TMI Blog2007 (5) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the payment of a separate consideration. The proprietary rights therein were retained till 30th June, 2000. On facts, in view of the above numerous judicial pronouncements, it cannot be said that what the transferee acquired was not a going concern. Rather, after the transfer, the transferee carried on the business without any disruption therein. In CIT vs. West Coast Chemicals Industries Ltd. (In Liquidation)[ 1976 (9) TMI 37 - MADRAS HIGH COURT] , CIT vs. F.X. Periera Sons (Travancore) (P) Ltd[ 1989 (12) TMI 40 - KERALA HIGH COURT] , Premier Automobiles Ltd. vs. ITO Anr. [ 2003 (4) TMI 43 - BOMBAY HIGH COURT] , and Asstt. CIT vs. Raka Food Products [ 2005 (6) TMI 25 - MADRAS HIGH COURT] amongst others, it has been held that in the case of a sale of an undertaking as a whole, on a going concern basis, if some assets are retained by the transferor or some liabilities are not taken over by the transferee, this fact does not render the slump sale as not a slump sale. A similar view has been expressed by the Delhi Bench of the Tribunal for asst. yr. 1999-2000 and 5507/Del/2003, for asst. yr. 2000-01, in the case of M/s ECE Industries Ltd., [ 2006 (9) TMI 221 - ITAT DE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, it is also correct that all the facts being before the AO, the CIT having powers co-terminus with those of the AO, was not incorrect in not remitting the issue to the AO for decision. Moreover, evidently, the AO duly represented the case of the Department before the learned CIT(A) and no objection was raised regarding the assessee having not pressed the issue before the AO. On merits, evidently, there has been no transfer of assets as envisaged u/s. 45 of the Act r/w s. 2(47) of the Act. The AO, pertinently, had agreed that the fee in question represented a capital receipt and not a business receipt. By signing the negative covenant, the assessee undertook not to carry out manufacture or trade of the products for a period of time. That being so, this act amounted only to a self-imposed restriction and not a transfer within the meaning of the Act. It was neither the sale or exchange or relinquishment of the asset, nor was any right therein extinguishable, the right to manufacture or trade remaining intact after the period for which the negative covenants were signed. Thus, we hold that the learned CIT(A) was justified in deciding the issue on merits in favour of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts earned by lending of rights and taxed as income. 5. The learned CIT(A) has erred both in law and on the facts of the case in treating the amount of ₹ 50 lacs received by the assessee on assignment/sale of trademark from M/s Rhone Poulene (India) Ltd. and declared by the assessee as capital gain in its return of income. 6. The learned CIT(A) has erred both in law and on the facts of the case in allowing the project development expenses amounting to ₹ 29,25,019 which were carried forward as deferred revenue expenditure. The assessee is following mercantile system of accounting and these expenses were required to be claimed in the relevant year. 7. The learned CIT(A) has erred both in law and on the facts of the case in allowing deductions under s. 35D. 2. Apropos ground No. 1, the AO observed that in the return filed, the assessee had claimed loss of ₹ 12,67,69,823 under the head Long-term capital gains , regarding the sale of its Betalactum Division w.e.f. 1st July, 1997, on a slump sale basis, for a sale consideration of ₹ 30 crores. The assessee had reduced from such sale proceeds, indexed cost of acquisition and improvement amounting to &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right contracts and employees registration along with liability. 4. The AO, however, observed that a perusal of the terms and conditions of the MoU, dt. 30th June, 1997 between the assessee and Max GB Ltd., regarding the sale of the assessee's Betalactum Division showed that the assessee company had sold its Betalactum Division on 30th June, 1997, whereas the intellectual property and know-how including technical know-how pertaining to the Betalactum Division, which was an inseparable part of the undertaking, had not been transferred on the said date; and that rather, it had been agreed that it would be transferred by the seller to the purchaser on a future date, i.e., 1st July, 2000, which fell much after the asst. yr. 1998-99. The AO observed that as per s. 2(47) of the IT Act, transfer in relation to a capital asset includes the extinguishment of any rights in a capital asset. It was observed that the same was the case in respect of the technical know-how developed and improved by the assessee company and constituting business activities of the assessee's betalactum division, which had not been transferred during the assessment year under consideration; that in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration received and the book value of the assets; that the assets had been revalued block-wise, based on the revaluation of various assets as per the revaluation reports which finally determined the sale consideration; that so, the sale consideration had apparently been received by evaluating the assets forming part of the undertaking and the variation in the consideration received and the net worth may be attributable to the goodwill, which had been admitted as a part of the Betalactum Division sold as per the MoU, for the purpose of computing the income/loss from the transfer of the said unit. 6. In response, the assessee submitted that what had been sold by the assessee company was the undertaking and not the depreciable assets per se and that accordingly, the special provisions dealing with the sale in the case of depreciable assets had no application on the sale of assets as depreciable assets; that undisputedly, the assessee company had never claimed any depreciation on the undertaking; that the various case law cited by the assessee continued to have applicability in the case of a slump sale; that apropos the judgment relating to the pre-1988 period also, there were prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registrations, approvals, quotas, consents and benefits pertaining thereto and shall be completed on or before the effective date, except for the technical know-how developed and improved by the seller, which shall be transferred by the seller to the purchaser on 1st July, 2000, however, the purchaser shall be entitled to use such technical know-how from the effective date till 30th June, 2000; that cl. 3(a) of the MoU dealt with purchase consideration and royalty, while para (1) thereof dealt with purchase consideration on a slump price basis; that para (2) dealt with royalty for use of know-how; that cl. 3(b) further clarified that the purchase consideration as referred to in cl. (a)(1) had been mutually agreed between the parties as a slump price and the parties accepted the same as final; that cl. 4, which dealt with the effective date, which had been defined in cl. 1.1(iii) as 1st July, 1997, provided that from the effective date, the sale shall become irrecoverable, irrespective of whether the formal transfer/sale of various assets comprised in the Betalactum business has been completed by the effective date or not; that thus, the sale of the Betalactum business, including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e; that further, the CBDT circular referred to by the assessee also reiterates that where the business is sold as a going concern, the profit is chargeable under the head 'Capital gain' and not as business profit; and further that, no portion of the price is attributable to stock-in-trade; that this was what the assessee had done by assigning the entire consideration received entirely to the land and other depreciable assets like plant and machinery, vehicles and furniture, etc., and therefore, the provisions of s. 50 of the Act were applicable; that the loss declared by the assessee company in respect of sale of various depreciable assets by applying indexed cost of acquisition was not appropriate in view of the special provisions of s. 50 of the Act; that further, the sale of Betalactum Division as a whole was not complete since the interest of assessee in the intellectual property forming part of the Betalactum Division, as per the MoU, did not pass on to the buyer during the asst. yr. 1998-99 but much later; that the purpose of getting revaluation of various depreciable assets, i.e., land building, plant and machinery, furniture and vehicles, etc., belonging to the Beta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -term capital gain was hence worked out at ₹ 4,39,64,437 which was added to the income of the assessee against the loss declared by the assessee from the sale of its Betalactum Division, at ₹ 12,67,69,823. 8. The learned CIT(A) observed, inter alia, that he agreed with the contention of the assessee that the valuation of its fixed assets had been made by the AO himself and not by the assessee; that the revaluation of the fixed assets of the Betalactum Division was got done on 31st March, 1997, whereas the sale was made w.e.f. 1st July, 1997 and the depreciable valuation of the assets could not be equated with the market value; that there being nothing in the MoU filed by the assessee during the assessment proceedings to suggest that the sale was not on a slump sale basis, it was acceptable that the sale was on a slump sale basis; that the decision of the Hon'ble Supreme Court in the case of CIT vs. Electric Control Gear Mfg. Co. (1997) 141 CTR (SC) 302: (1997) 227 ITR 278(SC) clearly applied to the facts of the assessee's case, since the assessee had never disclosed the break-up of the sale consideration; that the AO was not right in assigning the slump price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a slump sale, loss has been worked out by the assessee against capital gain. It has been submitted that the CIT(A) has mainly stated that from the evidence on record, the sale was, in fact, a slump sale. According to the learned Departmental Representative, even so, the capital gain has to be worked out. 10. The learned counsel for the assessee, on the other hand, reiterating the stand taken by the assessee before the taxing authorities, has submitted that as per the definition of slump sale under s. 2(42C) of the IT Act, as applicable from 1st April, 2000, if an undertaking is transferred as a going concern with all its assets, liabilities, rights, obligations and personnel, without values being assigned to the individual assets, it would be regarded as a slump sale; that undertaking is defined in Expln. 1 to s. 2(19AA) of the Act to include any part of the 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; that it thus follows that where assets and liabilities of the undertaking or the assets of the underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eree, the right to use the technical know-how developed by the assessee, against the payment of separate consideration, while retaining proprietary rights therein upto 30th June, 2000; that thus, what the transferee acquired was the going concern and carried on business without any disruption; that s. 50B inserted in the IT Act, by the Finance Act, 1999, w.e.f. 1st April, 2000 does not have retrospective operation; and that in case these submissions were not to be accepted, the AO be directed to work out the capital gain by allocating the slump price over the assets comprising non-depreciable assets such as land, depreciable assets, use of intangible assets, such as trademark, goodwill and trained work force, etc. 11. We have heard the parties and have perused the material on record. The assessee claimed loss of ₹ 12,67,69,823 under the head 'Long-term capital gain'. This loss was claimed regarding the sale by the assessee, of its Betalactum Division, w.e.f. 1st July, 1997. The assessee claimed that this sale was made on a slump sale basis, for a sale consideration of ₹ 30 crores. From such sale proceeds of ₹ 30 crores, the assessee reduced indexed cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets like plant and machinery, furniture and vehicles, etc., the assessee had attributed the price to its stock-in-trade and that therefore, the provisions of s. 50 of the Act were applicable, and in view of this, the loss declared by the assessee regarding the sale of various depreciable assets by applying indexed cost of acquisition, was not proper. The AO observed that as such, the method of computation of loss from the sale of the Betalactum Division was not acceptable. The learned CIT(A) accepted the stand of the assessee that the assessee had not disclosed the break-up of the sale consideration and that the assignment of the value had been done by the AO. The learned CIT(A) held that the revaluation of the fixed assets of the Betalactum Division was done on 31st March, 1997, whereas the sale was made w.e.f. 1st July, 1997. It was also be held that the depreciated value of any asset could not be equated with its market value. That the sale made was on a slump sale basis was also accepted by the learned CIT(A), holding that there was nothing in the MoU nor in any papers filed by the assessee during the assessment proceedings to suggest otherwise. The learned CIT(A) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a slump sale. 15. As per cl. 1.1(i) of the MoU, dt. 30th June, 1977, the Betalactum undertaking (Division) of the assessee comprised of the following assets of the Betalactum business : (a) The plant and equipment to manufacture betalactum antibiotics in bulk located at Bhai Mohan Singh Nagar, Toansa, Tehsil Balachaur, District Nawan Shahr 144533 (Punjab); (b) Freehold land admeasuring 244 Kanal 08 Marlas 03 Sirsai or thereabout together with hereditaments thereof situated in Bhai Mohan Singh Nagar, Toansa, Tehsil Balachaur, District Nawan Shahr 144533 in the State of Punjab, more particularly described in Annex. 1 hereof together with all buildings and structures constructed thereon; (c) Leasehold land admeasuring 27 Kanal 09 Marlas situated at Bhai Mohan Singh Nagar, Toansa, Tehsil Balachaur, District Nawan Shahr-144533 in the State of Punjab, more particularly described in Annex. 2 hereof, together with all buildings and structures constructed thereon. Further, the Betalactum Division, as per the said cl. 1.1(i) of the MoU also means the following : (a) Raw material, stores, spares, tools, office furniture, vehicles and equipment; (b) All intellectual pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee or any member of his family dependent on him. The undertaking, it is seen, as correctly held by the learned CIT(A), is a capital asset distinct and separate from the assets constituting it. It was sold by the assessee as a business activity, taken as a whole. It was sold including land, building, plant and machinery, furniture and fixtures, office equipment, motor vehicles, capital WIP, inventories, sundry debtors, and loans and advances as assets and bank overdrafts, sundry creditors and other liabilities as liability. The Betalactum Division of the assessee comprised of licenses, permits, approvals, registrations, incentives, utility connections, all arm's length contracts with clients and suppliers, workers and employees and contingent liabilities. All these were sold in the sale. The undertaking was sold as a going concern at a slump price. 20. In CIT vs. West Coast Chemicals Industries Ltd. (In Liquidation) (1962) 46 ITR 135(SC), the facts were that on 9th May, 1943, the assessee company entered into an agreement for the sale of the lands, buildings, plant and machinery of a match factory belonging to it for ₹ 5,75,000, with a view to close down thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to an agreement, sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities, development expenses, and liability in respect of deposits made by intending purchasers. The consideration of ₹ 34,99,300 was paid by the allotment of shares to the partners or their nominees. The Tribunal held that the firm had no goodwill and that the sum of ₹ 2,50,000 allocated towards goodwill was really the excess value of the land, which was the stock-in-trade of the company and that although the sale was that of a business as a going concern, the value of this stock-in-trade could be traced, but that the transaction was a mere adjustment of the business position of the partners and the firm was not entitled to take the book keeping entries as evidence of any profits. The Hon'ble Supreme Court held that the sale was the sale of a whole concern and no part of the price was attributable to the cost of the land and no part of the price was taxable; that the fact that in the schedule to the agreement, the price of the land was stated, did not lead t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a capital asset. 24. In CIT vs. Narkeshari Prakashan Ltd. (1992) 196 ITR 438(Bom), the assessee was a publishing house, having two branches. The branches were sold along with their assets and liabilities. The Tribunal found that the entire branch businesses were sold as a whole as going concerns, for a slump price, that the value of liabilities stood adjusted against the value of the assets and that the inventory was made for identification and value was indicated against each item. The Hon'ble Bombay High Court held that the overwhelming character of the transaction did not stand changed and that the Tribunal was justified in deleting the addition made as profit on sale of the branches and that no question of law arose. 25. In CIT vs. Kar Valves Ltd. (1992) 197 ITR 95(Ker), it was held, inter alia, that business undertaking is a capital asset. 26. In Premier Automobiles Ltd. vs. ITO Anr. (2003) 182 CTR (Bom) 202: (2003) 264 ITR 193(Bom), it was held that where the entire undertaking of manufacture and sale of motor cars was sold as a going concern, where the business was continuing and there was no sale of items of assets, the transaction amounted to a slump sale. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asst. yr. 2000-01, in the case of M/s ECE Industries Ltd., vide order dt. 29th Sept., 2006 (copy placed on record). Therefore, the findings of the learned CIT(A) in this regard are upheld. 30. Further, s. 50B of the IT Act has correctly been held by the learned CIT(A) as having no applicability to a slump sale, as in the present case. It is significant that this section was inserted in the Act by the Finance Act, 1999 w.e.f. 1st April, 2000. It has not been stated to be applicable retrospectively. In the absence of any such specific statement, it can only apply prospectively. 31. In view of the above, we hold that there is no force in the grievance of the Department, by way of ground No. 1, that the CIT(A) has erred in holding that the sale of the Betalactum Division of the assessee company was a slump sale and ss. 50 and 50A of the Act are not applicable and that the long-term capital gain has to be computed by indexing the cost of acquisition. Ground No. 1 is therefore, rejected. 32. According to ground No. 2, the learned CIT(A) erred in deleting the disallowance of ₹ 5 lacs paid for securing the membership of club for Shri Ashwani Windlass, Jt. Managing Director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame ratio. In Anarkali Chit Fund (P) Ltd. vs. ITO (1988) 32 TTJ (Hyd) 134: (1989) 43 Taxman 292(Hyd)(Mag), it was held that life term membership of a club taken by the managing director of the company is a business expenditure and not a personal expenditure of the managing director. It was held therein that it might be that the membership of the club gave some personal benefits to the managing director also, but so far as the assessee was concerned, it was an allowable business expenditure. In Gujarat State Export Corporation Ltd. vs. CIT (supra), it has been held that payment of entrance fee for a sports club is not made with the intention of acquiring any capital asset or advantage for enduring benefit of the business of the business and the same being for running the business or for bettering the conduct of the business, is a deductible revenue expenditure. In view of the above, ground No. 2 is rejected. 35. Ground No. 3 states that the learned CIT(A) has erred in deleting the addition on account of expenses of ₹ 4,22,084 incurred for revaluation of the fixed assets. According to the Department, the expense on valuation required for the purpose of sale of the Betalactum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture was connected with the transfer of the Betalactum Division, the same may be allowed to be deducted in computing the capital gain/loss on transfer of the undertaking as expenditure incurred in connection with the said transfer. 38. We have considered the rival submissions in this regard. The facts are that the revaluation was got done on 31st March, 1997 and the sale took place on 1st July, 1997. It is evident that the assessee got the revaluation done for the purpose of the sale. The assessee has contended that this exercise was carried out in routine in order to secure finance from financers/financial institutions, for the business needs of the assessee. However, it is seen that such revaluation is not a regular feature of the assessee. At least no other such instance of revaluation, at any other point of time, has come on record. Moreover, the assessee has also not placed on record any material to show that any finance was secured from the financial institutions/financers in pursuance of the said revaluation. Anyhow, the alternative contention of the assessee appears to be right and is accepted as such. This expenditure will be allowed to be deducted in computing the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hallenged this finding of the AO before the learned CIT(A). It was argued that as per assessment proceedings, the assessee was required to show cause as to why the non-compete fee could not be treated as business income; that after detailed deliberations on the subject-matter, the AO had agreed that the said fee represented a capital receipt and not business receipt; that the question, therefore, was as to whether the said capital was liable to tax as capital gain; that under s. 45 of the Act, it was only profits and gains arising on the transfer of a capital asset, which could be taxed; that in the present case, since the signing of the negative covenants, i.e., undertaking not to carry out the manufacturing or trading was a self-imposed restriction, there was no transfer whatsoever and, therefore, the amount of ₹ 5 crores was not liable to tax, as provided by s. 45 of the Act. 43. The learned CIT(A) decided this issue in favour of the assessee holding that undisputedly, the right to manufacture constituted a capital asset, but s. 45 of the Act could be invoked only if there was a transfer and not otherwise; that he agreed with the assessee's contention that there had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the other issues; that this agreement was already before the AO and he could well decide the issue on merits, taking into consideration the said agreement; that this being so, nothing remained to be examined afresh by the AO and so, the learned CIT(A) was not obliged to remit the issue back to the AO and so, the findings recorded by the learned CIT(A) on this count are well sustainable. On the merits of the issue, the learned counsel for the assessee has submitted that the non-compete fee received for undertaking a negative covenant for not carrying on the business is in the nature of a capital receipt not liable to tax; and that the amendment in s. 28(va) of the Act, w.e.f. 1st April, 2003, further fortifies the statement that prior to asst. yr. 2003-04, non-compete fee was not liable to tax. 47. We have heard the parties and have perused the material on record. The first dispute here is as to whether the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee, in view of the fact that as recorded in the assessment order, the assessee had not pressed the issue before the AO. In this regard, we find that the assessee is correct when it contends t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signment/sale of trademark from M/s Rhone Poulenc (India) Ltd. and declared by the assessee as a capital gain in its return of income. The facts in this regard are that in its return of income, the assessee had offered capital gains of ₹ 50 lacs on the sale of self-generated trademarks, taking the cost of acquisition thereof as 'nil'. On the basis of the amount offered by the assessee, the AO added the same in the assessment. Before the learned CIT(A), the assessee contended that the business of the pharmaceutical formulations constituted a source of income for the assessee; that the brands were self-generated assets of the assessee; that, therefore, the consideration received without assignment of such trademarks/brand names constituted a capital receipt in the hands of the assessee, not liable to tax; that since the cost of the trademarks/brand names, being self-generated assets of the assessee, could not be determined, the computation provisions failed and so, the amount could not be taxed, as held by the Hon'ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138: (1981) 128 ITR 294(SC); that the amendment in s. 55(2)(a) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT(A) in so deciding the matter, which is in appeal before us. In this regard, evidently, before the asst. yr. 2002-03, B.C. Srinivasa Setty (supra), rendered by the Hon'ble Supreme Court was the law of the land. Till such time, when s. 55(2)(a) of the Act was amended w.e.f. 1st April, 2002, no capital gains could be computed on the transfer of self-generated trademarks, such trademarks having no cost of acquisition. Therefore, the learned CIT(A) has correctly deleted the addition made. Accordingly, ground No. 5 raised by the Department stands rejected. 53. Ground No. 6 states that the learned CIT(A) has erred in allowing the project development expenses amounting to ₹ 29,25,019, which project expenses were carried forward as deferred revenue expenses. It is the case of the Department that the assessee was following the mercantile system of accounting and that these expenses were required to be claimed in the relevant year. 54. The assessee had incurred an expenditure of ₹ 31,68,663 during the period 1st April, 1997 to 30th April, 1998, which was debited under the head 'Project development expenses' in the books of account relevant to the asst. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO, for the asst. yr. 1991-92, had disallowed the amount of ₹ 29,25,019 pertaining to the asst. yr. 1998-99. The nature of the expenses not being in dispute, the learned CIT(A) was justified in allowing the deduction. As such, ground No.6 stands rejected. 58. According to ground No. 7, the learned CIT(A) has erred in allowing deductions under s. 35D. The facts are that in the asst. yr. 1992-93, the assessee had incurred expenditure on issue of convertible debentures. It was claimed as a deduction during the year, as a revenue expenditure. The issue was raised before the learned CIT(A) by way of an additional ground, pleading that deduction of ₹ 2,21,459 disallowed under s. 35D in the earlier year on account of expenses, be allowed. In the statement of assessable income, in the return for the asst. yr. 1998-99, the assessee clarified that the deduction claimed on account of s. 35D did not include the sums of ₹ 13,580, ₹ 1,87,879 and ₹ 20,000, aggregating to ₹ 2,21,459, on account of expenses disallowed by the Department in the assessments completed for the asst. yrs. 1991-92 and 1992-93 and considered as deduction under s. 35D; that the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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