2008 (7) TMI 608 - AT - Income Tax

Certain transactions amounting to transfer u/s 47 - Chargeability to tax of the capital gain on transfer as going concern of TFD division of the assessee to ITEL - transfer Schemes is demerger or not - Slump sale u/s 50B or not - business of providing solutions in the field of voice communications and manufacture of telephone instruments, EPBAX systems etc. - assessee transferred the TFD to ITEL Industries Private Limited (ITEL) - scheme of arrangement between the assessee and ITEL for the transfer of the TFD to ITEL was approved by the Bombay High Court. No dispute that the value of the assets which was taken over by ITEL was less than the liabilities that were taken over by ITEL. The assessee had shown this amount as capital reserve in it s balance sheet. Five issues arise for consideration regarding the chargeability to tax of the capital gain on transfer of TFD division of the assessee to ITEL. Whether the transfer of TFD division by the assessee to ITEL could be termed as a demerger within the meaning of section 2(19AA) of the Act and consequently capital gain, if any, on such transfer is not chargeable to tax in view of the provisions of section 47(vib) of the Act? - HELD THAT - All the conditions laid down in section 2(19AA) have to be satisfied in a case to be called a demerger for the purpose of section 47(vib) of the Act. As rightly contended by learned DR for the revenue, the Legislature is deemed to have foreseen all possible contingencies and yet has thought it fit to impose the above conditions for qualifying as a demerger for the purpose of section 47(vib) - There cannot be any presumption regarding omission by the Legislature to provide for a situation where the consideration is not in the form of allotment of shares in the resulting company to the shareholders of the demerged company. A matter which should have been, but has not been provided for in a statute cannot be supplied. The intention of the Legislature in such cases is not to confer the benefit of exemption to an assessee u/s 47(vib) of the Act - All the conditions laid down in section 2( 19AA ) have to be satisfied in a case to be called a demerger for the purpose of section 47( vib ) of the Act. We therefore, reject the plea on behalf of the assessee in this regard and hold that the transfer in the present case cannot be regarded as a demerger within the meaning of section 2(19AA) of the Act. The answer to the first issue is, therefore, in the negative. Whether the transaction in question can be said to be slump sale within the meaning of section 2(42C) of the Act attracting the provisions of section 50B of the Act - HELD THAT - It is clear that, it is only a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise then as a result of sale will not qualify as a slump sale. The question whether transfer of the property consequent to amalgamation could be construed as a sale or not has been considered in the case of Sadanand S. Varde 2000 (6) TMI 16 - BOMBAY HIGH COURT , the question arose before Hon ble Court in the context of the provisions of Chapter XX-C of the Income-tax Act under which, the Government had a right of pre-emptive purchase of property. For the purpose of Chapter XX-C of the Act, expression transfer means transfer by way of sale or exchange or lease for a term of not less than 12 years - Therefore, we are of the view that the transfer of TFD by the assessee to ITEL consequent to scheme of amalgamation approved by Hon ble Bombay High Court cannot said to be a sale of undertaking by the assessee. Consequently, the transfer could not be said to be as a result of sale and therefore the provisions of section 2(42C) of the Act did not apply. The provisions of section 50B were also not therefore applicable to the facts and circumstances of the present case - The answer to this issue, is in negative. Whether the transfer of TFD by the assessee to ITEL results in capital gain u/s 45 of the Act; but nevertheless cannot be brought to tax because of impossibility of computing capital gains u/s 48 of the Act - HELD THAT - In the present case, what was transferred by the assessee was the TFD undertaking as a whole. It is a capital asset within the meaning of section 2( 14 ) of the Act. The process by which, this undertaking was transferred to ITEL is transfer of capital asset. With regard to other ingredients, which is required for levy of capital gains namely profits or gains arising from the transfer of the undertaking, no part of consideration was indicated against different and definite items having regard to their valuation on the date of transfer - There is no basis for even apportioning any consideration for various assets comprised in the transfer. Since, individual items of capital assets having not been transferred the aggregate of individual assets in the form of an undertaking was a capital asset which was transferred. The transfer being one of the going concerns, it is not possible to ascertain the profit or gain from transfer of undertaking. Cost of acquisition and the cost of improvement of the undertaking cannot be ascertained. It, therefore, becomes difficult to apply computation under provisions of section 48 - If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern, consideration realized by the assessee would be outside the purview of capital gains u/s 45 - We hold that computation provisions fail in the present case and consequently there can be no capital gain that could be brought to tax. In view of our decision as the issue as formulated above, is not being taken up for consideration. We may mention that elaborate arguments have been advanced by both parties on this issue also. Taxability of lease income - under head income from other sources or income from business - business of leasing - HELD THAT - We are of the view that the transaction in question is only a method of selling the assessee s product. Arrangement was only to provide the finance to the customers to enable buyers to buy the assessee s product. Such arrangement in the business world of today is directed only towards increasing profitability of the assessee. It has been done in systematic and organized method - AO has accepted first part of the transaction as business transaction and treated the second part as leasing transaction and not business transaction. This approach of the AO was not correct in law. The ld CIT(A) while deciding similar issue in AY 2001-02 has rightly approached the issue. Therefore, we direct that the income in question has to be treated as income from business. Second ground of appeal is allowed. Disallowance on obsolete stock written off - whether the write off of stock as obsolete has to be accepted or not - HELD THAT - The inventory of work-in-progress written off as obsolete has also been furnished before us. Perusal of the same reveals that complete details and break up of items and value has been furnished by the assessee before the AO. AO and learned CIT(A) have proceeded on the basis that evidence regarding the stock having become obsolete has not been produced and therefore the claim of the assessee should be rejected. No dispute that the method followed by the assessee was the same as in the past - In such circumstances, the burden to show that the write off of obsolete stock was not bona fide is on the revenue as held by the Mumbai Bench of the ITAT, in the case of Consolidated Pneumatic Tool Co. (India) Ltd. 1985 (10) TMI 122 - ITAT BOMBAY-E where the facts were identical to the case of the assessee - the AO in the present case without pointing out as to how the write off in question was not correct or bona fide , when all facts and details were placed before him, could not have made the impugned addition. We, therefore, direct that the addition made in this regard be deleted. This ground of appeal of the assessee is allowed. Computation of income - Non-compete payment - claim of the assessee was not allowed in the relevant assessment year. Without prejudice to the claim that the consideration paid to NELCO must be allowed as deduction in the assessment year 1997-98, the assessee submitted that the period of the agreement was 5 years - HELD THAT - We are of the view that the additional ground has to be admitted for adjudication as the claim was made in the return of income filed by the assessee. We were informed that the claim for deduction of the entire sum is still pending adjudication in assessment years 1997-98 and 1998-99. In the circumstances, we admit the additional ground for adjudication and remand the matter to learned CIT(A) for deciding the issue in accordance with law after taking into consideration the decision if any, in assessment years 1997-98 and 1998-99. In the result, the appeal by the assessee is partly allowed.

Summary

Issues Involved:
1. Whether the transfer of TFD division by the assessee to ITEL could be termed as a demerger within the meaning of section 2(19AA) of the Act.
2. Whether the transfer in question could be said to be a slump sale within the meaning of section 2(42C) of the Act attracting the provisions of section 50B of the Act for computation of capital gain.
3. Whether there is no capital gain since there was negative net worth in the present case and since there was no consideration received by the assessee.
4. Whether the computation provisions of section 48 would fail because of the inability to identify the full value of consideration for the different assets comprised in the transfer.
5. Whether the revenue was justified in adding the excess of liabilities over the assets taken over by ITEL to the negative net worth while computing capital gain.
6. Whether the lease income earned by the assessee was taxable as 'income from other sources' or 'income from business'.
7. Whether the expenditure on computer software is capital or revenue.
8. Whether the disallowance in respect of obsolete stock written off by the assessee was justified.
9. Whether the additional grounds of appeal related to non-compete payment should be admitted and decided.

Detailed Analysis:

1. Demerger within the meaning of section 2(19AA) of the Act:
The Tribunal held that the transfer of TFD division by the assessee to ITEL could not be termed as a demerger within the meaning of section 2(19AA) of the Act. The conditions under section 2(19AA) were not satisfied, specifically the issuance of shares by the resulting company to the shareholders of the demerged company and the holding of at least three-fourths of the value of shares by the shareholders of the demerged company in the resulting company.

2. Slump sale within the meaning of section 2(42C) of the Act:
The Tribunal concluded that the transfer of TFD by the assessee to ITEL could not be considered a slump sale within the meaning of section 2(42C) of the Act. The transfer was as a result of a scheme of amalgamation approved by the Bombay High Court and not a sale. Therefore, the provisions of section 50B were not applicable.

3. Negative net worth and no consideration received:
Since the transfer was not a slump sale, the computation provisions under section 50B did not apply. The Tribunal also noted that there was no consideration received by the assessee, and the computation provisions under section 48 could not be applied due to the impossibility of determining the full value of consideration and the cost of acquisition for the different assets.

4. Failure of computation provisions of section 48:
The Tribunal held that the computation provisions under section 48 failed because the transfer involved a going concern, making it impossible to ascertain the cost of acquisition and the cost of improvement. Therefore, the charge under section 45 could not be effectuated.

5. Addition of excess liabilities over assets:
The Tribunal did not need to address this issue explicitly, as it was rendered moot by the decisions on the preceding issues. The computation provisions failing meant there could be no capital gain to bring to tax.

6. Lease income taxable as 'income from other sources' or 'income from business':
The Tribunal held that the lease income earned by the assessee was taxable as 'income from business.' The transaction was a method of selling the assessee's product, done in a systematic and organized manner, and constituted business income.

7. Expenditure on computer software - capital or revenue:
The Tribunal confirmed that the expenditure on computer software was capital in nature, following the principles laid down by the Special Bench in the case of Amway India Enterprises v. Dy. CIT.

8. Disallowance of obsolete stock written off:
The Tribunal directed that the addition made for the obsolete stock written off should be deleted. The method followed by the assessee was consistent with past practices, and the burden was on the revenue to show that the write-off was not bona fide.

9. Additional grounds of appeal related to non-compete payment:
The Tribunal admitted the additional ground for adjudication regarding the non-compete payment and remanded the matter to the CIT(A) for a decision in accordance with the law after considering the decisions in the relevant assessment years.

Conclusion:
The appeal by the assessee was partly allowed, with specific directions provided for each issue based on the detailed analysis and legal principles involved.