Income-tax---

----Capital gains---Appeal to Appellate Tribunal---Sale of entire business-- Assessing Officer holding that difference between written down value of assets and sale price was goodwill and that it was assessable as short-term capital gains---Order affirmed by Tribunal without considering material-- Tribunal was not justified in upholding order of Assessing Officer---Indian Income Tax Act, 1961, Ss.45 & 254.

The assessee was a business concern having business at various places, namely, Guwahati, Tinsukia in Assam and at Faridabad near Delhi. The company wound up its business in Assam and transferred all the assets to another company, namely, Pheros & Co. (Assam) (Pvt.) Ltd. for a consideration of Rs.7,58,796 with effect from January 1, 1975. The Assessing Officer noted that the assessee claimed that the plant and machinery were of foreign origin and, therefore, the price was very high. The Assessing Officer found that the assessee could not furnish any-basis for supporting the contention. He held that even if the assessee sold the fixed assets at Rs.3,50,000 as against the depreciated value of Rs.94,524, it was for the assessee to place materials as everything was within the knowledge of the assessee. The Assessing Officer pointed out that the original cost of the assets was Rs.1,34,316 and the depreciated value on the date of transfer was only Rs.47,227. The Assessing Officer held that the assessee had earned capital gain on the transfer of the business, which was a short-term capital gain. On appeal, the Commissioner of Income-tax (Appeals) held that there was no warrant for the Income-tax Officer to come to the conclusion that the gain made on sale was in the nature of good will or in the nature of short-. term capital gain in its entirety. On further appeal, the Tribunal came to be conclusion that the excess proceeds realised by the assessee on the transfer of the business, i.e., two units owned by the assessee as going concerns, was chargeable to tax as capital gain. The Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and restored the order of the Income tax Officer. On a reference:

Held, that it was clear that the difference between the depreciated value and the sale price, according to the Assessing Officer, was only goodwill. Since no materials were placed before the Tribunal by either of the parties in spite of opportunity being given, the Tribunal affirmed the order passed by the Income-tax Officer. The Tribunal totally accepted the order passed by the Assessing Officer. It was the duty of the Tribunal either to remand the matter to the Commissioner of Income-tax (Appeals) or to call for the materials from the other side. The Tribunal shirked its responsibility by saying that the assessee failed to produce the materials and deciding the matter in the absence of materials. The Tribunal was not justified in law in not deciding the alternative ground of the assessee that even if the receipt in question amounted to goodwill as held by the Income-tax Officer, it was not a short-term capital asset and not taxable as such. On the `facts and in the circumstances of the case, the capital gain could not be treated as income of the assessee.

Dr. A. K. Saraf, K. K. Gupta and R.K. Agarwala for the Assessee.

G.K. Joshi and U. Bhuyan for the Commissioner.

JUDGMENT

D. N. BARUAH, J.---As per direction given by this Court in Civil Rule No.37 (Gau) of 1981, the following questions have been referred by the Income-tax Appellate Tribunal under section 256(2) of the Income Tax Act, 1961 (for short "the Act"), for opinion of this Court:

"(1)Whether under the facts and in the circumstances of the case, the Tribunal was justified in law in restoring the order of the income tax Officer without considering and deciding the contentions of the assessee in regard to the taxability of the goodwill?

(2)Whether under the facts and in the circumstances of the case, the Tribunal was justified in law in not deciding the alternative ground of the assessee that even if the receipt in question amounted to goodwill as held by the Income-tax Officer, it was not a short-term capital asset and not taxable as such?

(3)Whether, on the facts and in the circumstances of the case, the capital has to be treated as income of the assessee?"

The assessee is a business concern having business at various places, namely, Guwahati, Tinsukia in Assam and at Faridabad near Delhi. For the assessment year 1976-77, the Income-tax Officer noticed that the assessee company was engaged in manufacturing of wire mesh and wire drawings at its factories at Guwahati, Tinsukia and Faridabad. The company wound up its business in Assam and transferred all the assets to another company, namely, Pheros & Co. (Assam) (Pvt.) Ltd. for a consideration of Rs.7,58,796 with effect from January 1, 1975. According to the assessee company Rs.3,50,000 was the sale price of its office, factory building, machinery, plant, furniture, cycle, jeep, etc., at Guwahati and Tinsukia and that the balance represented the sale price of raw materials and finished goods which were lying in the bank godown in Guwahati and Tinsukia factories. Accordingly, the assessee declared profit under section 41(2) on the sale of such items. An agreement was entered into by and between the parties on December 20, 1974, by which the fixed assets were transferred for a consideration of Rs.3,50,000 and the purchaser would take over all the stock of raw materials and finished goods on a consideration of Rs.4,08,796. According to the assessee, the said transaction took place pursuant to the agreement entered into between the parties. When the assessment was completed, the assessee took up the matter before the Appellate Assistant Commissioner and took a new plea that the stock was transferred at cost price and that the price of the machinery was very high as the same was brought from outside which had a high price in the market.

As directed by the Appellate Assistant Commissioner, the Income tax Officer took up the assessment for fresh disposal after verification of the market price of the assets. Amongst other things, in the fresh assessment order, it was noted that the assessee claimed that the plant and machinery were of foreign origin and, therefore, the price was very high. The Assessing Officer found that the assessee could not furnish any basis for supporting the contention. He held that even if the assessee would sell the fixed assets at Rs.3,50,000 as against the depreciated value of Rs.94,524, it was for the assessee to place materials as everything was within the knowledge of the assessee. The Assessing Officer pointed out that the original cost of the assets was only Rs.134316 and the depreciated value on the date of transfer was only Rs.47,277. The Assessing Officer held that the assessee had earned capital gain on the transfer of the business, which was a short-term capital gain.

Being dissatisfied, the 1.5sessee preferred an appeal before the Commissioner of Income-tax (Appeals) who disposed of the appeal with a direction to re compute the total income as per the observations made. While disposing of the appeal, the Commissioner of Income-tax (Appeals) observed thus:

"I must also enter the finding that there was no warrant for the Income-tax Officer to come to the conclusion that the gain made on sale is in the nature of goodwill or in the nature of short-term capital gain in its entirety. "

Being aggrieved, the assessee took up the matter before the Income tax Appellate Tribunal contending that the Commissioner of Income-tax (Appeals) had no jurisdiction, justification and basis to ignore to give his finding in respect of the ground of appeal and that the Income-tax Officer had no justification and basis to hold that the surplus amount of Rs.2,55,476 received on the sale of business assets was nothing but taxable capital gain representing the sale value of goodwill which was a short-term capital gain. After considering the entire matter that no materials have been place before the Tribunal by either of the parties so as to work out the capital gain, the Tribunal came to the conclusion that the excess proceeds realised by the assessee on the transfer of the business, i.e., two units owned by the assessee as going concerns, was chargeable to tax as income from capital gain. The Tribunal reversed the order of the Commissioner of Income-tax (Appeals) and restored the order of the Income-tax Officer. Hence the reference.

We have heard Dr. A.K. Saraf, learned counsel appearing on behalf of the assessee, and Mr. G.K. Joshi, learned standing counsel appearing on behalf of the Revenue.

Dr. Saraf Submits that the Income-tax Officer found that the business concern of the assessee was sold at a price which was higher than the depreciated value and the difference between the depreciated value and the difference between the sale price was held to be goodwill and, therefore, assessable to tax on capital gain. The Tribunal also affirmed the same. Therefore, according to Dr. Saraf, the Tribunal also held that the difference was nothing but goodwill and it was assessable to tax without however considering whether goodwill is liable to tax as capital gain.

On the other hand, Mr. Joshi made all endeavour to show that the Tribunal did not say that the difference of the depreciated value and the sale value was goodwill. Mr. Joshi fairly concedes that goodwill is a self generating asset and, therefore, it may not have any value in the initial year or period He further submitted that no capital gain tax was imposable under section 45 in respect of goodwill since the assessee did not incur any cost in respect thereof. However, he emphatically submits before us that the Tribunal never said that it was a good will but only a capital gain for the higher price perceived by the assessee from the depreciated value of assets. Mr. Joshi also has drawn our attention that as per the assessee's own contention the goodwill cannot be more than Rs.45000.

On the rival contentions of the parties, it is to be seen whether the Tribunal was justified in giving the direction to assess the tax under the facts and circumstances of the case. For that purpose, it will be apposite on our part to look to the order of the Assessing Officer as well as the Tribunal. The Assessing Officer in his order very categorically stated thus:

"This is to be considered as nothing but payment for goodwill. I derive support from the fact that the stocks of substantial worth yielding a very high margin of profit were transferred at cost price only. "

From this it is abundantly clear that the difference of the depreciated value and the sale price, according to the Assessing Officer, was only goodwill. Since no materials were placed before the Tribunal by either of the parties in spite of opportunity being given, the Tribunal affirmed the order passed by the Income-tax Officer.

From the judgment, we find that the Tribunal totally accepted the order passed by the Assessing Officer. In our opinion, it was the duty of the Tribunal either to remand the matter to the Commissioner of Income-tax (Appeals) or to call for the materials from the other side. The Tribunal shirked its responsibility by saying that the assessee failed to produce the materials and decided the matter in the absence of materials.

Mr. Joshi submits that direction may be given to the Tribunal to reconsider the matter after taking fresh evidence, etc. We are not giving any direction to the Tribunal. The Revenue is at liberty to approach the Tribunal.

In view of the above, we answer the questions in the negative, i.e., against the Revenue and in favour of the assessee.

M.B.A./1588/FCReference answered.