TMI Blog2007 (7) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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 business on a 'going concern' basis. 5. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assets and its liabilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, applicable for comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 52,94,868.12 75,93,119 ------------- 1,35,41,168" ------------- 4.6 The assessee challenged the findings and working of the AO before the learned CIT(A). It was submitted that the main object in the acquisition 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the face value of Rs. 10 each in the capital of SCL. so that the said 45 lakh shares shall immediately after the closing constitute about 60 per cent of the total issued subscribed and paid up capital of SCL' it is a slump sale and the AO has rightly treated it a slump sale under the provisions of s. 50B of the IT Act which is introduced w.e.f. asst. yr. 2000-01. The assessee pleaded 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 corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken." 4.12 The learned CIT(A) did not find force in the submissions of the assessee and held that provisions of s. 50B and s. 2(42C) which define slump sale, were clearly applicable to the case of the assessee. He thus upheld the action of the AO in taxing short-term capital gain. In support of his findings, the learned CIT(A) relied upon the following authorities also: (i) PNB Finance Ltd. 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 direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealing in software. While it owned the unit, it had absolute and total control over its assets and liabilities and the entirety of its business interests. The assessee company had agreed to hold the ownership interests. The assessee company had agreed to hold the ownership of this through the shareholdings of SCL. In effect therefore. the transaction resulted in the assessee suffering loss of 40 per cent 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard it was submitted by him that the shares of the transferee company were dealt on the stock exchange and therefore at the most, the value of the share could have been determined on the basis of market value of the shares on the date of transfer i.e.,16th June, 2000. It was pointed out by him that the nearest quotation on record was 30th June, 2000 on which date 100 shares were traded @ Rs. 4.05 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the stock exchange of the shares of Suri Capital Leasing Ltd. at the relevant time, was the relevant factor for working out the market value of the shares. The projection of the AO of the value of the shares at Rs. 10, according to him, was therefore clearly preposterous. If at all the value as quoted on the stock exchange had to be bypassed or ignored or even substituted by another value, then it was incumbent 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the words 'sale', 'exchange' and 'relinquishment' are separate and independent terms and are to be construed accordingly. Regarding the purchase price, it was submitted by the learned counsel that the term 'purchase price' mentioning the number of equity shares allotted along with the value of each share clearly spells the amount of consideration received and therefore there is no question of any presumption on the 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ths immediately preceding the date of its transfer. 8.2 As per the amended provision contained in s. 50B(2), the net worth of the undertaking shall be deemed to be the cost of acq1tisition and the cost of improvement for the purpose of ss. 48 and 49. Thus, in our opinion, the AO as well as the learned CIT(A) were fully justified in taking the transaction relating to the transfer of the undertaking as that of slump 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee really received was the market value of the shares as on the date it became entitled to receive them, and not their face value. Applying this ratio in the instant case also the market value of the shares is to be determined by making reference to the quoted price of the shares in the stock exchange. It may be pointed out here that learned Departmental Representative has not submitted any other rates of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port News ---------------------------------------------------- Date Open High Low Close Volume ---------------------------------------------------- 14 July, 2000 4.05 4.05 4.05 4.05 200 ---------------------------------------------------- 13 July, 2000 5.00 5.00 5.00 5.00 800 ---------------------------------------------------- 12 July, 2000 5.00 5.00 5.00 5.00 400 ---------------------------------------------------- 11 July, 2000 5.00 5.50 5.00 5.50 1000 ---------------------------------------------------- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is required to submit a report of an accountant, indicating the computation of net worth. This provision is as under: "50B(3)-Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-s. (2) of s. 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section." 8.13 From the assessment order and from the order of the learned CIT(A), it is not clear 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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