2003 (11) TMI 303 - AT - Income Tax

Capital gains on the sale of the undertaking - Whether the sale of the cement unit in question is a slump sale or an itemised sale and, in either case, what are the tax consequences thereof - cost of acquisition of an undertaking - Tax consequences of the sale under the head 'Short-term capital gains' u/s 50 of the Income-tax Act - Claim for depreciation without reducing the W.D.V. of the assets of the block - whether the cost of acquisition and of improvement of the cement unit in terms of section 48 are terms of section 48 are capable of being ascertained for a levy under section 45 to be exigible. HELD THAT - We are of the view that the assessee deserves to succeed. There is no decisive evidence in favour of the Department's plea that it is an itemised sale. We have extracted hereinabove the terms of the invitation for bids, offer made by the India Cements Company and the sale agreement. In all these documents, the cement unit is stated to have been sold as a going concern on 'as-is-where-is basis'. It is true that separate procedures have been laid down for valuation of current assets, obsolete items, statutory dues, contingent liabilities, etc. To our mind, such special procedures for the valuation of certain items do not detract from the concept of a slump sale. There is an intervening period between the sale agreement and the date of transfer. During this period, as mentioned by the learned counsel for the assessee, items of the current assets and other items, fluctuate widely, and it is to guard against such fluctuations, the agreement stipulated special procedures for valuation of such items. Such stipulation of special procedures for certain items do not detract from the fact that it is a slump sale of the unit as a whole and as a going concern. Physical assets of the assessee's cement unit involved huge machinery and also substantial acreage of land exceeding 2000 acres. These tangible assets are spread over different places like Cuddapah and Secundarabad in Andhra Pradesh and Madras, Bangalore, Ernakulam etc. When tangible assets situated at far-flung areas are involved, it would be nitpicking to say, on the basis of the valuation of a few ancillary items, that the sale is not a slump sale. The entire man power of the assessee company has been taken over by India Cements Ltd. Financial liabilities are taken over. What is to be seen is whether the cement unit as a functional productive unit has been transferred for a lumpsum price. We are of the view that it was so transferred. Levy of tax under the head capital gains on the transfer of an undertaking - There is a basic difference between Rule 1BB of the Wealth-tax Rules on the one hand and section 50B and section 55(2)(a) of the Income-tax Act under consideration, on the other. Rule 1BB has been considered by the Apex Court as a rule of evidence because it deems the market value of the residential house to be one arrived at on application of a particular method of valuation, which is also a recognised and accepted method. So, Rule IBB has been held to be procedural. In the context of section 50B or section 55(2)(a), such is not the position. It is not one of the recognised methods of valuation, which is stipulated to arrive at the cost of either the assets mentioned in section 55(2)(a) or the undertakings referred to in section 50(B). So far as section 50B is concerned, cost of acquisition cannot be equated to the 'net worth' of the undertaking as on the date of transfer in terms of any recognized modes of ascertainment of cost. So, section 50B cannot, to our mind, be regarded as a procedural section. While it is not a charging section, it is also not a procedural section. It may have to be regarded only as a substantive provision. So, it has only prospective operation, as held in the cases referred to above. Thus, the computational requirements of section 48 are not satisfied, and so, no tax is leviable in terms of section 45 on the transfer of the cement unit in question. In this context, we also refer to the judgment of the Apex Court in the case of Ajax Products Ltd. 1964 (10) TMI 21 - SUPREME COURT , in which it was held that the subject is not to be taxed unless the charging provision clearly imposes the obligation. In the present case, the charging provision, i.e. section 45, is clear, but the computational provisions of section 48 are not satisfied as held by the Apex Court in the case of B.C. Srinivasa Setty 1981 (2) TMI 1 - SUPREME COURT . In this view of the matter, we accept the contentions of the assessee on this aspect, and hold that no tax is leviable on the transfer of the cement unit in this case, as the requirements of computational provisions of section 48 are not satisfied. Assessee's grounds on this issue are accepted. Thus, we do not have to go into the question of correctness or otherwise of the directions given by the CIT(A) for ascertaining the cost of acquisition of the undertaking. Claim for depreciation without reducing the W.D.V. of the assets of the block - In the present case, the Assessing Officer presumably treated both the fertilizer and cement business as one unit and so, while computing the short-term capital gains u/s 50, he gave deduction for the W.D.V. of the blocks of both the fertilizer unit and of the cement unit. As we have held in the context of departmental appeals hereinabove that the lumpsum consideration is not allowable to the depreciable assets and so the provisions of section 50 are not attracted in this case, it makes no difference whether both the units are treated as the same business or they are treated as separate units or businesses. In view of the specific provision of section 43(6)(c)(ii) stipulating as to how exactly depreciation has to be granted on the block on sale of an asset falling on the block, it is claimed that it is immaterial that the blocks of the cement unit have ceased to exist and they are no longer owned by the assessee or used by the assessee. This is on the assumption that the fertilizer and cement units are one business and as the Assessing Officer himself has treated it as one business as mentioned herein above, it is not correct for the Tribunal to treat both the units as separate. As already mentioned, in view of the decision of the A.P. High Court, we have to treat both the units as separate and not as one business, notwithstanding the fact that the Assessing Officer himself treated it as one business. Even otherwise, section 43(6)(c)(ii) covers a case where money is receivable on the sale of an asset. It does not cover a situation where, as in the present case, money in lumpsum is received and no part of it is allocable for the depreciable assets. Similarly, if the asset is gifted, no amount is receivable but the asset has ceased to exist and we are of the view that in such a situation also section 43(6)(c)(ii) is not attracted. We may mention that, to be fair to him, the learned Counsel for the assessee himself has given this example of gift even though he did not concede the ground explicitly. As in the case of the assessee the conditions under section 43 (6)(c)(ii) are not satisfied, we are of the view that even without going into the question of source-wise computation of income, the assessee is not eligible for the grant of depreciation without the reduction of WDV of block of assets of the cement unit from the value of the aggregate value of blocks of both the units. In other words, in a situation like that of the assessee, the precondition of ownership and user are required to be satisfied as the lumpsum received is not allocable to depreciable assets and, as such, the procedure stipulated in section 43(6)(c)(ii) cannot be followed. So we reject the ground No. 9. Thus, the appeal is partly allowed.

Summary

Issues Involved:
1. Whether the sale of the cement unit is a slump sale or an itemized sale.
2. Tax consequences of the sale under the head 'Short-term capital gains' u/s 50 of the Income-tax Act.
3. Whether the cost of acquisition and cost of improvement of the cement unit can be determined for the purpose of capital gains tax.
4. Whether the assessee is eligible for depreciation on the transferred assets.
5. Allowability of certain expenses and provisions in the computation of capital gains.

Summary:

Issue 1: Whether the sale of the cement unit is a slump sale or an itemized sale.
The Tribunal held that the sale of the cement unit was a slump sale. The unit was sold as a going concern on an "as-is-where-is" basis for a lumpsum consideration of Rs. 105.30 crores plus the value of net current assets. The Tribunal found no decisive evidence to support the Department's claim that it was an itemized sale. The special procedures for valuing certain items like current assets and obsolete items did not detract from the fact that it was a slump sale. The Tribunal relied on the decision in Premier Automobiles Ltd. and other relevant case law to conclude that the sale was a slump sale.

Issue 2: Tax consequences of the sale under the head 'Short-term capital gains' u/s 50 of the Income-tax Act.
The Tribunal held that the provisions of section 50 were not attracted as the sale was a slump sale. The lumpsum consideration was not allocable to depreciable assets, and therefore, no tax under the head 'Short-term capital gains' was leviable. The Tribunal referred to the decisions in Mugneeram Bangur & Co., Artex Mfg. Co., and Electric Control Gear Mfg. Co. to support its conclusion.

Issue 3: Whether the cost of acquisition and cost of improvement of the cement unit can be determined for the purpose of capital gains tax.
The Tribunal held that the cost of acquisition and cost of improvement of the cement unit were not ascertainable. The computational provisions of section 48 failed, and therefore, no tax under section 45 was leviable on the transfer of the cement unit. The Tribunal relied on the decision in B.C. Srinivasa Setty and other relevant case law to conclude that the cost of acquisition of an undertaking is inherently unascertainable.

Issue 4: Whether the assessee is eligible for depreciation on the transferred assets.
The Tribunal held that the assessee was not eligible for depreciation on the transferred assets. The precondition of ownership and user in the business of the assessee was not satisfied as the blocks of assets of the cement unit had ceased to exist. The Tribunal referred to the provisions of section 43(6)(c) and concluded that the assessee could not claim depreciation without reducing the written down value of the assets of the cement unit from the block of assets.

Issue 5: Allowability of certain expenses and provisions in the computation of capital gains.
The Tribunal held that the expenses and provisions claimed by the assessee, such as legal fees, consultancy fees, exchange value difference, value of obsolete items, and the difference in the valuation of Rs. 12,70,672 relating to current assets, were not allowable as deductions from the other taxable income. These items were part of the computation of the profit on the sale of the cement unit, and since no tax under the head 'capital gains' was leviable, separate deductions for these amounts were not allowed.

Conclusion:
The Tribunal dismissed the Department's appeal and partly allowed the assessee's appeal, holding that the sale of the cement unit was a slump sale, no tax under section 50 was leviable, the cost of acquisition and cost of improvement were not ascertainable, and the assessee was not eligible for depreciation on the transferred assets. The Tribunal also restricted the disallowance of entertainment expenditure to 75%.