2019 (2) TMI 1542 - HC - Income Tax

Slump sale - Section 2(42C) - valuation entire unit - valuer assigned separate valuation to different parts of the unit - HELD THAT - The sale in question was correctly held to be a slump sale as defined in section 2(42C). Merely because for the purpose of arriving at a proper valuation for transfer of the entire unit in the valuation report obtained by the purchaser, the valuer assigned separate valuation to different parts of the unit would not take away the fact that what was sold by the assessee was entire unit as a going concern. No question of law, therefore, arises. Effective date of sale of this unit - CRM division stood sold from the effective date - Date of transfer - Date of agreement - HELD THAT - The agreement in question referred to the effective date of transfer as 31st May 2007. Tribunal records that written agreement which was executed a couple of months later and was registered some time thereafter, would not make any difference. The issue can be looked from slightly different angle. The date assessee stopped claiming income arising out of conducting charges of the said unit after 31st May 2007, surely the purchaser JSW would also have stopped claiming expenditure towards such charges. If both sides have accordingly acted in terms of clear understanding, the revenue authority had no reason or even power to shift such date. That too, in case of only one party i.e. the recipient of the income. Disallowance of expenditure made in terms of section 14A - HELD THAT - We notice that before the A.O. the assessee has not raised such contention. We are informed that before CIT (Appeal) such a contention was raised. The same was not dealt with. Tribunal has merely made one line declaration that the assessee had not earned any exempt income. No reasons for for refraction of the Tribunal s examination on the accounts of the assessee before coming to such a conclusion. We would request the Tribunal to re-examine this question and give a fresh finding with brief reasons. We are not disputing the Tribunal s conclusion that if the assessee had not earned any exempt income disallowance u/s 14A read with Rule 8D could not have been done. This is what this Court in a judgement in case of The Pr. Commissioner of Income Tax Vs. Huntsman International (India) Pvt. Ltd. 2019 (2) TMI 1457 - BOMBAY HIGH COURT has held.

Summary

Issues Involved:
1. Whether the valuation report obtained by the buyer of the CRM division could be considered for reaching a board enterprise value or for assigning sale values to individual assets and liabilities under section 2(42C) of the Income Tax Act, 1961?
2. Whether the effective date of the sale of the CRM division was 31/5/2007 as per the agreement or 4/9/2007 as per the registration of the deed of transfer?
3. Whether the disallowance under section 14A read with Rule 8D made by the Assessing Officer was correctly deleted by the Tribunal due to the absence of exempt income earned by the assessee during the relevant period?

Analysis:

Issue 1: Valuation Report and Slump Sale
The Tribunal concluded that the sale of the CRM division was a slump sale as defined under section 2(42C) of the Income Tax Act. The Tribunal found that the transfer involved both tangible and intangible assets and liabilities as a going concern. The valuation report obtained by the buyer, which assigned separate values to different parts of the unit, did not change the nature of the sale as a slump sale. The Tribunal correctly interpreted the agreement between the parties, which defined the "Unit" as all tangible and intangible assets and liabilities of the entire unit. Thus, the Tribunal did not commit any error in its decision.

Issue 2: Effective Date of Sale
The dispute regarding the effective date of the sale arose between the assessee and the revenue authority. While the revenue contended that the sale was effective from the date of registration of the deed of transfer, the assessee claimed that the effective date was 31/5/2007 as per the agreement. The Tribunal upheld the assessee's position, noting that both parties had acted in accordance with the understanding that the transfer date was 31/5/2007. The Tribunal's decision was based on the clear terms of the agreement, and the revenue authority had no grounds to shift the effective date.

Issue 3: Disallowance under Section 14A
The Tribunal deleted the disallowance under section 14A read with Rule 8D, as the assessee had not earned any exempt income during the relevant period. The Tribunal relied on the decision of the Gujarat High Court and held that if no exempt income was earned, the disallowance could not be justified. However, the Tribunal did not provide detailed reasons for this conclusion. The High Court requested the Tribunal to re-examine this issue and provide a fresh finding with brief reasons, emphasizing the importance of a thorough examination before concluding on such matters.

In conclusion, the High Court upheld the Tribunal's decision on the first two issues but requested a re-examination of the third issue regarding the disallowance under section 14A. The case was restored to the Tribunal for further consideration on this specific matter.