2007 (5) TMI 614 - AT - Income Tax

Applicability of u/s 50 and 50A - Slump sale - long-term capital gain - cost of acquisition - disallowance of depreciation as a result of reduction of block of assets - Whether CIT(A) has erred in holding that the sale of Betalactum Division by the assessee company is a slump sale on which ss. 50 and 50A are not applicable and long-term capital gain has to be computed by indexing the cost of acquisition - HELD THAT - It is evident that for a sale to be termed as a slump sale it is not essential that all the assets and liabilities must be transferred. Even if some assets and liabilities are retained by the transferor the sale would not lose the character of being a slump sale if the transfer is of a going concern on that basis and the transferee is in a position to carry on the business without any interruption. In the present case the right to use the technical know-how developed by the assessee was granted by the assessee to the transferee against the payment of a separate consideration. The proprietary rights therein were retained till 30th June 2000. On facts in view of the above numerous judicial pronouncements it cannot be said that what the transferee acquired was not a going concern. Rather after the transfer the transferee carried on the business without any disruption therein. In CIT vs. West Coast Chemicals Industries Ltd. (In Liquidation) 1976 (9) TMI 37 - MADRAS HIGH COURT CIT vs. F.X. Periera Sons (Travancore) (P) Ltd 1989 (12) TMI 40 - KERALA HIGH COURT Premier Automobiles Ltd. vs. ITO Anr. 2003 (4) TMI 43 - BOMBAY HIGH COURT and Asstt. CIT vs. Raka Food Products 2005 (6) TMI 25 - MADRAS HIGH COURT amongst others it has been held that in the case of a sale of an undertaking as a whole on a going concern basis if some assets are retained by the transferor or some liabilities are not taken over by the transferee this fact does not render the slump sale as not a slump sale. A similar view has been expressed by the Delhi Bench of the Tribunal for asst. yr. 1999-2000 and 5507/Del/2003 for asst. yr. 2000-01 in the case of M/s ECE Industries Ltd. 2006 (9) TMI 221 - ITAT DELHI-D . Therefore the findings of the learned CIT(A) in this regard are upheld. Further s. 50B of the IT Act has correctly been held by the learned CIT(A) as having no applicability to a slump sale as in the present case. It is significant that this section was inserted in the Act by the Finance Act 1999 w.e.f. 1st April 2000. It has not been stated to be applicable retrospectively. In the absence of any such specific statement it can only apply prospectively. Thus we hold that there is no force in the grievance of the Department by way of ground No. 1 that the CIT(A) has erred in holding that the sale of the Betalactum Division of the assessee company was a slump sale and ss. 50 and 50A of the Act are not applicable and that the long-term capital gain has to be computed by indexing the cost of acquisition. Ground No. 1 is therefore rejected. Addition on account of expenses incurred for revaluation of the fixed assets - HELD THAT - The facts are that the revaluation was got done on 31st March 1997 and the sale took place on 1st July 1997. It is evident that the assessee got the revaluation done for the purpose of the sale. The assessee has contended that this exercise was carried out in routine in order to secure finance from financers/financial institutions for the business needs of the assessee. However it is seen that such revaluation is not a regular feature of the assessee. At least no other such instance of revaluation at any other point of time has come on record. Moreover the assessee has also not placed on record any material to show that any finance was secured from the financial institutions/financers in pursuance of the said revaluation. Anyhow the alternative contention of the assessee appears to be right and is accepted as such. This expenditure will be allowed to be deducted in computing the capital gain/loss on the transfer of the Betalactum Division since this expenditure was incurred in connection with the said transfer. Ground No. 3 is as such accepted in the above terms. Non-compete fee received by company that is capital or revenue receipts - HELD THAT - We find that the assessee is correct when it contends that the issue of taxability of non-compete fee being a legal one even if the assessee did not press it before the AO it could well have been pressed before the learned CIT(A) as was done. Further it is also correct that all the facts being before the AO the CIT having powers co-terminus with those of the AO was not incorrect in not remitting the issue to the AO for decision. Moreover evidently the AO duly represented the case of the Department before the learned CIT(A) and no objection was raised regarding the assessee having not pressed the issue before the AO. On merits evidently there has been no transfer of assets as envisaged u/s. 45 of the Act r/w s. 2(47) of the Act. The AO pertinently had agreed that the fee in question represented a capital receipt and not a business receipt. By signing the negative covenant the assessee undertook not to carry out manufacture or trade of the products for a period of time. That being so this act amounted only to a self-imposed restriction and not a transfer within the meaning of the Act. It was neither the sale or exchange or relinquishment of the asset nor was any right therein extinguishable the right to manufacture or trade remaining intact after the period for which the negative covenants were signed. Thus we hold that the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee. Such finding of the learned CIT(A) is therefore hereby upheld. Ground No. 4 is thus rejected. In the result the appeal of the Department stands partly allowed.

Summary

Issues Involved:

1. Classification of the sale of Betalactum Division as a slump sale.
2. Disallowance of club membership fee.
3. Disallowance of expenses for revaluation of fixed assets.
4. Taxability of non-compete fee.
5. Taxability of the amount received on the assignment/sale of trademark.
6. Allowance of project development expenses.
7. Allowance of deductions under Section 35D.

Issue-wise Detailed Analysis:

1. Classification of the Sale of Betalactum Division as a Slump Sale:

The primary issue was whether the sale of the Betalactum Division by the assessee company constituted a slump sale, thereby affecting the applicability of Sections 50 and 50A of the IT Act. The AO contended that the sale was not a slump sale because the intellectual property and know-how were not transferred during the assessment year. The CIT(A) disagreed, holding that the sale was indeed a slump sale, as the division was sold as a going concern without assigning individual values to the assets. This conclusion was based on the MoU and the nature of the transaction, which included all assets and liabilities of the division. The Tribunal upheld the CIT(A)'s decision, noting that the definition of a slump sale under Section 2(42C), though not applicable for the assessment year in question, supported the view that the transaction was a slump sale. Consequently, the long-term capital gain was to be computed by indexing the cost of acquisition.

2. Disallowance of Club Membership Fee:

The AO disallowed the club membership fee paid for the Joint Managing Director, considering it a personal benefit. The CIT(A) reversed this, treating the expense as a revenue expenditure, citing that club membership fees do not create an enduring benefit and are thus allowable business expenses. The Tribunal supported the CIT(A)'s view, referencing various judicial precedents that have allowed such expenses as business expenditures.

3. Disallowance of Expenses for Revaluation of Fixed Assets:

The AO disallowed the expenses incurred for revaluation of fixed assets, arguing they were not incidental to business but related to the transfer of a capital asset. The CIT(A) disagreed, allowing the expenses as revenue expenditure. The Tribunal, however, concluded that while the revaluation was done for the purpose of sale, the expenses should be allowed as a deduction in computing the capital gain/loss on the transfer of the division.

4. Taxability of Non-Compete Fee:

The AO included the non-compete fee as capital gain, which the CIT(A) reversed, treating it as a capital receipt not liable to tax. The Tribunal upheld the CIT(A)'s decision, noting that there was no transfer of assets as per Section 45 of the IT Act. The non-compete fee was considered a self-imposed restriction, not a transfer, and thus not taxable. The Tribunal also referenced judicial precedents and the amendment in Section 28(va) effective from April 1, 2003, which further supported the non-taxability of such fees before the said date.

5. Taxability of the Amount Received on Assignment/Sale of Trademark:

The AO added the amount received from the sale of trademarks as capital gain, which the CIT(A) deleted, treating it as a non-taxable capital receipt. The Tribunal upheld this decision, referencing the Supreme Court's ruling in B.C. Srinivasa Setty, which held that self-generated trademarks have no cost of acquisition, thus making the computation of capital gains impossible. The amendment in Section 55(2)(a) effective from April 1, 2002, also indicated that prior to this date, such gains could not be computed.

6. Allowance of Project Development Expenses:

The AO disallowed the project development expenses, which the CIT(A) allowed, noting that these were revenue expenses pertaining to the assessment year 1998-99. The Tribunal upheld the CIT(A)'s decision, recognizing that the nature of these expenses was not in dispute and that they were correctly treated as deferred revenue expenditure.

7. Allowance of Deductions under Section 35D:

The AO had disallowed certain expenses under Section 35D, which the CIT(A) allowed, following the Tribunal's earlier decision in the assessee's favor for the assessment year 1992-93. The Tribunal upheld the CIT(A)'s decision, noting that the Department had consistently allowed such deductions in previous years and could not backtrack on this stand.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on most issues, recognizing the sale of the Betalactum Division as a slump sale, allowing the club membership fee, project development expenses, and deductions under Section 35D, and treating the non-compete fee and amount received from the sale of trademarks as non-taxable. The only modification was regarding the revaluation expenses, which were to be considered in computing the capital gain/loss on the transfer of the division.