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TMI Blog2007 (7) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... d does not require any specific adjudication. 4. Ground Nos. 1 to 10: These grounds relate to the addition made on account of short-term capital gain. The facts relating to the issue, as culled out from the material on record, as well as on perusal of the orders of the authorities below, are as under: 4.1 The assessee company was incorporated in the year 1998 with the main object of development of software and multimedia contents. It decided to transfer its undertaking to M/s Suri Capital & Leasing Limited ("SCL" in short). For this purpose. acquisition agreement between SCL and the assessee company, namely, Virtual Software & Training (P) Ltd. ("VSTL" in short), was executed on16th June, 2000. We consider it proper to reproduce the relevant clauses of this agreement, which are as under: "3. VSTL is desirous of transferring its entire undertaking with respect to software development and training, consisting of its assets, liabilities. intellectual property rights and other contractual rights and obligations as more particularly described in Sch. B to this agreement on a 'going concern' basis (hereinafter referred to as the "business"). 4. SCL is desirous of acquiring the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h July, 2000and31st July, 2000, the assessee company transferred its entire undertaking with respect of software business consisting assets, liabilities, intellectual property rights, contractual rights and obligations to VSL. The assessee company exchanged all its assets and liabilities, lock stock and barrel as 'going concern' and VSL took over all such assets and liabilities in exchange of allotting the assessee 45 lakh equity shares in VSL. The equity shares of VSL are listed and traded in various stock exchanges across the country. As per the terms of the agreement for acquiring the business of the assessee company, VSL discharged the consideration by allotment of its 45 lakh equity shares of the face value of Rs. 10 each. Thus as on31st July, 2000; the situation stands as under: (i) Assets, liabilities, employees, intellectual property rights, contractual obligations, etc. of the assessee company stood transferred to VSL. (ii) For such transfer, as stated above in (i) the assessee company was allotted 45 lakh equity shares of the face value of Rs. 10 each of VSL. Thus the assets of the assessee company which upto31st July, 2000were in the form of fixed assets, current asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued, subscribed, and paid up capital of SCL.' Earlier in art. 2.1 of the same agreement (it) has also been described as 'Agreement to sell and purchase'. Under such article, it has been mentioned that the assessee company shall sell, transfer, etc., to VSL the entire organization in the business of computer software. In view of the above, provisions of the agreement dt. 16th June, 2000 between the assessee company and M/s Suri Capital and Leasing Ltd. the transaction is slump sale of the business of the assessee company in consideration of 45 lakhs shares of face value of 10 each of M/s Suri Capital and Leasing Ltd. Sec. 50B has been inserted in the IT Act w.e.f. 2000-01. Sec. 50B is applicable for computation of capital gains in case of slump sale of business. In order to tax, transaction as a slump sale, it is necessary to understand the word 'slump sale' and provisions of s. 50B. As defined in s. 2(42C) 'slump sale' means the transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities. "Sec. 50B has been inserted with effect from the asst. yr. 2000-01. Provisions of s. 50B, app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on agreement was to get control of a company by the assessee. In support of this submission it was stated that even though the entire undertaking software was transferred, but the domain names owned by the assessee was never transferred. It was pointed out that all such domain names related to the software business whereas M/s Suri Capital was carrying on the business of leasing. Thus, in view of the agreement, both M/s Suri Capital and the assessee could continue their business in the ordinary course of business. 4.7 The assessee further submitted that the transaction was given the name of transfer only for commercial reasons. It was submitted that in reality the assessee had subscribed for the shares of M/s Suri Capital and instead of contributing the actual cash, it had contributed variable assets i.e., business undertaking. It was pointed out that in pursuance of art. 3 of the Acquisition Agreement, 45 lakh equity shares were allotted which resulted into holding of 60 per cent of the total capital of M/s Suri Capital. Thus, in consideration of the cost of 45 lakh equity shares, the assessee had contributed its entire commercial undertaking and thus in return it had acquired th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before the CIT(A) that equity share of M/s Suri Capital Leasing Ltd., are listed atDelhiand Mumbai Stock Exchange. The market value of the share is Rs. 4 per share as per exchange quotation. The AO has rightly taken the value of each share Rs. 10 in view of acquisition agreement made between these two parties that the transfer share will be made on face value of Rs. 10 each. The assessee has also referred to the balance sheet of M/s Suri Capital valued by Price Waterhouse Cooper, chartered accountant company. It is valued the assets to Rs. 8 crores to 11 crores in different way of valuation and states that the difference between the face value of the share allotted at Rs. 4.5 crores and such book value of the net assets is an intangible assets i.e., goodwill. The assessee's contention is not correct, as the acquisition agreement clearly states that the transfer of the share on face value is Rs. 10 each and has no reference to the tangible assets or the goodwill. The assessee company also pleads that it gets 60 per cent control over the total capital of M/s Suri Capital Ltd., thus the assessee gets 45 lakhs shares as well as control over the M/s Suri Capital Ltd., whose shares are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs. CIT (2001) 168 CTR (Del) 509 : (2001) 252 ITR 491 (Del) : (2001) 117 Taxman 586 (Del); (ii) CIT vs. G. Narasimhan (1999) 151 CTR (SC) 94 : (1999) 236 ITR 327 (SC) : (1999) 102 Taxman 66 (SC); (iii) C.R. Rajendra vs. (2002) 125 Taxman 55 (Mad); (iv) Kuttukaran Machine Tools vs. CIT (2003) 185 CTR (Ker) 104 : (2003) 264 ITR 305 (Ker) : (2003) 131 Taxman 690 (Ker). 4.13 He has also placed reliance on the ratio of decision of the Hon'ble Supreme Court in the case of Rameshwar Prasad Bagla vs. CIT 1973 CTR (SC) 459 : (1973) 87 ITR 421 (SC) to hold that profit on sale of shares acquired with the intention of acquiring managing agency, was a capital gain, which was taxable as capital gains. 5. Aggrieved, the assessee has preferred second appeal before the Tribunal. On the directions of the Bench dt.3rd Jan., 2007,18th Jan., 2007and26th Feb., 2007, both the parties have also filed written submissions, besides making oral submissions in support of their respective claims. The assessee filed written arguments dt.13th March, 2007. Subsequently, the assessee has also filed further written submissions. The learned CIT-Departmental Representative has similarly filed written submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t control over its software undertaking and gaining 60 per cent control over the share capital of SCL. This transaction can thus, by no stretch of either imagination or reasoning, be equated to a straight case of sale as contemplated under s. 2(42C) of the Act or a case of transfer under s. 2(47) of the Act. Where there is no sale, s. 2(42C) of the Act has no role to play. And when there is no transfer, the provisions of capital gains tax would not apply. The learned authorities failed to appreciate and realize that the exclusion of the domain names from the vesting contract and further the explicit provision pinning responsibility for repayment of assets and liabilities of leasing business on SCL virtually crafted a situation where the appellant would have complete control over the software undertaking as heretofore with no responsibility of the leasing business thereby totally and completely obviating the incidence of a transfer. It was a simple case of the appellant contributing its undertaking in consideration of its acquiring SCL shares numbering 45 lakhs. Appellant's rights over the software unit did not relinquish or extinguish completely just as the responsibility of SCL fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per share. It was also pointed out that the price or value per share cannot be more than Rs. 4 during that period and therefore at the most the sale consideration should be determined by taking into account such market value. The learned counsel also submitted arguments on the working of net worth and placed reliance on the valuation report of Price Water House. Thus, according to him, no short-term capital gain can be worked out if the net worth is taken at Rs. 8 to 11 crores and the value of shares is taken at Rs. 45,00,000 X 4 = 1,80,00,000. 6.4 In order to challenge the finding of the learned AO and that of the learned CIT(A) that the transaction was a slump sale, he submitted that neither under the Sales of Goods Act nor under the Transfer of Property Act. this transaction could be called sale simplicitor. He further pointed out that the requirement of slump sale as contained under s. 2(42C) were also not satisfied because the transaction was merely an exchange resulting into diminution of controlling rights by 40 per cent. The other argument taken by the learned counsel in the written submission was that the face value of Rs. 10 per share of 45 lakh shares, which was the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umbent on the AO to have brought on record the extra-commercial consideration so agreed to and changing hands on account of this deal. 6.6 It was pointed out by the learned counsel for the assessee that the agreement between the assessee company and Suri Capital & Leasing Ltd. only stipulated an exchange of 45 lakh shares. The agreement did not state at any place, that the transaction is for a sum of Rs. 4.5 crores. Such is only a presumption of the AO. The genuineness of the transaction has not been questioned. In such a situation, the averments in the agreement are not only binding but are final. Nothing could be construed beyond what is stated in the agreement. As for instance, the multiplication of the number of shares by their face value is not in the contemplation of the agreement. Commercial transactions are always to be valued in terms of business concepts and practices. The High Court of Madhya Pradesh in Smt. Maharani Ushadevi vs. CIT (l981) 131 ITR 445 (MP) has prohibited any estimation or valuation and had directed the Department to go-by the transaction value as stipulated in the agreement. The Hon'ble High Court has done so in consonance with commercial principles. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he part of the AO. According to learned Departmental Representative, as per the terms and conditions of the agreement the purchase price stated was allotment of 45 lakhs of equity shares on face value of Rs. 10 per share. 8. We have carefully considered the facts and circumstances relating to this matter and the rival submissions. On going through the agreement, referred to above, it is clear that the assessee agreed to transfer VSTL as a going concern. The term 'going concern' has been deliberately used in para 3 of the agreement, which has been reproduced above. Similarly, in art. 3, under the caption, "Consideration and payment", slump purchase price has been indicated. Thus, on consideration of various stipulations and provisions made in the agreement, it is clear that the intention of the parties was to sell and purchase a going concern for a slump purchase price. It is true that in art. 2.1 though domain name owned by VSTL have been retained but by merely reserving the domain names by the assessee it cannot· be said that there was no transfer of VSTL to the transferee company i.e., SCL. The terms of the agreement are very specific and clear and there is no need for im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump sale. The argument of the learned counsel for the assessee that the transaction is not covered within the definition of 'transfer' under the Sales of Goods Act and Transfer of Property Act is not tenable because definition of 'transfer' has been given in s. 2(47) which includes sale, exchange or relinquishment of the asset. The argument that the word 'relinquishment' will qualify sale and exchange is not acceptable because the words used are 'sale', 'exchange' or 'relinquishment' of the asset. Thus, it is not necessary that there should be extinguishment of all the rights in the case of sale or exchange. In any case, there can be no dispute that the transaction was transfer within the meaning of s. 2(47). The slump sale has also been defined in s. 2(42C) which is as under: "(42C) 'slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales." 8.3 The definition is quite clear and ingredients of this definition are fully satisfied in the case of the present assessee. We are. therefore, unable to accept the contention of the learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares on the relevant dates nor has cited any other authority to show that it is only the face value of the shares which is to be taken into account for working out the sale consideration. 8.6 The stand of the assessee regarding determination of the value of shares right from the very beginning was that the consideration determined by the AO at Rs. 4.50 crores is wrong. In this regard before the Tribunal also ground Nos. 8 and 9 have been taken specifically. The learned counsel pointed out that before the AO as well as before the learned CIT(A) this submission was made but has not been considered by the authorities. 8.7 On going through the assessment order, it is found that before the AO in the written submissions, the assessee took the following plea: "As on31st July, 2000when the above transaction took place, the market value (as per stock exchange quotation) of the equity shares of VSL was hovering between Rs. 2, Rs. 3 per share. Thus, what the assessee received for parting with its assets, liabilities, contractual obligations, etc. is only the market value (as per stock exchange quotation) of the equity shares of VSL. In respect of the above transaction of transfer of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------- 6 July, 2000 5.60 5.60 4.35 5.00 4700 ---------------------------------------------------- 5 July, 2000 4.05 4.50 4.05 4.50 800 ---------------------------------------------------- 5 July, 2000 5.00 5.00 4.50 4.50 2400 ---------------------------------------------------- 30 June, 2000 4.05 4.05 4.05 4.05 100 ---------------------------------------------------- Data Source -Asian CERC IT Ltd. 8.10 The above details were submitted before the AO and the learned CIT(A) but they have not commented about the same. On the basis of the quoted price, as per above, the average price per share in any case will be around Rs. 4.70 per share on and near the date of transaction of sale and hence this may be the cost which should normally be taken into account for determining the sale consideration, but in the circumstances of the present case, where the shares of transferee company were acquired in bulk and controlling interest over that company was also acquired by the assessee, the market price of the shares so acquired should be determined after taking into consideration all these relevant aspects including the rates of shares quoted in stock exchange, wherein too s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether the assessee filed any such report as required under s. 50B(3), referred to above, along with the return or not and as to whether the net worth of the business has been worked out by the AO on the basis of such report or not. The provision of s. 50B(3) is mandatory in nature and therefore the AO is required to follow the procedure laid down therein. Hence, we consider it proper to direct the AO to ensure compliance of this provision for working out the net worth of the business of the assessee. In case such report has been filed, then the facts and figures shall be verified and in case it has not been so filed, then such report shall be obtained and shall be taken into consideration as per law. 8.14 In view of the above discussion, we set aside the findings of AO and that of the learned CIT(A) on the point of computation of short-term capital gain and direct the AO to work out the short-term capital gain in the case of the present assessee after taking into account the sale consideration, which is to be worked out in the light of our observations made above and to adopt the net worth of the business of the assessee as per the provisions of s. 50B(3) as referred to ab ..... 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