M/S.sanmar Speciality Chemicals Limited v. The Assistant Commissioner Of Income-Tax/Deputy Commissioner Of Income Taxcompany Circle Vi(1)Chennai – 600 034

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 07.07.2020 CORAM THE HON'BLE MR. JUSTICE T.S.SIVAGNANAMANDTHE HON'BLE MRS.JUSTICE V.BHAVANI SUBBAROYAN TAX CASE (APPEAL) NO.42 OF 2018 M/s.Sanmar Speciality Chemicals Limited,9, Cathedral Road,Chennai – 600 086 ...Appellant/Respondent -vs- The Assistant Commissioner of Income-tax/Deputy Commissioner of Income TaxCompany Circle VI(1)Chennai – 600 034. ...Respondent/Appellant Tax Case (Appeal) filed under Section 260A of the Income TaxAct, 1961, against the common order of the Income Tax AppellateTribunal'C'Bench, Chennai, dated18.08.2017, inITA.No.738/Mds/10 for Assessment year 2007-08 against the orderof the Commissioner of Income Tax(Appeals)-V, Chennai-34, dated15.02.2010 made in ITA 284/09-10, against the order of theAdditional Commissioner of Income Tax, Company Range VI,Chennai-34, dated 31/12/09 made in order PAN No. forthe Assessment year 2007-08. This appeal by the Assessee filed under Section 260A of theIncome Tax Act, 1961 (the Act for brevity) is directed againstthe order passed by the Income Tax Appellate Tribunal Madras,'C' Bench, in ITA.No.738/Mds/10, for the assessment year 2007-08. https://hcservices.ecourts.gov.in/hcservices/ 2. The Tax Case Appeal was admitted on 07.06.2019 on thefollowing substantial questions of law:- “(i)Whether on the facts and circumstancesof the case, the tribunal was right in holdingthat the transfer of the division is to betreated as a 'slump sale' and not sale ofindividual items?(ii)whether on the facts and circumstancesof the case, the Tribunal was right in holdingthat provisions of Section 50B are attracted incomputing the capital gains arising fromtransfer of API division as a going concern?” 3. The facts leading to this appeal are briefly stated ashereunder. The assessee filed return of income on 29.10.2007for the assessment year 2007-08, admitting an income ofRs.2,43,99,239/- and book profit under Section 115JB admitted isRs.30,52,48,255/-. The scrutiny assessment was undertaken andan order was passed under Section 143(3) on 31.12.2009disallowing/adding among others, treating the sale of APIdivision as a “slump sale” as against individual sale. Duringthe previous year, relevant to the assessment year 2007-08, theassessee sold one of its divisions namely API division for atotal sale consideration of Rs.5,554.18 lakhs. According to theassessee the break-up of the consideration received is ashereunder:- 4. The Assessing Officer issued show cause notice callingupon the assessee as to why the sale should not be treated as“slump Sale” and the profits arising out of such sale should notbe treated as 'Capital Gains' under Section 50B of the Act. Theassessee was called upon to furnish in the case of depreciableassets, the written down value, (WDV) of the block of assetsdetermined in accordance with the provisions of the Act. Theassessee replied stating that the sale is not a 'slump sale' byreferring to the various clauses in the agreement, enclosed acopy of the sale bill dated 08.02.2007, wherein the amounts werementioned as referred above. The assessee also pointed out as 4. The Assessing Officer issued show cause notice callingupon the assessee as to why the sale should not be treated as“slump Sale” and the profits arising out of such sale should notbe treated as 'Capital Gains' under Section 50B of the Act. Theassessee was called upon to furnish in the case of depreciableassets, the written down value, (WDV) of the block of assetsdetermined in accordance with the provisions of the Act. Theassessee replied stating that the sale is not a 'slump sale' byreferring to the various clauses in the agreement, enclosed acopy of the sale bill dated 08.02.2007, wherein the amounts werementioned as referred above. The assessee also pointed out as to the obligations on the seller as could be culled out from theagreement. Further, it was stated that the API division becamepart of the company in 1999 and no separate depreciationschedule is prepared for that unit, as the company has not optedfor the benefit of Section 50B. The working for division wiseIncome Tax depreciation is only academic. Further, it wasstated that the sale value was reduced from the respectiveblocks and whenever the resultant figures were negative, thesame was offered as short-term Capital Gains under Section 50and the sale of land was treated as long-term capital gains andas the tax payable under Section 115JB was higher than the taxpayable under normal method, the tax was paid under Section115JB. The Assessing Officer completed the assessment underSection 143(3) by order dated 31.12.2009, disallowing the sameon the ground that as per the agreement, the sale is entered asa going concern and this will clearly fall within the definitionof “slump sale”. Further, the Assessing Officer held that thereis no mention of the individual values in the agreement, whichwas entered into by the assessee. The various clauses in theagreement, which were referred to by the assessee were stated tobe of no assistance to the assessee to get their case outsidethe purview of a “slump sale”. Aggrieved by such order, theassessee preferred appeal before the Commissioner of Income-tax(Appeals-V), Chennai (CIT(A)), who by order dated 15.02.2010,allowed the appeal. Aggrieved by the same, the Department filedappeal before the Tribunal, which was allowed by the impugnedorder and this is how the assessee is before us by way of thisappeal. 5. We have elaborately heard Mr.R.Vijayaraghavan, learnedcounsel for the appellant/assessee and Mr.J.Narayanaswami,learned Senior Standing Counsel for the respondent/revenue. 6. The short issue, which falls for consideration iswhether the Tribunal was right in affirming the order passed bythe Assessing Officer and holding that the transfer of thedivision is to be treated as a 'slump sale' and not sale ofindividual items and consequently, Section 50B of the Act wasattracted. It is noteworthy to point out that when the assesseefiled appeal before the CIT(A), the following grounds wereraised:- “(b) The transfer of the Undertaking was doneon individualized method and not on the basis oflump sum consideration. In other words, theconsideration of Rs.55.54 Crores was towards thefollowing items as set out in the agreement. (c) In terms of Clause 5.2(h) of the BusinessPurchase Agreement dated February 07, 2007, theSeller (i.e. Appellant) needs to deliver the SaleBill covering all the Assets other than thefreehold property to the buyer (i.e. M/s.ActavisPharmaManufacturingPrivateLimited).Accordingly, the Appellant issued Sale Bill dated08.02.2007, under reference INV NO/MISC/001.(Copy of the Sale Bill enclosed as Annexure-I).In this bill, the Sale Value assigned to variousassets are as under:-Net Current Assets 3,00,00,000*Patent - 1,000-Furniture and Fixtures 34,00,000Plant and Machinery - 43,40,99,000 ____________Total- 46,75,00,000 ____________ *Post Closing, the Appellant received anAdditional amount of Rs.154.18 lacs as per Clause (c) In terms of Clause 5.2(h) of the BusinessPurchase Agreement dated February 07, 2007, theSeller (i.e. Appellant) needs to deliver the SaleBill covering all the Assets other than thefreehold property to the buyer (i.e. M/s.ActavisPharmaManufacturingPrivateLimited).Accordingly, the Appellant issued Sale Bill dated08.02.2007, under reference INV NO/MISC/001.(Copy of the Sale Bill enclosed as Annexure-I).In this bill, the Sale Value assigned to variousassets are as under:-Net Current Assets 3,00,00,000*Patent - 1,000-Furniture and Fixtures 34,00,000Plant and Machinery - 43,40,99,000 ____________Total- 46,75,00,000 ____________ *Post Closing, the Appellant received anAdditional amount of Rs.154.18 lacs as per Clause 3.1 of Business Transfer Agreement. (d) As per Clause 5.2(c) of the BusinessPurchase Agreement dated February 07, 2007, theSeller (ie Appellant) need to execute in favour ofthe Buyer, Sale Deed for the Conveyance,Assignment or Transfer of Freehold Property. TheValue at which the Land and Building weretransferred were:- Rs.Land- 3,00,00,000-Building4,25,00,000__________-Total7,25,00,000__________ (e) As the Appellant had valued each categoryof asset as above, the Sale Value was reduced fromthe respective blocks, and wherever the resultingfigures exceeded block value, the same was offeredas Short Term Capital Gains under Section 50 ofthe Income Tax Act, 1961. Sale of Land wastreated as Long Term Capital Gain. (f) The Appellant during the course ofassessment proceedings on 01.12.09 and 26.11.2009,submitted a detailed note substantiating thereason for treating the Sale as IndividualizedSale. (g) The learned Additional Commissioner ofIncome Tax brushed aside the submissions of theAppellant and treated the Individualized Sale asSlump Sale under Section 50B of the Income TaxAct, 1961. 7. The CIT(A) while considering the correctness of thesubmissions made by the assessee rendered the following factualfinding:- 6.1.15. In terms of Clause 5.2(h) of the BTAdated February 07, 2007, the Seller (i.e.Appellant) needs to deliver the Sale Billconveying all the Assets other than the freeholdproperty to the buyer. Accordingly, the Appellantissued Sale Bill dated 08.02.2007, under referenceINV NO/MISC/001. In this bill, the Sale Valueassigned to various assets are as under: Rs.Net Current Assets - 3,00,00,000*-Patents 1,000-Furniture and Fixtures 34,00,000Plant and Machinery - 43,40,99,000 ____________-Total 46,75,00,000 ____________ * Subject to the Adjustment to be made as perclause 3.1 of Business Transfer Agreement.(The above document was provided to me asAnnexure 5 to paper book presented during thecourse of hearing). 6.1.16. Further in terms of Clause 5.2(c) ofthe BTA dated February 07, 2007, the Seller (iethe Appellant) needs to execute the Sale Deed inthe agreed form for assignment of patents. Theform was provided as Annexure – 11, to theagreement and this contained value of patentsalso. (This document was provided to me as Annexure 6 to paper book during the course ofhearing). 6.1.17. Further as per Clause 5.2(c) of theBTA dated February 07, 2007, the Seller (ieAppellant) need to execute in favour of the Buyer,Sale Deed for the Conveyance, Assignment toTransfer of Freehold Property. The Value at whichthe Land and Building were transferred were: Rs.Land- 3,00,00,000-Building4,25,00,000 __________ -Total7,25,00,000 __________ 6.1.16. Further in terms of Clause 5.2(c) ofthe BTA dated February 07, 2007, the Seller (iethe Appellant) needs to execute the Sale Deed inthe agreed form for assignment of patents. Theform was provided as Annexure – 11, to theagreement and this contained value of patentsalso. (This document was provided to me as Annexure 6 to paper book during the course ofhearing). 6.1.17. Further as per Clause 5.2(c) of theBTA dated February 07, 2007, the Seller (ieAppellant) need to execute in favour of the Buyer,Sale Deed for the Conveyance, Assignment toTransfer of Freehold Property. The Value at whichthe Land and Building were transferred were: Rs.Land- 3,00,00,000-Building4,25,00,000 __________ -Total7,25,00,000 __________ 6.1.18. From the above document forming partof the BTA, it is clear that the Appellant hasassigned separate values for immovables consistingof land and building and movables consisting ofFurnitures and fixtures, Plant and Machinery,patents, Net current assets. Thus theconsideration for transfer cannot be called as alump sum consideration.” 8. From the above finding, it is seen that the CIT(A) notonly analysed the conditions contained in the agreement, butalso referred to the sale bills, which were provided as anannexure to the paper book, which was presented before the CIT(A) during the course of hearing. After considering thosedocuments, the CIT(A) rendered a factual finding that theassessee has assigned separate values for the immovablesconsisting of land and building and movables consisting offurnitures and fixtures, plant and machinery, patents, netcurrent assets and therefore, concluded that the considerationfor transfer cannot be called as a lump sum consideration. TheCIT(A), thereafter, proceeded to refer to a few decisions of theTribunal and held that the sale effected by the assessee doesnot constitute “slump sale” as per Section 2(42C) of the Act andhence the provisions of Section 50B will not be applicable. TheRevenue preferred appeal before the Tribunal. On a perusal ofthe grounds of appeal, we find that all that the Revenue statedwas that CIT(A) erred in holding that the sale effected by theassessee does not constitute “slump sale” as per Section 2(42C)of the Act and hence provisions of Section 50B will not beapplicable. The same grounds have been repeated, but not in thesame format, but by adopting a different style. What isrelevant to note is that the factual findings recorded by CIT(A)was not disputed by the Revenue before the Tribunal. During thecourse of argument, the Department representative submitted thatthe assessee never assigned any value to the individual assets in the agreement for sale. The argument has been referred to bythe Tribunal in paragraph 11 of its order. However, the factremains that though the individual value is not contained in theagreement, materials were placed by the assessee which has beenclearly brought out by the CIT(A) in its order dated 15.02.2020,relevant portion of which we have extracted above. Therefore,the Revenue proceeded on a wrong footing, ignored the documentsproduced by the assessee both before the Assessing Officer aswell as before the CIT(A) and continued to reiterate the standthat there is no separate value given for the individual assetsin the agreement. The assessee pointed out that the CIT(A) hasrecorded a factual finding as to how the individual assets havebeen valued. Unfortunately, the Tribunal did not undertake anyexercise to examine the correctness of the contentions raised bythe assessee, in fact, the Tribunal ought to have noted that theRevenue never disputed the facts which were recorded by the CIT(A) showing that the individual assets were separately valued,though not specified in the agreement for sale. 9. It is the argument of Mr.J.Narayanaswami, the learnedSenior Standing Counsel that if the Tribunal had failed to do sothen, it is a fact finding exercise and at best, the matterneeds to be remanded for a fresh exercise. 10. In our considered view, the substantials question oflaw framed for consideration in this appeal undoubtedly aremixed questions of fact and law. If there is a perversity inthe approach of the authorities or the lower forum with regardto the factual aspect, if the authorities failed to take note ofimportant evidence placed by the assessee or if there ismisinterpretation of such important evidence, then, as anappellate court, such error can be corrected, as it is an errorof law and not an error of fact. The question of remanding thematter to the Tribunal for fresh consideration would not arisefor the simple reason that the fact that the individual assetswere separately valued as recorded by the CIT(A) was neverdisputed by the Revenue before the Tribunal. Therefore, on suchadmitted facts, if we examine the finding of the Tribunal, moreparticularly, in paragraph 13 of the order, we find that thesame calls for interference. 11. In Commissioner of Income Tax vs. Artex ManufacturingCompany, reported in (1997) 272 ITR 0260, the substantialquestion of law, which was involved was whether the surplus as aresult of difference between the written down value and the saleconsideration from the plant, machinery and dead stocktransferred by the assessee is taxable under Section 41(2) ofthe 1961 Act (pari materia to Section 50 of the Amended Act).While answering the question as to whether if the surplus isfound to be taxable, whether it should be taxed under Section 41 https://hcservices.ecourts.gov.in/hcservices/ (2) or under the head “capital gains”, the assessee pointed outthat the value of the plant, machinery and dead stock though notmentioned in the agreement, but information was furnished by theassessee before the Income Tax Officer from which it becameevident that the plant, machinery and dead stock were separatelyvalued and therefore, it was held that it is not a case in whichit cannot be said that the price attributed to the itemstransferred is not indicated and hence Section 41(2) of the 1961Act cannot be applied. This decision would clearly support thecase of the assessee, who had succeeded before the CIT(A) byestablishing that the individual assets were separately valuedand documents to the said effect were produced. Added to thatthe Revenue did not dispute such a factual position before theTribunal and consequently, the finding rendered by the Tribunaldoes not merit acceptance. 12. For all the above reasons, the Tax Case Appeal isallowed, the order passed by the Tribunal is set aside and theorder passed by the CIT(A), dated 15.02.2010 is restored and thesubstantial questions of law are answered in favour of theassessee. No costs. Sd/- Assistant Registrar(CO)MDU Sub Assistant Registrar //True Copy// pbn To 1.The Income Tax Appellate Tribunal Chennai Bench 'C', Chennai. 2. Commissioner of Income-tax (Appeals-V), Chennai 3.The Assistant Commissioner of Income-tax/Deputy Commissioner of Income TaxCompany Circle VI(1)Chennai – 600 034. Tax Case (Appeal) No.42 of 2018 VG II (CO)KKV/19/08/2020