Income-tax---

----Capital gains---Balancing charge---Bus transport undertaking---Taking over of undertaking by State Government amounted to compulsory acquisition---Compensation determined for each and every one of the assets- Balance charge and capital gains tax leviable on surplus received---Indian Income Tax Act, 1961, Ss.41(2) & 45.

The assessee was a public limited company running the business of transport of passengers and goods. On January 17, 1972, the passenger transport division of the assessee-company was taken over by the Government of Tamil Nadu by a notification issued under section 2 of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971. The Income-tax Officer in the assessment order for the assessment year 1972-73, held that by virtue of the vesting of the stage carriages owned or operated by the assessee with the Government absolutely, there was a compulsory acquisition of the capital assets of the assessee used in his business amounting to the sale of those assets and accordingly brought to tax the difference between the written down value and the cost of the assets as profits chargeable under section 41(2) of the Income Tax Act, 1961. He also brought to tax the difference between the consideration received and the cost of the assets as capital gains chargeable under section 45 of the Act. This was upheld by the Tribunal. On a reference:

Held, that under the provisions of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, there was a take over of the fleet of stage carriages owned and operated by the fleet operators and on the issue of Notification under section 3 of the said Act, they vested with the Government absolutely and free from all encumbrances. There was a compulsory acquisition of the assets within the meaning of the term "sold" found in sections 32 and 41 and also within the definition of "transfer" in section 2(47) of the Act. All the assets of the transport division of 'the assessee vested with the Government by operation of law and it attracted the provisions of sections 41(2) and 45. The Schedule to the Tamil Nadu Flee: Operators Stage Carriages (Acquisition) Act, provided that the compensation to be paid by the Government in respect of the acquired property shall be the market value of such property. There was a statutory liability on the part of the Government of Tamil Nadu to pay compensation at the market value of the property for the acquired property, and correspondingly, there was a statutory right vested with the assessee to receive the compensation. It was significant to notice that the, compensation had to be determined by the Government for each and every one of the assets mentioned in section 3 of the Act, and consequently, when the Government paid the compensation which the assessee received, after negotiation and without protest and without resort to arbitration proceedings, it must be taken that the Government reckoned the compensation for each and every item of the assets taken over from the passenger transport division of the assessee. The assessee had also disclosed the profits under the provisions .of section 41(2) of the Act. The liability under section 41(2) of the Act is limited to the amount of surplus to the extent of difference between the written down value and the actual cost and if the compensation amount exceeded the difference between the written down value and the actual cost, then, the surplus to the extent of such excess was liable to be treated as capital gains for the purpose of levy under section 45 of the Act.

CIT v. Artex Manufacturing Co (1997) 227 ITR, 260 (SC) applied.

CIT v. Electric Control Gear Mfg. Co. (1997) 227 ITR 278 (SC); CIT v. Mugneeram Bangur & Co. (Land Department) (1965) 57 ITR 299 (SC), CIT v. Narkeshari Prakashan Ltd. (1992) 196 ITR 438 (Bom.); State of T4nil Nadu v. Abu Kavur Bai (L.) (1984) 1 SCC 515; AIR 1984 SC 326 and Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681 (Kar.) ref.

S.A. Balasubramanian for the Assessee.

C.V. Rajan for the Commissioner.

JUDGMENT

N.V. BALASUBRAMANIAN, J.---At the instance of the assessee, the Income-tax Appellate Tribunal, has stated a case and referred the following questions of law for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the taking over of the bus transport undertaking by the Government of Tamil Nadu from the assessee under the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971 (Act 37 of 071), amounted to a 'compulsory acquisition' as defined in Article 31(2-A) of the Constitution, thus, attracting the provisions of section 41(2) and section 45 of the Income-tax Act?

(2) Whether, on the facts and circumstances of the case, the acquisition of stage carriages of the assessee tinder section 3 of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971, amounted to the assets of the assessee being sold within the meaning of sections 32 and 41 of the Income-tax Act or transfer within the meaning of section 2(47) of the Act?

(3) Whether; on the facts and circumstances of the case, the payment of compensation for acquisition of the transport division of the assessee-company amounted to a slump transaction in respect of which balancing charge under section 41(2) and capital gains under section 45 could not be levied?"

The assessee is a public limited company running the business of transport of passengers and goods. On January 17, 1972, the passenger transport division of the assessee-company was taken over by the Government of Tamil Nadu by a Notification issued under section 2 of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971 (Tamil Nadu Act 37 of 1971), hereinafter referred to as the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act. The 'Income-tax Officer in the assessment order for the assessment year 1972-73 held that by virtue of the vesting of the stage carriages owned or operated by the assessee, with the Government absolutely, there was a compulsory acquisition of the capital assets of the assessee used in his business amounting to the sale of those assets and accordingly brought to tax the difference between the written down value and the cost of the assets as profits chargeable under section 41(2) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act"). He also brought to tax the difference between the consideration received and the cost of the assets as capital gains chargeable under section 45 of the Act. Further, the Income-tax Officer did not grant depreciation for those assets for their use in the business prior to the take over by applying the provisions of clause (ii) of subsection (2) of section 34 of the Act.

The assessee preferred an appeal before the Appellate Assistant Commissioner against the order of assessment made by the Income-tax Officer. The Appellate Assistant Commissioner held that the vesting of the undertaking did not amount to sale within the meaning of section 32(1)(iii) of the Act and hence the assessee was entitled to claim depreciation. In so far as the application of section 41(2) of the Act is concerned, he held that there was no transfer of individual items of capital assets, but there was a vesting of the entire undertaking as a whole as a running concern. He further held that no capital gains arose because .the original cost exceeded the compensation received. In this view of the matter, he deleted the additions made towards the profit under section 41(2) of the Act and the capital gains under section 45 of the Act.

Dissatisfied with the order of the Appellate Assistant Commissioner, the Revenue preferred an appeal before the Income-tax Tribunal. Before the Tribunal, there was a wide range of controversy whether there was a sale when the undertaking was taken over by compulsory acquisition and the compensation paid was illusory, etc. The Appellate Tribunal, however, examined the provisions of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act and carne to the conclusion that the provisions of sections 32(1)(iii), 41(2) and 45 of the Act would apply to the compulsory acquisition of the: capital assets also. The Tribunal held that the compulsory acquisition of the assets would be regarded as a sale within the meaning of sections.32 and 41 and also it will be a transfer for the purpose of section 2(47) of the Act. In so far as the alternative argument advanced on behalf of the assessee that when the passenger transport division was taken over, it amounted to a slump sale and, therefore, the' assessment of the balancing charge under section 41(2) did riot arise, was not accepted by the Appellate Tribunal. The Tribunal noticed the provision of section 3 of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition.) Act and the negotiations arrived at between the parties and came to the conclusion that this is not a case in which it could not be said that no part of the compensation received was riot attributable to the individual assets acquired The Tribunal, therefore, held that the provisions of section 41(2) of the Act were rightly attracted and the assessment of capital gains under section 45 of the Act was correct in law. The assessee challenged the order of the Appellate Tribunal and sought for a reference and the Appellate Tribunal, as already stated, has stated a case and referred the questions of law set out above.

Mr. S.A. Balasubramanian, learned counsel for the assessee, submitted that, the taking over of the bus transport division by the Government of Tamil Nadu from the assessee under the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act did not amount to compulsory acquisition. His further submission was that the acquisition of the stage carriage under section 3 of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act did not amount to sale of the assets within the meaning of sections 41 and 45 of the Act. The main submission of Mr. S.A. Balasubramanian, learned counsel for the assessee, is that what was taken over was an undertaking i.e., a passenger transport division as a whole and the assets, and the entire lock, stock and barrel of the undertaking were taken over by the Government. His submission was the individual assets were not sold, and the money paid has no relation to the assets taken over by the Government. He submitted that the figure of Rs.80 lakhs for the buses would clearly indicate that what was paid was not in relation to the value of the vehicles and it has no relation to the vehicles taken over by the Government. He would further submit that the sum paid has also no relation to the market value. He drew our attention to some of the charts filed before the authorities below and submitted that the compensation amount was not relatable to any of the assets and the fact that the liability was deducted would indicate that the compensation, cannot be attributed to the assets acquired. He further submitted that it is not possible to attribute; the compensation to the value of each and every asset acquired and the surplus must relate to a specific asset and in the absence of any evidence to show that the surplus related to specific assets, it is not permissible to the Income-tax Officer to bring the amount to charge under section 41(2) or 45 of the Act. Mr. S.A. Balasubramanian, learned counsel for the assessee, strongly placed reliance on a decision of the Supreme Court in the case of CIT v. Mugneeram Bangur & Co. (1965) 57 ITR 299, and submitted that where the sale is of a whole concern and no part of the price is attributable to the cost of the land, it is not possible to levy tax under section 41(2) of the Act. He submitted that the decision of the Supreme Court makes it very clear that though in the schedule a certain price was fixed or shown, it cannot be said that it represented the value of the assets taken over. Mr. S.A. Balasubramanian, learned counsel for the assessee, also placed reliance on the decision of the Bombay High Court in CIT v. Narkeshari Prakashan Ltd. (1992) 196 ITR 438, and submitted that when the entire business was sold as a whole and the value of the liability was adjusted, the character of the transaction as a slump sale is not changed and it is not permissible to levy the balancing charge under section 41(2) of the Act. He also referred to. the decision of the Karnataka High Court in the case of Syndicate Bank Ltd. v. Addl. CIT (1985) 155 ITR 681, and submitted that if there was a transfer as a whole concern and no part of the price can be allocated to the capital assets in specie, what is taxable in such a case would be the gain in respect of the transaction and nothing else. Lastly, he relied upon the decision of the Supreme Court in CIT v. Electric Control Gear Mfg. Co. (1997) 227 ITR 278, wherein the Supreme Court has held that where there is nothing to indicate the price attributable to the assets like machinery, plant, etc, the provisions of section 41(2) of the Act would not apply. Therefore, he would submit that the case of the assessee would fall squarely within the decision of the Supreme Court in the case of Electric Control Gear Mfg. Co. (1997) 227 ITR 278.

Mr. C.V. Rajan, learned standing counsel for the Revenue, on the other hand, submitted that under the provisions of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, the compensation received by the assessee can be attributed to the assets acquired. He referred to section 5 of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, and submitted that the amount of compensation for the acquired property, was determined by agreement and under the Schedule to the said Act, the compensation paid by the Government in respect of the acquired properties shall be on the market value of property on the acquired date. He, therefore, submitted that the amount -was arrived at and agreed to between the parties after some negotiations, and at the time of acquisition of the undertaking the compensation amount was determined and when the compensation amount was determined or arrived at, it was with reference to the 'stage carriages owned or operated by the assessee and other assets which were taken over by the Government. He, therefore, submitted that it is not permissible for the assessee to say that the amount of compensation was not relatable to the value of the assets taken over by the Government. He r6ferred to the decision of the Supreme Court in the case of CIT v. Artex Manufacturing Co. (1997) 227 ITR 260 and submitted that where there is a slump transaction, and the business is sold as a going concern, it has to be seen that whither any portion of the slump price is attributable to the assets taken over. He further submitted that on the facts of this case, it is very clear that the price can be attributed to each and every one of the items taken over by the Government and, therefore, the decision of the Supreme Court in the case of CIT v. Artex Manufacturing Co. (1997) 227 ITR 260 (SC) would apply to the facts of this case.

We have carefully considered the rival submissions of learned counsel for the assessee and learned counsel for the Revenue. In so far as question No. l is concerned, we are of the opinion that under the provisions of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, there was a take over of the fleet of stage carriages owned and operated by the fleet operators and on the issue of notification under section 3 of the said Act, they vested with the Government absolutely and free from all encumbrances. Subsection (2) of section 3 of the said Act also provides for the vesting of building, workshops and other places, etc. A mere look at the provisions of section 3 of the Tamil Nadu Act 37 of 1971 indicates that the Tamil Nadu Act was passed for the acquisition of the stage carriages of fleet operators holding fifty or more -stage carriage permits and for certain other matters connected therewith in the State and the preamble to the Tamil Nadu Act also mentions that the. Tamil Nadu Act was passed in public interest. to acquire all passenger transport divisions of fleet operators holding fifty or more stage carriage permits and the Act was passed with an intention to give effect to Article 39(b) and (c) of the Constitution of India. The Act is protected under Article 39(b) and (c) of the Constitution of India. The Supreme Court in the case of State of Tamil Nadu v. L. Abu Kavur Bai, AIR 1984 SC 326; (1984) 1 SCC 515, upheld the validity of the Tamil Nadu Stage Carriages and Contract Carriages (Acquisition) Act, 1973, and in our view, the decision of the Supreme Court in L. Abu Kavur Bai, AIR 1984 SC 326, would equally apply to the provisions of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, 1971. Following the decision of the Supreme Court, cited supra, we hold that there was a compulsory acquisition of the assets within the meaning of the term "sold" ,found in sections 32 and 41 and also within the definition of "transfer" in section 2(47) of the Act, when all the assets of the transport division of the assessee vested with the Government, of Tamil Nadu by operation of law upon the payment of compensation. Hence, we hold that there was a compulsory acquisition of assets under the provisions of Tamil Nadu Act 37 of 1971 and it attracts the provision of sections 41(2) and 45 of the Act.

The question whether the payment of compensation for the acquisition of the transport division of the assessee-company would amount to a slump transaction and whether the provisions of sections 41(2) and 45 are attracted have to be considered in the light of the provisions of the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act 37 of 1971. Under section 3 of the Act of 1971, on and from the date of Notification, ever stage carriage owned or operated by the fleet operator shall vest with the Government free from all encumbrances. Subsection (2) of section 3 of the Tamil Nadu Act provides that upon the issue of a notification in respect of any fleet owner, all lands, buildings, workshops and other places and all stores, instruments, machinery, tools, plants, etc., would vest with the Government free from all encumbrances. The compensation for the acquired property shall be determined under the provisions of section 5 of the Act and it shall be in accordance with the principles specified in the Schedule to the Tamil Nadu Act. The manner of determination of the compensation provided in section 5 of the Tamil Nadu Act, 1971, is that it will be on the basis of the agreement arrived at between the parties, or where no such agreement can be reached it shall be based on the award of the arbitrator. It is not necessary to refer to other provisions of the said Act, but to refer to the Schedule to the Act, which provides that the compensation to be paid by the Government in respect of the acquired property shall be the market value of such property, It is seen on the facts of this case, that the Government of Tamil Nadu issued a notification on December 4, 1971, and the stage carriages and other properties of the assessee as mentioned in the Act, vested with the Government on and from that date. The Government of Tamil Nadu also set up a Corporation called Pandian Roadways and transferred the properties to it on January 17, 1972. The Government of Tamil Nadu decided to pay compensation of Rs.51.50 lakhs initially on March 21, 1972, pending negotiations. There were negotiations between the Chairman and Managing Director of the assessee and a committee of the Secretaries to the Government which recommended payment of compensation as follows:

It is relevant to notice that the assessee-company has accepted the compensation and arbitration proceedings were not resorted to. Section 3 of the Act provides for acquisition of the fleet of stage carriages and all other items mentioned in the section and section 3 contemplates vesting of all the assets of the assessee contemplated in section 3 the Act. Section 2(a) defines the expression, "acquired property." which means the stage carriages and other properties vested in the Government under section 3 of the Act. Section 5 of the Act provides for compensation for the acquired property. It is clear that there was a statutory liability on the part of the Government of Tamil Nadu to pay compensation at the market value of the property for the acquired property, and correspondingly, there was a statutory right vested with the assessee to receive the compensation. It cannot be predicated that the amount of compensation paid by the Government of Tamil Nadu was not on the basis of the principles laid down in the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act, as it is not expected that the Government would pay something more, or something less, then what was provided in the Tamil Nadu Fleet Operators Stage Carriages (Acquisition) Act. It is significant to notice that the compensation has to be determined by the Government for each and every one of the assets mentioned in section 3 of the Act, and consequently, when the Government paid the compensation which the assessee received, after negotiation and without protest and without resort to arbitration proceedings, it must be taken that the Government reckoned the compensation for each and every item of the assets taken over from the passenger transport division of the assessee. Even though the break up of the figure of Rs.1,25,42,741:66 was not made available to us, since the compensation determined was with reference to items of assets taken over, the natural corollary is that the said sum represented the sum total of the value of the various assets .taken over and in the absence of any evidence or material contra it must be held that it is possible to attribute the compensation" amount received to each and every one of the assets taken over by the Government. That apart, the Tribunal noticed G.O. Ms. No.713, dated September 7, 1972, and found that on the basis of negotiations between the assessee and the Government, the compensation was fixed. Furthermore, the assessee, when it filed the return apportioned the compensation among various assets. Consequently, we are of the opinion that the compensation received by the assessee is attributed to the various assets acquired by the Government of Tamil Nadu under Act 37 of 1971.

In this factual background, various decisions relied upon by learned counsel for. the assessee as well as learned counsel for the Revenue have to be considered. In the decision in CIT v. Artex Manufacturing Co. (1997) 227 ITR 260, the Supreme Court considered the question of applicability of the balancing charge under the provisions of section 41(2) of the Act in detail and after noticing various decisions of the apex Court as well as High Courts, the Supreme Court laid down the following test. The test laid down by the Supreme Court is that even when there is a slump sale and the sale is of the business as a going concern, what has to be seen is whether any portion of the slump price is attributable to the assets transferred and if; on the basis of the facts, it can be found that a particular price is attributable to a particular item, the excess amount is chargeable to tax under section 41(2) of the Act. It is in the light of the test laid down by the Supreme Court that the factual situation of this case has to be considered and, therefore, it is not necessary to consider in detail all case-laws cited by both the parties, as the test is a common test and only on the application of the said test, there is a divergent view on the topic. The decisions in CIT v. Mugneeram Bangur and Ca. (Land Department) (1965) 57 ITR 299 (SC);. CIT v.. Electric Control Gear Mfg. Co. (1997) 227 1TR 278 (SC) and CIT v. Narkeshari Prakashan Limited (1992) 196 ITR 4.38 (Bom.), all fall on one side of the line. On the other hand, the decision relied upon by learned counsel for the Revenue in Artex Manufacturing Co.'s case (1997) .227 ITR 260 (SC), falls on the other side of the line. Applying the test laid, down by the Supreme Court in Artex Manufacturing Co.'s case (1997) 227 ITR 260, it is clear that on the facts of the case, the compensation received by the assessee can be attributable to the various assets taken over by the Government of Tamil Nadu and it is also possible to attribute the compensation to the particular items of assets taken over by the Government. Therefore, the provisions of section 41(2) of the Act are clearly attracted to the case.

Further, the assessee had also disclosed the profits under the provisions of section 41(2) of the Act and it cannot be held that it is not a case in which it cannot be said that the price attributable to the . items transferred is not traceable, attributable or is not indicated and, therefore, it cannot also be held that the provisions of section 41(2) of the Act are not attracted. Accordingly, we hold that the Tribunal has come to the correct conclusion in holding that the compensation received was attributable to the individual assets and the facts of the case rightly attracted the provisions of section 41(2) of the Act.

The questions referred to us also refer to capital gains under section 45 of the Act. The Tribunal was of the view that the provisions of section 4 of the Act are attracted on the basis that in the case of depreciable assets the written down value will be taken as the cost of acquisition instead of the original cost for the purpose of computing capital gains. Therefore, we are of the opinion that the liability under section 41(2) of the Act is limited to the amount of surplus to the extent of the difference between the written down value and the actual cost and if the compensation amount exceeds the difference between the written down value and the actual cost, then, the surplus to the extent of such excess is liable to be treated as capital gains for the purpose of levy under section 45 of the Act. We, therefore, hold that the tribunal was correct in holding that the payment of compensation for acquisition of the bus transport undertaking of the assessee company would attract the provisions of the capital gains under section 45 of the Act. In this view of the matter, we answer the questions of law referred to us as under:

(a) First question of law.---It is answered in the affirmative and against the assessee.

(b) Second question of law.---It is answered in the affirmative and against the assessee.

(c) Third question of law.---It is answered in the affirmative (sic) and against the assessee.

The assessee will pay the costs of the reference. Counsel fee is fixed of Rs.500.

M. B. A./4053/FCReference answered