2009 (6) TMI 685 - AT - Income Tax

Summary

Issues Involved:
1. Whether the sale of Howmedica business transaction should be treated as a slump sale or an itemized sale.
2. Whether the claim of slump sale made at the assessment stage is legally permissible.
3. Whether the non-filing of the audit report along with the return of income affects the claim.
4. Whether the Assessing Officer can examine the real character of the transaction instead of going by the agreement.
5. The treatment of the reimbursement received from Pfizer Inc.
6. The issue of write-off in closing stock.

Detailed Analysis:

1. Treatment of Howmedica Business Transaction:
The primary issue was whether the sale of Howmedica business should be treated as a slump sale or an itemized sale. The assessee claimed it as a slump sale, meaning the transfer of one or more undertakings for a lump sum consideration without assigning values to individual assets and liabilities. The Assessing Officer rejected this claim, treating it as an itemized sale, pointing out that the business transfer agreement provided a break-up of various items for the computation of net worth. The CIT(A) upheld the Assessing Officer's view, noting that the transaction involved the transfer of identifiable parts of the business rather than the business as a whole.

2. Legal Permissibility of Claim at Assessment Stage:
The CIT(A) held that the assessee was entitled to make a claim before the Assessing Officer even if it was not made in the Return of Income, relying on the judgment in National Thermal Power Corpn. Ltd. v. CIT [1998] 229 ITR 383 (SC). This decision was not contested by the revenue, thus settling the issue in favor of the assessee.

3. Non-Filing of Audit Report with Return of Income:
The CIT(A) concluded that the claim could not be denied merely because the audit report was not filed along with the return of income. The courts have held that while filing an audited report is mandatory, filing it along with the return is directory, and it can be accepted if filed before the completion of the assessment, provided there are good and sufficient reasons for the delay.

4. Examination of Real Character of Transaction:
The CIT(A) upheld the Assessing Officer's action to examine the various clauses of the business transfer agreement to ascertain the true character of the transaction. The CIT(A) noted that the agreement and the surrounding circumstances indicated that the transaction was not a transfer of the business as a whole but rather a transfer of identifiable parts of the business.

5. Treatment of Reimbursement from Pfizer Inc.:
The assessee received a sum from Pfizer Inc. as reimbursement for the cost of surgical instruments. The CIT(A) held that this amount should be assessed as short-term capital gain under section 50(1) of the Income-tax Act, as it related to depreciable assets. The CIT(A) directed the Assessing Officer to allow the deduction of the value of stock and other related expenses before computing the profits.

6. Write-Off in Closing Stock:
The Assessing Officer disallowed the claim of the assessee regarding the write-off in closing stock, suspecting unaccounted sales. The CIT(A) allowed the claim, noting that the write-off was a normal business practice in the pharmaceutical industry and had been allowed in previous years. The CIT(A) emphasized that such a deduction could only be disallowed if there were good and sufficient reasons, which were not present in this case.

Conclusion:
The appeal by the assessee was partly allowed, and the appeal by the revenue was dismissed. The transaction of Howmedica business was treated as an itemized sale, and the reimbursement from Pfizer Inc. was assessed as short-term capital gain. The write-off in closing stock was allowed as a legitimate business expense. The case was remanded to the Assessing Officer for the limited purpose of determining the net worth for computing the capital gains from the slump sale.