ORDER
S.K. Chander, Accountant Member
1. These cross appeals by the assessee and the revenue are directed against the order of the Commissioner (Appeals)-X, New Delhi dated 23-1-1985 relating to the assessment year 1983-84.
2. These appeals involve interesting issues. These issue arise from very interesting set of facts. Therefore, before setting out the issues, we bring the factual canvas of the case into focus.
3. The assessee is a corporate body registered under the Companies Act., 1956 under the name of Delhi Tambaku & Udyog (P.) Ltd., 544, Lahori Gate, Delhi-110006. The assessment year involved is 1983-84. Its previous year for the assessment year under appeal covered the period from 28-10-1981 to 15-11-1982 because the previous year was the Diwali year. There is a firm known as Brij Lal Mani Lal & Co. having its head office at Sagar in the State of Madhya Pradesh constituted of five partners, namely :
(1) Shri Babu Rao Pimplapure
(2) Shri Madhukar Rao Pimplapure
(3) Shri Gopal Rao Pimplapure
(4) Shri Divender Kumar Kunjabhai Patel
(5) Shri Narendra Kumar Kunjabhai Patel
The said firm was manufacturing bidies. The said company had finalised commencement of the business of manufacture and sale of ‘bidies’ in the State of Madhya Pradesh with a proposal of expanding its manufacturing activities in other States as well. The said firm decided to discontinue its manufacturing activities completely. There was an agreement between the said firm and the company on 23-9-1971. This appears at pages 36 to 39 of the paper book. As per this agreement, the said company agreed to manufacture ‘bidies’ of required specifications and sell the same to the said firm. However, the company retained its exclusive right to manufacture bidies of its own with its own trade-mark, labels under its own trade name and to sell the same to whomsoever and at whatsoever place, it may choose. It was also agreed that the said firm, in such situation, shall have no concern, whatsoever, with any such transaction of the said company. The said company shall also be free to manufacture ‘bidies’ for any person, firm, or company and the said firm shall not raise any objection therefor.
4. However, insofar as the manufacture of bidies by the said company for the said firm was concerned, the manufacturing was to be to the specifications regarding shape, size, quality and standard laid down by the firm. The bidies so manufactured were to be wrapped in printed tissue paper bearing trade-mark, labels of the said firm, which were to be supplied by the firm as per needs. The manufactured bidies were to be delivered by the company in fit condition for sale in the market at such centre or centres as may be mutually agreed upon and after the delivery had been effected in such manner, the liability of the said company in respect of the goods shall cease. It was also provided that the company shall make purchases of its own raw materials at its own discretion and in case ‘tendu leaves’ were supplied by the said firm to the company, they were to be used exclusively for manufacture of the bidies for sale to the said firm. The company undertook not to use labels and printed tissue paper on any other bidies other than those manufactured for the firm.
5. The price of the bidies so manufactured and supplied by the company to the said firm was to be determined from time to time on mutual consent taking into cansideration all relevant factors governing the manufacturing cost prevalent in the trade. However, it was provided that in no circumstances, such price of bidies shall be more than an amount equivalent to the manufacturing cost plus 10 per cent gross profit thereon. If there was any dispute, it was to be referred to a sole arbitrator to be mutually appointed. It was open to either of the parties to this agreement to terminate the agreement after giving two months’ notice. However, if the parties agreed to terminate this agreement without such notice, the notice period will not apply.
6. Under the above agreement, the company manufactured and sold bidies to the firm in accordance with the terms of the agreement.
7. On 11-9-1981, the company and the firm entered into another agreement. In this agreement, it was recorded that the said firm had now decided to carry on its own manufacturing of bidies and, therefore, informed the company of its intent to terminate the agreement dated 23-9-1971 referred to above. The parties mutually agreed to terminate the agreement. The company, i.e., the assessee agreed to sell to the said firm and the said firm agreed to purchase, the bidies manufacturing business of the company as a going concern from the date of this agreement. The business was to be purchased by the said firm, i.e., the vendees from the company, i.e., the assessee-vendor together with all the assets and the liabilities of the said bidi manufacturing business. It was agreed that the bidi manufacturing business of the vendor shall be purchased as a going concern as on 15-12-1981. The vendor had to prepare a separate balance sheet of its bidi manufacturing business as on 15-12-1981 showing all the assets and liabilities of the bidi manufacturing business of the vendor. It was provided that the assets of the business shall also include the goodwill, the benefit of all subsisting contracts, books of account of reference to consumers and other books and documents, trade-marks, etc. As consideration for the purchase of the bidi manufacturing business as a going concern, with its assets and liabilities, the firm, i.e., V.M. & Co. was to pay to the assessee as ‘slump price’ of Rs. 5 lakhs. The vendees also agreed that all the employees of the vendor engaged in the manufacture of bidi for the firm shall become the employees of V.M. & Co., i.e., the vendee-firm with effect from 15-12-1981 and they shall be deemed to be the employees of the said firm with effect from that date without any interruption or break in service.
8. When the balance sheet of the assessee-company as the vendors of the said business of bidi manufacturing as a going concern was prepared on 15-12-1981, the assets exceeded the liabilities by Rs. 51,473.41. Since the slump price was fixed at Rs. 5 lakhs, the vendee-firm of Sagar paid to the assessee vendor, the excess of Rs. 51,473.41 as additional amount. When the assessee-company filed the return for the year under appeal on 24-6-1983 declaring income of Rs. 2,31,932 the process of assessment for the year under appeal started with the issuance of a notice under Section 143(2) of the Income-tax Act, 1961 (‘the Act’) by the IAC (Assessment). The IAC (Assessment) examined the facts of the case and the provisions of the two agreements referred to supra. According to him, it was apparent from the agreements that the assessee-company had been holding an agency for manufacturing bidies for the registered firm of V.M. & Co., Sagar and the sum of Rs. 5 lakhs was received by the assessee-company on termination of this agency. To come to this view, the learned IAC (Assessment) relied upon certain judgments noted in his impugned assessment order dated 19-7-1984 made under Section 143(3).
9. In the alternative, the IAC (Assessment) held the view that Rs. 5 lakhs had been paid to the assessee-company by the firm, ‘for termination of contract entered into by the assessee-company in the ordinary course of its business’. The assessee-company had been manfacturing chemicals at its Bombay branch. According to the IAC (Assessment), when this contract was terminated on 11-12-1981, and the sum of Rs. 5 lakhs was paid to the assessee, the payment was taxable as a revenue receipt. Thus, in nutshell, the IAC first held that the receipt of Rs. 5 lakhs as slump price by the assessee for sale of a going manufacturing concern was taxable under Section 28(ii)(c) of the Act and in the alternative, it was a revenue receipt being payment for termination of a contract entered into in the ordinary course of business. The amount of Rs. 5 lakhs was thus included in the total income of the assessee.
10. The assessee-company had entered into an agreement with Maharashtra Industrial Development Corpn., a Corpn. constituted under the Maharashtra Industrial Development Act, 1961, on 18-10-1976. This agreement appears at pages 50 to 79 of the paper book. Under this agreement, the assessee-company was granted a licence under Clause (1) only to enter upon the piece of land described in the First Schedule to this agreement for the purpose of building and executing works thereon as provided in this agreement and for no other purpose, whatsoever. However, after the terms and conditions of this agreement were fulfilled, the assessee was entitled to a lease of the said permises. Clause (2) of this agreement provided that nothing in these presents contained shall be construed as a demise in law of the said land hereby agreed to be demised or any part thereof so as to give to the licensee any legal interest therein until the lease hereby contemplated shall be executed and registered. Stipulations to be fulfilled by the assessee licensee were recorded. Sub-clause (m) of the agreement provided that the assessee will not directly or indirectly transfer, assign, sell, encumber or part with its interest the benefits of this agreement or any part thereof, in any manner, whatsoever, without the previous consent in writing of the Chief Executive Officer. The Chief Executive Officer had the discretion to refuse such consent or to grant such consent subject to such conditions including the condition for payment of additional premium as he may in his absolute discretion think fit. Clause (7) of this agreement provided that after the factory building and works have been erected in accordance with the terms of the agreement and the licensee had observed all the stipulations and conditions, the Executive Officer had to issue a certificate and thereafter the grantor, i.e., Maharashtra Industrial Development Corpn. will grant and the licensee, i.e., the assessee-company will accept a lease of the said land and the factory building. This lease had to be executed by the parties in duplicate.
11. The factory building was completed in the end of 1978. The assessee before getting a lease from Maharashtra Industrial Development Corpn. decided to sell this factory, land and building at Taloja to D.K. Foods & Chemicals (P.) Ltd. as per agreement dated 15-10-1981 for a consideration of Rs. 8,50,000. D.K, Foods & Chemiclas (P.) Ltd. made Davments of Rs. 8,50,000 through different cheques. However, as pointed out supra, the assessee was merely a licensee so far of the said premises including the factory buildings thereon and had not yet obtained leasehold rights from the Maharashtra Industrial Development Corpn. Therefore, as provided in the agreement dated 18-10-1976, the transfer could not take place without the previous consent in writing of the Chief Executive Officer as per Clause (1) of the agreement. The Maharashtra Industrial Development Corpn. required a transfer fee of Rs. 1,39,800. On the payment of this fee a tripartite agreement was made on 18-1-1982 and the assessee-licensee was allowed to transfer the premises to D.K. Foods & Chemicals (P.) Ltd.
12. In the assessment for the year under appeal, in the profits and loss account of the Bombay branch office, the assessee declared a loss of Rs. 50,362 on this sale. The assessee also claimed the transfer fee of Rs. 1,39,800 paid to Maharashtra Industrial Development Corpn. for granting permission to sell this land and factory building by the assessee. Thus, the assessee in effect claimed a loss of Rs. 1,90,162 on this transaction.
13. The IAC (Assessment) held the view that the transaction of sale had not been completed as the final sale deed had not been executed/registered during the previous year relevant to the assessment year under appeal. The learned IAC has also recorded that the assessee projected to him that D.K. Foods & Chemicals (P.) Ltd. stopped the payment of Rs. 50,000 of last cheque dated 23-3-1982 on the plea that the assessee-company while removing the machineries and plants from the factory building had damaged the building extensively. Since, according to the learned IAC, the transaction was not complete during the accounting period, loss of Rs. 1,90,162 was disallowed (Rs. 1,39,800 plus Rs. 50,362) because he was of the opinion that it does not pertain to the year under appeal.
14. This assessment was challenged in appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals) considered the reasons given by the IAC (Assessment) and the submissions made before him by the learned Counsel for the assessee. He gave a finding that the receipt of Rs. 5 lakhs by the assessee-company is not in pursuance of termination of any agency granted by V.M. & Co. to the assessee. The learned Commissioner (Appeals) held that there was nothing to suggest that the payment of Rs. 5 lakhs was for termination of the agency. He, however, pointed out that, ‘the judgments cited by the learned IAC in his order are not at all relevant to the issue under consideration, as those mainly relate to termination of managing agency agreement and payment of compensation therefor’. Insofar as the alternative ground taken by the IAC was concerned, the learned Commissioner held that that was also not valid because the agreement between the parties was the very basis of the assessee’s carrying on its bidi manufacturing business. Since, it was not one of the several contracts entered into by the assessee-company in the ordinary course of business, compensation for termination of one such contract did not give rise to a revenue receipt. Thus, both the grounds taken by the IAC (Assessment) for taxing the sum of Rs. 5 lakhs were found as not sustainable.
15. However, the learned Commissioner (Appeals) observed that this receipt would give rise to capital gains. He directed the IAC (Assessment) to work out the capital gains liable to tax in accordance with the relevant provisions of law.
16. With regard to the loss of Rs. 1,90,162 the learned Commissioner (Appeals) held that the claim of the assessee that the agreement was covered by the provisions of Section 17(2)(v) of the Indian Registration Act, 1908 and as such, exempt from registration was not tenable because in the case of the assessee Section 17(1)(b) is applicable and since there was no registration, the transaction could not be said to be complete within the previous year relevant to the assessment year under appeal. He, thus, held that registration of the documents was necessary and it was not done. He further held that the document that was tendered for registration was the one that was executed on 22-3-1982. The transfer of the assessee’s right in the land and building, by whatever name be called, held the learned Commissioner (Appeals), would not have been completed before the registration of the document dated 22-3-1982. According to him, the document had not been registered till date. He, therefore, rejected the assessee’s contention on this ground.
17. Now, the assessee is in appeal before us on the finding of the learned Commissioner (Appeals) that the receipt of Rs. 5 lakhs would give rise to capital gains. The assessee is also aggrieved in the learned Commissioner (Appeals)’s holding that the assessee had acquired any rights and or interest in the land as a result of its agreement dated 18-10-1976 with Maharashtra Industrial Development Corpn. and that the execution of the documents transferring the assessee’s rights to D.K. Foods & Chemicals (P.) Ltd. required registration, which was not done during the accounting period relevant to the assessment year under appeal.
18. The revenue, on the other hand, in its appeal, is aggrieved with his order in holding that the sum of Rs. 5 lakhs received by the assessee-company represents capital gains and should be assessed as such and in not holding that the receipt of Rs. 5 lakhs is taxable under Section 28(ii)(c) as compensation for termination of the agency of manufacturing bidies. In the grounds of appeal as an alternative it is also contended that the learned Commissioner (Appeals) erred in not holding that under agreement dated 23-9-1971 a contract for manufacture of bidies was entered into and the receipt of Rs. 5 lakhs is revenue receipt representing payment for termination of contract entered into in the ordinary course of business.
19. We have heard the parties and carefully considered their rival submissions. From the side of the assessee, the submissions before us were in a way reiteration of the contentions taken up before the learned Commissioner (Appeals). These submissions were supported by two citations of the Hon’ble Supreme Court in CIT v. West Coast Chemicals & Industries Ltd. [1962] 46 ITR 135 and CIT v. Mugneeram Bangur & Co. [1965] 57 ITR 299. In nutshell, it was argued on behalf of the assessee that the sum of Rs. 5 lakhs is a receipt, which is neither capital nor revenue in character and as such should be held as not taxable being slump price for sale of a going business of manufacturing bidies as a whole. In regard to the claim of loss, the submissions were repeated and various provisions in the agreements were projected to bring to our notice that what the assessee under the agreements with Maharashtra Industrial Development Corpn. had received was merely a licence and not leasehold rights. The assessee had obtained a right to obtain the lease and that right had been transferred. Such a right was not right, title and interest of the character of immovable property. The transfer of it did not require any registration, as it was covered under Section 17(2)(v). The authorities below, therefore, erred in not accepting the loss. Their orders be reversed on this ground as well.
20. The revenue, on the other hand, relying upon the orders of the authorities below submitted that there is no case for an interference in them at the instance of the assessee as required. It was contended that the learned Commissioner (Appeals), however, erred in holding that the sum of Rs. 5 lakhs was in the nature of capital gains. The following judgments were relied upon to claim that it was the payment of Rs. 5 lakhs for termination of an agency and was taxable as revenue receipt under Section 28(ii)(c)–CIT v. South India Pictures Ltd. [1956] 29 ITR 910 (SC) and J.R. Kimtee & Sons v. CIT [1978] 115 ITR 190 (AP).
21. We have given careful consideration to the rival submissions. We first proceed to dispose of the issue relating to the sum of Rs. 5 lakhs. It is not in dispute that this sum arose out of a slump transaction, in which the business sold was a going concern. This transaction has been interpreted by the IAC as termination of agency of the assessee by the firm. There is no justification, whatsoever, for this conclusion. We have abstracted supra, the salient terms of the agreement entered into between the assessee company and the registered firm in 1971. This agreement clearly is one of the type which is entered into on principal to principal basis. The agreement shows that both the parties tried to protect their commercial interests by incorporating into the agreement provisions for this purpose. In this agreement, there is no provision, whatsoever, which could be interpreted as the assessee acting as an agency of the firm for the purpose of manufacture of bidies. The system of accounting arrived at in which the assessee could get the maximum profit of 10 per cent was for the mutual protection of the business interests of the parties. The case law relied upon by the learned IAC for holding this case as that of an agency is, therefore, absolutely irrelevant.
22. The learned Commissioner (Appeals), in our considered opinion, therefore, rightly held that the IAC (Assessment) was wrong in coming to the conclusion that it was a case of termination of agency. We also endorse his view that the case is also not one of termination of contract. In fact, this conclusion is embedded in our first decision to hold that the transaction was between principal to principal on commercial basis. There was no material, whatsoever, with the IAC (Assessment) to hold that the payment of Rs. 5 lakhs was on account of termination of contract in the ordinary course of business, because in fact, it was the sale of the going business itself and the assessee had not shown this type of transaction any time before.
23. Now, coming to the concept of capital gains propounded by the learned Commissioner (Appeals), we do not find any justification for it either on the facts of the case or the law applicable thereto. The earliest such case was Doughty v. Commissioner of Taxes [1927] AC 327. In that case two partners carrying on business in Newzealand as general merchants and drapers sold the partnership business to a limited company, in which they became the only shareholders. The sale was of the entire assets, including goodwill, the consideration being fully paid shares and an agreement by the company to discharge all the liabilities. The nominal value of the shares being more than the sum to the credit of the capital account of the partnership, in its last balance sheet, a new balance sheet was prepared showing a larger value for the stock-in-trade. The Commissioner of Taxes treated the increase in value so shown as a profit on the sale of the stock-in-trade and assessed it for income-tax under the Land and Income-tax Act, 1916 of Newzealand which imposed tax on all profits or gains derived from any business.
24. The Privy Council decided the case in favour of the assessee holding that if the transaction is to be treated as a sale, there was no separate sale of the stock and no valuation of the stock as an item forming part of the aggregate, which was sold. In this connection, it was observed that income-tax being a tax upon income, it is well established that the sale of a whole concern, which can be shown to be a sale at a profit as compared with the price given for the business or at which it stands in the books does not give rise to a profit taxable to income-tax.
25. The Hon’ble Supreme Court in the case of West Coast Chemicals & Industries Ltd.’s case (supra) observed upon Doughty’s case (supra) that this case shows that where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to hold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly be said that there was a trading from which alone profits can arise in business.
26. In the case of Mugneeram Bangur & Co. (supra), the Hon’ble Supreme Court held by applying the principles of Doughty’s case (supra) and West Coast Chemicals & Industries Ltd.’s case (supra), that in the sale of a whole concern with a slump price no part could be attributable to any other assets and no part of the price was taxable.
27. When we examine the case before us in the light of the law so laid down by the Hon’ble Supreme Court, we find that the decision arrived at by the learned Commissioner (Appeals) to hold that the sum of Rs. 5 lakhs gave rise to capital gains was wholly erroneous because in a slump transaction no such capital gain could arise because the sale was of a going concern and the transaction was not in business. In view of the ratio of the decisions of the Supreme Court in the above cases, this decision of the learned Commissioner (Appeals) on the facts of the case is clearly untenable. We reverse this decision and hold that Rs. 5 lakhs is a sum received by the assessee in a slump transaction, i.e., the sale of business as a going concern and no part of this amount is taxable either as revenue receipt or as capital gains. In this view, the first ground in the appeal of the assessee is allowed. Since all the grounds in the appeal of the revenue pertain to this sum of Rs. 5 lakhs the appeal of the revenue stands dismissed. We would like to observe that the contention of the revenue that the case is covered under Section 28(ii)(c) is not at all tenable because the case before us is not of termination of agency and as such, the provisions sought to be applied are irrelevant.
28. This leaves us only with the second substantive ground in the appeal of the assessee relating to loss of Rs. 1,90,162 claimed as short-term capital loss. On this we have given careful consideration to the submissions made on various facts of the issue by both the sides. However, we think, it is not necessary to advert to provisions relating to registration in this regard. This is so because under the agreement dated 18-10-1976, the assessee was a mere licensee. The Maharashtra Industrial Development Corpn. was the grantor of the licence. The rights of the licencee were restricted in terms of this agreement. Sub-clause (1) of Clause (3) of this agreement provided that the licensee will not directly or indirectly transfer, assign, sell, encumber or part with its interests under or the benefits of this agreement or any part thereof in any manner, whatsoever, without the previous consent in writing of the Chief Executive Officer. Now, this consent is incorporated in the order made by the Maharashtra Industrial Development Corpn. bearing No. MIDC/TLJ/G-17/L/679 dated 12-1-1982 appearing at page 80 of the assessee’s paper book. This order says that the licensee in pursuance of Sub-clause (1) of Clause (3) of the agreement dated 18-10-1976 represented to the Corporation for grant to them of a consent for transfer and assignment of their interests under or the benefit of the said agreement in favour of D.K. Foods & Chemicals (P.) Ltd. The Corporation after due consideration of the said request of the licensees decided to grant, its consent to the transfer by the licensees of the benefit of its interests under the said agreement subject to certain conditions. One of the conditions was that licensee shall pay to the Corporation a sum of Rs. 1,39,800 by way of additional premium. This premium was paid on 12-1-1982 itself. On 18-1-1982 there was a tripartite agreement, between MIDC, the assessee and D.K. Foods & Chemicals (P.) Ltd. It is only by this tripartite agreement that it was provided that this agreement is supplemental to the principal agreement and the principal agreement shall hereafter be construed as if the grantor entered into the principal agreement with the parties of the third part, i.e., D.K. Foods & Chemicals (P.) Ltd. and the party of the third part alone had agreed to observe and approve the stipulations contained in the principal agreement and the payment of Rs. 1,39,800 paid to the grantor by the licensees as premium shall be considered as paid by the party of the third part.
29. It is clear that it is the tripartite agreement that puts the seal of finality on the right of transfer of the licensee’s right and interest. It is common ground, as there is no controversion of the facts recorded by the learned Commissioner, that the factory building, etc., regarding the transfer of right to which short-term loss is claimed was built by the end of 1978. The transfer of rights to D.K. Foods and Chemicals (P.) Ltd. is thus permitted in January 1982. Thereafter, on 22-3-1982, the assigners, i.e., Delhi Tambaku Udyog (P.) Ltd. being the assessee assigned and transferred unto the assignees, i.e., D.K. Foods & Chemicals (P.) Ltd. all their rights, title and interests in the said factory building and structure consisting of four sheds known as ABC, and D comprising of about 884 sq. mts. built up area more particularly described in the second schedule to this agreement. Thus, it would be seen that the conclusions arrived at by the learned Commissioner (Appeals) that the loss claimed by the assessee was not within the statutory period of 36 months, and as such, it was not a short-term capital loss, is fully justified.
30. It may be noted that the arguments relating to the requirement of registration of right, title and interests of the assessee by virtue of agreement dated 18-10-1976 depending upon whether it was right creating right in immovable property or otherwise, therefore, does not require determination as on facts, the loss has arisen from sale of assets as claimed, which were built and sold after a period of 36 months. On this ground, therefore, the claim of the assessee regarding the sum of Rs. 1,90,162 was rightly rejected by the learned Commissioner (Appeals). This ground of appeal of the assessee, therefore, fails.
31. In view of what is stated above, appeal of the revenue is dismissed and that of the assessee is partly allowed.