On 18th March, 2019 this appeal under Section 260A of the Income Tax Act, 1961 was admitted, to be heard on the following substantial questions of law :-
(i) Whether in the assessment year 1993-94 the transfer of the assessee of its fertilizer unit and fibre unit was a slump sale?
(ii) If the answer to question No.(i) is in the affirmative, whether such sale was not assessable to capital gains under the Income Tax Act, 1961?
A short point of some legal importance is involved in this appeal. This sub-section of the said Act defines slump sale and is set out below:-
“2.(42C). “slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.
“Explanation 1.- For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA).
Explanation 2.- For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.”
In understanding the sub-section one has to read the explanation which says that an “undertaking” shall have the same effect assigned to it in Explanation 1 of clause 19AA (of Section 2).
Explanation 1 is as under:-
“Explanation 1.- For the purposes of this clause, “undertaking” shall include any part of an 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.'
The above definition of slump sale was incorporated into the statute with effect from 1st April, 2000.
Section 50B also effective from 1st April, 2000 enacts that any profit or gain from slump sale shall be treated as capital gains from the transfer of a long term capital asset and assessable to capital gains tax. But if the sale is of an undertaking as a capital asset owned and held by the assessee for not more than 36 months before the date of transfer, then it shall be treated as capital gains from short term assets.
This case pertains to the assessment year 1993-94 and the corresponding financial year 1992-93.
Mr. Bajoria, learned senior counsel for the respondent submits that this amendment of the law has only codified the meaning of slump sale which was understood in the trade and interpreted by the courts of our country.
During the financial year in question, 1993-1994 the respondent assessee sold its fertilizer unit for Rs.70 crores and a fibre unit for Rs.15 crores. In its return of income, it claimed long term capital loss under Section 48 of the Income Tax Act, 1961.
The assessing officer thought otherwise. He treated the assets as depreciable and thought that Section 50 of the said Act as it stood at that point of time was applicable. He treated the transaction as a short term capital gain amounting to Rs.8,13,92,981/- under that section.
On appeal, the CIT (Appeals) took an extreme view holding that the consideration was not chargeable to capital gains tax under Section 45 read with Section 48 of the said Act.
The matter went up to the tribunal. The tribunal made a detailed analysis of the agreements. It came to the conclusion that the entire businesses of the undertakings were transferred to its subsidiary. The transfer was on an as is where is basis. It held that the transfer was genuine, although it was by a holding to a subsidiary company.
The objection of the Revenue was with regard to “excluded assets” mentioned in the agreement. They were described in the said agreement as follows:-
“(f) “Excluded Assets means-
(a) cash in bank, cheques deposited in bank account and other unrealized cheques of ICI.
(b) all unpaid and outstanding insurance claims pertaining to the Fertilizer Business as at the Transfer Date;
(c) all other assets whether tangible or intangible pertaining exclusively to ICI’s various business other than the Fertilizer Business”.
The Revenue contended that since these assets were left out, it was not a sale of the entire undertaking and did not qualify as a slump sale.
Mr. Dutta, learned counsel for the appellant reiterated this submission. The tribunal by its impugned judgment and order dated 29th February, 2008 held that the entire fertilizer and fibre businesses of the assessee had been transferred as a going concern to CCFC. All assets and liabilities relating to these businesses had also been transferred. The left out assets were bank balance and the outstanding insurance claim. It opined:
“Merely because these two assets have been excluded from the assets transferred, it cannot be said that it is not the transfer of the undertaking as a going concern Land, building, plant and machinery, raw material, industrial licences, technology, trade mark have been transferred to CCFC. The employees of the assess working in fertilizer business have also been taken over by the CCFC. All current liabilities relating to fertilizer business has been taken over by CCFC. The sale consideration of the undertaking as a whole has been fixed at a “slump price” of Rs.70.00 Crores without specifying any specific value to any asset. The assets transferred includes tangible as well as intangible asset. Moreover, the seller i.e. the assessee has also agreed for not carrying on the similar business of manufacturing and marketing of urea fertilizer for a period of 10 years.”
Relying on the case of Coromondal Fertilisers Ltd. Vs. DCIT reported in (2004) 84 TTJ 370 (Hyd.), it held that the transaction was a slump sale and that it fell under Section 45 of the said Act and further that for determining the capital gain from the full value of the consideration, the cost of acquisition of assets as well as the cost of any improvement were to be deducted. Since the cost of acquisition of intangible assets could not be determined the income was not chargeable to capital gains tax. It upheld the order of the CIT (Appeals).
This concept of slump sale was discussed in Commissioner of Income Tax Vs. Mugneeram Bangur & Co. reported in (1965) 57 ITR 299(SC). At this stage it is quite important to appreciate the ratio of Commissioner of Income-Tax Vs. Artex Manufacturing Co. reported in (1997) 227 ITR 260(SC). The written down value of the plant, machinery and dead stock according to the assessee’s books was Rs.4,36,896/-. The undertaking was sold on a valuation of these items as Rs.15,87,296/-. According to the department, the written down value was Rs.3,32,276/-. The difference between (Rs.15,87,296 – Rs.3,32,276) = Rs.12,56,020 was the bone of contention in this case. Whether it would be taxed as capital gains or under the head “business”?
The Supreme Court ruled that if the value of the individual assets could not be determined, then the value of all the assets together should be taken. In that case, the profit or gain made would be taxed as capital gain. In other cases, it would be taxed as business income. The entire matter was referred to the tribunal for a decision. In that decision the Income Tax Act, 1922 was under consideration.
Mr. Bajoria, learned Senior Advocate appearing for the respondent assessee cited PNB Finance Ltd. Vs. Commissioner of Income-Tax reported in (2008) 307 ITR 75(SC).
In that case the assessment year 1970-71 was involved. The case related to the nationalization of the Punjab National Bank Ltd. Punjab Finance Ltd., on nationalization of the bank in 1969 received Rs.10.20 crores as compensation calculated on capitalization of profits for the last 5 years. The compensation was received in 1969. From the sale consideration, cost of acquisition, improvement and expenses in connection with the transfer were deductible in computing capital gains under Section 48 of the Income Tax Act, 1961. The assessee contended that it was not possible to allocate the full value of the consideration of Rs.10.20 crores amongst various assets of the undertaking. Consequently, and became the assets including intangible assets like gradually value of licences, manpower etc. could not be determined, the cost of acquisition and cost of improvement could not be determined. Since this could not be done the charging Section 45 of the said Act for computation of capital gains did not apply. Hence, it was not possible to compute capital gains. Therefore, Rs.10.20 crores was not taxable under Section 45 of the said Act. This submission was upheld by the court.
Mr. Justice Kapadia delivering the judgment and referring to Commissioner of Income Tax Vs. Mugneeram Bangur & Co. reported in (1965) 57 ITR 299(SC) and Commissioner of Income Tax Vs. Artex Manufacturing Co. reported in (1997) 227 ITR 260(SC). The case was different from Commissioner of Income-Tax Vs. Artex Manufacturing Co. reported in (1997) 227 ITR 260(SC), according to his lordship.
It is now very important to know the issues before the tribunal. The first issue was whether the alleged agreement of transfer was a genuine one or an eyewash.
The second issue was whether the transaction in question was a slump sale. The Revenue contended that it was not so because the entire undertaking was not sold. Some assets like cash in the bank and the insurance claim had been left out.
The third issue was if it was determined that the transaction was indeed a slump sale, whether the gain or profit would be computed as a short term capital gain or a long term capital gain or something else.
The first issue was purely a question of fact. The tribunal analysed the terms of the transfer agreement in detail and came to the conclusion that it was a bona fide agreement of transfer for a consideration.
We are not minded to interfere with that finding.
The second issue was also a pure question of fact. The tribunal came to the following finding:
“After reading the agreement as a whole, we find that the fertilizer business of the assessee has been transferred as a going concern to CCFC. All assets and liabilities relating to fertilizer business has been transferred, only assets excluded are bank balance and the outstanding insurance claim on the date of transfer. Merely because these two assets have been excluded from the assets transferred, it cannot be said that it is not the transfer of the undertaking as a going concern Land, building, plant and machinery, raw material, industrial licences, technology, trade mark have been transferred to CCFC. The employees of the assess working in fertilizer business have also been taken over by the CCFC. All current liabilities relating to fertilizer business has been taken over by CCFC. The sale consideration of the undertaking as a whole has been fixed at a “slump price” of Rs.70.00 Crores without specifying any specific value to any asset. The assets transferred includes tangible as well as intangible asset. Moreover, the seller i.e. the assessee has also agreed for not carrying on the similar business of manufacturing and marketing of urea fertilizer for a period of 10 years………………………Considering the totality of the above facts, we are of the opinion that it is a case of “slump sale” of undertaking as a going concern and not the sale of depreciable assets within the meaning of Section 50 of the Income Tax Act.”
Taking everything into account, the conclusion reached by the tribunal is a plausible one. It does not call for any interference.
The learned tribunal also held that since the collection of assets of the undertaking included intangibles like goodwill, intellectual property etc. their cost of acquisition could not be determined. This was also a finding of fact which is a plausible one. We do not wish to interfere with the same.
Now I come to the law points. Section 45 of the said Act provides that profits or gains from the transfer of a capital asset would be chargeable to income tax as capital gains. This gain is deemed to be the income in the financial year in which the transfer was effected.
Undoubtedly, the transfer of the undertaking in question was a transfer of a collection of almost the entire assets of the undertaking and hence transfer of capital.
The question is whether this capital gain was to be taken as long term capital gain or short term capital gain and if it was impossible to calculate capital gain, was it to be taken as something else?
Mr. Bajoria has relied on a single decision of the Supreme Court in PNB Finance Ltd. Vs. Commissioner of Income-Tax reported in (2008) 307 ITR 75(SC).
We have discussed the ratio of that decision. The facts of this appeal are similar to that case. We are bound by it and have to apply it. We dismiss the appeal.
The first and second questions in this appeal are answered in the affirmative for the assessee and against the revenue.
The appeal is accordingly allowed to the above extent.
Certified photocopy of this judgment and order, if applied for, be supplied to the parties upon compliance with all requisite formalities.
Cases Referred to
1. Coromondal Fertilisers Ltd. Vs. DCIT reported in (2004) 84 TTJ 370 (Hyd.)
2. Commissioner of Income Tax Vs. Mugneeram Bangur & Co. reported in (1965) 57 ITR 299(SC)
3. Commissioner of Income-Tax Vs. Artex Manufacturing Co. reported in (1997) 227 ITR 260(SC)
4. PNB Finance Ltd. Vs. Commissioner of Income-Tax reported in (2008) 307 ITR 75(SC)
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