2006 (9) TMI 221 - AT - Income Tax

Summary

Issues Involved:
1. Nature of the transaction: whether it was a slump sale or piecemeal sale.
2. Applicability of Section 50 and Section 50B of the Income Tax Act.
3. Computation of capital gains and inclusion of capital gains in book profits under Section 115JA.
4. Allowance of interest accrued from inter-corporate deposits.
5. Allowance of expenditure under Voluntary Retirement Scheme (VRS).
6. Set-off of carried forward business loss and capital loss.

Detailed Analysis:

1. Nature of the Transaction: Slump Sale vs. Piecemeal Sale
The primary issue was whether the sale of the Sonepat unit was a slump sale or a piecemeal sale. The assessee argued that the sale was a slump sale, transferring the entire unit as a going concern for a lump sum consideration of Rs. 42.50 crores without attributing specific values to individual assets. The AO and CIT(A) treated it as a piecemeal sale, attributing the entire consideration to depreciable assets and invoking Section 50 to compute short-term capital gains.

The Tribunal examined the agreement and supplementary documents, noting that the sale included all tangible and intangible assets, goodwill, and liabilities necessary to run the business as a going concern. The Tribunal found that no specific value was assigned to individual assets, supporting the assessee's claim of a slump sale. The Tribunal concluded that the transaction was indeed a slump sale, not a piecemeal sale.

2. Applicability of Section 50 and Section 50B
Section 50 applies to the computation of capital gains on depreciable assets, treating the gain as short-term. The AO applied Section 50, but the Tribunal found this inappropriate as the sale was of an entire undertaking, not just depreciable assets. The Tribunal noted that Section 50B, which specifically deals with slump sales, was introduced w.e.f. 1st April 2000 and does not apply retrospectively. Therefore, the Tribunal held that neither Section 50 nor Section 50B was applicable in this case. Instead, the capital gains should be computed under Sections 45 and 48, treating the entire unit as a long-term capital asset.

3. Computation of Capital Gains and Inclusion in Book Profits under Section 115JA
The Tribunal directed the AO to recompute the capital gains as long-term capital gains under Sections 45 and 48, considering the entire unit as a capital asset. Regarding the inclusion of capital gains in book profits under Section 115JA, the Tribunal upheld the CIT(A)'s decision, relying on the Bombay High Court's ruling in CIT vs. Veekaylal Investment Co. (P) Ltd., which mandates the inclusion of capital gains in book profits for MAT purposes.

4. Allowance of Interest Accrued from Inter-Corporate Deposits
The CIT(A) upheld the addition of Rs. 29.55 lakhs as interest accrued from inter-corporate deposits, following the mercantile system of accounting. The Tribunal, however, referred to its earlier decision in the assessee's case for AY 1998-99, where similar additions were deleted. Consequently, the Tribunal deleted the addition for the current year as well.

5. Allowance of Expenditure under Voluntary Retirement Scheme (VRS)
The CIT(A) disallowed the VRS expenditure claimed by the assessee, treating it as capital expenditure. The Tribunal referred to its earlier decision in the assessee's case for AY 1996-97, where it upheld the allowance of VRS expenditure as a revenue expense spread over five years. Consistent with this precedent, the Tribunal allowed the VRS expenditure for the current year.

6. Set-off of Carried Forward Business Loss and Capital Loss
The assessee claimed the set-off of carried forward business loss of Rs. 4,70,40,396 and long-term capital loss of Rs. 16.83 crores from AY 1999-2000. The CIT(A) disallowed the claim as the losses were not recognized in the relevant year. The Tribunal, having held the sale as a slump sale and directed the recomputation of capital gains, remanded the issue back to the AO to recompute the losses and decide the set-off as per law.

Conclusion:
The Tribunal concluded that the sale of the Sonepat unit was a slump sale, not a piecemeal sale, and directed the AO to recompute the capital gains as long-term capital gains. It upheld the inclusion of capital gains in book profits under Section 115JA, deleted the addition of interest accrued from inter-corporate deposits, allowed the VRS expenditure, and remanded the issue of set-off of carried forward losses to the AO for fresh computation.