TaxTMI 
TaxTMI 
2008 (7) TMI 608
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....ta Telecom Ltd. (TTL). The assessee had two divisions viz., Business Communications Divisions (BCD) and the Tata Fone Division (TFD). The BCD provided communication solutions and the TFD was engaged in the manufacture of EPBAX and telephone instruments. During the previous year relevant to the assessment year 2002-03, the assessee transferred the TFD to ITEL Industries Private Limited (ITEL). A scheme of arrangement ("scheme") between the assessee and ITEL for the transfer of the TFD to ITEL was filed in the Bombay High Court. The scheme was approved by the Bombay High Court vide order dated 29-6-2001. The appointed date for the transfer of TFD to ITEL was 1-4-2001. The salient features of the scheme were as follows :- "The scheme of Arrangement is for vesting of the Tata Fone Divisions of Tata Telecom Limited having its registered office at Matulya Centre, 'A' Block, 249, Senapati Bapat Marg, Lower Parel (West), Mumbai 400 013, as a going concern to and in ITEL Industries Private Limited having its registered office at Bombay House, 24 Homi Mody Street, Mumbai-400 001 pursuant to the relevant provisions of the Companies Act, 1956." 4. Clauses 4 and 5 of the Scheme provides a....
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....e or hold the same to its account and that the right of ITEL to recover or realize is in substitution the right of TTL. (iii)With effect from the appointed date, all debts, liabilities, duties and obligations of TTL appertaining to the Tata Fone Division as on the close business on the day prior to the Appointed date (hereinafter referred to the said liabilities), shall also, without any further act, instrument or deed be and stand vested in and/or deemed to be vested in ITEL pursuant to the provisions of section 391/394 of the Act so as to become as and from the appointed date the debts, liabilities, duties and obligations of ITEL and further that it shall not be necessary to obtain the consent of a third party or other person who is a party to any contract or arrangement by virtue of which such debts, liabilities duties and obligations have arisen, in order to give effect to the provisions of this clause. Consideration.-Upon the demerger of the Tata Fone Division of TTL into ITEL, ITEL would not pay any consideration either to TTL or the shareholders of TTL." 5. The Hon'ble Bombay High Court vide order dated 29-6-2001 sanctioned the aforesaid scheme of arrangement. 6.....
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....pany to a resulting company, if the resulting company is an Indian Company. Section 2(19AA) defines 'Demerger', in relation to companies, to mean the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that :- (i)All the property of the undertaking, being transferred by the demerged company, immediately before the demerger becomes the property of the resulting company by virtue of the demerger. (ii)All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger. (iii)The property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger. (iv)The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis. (v)The shareholders holding not less than three-fourths in value of t....
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....s shall be (a )in case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item ( i) of sub-clause (c) of clause (6) of section 43; and (b )in case of other assets, the book value of such assets." It was submitted that in the case of the assessee, there has been no sale for a lump sum consideration. Consequently, the provisions of section 50B read with section 2(42C) of the Act would not be applicable. Apart from the above, it was submitted that since no consideration has been received by the assessee, the question of sale being for a lump sum consideration without values being assigned to the individual assets will not arise. In view of the above, it was submitted that the provisions of section 50B of the Act are also not applicable to the case of the assessee. Without prejudice to the above, it was submitted that as no sale consideration has been received by the assessee, the question of computing any capital gain in respect of the said transfer will therefore not arise. It was submitted that since the consideration and consequently the gain thereon is incapable of being computed, ....
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....arties would be part of the consideration for the transfer. The court has also observed that when the business is sold as a going concern it is impermissible to ignore the liabilities taken over and disregard the same as not forming part of the consideration. The Assessing Officer, therefore, held that excess of liabilities over assets viz., 22.63 crores was consideration received for transfer. The Assessing Officer thereafter, determined capital gain as follows :- "However, since the transfer has been made without values being assigned to individual assets and liabilities, the transfer is in the nature of slump sale as defined under section 2(42C) of the Income-tax Act and accordingly, the computation of capital gain on such transfer will be as per the provisions of section 50B. Accordingly, the profits from the said transaction will be the total consideration received as reduced by the net worth of the company, as provided under Explanation 1 to section 50B. In this case, the assessee company has provided the net worth of the division as on the date of transfer as under :- Particulars Amount (Rs. in Lakhs) Fixed assets (book value) 453.47 Net current assets 4....
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....d that the excess of liability over the assets would not fall within the ambit of section 41(1) of the Act also. It was argued that the said provisions were applicable only where 'an allowance or deduction has been made for the assessment in any year in respect of loss, expenditure or trading liability incurred by the assessee'. Reliance was placed on various judicial decisions as under :- u Mahindra & Mahindra v. CIT [2003] 261 ITR 501 (Bom.). u CIT v. AVM Ltd. [1984] 146 ITR 355 (Mad.). u CIT v. Lal Textile Finishing Mills [1989] 180 ITR 45 (Punj.&Har.). u CIT v. Phoolchand Jiwan Ram [1981] 131 ITR 37 (Delhi). 14. It was also argued that the differential amount between the liability and assets could not be also taxed under section 28(iv) of the Act; since no benefit had arisen from the business or exercise of a profession. Relying on a decision of the Hon'ble Mumbai Tribunal in the case of Prism Cement Ltd. v. Jt. CIT [2006] 101 ITD 103. It was claimed that similar to the forfeited amount (due to non-payment of call money) credited as the amount written back and set off against expenditure in that case which had been held to be not chargeable to tax, the asse....
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....nly from 1-4-2000 inserted by the Finance Act, 1999. Besides, the section is a special provision for computation of capital gains in the case of slump sale. Thus, the normal provisions for capital gains computation would naturally not apply. Further, there is an inbuilt formula given in the said section itself to compute the gain by deducting (and not by reducing) the net worth from the sale consideration. The net worth has also been explained in the said section. I intend to emphasize on two phrases :- (i )full sale consideration as against sale amount. (ii )deduction of net worth as distinguished from reduction of net worth." Firstly, the term 'consideration' is obviously different from the word 'amount'. It could be anything other than a mere monetary amount. None ever hands over a division or an undertaking for nothing. I do agree that there was no express monetary amount mentioned in the so called demerge scheme. But, in effect TTL (the assessee) had offloaded its excess liability and precisely that was the first consideration received on such transfer. The assessee cannot and it requires an exercise to be made from day one with regard to the transferred out compan....
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....rned DR for the revenue. Five issues arise for consideration regarding the chargeability to tax of the capital gain on transfer of TFD division of the assessee to ITEL. (1)Whether the transfer of TFD division by the assessee to ITEL could be termed as a demerger within the meaning of section 2(19AA) of the Act and consequently capital gain, if any, on such transfer is not chargeable to tax in view of the provisions of section 47(vib) of the Act? (2)If the answer to issue No. 1 is in the negative, whether the transfer in question could be said to a slump sale within the meaning of section 2(42C) of the Act attracting the provisions of section 50B of the Act for computation of capital gain ? (3)If answer to issue No. 2 is in the affirmative, whether there is no capital gain, since there was negative net worth in the present case and since there was no consideration received by the assessee there was no capital gain which could be brought to tax ? (4)If the answer to issue No. 2 is in the negative, whether the computation provisions of section 48 would fail because of the inability to identify the full value of consideration for the different assets comprised in the transf....
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.... Learned DR for the revenue submitted that merely because the scheme of amalgamation and the order of Hon'ble High Court sanctioning the same mentions that there is no consideration for the transfer, it is not conclusive when provisions of section 2(19AA) are to be applied in a given case. According to him the assessee in the process of amalgamation could get rid of liabilities worth Rs. 22.32 crores and this was consideration in law for the transfer. The plea of impossibility of complying with the provisions of section 2(19AA), according to him will be irrelevant. It was argued by him that the Legislature while enacting provisions of section 2(19AA) would have been fully conscious of an amalgamation where there is no consideration. Yet it has thought it fit to restrict the case of demerger under section 2(19AA) of the Act, only to cases where consideration for transfer is in the form of allotment of shares. The Legislature while enacting provisions of section 2(19AA) is deemed to have foreseen all contingencies and there cannot be any presumption that a casus omissus exists. 19. We have considered the rival submissions. Section 47(vib) lays down that there shall be no charge to....
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....TFD by the assessee to ITEL as slump sale which is chargeable to tax as capital gain under section 50B of the Act. Drawing our attention to the provisions of section 50B of the Act, learned counsel for the assessee submitted that it is only a profit or gain arising from a slump sale effected in the previous year that can be brought to tax as capital gain. He then drew our attention to the definition of slum sale as given in section 2(42C) of the Act and submitted that the definition contemplate transfer of one or more undertakings as a result of sale for a lump sum consideration. He laid emphasis on the fact that the transfer of the undertaking should be as a result of sale. In this regard, he also submitted that expression 'transfer' in relation to the capital asset has been defined under section 2(47) of the Act to include many forms of transfer like exchange, relinquishment, conversion of the capital assets into stock-in-trade etc. His submission was that the transfer of capital asset could be in several forms; but Legislature while defining slump sale has thought it fit to include only transfer by way of sale and not any other mode of transfer. It was submitted by him that expr....
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....the case of Oudh Sugar Mills Ltd. v. ITO [1990] 35 ITD 76 , wherein it has been laid down that the transfer of asset of one company to another company in the scheme of arrangement approved by Hon'ble Bombay High Court; where consideration for transfer of asset and liability was received by shareholders of the transferor company, it could not be said there was a sale. Learned counsel for the assessee therefore prayed that the transfer in the present case does not satisfy the definition of slump sale; and therefore, provisions of section 50B will not apply. 25. Learned DR for the revenue on the other hand submitted that for a contract of sale, four ingredients were required to be satisfied namely (i) Parties to the contract (ii) Subject-matter of contract (iii) Transfer of property (iv) Consideration for transfer. It was submitted by him that all four conditions were satisfied in the case of the assessee and therefore, there was a sale by the assessee of TFD to ITEL. In the circumstances, it was submitted by him that the sale by the assessee was of an undertaking for a lump sum consideration without values being assigned to individual assets and liabilities and the same should be ....
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....initions of 'apparent consideration' given in clause (b) and 'transfer' given in clause (f) of section 269UA of the Income-tax Act, 1961, would unmistakably indicate that the transfer to which the provisions of Chapter XX-C are intended to apply, are transfers under agreements or contractual transfers and not statutory transfers or transfers effected by orders of the court or by operation of law. A scheme of amalgamation has statutory operation when sanctioned by the company court under the relevant provisions of the Companies Act and is distinct and different from a mere agreement signed by the necessary parties. Even if the scheme is approved by all concerned parties by consensus, merely because it is so agreed upon, the court is not obliged to put its imprimatur on it. The court has the discretion and power to reject a scheme even if all the shareholders and creditors have agreed to it. But, once the scheme is scrutinized by the company court and sanctioned by an order made by it under section 391 of the Companies Act, 1956, it ceases to retain the character of contract and operates by force of the statute. In a case of amalgamation, there is a share exchange ratio prescribed....
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.... The difference between a sale and an exchange is this that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter. The presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale." 29. In the case of Oudh Sugar Mills Ltd. (supra), the question arose in the context of provisions of section 41(2) of the Act. The assessee, a public limited company engaged in the manufacture and sale of sugar, during accounting year ended on 30-6-1981, transferred one of its units to A, another limited company, as per scheme of arrangement approved by Bombay High Court. As per Scheme certain assets of assessee became property of A from 1-7-1980, some assets were given on lease and employees of assessee became employees of A and all liabilities of assessee were taken over by A. Consideration for transfer of assets and liabilities was received by each of shareholders of assessee company in form of equity shares and face value of these shares was equal to amount debited to general reserve account of assessee. Assets....
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....al gain Legislature has indicated detailed provisions in order to compute profits or gains under the head 'Capital gains'. In the present case, what was transferred by the assessee was the TFD undertaking as a whole. It is a capital asset within the meaning of section 2(14) of the Act. The process by which, this undertaking was transferred to ITEL is transfer of capital asset. With regard to other ingredients, which is required for levy of capital gains namely profits or gains arising from the transfer of the undertaking, no part of consideration was indicated against different and definite items having regard to their valuation on the date of transfer. There is no basis for even apportioning any consideration for various assets comprised in the transfer. Since, individual items of capital assets having not been transferred the aggregate of individual assets in the form of an undertaking was a capital asset which was transferred. The transfer being one of the going concerns, it is not possible to ascertain the profit or gain from transfer of undertaking. Cost of acquisition and the cost of improvement of the undertaking cannot be ascertained. It, therefore, becomes difficult to app....
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....ost of acquisition and the cost of improvement. Apart from the above, there was also no consideration received on transfer. In view of the above, since, computation provisions cannot be applied in the present case, charge of capital gain to tax should also fail. In support of the above proposition, learned counsel for the assessee relied on the following decisions :- u Industrial Machinery Associates v. CIT [2002] 81 ITD 482 (Ahd.); u Jt. CIT v. Steri Sheets Ltd. [IT Appeal Nos. 546 and 547 (Delhi) of 2000 dated 12-5-2006]; u Salora International Ltd. v. Jt. CIT [2003] 129 Taxman 68 (Delhi) (Mag.). 36. The aforesaid decision relied up by the learned counsel for the assessee relates to the computation of capital gain in the case of sale of a going concern. The aforesaid cases also related to the period prior to insertion of section 50B of the Act. In the aforesaid decisions the principle that in the absence of provisions of section 50B of the Act, sale of business undertaking (transfer) as going concerns will not attract charge of tax under the head 'Capital gains' for the reason that it was not possible to conceptualized cost of acquisition as well as date of acquisitio....
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....itted that in respect of the assessment year prior to insertion of section 50B of the Act, there can be no charge of capital gain, when there is transfer of an undertaking in the form of slump sale. 39. We have considered the rival submissions. In our view, the decisions of the Tribunal relied upon by learned counsel for the assessee are authority for the proposition that prior to insertion of section 50B of the Act in the event of transfer of business undertaking as a going concern, there was impossibility of computation of cost of acquisition, date of acquisition etc., and therefore, computation provisions could not be applied. Consequently, levy of capital gains would also fail. The decisions of the Tribunal referred to above have followed the ratio laid down in the decision rendered by Hon'ble Karnataka High Court and Hon'ble Madras High Court in the case of Syndicate Bank Ltd. (supra) & K.P.V. Shaikh Mohammed Rowther & Co.'s (supra). These decisions in turn have been rendered by following the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). We may in this regard refer to the ratio laid down by the Ahmedabad Bench of ITAT in the case of Industri....
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....e of Premier Automobiles Ltd. (supra), we are of the view that the same cannot be accepted. In the case of Premier Automobiles Ltd. (supra), the issue before the Hon'ble Bombay High Court was whether there was a slump sale of business as going concern or was it a case of an itemized sale of assets and their Lordships held, in the facts and circumstances of that case, that entire business was sold by the assessee as a going concern without any intention of sale of itemized assets. As regards the computation of capital gains arising from the sale of a going concern, Hon'ble Bombay High Court, however, did not render my verdict and sent back the matter to the Assessing Officer with a direction to decide whether any capital gains tax liability arises from such sale and if so, to compute the quantum of capital gains under sections 45 to 50. Thus, the issue pertaining to the chargeability of profit arising from slump sale of business as a going concern to tax as capital gains was not decided by Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra) and the said decision cited by learned DR for the revenue is, therefore, of no help to support the revenue's case on the s....
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....ansactions is in the nature of business income and therefore taxable under the head "Income from business and profession". 46. The Assessing Officer was however of the view that the transaction of sale and thereafter sub-lease of the equipment are two separate transactions. The Assessing Officer was of the view that the first transaction (of sale) was a business transaction and the income from the same was to be taxed under the head 'Profits and gains from business or profession'. However, the second transaction was purely a finance transaction. On this reasoning, the Assessing Officer held that the leasing activity can be business of a leasing company but not of the assessee. The Assessing Officer also held that the transaction undertaken by the assessee cannot be regarded as being adventure in the nature of trade and therefore cannot be taxed under the head 'Profits and gains of business or profession'. 47. On appeal by the assessee, learned CIT(A) confirmed the order of the Assessing Officer. Before learned CIT(A), it was brought to his notice that in assessment year 2001-02 on identical issue, Predecessor in office of learned CIT(A) had held that income in question was in....
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....nue, the Special Bench, ITAT, Delhi in the case of Amway India Enterprises v. Dy. CIT [2008] 21 SOT 1 (URO) has laid down the following principles :- "The advantage which an assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account. The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field. (i )Nature of business of the assessee: It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment. (ii )As a general rule it may be stated that the more expensive....
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.... per books of account of the assessee (Rs. in lakhs) Difference Work-in-progress 1,659.87 1,568.32 91.55 Finished Goods 1,313.65 1,106.21 207.44 In the course of assessment proceedings, the Assessing Officer called upon the assessee to reconcile the difference. The assessee vide reply dated 3-3-2005 explained the difference as follows :- Work-in-progress The work-in-progress as per the statement submitted to the bank was Rs. 1,659.87 lakhs. The work-in-progress considered for valuation of closing stock is Rs. 1,568.32 lakhs. The major difference in the valuation of work-in-progress was due to writing off in the annual accounts the obsolete stock of Rs. 68 lakhs (Refer Schedule-15 of Annual Report). The value of the obsolete stock written off in the annual accounts was not excluded from the stock reported to the bank. Further the difference also arises on physical verification of the stock which is not completely finished by the time the statement is provided to the banks. Also year end dispatches also have a difference in the valuation of stock. Finished Goods The value of finished goods as per the statement submitted to the ban....
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....as per books of account of the assessee and finally concluded that the assessee failed to establish by producing evidence that stocks have become obsolete and rejected the claim of the assessee. The Assessing Officer by mistake has referred to the sum of Rs. 48.49 lakhs being 'obsolete fixed assets written off' and made an addition of Rs. 48.49 lakhs while computing total income of the assessee. 59. The assessee was also conscious of this mistake committed by the Assessing Officer. Before learned CIT(A), the assessee submitted that the write off of obsolete stock should be allowed on grounds of commercial expediency and prudent practices. The learned CIT(A), however, did not agree with the claim of the assessee. He substituted the disallowance of Rs. 48.49 lakhs made by the Assessing Officer to the correct figure of Rs. 268 lakhs written off by the assessee as obsolete stock. The assessee aggrieved by the order of learned CIT(A) has preferred ground No. 4 before the Tribunal which reads as follows :- "Disallowance of obsolete stock :- (a )The learned CIT(A) erred in enhancing the disallowance in respect of obsolete stock written off by the assessee from Rs. 48.49 lakhs to ....
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.... by an assessee which is accepted in the commercial world not doubted by the revenue when followed cannot be disregarded. 63. It was alternatively contended that if the plea of the assessee is not accepted then a direction to revalue the opening stock of the succeeding assessment year should be given. 64. The learned DR for the revenue drew our attention to the details of obsolete finished stock of Rs. 200 lakhs filed by the assessee and pointed out that the accounting sub-head thereon is shown as 'Excess or Shortage'. According to him the plea of the assessee that the write off was of obsolete stock was in contradiction with the details furnished. It was therefore submitted by him that the addition to the extent of Rs. 200 lakhs in any event has to be sustained on this basis because there was to proof of actual shortage. It was submitted that though this was not the basis on which the addition was made, the Tribunal can take note of the above while deciding the issue. 65. It was further submitted by him that the write off of obsolete stock even if claimed to be based on commercial prudence is always subject to scrutiny by the revenue and the assessee has to given a satisf....
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....the case of the assessee. The Tribunal held as follows :- "In the instant case, no material had been placed by the revenue to show that the method of valuing the obsolete stocks and writing them off in its accounts, followed by the assessee in the three relevant assessment years, was not bona fide and that method had not been followed by the assessee in the subsequent years. The department had been unable to point out anything wrong in the approach of the assessee in arriving at the value of the obsolete stocks or suggest any other better on appropriate and scientific method of valuation of such obsolete stocks. It was not the case of the revenue that the inventories of obsolete stocks prepared by the assessee in these three years were neither correct nor represented the true state of affairs nor had the department placed any material which would show that the findings reached by the Commissioner (Appeals) are not based on any material but on mere surmises and conjectures. In these circumstances, in view of the decision of Madras High Court in Indo-Commercial Bank Ltd. v. CIT [1962] 42 ITR 22, the additions made by the ITO on account of obsolete stocks written off by the assesse....
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....al grounds of appeal filed by the assessee :- Non-compete payment :- (a)The learned Assistant Commissioner erred in not considering the claim made by the assessee vide Note No. 1 of the notes forming part of the return of income. (b)Without prejudice to the appeal preferred in the earlier years, the learned Assistant Commissioner may be directed to allow deduction for an amount of Rs. 57,60,000 representing 1/5th of the total non-compete expenditure of Rs. 2.88 crores paid by the assessee to the National Radio & Electronics Company Ltd. 72. The assessee had entered into an agreement dated 29-3-1997 with NELCO. The assessee was engaged in the activity of telecommunication. NELCO was also engaged in the activity of manufacture and supply of telecommunication equipment, data communication equipment and systems, V-SAT equipment and systems, drives, automation and SCADA systems. The assessee and NELCO were affiliated with the TATA group of companies. The assessee proposed to NELCO to withdraw from the manufacture and supply of some of the telecommunications equipment in order to facilitate the reorganization of the telecommunications business within the TATA group of compani....