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Hindustan Engineering & Industries Ltd. Versus Addl. Commr. of Income Tax

2016 (4) TMI 519 - ITAT KOLKATA

Slump sale u/s. 2(42C) read with section 50B - sale of assets of chemical units - Held that:- Hon'ble Calcutta High Court in the case of Kwality Ice Cream (India) Ltd. v. CIT (2011 (1) TMI 905 - Calcutta High Court ) in which also though the sale of the undertaking was for a lump sum consideration it was held that sec. 50 of the Act in respect of depreciable assets will override all other previsions and for depreciable assets, the value has to be determined in accordance with the principles of b .....

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ement and hence, the sale cannot be treated as slump sale. We reverse the orders of the lower authorities and this issue of assessee is allowed. - ITA No. 330/Kol/2013 - Dated:- 16-3-2016 - Mahavir Singh, JM And M. Balaganesh, AM For the Appellant : Shri Siddharth Jhajharia, FCA For the Respondent : Shri G Mallikarjuna, CIT-DR ORDER Per Shri Mahavir Singh, JM This appeal by assessee is arising out of order of CIT(A)-VI, Kolkata vide Appeal No. 237/CIT(A)-VI/Cir-5/2011-12/Kol dated 03.12.2012. As .....

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he facts and in the circumstances of the case the Ld. CIT(A) erred in confirming the action of AO in treating itemized sale of the assets of the Chemical Unit of your petitioner as being slump sale and accordingly confirming the AO's action in aggregating the consideration of ₹ 41,98,00,000/- as being consideration towards slump sale u/s 2(42C) read with Sec. 5OB although such provision was not at all applicable. Even otherwise and without prejudice the Ld. CIT (A) failed to appreciate .....

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he facts and in the circumstances of the case it may kindly be held accordingly." 3. Brief facts relating to this issue are that the assessee is engaged in the business of manufacturing and selling of chemicals, castings, steel wires, wagons etc. The AO during the course of assessment proceedings noticed that the assessee company is having various business units namely, Railway wagon manufacturing unit, jute processing unit and chemical units in Gujarat and West Bengal. According to AO, eac .....

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as a undertaking whole. According to him, this cannot be covered under the definition of slump sale u/s. 2(42C) of the Act. But the AO treated the transfer of the assessee unit's assets, except land as slump sale and profit arising out of this transfer was considered as short term capital gain amounting to ₹ 31,13,58,000/-. The transfer of land was treated as long term capital gain and assessed at ₹ 7,56,82,683/-. Aggrieved, assessee preferred appeal before CIT(A), who confirmed .....

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ets of the assessee was sold for a lump sum single consideration and the appellant has not produced that any tenders/quotations for itemized sale of assets were called. The intention of the appellant is clear that all the necessary items to run it as a unit were sold to one person. For treating a transaction as slump sale and not an itemised sale, one needs to consider the intention of the parties, the facts and the documents of the transaction. Even if liabilities have not been transferred then .....

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ets and liabilities f. The intention of the parties was to sale the undertaking as a going concern for a lump sum without assigning values to individual assets and liabilities. 28. In section 2(19AA) a specific condition has been prescribed for transfer of all assets and liabilities of an undertaking. There is no such condition prescribed in section (2)(42C) that all liabilities must be transferred for slump sale. If the above conditions are satisfied, then even if liabilities are not transferre .....

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valued, the purchaser chooses or cherry picks the assets that he intends to acquire. 29. In the case of Rohan Software Pvt. Ltd v ITO 304 ITR 314 (An (MUM) it has been held that the assessee had transferred its business including intellectual property, codes, formulae and designs, along with all the rights. However, it did not transfer all assets and liabilities pertaining to the undertaking. The Income Tax Appellate Tribunal (Tribunal), Mumbai held that if the purchaser could carry on the busi .....

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lump sale of undertaking within the meaning of s. 2(42C) r/w s.2{19AA) . Fact that assessee did not transfer motor car building and assets and liabilities relating to income-tax matterrs would not make the transfer of business to fall short of slump sale because it could not be said that the purchaser cannot continue the activities in the absence of building and motor car, which had been kept apart. It further held as under: "29. In brief, as discussed hereinabove, "slump sale" ha .....

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fixed separately and charged. "Undertaking" is explained in Explanation I to section 2(19AA). According to this Explanation, as we noted already above, 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 intellectu .....

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has not sold the undertaking as a whole, is difficult to accept." 30. The Hon'ble Bombay High Court in the case CIT v. Polychem Ltd 343 ITR 114 held that the agreement did not contain an itemized valuation in respect of the land, building and fixed assets transferred. The total consideration of ₹ 10.6 crores determined under the agreement was for. the transfer of the business and undertaking as a whole comprising but not limited to the land, building and fixed assets. The transact .....

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arate sale of building or plant and machinery nor any specific price was assigned to land, building or plant and machinery. There is no evidence or material on record to show that any part of the sale consideration was attributed to depreciable assets or any other asset. Hence, it is a case of slump sale and not a case of itemised sale or piecemeal sale, and s. 50 cannot be applied. 32. The Hon'ble Punjab & Haryana High court in case of Max India 319 ITR 68 held that the Tribunal held th .....

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ssee were from sale of a going concern, which was a slump sale and not a sale of block of asset. 33. The Hon'ble Bombay High Court in Premier Automobiles Ltd. v. Income-tax Officer 264 ITR 193 held that a perusal of the documents connected with the transaction showed that the intention of the parties in the .commercial sense was to transfer the Kalyan business, as a whole, for a lump sum consideration of ₹ 247 crores, that, the parties did not Intend to make a sale of itemized assets. .....

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(2008) 23 SOT 58 (Kol) has held that the question is whether it is a "slump sale" of the undertaking as a whole or it is the sale of the depreciable assets within the meaning of s. 50. The fertilizer business of the assessee has been transferred as a going concern to CCFC. All assets and liabilities relating to fertilizer business has been transferred, only assets excluded are bank balance and the outstanding Insurance claim on the date of transfer. Merely because these two assets hav .....

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er from computing the correct liability of the assessee. In this case, there is transfer of the undertaking with lock, stock and barrel. In this case, the entire undertaking was almost transferred with almost all the assets and liabilities and it constitute a slump sale. The Hon'ble Supreme Court in the case of CIT v. Artex Manufacturing Co. [1997] 227 ITR 260 has held that in order to constitute a slump sale, there must be a sale of a going concern as a whole on as is where is basis and in .....

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w etc. In order to ascertain the true character of payment one has to go by the substance of the transaction and not by the manner in which the assessee had apportioned the price. The intention of the parties on the date of MOU and the surrounding circumstances and contemporaneous documents in existence on that date show that it was a sale of the entire business. 37. Further, in deciding the question as to whether the sale was a slump sale or a sale of itemized assets, one has to look at the ove .....

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void the payment of taxes. 38. The Hon'ble Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 has laid down certain tests to decide whether the transaction is a slump sale and held that the branch of the assessee had goodwill and, therefore, when the branch is transferred as a whole for a given price, it constituted a slump sale. Therefore, one of the tests applied by the Bombay High Court was transfer of a running business. The second test applied by the Bo .....

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ms of assets and liabilities in the agreements, it could not be said that the sales were of the going concerns as a whole for a slump price. It is not possible to accept these submissions. The first submission pertains to a factual aspect. As a matter of pure principle, even a branch of a publishing house like this can have different goodwill which depends upon a host of factors such as popularity, performance, circulation, peculiarities of the region, etc. As regards the second submission, a me .....

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in CIT V/s Mugneeram Bangur and Co. [1965] 57 ITR 299 also pertained to the agreement containing a schedule indicating the itemwise value of different assets and liabilities. The 1965 Circular clarified the principle involved in the said decision. Our attention was invited by the Revenue to the decision of the Gujarat High Court in the case of Jayantilal Bhogilal Desai v, CIT [1981] 130 ITR 655. Attention of the Tribunal was also drawn to the said decision. Rightly has the Tribunal come to the c .....

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roperty rights and no buyer would have bought each of these items alone. That every buyer would have insisted on total purchase and, these intangibles were not purchasable item-wise separately and independently in the market. In the circumstances, the second broad test applied by the Bombay High Court was that if several items were not capable of independent purchase then it would amount to a slump sale. The various test applied by Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd .....

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running unit with a change of control from one management to the other called all licenses, permission etc. The sale and transfer of the assets of the undertaking for which sale prices had been predetermined and agreed and disclosed in the agreement may be taken as sale price for slump sale and accordingly shall be determined in accordance with Sec. 50 read with Sec. 43(6)(c) for depreciable assets and for stock its business income u/s. 28 and long term capital gain on land. The Assessing Office .....

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section 50B(2) provides that the net worth of the undertaking will be deemed to be the cost of acquisition and the cost of improvement for the purposes of Section 48 & 49 and further no record was to be given to the previous contended in the 2nd proviso to Section 48. The Assessing Officer has not taken the aggregate value of total assets as per Explanation-2(2) Section-50B. In this case the appellant has not sold the liabilities and retained the same. Therefore, the net worth of the assets .....

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ire gain as long term capital gain. The Assessing Officer in the assessment order at page-7 has observed that the assessee has not submitted the details regarding the no. of months in which the assets other than land were held by the assessee company. The appellant has produced the copies of balance sheet for assessment years 2006-07, 2007-08 and 2008-09 in which the addition is only ₹ 97,604/- in assessment year 2006-07 and ₹ 22,650/- in assessment year 2007-08. There is no addition .....

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lant has given as alternative plea that the appellant has reduced the sale price from the value of assets of the gross block and thereby has taken lesser amount of depreciation. It has submitted that accordingly the value of the assets may be increased which are being taken as part of slump sale and the revised chart of depreciation may be considered for allowing higher/correct amount of depreciation in the computation of income. Otherwise there will be a double addition i.e. the assessee had co .....

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e assets in the depreciation chart without reducing the value of the sold assets considered as part of slump sale The Assessing Officer will verify this figures and the appellant is directed to produce the relevant records before the Assessing Officer to get it verified. The Assessing Officer on verification, if find any discrepancy will pass a detailed speaking order giving reasons for the same. 44. The appellant has filed as an alternative plea that the sale price and aggregate value of assets .....

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nd any variation from the calculation will pass a speaking order giving details for variation." Aggrieved, assessee came in second appeal before Tribunal. 4. We have heard rival contentions and gone through facts and circumstances of the case. We find from the facts of the case that the AO made addition of ₹ 31.13,58,000/- holding the sale of assets of Chemical Unit by assessee as slump sale and assessed the same as short term capital gain. The assessee sold its Chemical Unit at Haldi .....

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rdhanyaghata and Kismetdhanyaghata within P.S Sutahata in the District of Midnapore which HEIL holds as a Lessee for a period of 99 years with effect from Ist day of June 1977. b) Together with the infrastructure of plant and machinery fixed and moveable installed and for lying inside the said factory in "as is where is basis" c) Together with the Housing Complex for home to its staff situated at a nearby plot of land containing an area of 1.6 acres more or less situated within the sap .....

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enumerated in (a) to (f) above belonging to HEIL are hereinafter collectively referred as "the Property"). 2) HEIL and the Promoters have now agreed that the Property shall be sold by HEIL and purchased by the Promoters and/or their nominee the said Private Limited Company at agreed consideration be more fully agreed and recorded hereinafter. NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS:- HEIL will sell the property to the Promoters and/or their nominee the sai .....

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irty lacs only) The assessee was asked to produce the list of assets which constituted the plant & machinery which have been stated to have been sold and the details given by the assessee are as under: Particulars Railway Siding Machinery Electric Installation Water & Sanitation System Tools & Equipments Furniture & Fixtures Motor Cars & Vehicles We find from the agreement, which provided that purchaser will bear and pay all expenses for running of the said chemical unit from .....

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etc. retired up to the date of sale and gratuity and other retirement benefits due to all management staff of the chemical unit up to the date of sale was to be borne and paid by the seller. Even all the rates, taxes, rents, cess on green leaves, sales tax, excise duty, impositions and all other outgoings arising up to the date of sale was the liability of the seller and which was to be paid for by the seller only. 5. According to assessee the contention of the AO that this entire unit was sold .....

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that it was a slump sale of the unit as a going concern is wholly wrong and is not based on correct state of affairs. In this connection, first, the assessee drew attention to provisions contained in sec. 2(42C) defining as to what could be treated and or said, underlined lay emphasis, "[42(C) "slump sale" means the 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 su .....

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Explanation - I to clause 2(19AA), which is also reproduced hereunder: " 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. " The assessee explained that it owning different units/undertakings for Manufacturing and Selling of .....

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hemicals unit at Haldia. The assesse agreed to sell only some of the assets of this unit and for which prices of each individual assets were determined and fixed at an predetermined and agreed value and in this connection it may not be out of place to mention that it is such prices determined that had been received by different Account Payee Cheques during the previous relevant to A.Y 2009-10. The assessee produced copy of the Balance Sheet of this unit as on the date of transfer at and from a p .....

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sale of few assets of the unit at a predetermined and agreed price and retaining all other assets and all the liabilities by seller unit cannot be treated as slump sale because from definition of slump sale as reproduced above, as there could be no slump sale when prices of individual assets being sold and transferred had been determined by an Agreement and only sale prices of such individual assets had been received and when some of the liabilities had at all been transferred and all the liabi .....

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such individual assets with predetermined sale value cannot be treated as slump sale.The co-ordinate bench of this tribunal Cochin Bench, in the case of Harrisons Malayalam Ltd. V ACIT (2009) 315 ITR AT 1 wherein it is held as under: "(iii) That the estate in the nature of a rubber plantation was a going concern. The sale of every assets was attributable to a specified sum of consideration. Therefore, there could not be a "slump sale". Since all the assets and liabilities had not .....

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provisions of sec. 50B of the Act. " Further, Hon'ble Supreme Court in the case of CIT v, Artex Manufacturing Co. (1997) 227 ITR 260 in which though the issue involved was regarding determination of income u/s. 41(2) of the Act but the sale in this case was of the entire business as a going concern for a lump sum but where sale prices of plant & machinery and dead stock had been predetermined and hence it was held not to be slump sale and hence principles enunciated in this case wi .....

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facts and circumstances, we are of the view that sale and transfer of some of the assets of the undertaking for which sale prices had been predetermined and agreed and disclosed in the agreement itself without transferring other assets and without transferring any of the liabilities cannot be treated as slump sale. 7. In a recent decision of this Tribunal of Kolkata Bench in the case of DCIT Vs. Tongani Tea Co. Ltd. in ITA No. 1233/Kol/2008 for AY 2000-01 dated 06.11.2015 on identical facts has .....

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aken over by the company for a lump sum consideration. The AO and the Tribunal held that though the assessee has disclosed in its books goodwill at ₹ 2.5 lacs but firm did not enjoy any goodwill and the sum of ₹ 2.5 lacs was nothing but additional value of land which was stock in trade of the assessee's business. Hon'ble Supreme Court held that there was nothing in the agreement or document evidencing the transfer which in any manner proves that any attempt was made by the pa .....

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goodwill and other items is specified. He says that although the amount of ₹ 2,50,000 was shown as price of goodwill, it was really excess value of the land sold along with other assets. Secondly, he says, relying on the passage already cited above from Doughty's case** that the vendor's business was a business of purely buying and selling land. In our opinion, on the facts of this case it cannot be said that the vendors were carrying on the business of purely buying and selling la .....

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ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land on the date of sale. As the vendors were transferring the concern to a company, constituted by the vendors themselves, no effort would .....

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is court in Commissioner of Income-tax v. West Coast Chemicals & Industries Ltd.* and Doughty's case** that no part of the slump price is taxable. We, therefore, answer question No. 3 in the negative. As stated before, in view of this answer, it is not necessary to answer questions Nos. 2 and 4." 15. Ld. Counsel for the assessee also relied on the judgment of Hon'ble Bombay High court in the case of Premier Automobiles Ltd. Vs. ITO (2003) 264 ITR 193 (Bom), wherein Hon'ble H .....

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the Kalyan Undertaking and it is a transfer of going concern and, therefore, it was a case of slump sale and accordingly, it was stated that there arises long term capital gains. Hon'ble Bombay High court in Premier Automobiles Ltd., supra has held as under: "There is one more aspect which needs to be mentioned. Our above conclusion, namely, that the transaction is a slump sale is not only based on our interpretation of terms and conditions of the entire arrangement but it is also based .....

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ofits and, therefore, that value had to be ignored. These accounts of PAL support the slump sale agreement because the accounts are not based on the sale of itemized assets. This aspect has been lost sight of by the Assessing Officer. There was a separate ledger for the Kalyan business which contains various heads of accounts, viz., building account, land account, plant and machinery account, in which debit/credit entries were made as per the figures given on page 341 of the paper-book. ₹ .....

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d or not connected with his business or profession. In the case of West Coast Electric Supply Corporation Ltd. v. CIT [1977] 107 ITR 483 (Mad), it has been held that the word "property" in the definition of "capital asset" in section 2(14) would include an undertaking acquired as a whole. Therefore, the Kalyan business acquired as a whole by PPL, constituted property in the definition of "capital asset". In the case of demerger, all assets and liabilities stand tran .....

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is not attributed to individual items of assets. In the present case, all the tests laid down by the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 stand satisfied. In our view, principles for computing capital gains are the same, both under section 41(2) as it stood at the relevant time and under section 50 of the Income-tax Act. In the present case, having held that the transaction was a slump sale, the Assessing Officer will now have to decide, on remand .....

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le of itemized assets even then there is a basic fallacy in the stand taken by the Department. In this case, the Assessing Officer has held that there was a sale of itemized assets. According to the Income-tax Officer, there was a short-term gain on sale of building of ₹ 19.31 crores ; ₹ 64.39 crores on plant and machinery, ₹ 7.57 crores on paint shop. These short-term gains have been calculated by the Assessing Officer by assigning specific sale values to building, paint shop, .....

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al proprietary information and intangibles like licences, quotas, permits, etc., all of which have been transferred to PPL and consequently the liability of PAL stood increased arbitrarily. Moreover, there is arbitrariness in the assignment of sale value by the Assessing Officer. For instance, the Assessing Officer has assigned sale values to buildings, plant and machinery on the basis of the report of the valuer of September, 1996. However, when it came to assignment of the sale value to the pa .....

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res. Further, in this case, the controversy in computation of capital gains by the Assessing Officer is, whether the Assessing Officer was justified in taking into account valuation of assets done by PPL in September, 1996. At this stage, it may be mentioned that PAL sold the entire Kalyan business for a net consideration of ₹ 247 crores (see page 267 of the paper-book). As per the returns filed by PAL, the book profit/surplus was ₹ 81.31 crores. The Assessing Officer has increased t .....

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wn under the block of assets on the first day of the previous year. Lastly, the valuation of assets done by the transferee-PPL in this case is not for determining value of individual assets but for allocating the price of various assets in their books of account. Therefore, the sale value assigned by the transferee for the purposes of their books of account cannot constitute the basis for computing income/profits of PAL under the Income-tax Act. In the case of sale of business as a whole, there .....

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res is restricted to specific three items then liability of the assessee would stand increased artificially. In the case of sale of itemized assets, the Department will have to work out the cost of each item. We are dealing with the case concerning the assessment year 1995-96. At that time, there was no definition of slump sale. The concept of slump sale is based on judge-made law. Under the circumstances, even if we were to accept the contention of the Department, namely, that there was a sale .....

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uting engineering contracts etc. During the relevant year the assessee sold one of its rubber estates with standing trees and all other paraphernalia known as 'Boycee Estate' as a going concern. The CIT(A) held that the surplus arising out of the sale of its 'Boycee Estate' was taxable as capital gain u/s. 50B of the Act read with section 2(42C) of the Act, as the rubber estate owned by the assessee was sold as a going concern, which showed that the sale was a slump sale of under .....

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er, cocoa, cardamom, etc. In the case of rubber itself, the assessee is having about 12 different estates. During the previous year relevant to the assessment year under appeal, the assessee-company has sold one of its rubber estates known as "Boyce Estate". The estate has been sold on the basis of a detailed agreement executed between the vendor and vendee. The total consideration stipulated for the transfer of the estate has been spilt over different assets both movable and immovable .....

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ed the estate with all the assets and liabilities. All the financial assets available to the assessee up to the date of the transaction were not transferred as per the agreement but have been retained by the assessee-company. The assessee-company has assumed all the liabilities including the statutory liabilities till the date of transfer. Therefore, it is not possible to hold that the transfer was a slump sale only for the reason that the rubber estate was transferred to the buyer as a "go .....

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the transaction. Rubber plantation is a highly labour oriented activity. It is not easy to retrench all the experienced workers only for the reason that the property has been changed hands. Retrenchment of the workers will create serious labour problems and it will not be possible either for the assessee or for the buyer to dose the contract without having a clear cut understanding on the engagement of labour deployed in the rubber estate. Therefore, the agreement with the buyer that the new own .....

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nd all other activities have to be carried out without any interruption. Therefore, by the nature of the activities of the rubber plantation itself, it is a "going concern". Even if there is no such an expression in the agreement that the rubber estate is sold as a going concern, the nature of the asset has become "a continuous asset". Even, in the absence of such a specific clause, by its nature, a rubber plantation is in the nature of a "going concern". Unless and .....

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the case, we are of the considered view that the Commissioner of Income-tax (Appeals) has been highly carried away by the commercial expression reflected in the 'agreement like "going concern". At the cost of repetition, we have to state that a rubber plantation is always a "going concern". Even if the parties to the contract do not say so, still the estate in the nature of a rubber plantation is a going concern. Therefore, the said expression is not a test to be relied o .....

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that case, the Tribunal held that section 50 is applicable. The Tribunal further held that it was not the value of the transaction to be taken as a noteworthy for the purpose of "slump sale". The Tribunal held that section 50B did not attract in that case. 41. The Income-tax Appellate Tribunal, Bangalore Bench, in the case of Kampli Co-operative Sugar Factory Ltd. v. Joint CIT [2002] 83 ITD 460 has considered the case of split sale vis-a-vis slump sale. In that case, the Tribunal obse .....

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d circumstances of the case decided by the Bangalore Tribunal as mentioned above. As in the case of Kampli Co-operative Sugar Factory Ltd, v. Joint CIT [2002] 83 ITD 460 in the present case also, the items sold did not include liabilities. The sale agreement did not include investments and deposits. All the investments, deposits, receivables, stock and such other current assets in the form of financial and other assets remained with the assessee-company along with the liabilities. Only those ass .....

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e assets of undertaking and no liability was transferred to the buyer, the transfer of undertaking would not constitute a slump sale. 44. The Income-tax Appellate Tribunal, Kolkota Bench "D", in the case of Deputy CIT v. ICI (India) Ltd. [2008] 23 SOT 58 has held the same view that there cannot be a case of slump sale, if all the assets and liabilities of an undertaking have not been transferred to the vendee. 45. As rightly relied on by the learned chartered accountant appearing for t .....

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t schedules and annexure. The consideration has been specifically assigned to the sale of immovable property by way of rubber estate. Separate consideration has been assigned to the sale of movable properties including vehicles and other properties. Therefore, it is not a case of slump sale for a lump sum amount of consideration where the consideration is not attributable to any particular item of asset. There is no such a statement of blanket consideration in the present case. Here, the sale of .....

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n the light of the judgment of different Benches of the Tribunal as stated in the above paragraphs, we hold that this is not a "slump sale" answerable to section 50B of the Act. 47. Moreover, in the light of the decisions: (a) Manubhai A. Sheth's case (supra); (b) S. Mutyam Reddy's case (supra); (c) Alanickal Co. Ltd.'s case (supra); (d) All India Tea and Trading Co. Ltd.'s case (supra) and; (e) Singhai Rakesh Kumar's case (supra) The profits arising on sale of agri .....

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