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2022 (8) TMI 1348 - AT - Income TaxCapital gain u/s 50B - slump sale of one it s undertaking by the assessee under business transfer agreement - HELD THAT - Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between the aggregate value of total assets of the undertaking or division and the value of its liabilities as appearing in books of account . The aggregate value of total assets of the undertaking or division is the sum total of WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth. Provisions of Sec.48 49 stand substituted by the provisions of Sec.50B(2) . The methodology contemplated by these provisions cannot be altered or tampered with by reading the terms of the slum sale agreement and deferred payments laid down therein. For these by laying down that when capital assets being an undertaking or division is transferred by way of slump sale, the net worth of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48. For the reasons given above, we are unable to agree with the view canvassed by assessee. We are of the view that the CIT(A) fell into an error in accepting the plea of the assessee and holding that the sum not received owing to clause 3.1.2 of the BTA cannot be brought to tax in AY 14-15. We therefore allow the appeal of the Revenue.
Issues Involved:
1. Taxability of capital gains on slump sale under Section 50B of the Income Tax Act, 1961. 2. Determination of the full value of consideration for the slump sale. 3. Timing of capital gains recognition and its relation to the fulfillment of conditions in the Business Transfer Agreement (BTA). Detailed Analysis: 1. Taxability of Capital Gains on Slump Sale: The primary issue in this case is whether the CIT(A) was justified in holding that a sum of Rs. 10 Crores cannot be brought to tax as capital gain under Section 50B of the Income Tax Act, 1961, on the slump sale of one of its undertakings by the assessee under a business transfer agreement dated 01.03.2013, in AY 2014-15. Section 50B provides the mechanism for the computation of capital gains arising on slump sale. According to Section 50B(1), any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place. 2. Determination of the Full Value of Consideration: The assessee, a company engaged in the manufacture and sale of aluminum extrusion, executed a slump sale of its aluminum extrusion business to M/s. Bhoruka Extrusions Pvt. Ltd. for a total consideration of Rs. 110 Crores as per the BTA. However, the assessee adopted the slump sale consideration at Rs. 103,47,21,564/- in its capital gain computation. The AO contended that the entire consideration of Rs. 110 Crores should be the starting point for the computation of capital gain. The assessee argued that Rs. 10 Crores was contingent upon achieving certain sales targets and clearing legal issues, and thus, this amount should be taxed in the year of receipt. 3. Timing of Capital Gains Recognition: The AO rejected the assessee's contention, stating that as per Section 45 and Section 50B(1) of the Income Tax Act, the entire consideration for the slump sale, Rs. 110 Crores, should be adopted as the full value of consideration received in the year of transfer, i.e., AY 2014-15. The AO argued that the conditions mentioned in the BTA were not a condition precedent for the transfer of the undertaking but were to be satisfied subsequent to the slump sale. Therefore, the AO recomputed the long-term capital gains accordingly. On appeal, the CIT(A) agreed with the assessee, stating that the remaining sum of Rs. 10 Crores should be taxed only in the year of its receipt, as the liability to pay tax arises in the year in which the conditions are fulfilled by the assessee. The CIT(A) referred to the relevant clauses of the BTA, which specified that the subsequent business transfer consideration was contingent upon the fulfillment of certain conditions. Relevant Case Laws: The Revenue, represented by the DR, placed reliance on the decision of the Hon'ble Delhi High Court in the case of Ajay Guliya Vs. ACIT, where it was held that the entire income by way of capital gains is chargeable to tax in the year in which the transfer took place, despite the deferred payment mechanism. The assessee, on the other hand, relied on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Mrs. Hemal Raju Shete, which held that the deferred consideration, contingent upon future events, could not be taxed in the year of transfer as it had not accrued during that year. Tribunal's Decision: The Tribunal, after careful consideration of the rival submissions, held that the taxability of capital gain on slump sale arises in the year of transfer of the undertaking as per Section 50B of the Act. The Tribunal noted that the fulfillment of the conditions laid down in clause 3.1.2 of the BTA was not a condition precedent for the agreement to come into effect. The Tribunal emphasized that the computation of capital gain under Section 50B is specific and provides no leeway for parties to postpone recognizing capital gain based on deferred payments. The Tribunal concluded that the CIT(A) erred in accepting the assessee's plea and held that the entire consideration of Rs. 110 Crores should be taxed in AY 2014-15. Consequently, the Tribunal allowed the appeal of the Revenue. Conclusion: The appeal of the Revenue was allowed, and it was held that the entire consideration of Rs. 110 Crores should be taxed in AY 2014-15, as the conditions in the BTA were not a condition precedent for the transfer of the undertaking. The Tribunal emphasized the special provisions of Section 50B for the computation of capital gains on slump sale and the need to adhere to the statutory provisions without deviation.
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