[PNB Finance Ltd. v. CIT, (2008) 307 ITR 75 (SC)]
The Punjab National Bank Ltd. was set up in 1895 in an area
which now falls in Pakistan. It was nationalised as Punjab National Bank (PNB)
by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970.
On July 19, 1969 PNB Ltd. the appellant herein, on nationalisation received
compensation of Rs.10.20 crores. This compensation was calculated on the basis
of capitalisation of last 5 years’ profits. The said compensation was received
during the accounting year ending December 31, 1969, corresponding to the A.Y.
1970-71. During the A.Y. 1970-71, the appellant had to compute capital gains
u/s.48 by deducting from the sale consideration the cost of acquisition as
increased by the cost of improvement and expenses incurred in connection with
the transfer. Under the law then prevailing, the assessee could index the cost
of acquisition. A return was filed in this case by the assessee showing an
income of Rs.2,03,364.
The assessee in the course of assessment proceedings
submitted that he had an option u/s.55(2)(i) of having the value ascertained
as on January 1, 1954, whichever is higher, but could not exercise it as the
cost of acquisition in this case was not computable. In the alternative, the
assessee submitted the fair market value of the undertaking as on January 1,
1954. By letter dated September 30, 1970, the assessee claimed a capital loss.
The Assessing Officer, however, proceeded to hold on the
basis of capitalisation of the last 5 years’ profits the capital gains of
Rs.1,65,34,709.
Aggrieved by the decision of the Assessing Officer, the
matter was carried in appeal by the assessee to the Appellate Assistant
Commissioner who came to the conclusion that, in this case, it was not
possible to allocate the full value of the consideration received
(compensation) amounting to Rs.10.20 crores between various assets of the
undertaking and, consequently, it was not possible to determine the cost of
acquisition and cost of improvement under the provisions of S. 48 of the 1961
Act and since computation was inextrically linked with the charging provisions
u/s.45 of the said Act it was not possible to tax the tax the surplus, if any,
u/s.45 of the 1961 Act. Aggrieved by the decision of the Commissioner, the
Department went by way of appeal to the Tribunal which took the view that, in
this case, since the assessee had exercised its option for substitution of the
fair market value of the undertaking as on January 1, 1954, it was not open to
the assessee to contend that the cost of acquisition was not computable and,
therefore, the Assessing Officer was right in arriving at the figure of
capital gains fixed by him at Rs.1,65,34,709.
For the first time, relying upon S. 41(2), the High Court
dismissed the reference initiated at the behest of the assessee.
On an appeal, the Supreme Court held that as regards
applicability of S. 45, three tests are required to be applied. The first test
is that any surplus accruing on transfer of capital assets is chargeable to
tax in the previous year in which transfer took place. In this case, transfer
took place on July 18, 1969. The second test which needs to be applied is the
test of allocation/attribution. This test is spelt out in the judgment of this
Court in Mugneeram Bangur and Co. (Land Department) (1965) 57 ITR 299. This
test applies to a slump transaction. The object behind this test is to find
out whether the slump price was capable of being attributable to individual
assets, which is also known as itemwise earmarking. The third test is that
there is a conceptual difference between an undertaking and its components.
Plant machinery and dead stock are individual items of an undertaking. A
business undertaking can consist of not only tangible items but also
intangible items like, goodwill, manpower, tenancy rights and value of banking
licence. However, the cost of such items (intangibles) is not determinable. In
the case of CIT v. B. C. Sriniwasa Setty reported in [1981] 128 ITR
294, this Court held that S. 45 charges the profits or gains arising from the
transfer of a capital asset to Income-tax. In other words it charges surplus
which arises on the transfer of a capital asset in terms of appreciation of
capital value of that asset. In the said judgment, this Court held that the
‘asset’ must be one which falls within the contemplation of S. 45. It is
further held that, the charging Section and the computation provisions
together constitute an integrated code and when in a case the computation
provisions cannot apply, such a case would not fall within S. 45. In the
present case, the banking undertaking, inter alia, included intangible
assets like goodwill, tenancy rights, manpower and value of banking licence.
On the facts, the Supreme Court found that itemwise earmarking was not
possible. On the facts, it was found that the compensation (sale
consideration) of Rs.10.20 crores was not allocable item-wise as was the case
in Artex Manufacturing Co. (1997) 227 ITR 260. For the aforestated reasons,
the Supreme Court held that on the facts and circumstances of this case, which
concerned A.Y. 1970-71, it was not possible to compute capital gain and,
therefore, the said amount of Rs.10.20 crores was not taxable under Setion 45
of the 1961 Act. Accordingly, the impugned judgment was set aside. The Supreme
Court however, observed that in this case S. 55(2)(i) did not operationalise.
U/s.55(2), the fair market value as on January 1, 1954, could have substituted
the figure of cost of acquisition provided the figures of both ‘cost of
acquisition’ and ‘fair market value as on January 1, 1954’ were ascertainable.
