2018 (7) TMI 1611 - AT - Income Tax

Slump sale - entire sale consideration was taken as income of the impugned assessment year - Held that - Release of the amount lying in the escrow account is subject to issue of a letter from seller and purchaser to the escrow agent. No doubt, release of the escrow amount, is dependent on satisfaction of various responsibilities undertaken by the assessee in relation to the slump sale. However, in our opinion, this by itself would not be a reason to hold that consideration for the slump sale was not ₹ 18,31,00,000/-. Consideration is clearly mentioned in the slump sale agreement as ₹ 18,31,00,000/-. Segregating such consideration to two parts, one part payable in the relevant previous year and other part payable in the next year could not be in our opinion to a reason to say that capital gains arose only with reference to first part, even though release of the second part was subject to the seller abiding by certain conditions of the slump sale agreement. What is chargeable to tax is profits or gains arising from the slump sale. Profits or gains arising from a slump sale can be correctly computed only if the total consideration arising to an assessee on account of sale is reckoned. There is no provision which allows the assessee to segregate the consideration as per slump sale agreement in accordance with the year of receipt. - Decided against assessee Allowance of expenditure restricted - Held that - Admittedly, assessee had transferred its business on 06.04.2011 in a slump sale. Even if we accept that it was necessary for the assessee to incur some expenditure for maintaining its corporate status, we cannot understand why assessee incurred manufacturing expenses. The table reproduced by us clearly indicate that assessee incurred manufacturing expenses of ₹ 2,84,847/-. At the best, assessee would be eligible for 6/365 of the manufacturing expenditure of ₹ 2,84,847/-, since it transferred its business on 06.04.2011. This works out to ₹ 4,683/-. However, assessee s claim with regard to employee benefits, finance costs and administrative and other expenses ought not have been disallowed since these were necessary to maintain its corporate status. Therefore out of the total claim of ₹ 10,41,749/-, we direct the ld. Assessing Officer to allow ₹ 7,61,585/-. Balance of the disallowance is sustained. Ground of the assessee is partly allowed.

Summary

Issues Involved:
1. Computation of capital gains on slump sale.
2. Allowance of expenditure incurred by the assessee post slump sale.

Issue-Wise Detailed Analysis:

1. Computation of Capital Gains on Slump Sale:

The primary grievance of the assessee was that the entire sale consideration of ?18,31,00,000/- arising from a slump sale was taken as income for the impugned assessment year. The assessee contended that only ?16,02,00,000/- was received during the relevant financial year, with the remaining ?2,29,00,000/- received in the subsequent financial year. The assessee argued that the balance amount was kept in an escrow account and could only be encashed upon fulfilling certain obligations, thus should not be considered for capital gains in the impugned year.

The tribunal examined the slump sale agreement and the escrow agreement. It was noted that the consideration was clearly mentioned as ?18,31,00,000/- in the slump sale agreement, and the conditions for the escrow account were detailed. The tribunal held that the total consideration for the slump sale was ?18,31,00,000/-, and segregating it into parts payable in different years did not affect the computation of capital gains. The tribunal emphasized that Section 50B of the Income Tax Act, 1961, mandates that profits or gains from a slump sale are chargeable to tax in the year the transfer took place, and there is no provision allowing the segregation of consideration based on the year of receipt.

The tribunal also reviewed relevant case laws cited by the assessee but found them inapplicable to the present case. Consequently, the tribunal upheld the order of the Commissioner of Income Tax (Appeals), dismissing the assessee's ground on this issue.

2. Allowance of Expenditure Incurred Post Slump Sale:

The second issue involved the disallowance of expenditure amounting to ?10,41,749/- claimed by the assessee. The assessee argued that these expenses were necessary to maintain its corporate structure post the slump sale. The Assessing Officer had disallowed the entire expenditure, reasoning that there was no business activity after the slump sale. The Commissioner of Income Tax (Appeals) allowed the claim on a pro-rata basis for six days, considering the slump sale agreement date of 06.04.2011.

The tribunal reviewed the nature of the disallowed expenses, which included manufacturing expenses, employee benefits, finance costs, and administrative expenses. The tribunal agreed with the lower authorities that manufacturing expenses incurred post slump sale could not be justified. However, it held that expenses related to employee benefits, finance costs, and administrative expenses were necessary for maintaining the company's corporate status and should not have been disallowed. The tribunal directed the Assessing Officer to allow ?7,61,585/- out of the total claim, sustaining the balance disallowance.

Conclusion:

The appeal was partly allowed, with the tribunal upholding the computation of capital gains based on the total consideration of ?18,31,00,000/- and partly allowing the claim for expenditure incurred post slump sale. The order was pronounced on 19th July 2018 at Chennai.