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TMI Blog2008 (7) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... sions viz., Business Communications Divisions (BCD) and the Tata Fone Division (TFD). The BCD provided communication solutions and the TFD was engaged in the manufacture of EPBAX and telephone instruments. During the previous year relevant to the assessment year 2002-03, the assessee transferred the TFD to ITEL Industries Private Limited (ITEL). A scheme of arrangement ("scheme") between the assessee and ITEL for the transfer of the TFD to ITEL was filed in the Bombay High Court. The scheme was approved by the Bombay High Court vide order dated 29-6-2001. The appointed date for the transfer of TFD to ITEL was 1-4-2001. The salient features of the scheme were as follows :- "The scheme of Arrangement is for vesting of the Tata Fone Divisions of Tata Telecom Limited having its registered office at Matulya Centre, 'A' Block, 249, Senapati Bapat Marg, Lower Parel (West), Mumbai 400 013, as a going concern to and in ITEL Industries Private Limited having its registered office at Bombay House, 24 Homi Mody Street, Mumbai-400 001 pursuant to the relevant provisions of the Companies Act, 1956." 4. Clauses 4 and 5 of the Scheme provides as follows :- "Vesting of Tata Fone Division of TTL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recover or realize is in substitution the right of TTL. (iii)With effect from the appointed date, all debts, liabilities, duties and obligations of TTL appertaining to the Tata Fone Division as on the close business on the day prior to the Appointed date (hereinafter referred to the said liabilities), shall also, without any further act, instrument or deed be and stand vested in and/or deemed to be vested in ITEL pursuant to the provisions of section 391/394 of the Act so as to become as and from the appointed date the debts, liabilities, duties and obligations of ITEL and further that it shall not be necessary to obtain the consent of a third party or other person who is a party to any contract or arrangement by virtue of which such debts, liabilities duties and obligations have arisen, in order to give effect to the provisions of this clause. Consideration.-Upon the demerger of the Tata Fone Division of TTL into ITEL, ITEL would not pay any consideration either to TTL or the shareholders of TTL." 5. The Hon'ble Bombay High Court vide order dated 29-6-2001 sanctioned the aforesaid scheme of arrangement. 6. In the computation of income, the assessee in note No. 11 to the statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 2(19AA) defines 'Demerger', in relation to companies, to mean the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that :- (i)All the property of the undertaking, being transferred by the demerged company, immediately before the demerger becomes the property of the resulting company by virtue of the demerger. (ii)All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger. (iii)The property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger. (iv)The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis. (v)The shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the provisions contained in sub-item (C) of item ( i) of sub-clause (c) of clause (6) of section 43; and (b )in case of other assets, the book value of such assets." It was submitted that in the case of the assessee, there has been no sale for a lump sum consideration. Consequently, the provisions of section 50B read with section 2(42C) of the Act would not be applicable. Apart from the above, it was submitted that since no consideration has been received by the assessee, the question of sale being for a lump sum consideration without values being assigned to the individual assets will not arise. In view of the above, it was submitted that the provisions of section 50B of the Act are also not applicable to the case of the assessee. Without prejudice to the above, it was submitted that as no sale consideration has been received by the assessee, the question of computing any capital gain in respect of the said transfer will therefore not arise. It was submitted that since the consideration and consequently the gain thereon is incapable of being computed, the question of charging the same to tax as capital gains does not arise. In this regard the assessee submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sold as a going concern it is impermissible to ignore the liabilities taken over and disregard the same as not forming part of the consideration. The Assessing Officer, therefore, held that excess of liabilities over assets viz., 22.63 crores was consideration received for transfer. The Assessing Officer thereafter, determined capital gain as follows :- "However, since the transfer has been made without values being assigned to individual assets and liabilities, the transfer is in the nature of slump sale as defined under section 2(42C) of the Income-tax Act and accordingly, the computation of capital gain on such transfer will be as per the provisions of section 50B. Accordingly, the profits from the said transaction will be the total consideration received as reduced by the net worth of the company, as provided under Explanation 1 to section 50B. In this case, the assessee company has provided the net worth of the division as on the date of transfer as under :- Particulars Amount (Rs. in Lakhs) Fixed assets (book value) 453.47 Net current assets 4,76.42 Total assets (A) 929.89 Secured loan 706.83 Unsecured loan 2,555.00 Total liabilities (B) 3,261.83 Net worth (A- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance or deduction has been made for the assessment in any year in respect of loss, expenditure or trading liability incurred by the assessee'. Reliance was placed on various judicial decisions as under :- u Mahindra & Mahindra v. CIT [2003] 261 ITR 501 (Bom.). u CIT v. AVM Ltd. [1984] 146 ITR 355 (Mad.). u CIT v. Lal Textile Finishing Mills [1989] 180 ITR 45 (Punj.&Har.). u CIT v. Phoolchand Jiwan Ram [1981] 131 ITR 37 (Delhi). 14. It was also argued that the differential amount between the liability and assets could not be also taxed under section 28(iv) of the Act; since no benefit had arisen from the business or exercise of a profession. Relying on a decision of the Hon'ble Mumbai Tribunal in the case of Prism Cement Ltd. v. Jt. CIT [2006] 101 ITD 103. It was claimed that similar to the forfeited amount (due to non-payment of call money) credited as the amount written back and set off against expenditure in that case which had been held to be not chargeable to tax, the assessee's crediting of the excess of liability over asset to the Capital Reserve Account was also not chargeable to tax. 15. Finally, relying on a decision of Mumbai Tribunal in the case of Zuari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation would naturally not apply. Further, there is an inbuilt formula given in the said section itself to compute the gain by deducting (and not by reducing) the net worth from the sale consideration. The net worth has also been explained in the said section. I intend to emphasize on two phrases :- (i )full sale consideration as against sale amount. (ii )deduction of net worth as distinguished from reduction of net worth." Firstly, the term 'consideration' is obviously different from the word 'amount'. It could be anything other than a mere monetary amount. None ever hands over a division or an undertaking for nothing. I do agree that there was no express monetary amount mentioned in the so called demerge scheme. But, in effect TTL (the assessee) had offloaded its excess liability and precisely that was the first consideration received on such transfer. The assessee cannot and it requires an exercise to be made from day one with regard to the transferred out company's acquisition of assets and liabilities to find out which portion of the liabilities had stood excess over the assets. Besides, in a slump sale, by definition, no specific value is assigned to the individual a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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? (2)If the answer to issue No. 1 is in the negative, whether the transfer in question could be said to 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)If answer to issue No. 2 is in the affirmative, 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 there was no capital gain which could be brought to tax ? (4)If the answer to issue No. 2 is in the negative, 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, inability to bifurcate the cost of acquisition or cost of improvement for the different assets comprised in the transfer and therefore the ruling of the Hon'ble Supreme Court in the case of B.C. Srinivasan Setty (supra) would apply and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be applied in a given case. According to him the assessee in the process of amalgamation could get rid of liabilities worth Rs. 22.32 crores and this was consideration in law for the transfer. The plea of impossibility of complying with the provisions of section 2(19AA), according to him will be irrelevant. It was argued by him that the Legislature while enacting provisions of section 2(19AA) would have been fully conscious of an amalgamation where there is no consideration. Yet it has thought it fit to restrict the case of demerger under section 2(19AA) of the Act, only to cases where consideration for transfer is in the form of allotment of shares. The Legislature while enacting provisions of section 2(19AA) is deemed to have foreseen all contingencies and there cannot be any presumption that a casus omissus exists. 19. We have considered the rival submissions. Section 47(vib) lays down that there shall be no charge to tax a capital gain on any transfer, in a demerger, of a capital asset by the demerged company to the resulting company. For the purpose of section 47(vib), the term "Demerger" has been defined in section 2(19AA). One of the condition under section 2(19AA) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from a slump sale effected in the previous year that can be brought to tax as capital gain. He then drew our attention to the definition of slum sale as given in section 2(42C) of the Act and submitted that the definition contemplate transfer of one or more undertakings as a result of sale for a lump sum consideration. He laid emphasis on the fact that the transfer of the undertaking should be as a result of sale. In this regard, he also submitted that expression 'transfer' in relation to the capital asset has been defined under section 2(47) of the Act to include many forms of transfer like exchange, relinquishment, conversion of the capital assets into stock-in-trade etc. His submission was that the transfer of capital asset could be in several forms; but Legislature while defining slump sale has thought it fit to include only transfer by way of sale and not any other mode of transfer. It was submitted by him that expression 'sale' has not been defined in the Act; and therefore, the definition of term 'sale' as appearing in section 54 of the Transfer of Property Act, 1882 and section 4 of the Sale of Goods Act, 1930 have to be looked into. Under the Transfer of Property Act, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility was received by shareholders of the transferor company, it could not be said there was a sale. Learned counsel for the assessee therefore prayed that the transfer in the present case does not satisfy the definition of slump sale; and therefore, provisions of section 50B will not apply. 25. Learned DR for the revenue on the other hand submitted that for a contract of sale, four ingredients were required to be satisfied namely (i) Parties to the contract (ii) Subject-matter of contract (iii) Transfer of property (iv) Consideration for transfer. It was submitted by him that all four conditions were satisfied in the case of the assessee and therefore, there was a sale by the assessee of TFD to ITEL. In the circumstances, it was submitted by him that the sale by the assessee was of an undertaking for a lump sum consideration without values being assigned to individual assets and liabilities and the same should be considered as a slump sale. 26. We have considered the rival submissions. The expression 'transfer' as defined in section 2(47) of the Act, includes several forms of transfer; and sale is only one such form of transfer. Under section 50B any profits or gains arising fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntractual transfers and not statutory transfers or transfers effected by orders of the court or by operation of law. A scheme of amalgamation has statutory operation when sanctioned by the company court under the relevant provisions of the Companies Act and is distinct and different from a mere agreement signed by the necessary parties. Even if the scheme is approved by all concerned parties by consensus, merely because it is so agreed upon, the court is not obliged to put its imprimatur on it. The court has the discretion and power to reject a scheme even if all the shareholders and creditors have agreed to it. But, once the scheme is scrutinized by the company court and sanctioned by an order made by it under section 391 of the Companies Act, 1956, it ceases to retain the character of contract and operates by force of the statute. In a case of amalgamation, there is a share exchange ratio prescribed according to which, the shareholders of the transferor-company would be entitled to shares in the transferee-company. This, however, does not make it a situation of exchange of immovable property, or relinquishment of any right to immovable property so as to make the transaction amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other valuable consideration it may be an exchange or barter but not a sale." 29. In the case of Oudh Sugar Mills Ltd. (supra), the question arose in the context of provisions of section 41(2) of the Act. The assessee, a public limited company engaged in the manufacture and sale of sugar, during accounting year ended on 30-6-1981, transferred one of its units to A, another limited company, as per scheme of arrangement approved by Bombay High Court. As per Scheme certain assets of assessee became property of A from 1-7-1980, some assets were given on lease and employees of assessee became employees of A and all liabilities of assessee were taken over by A. Consideration for transfer of assets and liabilities was received by each of shareholders of assessee company in form of equity shares and face value of these shares was equal to amount debited to general reserve account of assessee. Assets were transferred by assessee to A at book value and there was a difference between book value and written down value of those assets. The question for consideration before the Tribunal was as to whether there was sale or exchange between assessee and A and assessee could be said to have rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. A business undertaking as a going concern includes all rights, assets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for the assessee relied on the following decisions :- u Industrial Machinery Associates v. CIT [2002] 81 ITD 482 (Ahd.); u Jt. CIT v. Steri Sheets Ltd. [IT Appeal Nos. 546 and 547 (Delhi) of 2000 dated 12-5-2006]; u Salora International Ltd. v. Jt. CIT [2003] 129 Taxman 68 (Delhi) (Mag.). 36. The aforesaid decision relied up by the learned counsel for the assessee relates to the computation of capital gain in the case of sale of a going concern. The aforesaid cases also related to the period prior to insertion of section 50B of the Act. In the aforesaid decisions the principle that in the absence of provisions of section 50B of the Act, sale of business undertaking (transfer) as going concerns will not attract charge of tax under the head 'Capital gains' for the reason that it was not possible to conceptualized cost of acquisition as well as date of acquisition, has been laid down. The submission of learned counsel for the assessee was that the charge of capital gains in the case of assessee should also be fails for identical reasons. 37. Learned DR for the revenue on the other hand placed strong reliance on the decisions of Hon'ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the assessee are authority for the proposition that prior to insertion of section 50B of the Act in the event of transfer of business undertaking as a going concern, there was impossibility of computation of cost of acquisition, date of acquisition etc., and therefore, computation provisions could not be applied. Consequently, levy of capital gains would also fail. The decisions of the Tribunal referred to above have followed the ratio laid down in the decision rendered by Hon'ble Karnataka High Court and Hon'ble Madras High Court in the case of Syndicate Bank Ltd. (supra) & K.P.V. Shaikh Mohammed Rowther & Co.'s (supra). These decisions in turn have been rendered by following the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra). We may in this regard refer to the ratio laid down by the Ahmedabad Bench of ITAT in the case of Industrial Machinery Associates (supra) :- "For the levy of capital gains under section 45 three ingredients should co-exist: (1) there should be a capital asset; (2) there should be transfer of such capital asset; and (3) profit or gain must arise from the transfer of such capital asset. So far as the first two ingredients ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the facts and circumstances of that case, that entire business was sold by the assessee as a going concern without any intention of sale of itemized assets. As regards the computation of capital gains arising from the sale of a going concern, Hon'ble Bombay High Court, however, did not render my verdict and sent back the matter to the Assessing Officer with a direction to decide whether any capital gains tax liability arises from such sale and if so, to compute the quantum of capital gains under sections 45 to 50. Thus, the issue pertaining to the chargeability of profit arising from slump sale of business as a going concern to tax as capital gains was not decided by Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra) and the said decision cited by learned DR for the revenue is, therefore, of no help to support the revenue's case on the said issue. 41. In view of the above, 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 above 3rd issue, which we have formulated above, is not being taken up for consideration. We may mention that elaborate arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) was a business transaction and the income from the same was to be taxed under the head 'Profits and gains from business or profession'. However, the second transaction was purely a finance transaction. On this reasoning, the Assessing Officer held that the leasing activity can be business of a leasing company but not of the assessee. The Assessing Officer also held that the transaction undertaken by the assessee cannot be regarded as being adventure in the nature of trade and therefore cannot be taxed under the head 'Profits and gains of business or profession'. 47. On appeal by the assessee, learned CIT(A) confirmed the order of the Assessing Officer. Before learned CIT(A), it was brought to his notice that in assessment year 2001-02 on identical issue, Predecessor in office of learned CIT(A) had held that income in question was income from business. Learned CIT(A), however, did not agree with the decision of his Predecessor in office and he held that the business of the assessee was not earning interest on finance transaction; and therefore, income in question was income from other sources. 48. We have heard the rival submissions. Learned counsel for the assessee submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account. The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field. (i )Nature of business of the assessee: It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment. (ii )As a general rule it may be stated that the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are Associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the statement submitted to the bank was Rs. 1,659.87 lakhs. The work-in-progress considered for valuation of closing stock is Rs. 1,568.32 lakhs. The major difference in the valuation of work-in-progress was due to writing off in the annual accounts the obsolete stock of Rs. 68 lakhs (Refer Schedule-15 of Annual Report). The value of the obsolete stock written off in the annual accounts was not excluded from the stock reported to the bank. Further the difference also arises on physical verification of the stock which is not completely finished by the time the statement is provided to the banks. Also year end dispatches also have a difference in the valuation of stock. Finished Goods The value of finished goods as per the statement submitted to the bank was Rs. 1,323.65 lakhs. The value of the finished stock as reported in the final accounts was Rs. 1,106.21 lakhs (excluding stock in transit). The major difference is on account of writing off in the annual account the obsolete stock worth Rs. 200 lakhs. (Refer Schedule 15 of Annual Report). The value of the obsolete stock written off in the annual accounts was not excluded from the stock reported to the bank. Further the rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this mistake committed by the Assessing Officer. Before learned CIT(A), the assessee submitted that the write off of obsolete stock should be allowed on grounds of commercial expediency and prudent practices. The learned CIT(A), however, did not agree with the claim of the assessee. He substituted the disallowance of Rs. 48.49 lakhs made by the Assessing Officer to the correct figure of Rs. 268 lakhs written off by the assessee as obsolete stock. The assessee aggrieved by the order of learned CIT(A) has preferred ground No. 4 before the Tribunal which reads as follows :- "Disallowance of obsolete stock :- (a )The learned CIT(A) erred in enhancing the disallowance in respect of obsolete stock written off by the assessee from Rs. 48.49 lakhs to Rs. 2.68 crores. (b )The assessee submits that the learned CIT(A) erred in enhancing the disallowances without discussion and without providing the appellant an opportunity to submit its explanation. The appellant, therefore, submits that the order passed by the learned CIT(A) in this regard is ultra virus and bad in law and be quashed. (c )Without prejudice to the above, the learned CIT(A) erred in confirming the disallowance in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the accounting sub-head thereon is shown as 'Excess or Shortage'. According to him the plea of the assessee that the write off was of obsolete stock was in contradiction with the details furnished. It was therefore submitted by him that the addition to the extent of Rs. 200 lakhs in any event has to be sustained on this basis because there was to proof of actual shortage. It was submitted that though this was not the basis on which the addition was made, the Tribunal can take note of the above while deciding the issue. 65. It was further submitted by him that the write off of obsolete stock even if claimed to be based on commercial prudence is always subject to scrutiny by the revenue and the assessee has to given a satisfactory basis for the write off. The fact that such write off was accepted in the past cannot be the basis to delete the addition. In this regard, it was argued by him that principles of res judicata are not applicable in income-tax assessments. 66. In rejoinder, learned counsel for the assessee submitted that the basis of disallowance was that there was a write off of obsolete stock and there was no question of any shortage of stock. It was also submitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in arriving at the value of the obsolete stocks or suggest any other better on appropriate and scientific method of valuation of such obsolete stocks. It was not the case of the revenue that the inventories of obsolete stocks prepared by the assessee in these three years were neither correct nor represented the true state of affairs nor had the department placed any material which would show that the findings reached by the Commissioner (Appeals) are not based on any material but on mere surmises and conjectures. In these circumstances, in view of the decision of Madras High Court in Indo-Commercial Bank Ltd. v. CIT [1962] 42 ITR 22, the additions made by the ITO on account of obsolete stocks written off by the assessee in its books had to be deleted." 69. The Delhi Bench of ITAT in the case of Pepperit + Fuchs (India) Ltd. (supra) has also laid down the principles to be followed in the cases like the present, as follows :- "The Apex Court in the case of Chainrup Sampat Ram v. CIT [1953] 24 ITR 481, opined that as the profits of income-tax are to be computed in conformity with the principles of commercial accounting unless such principles stand superseded or modified by a legisl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to the National Radio & Electronics Company Ltd. 72. The assessee had entered into an agreement dated 29-3-1997 with NELCO. The assessee was engaged in the activity of telecommunication. NELCO was also engaged in the activity of manufacture and supply of telecommunication equipment, data communication equipment and systems, V-SAT equipment and systems, drives, automation and SCADA systems. The assessee and NELCO were affiliated with the TATA group of companies. The assessee proposed to NELCO to withdraw from the manufacture and supply of some of the telecommunications equipment in order to facilitate the reorganization of the telecommunications business within the TATA group of companies. Under the above agreement as per clause 1, NELCO agreed to the following :- "With effect from the date of this Agreement and subject to the provisions of clause 2 below, NELCO shall cease and desist directly or indirectly carrying on or engaging in India, whether the brand name of NELCO or any other brand name, the manufacture and/or supply/marketing of telecommunication equipment for the territory of India, particularly the activities described in Annexure 'A'." The Annexure A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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