Bombay H.C : Reassessment on ground that transfer of undertaking by assessee was slump sale was unjustified since Tribunal had clearly recorded that transfer in lieu of shares was not a slump sale

High Court Of Bombay

Bharat Bijlee Ltd. vs. ACIT, Circle 6 (1), Mumbai

Assessment Year : 2005-06

Section : 50B, 147, 2(42C)

S. J. Vazifdar And B.P. Colabawalla, JJ.

Writ Petition No. 18 Of 2013

March 5, 2014

JUDGMENT

S.J. Vazifdar, J. – The petitioner has challenged a notice issued by respondent No.1 – Assistant Commissioner of Income Tax, under section 148 of the Income Tax Act, 1961 and an order dated 12.10.2012, passed by respondent No.2 – Deputy Commissioner of the Income Tax, Assessing Officer, disposing of its objections challenging the validity of the reassessment proceedings. Respondent No.3 is the Commissioner of Income Tax.

2. An agreement dated 31.05.2004 was entered into between the petitioner, Tiger Elevator Private Limited and Kone Elevator India Private Limited (TEPL). Under the agreement subject to the orders of this Court under sections 391 and 394 of the Act, TEPL and the petitioner agreed to implement the scheme of arrangement whereby the petitioner was to transfer its lift field operations business to TEPL for the consideration and on the terms and conditions stipulated therein. Clauses 1.9, 1.10, 1.55 and 4.1 of the said agreement read as under :—

‘1.9 “Bonds A” means the bonds of the value of Rs.95,500,000/- (Rupees Ninety-five million, five hundred thousand only) to be issued by Tiger to BBL pursuant to the Scheme of Arrangement in the form Schedule AA 1.9.

1.10 “Bonds B” means the bonds of the value of Rs.47,750,000/- (Rupees Forty-seven million, seven hundred and five thousand only) to be issued by Tiger to BBL pursuant to the Scheme of Arrangement in the form Schedule AA 1.10.

1.55 “Shares” means 33,425,000 (thirty-three million, four hundred and twenty-five thousand) preference shares of the face value of Rs.10/-(Rupees ten only) each, to be issued to BBL by Tiger in its capital pursuant to the Scheme of Arrangement. Schedule AA 1.55 is the format of the preference shares to be issued.

4.1 The consideration for the transfer of the Business shall be Shares and Bonds to be issued by Tiger to BBL the aggregate of the value of Shares and of the Bonds is hereinafter referred to as the (“Fixed Amount”) where, Bonds A shall be subject to plus or minus the 1st Adjustment, plus or minus the 2nd Adjustment, plus or minus the 3rd Adjustment, plus the 4th Adjustment and plus the 5th Adjustment and Bonds B shall be subject to plus the 6th Adjustment.’

3. By an agreement titled Second Amendment Agreement dated 13.08.2004, clause 4 of the agreement dated 31.05.2004 was modified as follows :—

‘2. CONSIDERATION

Clause 4 of the Agreement is hereby substituted to read as follows :

4.1 The consideration for the transfer of the Business shall be Shares and Bonds to be issued by Tiger to BBL the aggregate of the value of Shares and of the Bonds is hereinafter referred to as the “Fixed Amount”) where, Bonds A shall be subject to plus or minus the 2nd Adjustment, plus or minus the 3rd Adjustment, plus the 4th Adjustment and plus the 5th Adjustment and Bonds B shall be subject to plus the 6th Adjustment.

4.2 The Fixed Amount has been calculated according to the following formula:

Fixed Amount = Rs.330,000,000/- (Rupees Three Hundred and Thirty Million Only), i.e. A + B, where;

“A” = Rs.317,520,000/- (Rupees Three Hundred Seventeen Million Five Hundred Twenty Thousand Only). This is calculated as the outcome of (2.8 × Annual Value at the Appointed Date), where the Annual Value at the Appointed Date is Rs. 113,400,000/-.

“Annual Value” is defined as being equal to the aggregate amount of the annual customer price of actually transferred Maintenance Contracts. However, for the purposes of calculating the value of factor “A” only, the Annual Value at the Appointed Date shall be determined on the basis of the list of Maintenance Contracts attached to hereto as Schedule AA 4.2.

“B” = Rs. 13,086,000/- (Rupees Thirteen Million Eighty Six Thousand Only). This is calculated as the outcome of (0.0257548 × New Elevator Sales where the New Elevator Sales) is Rs.508,100,000/-.

“New Elevator Sales” is defined as being equal to the amount of the New Elevator Business Turnover for the 12 month period ending at March 31, 2004, as shown on the 2004 Financial Statements.’

4. As the transaction constituted a scheme of arrangement between the petitioner and Tiger Elevator Private Limited, the petitioner filed Company Petition No.832 of 2004, seeking the sanction of this Court under section 391 and 394 of the Companies Act, 1956 in respect thereof. By an order dated 17.12.2004, the company Judge sanctioned the scheme. 01.04.2004 was the effective date of the scheme. Disputes arose between the petitioner and other party to the agreement which were settled on the terms and conditions contained in a Settlement Agreement dated 29.08.2005, clause 3 whereof reads as under :—

‘3. The Parties agree that the total consideration to be paid to BBL by Olympus (including all adjustments) as stated in Clause 4 of the Acquisition Agreement shall be a fixed sum of three hundred and sixty-five million Indian Rupees (INR 365,000,000) (hereinafter referred to as the “Consideration”) which includes the agreed aggregated value of Bonds A and Bonds B of INR 117, 500,000/- and shall not be subject to any further adjustment, amendment or negotiation.

(i) The funds of INR 247,500,000 that have already been released by the Escrow Agent to BBL towards the 24,750,000 preference shares forming Escrow Funds Part A under the Escrow Agreement are to be considered as part of the Consideration.

(ii) The Escrow Funds of INR 82,500,000 retained at present by the Escrow Agent under the Escrow Agreement as Escrow Funds Part B and Part C shall also form a part of the consideration and shall be released in accordance with Clause 7 read with Annexure “C” hereunder.

(iii) The balance amount of consideration over and above the Escrow Funds, being an amount of INR 35,000,000, shall be paid to BBL in accordance with Clause 9 hereunder.’

5. At the request of the petitioner, a firm of chartered accountant prepared a “Report On The Valuation Of The Total Consideration dated 21.10.2005 For Transfer of the Petitioner’s Lift Field Operations Business”. The valuation report took into consideration the Settlement Agreement. Accordingly, the valuation was fixed at Rs.35.86 crores. The difference in the consideration mentioned in the Settlement Agreement and in the Valuation Report was probably on account of the schedule of payment.

6. On 28.10.2005, the petitioner filed its return for the assessment year (AY) 2005-2006. The relevant portion thereof reads as under :—

“II. Capital Gains :

Long Term Capital Gains from transfer of Elevator Field Operations Division (Refer Note 4 to the Computation)

Note 4 to the computation referred to above facts and stated that the transfer was by way of exchange and not sale and was therefore, not within the purview of the definition of Slump Sale under section 2(42C) of the Act and that the cost of Undertaking is not ascertainable and therefore, the machinery for computing gains fails. Without prejudice to the same, it was contended that the petitioner had calculated the indexed cost of acquisition of the Undertaking and computed the Long Term Capital Gains. Accordingly, the petitioner deposited a sum of Rs.15.50 crores in section 54EC Bonds within six months from the transfer of the undertaking. It was contended that the long term capital gains were therefore, to be treated as exempt from tax.”

7. There followed a series of queries raised and requisitions made by the Assessing Officer, which were replied to and complied with by or on behalf of the petitioner. The same establish clearly that the petitioner disclosed all facts material to the assessment and that the AO was not only aware of but considered the same before making the assessment order. The issues on the basis of which the impugned notice has been issued, were considered in considerable detail and exhaustively by the Assessing Officer before passing the assessment order dated 31.12.2007 under section 143(3). What follows demonstrates the same almost beyond doubt.

8. (A)(i). By a notice dated 09.08.2007, the Additional CIT called upon the petitioner to furnish several documents including ;

’28. Details of transfer of Elevator Field Operation Division alongwith copy of transfer agreement, copy of High Court order and the scheme of arrangement in this regard.

29. Kindly also submit the reasons on which you have stated in your report that these transactions is not taxable as capital gain.

For the purpose of verification and discussion, the case is fixed for hearing on 21.08.2007 at 11:30 AM.”

(ii) Under cover of a letter dated 03.09.2007, the petitioner forwarded the said agreements, scheme of arrangement, court order and the receipt for registration with ROC for the said transfer.

(B) On 18.09.2007 obviously pursuant to the requisitions of the respondents, the petitioner forwarded the schedules to the agreement as well as the details in respect thereof, including those relating to the transferred business, assets and liabilities, excluded assets, non-transferred liabilities and statement of net assets transferred. The copies of the preference shares and bonds were also forwarded.

(C) On 28.09.2007, the petitioner tendered detailed written submissions as to why the undertaking should be considered as capital assets and why the transfer should not be construed as only involving the current assets comprised in the Undertaking.

(D) Pursuant to the discussions with the respondent on 19.09.2007, the petitioner on 28.09.2007 forwarded a list of maintenance contracts as on 01.04.2004 and a list of maintenance contracts as on 23.12.2004.

These contracts were of vital importance for the purpose of carrying out the adjustment contemplated under the said agreement. The adjustment would obviously be dependent inter-alia upon the number of contracts subsisting as on the effective date. The Settlement Agreement quantified and listed the same.

(E) Even thereafter the petitioner submitted not only the preference shares and bonds but also the Settlement Agreement stating that the value was Rs.36.50 crores.

(F) By a letter dated 08.10.2007, the petitioner responded to the several queries raised by the AO. In paragraph 10, the petitioner furnished the “Working of adjustments conceived in the Acquisition Agreement [Annexure VII]”. Annexure VII in turn referred to the second to the sixth adjustments and the Settlement Agreement dated 29.08.2005. Against each of the second to the sixth adjustments, the petitioner stated the result of the buyers’ and the petitioner’s respective interpretations of the adjustments. The petitioner also referred to the Settlement Agreement dated 29.08.2005.

(G) By a letter dated 29.10.2007, the petitioner furnished the other dates “requisitioned” by the AO in respect of the escrow money deposited by the purchaser, preference shares redeemed, request for arbitration, NHB bonds investment made of Rs.15.50 crores, reply in the arbitration petition in view of the disputes regarding adjustment, receipt of Rs.3.50 crores towards redemption of the bond from the purchaser, receipt of Rs.8.25 crores towards redemption of the bonds from the escrow account and the details of the face value and redemption value of the bonds. The consideration of the preference shares and the value of bonds of Rs.24.75 crores and Rs.11.11 crores respectively aggregating to Rs.35.86 crores was also mentioned.

(H) By a further letter dated 30.11.2007, the petitioner submitted a note of case law on the issue regarding transfer of the EFO division, as well as working as requisitioned by the AO as per the provisions of section 50B of the long term capital gains on the transfer of the EFO division.

(I) By a letter dated 05.12.2007, the petitioner furnished the details of the expenses incurred by it in respect of the transfer of the EFO division and accounting of the transfer of the division viz. as approved by the scheme of arrangement sanctioned by this Court and submitted the books of account.

(J) Finally by a letter dated 20.12.2007, the petitioner responded to the discussions held on 14.12.2007 regarding treatment of the transfer of the EFO division. The petitioner stated that it was indicated that the consideration would be Rs.36.50 crores instead of Rs.35.86 crores as stated in its submissions. It is important to note that even this difference of Rs.35.86 crores and Rs.36.50 crores was specifically referred to. The petitioner went further and clarified that though the total consideration was fixed at Rs.36.50 crores by the Settlement Deed, the fair value of the total consideration as on the transfer date was valued at Rs.35.86 crores including the variable consideration defined under the scheme to be at Rs.64.00 lacs. It was stated that it has been treated as the short term capital gains in the previous year 2005-2006 for which the bonds were redeemed and an amount of Rs.45,35,280/- being legal fees had been claimed as expenditure towards the transfer of the bonds.’

9. The aforesaid correspondence indicates that every aspect of the transaction was not only disclosed but was specifically noticed by the AO. More important is the fact that every relevant aspect had been brought to the notice of the AO not merely in the return filed by the petitioner but in answer to the specific queries and in response to the requisitions of the AO during the assessment proceedings. No aspect of the matter remained to be disclosed. No aspect of the matter remained to be even sought by the AO.

10. The petitioner had not withheld or failed to disclose any material relevant to the assessment of its income for the assessment year in question viz. 2005-2006.

11. The matter does not end there. The assessment order under section 143(3) was passed on 31.12.2007. It deals with the effect of the transfer of the division as regards the petitioner’s tax liability in considerable detail. After setting out the petitioner’s case in detail, the AO considered the same exhaustively. Having done so, he came to the conclusion that the transaction fits into the definition of a slump sale. He held that the transaction of the transfer of the said division was taxable as per the provisions of section 50B of the act and taxed the same accordingly. The AO proceeded thereafter to compute the capital gains on the transfer of the said division himself. He computed taxable long term capital gains at Rs.1,93,61,060/-.

12. The petitioner challenged the order before the CIT (Appeals). By an order dated 25.07.2008, the appeal was dismissed.

The petitioner challenged the order before the Income Tax Appellate Tribunal (ITAT). The Tribunal by an order dated 11.03.2011 held that the scheme of arrangement resulted in a transfer of undertaking in exchange for the preference shares and bonds and was a case of exchange and not sale. Consequently neither the provisions of section 2(42C) nor section 50B were applicable.

13. This brings us to the impugned notice dated 13.03.2012 issued by respondent No.1 stating that there was reason to believe that the petitioner’s income in respect of which it is assessable to tax for the AY 2005-2006 had escaped within the meaning of section 147 and that it was therefore, proposed to reassess the income. This was beyond the period of four years from the end of the AY 2005-2006.

14. By a letter dated 22.08.2012, the Deputy Commissioner, at the petitioner’s request, furnished the reasons recorded for reopening the assessment. We do not find anything in the communication dated 22.08.2012 that was not considered during the assessment proceedings. Every single aspect referred to therein was considered in the assessment proceedings. One of the reasons stated was that as per the valuation report of the transferee’s chartered accountants M/s. P. Krishnan & Associates the fair market value of the division was determined at Rs.36.50 crores. Mr. Suresh Kumar, the learned counsel appearing on behalf of the respondents contended that this report had not been disclosed and that therefore, reopening of the assessment was permissible. We will deal with this submission shortly.

15. The petitioner had by a letter dated 26.09.2012, responded to the letter dated 22.08.2012 rightly contending inter-alia that the reopening was based on the same set of facts / material available on record for the year under consideration and that the reasons reflected a mere change of opinion.

16. By an order dated 12.10.2012, the petitioner’s objections against the initiation of reassessment proceedings were rejected. The order sets out the reasons and some of the objections raised by the petitioner. It also refers to certain authorities. The petitioner’s objections were rejected only on the basis of the report of M/s. P. Krishnan & Associates. It was held that the assessee was aware of it and should have disclosed the same before the AO fully and truly. The order does not even suggest that any of the other reasons mentioned in the letter dated 22.08.2012 justified reopening. Mr. Suresh Kumar was unable to indicate any of the other facts mentioned in the letter dated 22.08.2012 that were not disclosed or taken into consideration in the assessment proceedings.

17. As we mentioned earlier Mr. Suresh Kumar contended that the reopening of the assessment was justified in the report of M/s. P. Krishnan & Associates determining the fair value of the division of Rs.36.50 crores was not disclosed.

18. The submission is unsustainable. Firstly, the valuation report was prepared by the transferee’s chartered accountants. Even assuming that the petitioner was aware of the same and had a copy of it, it would make no difference. It was not suggested that the report contains any material relevant to the assessment, which was not disclosed during the assessment proceedings. A mere failure to furnish a document would not justify reopening an assessment. It must be established by the department that the contents of the documents relevant to the assessment were not disclosed by the assessee. There may be several documents which may not have be disclosed during the assessment proceedings. If however, the contents of the documents relevant to the assessment had been disclosed and had been considered by the AO, it would not justify reopening of the assessment. Several documents may contain the same information. It would not be necessary for the assessee to disclose every such document unless the existence of such documents themselves would be material to the assessment.

19. We referred in detail to all that transpired during the course of the assessment proceedings, especially the queries raised and the information sought by the AO and the petitioner’s response thereto. The same indicates beyond doubt that all the material facts were not only disclosed but were brought to the notice of the AO and the AO considered the same. As we also mentioned earlier Mr. Suresh Kumar was unable to indicate any of the other facts mentioned in the letter dated 22.08.2012 that were not disclosed or taken into consideration in the assessment proceedings. Even if the assessment order does not by itself indicate that the AO considered the same, it would make no difference. In Rabo India Finance Ltd. v. Dy. CIT [2012] 346 ITR 528/211 Taxman 423/26 taxmann.com 122, a Division Bench of this Court, to which one of us (S.J. Vazifdar, J.) was a party, held as under :—

“17. The facts thus far indicate that the respondents were aware not merely of the existence of the transactions between the petitioner and Rabobank International but also the details thereof. They also establish that the Assessing Officer had specifically considered the same. If an Assessing Officer calls for specific information relating to or in connection with the material before him, absent anything else, it is reasonable to presume that he had considered the material filed before him as well as the material called for by him before making the assessment order. Had he not considered the material filed before him originally there would be no question of his seeking further information in relation thereto. It is logical, therefore, to presume that he had considered the material in relation to which he sought further information. It would equally follow that the Assessing Officer would also have considered the information furnished pursuant to such demand. A view to the contrary would presume that the Assessing Officer had ignored the very information that he specifically sought. We are not inclined to presume negligence or indifference on the part of an Assessing Officer in such circumstances. It is reasonable, therefore, to presume that the Assessing Officer had applied his mind to the agreements and matters connected therewith relating to the agreement.”

20. There is nothing on record that indicates that the AO did not consider the material before him. Indeed the nature of the queries raised and the information sought by him indicates that he not only noticed but considered the information supplied by the petitioner. In the facts and circumstances of this case, it cannot by any stretch of imagination be held that the petitioner had failed to disclose fully and truly all material facts necessary for its assessment for the assessment year 2005-2006.

21. Rule is made absolute in terms of prayer (a). There shall be no order as to costs.

[Citation : 364 ITR 581]