TMI Blog2007 (8) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... see. slump sale has been defined as 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 in such sales. In the instant case of the assessee, though in the purchaser s books of account the individual assets have been priced independently, assessee had not assigned separate values and cones-quently sold the items for independent price. It is not the revenue s case also that individual assets had the price fixed separately and charged. Undertaking is explained in Explanation 1 to section 2(19AA). According to this Explanation, as we noted, includes any part of an undertaking or a unit or division of an undertaking or a business activity as a whole. Revenue s case is that some of the items like motor car and building has been retained by the assessee; as such this cannot be treated as a slump sale. But the fact to be considered is assessee is in the field of intellectual property rights. Computers, furniture, etc. which is linked with the business of the assessee has been sold. The items that the assessee kept separately, has nothing to do with assessee s business, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Further, the assessee has enclosed a copy of Memorandum Of Understanding dated 24-8-1999 executed between the assessee company and M/s. ICICI Infotech Services Ltd. On going through the same, it is revealed that the assessee company has received Rs. 1.78 crores from M/s. ICICI Infotech Services Ltd. for transferring all assets and properties of the assessee company in its business including intellectual properties, codes, formulae and designs, etc. Further, it is also mentioned that the assessee company shall not transfer the building, car and the assets and liabilities regarding income-tax matters. The assessee has considered the receipt of this consideration as capital gain and invested the same in mutual funds which are exempt from the capital gain tax. Further, the perusal of the said MOU clearly reveals that consideration received by the assessee is not in the nature of capital gains. No assets, whatsoever, mentioned in the balance-sheet of the assessee company has been transferred. This consideration has been received for utilizing the services of two directors of the assessee company and their intellectual property. This is a receipt of consideration for rendering off the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 103 ITR 437 and the decision of the Hon ble Allahabad High Court in the case of Ram Prasad v. ITO [1995] 82 Taxman 199 . It was further submitted, relying upon the decision of the Hon ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 , since the proceedings under section 147 are for the benefit of the revenue and not for the assessee, and it was aimed at gathering the escaped income of the assessee, it cannot be allowed to be converted as revisional or review proceedings at the instance of the assessee, thereby making the machinery unworkable. Relying upon the decision of the Hon ble Delhi High Court in the case of Rakesh Aggarwal v. Asstt. CIT [1996] 87 Taxman 306 , it was submitted that under the amended provision the power of reopening is much wider and can be exercised even if an assessee has disclosed fully and truly all material facts necessary for the assessment. 7. Considering the above submission of the Assessing Officer and of the assessee, the CIT(A) upheld the reopening. Aggrieved by the above order, assessee is in appeal before the Tribunal. 8. Learned counsel for the assessee submitted, the reasons recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 1994 and till the time of sale the assessee was in the field of developing software IPRs and managed to acquire reputable clients like Indian Express, RCF, IIT Mumbai, etc. The software which were developed for which the rights belonged to assessee [M/s. Rohan Software Pvt. Ltd. ("RSPL" for short)], were commercial advertisement and billing system, financial accounting system, terminal emulator, data logas/manager for packing machine controllers etc. The business along with all the rights to IPRs (intangible assets) developed was taken over by M/s. ICICI Infotech Services Ltd. ("IISL" for short) in 1999. Consequent to this, assessee was prohibited from doing any business using/selling of any of these IPRs. But the Director continued whole time employment in IISL as well. At the same time, he continued to be a Director of RSPL (assessee), which does not have any business. In response to further Question, it was stated that the assessee (RSPL) would transfer all IPRs codes, formulae, designs to IISL for the consideration of Rs. 1.78 crores and RSPL will make all arrangements to close the business within the time agreed with IISL. The promoters of RSPL (assessee), viz., Shri Man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subsequently the assessee filed a letter dated 8-3-2004, wherein it was stated that the amount received by the assessee at Rs. 178 lakhs from IISL is for sale of its business as a going concern, which has to be treated as a slump sale. The consideration received on sale of going concern is invested under section 54EA of the Income-tax Act, 1961. It was also stated that the report in Form No. 3CAE of an Accountant under section 50B(3) relating to computation of capital gains in case of slump sale was also submitted. According to the assessee, whether the sale is slump sale or not, one has to look at the overall transaction and ascertain whether the basic structure of the unit is transferred or not and one cannot go by individual items of the assets being transferred unless the particular test goes to the root of the matter, i.e., without intellectual properties, codes, formulae, designs, programs, etc., the business of the assessee has no existence. Assessee further stated that except for office premise, motor car, income-tax payable or receivable and cash, and bank balance, all other assets and liabilities are transferred by RSPL to IISL for lump sum consideration of Rs. 178 lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer had taken note of clause 1 of MOU, which specifically stated that "all assets and properties (except those specifically excluded in the agreement) of RSPL in its business as of this date including intellectual properties, codes, formulae, designs etc., shall be transferred to IISL for a consideration of Rs. 178 lakhs." He held, assessee is a software company. The intellectual property, codes, formulae, designs, etc. are trading commodity of the assessee. They charge professional fees for such services. Assessee is engaged in software development and providing selected services. This conclusion was arrived at by the Assessing Officer considering para 1, page 2 of MOU, which highlights the activity of the assessee, which reads as under : "WHEREAS RSPL is engaged in the business of software development and related services and has developed specialized skills and technical knowledge and know-how of its own." The receipts, Assessing Officer held, assessee always credited as "professional income", which was clear from the TDS certificates issued. He further held: "thus, in no way, IP, code, formulae, design, etc. are intangible asset. All these years, the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hargava [2002] 256 ITR 42 . 16. Coming to the alternate contention of the assessee that it is a slump sale, Assessing Officer rejected the said contention. He held, the licence to use the skills has been transferred to IISL. There is no transfer of business as such in this case and the transfer is for a period of three years and after three years the assessee could use the skills as per their choice. When there is no transfer of business as such but only handing over the licence to use the skills developed by the assessee company, there cannot be a question of slump sale. While coming to the above conclusion, Assessing Officer further noted, IISL is a single largest client of the assessee. By virtue of new set up, employees of assessee company have now become employees of IISL. Hence he held, there is transfer of business as such does not hold good. He held, in the past, i.e., before signing of MOU, employees of assessee company were working for the client (IISL) virtually and this system continues. Hence, Assessing Officer rejected assessee s contention of slump sale also. 17. Without prejudice the above, Assessing Officer held, if at all the transfer is of a capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items of fixed assets to whom value have been assigned at their WDV appearing in the balance sheet of the appellant company as on 1-4-1999, i.e., date of transfer and corresponding entries passed by the taking over company in its books of account as discussed above. The Assessing Officer has rightly relied on the jurisdictional High Court in the case of Anant Electrical Company Ltd. v. CIT 237 ITR 587. Whole case laws relied by the appellant are distinguishable on facts. So it makes amply clear that the receipt of Rs. 1,78,00,000 is not a slump sale and it is a revenue receipt, which is taxable as business income. Therefore, this ground of appeal is also dismissed. 8. In Ground No. 5 the appellant has opposed the alternate action of the Assessing Officer without prejudice to his finding that the receipt in question is a revenue receipt taxable as business income and alternatively, if at all it is a capital gain, then it should be taxed as a short-term capital gain. In this regard the findings of the Assessing Officer are self-speaking which are as under : Without prejudice to the above, if at all it is a transfer of capital asset, the gain is short-term capital gain. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee and IISL, the entire business of the assessee was transferred to IISL. Clause 1 of the MOU states inter alia : "1. All assets and properties (except those specifically excluded in this agreement) of RSPL in its business as of this date including intellectual properties, codes, formulae, designs etc. shall be transferred to IISL for a consideration of Rs. 178 lakhs. The valuation is based on the business valuation reports submitted by M/s. C.C. Choksi Co. and M/s. N.M. Raiji Co." Counsel submitted, from the above it is clear that all the business assets of the assessee company were transferred, except a few that were retained by the assessee vide clause 2 of the MOU, which reads as under: "2. RSPL shall not transfer the building, car and the assets and liabilities relating to income-tax matters of RSPL to IISL." Learned counsel submitted, the assets retained vide clause 2 of the MOU, i.e., building, car and the assets and liabilities relating to income-tax matters of the assessee, has no role or little role to play in the business of the assessee, which entirely consisted of trading in specialized skills and technical know-how relating to software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation 1 - For the purposes of this clause, undertaking shall have the meaning assigned to it in Explanation 1 to clause ( 19AA ). Explanation 2 - For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities." "2(19AA)****** Explanation 1 - For the purposes of this clause, undertaking shall include any part of an undertaking , or a unit or division of an undertaking or a business activity taken as a whole , but does not include individual assets or liabilities or any combination thereof not constituting a business activity." [Emphasis supplied] From the above, learned counsel submitted, even a particular business activity of an undertaking can be transferred on slump sale basis. In the instant case of the assessee, it is exactly what had happened. A perusal of Schedule of block of assets furnished for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y determine the value of each asset and liability for working out the "net worth" of the undertaking/division that is under slump sale. Inviting our attention to Item Nos. 2, 6 as well the Notes (3 and 5) of Form No. 3CEA ( vide Rule 6H of Income-tax Rules, 1962), counsel submitted, law itself requires determination of value of each individual asset and liability of the undertaking or division that is transferred as a going concern by way of slump sale. This is because unless the written down value of depreciable assets and book value of other assets and relatable liabilities are not taken separately and then aggregated, it would not be possible to determine the "net worth" of the undertaking/division thereof within the meaning of sub-section (2) of section 50B, which specifically requires determination of "net worth" for the purpose of computation of capital gains in the case of slump sale. Even otherwise, counsel submitted, assessee cannot be held responsible for the entries made in the books of account of the purchaser company in this regard. There cannot be any bar for the purchasing company to make entries in its books of account by estimating the value of each asset of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long-term capital gain." Learned counsel submitted, this finding is without any merit and without any basis. Business of the assessee, counsel submitted, as noted above, commenced from 11-9-1995. The sale was effected from 1-4-1999. Assessee was in business for the entire period. The finding of the Assessing Officer as confirmed by the learned CIT(A) is only a probability and imagination, without any basis. In support of the above, counsel again brought our attention to proviso to section 50B(1), which reads as under: "50B. Special provision for computation of capital gains in case of slump sale. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place : Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR also supported the orders of the revenue authorities. 21. In the alternative, learned DR submitted, it is clearly a short-term capital gain. Assessee started the business, even according to the learned counsel, only some forty and odd months earlier. Assessee s receipt in the initial stage was a meagre Rs. 2.71 lakhs, which shoot up in the assessment year 1999-2000 to Rs. 84.09 lakhs. In between the assessee developed so many techniques perhaps. All these techniques or innovation or development, whatever name called, has come into existence definitely within a period of less than thirty six months. Learned DR submitted, Assessing Officer rightly treated the gain in the alternative as short-term capital gain. Hence, learned DR submitted, the orders of the revenue authorities may be confirmed. In support of the above contention, he relied upon the decision of the Hon ble Kerala High Court in the case of CIT v. F. X. Periera Sons (Travancore)(P.) Ltd. [1990] 184 ITR 461 . 22. In his rejoinder, learned counsel submitted, the main plank of revenue s stand is that the assessee had given separate value for some of the items. Counsel submitted, even if it is so, it is a sl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "slump sale" in the newly inserted section 2( 42C ), which came into effect from 1-4-2000. Therefore, the decisions relied upon by the learned revenue authorities cannot be applied in the instant case of the assessee. 24. The definition of "slump sale" under section 2( 42C ) read with Explanation 1 to section 2( 19AA ) of the Act has been reproduced hereinabove at page 16 of our order. Reading of the above makes it clear that "slump sale" means 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. For the purpose of this section, "undertaking" has again been explained in Explanation 1 to section 2( 19AA ). It states that for the purpose of this clause "undertaking" shall have the meaning assigned to the undertaking. Explanation 1 to section 2( 19AA ) was introduced with effect from 1-4-2000 by the Finance Act, 1999. "Undertaking" includes, as per the definition, any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the parties, it is felt necessary to develop an arrangement designed to satisfy the long-term needs of both the parties. AND WHEREAS the parties have come to certain understanding in the above matter for mutual benefit." 26. It is clear from the above that the assessee s business is software development and related services and the assessee has specialized skills and technical knowledge in this field. Clause 1 of the MOU states that the assessee has agreed to transfer all assets and properties in its business including intellectual properties, codes, formulae, designs, etc. to IISL for a consideration of Rs. 178 lakhs. Clause 4 of the MOU states that all the business transactions carried out by RSPL with effect from 1-4-1999 till date of actual execution of transfer shall be considered as executed in trust for and on behalf of IISL and once the transfer is effective the business transactions shall continue with IISL and IISL shall be entitled to enforce their rights thereunder without any restriction whatsoever. Coming to clause 7 of the MOU, it makes clear that the promoters of assessee for a period of three years from the date of transfer of assets, as per clauses 1 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nches along with their assets and liabilities amounts to sale as a going concern for a slump price. The assessee s business assets are computers, furniture, etc. because the assessee is in the field of software business. It is difficult to hold that the purchaser cannot continue the activities purchased in the absence of building and motor car, which had been kept apart. If the purchaser perhaps prevented from continuing the business, the stand of the revenue that this is not sale of a going concern for a slump price, would have been correct. The question is whether the business will continue in the same line even without the two assets. Reading of MOU, relevant clauses of which have been quoted hereinabove, makes it clear that the assessee has transferred all the properties of the assessee in its business as of this date. Even according to the revenue, assessee s business assets are in the nature of intellectual properties, codes, formulae, designs, etc. It has been transferred for a consideration. 29. In brief, as discussed hereinabove, "slump sale" has been defined as transfer of one or more undertakings as a result of sale for a lump sum consideration without values being a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands allowed in part. 32. ITA No : 1676/Mum./2008 : The only effective ground urged by the assessee is directed against the order of the CIT(A) in confirming the penalty levied under section 271(1)( c ) of the Income-tax Act, 1961, amounting to Rs. 68,53,000 being minimum penalty leviable against addition made of Rs. 178 lakhs. 33. Assessee s declared income was Rs. 9,55,370. It was processed under section 143(1)( a ) of the Act on 19-3-2002. The case was reopened under section 147 of the Act and addition of Rs. 178 lakhs was made. Scrutiny assessment was completed under section 143(3) on 30-4-2004 fixing total income at Rs. 1,87,55,370. 34. Assessing Officer held, the detection of concealed income was possible only because the case was reopened under section 143(3), read with section 147. Assessee contended that the reopening itself was bad in law as it was mere change of opinion. This plea of the assessee was rejected by the Assessing Officer. Assessee contended further that there should be conscious concealment or conscious furnishing of inaccurate particulars of income, which was not there in the instant case of the assessee. Assessing Officer held, this belief of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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