Triune Projects Private Limited v. Deputy Commissioner Of Income Tax

$~3 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 448/2016, CM APPL.26426/2016 TRIUNE PROJECTS PRIVATE LIMITED..... AppellantThrough:Mr. Tarun Gulati with Mr. Rony OJohn, Mr. Shashi Mathews andMs. Rachana Yadav, Advocates. Versus DEPUTY COMMISSIONER OF INCOME TAX ..... RespondentThrough:Mr. Zoheb Hossain, Sr. StandingCounsel. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE NAJMI WAZIRIO R D E R%22.11.2016 1.Admit. 2.The question of law is “whether in the circumstances of the case theIncome Tax Appellate Tribunal (ITAT) fell into error in holding that theassessee’s transactions of sale to Triune Energy Services Pvt. Ltd. (hereafterreferred to as ‘buyer’) is not a genuine slump sale to qualify treatment underSection 50B of the Income Tax Act, 1961”. 3.The assessee is engaged in the business of design, engineering andconsultancy in the oil and gas (both onshore and offshore), petroleumrefinery and allied sector.It provides a range of services starting fromconcept or project which includes feasibility study, process design and detailengineering procurement services, construction supervision etc.On22.09.2006 it entered into a Slump Sale Agreement (hereafter referred to as‘the agreement’) with the buyer.The agreement had the effect of transferring the business undertaking entered by the appellant/assessee as agoing concern.All tangible assets and liabilities together with goodwillwere conveyed for a lump sum consideration of `45.85 crores. The net bookvalue of the assets so transferred was `5.27 crores. In the return filed by theassessee on 10.11.2007 it declared a corresponding income and since itsundertaking had been in existence for more than three years it computedlong term capital gains under Section 50B and offered 20% of it as tax. 4.The assessee’s claim was selected for scrutiny during which it reliedupon the agreement dated 22.09.2016 and its various terms. The AssessingOfficer (AO) rejected the assessee’s claim holding inter alia that the slumpsale tax claim was a “sham transaction” designed to avoid tax liability byartificially inflating assets value and that the assets so transferred were shortterm in nature.The AO decided that the considerations, i.e., lump sumamount received was income from other sources and directed a higher rateof tax. 5.The assessee unsuccessfully appealed to the Commissioner of IncomeTax (Appeals) [CIT(A)], who upheld the finding that the transaction was notgenuine and so had colourable device. The assessee accordingly appealed tothe ITAT.In the meanwhile, parallelly the buyer, which was formerlyknown as ‘Saipem Triune Engineering Private Limited’, preferred an appealto the ITAT against a similar finding that the transaction was colourable andthere was no expression of slump sale which resulted in purchase of suchassets. The ITAT, on that occasion, in its order made in the buyer’s appeal,accepted the genuineness of this slump sale agreement of 22.09.2006 and setaside the findings of the AO and the CIT(A).The ITAT, however,remanded the matter with respect to valuation of goodwill to the AO. The buyer, therefore, appealed to this Court. By judgment and order reported asTriune Energy Services Pvt. Ltd. Vs. Deputy Commissioner of IncomeTax, 2015-TIOL-2701-HC-Del-IT, it was held that the finding of the ITATwith respect to the genuineness of slump sale was on account of a crossappeal by the Revenue on this point. buyer, therefore, appealed to this Court. By judgment and order reported asTriune Energy Services Pvt. Ltd. Vs. Deputy Commissioner of IncomeTax, 2015-TIOL-2701-HC-Del-IT, it was held that the finding of the ITATwith respect to the genuineness of slump sale was on account of a crossappeal by the Revenue on this point. 6.On the other issue of the remit (for which the assessee had appealed),this Court held that goodwill was an intangible asset and the question of itsvaluation, in any manner, other than the one disclosed by the assessee couldnot have arisen.In so holding, this Court relied upon the decision of theSupreme Court in Commissioner of Income Tax Vs. Smifs Securities Ltd.348 ITR 302 (SC).Besides, the Court also noted the relevant FinancialReporting Standard i.e., No. 10 and the Accounting Standard issued by theChartered Accountants of India.Therefore, the Court concluded that theexcess consideration paid over and above the value of the net tangible asset,was none other than the value of the goodwill. 7.The ITAT, in the present case, negated the ruling of the CIT(A),which had concluded that the slump sale reported by the assessee here wasnot genuine. It was apprised of its previous ruling, in the buyer’s case whichhad, in effect, rejected the Revenue’s contention that the agreement was adevice or a “sham transaction”. The ITAT was made aware of the judgmentof this Court in Triune’s case (supra), however, it held as follows:- “29.We, however, find that in the meanwhile theCoordinate Bench of the ITAT, Delhi in the case ofpurchaser i.e. Saipem Triune Engg. Pvt. Ltd. vs. DCIT(supra) has given its finding on the genuineness of thesame agreement dated 22.9.2006 between STEP and thepresent assessee following the decision of Hon'blejurisdictional High Court of Delhi in the case of Triune Energy Services Pvt. Ltd. vs. DCIT & Ors. (supra). Wethus in the interest of justice set aside the matter to thefile of the Assessing Officer to decide the issue afresh inview of the above submission of the assessee and thedecisions cited above, after affording oppo1iunity ofbeing heard to the asesse, as the submissions of assesseebefore us meeting out the above objections raised by theLd. CIT(A) reproduced in para no. 28 above, needfactual' verification in view of the above cited decisionsto arrive at a just and proper conclusion on the issue. Theground No.2 of the appeal of the assessee is thus allowedfor statistical purposes.” 8.It is contended by the assessee that the question of remitting thematter, as was sought to be done by the impugned order, does not arise andthat the previous ruling in Triune’s case (supra) concludes the same entirelyin its favour. 9.Learned counsel relied upon the operative portion of the judgment inthat case and stated that a transaction held to be not a device or a sham, inthe hands of one of the parties cannot transform itself to a suspect and asham transaction in the hands of the other party. Accordingly, the Revenuehighlighted that the remittance order should be upheld. He highlighted thatthere are certain other aspects which cannot be papered over; the principleone being that the entire undertaking was not transferred to the buyer. It wassubmitted that two assets i.e. one in the form of bad debt and another shownto be written off were retained by the seller. In the circumstances the entire“undertaking was not sold”. To satisfy the pre-requisites of a slump sale, asdefined in Section 2(42C) of the Act, the undertaking had to be transferredas a whole. 10.At the outset, this Court is of the opinion that the ITAT entirelymisdirected itself in its interpretation of the previous judgment in Triune’scase (supra). This Court had affirmed the decision of the ITAT to the effectthat the transaction was not a sham or was not a colourable device. In thesecircumstances, unless there are exceptional facts to the contrary, the samefinding has to be maintained in the case of the seller – which the assesseetoo was. So far as the Revenue’s contentions with respect to the retention oftwo assets that were not sold as a part of the going concern by the assessee isconcerned, we find the argument is insubstantial. The sale transaction wasreported for a total consideration of Rs.45.83 crores.The sale was for agoing concern, which included ongoing service contracts, employmentcontracts and other tangible assets, and intangible assets such as technicalknow-how etc. To expect a purchaser to buy and pay value for defunct orsuperfluous assets flies in the face of commercial sense. Unfortunately, theRevenue’s understanding is that in a going concern the buyer is bound topay good money, transact and purchase bad and irrecoverable debts.Notonly does it fly in the face of common and commercial understanding, but itis not even a pre-condition , as is evident from the definition of“undertaking”, cited in Explanation (1) to Section 2 (19) (A) of the Act.11.This definition of “undertaking” is what has been engrafted into byreference, under Section 2(42C) of the Act. Therefore, if certain assets orproperties are left out because they would cause inconvenience or lead tosome kind of a trouble for the purchasing party, it is well within its right toexclude it from the list of assets. 12.For these reasons, the revenue’s contentions are rejected. 13.For the foregoing reasons, the appeal has to succeed; question of lawframed has to be answered in favour of the assessee and against the renue. Itis so answered.Accordingly, it is held that the slump sale qualifies fortreatment under Section 50(B) of the Act.14.The appeal is consequently allowed and CM No.26426/2016 standsdisposed off. S. RAVINDRA BHAT, J. NOVEMBER 22, 2016sb NAJMI WAZIRI, J.