2020 (3) TMI 972 - HC - Income Tax

Disallowance u/s 50B - slump sale - Special provision for computation of capital gains in case of slump sale - HELD THAT - Section 50B is a code in itself only for the determination of cost of acquisition and cost of improvement of the undertaking but not for the computation of capital gains in case of slump sale. The object of section 50B is to simply determine and supply the figure of cost of acquisition and cost of improvement of the undertaking or division, being its net worth along with the decision as to whether the undertaking is a long term or short term capital asset is decided and forwarded to section 48, the computation provision in the later section is activated for determining the income chargeable under the head capital gains in accordance with the mode of such computation as prescribed therein. The modus operandi to compute capital gain from the transfer of undertaking thus provides for reducing the cost of acquisition and cost of improvement of the capital asset from the full value of consideration received or accruing as a result of the transfer of capital asset. Coming back to the nature of capital asset being undertaking, which comprises of all assets minus all liabilities of the undertaking, the amount of capital gain means reducing the net worth, being cost of acquisition and cost of improvement of all assets minus all liabilities of the undertaking from the full value of consideration of all assets minus all liabilities of the undertaking. In computing the net worth of the undertaking or the division, as the case may be, the benefit of indexation as provided in the second proviso to section 48 has been withheld. The possible reason may be quid pro quo. By extending the benefit of lower rate of taxation on long term capital gain as provided under section 112 to the undertaking as a whole notwithstanding the fact that there may be several assets held by the assessee for a period of not more than 36 months, the Legislature though it to curtain the benefit of indexation to the cost of acquisition and cost of improvement. Enhancement of slum sale consideration from ₹ 143.21 crores to ₹ 186.58 crores - HELD THAT - Tribunal noticed that the assessee and Fortis Hospitals Ltd had entered into a business agreement and as per the agreement, excess liability arising during the transition period had to be adjusted from the lump-sum amount of ₹ 186.58 crores. It was further noted by the Tribunal that during the process of transaction, excess liability of ₹ 43.36 crores arose which had to be deducted from the lump-sum amount of ₹ 186.58 crores to arrive at the lump-sum consideration received by the assessee which was ₹ 143.21 crores. Accordingly, the order of the First Appellate Authority was affirmed. On due consideration, we do not find any error or infirmity in the order passed by the Tribunal. Besides, this is a finding of fact, rather a concurrent finding of fact and revenue is unable to point out any perversity in the conclusion reached. In the circumstances, no question of law, much less any substantial question of law, arises from such finding of the Tribunal. Treating the capital gain on slump sale as long term capital gain instead of short term capital gain initially held by the Assessing Officer - HELD THAT - Referring to the decision of the Tribunal in Summit Securities Ltd. 2012 (3) TMI 176 - ITAT MUMBAI CIT(A) held that if at least one asset was more than three years, then it was long term in nature. It was found that four of the assets were more than three years old. Therefore, capital gain accruing out of slum sale had to be assessed as long term capital gain. In further appeal before the Tribunal, the above decision in Summit Securities Ltd. was again adverted to where after Tribunal held that there was no need to interfere with the order of the First Appellate Authority as four hospitals of the assessee were owned by it for a period of more than 36 months. Therefore, the capital gain accruing out of the slump sale was nothing but long term capital gain. No reason to disturb such finding of the Tribunal. Rather we concur with the view taken by the Tribunal which affirmed the decision of CIT(A). The question framed by the revenue, therefore, does not arise for consideration. Addition u/s 14A read with Rule 8D - HELD THAT - Section 14A deals with expenditure incurred in relation to income not includible in total income. As per sub- section (1), for the purpose of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Rule 8D lays down the method for determining the amount of expenditure in relation to income not includible in total income. Tribunal held that assessee had not earned any exempt income during the assessment year under consideration, nor it had claimed any expenditure against any tax free income. Thus, the twin pre-conditions for invoking the provisions of Section 14A read with Rule 8D of the Rules i.e. earning of exempt income and claiming expenditure to earn the same were absent. Therefore, the order passed by the First Appellate Authority was affirmed. We are in agreement with the view taken by the Tribunal. As rightly held by the Tribunal, assessee had neither earned any exempt income nor claimed any expenditure for earning such exempt income. That being the position, Assessing Officer was not justified in making the disallowance by invoking the aforesaid two provisions. The same was rightly deleted by the First Appellate Authority which order has been affirmed by the Tribunal. Therefore, this question proposed by the revenue also fails.

Summary

Issues Involved:
1. Deletion of disallowance of ?18,43,30,378 incurred in relation to slump sale under Section 50B of the Act.
2. Deletion of enhancement of slump sale consideration from ?143,21,082 to ?186,58,21,669.
3. Deletion of addition of ?2,79,53,000 from lump sum consideration.
4. Treatment of ?317,21,09,994 on slump sale as long-term capital gain instead of short-term capital gain.
5. Deletion of addition of ?48,71,169 under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

1. Deletion of Disallowance of ?18,43,30,378 Incurred in Relation to Slump Sale:
The Tribunal confirmed the CIT(A)'s order deleting the disallowance made by the Assessing Officer under Section 50B of the Income Tax Act. The Tribunal relied on its previous decision in the case of DCIT Vs. Summit Securities Ltd., which held that Section 50B is a code only for determining the cost of acquisition and improvement, and not for computing capital gains. The computation of capital gains must follow Section 48, which includes deducting the expenditure incurred in connection with the transfer. The Tribunal found no error in the CIT(A)'s view that expenditure incurred for the transfer amounting to ?18,43,30,378 should be allowed.

2. Deletion of Enhancement of Slump Sale Consideration:
The Tribunal upheld the CIT(A)'s decision to delete the enhancement of slump sale consideration from ?143.21 crores to ?186.58 crores. The Tribunal referred to the agreement between the assessee and Fortis Hospitals Ltd, which allowed for an adjustment of liabilities exceeding ?599.62 crores from the lump-sum consideration of ?186.58 crores. The excess liability of ?43.36 crores was deducted, resulting in a lump-sum consideration of ?143.21 crores. The Tribunal found no error in the CIT(A)'s and Tribunal's concurrent findings that the Assessing Officer's enhancement was incorrect.

3. Deletion of Addition of ?2,79,53,000 from Lump Sum Consideration:
The Tribunal affirmed the CIT(A)'s decision to delete the addition of ?2.79 crores made by the Assessing Officer. The agreement required an escrow account of ?15 crores to be opened for two years, from which any further claims would be adjusted. The Tribunal found that the liability of ?2.79 crores was settled through the escrow account, and there was no double deduction. The Tribunal agreed with the CIT(A) that the Assessing Officer had erred in adding this amount to the lump-sum consideration.

4. Treatment of ?317,21,09,994 on Slump Sale as Long-Term Capital Gain:
The Tribunal concurred with the CIT(A)'s decision to treat the capital gain on slump sale as long-term capital gain. The CIT(A) referred to Section 50B(1) and its proviso, which states that if any asset in the undertaking is held for more than 36 months, the entire undertaking is considered a long-term capital asset. Since four of the hospitals were held for more than three years, the capital gain was treated as long-term. The Tribunal found no reason to disturb this finding.

5. Deletion of Addition of ?48,71,169 under Section 14A read with Rule 8D:
The Tribunal upheld the CIT(A)'s decision to delete the addition made by the Assessing Officer under Section 14A read with Rule 8D. The assessee had invested in shares of Kanishka Housing Development Co. Pvt. Ltd., a subsidiary, for business expediency. The Tribunal found that the assessee had not earned any exempt income nor claimed any expenditure for earning such income during the assessment year. Therefore, the disallowance under Section 14A read with Rule 8D was not justified.

Conclusion:
The appeal was dismissed as the Tribunal found no merit in the revenue's contentions. The Tribunal affirmed the decisions of the CIT(A) on all issues, finding no substantial question of law arising from the revenue's appeal.