TMI Blog2009 (6) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... alth products and pharmaceutical products. M/s. Pfizer Inc. globally sold its Howmedica business to M/s. Stryker Inc. with the object of controlling its core business. Pursuant to the global sale, the assessee company also sold its Howmedica business to M/s. Stryker India (P.) Ltd. during the financial year in pursuance to the business transfer agreement dated 29-10-1999 as a going concern basis for a total consideration of US$ 19,06,000 (equivalent to approx. Rs. 826.63 lakhs). The assessee also received an amount of US $6,64,000 (equivalent to approx. Rs. 287.99 lakhs) from M/s. Pfizer Inc. as reimbursement towards cost of surgical instruments. In the books of account for the year ending 31-3-2000, the assessee-company had reflected a loss of Rs. 65.14 lakhs on the sale of Howmedica business. Further, it had reflected the amount of Rs. 287.99 lakhs received from M/s. Pfizer Inc. under the head Other income as miscellaneous income. In the Return of Income the assessee claimed vide note Annexed to the computation of income that the company had sold its Howmedica business except for certain liabilities on an item-wise sale basis to M/s. Stryker India (P.) Ltd. for a consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re always treated as plant and machinery on which depreciation claimed was allowed by the Income-tax Department in the past assessments. The assessee placed reliance on the judgment in the case of Jute Corpn. of India v. CIT [1991] 187 ITR 688 (SC), National thermal Power Corpn. Ltd. v. CIT [1998] 229 ITR 383 (SC) and Orissa Cements Ltd. v. CIT [2001] 250 ITR 856 (Delhi) for the proposition that the assessee was entitled to make a different claim to that which was claimed in the Return of Income. The assessee further submitted before the Assessing Officer that there was no estoppel by reason of admission on the party as to the taxability of income, which is offered to tax under a mistaken belief. The assessee placed reliance on the agreement between the parties i.e., the business transfer agreement which clearly reflects the intention of the parties to transfer the business as a going concern. During the course of assessment proceedings in support of its claim, the sale of Howmedica business should be treated as slump sale and not as an itemized sale, reliance was placed on various judgments of different courts. The Assessing Officer noted that in all the judgments re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies relating to identifiable parts of business but not a transfer of business. The Assessing Officer further noted that the business of the plant was not transferred as a whole, there is no question of attraction of section 50B of the Income-tax Act and the claim of the assessee to treat the transaction as slump sale was rejected on two counts i.e., ( a ) the assessee has failed to comply with the requirements of rule 6H of the Income-tax Rules at the time of transaction and the said Certificate has been filed subsequently during the course of hearing belatedly and after the transfer never indicating that the intention is not of slump sale and ( b ) the analysis of business transfer agreement with reference to the index indicates that this is not a case of transfer of business as a whole but transfer of parts as an identical stream of the business of the assessee. The Assessing Officer worked out the addition of Rs. 7,70,07,060 after reducing the book value of fixed assets and sundry debtors from the receipts of the transaction and made an addition of the same. But, while making the said addition, loss on account of business claimed by the assessee in other expenses as well as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) thus held that the claim of the assessee that the profits arising to it on sale of part of its business is taxable in terms of section 50B of the Act could not be rejected merely for the twin reason that such claim was not made in the Return of Income filed and that the Report of the Chartered Accountant was not filed along with the Return. The CIT(A) upheld the action of Assessing Officer to go into the various clauses of the business transfer agreement in order to ascertain the true character of the transaction. The CIT(A) further noted that the observation of the Assessing Officer that provisions of section 50B of the Income-tax Act were effective from 1-4-2001 are not correct as the said section was incorporated by the Finance Act, 1999 with effect from 1-4-2000 and hence was applicable to the Assessment Year under consideration. 7. With regard to the character of transaction, after taking into consideration the submissions made by the assessee against the observations of the Assessing Officer, the CIT(A) laid the under-mentioned propositions : "30. However, apart therefrom the Assessing Officer has also examined the character of the transaction to arrive at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it should be unit or division or business as a whole but shall not include assets and liabilities or a combination of both not constituting a business activity. Hence the undertaking for qualifying under slump sale on transfer has to be either an independent business activity or a division or unit as a whole. A part of the unit or division or a business cannot be in the circumstance of transfer be taken as a slump sale. This aspect has also been recognized by the jurisdictional High Court in their decision in the case of Premier Automobiles Ltd. ( supra ). The Court therein have held that in the case of slump sale, there has to be a transfer of the entire business activity for a fixed price. 33. In the instant case, the only basis for the claim that the transferred activity was a separate undertaking was the separate maintenance of the accounting records. There is no separate place from where the so called business was carried out, no separate and identified personnel, no separate management, no separate finance and finally no separate marketing network are available in the instant case, ingredients that were available on the case of Premier Automobiles Ltd. ( supra ). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as taxable under section 50B of the Act as long term capital gain cannot be accepted." 8. The CIT(A) further held that the consideration received from M/s. Pfizer Inc. as part of reimbursement on account of surgical instruments lost, in respect of which the assessee had claimed depreciation, is assessable as income from short-term capital gain under section 50(1) of the Income-tax Act. The CIT(A) further held that the remaining amount received by the assessee from M/s. Stryker India (P.) Ltd. was chargeable to tax as business income under section 28 of the Income-tax Act. The CIT(A) observed that profits were to be worked out after deducting therefrom the cost of debtors transferred and also the cost of any stock transferred. The Assessing Officer had allowed deduction in respect of value of debtors. However, no deduction was granted in regard to the value of stock amounting to Rs. 5.32 crores. After the remand report and further on perusal of assessment records, the CIT(A) has concluded that the Assessing Officer had failed to allow the deduction on account of value of stock amounting to Rs. 5.32 crores and hence was directed to allow the same. The Assessing Officer was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to section 2( 42C ) and 2( 19AA ) of the Income-tax Act. It was stated by the learned A.R. that even a part of undertaking can be considered for slump sale, as under the provisions of section 50B of the Act, the only prohibition is that there should not be itemized sale. The learned A.R. pointed out that if the business of the assessee ceased to be carried on, as parent company had transferred its business to M/s. Stryker Inc. Reliance was placed in Monsanto Chemicals of India (P.) Ltd. v. State of Tamil Nadu [1982] 51 STC 278 (Mad.) for the ratio that every line of business carried on by the assessee is a separate business. The learned A.R. pointed out that the assessee had transferred the activity of Howmedica business as a whole and all the assets and liabilities of the line of business had been taken over except some liabilities. The learned A.R. fairly agreed that for determining the net worth of the assets transferred by the assessee, deduction of which is to be allowed out of the sale value of the business transferred, the matter may be restored back to the file of the Assessing Officer. The learned A.R. pointed out that in the agreement, the items, which were transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s lost/used, the same is profits. Reference was made to notes to account of the assessee placed at page 223 of the paper book, wherein it has been noted that the surgical instruments were not meant for sale but for the use of promotion of sale value of cost amortised over a period of five years and the learned D.R. thus submitted that reimbursement was rightly assessed as business income as shown by the assessee in the books of account itself. The learned D.R. further pointed out that it was only a transfer of part of the business carried on by the assessee where the items were segregated and as such the same was not slump sale. The learned D.R. further pointed out that transfer of business took place on 20-10-1999 and as the provisions of section 50B of the Act came into effect on 1-4-2000, the same do not apply. The learned D.R. stressed that the assessee has not submitted any valuation of Howmedica business nor audit report made on the date of transfer. The assessee had relied on the audit report for the first time during the course of assessment proceedings which in turn were prepared during December, 2002. As the assessee failed to file the audit report along with the return o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts utilized by medical professionals in the treatment of musculo-skeletal disorders. M/s. Pfizer Inc. was engaged in various activities in India including Howmedica business. In the preamble it is confirmed that Howmedica business is operated as a division of the seller i.e., the assessee before us and is not a separate legal entity. The preamble further provides as under : "( ii )the assessee was engaged in the business of developing, manufacturing, distributing and selling - specially surgical instrumentation and related products focused on stereotactic surgery known as Howmedica business." The parties further agreed, in consideration of mutual covenants and undertaking contained and subject to and on the terms and conditions set forth, to transfer the business as incorporated in Article 1 at pages 4 to 6 of the paper book, wherein the seller agrees to sell, convey, assign and transfer to the purchaser and the purchaser does purchase, acquire and accept from seller all the seller s right, title and interest in the assets, properties and rights owned on the closing date relating to the business, hereinafter known as Conveyed Assets . The description of assets, propertie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith M/s. Stryker India (P.) Ltd. The claim of the assessee is that Howmedica business carried on in India was sold as a going concern to M/s. Stryker India Private Ltd. for a consideration of US $1906,000 equivalent to approximately Rs. 826 lakhs. The assessee offered profit on sale of Howmedica business as business income by computing loss of Rs. 65.14 lakhs. In the return of income, the assessee had characterized the said transaction as an itemized sale and had offered profit on sale of Howmedica business. However, during the course of assessment proceedings, the assessee filed a report of Chartered Accountant dated 7-12-2002 in support of its claim that the transaction was a slump sale. The Assessing Officer rejected the claim of slump sale of the assessee on the preliminary ground that in the return of income the assessee had offered itemized sale of business and consequently offered business income. The Assessing Officer also rejected the claim of the assessee on the ground that Chartered Accountant s report in Form No. 3 CEA was not filed along with the return of income but was obtained at later date i.e., during the course of assessment proceedings. The CIT(A) in para 23 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of undertaking. As noted by us herein above as per Explanation 1 to section 2( 19AA ), the condition provided is that either the business as a whole is transferred or any part of the undertaking or the unit or division of the undertaking is transferred. But in case of transfer of individual assets and liabilities consisting the business activity, the same would not imply transfer of undertaking. 15. The intention of the parties is to be gathered from the terms and conditions of business transfer agreement entered into between the parties on 29-10-1999. The assessee, no doubt, was carrying on the business in three independent lines of hospital products, animal health products and pharmaceutical products. Though the assessee was maintaining separate books of account for each line of business, but the business was being carried on from the same premises and by the same set of people i.e., personnel involved for the day-to-day running of the business in all the three lines were the same. The question which arises for our adjudication is whether Howmedica business is an undertaking on transfer of which the lump sum consideration was received meaning thereby that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase price to the different assets and liabilities being taken over. Admittedly, the names and logos i.e., Pfizer and Duchem was not taken over by the seller as both the Pfizer and the assessee were carrying on business in other lines. Certain employees were also taken over by the purchaser and the employees benefits were the responsibility of the purchaser. The parties had inventorised the stock to be transferred and the stock list is attached at pages 21 to 86 of the paper book. However, the parties had recognized the value of goods in transit and the same are enumerated at the annexure placed at pages 87 88 of the paper book. The assessee had entered into C F arrangement with M/s. Rupashree Enterprises being assumed contract and the same was also handed over to the purchaser. Similarly, the import license No. 7819 dated 25-6-1998 and the license dated 27-7-1997 from FDA as enclosed in Schedule 4 to the agreement and placed at pages 102 to 106 of the paper book were also handed over to the purchaser. The assessee is carrying on its business through various Doctors and surgeons, the details of which are placed at pages 111 to 142 of the paper book being one of the assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above said steps taken by the assessee clearly reflect that the line of Howmedica business was an identifiable line of business being carried on by the assessee from year to year and all the transactions, rights, liabilities in connection with the said line of business were transferred by the assessee to the purchaser i.e., M/s. Stryker India (P.) Ltd. The transfer of business was as an ongoing concern and the amount received from M/s. Stryker India (P.) Ltd. for the transfer of inventory, contract, license agreements, accounts receivables including vendor lists etc., relating to the business falls within the definition of slump sale and is to be considered for computation of capital gains in line with the provisions of section 50B of the Income-tax Act. The said provisions were inserted by Finance Act, 1999 with effect from 1-4-2000. The transaction in question was executed between the parties on 29-10-1999 and as such the provisions of section 50B of the Act are clearly applicable to the transaction in question. In view of the specific provisions introduced for taxability of capital gains in case of slump sale under section 50B of the Income-tax Act, the profits or gains ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm capital gain. The CIT(A) has held as under : "37. In the instant case, out of the total consideration received by the appellant an amount of Rs. 287.99 lakhs has been received from M/s. Pfizer Inc. New York as part of the reimbursement on account of the surgical instruments lost. In respect of these surgical instruments the appellant had claimed depreciation on the written down value and the said claim has been allowed. There is no dispute in this regard. The Assessing Officer has taken this receipt that has been received admittedly a compensation for certain depreciable items lost on account of transfer as part of the business profits only on the ground that the said receipt has been received in the course of business activities. That conclusion of the Assessing Officer is legally not correct for any amount received in the course of business activity as consideration for the said depreciable assets is either required to be adjusted against the written down value of the block the said asset formed part if such receipt is less than the written down value or is to be charged to tax as short-term capital gain in terms of section 50(1) of the Act. 38. In the instant case, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he limited issue back to the file of the Assessing Officer for necessary verification. As held by us hereinabove, the income is includible in the hands of the assessee as short-term capital gain computed under section 50(1) of the Act and in case, the assessee has offered the income twice, the same shall be included in the hands of the assessee only under the head Income from capital gains . The Assessing Officer shall decide the issue after necessary verification and in accordance with law, after allowing a reasonable opportunity of hearing to the assessee. In the result, the ground of appeal raised by the assessee is partly allowed. 22. The revenue by way of ground No. 1 had raised a issue against the direction of CIT(A) in taxing the receipt on sale of Howmedica business as short-term capital gain and as business profits in paras 39 and 45 respectively of the CIT(A) s order. In view of our decision in paras herein above, we dismiss the ground No. l raised by the revenue. 23. The revenue in the second ground of appeal has raised alternate grounds which are as under : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utions. Further in terms of other guidelines, copies of which were filed during the course of appeal proceedings, the appellant is under obligation to compulsory withdraw the stock of expired goods issued to the Pharmaceuticals wholesalers. These expired goods do not have any resale value and in terms of FDA regulation, these are required to be destroyed only. In the circumstances, the loss claimed by the appellant on this account is an item of loss incurred by the appellant in the course of its business activities. These losses have been allowed in the past. The loss in the year under consideration is apparently of the same magnitude if taken as a percentage as in the earlier accounting years when these have been allowed. Though the doctrine of res judicata is not applicable to income-tax proceedings, where the deduction has been claimed in respect of the item that is a normal incidence of business, such an item if allowed as deduction in the past can be subjected to disallowance only if there is a good and sufficient reason to arrive at the said conclusion. In the instant case, no such reason has been brought on record." 25. We are in conformity with the findings of the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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