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2008 (2) TMI 649 - AT - Income TaxApplicability of section 50 - Capital gains - slump sale or going concern in the agreement of undertaking - genuineness of the agreement - sale agreement is a colourable device - HELD THAT - We are unable to agree with this allegation of the ld. DR. The agreement is a valid document which has been acted upon between the parties. The Assessing Officer has also not doubted the genuineness or the validity of the agreement. He has computed the short-term capital gain under section 50 as per the sale consideration mentioned in the agreement. Merely because the agreement to sale is with a subsidiary it cannot be presumed that it is a colourable device. The agreement has been acted upon between the parties and the units under consideration has been transferred on the basis of the sale agreement. In view of above we reject the contention of the ld. DR that the sale agreement is a colourable device. We find that the fertilizer business of the assessee has been transferred as a going concern to CCFC. All assets and liabilities relating to fertilizer business has been transferred only assets excluded are bank balance and the outstanding insurance claim on the date of transfer. Merely because these two assets have been excluded from the assets transferred it cannot be said that it is not the transfer of the undertaking as a going concern . Land building plant machinery raw material industrial licences technology trademark have been transferred to CCFC. The employees of the assessee working in fertilizer business have also been taken over by the CCFC. All current liabilities relating to fertilizer business has been taken over by CCFC. The sale consideration of the undertaking as a whole has been fixed at a slump price without specifying any specific value to any asset. The assets transferred includes tangible as well as intangible asset. Moreover the seller i.e. the assessee has also agreed for not carrying on the similar business of manufacturing and marketing of urea fertilizer for a period of 10 years. We are of the opinion that it is a case of slump sale of undertaking as a going concern and not the sale of depreciable assets within the meaning of section 50 of the Income-tax Act. We therefore agree with the ld. CIT(A) that the Assessing Officer was not justified in applying the provisions of section 50 of the Income-tax Act. slump sale of undertaking the capital gain is chargeable on the sale of undertaking as a unit being a capital asset - As per section 48 it is clear that for determining the capital gain from the full value of the consideration received or accruing as a result of transfer of capital asset cost of acquisition of asset as well as cost of any improvement of such asset is to be reduced. If cost of improvement of a particular asset cannot be ascertained than capital gain cannot be computed. While taking this view we derive support from the decision of Hon ble Apex Court in the case of B.C. Srinivasa Setty 1981 (2) TMI 1 - SUPREME COURT relied upon by the ld. Counsel for the assessee. The ITAT Hyderabad Bench in the case of Coromandel Fertilisers Ltd. 2003 (11) TMI 303 - ITAT HYDERABAD-B held that it is not possible to determine the cost of improvement of an undertaking specially when undertaking has so many intangible asset like trademark licence goodwill etc. We entirely agree with the above conclusion of the ITAT Hyderabad Bench. In view of above we respectfully following the decision of Hyderabad Bench in the case of Coromandel Fertilisers Ltd. (supra) uphold the order of the ld. CIT(A) and dismiss the revenue s appeal. In the result revenue s appeal is dismissed.
Issues Involved
1. Applicability of Section 50 for the sale of depreciable assets. 2. Classification of the sale as a "slump sale" or individual asset sale. 3. Computation of capital gains tax under Section 45 read with Section 48. 4. Allegation of the sale agreement being a colorable device to avoid tax. 5. Determination of cost of acquisition and cost of improvement for capital gains computation. Detailed Analysis 1. Applicability of Section 50 for the Sale of Depreciable Assets The revenue contended that the sale of the assessee's fertilizer and fiber units should be treated under Section 50 of the Income-tax Act, which pertains to the sale of depreciable assets. The Assessing Officer treated the entire sale consideration towards the sale of depreciable assets and calculated short-term capital gains accordingly. However, the CIT(A) held that the sale was a "slump sale" of the units as a going concern, making Section 50 inapplicable. 2. Classification of the Sale as a "Slump Sale" or Individual Asset Sale The CIT(DR) argued that the sale was not a slump sale because some assets were excluded, and the sale was to a subsidiary of the assessee-company, suggesting it was a colorable device to avoid capital gains tax. The CIT(A) and the Tribunal disagreed, noting that the agreement was genuine and acted upon. The sale included all assets and liabilities related to the units, except for bank balances and outstanding insurance claims, indicating a "slump sale" of the undertaking as a going concern. 3. Computation of Capital Gains Tax under Section 45 Read with Section 48 The revenue argued that even if it was a slump sale, capital gains should be computed on the sale of the undertaking as a whole. The Tribunal referred to various cases, including Raka Food Products, Shahibaug Entrepreneurs (P.) Ltd., and P.N.B. Finance Ltd., to discuss the computation of capital gains in slump sales. The Tribunal concluded that it is not possible to determine the cost of improvement for intangible assets like goodwill, trademarks, and licenses, which are part of the undertaking, making the computation of capital gains under Section 48 infeasible. 4. Allegation of the Sale Agreement Being a Colorable Device to Avoid Tax The CIT(DR) alleged that the sale agreement was a colorable device to avoid capital gains tax. However, the Tribunal found no merit in this allegation. The agreement was valid, genuine, and acted upon, and the sale was not merely a transfer of depreciable assets but a transfer of the entire undertaking as a going concern. 5. Determination of Cost of Acquisition and Cost of Improvement for Capital Gains Computation The Tribunal noted that for computing capital gains under Section 48, both the cost of acquisition and the cost of improvement must be determined. However, in the case of a slump sale involving intangible assets, it is challenging to ascertain the cost of improvement. The Tribunal referred to the Supreme Court's decision in CIT v. B.C. Srinivasa Setty and the ITAT, Hyderabad Bench decision in Coromandel Fertilisers Ltd., which held that if the cost of improvement cannot be determined, capital gains tax cannot be levied. Conclusion The Tribunal upheld the CIT(A)'s decision, agreeing that the sale was a slump sale of the undertaking as a going concern and not merely a sale of depreciable assets under Section 50. It also agreed that the computation of capital gains was not feasible due to the inability to determine the cost of improvement for intangible assets. Consequently, the revenue's appeal was dismissed.
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