2017 (4) TMI 1640 - HC - Income Tax

Sale of business assets - gain on soft drink business assets sold - Slump sale or capital gain - ITAT held that the transaction in a slump sale sand not an itemised sale - ITAT deleted addition holding that the sale of business assets was not an itemised sale and thus is not exigible to tax - ITAT justification in holding that the assets such as goodwill, know how, etc. were transferred and the cost of acquisition of these assets cannot be ascertained inspite of the specific provisions of Section 55(2)(a) - HELD THAT - As required to be noted that when the agreement was entered into between the parties, the parties recorded total assets and no individual assets was required to be given in the MOU by the independent party that the party is running the unit along with only the property and not any other liability. In that view of the matter the individual valuation which has been put forth in pursuance to the letter of the Assessing Officer on the basis of book value in the list of individual is not established but taking into consideration the agreement between the parties the second value which has been rightly pointed out was for the purchaser for the purpose of arriving at a price of assets. We are of the opinion that the Tribunal has not committed any error in allowing the appeal. In our considered opinion the three issues which are raised are answered in favour of the assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 9,26,19,881/- by ITAT.
2. Classification of the transaction as a slump sale or itemized sale.
3. Transfer of assets such as goodwill and know-how under Section 55(2)(a) of the Income Tax Act, 1961.
4. Evaluation of the ITAT's findings as perverse, contrary to the record, and untenable in law.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 9,26,19,881/- by ITAT:
The appellant challenged the ITAT's decision to delete the addition of Rs. 9,26,19,881/-. The ITAT had reversed the findings of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)], partly allowing the assessee's appeal. The AO had initially included this amount as taxable, but the ITAT held that the sale of business assets was not an itemized sale and, therefore, not exigible to tax.

2. Classification of the Transaction as a Slump Sale or Itemized Sale:
The court examined whether the transaction was a slump sale or an itemized sale. The assessee had entered into an agreement to sell its soft drink business assets to M/s Hindustan Coca Cola Bottling North West Pvt. Ltd. The AO contended that the sale was itemized, as individual values were assigned to assets and liabilities. However, the ITAT concluded that the transaction was a slump sale, where no individual values were assigned, aligning with the definition under Section 2(42C) of the Income Tax Act.

3. Transfer of Assets Such as Goodwill and Know-how:
The ITAT held that the assets, including goodwill and know-how, were transferred, and their cost of acquisition could not be ascertained despite the provisions of Section 55(2)(a). The AO had argued that specific values were assigned to these assets, making them taxable. The ITAT, however, found that the transaction did not assign individual values to these intangible assets, supporting the slump sale classification.

4. Evaluation of ITAT's Findings:
The appellant argued that the ITAT's findings were perverse and contrary to the record. The AO and CIT(A) had detailed the assets and liabilities transferred, suggesting an itemized sale. The ITAT, however, found that the overall agreement and subsequent actions indicated a slump sale, where the business was sold as a whole without itemizing individual assets and liabilities.

Supporting Judgments and Legal Precedents:
The appellant cited the Supreme Court's decision in Vatsala Shenoy vs. Joint Commissioner of Income Tax, which emphasized that a sale could only be treated as a slump sale if no value was assigned to individual assets and liabilities. The ITAT's decision was also supported by the Supreme Court's ruling in Commissioner of Income Tax vs. B.C. Srinivasa Setty, which stated that goodwill generated in a newly commenced business could not be described as an "asset" within the terms of Section 45 and, therefore, its transfer was not subject to income tax under capital gains.

Conclusion:
The High Court upheld the ITAT's decision, concluding that the sale was indeed a slump sale and not an itemized sale. The court found no error in the ITAT's appreciation of facts and legal principles. The appeal was dismissed, and the issues were resolved in favor of the assessee, affirming the ITAT's findings and the classification of the transaction as a slump sale.