Kerala H.C : The sale of the industrial units by the respondent-assessees with the land, building, plant and equipments as going concerns to another company during the previous year cannot be assessed to tax for capital gains as “slump sale” under section 50B

High Court Of Kerala

CIT, Kottayam vs. Accelerated Freeze Drying Co. Ltd.

Assessment Year : 2003-04

Section 50B, 2(42C)

C.N. Ramachandran Nair And K. Surendra Mohan, JJ.

IT Appeal Nos. 640 And 1470 Of 2009

October 6, 2010

JUDGMENT

C.N. Ramachandran Nair, J. – The question raised in the connected appeals filed by the revenue is whether the Income-tax Appellate Tribunal was justified in holding that the sale of the industrial units by the respondent-assessees with the land, building, plant and equipments as going concerns to another company during the previous year cannot be assessed to tax for capital gains as “slump sale” under section 50B but assessable for capital gain as sale of depreciable assets under section 50 of the Income-tax Act. The first appeals in the case of the two assessee’s were decided by separate Commissioners of Income-tax (Appeals) and they rendered divergent orders, one confirming the assessment of sale of the industrial undertaking as slump sale under section 50B and in the connected case, the Commissioner (Appeals) cancelled the assessment with direction to the officer to compute liability for capital gains under section 50 of the Income-tax Act. The Tribunal considered the issue in detail in the case of the assessee covered by I.T.A. No. 1470/2009, allowed the said appeal and following the said decision allowed the other appeal as well without considering facts in that case which are admittedly same as the facts in I.T.A. No. 1470/2009. We therefore proceed to consider I.T.A. No. 1470/2009 wherein the Tribunal has considered the matter in detail.

2. We have heard senior counsel Mr. P.K.R. Menon appearing for the revenue and Mr. P. Balakrishnan appearing for the respondent-assessee.

3. The admitted facts that lead to the controversy are the following. The assessee which was engaged in seafood processing and export with their own factories transferred one of their industrial units as a going concern during the previous year relevant for the assessment year 2003-04 to Hindustan Lever Limited for a total consideration of Rs. 22.20 crores. The consideration agreed is the aggregate value for land, building, machinery and all equipments with liabilities specifically mentioned in the agreement entered into between parties. The sale is in two parts, one sale deed executed and registered covers, land and building and for the purpose of payment of stamp duty and registration fee a valuation was separately made based on which stamp duty and registration fee were paid. Besides the valuation of land and building which is specifically stated in the conveyance deed as fair market value adopted only for the purpose of payment of stamp duty and registration charges, sale consideration was not separable between value for land and building and for other items sold. In other words the assessee sold the industrial unit as a going concern and as an operating unit for a total agreed consideration whereby the assessee received the net sale price after retaining liabilities to be borne by the purchaser. In clause 3.2 of the sale deed executed between the assessee and the purchaser it is clearly stated that the undertaking is transferred as a going concern on “slump sale basis”. The assessee also initially treated the sale of industrial unit as “slump sale” and when income-tax return was filed assessee submitted auditor’s report in Form 3(EA) prescribed under rule 6H of the Income-tax Rules which is the requirement for the purpose of assessment of capital gains on “slump sale” under section 50B(3) of the Act. In spite of the declaration in the sale deed and treatment of the transfer of the industrial undertaking as a going concern to another company as a “slump sale” by obtaining and producing Chartered Accountant’s certification in the prescribed form in terms of section 50B(3) of the Act, in the return filed, the assessee returned the transaction for assessment for capital gains as sale of depreciable items under section 50 of the Act. Before the Assessing Officer assessee contended that Form 3EA is furnished as a precaution and assessee’s contention is that the sale of industrial undertaking should be assessed for capital gains as sale of depreciable assets under section 50 of the Income-tax Act. The Assessing Officer noticed that the sale is a “slump sale” falling within the definition of section 2(42C) of the Act and he made the assessment for capital gain as provided under section 50B of the Income-tax Act. The assessment was made by invoking powers under section 147 of the Act which was also challenged by the assessee in appeal. In this case, the first appellate authority allowed the appeal on both the grounds that is by cancelling the income escaping assessment as passed without jurisdiction and on merits by holding that the sale of the industrial undertaking is not slump sale but is to be assessed as sale of depreciable asset under section 50 of the Act. In the connected case, the CIT(Appeals) took an entirely different view by upholding the assessment of sale of industry as a “slump sale”. In the second appeal filed by the revenue before the Tribunal in this case, the Tribunal upheld the CIT (Appeals) order on merits but did not consider the validity of reopening raised by the revenue as the said ground had become academic by virtue of the Tribunal’s decision on merit in favour of the assessee. It is against this order of the Tribunal revenue has filed the appeal.

4. Based on the facts stated above, the only question to be considered is under what provision of the Income-tax Act capital gain is to be assessed on the profit received by the assessee on the sale of the industrial undertaking.

5. Slump sale is defined under section 2(42C) as follows:—

“‘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 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.”

We have already noticed that the unit transferred by the assessee is an industrial undertaking which is a fish processing factory with land, building, machinery, plant and all equipments as a going concern with all the assets and liabilities. The consideration agreed between assessee and the buyer is admittedly a lump sum amount of Rs. 22.20 crores. Since the industrial unit sold is as a whole and as a continuing business concern with land, building, plant, machinery and all equipments as a going business with assets and liabilities for a consolidated sum, the same squarely attracts definition of the undertaking covered by Explanation 1 of the definition clause. Further, it has to be noted that the assessee was well aware of Explanation 2 of section 2(42C) because except the value adopted for land and building which is specifically stated as for the purpose of payment of stamp duty and registration fee the sale price agreed and paid was a lump sum amount of Rs. 22.20 crores. Further the assessee and the purchaser have specifically stated in clause 3.2 of the sale deed that the sale is on “slump sale basis” which is nothing but adoption of the said terms as contained in the above provision of the Income-tax Act. It is also to be taken note that the assessee knowing well the chance of transaction being treated as a “slump sale” for the purpose of assessment of capital gain furnished along with the return filed the Chartered Accountant’s Certificate in Form 3EA prescribed under rule 6H in terms of section 50B(3) of the Income-tax Act. Even after annexing the Chartered Accountant’s Certificate issued in the prescribed form for assessment under section 50B of the Act, assessee claimed that capital gain is assessable on sale of the undertaking as sale of depreciable assets under section 50 of the Act. The question now to be considered is whether the claim of the assessee is tenable or not. In this regard we have to consider the scope of section 50 and section 50B of the Act. In our view assessee’s claim for assessment of capital gain under section 50 of the Act is not tenable because the said section provides for assessment of capital gains in the case of sale of depreciable assets. This section provides for assessment for capital gain of assets forming part of block of assets in respect of which depreciation is allowed under the Act. What the assessee has sold is not any asset in a block, if at all the assets sold form part of a block of asset on which depreciation was being allowed. On the other hand sale is of an industrial undertaking as a whole which includes land, building, machinery, equipments etc. as a going concern with all the assets and liabilities. We have already found that the sale is of business undertaking as a going concern and the same squarely falls within the definition of “slump sale” as defined under section 2(42C) of the Act. Section 50B which provides for computation of capital gain in the case of slump sale is as follows:—

‘(1)Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place:

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(2)In relation to capital assets being an undertaking or division transferred by way of such sale, the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.

(3)Every assessee in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288, indicating the computation of the net worth of the undertaking or division, as the case may be and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.

Explanation 1.—For the purposes of this section, “net worth” shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account.’

What is clear from the above is that section 50B is the only provision which provides for computation of capital gains in the case of slump sale, even though sale of business undertaking as a going concern will involve sale of assets forming block of assets on which depreciation was being allowed. Assessee’s counsel contended that when depreciable assets are sold, provision to be applied for assessment of capital gain is section 50. However we are of the view that section 50 applies only when an independent asset or a block of asset are sold on which depreciation was allowed and not when the industrial undertaking with depreciable assets are sold as a whole. In fact, when section 50B provides for computation of capital gain on the sale of the undertaking it covers capital gain payable on depreciable assets forming part of the industrial undertaking also. In other words the distinction between sections 50 and 50B is that while section 50 provides for computation of capital gain on the sale of only depreciable assets, section 50B provides for computation of capital gain on the sale of an undertaking as a whole which includes depreciable assets as well. In fact there is also difference in the mode of computation of capital gains under section 50 for depreciable assets and for “slump sale” under section 50B. Section 50 is a full code for computation of capital gains on depreciable assets. On the other hand under section 50B the asset has to be first classified between long-term or short-term capital asset and then for the purpose of sections 48 and 49 net worth has to be computed in terms of Explanation 1 of the said section. The capital gain under section 50B is the sale proceeds as reduced by the net worth.

6. From the above findings, we hold that the sale of the undertaking is a slump sale within the meaning of section 2(42C) assessable under section 50B of the Act and assessee also rightly styled the transaction as such as “slump sale” in the sale documents and even got the Auditor’s report prepared and filed along with return in terms of section 50B(3) of the Act. We therefore allow the appeal by reversing the order of the Tribunal and that of the first appellate authority and hold that assessment was rightly made by the Officer under section 50B treating the transaction as “slump sale”. Since the Tribunal has not considered the question raised on the validity of re-opening and completion of assessment under section 147, we remand the matter to the Tribunal for decision on this issue after hearing both sides.

7. As already stated the issue raised in I.T. Appeal No. 640/2009 filed by the revenue is the same as in the case decided above and both the companies are stated to be related companies of the same group. Tribunal allowed assessee’s appeal by reversing the order of the CIT (Appeal) following their decision in ITA No. 1470/2009 which we have reversed vide above judgment. Since the facts are the same following our above judgment we allow this appeal also by reversing the order of the Tribunal and by restoring the order of the CIT (Appeal) confirming the assessment.

8. Counsel appearing for the assessee in I.T.A. No. 1470/2009 contended that the computation of capital gains under section 50B by the Assessing Officer itself is not correct and there was no occasion to consider the correctness of computation by any of the appellate authorities because issue happened to be decided in their favour by the first appellate authority and the Tribunal. We give one more opportunity to the assessee to raise this issue before the Assessing Officer if the Tribunal upholds the income escaping assessments and remands the matter for revision of assessment in terms of our judgment.

[Citation : 337 ITR 440]

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