2003 (4) TMI 43 - HC - Income Tax

Capital gain - sale of entire business as a going concern for a lump sum consideration - in this case there was a transfer of the Kalyan business as a going concern to PPL and that the Tribunal erred in holding that there was a sale of itemized assets - sale of entire business as a going concern amounted to a slump sale and capital gain liable to be computed on that basis

Issues Involved:
1. Whether the transaction of sale of Kalyan business was a slump sale or a sale of itemized assets.
2. Whether the lump sum consideration of Rs. 210 crores is apportionable to different assets and if the value of individual assets is ascertainable.
3. Whether the apportionment of Rs. 210 crores done by the transferee-company for its accounting purposes should be taken by the Assessing Officer for working out the depreciation allowable to the assessee-company.

Detailed Analysis:

1. Whether the transaction of sale of Kalyan business was a slump sale or a sale of itemized assets:
The court analyzed the MOU dated March 11, 1993, the supplemental MOU dated May 17, 1994, the joint venture agreement dated October 19, 1994, and the slump sale agreement dated January 6, 1995, to determine the nature of the transaction. The MOU indicated the intention to transfer the Kalyan business as a whole for Rs. 210 crores, including the facilities at Kalyan, Kurla, and Pune. The supplemental MOU and joint venture agreement further confirmed this intention by detailing the steps to transfer the entire Kalyan business to the joint venture company (KMCL, later PPL). The slump sale agreement specified the transfer of the Kalyan business as a going concern, including all assets and liabilities, for Rs. 210 crores plus the value of net current assets. The court found that the entire arrangement indicated a transfer of the Kalyan business as a whole, not a sale of itemized assets. The court noted that the valuation of individual assets was not intended by the parties and that the lump sum price was for the entire business, including intangible assets like licenses and quotas. Therefore, the court concluded that the transaction was a slump sale.

2. Whether the lump sum consideration of Rs. 210 crores is apportionable to different assets and if the value of individual assets is ascertainable:
The court found that the lump sum consideration of Rs. 210 crores was not intended to be apportioned to different assets. The MOU, supplemental MOU, and joint venture agreement did not provide for the valuation of individual assets. The court noted that the due diligence exercise mentioned in the supplemental MOU was for verifying the condition of assets, not their valuation. The court also found that the Assessing Officer had arbitrarily assigned sale values to land, building, plant, and machinery without considering intangible assets like intellectual property and licenses. The court held that the lump sum price was for the entire Kalyan business and that the value of individual assets was not ascertainable. Therefore, the court concluded that the lump sum consideration was not apportionable to different assets.

3. Whether the apportionment of Rs. 210 crores done by the transferee-company for its accounting purposes should be taken by the Assessing Officer for working out the depreciation allowable to the assessee-company:
The court held that the apportionment of Rs. 210 crores done by the transferee-company (PPL) for its accounting purposes could not be used by the Assessing Officer to determine the depreciation allowable to the assessee-company (PAL). The court noted that the valuation of assets done by the transferee was for its accounting purposes and not for determining the sale value of individual assets. The court emphasized that the sale was a slump sale, and the entire business was transferred for a lump sum price. Therefore, the court concluded that the apportionment done by the transferee-company should not be used by the Assessing Officer for working out the depreciation.

Conclusion:
The court concluded that the transaction was a slump sale and not a sale of itemized assets. The lump sum consideration of Rs. 210 crores was not apportionable to different assets, and the apportionment done by the transferee-company for its accounting purposes should not be used by the Assessing Officer for working out the depreciation. The court allowed the appeal and remanded the matter back to the Assessing Officer to compute the quantum of capital gains and depreciation based on the principles laid down in the judgment.

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