Commissioner of Income Tax vs Madurai Co. (P.) Ltd.

T. Kochu Thommen, J.—Pursuant to the direction of this court in O.P. No. 1481 of 1978 instituted by the Revenue, the following questions have been referred to us by the Income Tax Appellate Tribunal, Cochin Bench :

" 1. Whether, on the facts and in the circumstances of the case, and on an interpretation of Section 41 read with Section 32(1) of the Income Tax Act, 1961, should not the Tribunal have fixed the value of the fixed assets (excluding land) at Rs. 21,00,000?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that ''the price for which the buildings, plant and machinery is sold is only Rs. 13.15 lakhs'' and is not the above finding wrong and without considering relevant materials?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law, fact and substance in holding that ''what is sold here is business as a whole'' and is not the above finding wrong, unreasonable, unwarranted and without materials? "

The assessment year is 1968-69. During the accounting year relevant to the assessment year, the assessee sold its business assets to M/s. Sudarsan Trading Company Ltd. The assets sold included land also. The total sale price, as disclosed by the document of sale, was Rs. 22,00,000. The assessment was completed on the basis that the amount realised by the sale of the assets, for the purpose of computation of the income, was only Rs. 13.15 lakhs. This amount was arrived at after deducting from the total sale proceeds of Rs. 22,00,000, the gratuity liability alleged to have been incurred by the assessee in the sum of Rs. 7,27,612 as well as Rs. 1,00,000 being the value of the land transferred along with the other assets. Subsequently, it was noticed that the actual sum which was liable to be taken into account in the computation of, the income was not Rs. 13.15 lakhs, as was originally done, but the total sale price minus Rs. 1 lakh being the value of the land. Accordingly, pursuant to notice u/s 148, the assessee''s income was redetermined by adding Rs. 9,16,179, being the difference between the total amount which ought to have been added consequent on the sale of the assets and a sum of Rs. 5,96,433 which had already been taken into account at the time of the original assessment.

Aggrieved by this order, the assessee approached the Appellate Assistant Commissioner who by his order dated July 25, 1974, allowed the appeal holding that the sale proceeds for the purpose of determining the income ought to have been determined after deducting from the total amount, the liability incurred by the assessee for payment of gratuity. Dismissing the appeal filed by the Revenue, the Tribunal held that the assets were sold only for Rs. 14.15 lakhs and the income had to be determined with reference to that amount minus the value of the land.

It cannot be gainsaid that the assets were transferred for the total amount of Rs. 22,00,000. That is the amount that is disclosed by the documents. One question which arises in this case is whether, for the purpose of determining the escaped income, the sale price should be considered to be the total amount of Rs. 22,00,000 as disclosed by the documents or that amount should be reduced by the liability, if any, for payment of gratuity. The second question is whether the Tribunal was right in taking into account, for the purpose of Section 41, the sale price of the assets. The third point urged at the instance of the Revenue is that the authorities went wrong in not examining the question of escaped assessment from the point of view of Section 45.

For the purpose of Section 41, the sale price is irrelevant. What is relevant for that provision is the cost price and the depreciation allowed u/s 32. There is no finding as to what is the cost price in this case. We have, however, no doubt that for the purpose of determining the actual extent, if any of the income which-escaped assessment, the sale price is a relevant factor as there should necessarily be a determination of the gains, if any, u/s 45.

Counsel for the Revenue submits that for the purpose of Section 45, the sale price should be computed without deducting from the total proceeds the liability, if any, towards gratuity. Counsel for the assessee, on the other hand, contends that the actual sale price is not the total amount for which the assets were sold, but that amount minus the gratuity liability which the assessee had incurred and which was taken over by the transferee.

It is unnecessary and impossible for us to determine the controversies at this stage, because the basic facts have yet to be found. The question whether income has escaped assessment must be considered with reference to Section 41 as well as Section 45, For the purpose of these two provisions, the actual cost price as well as the actual sale price must be found. The question of sale price was examined by the authorities without reference to the ingredients of Section 45. It was only considered with reference to Section 41, though, as we stated earlier, Section 41 has no relevance to the sale price.

In determining what is the sale price, the authorities must necessarily consider the assessee''s contention that the alleged gratuity liability was deductible. It should first be ascertained whether there was such a liability. Admittedly, there was no statutory liability for gratuity. Was there a present contractual liability to pay gratuity, although payable in future, in accordance with any scheme, is a question which has to be considered. If such a present liability payable in future had been incurred by the assessee, was that liability, which was under the agreement taken over by the buyer, liable to be deducted in the computation of the actual sale price for the purpose of finding out the capital gains? These are matters on which, in the absence of findings by the authorities, we express no view. The finding of the Tribunal that the gratuity liability was deductible without considering whether, on the material produced by the assessee, such liability had in fact been incurred, was uncalled for. We have no doubt that the Tribunal will consider these facts and, if necessary, remit the matter to the appropriate authority,

For the reasons stated above, we decline to answer the questions.

We direct the parties to bear their respective costs in this tax referred case.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.