2007 (8) TMI 486 - AT - Income Tax

Slump sale of business as a going concern - Taxable under Capital Gain or Business Income - Business of software development and developed technical knowledge and know-how of its own - intangible assets and M/s. Rohan Software Pvt. Ltd. (RSPL) transferred for a consideration to M/s. ICICI Infotech Services Ltd. (IISL) - HELD THAT - We find that the decisions relied upon by the learned DR and the revenue authorities, i.e., Anand Electric Co. Ltd. v. CIT 1998 (11) TMI 106 - BOMBAY HIGH COURT and CIT v. Artex Mfg. Co. 1997 (7) TMI 7 - SUPREME COURT , were decided before the introduction of section 50B by the Finance Act, 1999, with effect from 1-4-2000 and also the definition of slump sale in the newly inserted section 2(42C), which came into effect from 1-4-2000. Therefore, the decisions relied upon by the ld revenue authorities cannot be applied in the instant case of the assessee. slump sale has been defined as transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. In the instant case of the assessee, though in the purchaser s books of account the individual assets have been priced independently, assessee had not assigned separate values and cones-quently sold the items for independent price. It is not the revenue s case also that individual assets had the price fixed separately and charged. Undertaking is explained in Explanation 1 to section 2(19AA). According to this Explanation, as we noted, includes any part of an undertaking or a unit or division of an undertaking or a business activity as a whole. Revenue s case is that some of the items like motor car and building has been retained by the assessee; as such this cannot be treated as a slump sale. But the fact to be considered is assessee is in the field of intellectual property rights. Computers, furniture, etc. which is linked with the business of the assessee has been sold. The items that the assessee kept separately, has nothing to do with assessee s business, which is sold/handed over to the purchaser, i.e., IISL. The business has been sold. The purchaser could very well carry on the business, which was carried by the assessee before the sale, without purchasing any independent items. Thus, the plea of the revenue that the assessee has not sold the undertaking as a whole, is difficult to accept. One of the objections of the revenue is that when the assessee started the business, the professional receipt was less than Rs. 3 lakhs. Now it is more than Rs. 84 lakhs. The growth within a short period of three and half years is commendable. Many of the developments in the field, definitely, according to the revenue, would have taken place within a period of less than thirty six months and therefore, it cannot be treated as long-term capital gain. We are unable to accept this view of the revenue as well. A businessman does the business every day. If some of the items that are developed subsequently within less than thirty six months if sold, it cannot be taken independently. Assessee is selling the business as a whole. It is not part by part, bit by bit and as such, this contention of the revenue is without merit. Hence, the appeal by the assessee on this ground is allowed. In the result, appeal of the assessee stands allowed in part.

Issues Involved:
1. Reopening of assessment under section 147 of the Income-tax Act, 1961.
2. Nature of receipt of Rs. 1.78 crores: whether it is a capital gain or business income.
3. Classification of the sale as a slump sale or not.
4. Determination of the gain as long-term or short-term capital gain.
5. Penalty under section 271(1)(c) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee filed a return on 29-5-2000, declaring an income of Rs. 9,55,370. The assessment was reopened under section 147 based on the belief that Rs. 1.78 crores received from M/s. ICICI Infotech Services Ltd. had escaped assessment. The assessee contended that the reopening was unlawful as the reasons for reopening were not provided. The Tribunal rejected this argument, citing the Delhi Bench decision in the case of ITO v. Smt. Gurinder Kaur, and upheld the reopening of the assessment.

2. Nature of Receipt of Rs. 1.78 Crores:
The primary dispute was whether the receipt of Rs. 1.78 crores was a capital gain or business income. The Assessing Officer (AO) argued that the consideration was for utilizing the services of two directors and their intellectual property, thus treating it as business income. The assessee contended that it was a capital gain from the sale of business assets. The Tribunal examined the details and upheld the AO's view that it was a revenue receipt taxable as business income.

3. Classification of the Sale as a Slump Sale:
The assessee argued that the sale was a slump sale of its business as a going concern, which should be treated under section 50B of the Act. The AO and CIT(A) rejected this contention, stating that not all assets were transferred, and individual values were assigned to certain assets. The Tribunal, however, found that the entire business, including intellectual properties, codes, formulae, designs, etc., was transferred, except for a few assets like the building and car. The Tribunal concluded that the transaction was indeed a slump sale as defined under section 2(42C) and section 2(19AA) of the Act.

4. Determination of the Gain as Long-term or Short-term Capital Gain:
The AO alternatively held that if the transfer was considered a capital asset transfer, it should be treated as short-term capital gain since the specialized skills were developed within three years. The Tribunal disagreed, noting that the business was operational for over thirty-six months, making it a long-term capital gain. The Tribunal emphasized that the sale was of the business as a whole, not individual assets, thus qualifying it as a long-term capital gain.

5. Penalty under Section 271(1)(c):
The AO imposed a penalty of Rs. 68,53,000 under section 271(1)(c) for furnishing inaccurate particulars of income. The CIT(A) confirmed the penalty. However, since the Tribunal allowed the assessee's appeal on the merits of the case, it held that the penalty did not survive. Consequently, the penalty was annulled.

Conclusion:
The Tribunal allowed the appeal by the assessee, confirming that the transaction was a slump sale and the gain was long-term capital gain. The penalty imposed under section 271(1)(c) was also annulled. The Tribunal's decision was based on a detailed examination of the facts, the MOU, and the relevant legal provisions.

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