2016 (12) TMI 408 - HC - Income Tax

Slump sale - genuine slump sale to qualify treatment under Section 50B - Held that - So far as the Revenue s contentions with respect to the retention of two assets that were not sold as a part of the going concern by the assessee is concerned, we find the argument is insubstantial. The sale transaction was reported for a total consideration of ₹ 45.83 crores. The sale was for a going concern, which included ongoing service contracts, employment contracts and other tangible assets, and intangible assets such as technical know-how etc. To expect a purchaser to buy and pay value for defunct or superfluous assets flies in the face of commercial sense. Unfortunately, the Revenue s understanding is that in a going concern the buyer is bound to pay good money, transact and purchase bad and irrecoverable debts. Not only does it fly in the face of common and commercial understanding, but it is not even a pre-condition , as is evident from the definition of undertaking , cited in Explanation (1) to Section 2 (19) (A) of the Act. This definition of undertaking is what has been engrafted into by reference, under Section 2(42C) of the Act. Therefore, if certain assets or properties are left out because they would cause inconvenience or lead to some kind of a trouble for the purchasing party, it is well within its right to exclude it from the list of assets. For these reasons, the revenue s contentions are rejected. The slump sale qualifies for treatment under Section 50(B) of the Act. - Decided in favour of assessee

Summary

Issues:
Question of law regarding the genuineness of the slump sale transaction for qualification under Section 50B of the Income Tax Act, 1961.

Detailed Analysis:

1. Background of the Assessee's Business and the Slump Sale Agreement:
The assessee, engaged in design, engineering, and consultancy services in the oil and gas sector, entered into a Slump Sale Agreement transferring its business undertaking as a going concern to a buyer for a lump sum consideration. The net book value of assets transferred was significantly lower than the consideration received.

2. Initial Rejection of Claim by Assessing Officer (AO):
The AO rejected the claim, deeming it a sham transaction to evade tax liability by inflating asset values and classifying the consideration as income from other sources, subject to a higher tax rate.

3. Appeals and ITAT Proceedings:
The CIT(A) upheld the AO's findings, considering the transaction not genuine and a colorable device. The assessee then appealed to the ITAT, which was aware of a similar case involving the buyer where the ITAT accepted the genuineness of the slump sale agreement.

4. Valuation of Goodwill and ITAT's Decision:
The High Court emphasized that goodwill is an intangible asset, and the excess consideration over tangible assets represents goodwill value. The ITAT, despite the buyer's case ruling in favor of genuineness, remanded the matter to the AO for fresh consideration.

5. Contentions and Court's Analysis:
The assessee argued against the remittance order, citing the buyer's case judgment and contending that the entire undertaking was transferred. The High Court found the ITAT misdirected in interpreting the buyer's case judgment, maintaining that the transaction was not a sham. It dismissed the Revenue's argument regarding the retention of two assets, stating that a going concern sale includes only relevant assets.

6. Conclusion and Judgment:
The High Court rejected the Revenue's contentions, holding that the slump sale qualified for treatment under Section 50B of the Act. The appeal was allowed in favor of the assessee, emphasizing the commercial sense and legal definitions governing such transactions.

In conclusion, the High Court's judgment favored the assessee, upholding the genuineness of the slump sale transaction and its qualification for tax treatment under Section 50B of the Income Tax Act, 1961.