2011 (5) TMI 465 - AT - Income Tax

Capital gain - sale of proprietary concern - business purchase agreement revealed that the proprietary concern was taken over by the company as a going concern and this fact has not been disputed by the Revenue - It is also seen that the shareholding pattern of the company from the year 2002-03 to 2007-08 as submitted before the Registrar of Companies shows that the assessee had retained more than 51% of shareholding in the company all through these years as stipulated in section 47(xiv) - This fact was verified from the net worth statement of the assessee in which investment in the company is found to be in tact as shareholding and admittedly no consideration from this company has passed to the assessee other than by way of allotment of shares which is also one of the requirement of section 47(xiv) - These facts clearly go to evince that the assessee has fully adhered to the conditions laid in section 47(xiv). Thus do not find any infirmity in the order of the ld. CIT(A) and we are also of the considered opinion that this transaction has to be treated as a transfer within the meaning of section 47(xiv) and the surplus over the net worth is held to be exempt from income tax - Decided in favour of assessee.

Summary

Issues:
Interpretation of section 47(xiv) of the Income-tax Act, 1961 in the context of a transaction involving the sale of a proprietary concern as a going concern to a company.

Analysis:
1. The primary issue in this case revolved around the interpretation of section 47(xiv) of the Income-tax Act, 1961, concerning the exemption of transfers involving a sole proprietary concern succeeded by a company. The Assessing Officer contended that the transaction should be treated as a slump sale under section 50B, resulting in the imposition of capital gains tax. However, the assessee argued that the conditions under section 47(xiv) were met, which exempted the transaction from capital gains tax.

2. The Assessing Officer invoked Explanation 1 of section 50B to treat the difference between the net worth of the concern and the sale proceeds as profit on the sale of the business, thereby taxing the differential amount as Long Term Capital Gains (LTCG). The assessee maintained that the transaction did not constitute a slump sale or transfer of a capital asset, and therefore, the surplus from the allotment of shares should not be considered income from capital gains.

3. The Appellate Tribunal observed that the conditions stipulated under section 47(xiv) were fulfilled by the assessee, as evidenced by the business purchase agreement and the shareholding pattern of the company. The Tribunal emphasized that the proprietary concern was taken over as a going concern by the company, and no consideration other than the allotment of shares had passed to the assessee, meeting the requirements of section 47(xiv).

4. The Tribunal relied on a previous decision of the Cochin Bench of the ITAT to support its conclusion that the transaction qualified for exemption under section 47(xiv). The Tribunal emphasized that when a specific provision like 47(xiv) addresses a particular scenario, it should take precedence over other provisions like section 50B. The Tribunal held that the transaction should be treated as a transfer within the meaning of section 47(xiv), exempting the surplus over the net worth from income tax.

5. Ultimately, the Tribunal dismissed the appeal of the Revenue, upholding the decision that the transaction fell within the scope of section 47(xiv) and was therefore exempt from income tax. The detailed analysis provided a comprehensive understanding of the legal interpretation and application of the relevant provisions in this case.

By thoroughly analyzing the facts, legal provisions, and precedents, the Tribunal clarified the applicability of section 47(xiv) to the transaction in question, providing a detailed and reasoned judgment on the matter.