2010 (7) TMI 671 - AT - Income Tax

Disallowance - Long term capital loss - Slump sale u/s 50B - where the assets and liabilities of an undertaking are sold as a group or lumped together, such a sale would qualify as a slump sale - On consideration of various stipulations and provisions stated therein the agreement, it is clear that the intention of the parties was to sell the subsidiary company i.e., VST NPL to GGCL and purchaser s intention is to purchase the VST NPL for a consolidated price, which is nothing but slump purchase price - assessee sold the entire undertaking with all its assets and liabilities together with al licences, permits, approvals, registration, contracts, employees and other contingent liabilities also for a slump price - This kind of sale falls under the purview of sec.50B Regarding bad debts - To claim debt as bad debt and as a deduction, the debt should be in respect of business, which is carried on by the assessee in the relevant assessment year, should have been taken into account in computing the income of the assessee for the accounting year or should represent money lent in ordinary course of its business of banking or money lending - The debt arises out of investment activities of the assessee or associated with the capital field, not on account of revenue cannot be allowed as a bad debt - The assessee company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in the capital field and that person failed to return the same, that amount cannot be claimed as deduction as bad debt Regarding write off of the secondment charges and other expenses - These amounts are advanced to subsidiary company for the purpose of incurring the business expenses of the subsidiary companies and the consideration for the sale of the subsidiary company is worked out after considering the amount receivables - it is presumed that the amounts due were already considered while arriving at the sale price of the subsidiary company represents an advance made to the subsidiary company and not an expenditure Regarding irrecoverable amount spent on agronomy and marketing rights - Since the subsidiary company is sold, this amount which is not realizable, is claimed as expenditure - The assessee company is making a claim u/s 37(1) as expenditure or u/s 36(2) as a bad debt - This expenditure cannot be allowable under this provision where this expenditure is not an expenditure incurred for the purpose of assessee s own business and also this is loss of capital and cannot be allowed as a bad debt - Accordingly all the appeal made by assessee is decided against the assessee

Summary

Issues Involved:
1. Disallowance of long-term capital loss claim by the assessee.
2. Disallowance of the claim of bad debts/deductions under Section 37(1) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Long-Term Capital Loss Claim:
- Facts and Background: The assessee sold shares held in its subsidiary company VST-NPL to M/s Global Green Company Ltd. (GGCL) for Rs.15.50 crores, resulting in a claimed long-term capital loss of Rs.13,96,22,585. The assessing officer treated this transaction as a "slump sale" under Section 50B of the Income Tax Act, 1961, rather than a sale of shares.
- Assessee's Argument: The assessee contended that the transaction was not a slump sale but merely a sale of shares, and thus the loss should be computed under Section 45 of the Act. The intention was to sell shares, not the entire undertaking.
- Department's Argument: The Departmental Representative argued that the transaction involved the transfer of the entire undertaking, including all assets and liabilities, making it a slump sale under Section 50B. The agreement and supplementary documents indicated a comprehensive transfer beyond just shares.
- Tribunal's Analysis: The tribunal examined the agreement dated 23-11-1999 and supplementary agreement dated 24-12-1999, concluding that the transaction was indeed a slump sale. The terms of the agreement, including the transfer of assets, liabilities, and other contingent liabilities, supported this conclusion. The tribunal upheld the CIT(A)'s direction to compute the capital gain under Section 50B, confirming that the transaction was a slump sale as defined under Section 2(42C) of the Act.

2. Disallowance of Bad Debts/Deductions under Section 37(1):
- Facts and Background: The assessee claimed deductions for amounts not recoverable from the subsidiary company VST-NPL, including money advanced, salary, secondment charges, and non-recovery of agronomy and marketing rights, totaling Rs.27,23,35,941.
- Assessee's Argument: The assessee argued that the advances were made out of business necessity and were written off as irrecoverable due to the subsidiary's financial difficulties. The amounts were claimed as business deductions under Sections 36(1)(vii) and 37(1) of the Act.
- Department's Argument: The Departmental Representative contended that the amounts were capital advances, not trade advances, and thus not allowable as bad debts or business deductions. The advances were not related to the assessee's normal business activities and were not trade debts.
- Tribunal's Analysis: The tribunal noted that to qualify as bad debt, the debt must be related to the business carried on by the assessee and should have been taken into account in computing the income. The tribunal found that the advances were capital in nature, related to investment activities, and not trading debts. The amounts were not incurred in the ordinary course of the assessee's business and thus could not be allowed as bad debts or business deductions under Sections 36(1)(vii) and 37(1). The tribunal relied on various judgments, including those of the Supreme Court, to support its conclusion that the advances were capital losses, not deductible as bad debts or business expenses.

Conclusion: The tribunal dismissed the appeal of the assessee, upholding the CIT(A)'s decision to treat the transaction as a slump sale under Section 50B and disallow the claimed bad debts/deductions. The order was pronounced in the open court on 23.7.2010.