2016 (5) TMI 880 - HC - Income Tax

Computation of capital gains arising from transfer of an undertaking by the Assessee to a new company in terms of a scheme of arrangement - Assessee had received only 32.48 crores in terms of the Scheme and the balance amount of 17.64 crores was discharged by MTAIC by directly issuing fully paid shares to the shareholders of the Assessee Held that - If we look at the Scheme in the context in which it belongs it would be plainly evident that it is an instrument for effecting sale of the Assessee s assets (the Panasonic Division) where the owner selling its assets (the Assessee) has called upon the buyer to pay a part of the consideration to a third party (its shareholders). Indisputably the seller would be entitled to the entire consideration for the sale and the fact that at its instance a part of the consideration is diverted to a third party would not absolve the seller from recognizing the entire consideration. We are unable to accept Mr Kapoor s contention that merely because part of the consideration for the transfer of the Panasonic Division had been paid to the shareholders of the Assessee by issue of fully paid-up shares the same could not be stated to have been received or accruing in favour of the Assessee. The expression accruing as used in Section 48 of the Act is synonymous to entitlement. If the Assessee is entitled to the consideration then the same must be taken into account for the purposes of computation of capital gains in terms of Section 48 of the Act. The consideration for the transfer of Panasonic Division is real and not hypothetical. The fact that the Assessee had agreed for part of the same being directly received by its shareholders would not make the consideration unreal in its hands; the income sought to be taxed cannot be stated to be hypothetical. - Decided in favour of the Revenue and against the Assessee.

Issues Involved:
1. Quantum of consideration for the purposes of computation of capital gains on transfer of the undertaking.
2. Applicability of Section 50 of the Income Tax Act, 1961.

Detailed Analysis of the Judgment:

Issue 1: Quantum of Consideration for Computation of Capital Gains
Background:
The Assessee transferred its Panasonic Division to M/s Matsushita Television & Audio India Ltd. (MTAIC) under a court-sanctioned scheme. The Assessee claimed a short-term capital loss of ?11,14,31,696/-, whereas the Assessing Officer (AO) assessed a short-term capital gain of ?25,34,72,144/-. The dispute centered on the quantum of consideration: the Assessee claimed it was ?32,48,00,000/-, while the AO asserted it was ?50,12,00,000/-.

Tribunal's Findings:
The Tribunal noted that the scheme was sanctioned by the Court and had statutory recognition. It observed that only ?32.64 crores was received by the Assessee, and ?17.64 crores was given to the Assessee’s shareholders by MTAIC by allotment of shares. The Tribunal held that this amount was diverted at the source and could not be considered as part of the Assessee’s income.

High Court's Reasoning:
The High Court held that the sanctioning of the scheme by the Company Court under Sections 391-394 of the Companies Act, 1956, does not alter the nature of the transaction for tax purposes. It emphasized that the transaction should be viewed holistically. The Court noted that the Assessee was entitled to the entire consideration for the transfer of its assets, and the fact that part of the consideration was diverted to its shareholders did not absolve the Assessee from recognizing the entire consideration.

The Court explained that the expression “accruing” in Section 48 of the Income Tax Act is synonymous with entitlement. Therefore, the Assessee was required to account for the entire consideration of ?50,12,00,000/-, including the ?17.64 crores issued to its shareholders.

Conclusion:
The High Court concluded that the consideration for the transfer of the Panasonic Division was ?50.12 crores, not ?32.48 crores. The question of law was answered in favor of the Revenue, and the appeal was allowed.

Issue 2: Applicability of Section 50 of the Income Tax Act, 1961
Background:
The second question involved whether Section 50 of the Income Tax Act, 1961, was applicable to the Assessee. This section pertains to the computation of capital gains in the case of depreciable assets.

Tribunal's Findings:
The Tribunal noted that the transfer of the Panasonic Division was a slump sale, where the division was transferred as a going concern, including intangible assets. It concluded that Section 50 was inapplicable as the sale consideration was not identifiable with individual assets. The Tribunal also referred to Section 50B of the Act, introduced after AY 1997-98, and held it inapplicable for the relevant assessment year.

High Court's Reasoning:
The High Court noted that the Tribunal did not hold that income chargeable under the head "Capital Gains" could not be computed. Further, the Assessee did not appeal against the Tribunal's order, and the Revenue did not press the issue regarding the cost of acquisition of the assets sold.

Conclusion:
Since the Revenue did not press the second question, the High Court did not examine the applicability of Section 50 in detail. The focus remained on the quantum of consideration for the transfer of the Panasonic Division.

Summary:
The High Court addressed the primary issue of the quantum of consideration for the computation of capital gains on the transfer of the Panasonic Division. It held that the entire consideration of ?50.12 crores, including the amount diverted to the Assessee's shareholders, must be accounted for. The appeal was allowed in favor of the Revenue, and the question of law was answered affirmatively. The Court did not delve into the applicability of Section 50 of the Income Tax Act, as the Revenue did not press this issue.

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