. The learned CIT(A) agreed with the contentions of the assessee and held the amount of Rs. 50 lacs to be not liable to tax.
51. The learned Departmental Representative has, before us, contended that a perusal of the assessment order shows that the AO has not discussed this issue at all and that, therefore, it needs to be sent back to the AO. The learned Counsel for the assessee, on the other hand, has supported the impugned order in this regard. It has been contended that the AO did make the addition, which was deleted by the learned CIT(A) by passing a reasoned order. It has been submitted that self-generated trademarks like the ones under consideration, have no cost of acquisition; that capital gains cannot be determined in such cases, as held by the Hon’ble Supreme Court in the case of B.C. Srinivasa Setty (supra); and that it has been held in the case of Voltas Ltd. v. Dy. CIT (1998) 64 ITD 232 (Bom), that in a case of transfer of self-generated trademarks, the computation machinery fails, for the reason that these trademarks have no cost of acquisition. The learned Counsel for the assessee has contended that the amendment in Section 55(2)(a) w.e.f. 1st April, 2002, to treat nil cost of acquisition for self-generated trademarks, also goes to show that prior to asst. yr. 2002-03, no capital gains could be computed in such cases.
52. With regard to this issue, the stand taken by the Department is not found acceptable. As seen while dealing with ground No. 4 above, the Department was duly represented by the AO before the learned CIT(A). The AO had made the addition, which had been challenged by the assessee before the learned CIT(A). The learned CIT(A) decided this issue in favour of the assessee. It is the reasoning taken by the learned CIT(A) in so deciding the matter, which is in appeal before us. In this regard, evidently, before the asst. yr. 2002-03, B.C. Srinivasa Setty (supra), rendered by the Hon’ble Supreme Court was the law of the land. Till such time, when Section 55(2)(a) of the Act was amended w.e.f. 1st April, 2002, no capital gains could be computed on the transfer of self-generated trademarks, such trademarks having no cost of acquisition. Therefore, the learned CIT(A) has correctly deleted the addition made. Accordingly, ground No. 5 raised by the Department stands rejected.
53. Ground No. 6 states that the learned CIT(A) has erred in allowing the project development expenses amounting to Rs. 29,25,019, which project expenses were carried forward as deferred revenue expenses. It is the case of the Department that the assessee was following the mercantile system of accounting and that these expenses were required to be claimed in the relevant year.
54. The assessee had incurred an expenditure of Rs. 31,68,663 during the period 1st April, 1997 to 30th April, 1998, which was debited under the head ‘Project development expenses’ in the books of account relevant to the asst. yr. 1999-2000. In the asst. yr. 1999-2000, the AO had allowed a deduction of Rs. 2,43,743, holding that the balance amount of Rs. 29,25,019 pertained to the asst. yr. 1998-99. The said order is on record. It was pursuant to the above findings of the AO for the asst. yr. 1998-99, that the assessee filed an additional ground before the learned CIT(A) in the asst. yr. 1998-99, claiming a deduction of Rs. 29,25,019. The assessee contended that the project development expenses were basically revenue expenses like salary to project engineers, their conveyance, travelling expenses, etc., and that since the expenses pertained to the year ended on 31st March, 1998, they needed to be allowed in the asst. yr. 1998-99.
55. The learned CIT(A) held in favour of the assessee, observing that the AO had himself allowed Rs. 2,43,743 out of a sum of Rs. 31,68,663, wherein he had disallowed the remaining sum of Rs. 29,25,019 for the reason that it pertained to the asst. yr. 1998-99; that since the assessee had been able to show that the sum of Rs. 29,25,019 had not already been claimed and allowed for the asst. yr. 1998-99 and that since the assessee had been following the mercantile/accrual method of accounting, it was entitled to Rs. 29,25,019 for the asst. yr. 1998-99.
56. In this regard also, the learned Departmental Representative submitted that this issue was not discussed before the AO and so, the issue needs to be examined by the AO, for which the matter be remitted to his file. The learned Counsel for the assessee, on the other hand, supporting the impugned order, has submitted that the nature of the expenses in question is not at all in dispute; that the assessee had made the claim in the asst. yr. 1999-2000; that the AO had allowed a part thereof, as above, and had held that the balance was regarding the earlier year; and that in the books of account of the assessee, these expenses have been treated as a deferred revenue expenditure. It has been further contended that this Bench of the Tribunal, in the assessee’s own case, for the asst. yr. 1991-92 (copy of the order placed on record) has allowed revenue deduction for the same expenditure.
57. With regard to this issue too, we are at one with the assessee. The treatment given by the assessee to these expenses in its books of account is that of deferred revenue expenditure. The AO, for the asst. yr. 1991-92, had disallowed the amount of Rs. 29,25,019 pertaining to the asst. yr. 1998-99. The nature of the expenses not being in dispute, the learned CIT(A) was justified in allowing the deduction. As such, ground No. 6 stands rejected.
58. According to ground No. 7, the learned CIT(A) has erred in allowing deductions under Section 35D. The facts are that in the asst. yr. 1992-93, the assessee had incurred expenditure on issue of convertible debentures. It was claimed as a deduction during the year, as a revenue expenditure. The issue was raised before the learned CIT(A) by way of an additional ground, pleading that deduction of Rs. 2,21,459 disallowed under Section 35D in the earlier year on account of expenses, be allowed. In the statement of assessable income, in the return for the asst. yr. 1998-99, the assessee clarified that the deduction claimed on account of Section 35D did not include the sums of Rs. 13,580, Rs. 1,87,879 and Rs. 20,000, aggregating to Rs. 2,21,459, on account of expenses disallowed by the Department in the assessments completed for the asst. yrs. 1991-92 and 1992-93 and considered as deduction under Section 35D; that the additional deduction in this regard was allowed by the AO upto 1997-98; that for the asst. yr. 1998-99, a sum of Rs. 22,459 had not been allowed as an additional deduction, which should have been allowed. The learned CIT(A) accepted the assessee’s contentions.
59. The learned Departmental Representative submitted that once again this issue has not been discussed by the AO and, therefore, this matter also be remitted to the AO.
The learned Counsel for the assessee, on the other hand, has submitted that the Tribunal has decided this issue in favour of the assessee for the asst. yr. 1992-93 (copy of the order oh record), holding that the expenses need to be amortised under Section 35D and that this is the deduction which had been allowed by the Department this year and till 1997-98.
Here again, we find that the Department cannot backtrack from the stand consistently taken by it for the earlier years. Therefore, we hold that the learned CIT(A) was correct in deciding the issue in favour of the assessee. Accordingly, ground No. 7 also stands rejected.
60. In the result, the appeal of the Department stands partly allowed, as indicated.