2011 (1) TMI 905 - HC - Income Tax

Capital Receipt or not - Whether the amount received by the appellant for transfer of its entire marketing undertaking by way of slump sale in terms of the agreement was a capital receipt to which the provisions of Section 50(1) of the Income Tax Act, 1961 of the Income Tax Act, had no application and no capital gains could be assessed - Held that the assets and properties which are tangible in nature and for which depreciation was allowed should be apportioned from the other intangible assets and to that effect Section 45 read with Section 50 shall be made applicable - Therefore direct the Assessing Officer concerned to apportion and/or segregate the amount of consideration received by way of transfer of assets, out of total consideration of Rs. 3 crores to pick up the amount of consideration of tangible assets for assessment of tax under the heading capital gain under Section 45 read with 50 of the said Act.

Issues Involved:
1. Whether the amount received for the transfer of the marketing undertaking by way of slump sale was a capital receipt and not subject to capital gains tax under Section 50(1) of the Income Tax Act, 1961.
2. Apportionment of the consideration received for the transfer of the marketing undertaking between physical depreciable assets and other assets.
3. Exemption of the entire consideration from capital gains tax.
4. Determination of the portion of the consideration liable to capital gains tax and the applicable rate.

Detailed Analysis:

Issue 1: Capital Receipt and Applicability of Section 50(1)
The appellant transferred its marketing undertaking, which included both tangible depreciable assets and intangible assets, to Brooke Bond under a strategic alliance agreement for Rs. 3 crores. The primary question was whether this amount was a capital receipt and, hence, not subject to capital gains tax under Section 50(1).

The court examined Section 50, which deals with the computation of capital gains on depreciable assets. The court noted that the section specifically provides for the computation of capital gains for assets forming part of a block of assets in respect of which depreciation has been allowed. The court held that Section 50 applies to tangible depreciable assets but not to intangible assets since depreciation is not applicable to the latter.

Issue 2: Apportionment of Consideration
The appellant argued that the consideration received should be apportioned between physical depreciable assets and other intangible assets. The court agreed that the entire composite sale consideration could not be taken into consideration solely for depreciable assets. The court emphasized the need to segregate tangible assets from intangible assets for accurate tax computation.

The court directed the Assessing Officer to apportion the consideration received by separating the amount attributable to tangible depreciable assets from the total consideration of Rs. 3 crores. This segregation is necessary to apply Section 45 read with Section 50 for the capital gains tax assessment.

Issue 3: Exemption from Capital Gains Tax
The appellant contended that the entire consideration of Rs. 3 crores should be exempt from capital gains tax as it was a composite and joint nature consideration. The court rejected this argument, stating that while intangible assets are not subject to Section 50, tangible depreciable assets are. Therefore, the portion of the consideration attributable to tangible assets is liable to capital gains tax.

Issue 4: Determination of Taxable Portion and Rate
The court concluded that the consideration received for tangible depreciable assets should be subject to capital gains tax under Section 45 read with Section 50. The court directed the Assessing Officer to complete the apportionment exercise within three months and determine the taxable portion of the consideration.

Conclusion
The court allowed the appeal partly, directing the Assessing Officer to apportion the consideration received for the transfer of the marketing undertaking, segregating tangible depreciable assets from intangible assets. The portion attributable to tangible depreciable assets is subject to capital gains tax under Section 45 read with Section 50 of the Income Tax Act, 1961. The exercise is to be completed within three months from the receipt of the court's order.

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