TaxTMI 
TaxTMI 
TaxTMI 
2007 (5) TMI 614
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....leting the disallowance of Rs. 5 lacs paid for securing the membership of club for Mr. Ashwani Windlass, Jt. Managing Director, which was otherwise of the nature of a personal benefit. 3. The learned CIT(A) has erred both in law and on the facts of the case in deleting the addition on account of expenses of Rs. 4,22,084 incurred for revaluation of fixed assets. The expenses on valuation required for the purpose of sale of that division was not incidental to business. 4. The learned CIT(A) has erred both in law and on the facts of the case in holding that the non-compete fee of Rs. 5 crores received by the assessee company from M/s MAX GB Ltd. is a capital receipt not liable to tax and is not capital gain, whereas, this amount was self-declared by the assessee as capital gain during the assessment proceedings, where a revised computation of income was filed dt. 29th May, 2000. The assessee transferred its right to manufacture for a definite period and in turn the amount received as its gain liable to be taxed. Even if it is accepted that no right is extinguished permanently as held by the learned CIT(A) then those receipts of Rs. 5 crores should be treated as revenue receipts earn....
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....ng with lands and other assets, etc., and that according to the special provisions of ss. 50 and 50A of the IT Act, where sale of any or all of depreciable assets was involved, the excess of the sale consideration and the WDV of such assets would amount to short-term capital gain. It was also pointed out that upto the asst. yr. 1999-2000, there existed no special provision in the IT Act for computation of income in the case of slump sale and it was only w.e.f. 1st April, 2000, that a special provision for computation of capital gain in the case of a slump sale had been inserted in the Act by way of s. 50B and that dealing with the case of the assessee, the provisions of ss. 50 and 50A of the Act would come into play. The assessee was, in this manner, asked to show cause as to why the income in respect of the depreciable assets of the sold Betalactum Division of the assessee be not computed on the said basis. 3. The assessee submitted before the AO that the sale of its Betalactum Division was a slump sale of the undertaking as a whole, as a going concern, including land, building, plant and machinery, inventory, stock, intellectual property, right contracts and employees registrati....
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....27,01,39,328/17, as on 31st March, 1997; that similarly, the revaluation of the various blocks of assets had been shown at Rs. 25,96,95,009/79, after claim of depreciation as on 30th June, 1997, the date when the C&BC unit was transferred; that the copies of the source of fund and assets and liabilities statement of the Betalactum Division as on 31st March, 1997 and 30th June, 1997 had also been filed. The AO noted that the revaluation of the various assets of the Betalacum Division was a solitary exercise conducted by the assessee company amongst the various divisions/units owned by it and that too, earlier to the transfer of the said unit; that the purpose of such revaluation was apparent, i.e., to have a basis of the value of the various assets of the said division in view, before arriving at the figure of the total consideration for transfer of the unit and the extent of revaluation of these assets, giving appreciation by about Rs. 11,10,95,525 which, added to the existing value of various assets, nearly, amounted to the final consideration agreed to at Rs. 30 crores, which showed a wide gap between the consideration received and the book value of the assets; that the assets ha....
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....covers a slump sale also, it would lead to an unharmonious interpretation that the two special provisions had parallel jurisdiction over a subject-matter; that this was not the intention of the legislature and the only harmonious interpretation would be that s. 50 does not have any applicability to a slump sale; that s. 50 does not get attracted in the case of a slump sale and the assessee company was eligible to deduct indexed cost of acquisition and the indexed cost of improvement and thus, the loss of Rs. 12,67,69,823, as computed by the assessee company, was allowable in the computation under the head "Capital gain"; that cl. 1.1(i) of the MoU, dt. 30th June, 2000 defined 'Betalactum business'; that vide sub-para (c) thereof, "All intellectual property and know-how including technical know-how pertaining to the Betalactum Division" was included; that cl. (ii), which dealt with the sale, provided that the sale or transfer of Betalactum Division shall be of a going concern/running business or an 'as is where is' basis, together with all intangible rights comprising of all licences, permits, registrations, approvals, quotas, consents and benefits pertaining thereto....
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....tum Division exclusively, while working out the capital gain on the sale of Betalactum Division; that in doing so, the special provisions of ss. 50 and 50A of the IT Act, as relevant to the assessment year under consideration were not taken into account; that these provisions deal with the manner of computation of income in the cases of depreciable assets and do not permit application of indexed cost of acquisition in respect of such assets; that the special provisions of law have precedence over the general provisions, including s. 48 of the Act and its proviso; that further, in view of these special provisions of s. 50 of the IT Act having come into force subsequent to the decision of the Hon'ble Supreme Court in the case of M/s Mugneeram Bangur & Co. (supra), the sale consideration pertaining to the depreciable assets would fall under the provisions of these sections which do not provide for working out indexed cost of acquisition for the purpose of arriving at the short-term capital gain or reduced WDV in the case of sale of such assets forming part of block of assets in the case of the assessee; that further, the CBDT circular referred to by the assessee also reiterates th....
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....ons of s. 50 of the IT Act. The AO observed that the assessee had itself assigned the sale consideration of Rs. 30 crores to the cost of land, building, machinery, vehicles and furniture; that the assessee had worked out the WDV of the various assets by getting the same revalued before the sale; that, therefore, the same value was being taken as forming part of the consideration received aggregating to Rs. 30 crores and the balance related to the goodwill which had been admitted to be part of the business, but for which no valuation had been assigned by the assessee. The AO thus arrived at a figure of Rs. 5,81,99,106 representing excessive depreciation claimed. This amount was disallowed and added to the total income of the assessee. The long-term capital gain on the land was worked out at Rs. 35,89,446. Apropos goodwill, the AO reduced from the total sale consideration of Rs. 30 crores, an amount of Rs. 25,96,25,009 representing consideration received in respect of other assets. The long-term capital gain in this regard was thus worked out at Rs. 4,03,74,991. The total long-term capital gain was hence worked out at Rs. 4,39,64,437 which was added to the income of the assessee agai....
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....f Rs. 12,67,69,823 instead of gain of Rs. 4,39,64,437 as worked out by the AO." 9. Before us, the learned Departmental Representative has argued, challenging the impugned order, that the assessee sold its Betalactum Division; that the sale was claimed to be that of a going concern; that it was claimed to be a slump sale; that, however, for computing the capital gain, the assessee took into account the cost of all assets and worked out loss of Rs. 42,67,69,823; that the AO held that the sale was not a slump sale because the assessee got its assets revalued as on 31st March, 1997 and appropriate valuation was shown in the details filed with the return; that taking the cost of acquisition, the unit having started in 1985, the same cost was indexed, after taking for the depreciation, etc. The learned Departmental Representative, arguing that the capital gain does arise in a slump sale, has relied on 66 ITR 764(SC) (sic) and 59 ITR 690(Mad) (sic). The learned Departmental Representative has next argued that just because the sale was stated to be a slump sale, loss has been worked out by the assessee against capital gain. It has been submitted that the CIT(A) has mainly stated that from....
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....ng is transferred as a composite unit, it cannot be said that its different ingredients are separately acquired; that what is required is the undertaking as a composite unit, which is wholly different from this component; that where the undertaking is sold as a going concern for a slump price without values being assigned against different and definite items, the agreed price cannot be apportioned on capital assets in specie; that what is sold is not an individual item of property forming part of the aggregate, but the capital asset consisting of the business of the whole concern or undertaking; that in order to constitute slump sale, it is not necessary that all assets and liabilities must be transferred; that even if some assets and liabilities are retained by the transferor, the same would nevertheless be a slump sale, so long as the transfer is on a going concern basis and the transferee is in a position to carry on the business without any intervention or interruption; that in the present case, the assessee granted to the transferee, the right to use the technical know-how developed by the assessee, against the payment of separate consideration, while retaining proprietary rig....
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....the various assets of the Betalactum Division by the assessee was a solitary exercise conducted by the assessee amongst its various divisions and that this revaluation was also prior to the transfer of the Betalactum Division. According to the AO, this revaluation was done in order to assess the total consideration for the transfer of the unit. The AO further noted that this revaluation gave an appreciation by about Rs. 11,10,95,525; and that this added to the existing value of the various assets, which amounted to roughly about the final sale consideration of Rs. 30 crores. The AO observed that the provisions of ss. 50 and 50A of the Act do not permit application of indexed cost of acquisition in respect of capital assets and where the business was sold as a going concern, the profit was chargeable as capital gain and not as business profit, no portion of the price being attributed to the stock-in-trade. The AO observed that by assigning the entire consideration to the cost of land and other depreciable assets like plant and machinery, furniture and vehicles, etc., the assessee had attributed the price to its stock-in-trade and that therefore, the provisions of s. 50 of the Act we....
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....e" to mean the transfer of one or more undertakings as a result of sale for a lump sum consideration, without values being assigned to the new assets and liabilities in such sale. In other words, if an undertaking is transferred as a going concern, with all its assets and liabilities, without valuations having been assigned to individual assets, such a transaction is to be regarded as a "slump sale". As per Expln. 1 to s. 2(42C) of the Act, "undertaking" shall have the meaning assigned to it in Expln. 1 to s. 2(19AA) of the Act. 13. Explanation 1 to s. 2(19AA) states that for s. 2(19AA), "undertaking" shall include any part of the undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. 14. From the above, it is amply clear that where the assets and liabilities of an undertaking are sold as a group, lumped together, such a sale would qualify as a slump sale. 15. As per cl. 1.1(i) of the MoU, dt. 30th June, 1977, the Betalactum undertaking (Division) of the assessee comprised of the following assets of the Betalactum business :....
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....e, 1997. The assets and liabilities of the undertaking were sold together as a group and this sale entirely fell in line with the idea of a slump sale, as provided under the Act, as discussed hereinabove. Though the aforesaid definition of the slump sale is not applicable to the assessment year under consideration, i.e., the asst. yr. 1998-99, it was only such sale which was envisaged by the legislature to be a slump sale and none other. 18. The learned CIT(A) has held that the undertaking comprising the Belalactum Division of the assessee was a distinct and separate identifiable asset of the assessee. Is such conclusion correct ? 19. Sec. 2(14) of the IT Act lays down that a "capital asset" is property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade, stores and raw materials, etc., held for the purposes of his business; personal effects like movable property, held for personal use by the assessee or any member of his family dependent on him. The undertaking, it is seen, as correctly held by the learned CIT(A), is a capital asset distinct and separate from the assets constituting it. It was sold by....
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....ssee on behalf of the buyer till the entire consideration was paid, made no difference, as the agreement clearly indicated that the assessee was keeping the factory going, not on his own behalf but entirely on behalf of the buyer and that, as such, it could not be fairly said that the sale of the chemicals and raw materials for match manufacture was anything more than a winding up sale, not with a view to trading in chemicals and raw materials, except by comparing the two prices offered to be paid by the buyer, i.e., the price without the chemicals and raw materials and the price with them; and that, however, from that alone, it was impossible to infer that the chemicals and raw materials were sold in the ordinary way of business or that the assessee company was carrying on a trading business. 21. In CIT vs. Mugneeram Bangur & Co. (Land Department) (supra), a firm, which carried on the business of buying land, developing it and then selling it, pursuant to an agreement, sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities, development ex....
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.... determined, then, it cannot be described as an "asset" within the meaning of s. 45 and, therefore, its transfer is not subject to income-tax under the head "Capital gains"; that if there is a transfer of the whole concern and no part of the agreed price is indicated against different and definite items having regard to their valuation on the date of sale, the agreed price cannot be apportioned on capital assets in specie; that what is sold in such a case is not individual items of property forming part of the aggregate, but the capital asset consisting of the business of the whole concern or undertaking; and that what would arise for consideration from the point of view of taxation is only the gain in respect of that transaction, and nothing else. 23. In CIT vs. F.X. Periera & Sons (Travancore) (P) Ltd. (1991) 94 CTR (Ker) 176: (1990) 184 ITR 461(Ker), it was held that transfer of business as a going concern would constitute transfer of a capital asset. 24. In CIT vs. Narkeshari Prakashan Ltd. (1992) 196 ITR 438(Bom), the assessee was a publishing house, having two branches. The branches were sold along with their assets and liabilities. The Tribunal found that the entire branch....
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....therein were retained till 30th June, 2000. On facts, in view of the above numerous judicial pronouncements, it cannot be said that what the transferee acquired was not a going concern. Rather, after the transfer, the transferee carried on the business without any disruption therein. In CIT vs. West Coast Chemicals & Industries Ltd. (In Liquidation) (supra), CIT vs. F.X. Periera & Sons (Travancore) (P) Ltd. (supra), Premier Automobiles Ltd. vs. ITO & Anr. (supra), and Asstt. CIT vs. Raka Food Products (supra) amongst others, it has been held that in the case of a sale of an undertaking as a whole, on a going concern basis, if some assets are retained by the transferor or some liabilities are not taken over by the transferee, this fact does not render the slump sale as not a slump sale. A similar view has been expressed by the Delhi Bench of the Tribunal in ITA Nos. 2584/Del/2003, for asst. yr. 1999-2000 and 5507/Del/2003, for asst. yr. 2000-01, in the case of M/s ECE Industries Ltd., vide order dt. 29th Sept., 2006 (copy placed on record). Therefore, the findings of the learned CIT(A) in this regard are upheld. 30. Further, s. 50B of the IT Act has correctly been held by the learn....
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....India) Ltd. vs. CIT (1991) 96 CTR (Bom) 14: (1992) 195 ITR 682(Bom) and that of the Hon'ble Gujarat High Court in the case of Gujarat State Export Corporation Ltd. vs. CIT (1996) 131 CTR (Guj) 23: (1994) 209 ITR 649(Guj). It has been argued that it is not a personal expenditure, rather, it is only an entrance fee for a club. 34A. This issue is squarely covered in favour of the assessee by the decision of the Hon'ble Bombay High Court wherein the club membership fee has been held to be an allowable business expenditure. CIT vs. Sundaram Industries Ltd. (2000) 158 CTR (Mad) 437: (1999) 240 ITR 335(Mad), Gujarat Petrosynthese Ltd. vs. Dy. CIT (2001) 71 TTJ (Ahd) 349: (2001) 76 ITD 257(Ahd), Dy. CIT vs. Hindustan Dorr Oliver Ltd. (1994) 48 TTJ (Bom) 552, Apollo Tyres Ltd. vs. Dy. CIT (1992) 44 TTJ (Coch) 534and ITO vs. Soya Production & Research Association, (1985) 22 TTJ (Del) 594also carry the same ratio. In Anarkali Chit Fund (P) Ltd. vs. ITO (1988) 32 TTJ (Hyd) 134: (1989) 43 Taxman 292(Hyd)(Mag), it was held that life term membership of a club taken by the managing director of the company is a business expenditure and not a personal expenditure of the managing director. I....
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.... transfer of the assets. 37. On the other hand, the learned counsel for the assessee has submitted that this expenditure does not relate to the transaction of slump sale; that the revaluation was carried out on 31st March, 1997, whereas the sale took place on 1st July, 1997; that the revaluation was necessary to obtain bank loans; that the revaluation was with regard to the fixed assets of the Betalactum Division; that this revaluation was not carried out for the purpose of the transfer of the undertaking; and that the revaluation exercise is carried out in routine, whenever the assessee company approaches financers/financial institutions to secure finance for its business needs; and that the expenditure was thus incurred wholly and exclusively for the purpose of the assessee's business. It has been argued, without prejudice to these arguments, that if it is considered that the expenditure was connected with the transfer of the Betalactum Division, the same may be allowed to be deducted in computing the capital gain/loss on transfer of the undertaking as expenditure incurred in connection with the said transfer. 38. We have considered the rival submissions in this regard. The....
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....h provides that the cost thereof shall be taken as 'nil'; that a suitable part of the said consideration represented long-term capital gain and the balance was exempt from tax, being a capital receipt; that in view of the specific definition contained in s. 55(2)(ii), fee received had been shown as capital gains; that the amount received also included an arrangement binding on the company not to carry out other activity, i.e., trading, etc., in the medicines produced by the Betalactum Division, which did not fall in the definition of 'asset' as per s. 55(2)(ii); and that a reasonable amount be exempted from being considered as capital receipt. 41. The AO observed that this issue had not been pressed by the assessee. As such, the AO took the entire amount of Rs. 5 crores declared as capital gain, as such capital gain. 42. The assessee, however, challenged this finding of the AO before the learned CIT(A). It was argued that as per assessment proceedings, the assessee was required to show cause as to why the non-compete fee could not be treated as business income; that after detailed deliberations on the subject-matter, the AO had agreed that the said fee represented....
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....t order, that this issue was not pressed before the AO; and that this being so, the learned CIT(A) erred while going into the merits of the case. 46. The learned counsel for the assessee, on the other hand, has submitted that even if the issue was not pressed before the AO, there was no estopple in law to press such claim before the learned CIT(A); that moreover, before the learned CIT(A) the Department was duly represented by the AO, who raised no objection to the matter being proceeded with on merits; that the learned CIT(A) has powers co-terminus with those of the AO and, therefore, he was justified in deciding the issue as he did; that further, the issue as to whether non-compete fee is or is not taxable, is a legal issue which can be raised at any time; that the non-compete fee in question arose from the same agreement as is in question regarding the other issues; that this agreement was already before the AO and he could well decide the issue on merits, taking into consideration the said agreement; that this being so, nothing remained to be examined afresh by the AO and so, the learned CIT(A) was not obliged to remit the issue back to the AO and so, the findings recorded by ....
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....transfer involved in the transaction : 1. CIT vs. A.S. Wardekar (2005) 199 CTR (Cal) 255; 2. CIT vs. Milk Food Ltd. (2005) 199 CTR (Del) 567: (2006) 280 ITR 331(Del); 2. T.S. Manocha vs. Dy. CIT (2006) 5 SOT 277(Asr). Further, as rightly pointed out, the amendment in s. 28(va) of the Act, w.e.f. 1st April, 2003 also supports the submission that before the asst. yr. 2003-04, non-compete fee was not liable to tax. This amendment defines the intention of the legislature in this regard. 49. In view of the above, we hold that the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee. Such finding of the learned CIT(A) is, therefore, hereby upheld. Ground No. 4 is thus rejected. 50. As per ground No. 5, the learned CIT(A) has erred in treating the amount of Rs. 50 lacs received by the assessee on assignment/sale of trademark from M/s Rhone Poulenc (India) Ltd. and declared by the assessee as a capital gain in its return of income. The facts in this regard are that in its return of income, the assessee had offered capital gains of Rs. 50 lacs on the sale of self-generated trademarks, taking the cost of acquisition thereof as 'nil'. On the bas....
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.... case of transfer of self-generated trademarks, the computation machinery fails, for the reason that these trademarks have no cost of acquisition. The learned counsel for the assessee has contended that the amendment in s. 55(2)(a) w.e.f. 1st April, 2002, to treat nil cost of acquisition for self-generated trademarks, also goes to show that prior to asst. yr. 2002-03, no capital gains could be computed in such cases. 52. With regard to this issue, the stand taken by the Department is not found acceptable. As seen while dealing with ground No. 4 above, the Department was duly represented by the AO before the learned CIT(A). The AO had made the addition, which had been challenged by the assessee before the learned CIT(A). The learned CIT(A) decided this issue in favour of the assessee. It is the reasoning taken by the learned CIT(A) in so deciding the matter, which is in appeal before us. In this regard, evidently, before the asst. yr. 2002-03, B.C. Srinivasa Setty (supra), rendered by the Hon'ble Supreme Court was the law of the land. Till such time, when s. 55(2)(a) of the Act was amended w.e.f. 1st April, 2002, no capital gains could be computed on the transfer of self-genera....
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.... has submitted that the nature of the expenses in question is not at all in dispute; that the assessee had made the claim in the asst. yr. 1999-2000; that the AO had allowed a part thereof, as above, and had held that the balance was regarding the earlier year; and that in the books of account of the assessee, these expenses have been treated as a deferred revenue expenditure. It has been further contended that this Bench of the Tribunal, in the assessee's own case, for the asst. yr. 1991-92 (copy of the order placed on record) has allowed revenue deduction for the same expenditure. 57. With regard to this issue too, we are at one with the assessee. The treatment given by the assessee to these expenses in its books of account is that of deferred revenue expenditure. The AO, for the asst. yr. 1991-92, had disallowed the amount of Rs. 29,25,019 pertaining to the asst. yr. 1998-99. The nature of the expenses not being in dispute, the learned CIT(A) was justified in allowing the deduction. As such, ground No.6 stands rejected. 58. According to ground No. 7, the learned CIT(A) has erred in allowing deductions under s. 35D. The facts are that in the asst. yr. 1992-93, the assessee ....