1. This Tax Case Appeal is filed at the instance of the Income Tax Department in relation to the assessment year 1999- 200.
2. The Assessee/ Respondent is engaged in the manufacture of Soft drinks under a franchise from Coco Cola. It had two bottling plants, Unit I at Poonamallee High Road, Arumbakkam and Unit II at Pulianthope, Trivellore District, Nemam. The assessee, in the previous year relevant to the present assessment year, entered into an arrangement for transfer of its entire soft drinks and beverage undertaking as a going concern to Hindustan Coco Cola Bottling South West Pvt. Ltd (in short ‘HCC’).
Value of the broken bottles need not be reduced from the written down value for the purpose of calculation of short term capital gains arising from sale of bottles.
3. The first issue raised in the appeal relates to the reduction of the value of breakages of bottles and crates from the written down value (‘WDV’) in the computation of short term capital gains u/s 50 of the Income tax Act 1961 (the ‘Act’). The Assessee had sold bottles and crates to HCC offering short term capital gain of an amount of Rs. 8,28,97,258/- to tax in terms of section 50 of the Act. In doing so, WDV was adopted at Rs. 12,02,56,812/-. Separately, the assessee accounted for breakages of bottles and crates at the rate of 15% as against 33% for earlier years. The realisation from the sale of broken bottles and crates was offered to tax. The assessing officer was of the view that the value of breakages should be deducted from the WDV adopted for bottles and crates, whereas, according to assessee, the breakages had already been taken into account in its statement of income by way of suo moto dis allowance and there was thus no need to reduce the same once more from the WDV. However, the assessing officer noted that the sale to HCC as on 28.02.99 could only be of the bottles existing as on that date which could not have included the broken bottles and crates. Thus, he estimated the breakages at a figure of Rs.1,88,47376 reducing the same from WDV. The short term capital gain stood enhanced to Rs. 10,54,18,206/- in place of Rs. 8,28,97,258/- computed by the Assessee.
4. The second issue related to the allow ability of an amount of Rs. 1,84,63,029/- being compensation charges. The Assessee had claimed the same in terms of Section 36(1)(iii) of the Act or alternatively as a revenue outgo in terms of Section 37(1) of the Act. The Assessing Officer was of the view that the compensation charges were capital in nature and disallowed the same. The third adjustment related to an amount of Rs. 3 crores representing goodwill that, according to the assessee was liable to tax in AY 2002- 03 and not in the year under consideration. The assessee submitted that the actual closure of business was conditional on the completion of various statutory formalities and produced a letter from the purchaser HCC to the effect that the sum of Rs. 3 crores constituted only an advance in respect of which a Bank Guarantee had been given by the Assessee. The submission was negated by the Assessing Officer, who noted that the Assessee had, as on 28.02.1999, stopped manufacturing operations and was only rendering job work for HCC. The Assessing Officer drew support from the Annual Report of the Company for the year ending 31.03.1999 that corroborated this position and reflected the closing stock as Nil. Thus the Assessing Officer brought to tax the amount of Rs. 3 crores in the present assessment year being of the view that the transfer of goodwill business had been effected in the present year itself.
5. In appeal before the Commissioner of Income Tax (Appeals) all issues were held against the Assessee. The order was assailed in appeal before the Income Tax Appellate Tribunal, which held the issues in favour of the assessee. The aforesaid order of the Tribunal dated 12.06.2006 is challenged in appeal before us.
6. We have heard the submissions of Mr. T. Ravikumar, learned counsel appearing for the Income Tax Department and Mr. V.S. Jayakumar, and Mr. Sandeep Bagmar, learned counsels appearing for the Assessee/ Respondent.
7. Adverting to the issue of computation of short term capital gain, the assessee has been consistently providing for breakage of bottles and crates, 33% in the present year as against 5% in the past, adding the same back for the claim of depreciation. The assessee also did did not claim the loss from breakage since it was capital in nature. The income from sale of bottles was being offered as income. This practice has been accepted by the department on all counts. In the financial year relevant to the present assessment year, the assessee transferred the assets to the purchaser and this gave rise to short term capital gain computed in terms of section 50 of the Act, relating to depreciable assets Section 50 reads thus:
‘50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income tax Act 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:-
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of assets during the previous year, exceeds the aggregate of the following amounts, namely:-
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year; such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short term capital assets.
8. In accordance with the provisions of section 50, where a capital asset forms part of a block of assets and depreciation has been allowed in regard to the same, then, in the computation of capital gain on the transfer of such asset, the cost of acquisition shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block acquired during the previous year. In the present case, the WDV as on 1.4.1998 is Rs. 12,02,56,812/- after reducing the depreciation allowable. In such an event, and in the light of the fact that the breakages have not been claimed in the computation of income, there is no justification for any further reduction from WDV. The case law relied upon by the assessing officer have been rightly distinguished by the Tribunal as they turn on entirely different facts. Substantial Question No. 1 is answered against the Revenue and in favour of the Assessee.
