"'As-is-where-is' transfer of an entire undertaking: treated as slump sale, not itemised asset sale; capital gains recalculation ordered"

For AY 1995-96, the dominant issue was whether transfer of an undertaking "as is where is" constituted a slump sale or sale of itemised assets for capital gains computation. Applying judge-made slump sale principles (in absence of a statutory definition then), HC held that sale of the business as a whole involves no allocation of consideration to individual assets, whereas an itemised sale requires apportionment across all transferred assets; restricting consideration to selected assets would artificially inflate liability. HC held the transaction was for a slump price and that s.45 applied, set aside the Tribunal order, and remanded to the AO to determine cost of the undertaking, valuation under s.55, indexation basis/quantum, depreciation on blocks, and compute any capital gains under ss.45/48.

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Issues: (i) Whether the sale of the Kalyan business to Kalyan Motor Company Ltd. / PPL was a slump sale or a sale of itemized assets; (ii) Whether the lump sum consideration of Rs. 210 crores was apportionable to different assets and the value of individual assets ascertainable; (iii) Whether the apportionment done by the transferee for accounting purposes should be adopted by the Assessing Officer for computing depreciation and capital gains.

Issue (i): Whether the transfer effected by the agreements constituted a slump sale (transfer of the Kalyan business as a going concern) or an itemized sale of individual assets.

Analysis: Consideration is given to the MOU (11.3.1993), supplemental MOU (17.5.1994), joint venture agreement (19.10.1994) and slump sale agreement (6.1.1995) together with surrounding commercial circumstances as at 11.3.1993. The arrangement fixed a lump sum price for the Kalyan business, contemplated centralisation of activities across Kalyan, Kurla and Pune, transferred licences, dealers, workforce and other intangibles, and resulted in continuity of manufacturing by the transferee (turnover shortly after transfer). Contemporaneous due diligence and later accounting or valuation by the transferee do not alone convert the transaction into an itemized sale. Conveyance and valuation for stamp duty and accounting allocations post-transfer do not negate transfer of the business as a whole where the commercial intention and structure show a lump sum transfer.

Conclusion: The transaction was a slump sale (in favour of the assessee).

Issue (ii): Whether the lump sum consideration of Rs. 210 crores is apportionable to different assets and individual asset values ascertainable for the purpose of treating the transfer as an itemized sale.

Analysis: The MOU and subsequent documents show a lump sum price that incorporated fixed assets and business advantages; the net current assets were separately quantified only as of the sale date and did not give rise to profit. Post-hoc allocations by the transferee or valuers are accounting exercises and cannot, by themselves, be treated as evidence that the parties intended an itemized sale at the MOU date. If the transaction were treated as an itemized sale, a correct apportionment would require allocation across all transferred items (including intangibles) and application of statutory parameters; the Assessing Officers selective apportionment to certain depreciable assets only was arbitrary.

Conclusion: The lump sum consideration under the arrangement is not to be treated as apportionable in the manner adopted by the Revenue; the finding that the consideration was apportionable to individual assets is negatived (in favour of the assessee).

Issue (iii): Whether the apportionment carried out by the transferee for accounting purposes should be adopted by the Assessing Officer for computing depreciation and capital gains of the transferor.

Analysis: Allocations made by the transferee for its books are internal accounting entries and do not bind tax treatment of the transferor. Proper tax computation requires the Assessing Officer to apply the statutory rules (sections 45, 48, 50, 55 etc.) and to consider cost, indexation and depreciation as relevant. The Assessing Officers adoption of the transferees allocations without apportioning the lump sum across all transferred assets (including intangibles) and without following statutory computation principles was incorrect.

Conclusion: The transferees accounting apportionment is not binding for tax computation of the transferor; the issue is resolved in favour of the assessee and against the Revenue.

Final Conclusion: Reading the entire arrangement and the relevant circumstances the transfer of the Kalyan business constituted a slump sale; the matter is remitted to the Assessing Officer to determine and compute any capital gains applying the applicable statutory parameters and rules.

Ratio Decidendi: Where contractual documents and contemporaneous commercial circumstances establish transfer of a business as a going concern for a lump sum price and there is continuity of business by the transferee, the transaction is a slump sale; post-transfer accounting allocations or later valuations by the transferee do not convert such a lump sum going-concern sale into an itemized sale for tax purposes, and tax computation must follow statutory rules (including appropriate apportionment across all transferred assets if an itemized sale is found) on remand.

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