Ita/640/2009 Of Commissioner Of Income Tax,Kottayam v. M/S.accelerated Freeze Drying Co.ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN WEDNESDAY, THE 6TH OCTOBER 2010 / 14TH ASWINA 1932 ITA.No. 640 of 2009() --------------------- ITA.611/COCH/2008 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH .................... APPELLANT:RESPONDENT: -------------------------------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM BY ADV. SRI.JOSE JOSEPH, SC,INCOME TAX RESPONDENT(S): APPELLANT: ------------------------------------------------ M/S.ACCELERATED FREEZE DRYING CO.LTD., CHERTHALLA, ALAPPUZHA. BY ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06/10/2010 ALONG WITH ITA NO. 1470 OF 2009,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: 'CR' C.N.RAMACHANDRAN NAIR &K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A.NOS: 640 & 1470 OF 2009 ----------------------------------------------------------- Dated this the 6[th] October, 2010. JUDGMENT Ramachandran Nair, J. The question raised in the connected appeals filed by theRevenue is whether the Income Tax Appellate Tribunal was justifiedin holding that the sale of the industrial units by the respondent-assessees with the land, building, plant and equipments as goingconcerns to another company during the previous year cannot beassessed to tax for capital gains as “slump sale” under Section 50Bbut assessable for capital gain as sale of depreciable assets underSection 50 of the Income Tax Act. The first appeals in the case ofthe two assessee's were decided by separate Commissioners ofIncome Tax (Appeals) and they rendered divergent orders, oneconfirming the assessment of sale of the industrial undertaking asslump sale under Section 50B and in the connected case, theCommissioner (Appeals) cancelled the assessment with direction to ITA 640 & 1470/2009 the officer to compute liability for capital gains under Section 50 ofthe Income Tax Act. The Tribunal considered the issue in detail inthe case of the assessee covered by I.T.A.1470/2009, allowed thesaid Appeal and following the said decision allowed the otherappeal as well without considering facts in that case which areadmittedly same as the facts in I.T.A.1470/09. We thereforeproceed to consider I.T.A.1470/2009 wherein the Tribunal hasconsidered the matter in detail. 2. We have heard senior counsel Mr. P.K.R.Menon appearingfor the Revenue and Mr.P.Balakrishnan appearing for therespondent-assessee. 3. The admitted facts that lead to the controversy are thefollowing. The assessee which was engaged in seafood processingand export with their own factories transferred one of theirindustrial units as a going concern during the previous yearrelevant for the assessment year 2003-04 to Hindustan LeverLimited for a total consideration of 22.20 crores. The considerationagreed is the aggregate value for land, building, machinery and allequipments with liabilities specifically mentioned in the agreemententered into between parties. The sale is in two parts, one saledeed executed and registered covers, land and building and for the ITA 640 & 1470/2009 3. The admitted facts that lead to the controversy are thefollowing. The assessee which was engaged in seafood processingand export with their own factories transferred one of theirindustrial units as a going concern during the previous yearrelevant for the assessment year 2003-04 to Hindustan LeverLimited for a total consideration of 22.20 crores. The considerationagreed is the aggregate value for land, building, machinery and allequipments with liabilities specifically mentioned in the agreemententered into between parties. The sale is in two parts, one saledeed executed and registered covers, land and building and for the ITA 640 & 1470/2009 purpose of payment of Stamp duty and registration fee a valuationwas separately made based on which stamp duty and registrationfee were are paid. Besides the valuation of land and building whichis specifically stated in the conveyance deed as fair market valueadopted only for the purpose of payment of stamp duty andregistration charges, sale consideration was not separable betweenvalue for land and building and for other items sold. In other wordsthe assessee sold the industrial unit as a going concern and as anoperating unit for a total agreed consideration whereby theassessee received the net sale price after retaining liabilities to beborne by the purchaser. In Clause 3.2 of the sale deed executedbetween the assessee and the purchaser it is clearly stated that theundertaking 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 assesseesubmitted auditor's report in form 3 (EA) prescribed under Rule 6(H)of the Income Tax Rules which is the requirement for the purposeof assessment of capital gains on “slump sale” under Section 50B(3)of the Act. In spite of the declaration in the sale deed andtreatment of the transfer of the industrial undertaking as a goingconcern to another company as a “slump sale” by obtaining and ITA 640 & 1470/2009 producing chartered accounts certification in the prescribed form interms of Section 50B(3) of the Act, in the return filed, the assesseereturned the transaction for assessment for capital gains as sale ofdepreciable items under Section 50 of the Act. Before theAssessing Officer assessee contended that Form 3EA is furnished asa precaution and assessee's contention is that the sale of industrialundertaking should be assessed for capital gains as sale ofdepreciable assets under Section 50 of the Income Tax Act. TheAssessing Officer noticed that the sale is a “slump sale” fallingwithin the definition of Section 2(42C) of the Act and he made theassessment for capital gain as provided under Section 50B of theIncome Tax Act. The assessment was made by invoking powersunder Section 147 of the Act which was also challenged by theassessee in appeal. In this case, the first appellate authorityallowed the appeal on both the grounds that is by cancelling theincome escaping assessment as passed without jurisdiction and onmerits by holding that the sale of the industrial undertaking is notslump sale but is to be assessed as sale of depreciable asset underSection 50 of the Act. In the connected case, the CIT(Appeals) tookan entirely different view by upholding the assessment of sale ofIndustry as a “slump sale”. In the second appeal filed by the revenue ITA 640 & 1470/2009 before the Tribunal in this case, the Tribunal upheld the CIT(Appeals) order on merits but did not consider the validity ofreopening raised by the revenue as the said ground had becomeacademic by virtue of the Tribunal's decision on merit in favour ofthe assessee. It is against this order of the Tribunal revenue hasfiled the appeal. ITA 640 & 1470/2009 before the Tribunal in this case, the Tribunal upheld the CIT(Appeals) order on merits but did not consider the validity ofreopening raised by the revenue as the said ground had becomeacademic by virtue of the Tribunal's decision on merit in favour ofthe assessee. It is against this order of the Tribunal revenue hasfiled the appeal. 4. Based on the facts stated above, the only question to beconsidered is under what provision of the Income Tax Act capitalgain is to be assessed on the profit received by the assessee on thesale of the industrial undertaking. 5. Slump sale is defined under Section 2(42C) as follows:- “Slump sale” means the transfer of one or moreundertakings as a result of the sale for a lump sumconsideration without values being assigned to theindividual assets and liabilities in such sales. Explanation 1—For the purposes of this clause,“undertaking” shall have the meaning assigned to it inExplanation 1 to clause (19AA). Explanation 2 ---For the removal of doubts, it ishereby declared that determination of the value of anasset or liability for the sole purpose of payment ofstamp duty, registration fees or other similar taxes orfees shall not be regarded as assignment of values toindividual assets or liabilities.” ITA 640 & 1470/2009 We have already noticed that the unit transferred by the assesseeis an industrial undertaking which is a fish processing factory withland, building, machinery, plant and all equipments as a goingconcern with all the assets and liabilities. The considerationagreed between assessee and the buyer is admittedly a lump sumamount of 22.20 crores. Since the industrial unit sold is as awhole and as a continuing business concern with land, building,plant, machinery and all equipments as a going business withassets and liabilities for a consolidated sum, the same squarelyattracts definition of the undertaking covered by explanation 1 ofthe definition clause. Further, it has to be noted that the assesseewas well aware of explanation 2 of Section 2(42 C) because exceptthe value adopted for land and building which is specifically statedas for the purpose of payment of stamp duty and registration feethe sale price agreed and paid was a lump sum amount of Rs.22.20crores. Further the assessee and the purchaser have specificallystated in Clause 3.2 of the sale deed that the sale is on “slump salebasis” which is nothing but adoption of the said terms as containedin the above provision of the Income Tax Act. It is also to be takennote that the assessee knowing well the chance of transactionbeing treated as a “slump sale” for the purpose of assessment of capital gain furnished along with the return filed the charteredaccountant's certificate in form 3EA prescribed under Rule 6H interms of Section 50B(3) of the Income Tax Act. Even afterannexing the Chartered Accountant's Certificate issued in theprescribed form for assessment under Section 50B of the Act,assessee claimed that capital gain is assessable on sale of theundertaking as sale of depreciable assets under Section 50 of theAct. The question now to be considered is whether the claim ofthe assessee is tenable or not. In this regard we have to considerthe scope of Section 50 and Section 50B of the Act. In our viewassessee's claim for assessment of capital gain under Section 50 ofthe Act is not tenable because the said Section provides forassessment of capital gains in the case of sale of depreciableassets. This Section provides for assessment for capital gain ofassets forming part of block of assets in respect of whichdepreciation is allowed under the Act. What the assessee has soldis not any asset in a block, if at all the assets sold form part of ablock of asset on which depreciation was being allowed. On theother hand sale is of an industrial undertaking as a whole whichincludes land, building, machinery, equipments etc. as a goingconcern with all the assets and liabilities. We have already found ITA 640 & 1470/2009 that the sale is of business undertaking as a going concern and thesame squarely falls within the definition of “slump sale” as definedunder Section 2(42C) of the Act. Section 50B which provides forcomputation of capital gain in the case of slump sale is as follows:- “(1) Any profits or gains arising from theslump sale effected in the previous year shall bechargeable to income-tax as capital gains arisingfrom the transfer of long-term capital assets andshall be deemed to be the income of the previousyear in which the transfer took place: Provided that any profits or gains arisingfrom the transfer under the slump sale of anycapital asset being one or more undertakingsowned and held by an assessee for not more thanthirty-six months immediately preceding the dateof its transfer shall be deemed to be the capitalgains arising from the transfer of short-termcapital assets. (2) In relation to capital assets being anundertaking or division transferred by way of suchsale, the “net worth” of the undertaking or thedivision, as the case may be, shall be deemed to bethe cost of acquisition and the cost ofimprovement for the purposes of Sections 48 and49 and no regard shall be given to the provisionscontained in the second proviso to Section 48. (3) Every assessee in the case of slump sale,shall furnish in the prescribed form along with thereturn of income, a report of an accountant asdefined in the Explanation below sub-section (2) ofSection 288, indicating the computation of the networth of the undertaking or division, as the casemay be and certifying that the met worth of theundertaking or division, as the case may be, hasbeen correctly arrived at in accordance with theprovisions of this Section. Explanation 1:-- For the purposes of thisSection, “net worth” shall be the aggregate value oftotal assets of the undertaking or division asreduced by the value of liabilities of suchundertaking or division as appearing in its booksof account.” What is clear from the above is that Section 50B is the onlyprovision which provides for computation of capital gains in thecase of slump sale, even though sale of business undertaking as agoing concern will involve sale of assets forming block of assets onwhich depreciation was being allowed. Assessee's counselcontended that when depreciable assets are sold, provision to beapplied for assessment of capital gain is Section 50. However weare of the view that Section 50 applies only when an independent ITA 640 & 1470/2009 Explanation 1:-- For the purposes of thisSection, “net worth” shall be the aggregate value oftotal assets of the undertaking or division asreduced by the value of liabilities of suchundertaking or division as appearing in its booksof account.” What is clear from the above is that Section 50B is the onlyprovision which provides for computation of capital gains in thecase of slump sale, even though sale of business undertaking as agoing concern will involve sale of assets forming block of assets onwhich depreciation was being allowed. Assessee's counselcontended that when depreciable assets are sold, provision to beapplied for assessment of capital gain is Section 50. However weare of the view that Section 50 applies only when an independent ITA 640 & 1470/2009 asset or a block of asset are sold on which depreciation was allowedand not when the industrial undertaking with depreciable assets aresold as a whole. In fact, when Section 50B provides forcomputation of capital gain on the sale of the undertaking it coverscapital gain payable on depreciable assets forming part of theindustrial undertaking also. In other words the distinction betweenSection 50 and 50B is that while Section 50 provides forcomputation of capital gain on the sale of only depreciable assetsSection 50B provides for computation of capital gain on the sale ofan undertaking as a whole which includes depreciable assets aswell. In fact there is also difference in the mode of computation ofcapital gains under Section 50 for depreciable assets and for “slumpsale” under Section 50B. Section 50 is a full code for computationof capital gains on depreciable assets. On the other hand underSection 50B the asset has to be first classified between long term orshort term capital asset and then for the purpose of Sections 48and 49 net worth has to be computed in terms of explanation 1 ofthe said Section. The capital gain under Section 50B is the saleproceeds as reduced by the net worth. 6. From the above findings, we hold that the sale of theundertaking is a slump sale within the meaning of Section 2(42C) ITA 640 & 1470/2009 assessable under Section 50B of the Act and assessee also rightlystyled the transaction as such as “slump sale” in the sale documentsand even got the Auditor's report prepared and filed along withreturn in terms of Section 50B(3) of the Act. We therefore allow theappeal by reversing the order of the Tribunal and that of the firstappellate authority and hold that assessment was rightly made bythe Officer under Section 50B treating the transaction as “slumpsale”. Since the Tribunal has not considered the question raised onthe validity of re-opening and completion of assessment underSection 147, we remand the matter to the Tribunal for decision onthis issue after hearing both sides. 7. As already stated the issue raised in I.T.Appeal 640/2009filed by the revenue is the same as in the case decided above andboth the companies are stated to be related companies of the samegroup. Tribunal allowed assessee's appeal by reversing the order ofthe CIT (Appeal) following their decision in ITA 1470/2009 which wehave reversed vide above judgment. Since the facts are the samefollowing our above judgment we allow this appeal also by reversingthe order of the Tribunal and by restoring the order of the CIT(Appeal) confirming the assessment. ITA 640 & 1470/2009 8. Counsel appearing for the assessee in I.T.A.1470/2009contended that the computation of capital gains under Section 50Bby the Assessing Officer itself is not correct and there was nooccasion to consider the correctness of computation by any of theappellate authorities because issue happened to be decided in theirfavour by the first appellate authority and the Tribunal. We giveone more opportunity to the assessee to raise this issue before theA.O. if the Tribunal upholds the income escaping assessments andremands the matter for revision of assessment in terms of ourjudgment. ITA 640 & 1470/2009 8. Counsel appearing for the assessee in I.T.A.1470/2009contended that the computation of capital gains under Section 50Bby the Assessing Officer itself is not correct and there was nooccasion to consider the correctness of computation by any of theappellate authorities because issue happened to be decided in theirfavour by the first appellate authority and the Tribunal. We giveone more opportunity to the assessee to raise this issue before theA.O. if the Tribunal upholds the income escaping assessments andremands the matter for revision of assessment in terms of ourjudgment. C.N.RAMACHANDRAN NAIR Judge jj K. SURENDRA MOHANJudge