Income Tax Appellate Tribunal - Mumbai
P.V. Leela Amma, Mumbai vs Department Of Income Tax on 21 November, 2014
आयकर अपील य अ धकरण "सी" यायपीठ मंुबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, MUMBAI ी संजय अरोड़ा, लेखा सद य के सम एवं ी अ मत शु ला, या यक सद य ।
BEFORE SHRI SANJAY ARORA, AM AND SHRI AMIT SHUKLA, JM
आयकर अपील सं./I.T.A. No. 1277/Mum/2010
( नधारण वष / Assessment Year: 2006-07)
Income Tax Officer - 20(2)(1), P. V. Leela Amma
बनाम/
701, Piramal Chambers, Lalbaug, Leela Baug, Sir M. V. Road,
Mumbai-400 012 Vs. Andheri (E), Mumbai
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAFPN 5693 M
(अपीलाथ /Appellant) : ( यथ / Respondent)
अपीलाथ क ओर से / Appellant by : Shri Premanand J
यथ क ओर से/Respondent by : Shri Nitesh Joshi
सनु वाई क तार ख / : 11.11.2014
Date of Hearing
घोषणा क तार ख /
: 21.11.2014
Date of Pronouncement
आदे श / O R D E R
Per Sanjay Arora, A. M.:
This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)-31, Mumbai ('CIT(A)' for short) dated 12.11.2009, allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act') for the assessment year (A.Y.) 2006-07 vide order dated 30.12.2008.
2. The issue arising in the instant appeal, raising as many as four Grounds - ground nos. 5 & 6 being general in nature, warranting no adjudication, as discerned from the orders of the authorities below as well as the arguments made before us, is the exigibility to tax u/s. 45(1) or under any other provision of the Act, of the income, if any, arising to the assessee on the transfer of her business.
2 ITA No. 1277/Mum/2010 (A.Y. 2006-07)3. The assessee, a sole proprietor of a firm, Vivek Industries, is in the business of manufacture of garments on job work basis vide three proprietary concerns viz. M/s. Bombay Fashions, M/s. Design Creations and M/s. Apparel Industries. The garments are manufactured primarily for the group concern, Design Creations (Mumbai) Pvt. Ltd. ('DCPL' for short). Vide three separate agreements dated 29.03.2005, the assessee agreed to sell her said business, on a going concern basis, effective 01.04.2005, to the said company DCPL (name subsequently changed to M/s. Leela Scottish Lace (P.) Ltd.), a company incorporated under the Companies Act, 1956, with its registered office at Andheri (E), Mumbai. Clause 3 of the relevant agreements, identically worded, is in respect of consideration for the transfer, and reads as under:
'3. Consideration 3.1 The Consideration for the purchase of Business shall amount to Rs.10,000/- subject to paragraph 3.3 below. 3.2 The Consideration shall be discharged by DCPL in cash within 7 (seven) days from the Completion Date or within such time as may be mutually agreed upon between the parties. 3.3 The Consideration shall be adjusted as follows:
(a) If the Final Net Assets exceeds the Consideration, the Consideration shall be increased to an amount equal to the Final Net Assets;
(b) If the Final Net Assets is less than the Consideration, the Consideration shall be reduced to an amount equal to the Final Net Assets.
3.4 For the purposes of this Agreement, 'Final Net Assets' means assets less liabilities as on the Completion Date.' The net worth of the three firms as on the transfer date (01.04.2005), as furnished by the assessee during the assessment proceedings, i.e., at an aggregate of Rs. 73 lacs, was as under: (Amount in Rs. lacs)
a) Bombay Fashions 205.29
b) Design Creations (-) 99.78
c) Apparel Industries (-) 32.51 3 ITA No. 1277/Mum/2010 (A.Y. 2006-07) ITO vs. P. V. Leela Amma In the view of the Assessing Officer (A.O.), the assessee had nowhere proved that the net worth of the latter two firms afore-referred was in the negative, so that their entire capital had been wiped off, and that the assessee had incurred loss to that extent. That being the case, the consideration for their transfer was to be considered at Rs.10,000/-, rather than being adjusted by the negative sum of their net worth, as contended by the assessee. For the third firm, M/s. Bombay Fashions, the consideration (Rs.10,000/-) was to be further increased by its positive net worth of Rs.205.29 lacs. Accordingly, the total consideration was taken by him at Rs.205.59 lacs, which was considered as the benefit arising to the assessee from the transfer. Further, section 47(xiv) would not apply in-as-much as the assessee's shareholding in the transferee-company (DCPL) was only 31%, as against a minimum of 50%, as specified in the said provision. In fact, the assessee had herself admitted to both, i.e., section 47(xiv) and s. 50B, as being not applicable to the transaction/s under reference. The same was accordingly assessable u/s.56, falling under the residuary head 'income from other sources', where-under income of every kind, not specifically excluded from the total income, would become chargeable to income-tax.
In appeal, the assessee found favour with the ld. CIT(A). The consideration for the transfer was, in effect, the net worth of the transferor-undertaking/s, whether positive or negative. The assessee had not received anything beyond Rs.73 lacs, i.e., the net worth of the three firms, save the aggregate cash and bank balances of the three firms as at the completion date (Rs.5.45 lacs), which was not subject to transfer. Nor it is in fact the A.O.'s case that it is so. The assessee's case was thus covered u/s.50B. Further, the sale consideration for all the three undertakings transferred being their respective net worths, no addition was called for in-as-much as the transaction did not give rise to any capital gains. The entire addition made being deleted thus; aggrieved, the Revenue is in appeal.
4. We have heard the parties, and perused the material on record.
4.1 The transfer of the Undertakings vide separate agreements is not denied by it. The principal issue raised by the A.O. is with regard to the 'consideration'. The same is not Rs.10,000/-, subject to a further increase or decrease by the amount of final net assets (net worth) of the transferor-entity, as construed by the A.O., but its' net worth itself. In fact, 4 ITA No. 1277/Mum/2010 (A.Y. 2006-07) ITO vs. P. V. Leela Amma as it appears to us, the consideration clause in the Agreements has been stated in the manner it has been, i.e., rather than simply stating it to be the book value of the final net assets, in view of the same being in the negative for two of the three concerns being transferred. Be that as it may, the A.O.'s confusion, as it would appear to us, is as to how the consideration could be in the negative? The ld. Authorized Representative (AR), the assessee's counsel, on being so queried during the course of hearing, would object thereto, stating it as not so, but only that the assessee had not been able to show that the net worth of the said two firms had been lost. We are surprised. In our view, the A.O.'s confusion stems principally on account of the negative net worth of two of the three undertakings transferred. How could the consideration, which is pegged at the net worth, whether positive or negative, be in the negative? How for instance, one may ask, would it be conveyed? As such, even assuming the ld. AR to be correct in stating that to be not the (or a) source of the AO's confusion, how we wonder it would not be an issue arising in the matter and, thus, not relevant for being questioned and examined in deciding the same. We would rather consider this to be the issue arising in the instant case. The ld. AR, in our view, ought to have addressed the query, being germane to the issue. In fact, we find copies of the order by the tribunal in the case of Zuari Industries Ltd. vs. Asst. CIT [2007] 105 ITD 569 (Mum) (marked as 'AR') in the appeal folder. Vide its' said decision, the Tribunal has held precisely what the A.O. has done in the instant case, except that he has brought the same to tax u/s. 56, which though is not understandable. There is in fact more than one copy of the said order in file, so that it may well have been that reliance thereon stood placed, i.e., on an earlier date/s of hearing, on behalf of the Revenue as well.
The tribunal in the said case held that the cost of acquisition of an asset, where the net worth was in the negative, so that the value of the liabilities exceeded that of the assets, is to be taken at nil. Not so doing would amount to the capital gains being in excess of the sale consideration, which cannot be. A 'gain', which would arise only where the sale consideration is more than the cost, is always a part of the consideration. Rather, where the cost exceeds the sale (or transfer) consideration, capital gain would be 5 ITA No. 1277/Mum/2010 (A.Y. 2006-07) ITO vs. P. V. Leela Amma in the negative, i.e., a capital loss. How could, therefore, it wondered, capital gain exceed the sale consideration? That is, a scenario of capital gain being in excess of or higher than the sale consideration could never arise in reality. The same, as where a negative cost or net worth is considered as the cost of acquisition and/or improvement, it considered to arise out a mathematical jugglery, with no basis in facts. How could, it questioned, the cost of an asset be negative? The value of a capital asset or property could, therefore, at best be 'nil', and there is no concept of negativity with reference to the expressions 'net worth' or 'cost of acquisition'. Surprisingly; more so, as it obtained despite our direct query in the matter, neither the ld. AR nor the ld. DR adverted to this decision, placed in the file folder, during hearing.
The tribunal in the said case considered the issue from both the common law and tax law perspective, as well as, in fact, a mathematical one. The said decision being also rendered in the context of section 50B, which stood also considered, the matter would require being referred to a larger bench, i.e., where the view expressed by the tribunal in Zuari Industries Ltd. (supra) was to be not adopted or followed by us, stating our reason/s for the same. The ld. DR, however, relied before us on the decision in the case of Dy. CIT vs. Summit Securities Ltd. [2012] 15 ITR (Trib) 1 (Mum) (SB), which disapproves the decision in the case of Zuari Industries Ltd. (supra), as also dissents from another in the case of Paper Base Co. Ltd. vs. Asst. CIT [2008] 19 SOT 163 (Del). It stands clarified therein that section 2(14)) of the Act, which defines a capital asset to mean property of any kind held by the assessee, no doubt refers to some positive possession. However, the contention that its' cost therefore cannot be negative, fails in the context of section 50B, as the capital asset referred to therein is an Undertaking, which would encompass not only assets, but its' liabilities as well, as where their value exceeds that of the assets. Section 50B(2) makes it abundantly clear that the undertaking or a division as a whole is considered as a one asset and the net worth of this capital asset is to be considered as the cost of acquisition and improvement for the purposes of sections 48 & 49, and which is to be reduced from the full value of the consideration received or accruing as a result of transfer. The object of section 50B is thus simply to determine and supply the figure of 6 ITA No. 1277/Mum/2010 (A.Y. 2006-07) ITO vs. P. V. Leela Amma cost of acquisition and cost of improvement of the undertaking/s to section 48, so as to eventually compute the capital gains u/s.45. The tribunal also answered the question with regard to the tribunal's power; the questions addressed by it not arising from the grounds before it or even those posed before the special bench, placing reliance on the decision in the case of Ahmedabad Electricity Co. Ltd. vs. CIT [1993] 199 ITR 351 (Bom) (FB).
4.2 We next consider the applicability of the said decision by the Special Bench in the case of Summit Securities Ltd. (supra) in the facts and circumstances of the case. The same, apparently, even as observed during the course of hearing by the Bench, supports the case of the assessee, rather than that of the Revenue. The tribunal has clarified the capital asset to be something positive in-as-much as it connotes, and is, only a property, so that something of worth, i.e., value, is being transferred. To that extent it is in agreement with and endorses the view expressed by the tribunal earlier in Zuari Industries Ltd. (supra). Where it differs from the latter is with regard to its valuation. An undertaking/s, which is the subject matter of transfer u/s.50B, in-as-much as it includes its' liabilities also, could as well be negative, i.e., where their value exceeds that of its assets. That is, while what is being transferred is a property and, thus, a capital asset by definition, its' net worth, which its' cost of acquisition and/or improvement is deemed as (section 50B(2)), could be negative, i.e., where the value of the liabilities exceeds that of the assets. This is as section 50B entails a species of capital assets, an undertaking, which is an amalgam of assets and liabilities, which cannot be segregated, constitute as they do an integral part of the undertaking or a business activity as a whole. Section 2(14), defining capital asset, does not override section 50B, which prescribes the mode and manner of computing the capital gain in a defined set of circumstances, i.e., slump sale of an undertaking/s.
Further, consideration, by definition, cannot be negative. A negative consideration implies transfer of an obligation, which cannot be said to be an asset, much less in the capital field, or a capital asset by definition; we having clarified property to be something positive, i.e., of value. An undertaking is and, thus, has to be seen as a concept or entity, distinct and apart from its' cost of acquisition and/or improvement, valued on a valid 7 ITA No. 1277/Mum/2010 (A.Y. 2006-07) ITO vs. P. V. Leela Amma basis. The moment this is done, the mathematical identity that capital gain cannot exceed the sale consideration, which prevailed with the tribunal in Zuari Industries Ltd. (supra), shall no longer obtain, dissolving all the confusion and ambiguity in the matter.
4.3 Coming to the facts of the present case, what the assessee has transferred is its' business of manufacture/stitching of garments (on job work basis), undertaken through its three proprietary firms. Though per separate agreements, the same is in effect one single transaction of transfer of the assessee's said business to another entity, DCPL, and what the assessee has received, in consideration, is a single positive sum from the said transferee-company. Consideration, as afore-stated, cannot be negative, and is not so in the instant case, and which would also stand to answer the query made during hearing. To this extent we are in disagreement with the ld. CIT(A), who though has finally combined the net worth of all the three firms, at Rs.78.45 lacs, i.e., by adjusting the negative net worth of the two firms with that of the third, having a positive figure. The transactions being considered as disparate or, at least separate, in our view stood so perceived by both the authorities below on account of the disjointed manner in which the transaction has been structured, i.e., by executing three separate agreements of even date, for parts of the same business, and on like terms, between the same parties. Explanation 1 to section 2(19AA), defining 'undertaking', speaks of the business activity as a whole. Similarly, section 2(42C), defining 'slump sale', speaks of one or more undertakings. The sale of all the three firms has therefore to be viewed as a part of one and the same slump sale. The assessee further confounded the matter by stating of section 50B as being not applicable to the transaction. This could perhaps be for the reason of the decision in the case of Zuari Industries Ltd. (supra), holding of ignoring the negative (net) worth, decided the matter against the assessee. Whatever may have been the reason, it is not the view or the stance adopted by the parties that would be decisive of the matter. The assessee's view, in any case, does not bind the A.O., who is duty bound to, regardless, ascertain the assessee's correct tax liability. Here we may also clarify that the non-transfer of the cash and bank balances of the three firms (Rs.5.45 lacs), admitted before us by the ld. AR, would not, in the facts and circumstances of the case, remove the assessee's case from the 8 ITA No. 1277/Mum/2010 (A.Y. 2006-07) ITO vs. P. V. Leela Amma purview of section 50B, which envisages the transfers of all the assets and liabilities, so that exclusion of even one may operate to preclude the same. We state so as the consideration in the present case is in cash. The cash/bank balance with the assessee can thus be considered as having been given by her to and received back from the transferee, so that it continues to remain in her possession and, thus, of no consequence.
We may also refer to the decision by the apex court in the case of CIT vs. Attili N. Rao [2001] 252 ITR 880 (SC), distinguished by the tribunal in the case of Zuari Industries Ltd. (supra). We consider this as incumbent upon us, as the tribunal on an earlier occasion, i.e., vide order sheet entry dated 25.04.2011, specifically sought clarification on the applicability or otherwise of the said decision in the facts and circumstances of the instant case. The parties again did not refer thereto during hearing. So, however, in our view, the said decision is qua another aspect of the matter. In the facts of the said case, the assessee, in abkari business, had mortgaged his immovable property to the State Government (in the Excise Department), which in the recovery proceedings under the Excise Act auctioned the same, and deducting there-from its dues, paid over the balance to the assessee. The assessee sought deduction of the amount retained by the Government in the computation of capital gains, in-as-much as the property sold was under charge or mortgage for that amount, which therefore never reached him, so that there was thus a diversion by overriding title. While the tribunal and the high court held in assessee's favour, the apex court, reversing the same, held that what has been discharged by the assessee was only a debt out of the sale proceeds of his property and, therefore, the assessee had received the full price. Given our finding that what has been transferred by the assessee are her undertakings, as going concerns, forming part of her business, for a lumpsum consideration, and not their individual assets, the said case has no application in the facts of the present case.
Decision
5. The present case is of a slump sale; the assessee transferring its' business carried on through three undertakings. The provisions of section 50B shall apply; there being no 9 ITA No. 1277/Mum/2010 (A.Y. 2006-07) ITO vs. P. V. Leela Amma finding of any asset or liability of the said business as having not been transferred, with we having already clarified the aspect of 'non-transfer' of cash and bank balance/s. The sale consideration is a single sum of Rs.78.45 lacs, i.e., the combined net worth of all the three firms as at the completion date, received by the assessee in cash. Further, as this net worth is also deemed as the cost of acquisition and/or improvement u/s. 50B(2), no capital gain would stand to arise. We, therefore, approve the assessee's claim in principle. The assessee, however, has admittedly not furnished a report/s from an Accountant, indicating the computation of net worth of the undertakings and, further, certifying the same, i.e., in terms of s. 50B(3). This perhaps is for the reason that the assessee was at the relevant time under the belief that section 50B is not applicable to its' case. We, however, having held it as so; the assessee rather itself pleading it as so in the appellate proceedings, it would be incumbent on her to satisfy the said requirement, albeit procedural, of the said section. The matter is accordingly restored back to the file of the first appellate authority, which had found s. 50B to be applicable in the first instance. Subject to the ld. CIT(A) returning a positive finding of the assessee having complied with the said condition, rendered upon observing the due process of law, and after allowing a reasonable opportunity of being heard to the parties before him, so that the requirements of law are satisfied, we allow the assessee's claim. We may however clarify that in case of any difference between the sale consideration, since crystallized and received at Rs.78.45 lacs, and the net worth as so determined, if any, the same shall be the capital gain or capital loss, as the case may be, chargeable u/s. 45(1) r/w s. 50B of the Act. We decide accordingly.
6. In the result, the Revenue's appeal is disposed on the aforesaid terms.
Order pronounced in the open court on November 21, 2014
Sd/- Sd/-
(Amit Shukla) (Sanjay Arora)
या यक सद य / Judicial Member लेखा सद य / Accountant Member
मुंबई Mumbai; दनांक Dated : 21.11.2014
10
ITA No. 1277/Mum/2010 (A.Y. 2006-07)
ITO vs. P. V. Leela Amma
व. न.स./Roshani, Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु त(अपील) / The CIT(A)
4. आयकर आयु त / CIT - concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai
6. गाड फाईल / Guard File
आदे शानस
ु ार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai