I-T - Whether when assessee sells undertaking as going concern alongwith employees and licences, no capital gain tax can be levied on sum received in excess of written down value of assets transferred - YES: Bombay HC

THE issues before the HC are - Whether when the assessee sells the whole undertaking as a going concern alongwith the employees and various licenses and the cost of the assets cannot be determined separately, no capital gain can be taxed on the amount received in excess of the written down value of the assets transferred and whether prior to insertion of section 50B, the profit arising on the sale of the undertaking as a whole cannot be taxed. And the verdict goes against the Revenue.

Facts of the case
Assessee was engaged in the business of manufacture and sale of liquor. An agreement was entered into by the assessee with IDPL by which the assessee agreed to sell to the purchaser the undertaking / business together with its assets and liabilities as a running business / going concern on as is where is basis. AO noted that in the notes to account, it was mentioned that the written down value of the assets transferred was shown as a deduction for the purpose of computing depreciation from the block of assets. The excess of the cost of IMFL business was stated as not taxable and was not deducted from the respective block of assets. AO while framing the assessment deducted from the total sale price the written down value of the fixed assets and the value of the stores, raw materials and finished goods and observing that the difference was held to be chargeable under the head of capital gains. What was transferred by the assessee was the entire business as a slump sale but held that the profit arising on such transfer of business as a going concern would be chargeable to tax under the head of capital gains.

CIT (A) affirmed the order passed by the AO stating that the agreement between the assessee and the purchaser made it clear that a lump sum consideration was in fact arrived at on the basis of the assets of the assessee. Net worth of the unit was ascertained by evaluating each asset and liability and the sale price being determined on the basis of each asset and liability it could not be asserted that the assets were not acquired at any cost. Assessee contended before ITAT that what was transferred was the entire business and undertaking of the IMFL unit on the basis of a slump sale. Tribunal held that this was not a sale of itemized assets. It was not possible to ascertain the cost of the capital asset viz. the IMFL undertaking / business or the cost of the improvements thereto and it was hence not possible to compute any chargeable capital gain on the sale of the undertaking as a going concern.

Revenue contended that the purchaser as well as the assessee had furnished a valuation of the fixed assets which was the subject matter of transfer and the CIT (A) consequently held that it was not the case of the assessee that any of the assets transferred did not have a cost or that it was self generated.

Assessee contended that the agreement for the transfer made it abundantly clear that what was transferred included, besides the land, building and fixed assets, the benefit of all pending contracts, all licenses, permissions and approvals received from the Central and the State Governments, distribution network, intangible assets including rights in intellectual property and workforce employed in the undertaking. Prior to the insertion of section 50B, the computation provisions for computing capital gains would break down since no cost can be attributed to the intangibles which formed subject matter of the transfer.

After hearing both the parties, the High Court held that,

++ the Agreement does not contain an itemized valuation in respect of the land, building and fixed assets transferred. Under the agreement the assessee transferred to the purchaser the entire undertaking /business at and for a consideration of Rs.10.60 Crores. The assets and liabilities were subject to adjustment that if any machinery was missing it was to be replaced by the vendor and if there was any variance in the current assets or liabilities it was liable to be adjusted from the price. The assessee transferred its employees as part of the undertaking / business as a going concern to the purchaser. Thus, the transfer was of the business of the undertaking of the IMFL unit as a going concern. Among the assets that were transferred included the benefit of the existing contracts, licenses which the assessee held entitling it to manufacture and sell Indian Made Foreign Liquor, intangibles including the right to utilize trade marks and the labor force which was being transferred to the purchaser. The transaction involved a slump sale. There was no itemized valuation of the fixed assets and other assets which formed part of the undertaking. What was sold comprised of the undertaking and the business as a whole;

++ neither a transfer of assets in specie nor was a valuation placed in the agreement on the individual assets of the undertaking that formed the subject matter of the transfer. The agreement does not contain does not contain any such computation of profit. There was, therefore, fundamentally an error on the part of the AO stating that there was a profit being the difference between the sale price and the deductions. The point which both the AO and CIT (A) missed was the fact that when a transfer takes place as in the present case of the whole business and undertaking of the assessee and the transfer involves not only fixed assets such as land, building and machinery but other component elements such as the benefit of existing contracts, licenses and approvals and intangibles including intellectual property and transfer of the work force of the undertaking or business, it would be impossible in a case such as the present to attribute or allocate the sale consideration as between the fixed assets on the one hand and the intangibles on the other;

++ the case is related to period prior to the insertion of the provisions of section 50B by the Finance Act of 1999. Thus, section 50B has no application. The Supreme Court in CIT Vs. Artex Manufacturing Company has held that as regards the applicability of Section 45 three tests are required to be applied. First, both the charging Section and computation provisions are inextricably linked. Second, the test of allocation / attribution must be applied, the object being to determine whether the slump price was capable of being attributable to individual assets. Third, there is a conceptual difference between the undertaking and its components. In the present case undoubtedly there has been no itemized sale of the assets of the undertaking. The subject matter of the transfer is the business undertaking of the IMFL Unit as a whole. In a situation such as the present, itemized earmarking would not be possible. That is because the business of the undertaking consists not only of tangible items but other intangibles such as rights in intellectual property, licenses and manpower. The Cost of such intangibles is not determinable. As per the judgement of Hon’ble Supreme Court in the case of CIT Vs. B.C. Srinivasa Setty when in a case the computation provisions cannot apply, such a case would not fall within Section 45. Thus, the order of the Tribunal is upheld.