2009 (12) TMI 595 - AT - Income Tax

Slump sale or an itemized sale - sale of business - Held that - As for the assessee and the buyer being sister concerns, merely because an agreement is entered into by related parties the effect of the agreement cannot be ignored. The case of the assessee has all along been that the method of arriving at the sale consideration of the industrial unit has been capitalization of profits , and none of the authorities below has doubted correctness of this claim. - transaction is not a case of itemized sale and it is clearly a case of slump sale of the business. Assessee firm as a going concern was transferred as a whole as per the term of an agreement - the contents of the agreement and second, the method adopted for determination of the lump sum consideration, are the primary evidences which are helpful for answering the question - Assets wise price was not fixed hence cannot fall within the scope of section 41(2) of the I.T.Act - Section 50 of the I.T. Act comes into operation when the consideration of such assets can be ascertained may be a part of the block assets but depreciation had been allowed Section 50 of the I.T. Act comes into operation when the consideration of such assets can be ascertained may be a part of the block assets but depreciation had been allowed. On the other hand in the case of a slump sale or the sale of undertaking as a whole do not fall within the ambits of section 50 because no depreciation had ever been claimed or allowed on such an undertaking as a whole, hence the view of the Hon ble Courts, as discussed above, is that in such a situation i.e in the absence of itemized sale, the provisions of section 50 are inapplicable. In the case of Premier Automobiles Ltd 2003 -TMI - 11540 - BOMBAY High Court) high court has held that provisions of section 45 has to be applied in such type of case.

Summary

Issues Involved:
1. Whether the impugned transaction was a 'slump sale' or an 'itemized sale'.
2. Taxability of the amount realized from the sale.
3. Applicability of Section 50 and Section 45 of the Income Tax Act.
4. Determination of capital gains and the method of computation.

Issue-wise Detailed Analysis:

1. Whether the impugned transaction was a 'slump sale' or an 'itemized sale':
The primary issue was whether the transaction in question constituted a 'slump sale' or an 'itemized sale'. The assessee argued that the entire business was sold at a slump price based on the capitalization of profits method, without assigning individual values to the assets. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the transaction as an itemized sale, thereby attributing specific values to the assets and taxing the difference as goodwill.

The Tribunal, after considering the facts and submissions, concluded that the transaction was indeed a slump sale. The Third Member agreed with the Judicial Member's view, stating, "the impugned transaction is not a case of itemized sale and it is clearly a case of slump sale of the business." This conclusion was based on the fact that the sale consideration was arrived at using the profit capitalization method and not by valuing individual assets.

2. Taxability of the amount realized from the sale:
The AO treated the difference between the revalued amount of assets and the sale consideration as goodwill and taxed it as long-term capital gain. The CIT(A) upheld this view, relying on the Supreme Court's decision in the case of Artex Manufacturing Co. The Tribunal, however, found that the sale was a slump sale, and thus, the provisions of Section 50, which deal with the sale of depreciable assets, were not applicable.

3. Applicability of Section 50 and Section 45 of the Income Tax Act:
The Tribunal held that Section 50, which applies to the sale of depreciable assets, was not applicable in this case because the transaction was a slump sale. The Tribunal noted, "Section 50 of the I.T. Act visualized only the transfer of depreciable assets and not the transfer of an undertaking." Instead, the Tribunal directed the AO to apply the provisions of Section 45, which deals with the taxation of capital gains arising from the transfer of a capital asset.

4. Determination of capital gains and the method of computation:
The Tribunal remanded the matter back to the AO to compute the capital gains arising from the slump sale. The AO was directed to determine the cost of acquisition of the undertaking and apply the provisions of Section 55 of the Income Tax Act to compute the capital gains. The Tribunal emphasized that "the A.O will also be required to decide its value u/s 55 of the Act and will be required to decide on what basis indexation should be allowed in computing the capital gains."

Conclusion:
The Tribunal concluded that the impugned transaction was a slump sale and not an itemized sale. Consequently, the provisions of Section 50 were not applicable, and the AO was directed to compute the capital gains under Section 45, following the guidelines laid down by the Tribunal. The appeal was partly allowed, with the matter remanded back to the AO for re-computation of capital gains.