TaxTMI 
TaxTMI 
2007 (7) TMI 342
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.... 13 is general in nature and does not require any specific adjudication. 4. Ground Nos. 1 to 10: These grounds relate to the addition made on account of short-term capital gain. The facts relating to the issue, as culled out from the material on record, as well as on perusal of the orders of the authorities below, are as under: 4.1 The assessee company was incorporated in the year 1998 with the main object of development of software and multimedia contents. It decided to transfer its undertaking to M/s Suri Capital & Leasing Limited ("SCL" in short). For this purpose. acquisition agreement between SCL and the assessee company, namely, Virtual Software & Training (P) Ltd. ("VSTL" in short), was executed on16th June, 2000. We consider it proper to reproduce the relevant clauses of this agreement, which are as under: "3. VSTL is desirous of transferring its entire undertaking with respect to software development and training, consisting of its assets, liabilities. intellectual property rights and other contractual rights and obligations as more particularly described in Sch. B to this agreement on a 'going concern' basis (hereinafter referred to as the "business"). 4. SCL ....
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.... to as 'VSL'). Pursuant to such agreements dt.16th July, 2000and31st July, 2000, the assessee company transferred its entire undertaking with respect of software business consisting assets, liabilities, intellectual property rights, contractual rights and obligations to VSL. The assessee company exchanged all its assets and liabilities, lock stock and barrel as 'going concern' and VSL took over all such assets and liabilities in exchange of allotting the assessee 45 lakh equity shares in VSL. The equity shares of VSL are listed and traded in various stock exchanges across the country. As per the terms of the agreement for acquiring the business of the assessee company, VSL discharged the consideration by allotment of its 45 lakh equity shares of the face value of Rs. 10 each. Thus as on31st July, 2000; the situation stands as under: (i) Assets, liabilities, employees, intellectual property rights, contractual obligations, etc. of the assessee company stood transferred to VSL. (ii) For such transfer, as stated above in (i) the assessee company was allotted 45 lakh equity shares of the face value of Rs. 10 each of VSL. Thus the assets of the assessee company which upto31st J....
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....after the closing constitute about 60 per cent of the total issued, subscribed, and paid up capital of SCL.' Earlier in art. 2.1 of the same agreement (it) has also been described as 'Agreement to sell and purchase'. Under such article, it has been mentioned that the assessee company shall sell, transfer, etc., to VSL the entire organization in the business of computer software. In view of the above, provisions of the agreement dt. 16th June, 2000 between the assessee company and M/s Suri Capital and Leasing Ltd. the transaction is slump sale of the business of the assessee company in consideration of 45 lakhs shares of face value of 10 each of M/s Suri Capital and Leasing Ltd. Sec. 50B has been inserted in the IT Act w.e.f. 2000-01. Sec. 50B is applicable for computation of capital gains in case of slump sale of business. In order to tax, transaction as a slump sale, it is necessary to understand the word 'slump sale' and provisions of s. 50B. As defined in s. 2(42C) 'slump sale' means the transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities. "Sec. 50B has been inserted wi....
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....sp; 40,02,203.07 Cash in hand 460,887.77 Balance with scheduled bank in current account 37,22,318.45 Advance recoverable in cash or kind or value 55,61,455.10 to be received Security deposit 3,62,500.00 Total 2,11,34,288.69 Less: Sundry creditors 13,60,189.71 Other liabilities 9,38,061.94 Adv. from clients ....
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....d the shares and also the controlling interest. It was also submitted that various assets and liabilities of the undertaking subscribed for the shares were at book value only. 4.8 It was contended on behalf of the assessee that for the purpose of capital gain, s. 48 provides that the full value of the consideration accruing or received was to be adjusted against the deduction on account of the cost of acquisition of the asset transferred and the cost of improvement thereto. The assessee further submitted that undertaking which was subscribed to form share capital had been evaluated by M/s Price Waterhouse Coopers. chartered accountants at the value ranging between Rs. 8 crores to Rs. 11 crores and thus the difference between the face value of the shares allotted and such book value of the net assets represented its intangible assets i.e., goodwill. 4.9 In support of this submission, the assessee placed reliance on the ratio of decisions in the cases of CIT vs. Mugneeram Bangur & Co. (l965) 57 ITR 299 (SC); Venkatesh & Ors. vs. CIT (2000) 162 CTR (Mad) 142 : (2000) 243 ITR 367 (Mad); and CIT vs. Central India Industries Ltd. 1972 CTR (SC) 304 : (1971) 82 ITR 555 (SC). 4.10 ....
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....e shares are quoted in the stock exchange. This plea of the assessee is not acceptable as there is nothing in the acquisition agreement that it will effect the value of the face value of the shares.... The assessee's this contention is also not correct. The s. 50B(3) explains that 'the benefit of indexation will not be available'. The assessee has also referred the following Hon'ble judgment: (i) CIT vs. Central India Industries Ltd. 1972 CTR (SC) 304 : (1971) 82 ITR 555 (SC); (ii) Smt. Maharani Ushadevi vs. CIT (1981) 131 ITR 445 (MP); (iii) Venkatesh & Ors. vs. CIT (2000) 162 CTR (Mad) 142 : (2000) 243 ITR 367 (Mad); (iv) CIT vs. Mugneeram Bangur & Co. (1965) 57 ITR 299 (SC). These judgments are clearly distinguishable from the facts of the present case. Moreover the judgments are dt. 7th Sept., 1971, 21st Dec., 1981 and 31st March, 1965, whereas the provisions of s. 50B have been inserted in the IT Act w.e.f. asst. yr. 2000-01 and, hence these judgments have no relevance for the present case which relates to asst. yr. 2001-02. In view of the facts of the case, the appeal filed by assessee may kindly be rejected." 4.11 Against the remand report, the assessee ....
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....ative has similarly filed written submissions dt.31st Jan., 2007along with the submission of the AO dt.25th Jan., 2007. The learned Departmental Representative has also filed further submissions dt.12th March, 2007. The learned Departmental Representative has placed reliance on various authorities including the decision of Tribunal Mumbai Bench 'E' in the case of Zuari Industries Ltd. vs. Asstt. CIT (2006) 9 SOT 563 (Mumbai). 6.1 The main argument of the learned counsel for the assessee was that the AO was not justified in treating the transaction as a slump sale. According to him, there was no sale in the transaction and it was only exchange in terms of agreement itself. It was pointed out by him that the assessee company had lodged its software undertaking minus its domain rights to M/s Suri Capital & Leasing Ltd. in consideration of its receiving 45 lakh equity shares of the said company, so as to make the assessee company a dominant and controlling shareholder in M/s Suri Capital & Leasing Ltd. The effect of the transaction, according to him, was that what was owned exclusively as a 100 per cent interest in an undertaking got diluted by 40 per cent and consequently, leaving ....
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.... completely just as the responsibility of SCL for its leasing business continued uninterrupted as before. Part relinquishment or partial extinguishment are beyond the contemplation of the provisions. Inchoate adjustment of rights do not create a taxable event for it is impossible to read a clear transfer therein. The provisions aim at a total transfer of the undertaking. That is a prerequisite of a slump sale. In the given facts there is no total transfer of the undertaking involved for indubitably the sway of the appellant over the undertaking and its business interest goes unaffected. In such circumstances slump sale conditions are not manifest and so the cited provisions are otiose in the context of the conditionalities as enumerated here before. Further transaction is required to be examined for its tax impact on the basis of the incidence of the conditions as contended in the documents. All the same, it is now well established through a series of decisions that in undertaking the import and impact of a transaction, the name given by the party to the transaction is not decisive. Parties to the transaction are free to give any name to the transaction just the assessing authority....
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....s. 10 per share of 45 lakh shares, which was the subject-matter of exchange, was of little significant. It is pointed out by him that the quotation on the stock exchange of shares of M/s Suri Capital & Leasing Ltd. at the relevant time was the applicable and binding value. The learned counsel thus contended that the agreement nowhere states that the transaction was for Rs. 4.5 crores and the AO had only gone on presumption in taking this value as consideration for the transfer of the software undertaking. This argument has been taken by him in the written submission filed on13th March, 2007and we consider it proper to reproduce the same which is as under: "The AO wrongly attributed the face value of Rs. 10 to the 45 lakh shares being the subject-matter of exchange. As between the parties, it is only the number of shares that mattered, so as to give the assessee company a controlling interest in the composite entity. The face value of Rs. 10 was of no relevance to either party. In fact, such face value was of no significance to anyone else also, on established principles of law. The principle of law is that where shares are quoted on the stock exchange, it is the value so quoted ....
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....rt has done so in consonance with commercial principles. No businessman would pay Rs. 10 for a share just because of its face value, ignoring the crucial fact that at the relevant time, the market value of such share as per the stock exchange quotation, was in the range band of Rs. 2 to Rs. 3. If such were done, then there would be an extra commercial element flowing out of the transaction so as to belie the AO's own computation of the net worth at Rs. 1.35 crores. 6.7 In the written submissions, effort has also been made to distinguish the case laws on which the AO as well as the learned CIT(A) have placed reliance. 7. The learned CIT-Departmental Representative, on the other hand, has filed detailed arguments to controvert the arguments of the learned counsel for the assessee. According to the learned CIT-Departmental Representative, s. 50B contained special provision for computation of capital gain in the case of slump sale. It was pointed out by her that the net worth of the undertaking or the division, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of ss. 48 and 49 of the IT Act and the provisions contained in second proviso to....
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....ent are very specific and clear and there is no need for importing any other conditions. The provision of s. 50B has been incorporated w.e.f.1st April, 2000. This provision is as under: "50B Special provision for computation of capital gains in case of slump sale-(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place: Provided that any profits or gains arising from the transfer under the slump sale of any capital assets being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. (2) In relation to capital assets being an undertaking or division transferred by way of such sale, the 'net worth' of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of ss. 48 and 49 and no regard shall be ....
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....are. therefore, unable to accept the contention of the learned counsel for the assessee that the transaction involved here is neither sale nor exchange and consequently it is not absolute transfer. We, therefore, reject these contentions and uphold the view taken by the AO and sustained by the learned CIT(A) in holding that the transaction is covered within the definition of slump sale and is a transfer of the undertaking by the assessee to the transferee for a consideration. Similarly, we concur with the findings of AO in calculating the net worth of the undertaking transferred. 8.4 The next point to be considered relates to the working of the short-term capital gain. In the agreement the sale consideration is shown in terms of 45 lakh shares of SCL of the face value of Rs. 10 each. The actual consideration in terms of money has not been indicated in the agreement. Nowhere in the agreement the price of these shares is shown to be at Rs. 4.5 crores. It is settled legal preposition that the shares are to be valued as per market rate or price of shares prevailing in the market on the date of transfer. Hence, in our considered opinion for working out the short-term capital gain, th....
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....f the equity shares of VSL. In respect of the above transaction of transfer of assets, etc. and allotment of equity shares, there is no element of income, whether on revenue account or on capital account." 8.8 However, the AO while determining sale consideration, took the value at Rs. 4.5 crores. He has not commented as to why the value as shown by the assessee in the written submission, referred to above, should not be taken into account. On going through the order of the learned CIT(A) also, it is found that the assessee objected to the determination of sale consideration on the basis of face value of shares. It appears that on this issue also a remand report was sought from the AO. Vide his report dt.29th Nov., 2004, reproduced on p. 7 of the learned CIT(A)'s order, the AO has again justified the approach adopted in the assessment order. It is clear from the following extract of remand report: "The assessee pleaded before the CIT(A) that the equity share of M/s Suri Capital Leasing Ltd. are listed atDelhiand Mumbai Stock Exchanges. The market value of the share is Rs. 4 per share as per exchange quotation. The AO has rightly taken the value of each share at Rs. 10 in view ....
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....--------------- 5 July, 2000 4.05 4.50 4.05 4.50 800 ---------------------------------------------------- 5 July, 2000 5.00 5.00 4.50 4.50 2400 ---------------------------------------------------- 30 June, 2000 4.05 4.05 4.05 4.05 100 ---------------------------------------------------- Data Source -Asian CERC IT Ltd. 8.10 The above details were submitted before the AO and the learned CIT(A) but they have not commented about the same. On the basis of the quoted price, as per above, the average price per share in any case will be around Rs. 4.70 per share on and near the date of transaction of sale and hence this may be the cost which should normally be taken into account for determining the sale consideration, but in the circumstances of the present case, where the shares of transferee company were acquired in bulk and controlling interest over that company was also acquired by the assessee, the market price of the....