TaxTMI 
TaxTMI 
2010 (12) TMI 946
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....howed cost of Lamp Division at Rs.59.33 crores and declared the long term capital loss at Rs.16.83 Crores to be adjusted against the profit for the current year. The AO invoked the provisions of Section 50 of the Income Tax Act (hereinafter referred to as 'the Act') and issued a show cause notice to the assessee to explain as to why the capital gain earned on sale of Lamp Division be not treated as short term capital gain under Section 50(2) of the Act. The assessee submitted that the Sonepat Unit was sold as a going concern vide agreement dated 20.05.1998 against lump sum consideration of Rs.42.50 Crores as consideration for all the tangible and intangible assets as well as contracts and rights sold and transferred to M/s. Osram India (P) Ltd. It was contended that no part of the price of Rs.42.50 Crores was attributable to any particular asset including any depreciable asset and therefore provisions of Section 50(2) were not attracted. It also contended that it was an old concern for more than 36 months, its transfer would give long term capital gain. The assessee also relied on Commissioner of Income-Tax, Gujarat v. M/s. Artex Manufacturing Co. [227 ITR 260 (SC)] Sarabhai M. Che....
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....l'), who held that the transaction of sale of Sonepat Unit by the assessee was a transaction in the nature of slump sale of a going concern as a whole. Since the Sonepat unit was a capital asset within the meaning of Section 2(14) of the Act, the profit arose on transfer of such capital asset is to be treated as long term capital gain. Neither the provisions of Section 50 nor the provisions of Section 50B shall be attracted in the present matter. Rather provisions of Section 45 and 48 shall be applied. Accordingly, the Tribunal directed the AO to recomputed the capital gain in the light of observations made by the Tribunal after providing full opportunity to the assessee in accordance with law. 5. In support of its view, the Tribunal in Para 35 of its order has given as many as 17 reasons, which will be taken note of at an appropriate stage. While remanding the case back to the AO, directions to undertake the exercise afresh on the lines suggested by the Tribunal are stated as under: "63. In view of the above, we accept the contentions raised on behalf of the assessee in support of ground numbers 1 to 8 of this appeal, referred to above, and held that the transa....
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....action of sale of depreciable asset? (3) Whether provisions of Section 50 were applicable to the transfer of sale of Sonepat Unit by the assessee?" 7. As the counsel for the parties were ready to argue the matter at that point of time, simultaneously with the admission of the appeals, we heard the counsel for both the parties at length on the aforesaid questions. 8. It is clear from the questions of law as formulated, the dispute, as to whether profits which have accrued to the assessee on the transfer of Sonepat Unit are to be treated as long term capital gain or short term capital gain, whereas the Revenue holds that these profits are in the realm of short term capital gain. Answering to this depends on the question as to whether transaction of sale is to be treated in the nature of slump sale and applicability of Section 50(2) of the Act, in the process. This would show that though three questions of law are framed, they are all interconnected and overlapping and the discussion of one aspect will have bearing on the other. According to the learned counsel for the Revenue, the Lamp Division at Sonepat unit was sold for Rs.42.50 Crores on 09.11.1988, ....
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....s held in Brindavan Beverages Limited, rep. by its Managing Director, S.N. Ladhani vs. The Deputy Commissioner of Income Tax [321 ITR 197]. 10. Mr. Ajay Vohra, learned counsel appearing for the assessee, on the other hand, highlighted the fact that the entire Sonepat division was sold as a going concern - lock, stock and barrel for slump consideration - and therefore, it was a slump sale as per the provisions of Section 50B of the Act. He also argued that the undertaking was to be treated as different from other assets and where entire undertaking is sold, no value was attributable to any particular assets including any depreciable assets. The learned counsel referred to the agreement of sale with M/s. Osram India Pvt. Ltd. to which the aforesaid unit was sold and this clearly reveals that the entire unit was to be sold in a blocked manner. He drew the attention to the preamble of the agreement discussing the intention of the party, which was in the following term: "WHEREAS ECE intends to sell all its lamp activities, as a going concern, namely, the lamp manufacturing activities in Sonepat and the sales activities for lamps according to the terms and conditions ....
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....ssions made by counsel for the parties on either side. Before we embark on the discussion on the issue that qua for consideration and deal with our comments, we deed it proper to take note of the relevant statutory provisions. Chapter IV which deals with 'Computation of Total Income' starts with Section 14 which delineates 'Heads of Income'. These 'heads of income' are thereafter categorized from various parts, i.e., from (A) to (F). Income arising out of capital gains is one such head discussed in (E) starts from Section 45 and goes up to Section 55A of the Act. Section 45 defines capital gains and sub-section (1) thereof reads as under: "Section 45 (1) (1) Any profits or gains arising from the transfer 737 of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an....
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....t the assessee had not furnished the details of consideration received on loan and therefore, capital gain was computed on the block of assets as a whole. However, he neither considered the conveyance deeds, relied upon by the assessee, nor on the detailed written submissions of the assessee, arguing that Section 50 of the Act was not applicable. The CIT(A), no doubt, examined these documents and the submissions of the assessee. He, however, held that Section 50 was applicable in case of depreciable assets and rejected the submission of the assessee about the applicability of Section 50B of the Act on the ground that this provision came into effect only from 01.04.2000, i.e., Assessment Year 2000-01. The Tribunal, on the other hand, held that Section 50 would not be applicable in the instant case, as it was not a case of transferring depreciable asset, but for transferring the entire unit as a whole and the sale consideration settled between the parties was not only the depreciable assets but for all intangible or tangible assets including goodwill, licenses and liabilities. Even the stamp duty for transferring the land and building was part of sale consideration, as the same was t....
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....ee including all the undertakings even though they may be self-sufficient and independent units, is not correct because the word "slump sale" as interpreted by various authorities and as defined in Section 2(42C) means "transfer of one or more undertakings" as a result of the sale for a lump sum consideration without values being assigned to any assets and liabilities. Although this definition has been brought in Section 2(42C) by the amendment introduced w.e.f. 1st April, 2000 but the concept behind slump sale has been the same even before the amendment as has been held by various Courts. (ix) It is to be pointed out that total purchase consideration of the entire unit even included the contracts and rights to be sold as per Chapters 1, 2 and 3 of the agreement, it included transfer of goodwill and know-how and benefits connected therewith. Even the stamp duty for transferring the land and building was part of sale consideration as the same was to be borne out by the transferee. The mode of transferring possession of all assets and liabilities as well as the mode of payment given in the supplementary agreement further proves the intention and conduct of the parties that ....
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....oing concern as held in the case of Premier Automobiles Ltd. (supra). (xvi) It is to be pointed out that for effectuating and executing the intention of parties to the sale transaction and for enabling the transferee to carry on the running business of the undertaking, the assessee even incorporated a non-competition clause which further strengthens the argument of the assessee that the business undertaking as a whole was transferred. For non-competition agreement, no consideration was taken. (xvii) For handing over full functional unit/undertaking, all licenses, terms, contracts, right to sell, etc. were also transferred, thus, nothing was left to be done after the transfer for running the business of the undertaking." 17. We are inclined to agree with the aforesaid approach of the Tribunal having regard to the position of law contained in various judgments cited by the learned counsel for the assessee and we now proceed to discuss the same. In R.C. Cooper (supra), the Supreme Court had defined the term 'undertaking' in the following manner: "163. In Gardner v. London Chatham and Dover Railway Co. (1867-8) Vol. II, Chancery Appeals 201 the u....
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.... have been legislative provisions for acquisition of some of these undertakings." 18. Taking note of the various pronouncements in Para 164, the Supreme Court further held that the undertaking is an amalgam of all ingredients of property and is not capable of being dismembered. That would destroy the essence and innate character of the undertaking. In reality the undertaking is a complete and complex weft and the various types of business and assets are threads which cannot be taken apart from the weft. We are, therefore, of opinion that undertaking of a banking company is property which can be validly acquired under Article 31(2) of the Constitution. 19. It is clear from the above that when an undertaking is sold, it is to be understood in contra-distinction, a whole of undertaking. From this itself, it would clearly follow that Section 50 dealing with the depreciable asset would not be applicable when the entire Sonepat Unit as a going undertaking was sold by the assessee. 20. This judgment of the Supreme Court was relied upon by a Division Bench of this Court in the case of PNB Finance Limited vs. C.I.T (Delhi) [252 ITR 491] in the following manner:....
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....to establish a joint venture company known as Kalyan Motors Co. Ltd. (KMCL) for manufacture and distribution of 60,000 Peugeot cars throughout India. Under the MOU, it was agreed that PAL would contribute to the equity of the joint venture company -KMCL to the extent it was engaged in the manufacture and sale of 118 NE cars. PAL also entered into a supplemental MOU with AP on May 17, 1994 whereby PAL agreed to sell, assign and transfer to KMCL its kalian undertaking as a going concern on an "as is where is" basis. On 19.10.1994, whereby PAL entered into a joint venture agreement with AP. On 06.01.1995, PAL executed a slump sale agreement whereby PAL transferred and sold to KMCL the said Kalyan undertaking as a going concern on an "as is where is" basis. For the assessment year 1995-96, PAL submitted its return of income enclosing a profit and loss account in which it disclosed a book profit of Rs.81.31 crores from the slump sale dated 06.01.1995. The AO, however, took the view that it was a sale of itemized assets. He therefore, assigned to sale value to building plant and machinery, paint shop, etc, separately. This was upheld by the Commissioner (Appeals) and the Tribunal. The or....
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....g-term capital loss" by deducting from the sale proceeds, the cost of acquisition of the division and its improvement. The Assessing Officer rejected the claim of the assessee and held that in accordance with Sections 50 and 50A of the Act were not applicable. On further appeal, the Revenue contended that the sale was a sale of block of assets, the gain from which was liable to be treated as short-term capital gains and that the assessee was not entitled to indexing under Section 48 of the Act. Dismissing the appeal, the High Court held that the sale proceeds received by the assessee were from sale of a going concern, which was a slump sale and not a sale of block of assets. Therefore, Section 50 was not applicable. 23. It would be of some relevant to point out that the Special Leave Petition against the judgment was also dismissed by the Supreme Court on 13.08.2009. The Supreme Court reiterated this legal principle in PNB Finance Ltd. vs. Commissioner of Income Tax [2008] 307 ITR 75 (SC) with much more clarity in the following manner: "14. Section 41(2) stands attracted only in the case of a sale of building, machinery, plant or furniture in the previous year. ....
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....997] 227 ITR 278 (SC) has held that whether the business of the assessee stood transferred as a going concern for slump sale price, in the absence of evidence on record as to how the slump price stood arrived at, Section 41(2) had no application. It is interesting to note that the judgment in the case of Electric Control Gear Manufacturing Co. (supra) is given by the same Bench which decided the case of Artex Manufacturing Co. In fact, both the judgments are reported one after other in [1997] 227 ITR 260 (SC) respectively. In the present case, as can be seen from the impugned judgment of the Delhi High Court, the judgment of this Court in Electric Control Gear Manufacturing Co. (supra) is missed out. That judgment has not been considered by the High Court. As stated above, this Court has clarified its judgment in Artex Manufacturing Co. (supra) in its judgment in the case of Electric Control Gear Manufacturing Co.. Therefore, Section 41(2) has no application to the facts of the present case. 17. As regards applicability of Section 45 is concerned, three tests are required to be applied. In this case, Section 45 applies. There is no dispute on that point. The first test is....