2009 (9) TMI 690 - AT - Income Tax

Tribunal Rules on Slump Sale Taxation: Appeal Partly Allowed, Capital Gains Upheld

JB. Electronics Versus Joint Commissioner of Income-tax, Special Range-5, Pune

JB. Electronics Versus Joint Commissioner of Income-tax, Special Range-5, Pune - [2010] 40 SOT 176 (PUNE) (TM) Issues Involved:1. Taxability of the difference between slump price and book value.2. Jurisdiction of the Assessing Officer in bifurcating the consideration realized on transfer of the business.3. Admissibility of depreciation claimed by the appellant firm.Issue-wise Detailed Analysis:1. Taxability of the Difference Between Slump Price and Book Value:The primary issue was whether the difference of Rs. 3,90,75,997 between the slump price of the business realized and the book value, as worked out by the Assessing Officer, was exigible to tax. The appellant argued that this amount should not be taxed, citing various precedents such as B.C. Shrinivasa Shetty (128 ITR 294) and Mugneeram Bangur & Co. (57 ITR 299). The Assessing Officer, however, treated part of this amount as short-term capital gain (Rs. 1,55,84,366) and the rest as long-term capital gain (Rs. 3,92,94,500), arguing that the value of assets could not exceed the revalued amount and the remaining consideration was goodwill. The CIT(A) supported this view, relying on the Supreme Court's decision in Artex Engg. Co. (227 ITR 260), and concluded that the provisions of section 50 were applicable since the assets transferred were depreciable, and the remaining amount was goodwill taxable under section 55(2)(a)(ii).2. Jurisdiction of the Assessing Officer in Bifurcating the Consideration Realized on Transfer of the Business:The appellant contended that the bifurcation of the consideration by the Assessing Officer was beyond his jurisdiction and erroneous. The appellant argued that the entire business was sold as a going concern at a slump price, and no part of the income should be taxable. The appellant cited decisions such as Syndicate Bank Ltd. (155 ITR 681) and B.C. Shrinivasa Shetty (128 ITR 294) to support their claim. The Tribunal, however, upheld the view that the transfer was not itemized but a slump sale, and the method of arriving at the sale consideration was based on profit capitalization, not on the valuation of individual assets. The Tribunal concluded that the transaction was a slump sale and not an itemized sale, thereby reversing the findings of the Assessing Officer and CIT(A).3. Admissibility of Depreciation Claimed by the Appellant Firm:The appellant firm claimed depreciation of Rs. 1,81,670, which was rejected by the taxing authorities. The appellant argued that the rejection was erroneous and contrary to the provisions of law. However, at the outset of the hearing, the appellant's representative conceded this ground, and it was dismissed as not pressed.Separate Judgments Delivered by the Judges:A difference of opinion arose between the Judicial Member and the Accountant Member of the Tribunal. The Judicial Member held that the transaction was a slump sale, emphasizing that the consideration was fixed based on profit capitalization and not on the valuation of individual assets. Conversely, the Accountant Member viewed the transaction as an itemized sale, arguing that the assets were specifically revalued, and the excess amount was goodwill.The matter was referred to a Third Member, who agreed with the Judicial Member's view that the transaction was a slump sale. The Third Member highlighted that the sale consideration was computed on the basis of profit capitalization, and the method was not challenged by the authorities below. The Third Member concluded that the transaction was not an itemized sale but a slump sale of the business.Final Decision:The Tribunal, in conformity with the majority view, held that the transaction was a slump sale and not an itemized sale. Consequently, the grounds related to the taxability of the difference between the slump price and book value were allowed, and the appeal was partly allowed.