T.V. Rajagopala Rao, Judicial Member - (1.) THE questions involved in this appeal filed by the assessee are whether on the facts and in the circumstances of this case the department can be allowed to reckon balancing charge under Section 41(2) of the Income-tax Act and to bring it to tax. If so, what is the amount which can be assessed as the balancing charge.
(2.) The facts are few and they may be stated as under. The assessee is an ordinary Hindu undivided family. The assessment year involved is 1982-83 for which the previous year ended by 31-3-1982. The assessee used to do business of leasing out a cinema hall called Srinivasa Mahal at Palakol, West Godavari District. The site on which Srinivasa theatre was constructed belonged to one Shri T. Krishnamurthy. In the first instance, the site was taken on lease for 25 years, i.e., 21-4-1957 to 20-4-1982 by one Sri Y. Narayana Rao, who had constructed Srinivasa theatre on the said site. The theatre together with the unexpired portion of the lease rights in the site were sold to Sri N. China Satyanarayana, etc., by a registered sale deed dated 3-2-1965. The said cinema hall together with the unexpired portion of the lease rights in the site were sold by Sri N. China Satyanarayana, etc., in their turn to Sri V. Venkatarama Raju son of Sri Subbaraju on behalf of the assessee-HUF under the registered sale deed dated 6-3-1968. On behalf of the assesse-HUF Sri T. Krishnamurthy was requested to extend the lease period (sic). In pursuance of the agreement Sri T. Krishnamurthy executed a registered lease deed dated 1-2-1968 extending the lease period from 20-4-1982 to 31-12-1992. The assessee-HUF leased out cinema hall to Sri K. Ramachandraraju and Sri K. Venkataramaraju on condition that they should pay rent of Rs. 12,050 per month. The lease is for five years, i.e., from 1-6-1980 to 1-5-1985. The lease deed was registered. The lease amount was offered as business income derived by the assessee-HUF and it was accepted by the department in the income-tax assessments completed against the assessee in the previous years. Even while the lease was existing the assessee-HUF sold away the cinema theatre together with all the machinery and furniture along with unexpired portion of the lease rights in the site for Rs. 3,00,000 by means of the registered sale deed dated 2-11-1981 to one Sri K. Kanna Rao and his minor son. It may be mentioned that the lease land is in three plots and all of them are situated in RS No. 320/12 measuring 84 cents in Gunipudi village. The super-structure of the cinema hall, machinery and furniture were all purchased for Rs. 1,32,046 in 1968. In the first spell of the lease period the ground rent that was agreed to be paid to Sri T. Krishnamurthy was Rs. 200 per month. However, for the second spell of the lease period though it purported to have been covered the period from 20-4-1982 to 31-12-1992 the rent payable per month or per year was not ascertainable from the material on record. The assessee-HUF executed the sale deed dated 2-11-1981 in favour of Sri K. Kanna Rao and his minor son Sri Venkateswara Rao for a consideration of Rs. 3 lakhs. How the consideration was fully received ultimately by the vendors was stated in the recitals of the sale deed dated 2-11-1981, a copy of which is filed before us. It is in Telugu and a free translation of the said document is also filed along with it. The latest assessment order was dated 28-1-1974 for assessment year 1972-73 completed by the Income-tax Officer, A-Ward, Palakol. A perusal of the same disclosed that as on 1-4-1971 which is the first day of assessment year 1972-73 the WDV of the building, machinery and furniture was noted to be Rs. 87,256. For assessment year 1972-73 the WDV of Rs. 8,599 was allowed. Till the assessment year 1972-73 the WDV allowed worked out to Rs. 87,256. Deducting therefrom depreciation of Rs. 8,599 allowed for assessment year 1972-73 at the end of the accounting year it would work out to Rs. 78,657. The difference of Rs. 73,389 represents depreciation allowed in the assessments up to and including assessment year 1972-73. The assessment order for 1972-73 a copy of which is filed by assessee before the Income-tax Officer disclosed that an amount of Rs. 5,763 representing unabsorbed depreciation was ordered to be carried over to subsequent years. Deducting this, the balance worked out to Rs. 67,621. This amount of Rs. 67,621 was sought to be brought to tax as profit under Section 41(2) of the IT Act. The assessee objected to the same and contended that as the entire undertaking was sold away as going concern no question of any balancing charge under Section 41(2) could arise and the assessee relied upon the decision of the Gujarat High Court in Artex Mfg. Co. v. C1T [1981] 131 ITR 559. The Income-tax Officer overruled this objection of the assessee stating that the facts of the case cited are quite different from the facts on hand before him and ultimately he brought the amount of Rs. 67,621 to tax in the hands of the assessee.
(3.) IN the appeal before the CIT(A), Visakhapatnam the argument that the balancing charge cannot be brought to tax as the entire undertaking was sold without specifying any value in respect of each individual depreciable asset and the assessee relied upon besides the decision already cited before the INcome-tax Officer on two more decisions, one of Gujarat High Court reported in Sarabhai M. Chemicals (P.) Ltd. v. P.N. Mittal, Competent Authority, IAC [1980] 126 ITR 1 at 22 and CIT v. Mugneeram Bangur & Co. {Land Department) [1965] 57 ITR 299 of the Supreme Court. The learned CIT(A) firstly held that it was unfortunate that the INcome-tax Officer did not and could not lay his hands on the records after the assessment year 1972-73. He also found that in the assessment records for the present assessment year with which we are concerned, vis., 1982-83 the valuer's report (Sri B.H. Subbaraju, Civil Engineer) was on record. It appears the learned CIT(A) states that the assessee instructed the abovesaid engineer to make a personal inspection and assess the value of the property expressly for the purpose of ascertaining the capital gains and the said civil engineer made an elaborate itemised valuation of the entire property. IN his report he discussed the present state of each and every item of business asset comprised in the sale deed which is now the subject-matter of appeal before him. The values placed by the engineer over each item of the building and machinery as well as furniture were given as each of them bears in September 1981. Thus, values were given in a list which is shown as Annexure to the CIT(A)'s order which is as follows: JUDGEMENT_5153_TLIT0_19870.htm The learned CIT(A) recorded that the valuation by the above engineer was done on 5-9-1981 and the sale of the cinema hall, etc. took place well within two months from that date. He stated that he is thoroughly convinced that with a view to ascertain the market value of each and every item of depreciable asset the valuation was got done by the assessee. He also held that this valuation has greatly influenced to fix the market value at Rs. 3 lakhs under sale deed dated 2-11-1981. The difference between Rs. 3 lakhs and Rs. 2,71,000 in the view of the learned CIT(A) would represent the goodwill for which no value was put by the valuer or this would represent the pro rota increase in the value of each asset in the course of bargain or negotiations. Later the learned CIT(A) held that the Supreme Court decision in Mugnee-ram Bangur & Co. (Land Department)'s case (supra) and the Gujarat High Court decision in Artex Mfg. Co.'s case (supra) have been discussed and distinguished in Chandra Katha INdustries v. CIT [1982] 138 ITR 168 (All.). Ultimately he held perhaps basing his decision on Chandra Katha INdustries' case (supra) it is obvious that the assessee has consciously fixed separate cost for individual items two months before the sale. He held that it is against common sense that in a transaction of sale of this type a slump price could be just intuitively imagined and agreed upon. The slump price, if any, is only a convenient name for the aggregate of the prices individually determined after proper thought deliberately placed to avoid an assessment of the profits under Section 41(2). Thus he confirmed the order of the INcome-tax Officer and dismissed the appeal preferred by the assessee. Hence the second appeal.;