Tribunal Rules Cement Unit Sale as Slump Sale; No Tax u/s 50, Limits Entertainment Expense Disallowance.

Coromandel Fertilisers Ltd. Versus Deputy Commissioner Of Income-Tax.

Coromandel Fertilisers Ltd. Versus Deputy Commissioner Of Income-Tax. - ITD 090, 344, TTJ 084, 370, Issues Involved:
1. Whether the sale of the cement unit is a slump sale or an itemized sale.
2. Tax consequences of the sale under the head 'Short-term capital gains' u/s 50 of the Income-tax Act.
3. Whether the cost of acquisition and cost of improvement of the cement unit can be determined for the purpose of capital gains tax.
4. Whether the assessee is eligible for depreciation on the transferred assets.
5. Allowability of certain expenses and provisions in the computation of capital gains.

Summary:

Issue 1: Whether the sale of the cement unit is a slump sale or an itemized sale.
The Tribunal held that the sale of the cement unit was a slump sale. The unit was sold as a going concern on an 'as-is-where-is' basis for a lumpsum consideration of Rs. 105.30 crores plus the value of net current assets. The Tribunal found no decisive evidence to support the Department's claim that it was an itemized sale. The special procedures for valuing certain items like current assets and obsolete items did not detract from the fact that it was a slump sale. The Tribunal relied on the decision in Premier Automobiles Ltd. and other relevant case law to conclude that the sale was a slump sale.

Issue 2: Tax consequences of the sale under the head 'Short-term capital gains' u/s 50 of the Income-tax Act.
The Tribunal held that the provisions of section 50 were not attracted as the sale was a slump sale. The lumpsum consideration was not allocable to depreciable assets, and therefore, no tax under the head 'Short-term capital gains' was leviable. The Tribunal referred to the decisions in Mugneeram Bangur & Co., Artex Mfg. Co., and Electric Control Gear Mfg. Co. to support its conclusion.

Issue 3: Whether the cost of acquisition and cost of improvement of the cement unit can be determined for the purpose of capital gains tax.
The Tribunal held that the cost of acquisition and cost of improvement of the cement unit were not ascertainable. The computational provisions of section 48 failed, and therefore, no tax under section 45 was leviable on the transfer of the cement unit. The Tribunal relied on the decision in B.C. Srinivasa Setty and other relevant case law to conclude that the cost of acquisition of an undertaking is inherently unascertainable.

Issue 4: Whether the assessee is eligible for depreciation on the transferred assets.
The Tribunal held that the assessee was not eligible for depreciation on the transferred assets. The precondition of ownership and user in the business of the assessee was not satisfied as the blocks of assets of the cement unit had ceased to exist. The Tribunal referred to the provisions of section 43(6)(c) and concluded that the assessee could not claim depreciation without reducing the written down value of the assets of the cement unit from the block of assets.

Issue 5: Allowability of certain expenses and provisions in the computation of capital gains.
The Tribunal held that the expenses and provisions claimed by the assessee, such as legal fees, consultancy fees, exchange value difference, value of obsolete items, and the difference in the valuation of Rs. 12,70,672 relating to current assets, were not allowable as deductions from the other taxable income. These items were part of the computation of the profit on the sale of the cement unit, and since no tax under the head 'capital gains' was leviable, separate deductions for these amounts were not allowed.

Conclusion:
The Tribunal dismissed the Department's appeal and partly allowed the assessee's appeal, holding that the sale of the cement unit was a slump sale, no tax under section 50 was leviable, the cost of acquisition and cost of improvement were not ascertainable, and the assessee was not eligible for depreciation on the transferred assets. The Tribunal also restricted the disallowance of entertainment expenditure to 75%.