Income Tax Appellate Tribunal - Mumbai
Rohan Software Pvt. Ltd. vs Income Tax Officer on 30 August, 2007
Equivalent citations: [2008]304ITR314(MUM), (2008)117TTJ(MUM)490
ORDER
K.P.T. Thangal, Vice President
1. These appeals by the assessee, pertaining to assessment year 2000-01, are disposed off by this consolidated order, for the sake of convenience.
2. ITA No: 1429/Mum/2005:- The first ground of objection by the assessee is directed against the order of the CIT(A) in upholding the reopening of assessment under Section 147 of the Income Tax Act, 1961.
3. Assessee filed the return on 29.05.2000 declaring income at Rs. 9,55,370/- along with audited accounts and other documents. The reopening was done under Section 147 of the Act, vide order sheet entry dated 12.01.2004. The reasoning for the reopening is reproduced at Page 1 and 2 of the assessment order, which reads as under:
The assessee company has filed the return of income on 29.11.2000, which has been accepted Under Section 143(1) of the Act. The perusal of the Balance-sheet reveals that the capital reserves has increased by Rs. 1.54 crores. Further, the assessee has enclosed a copy of Memorandum Of Understanding dated 24.08.1999 executed between the assessee company and M/s ICICI Infotech Services Ltd. On going through the same, it is revealed that the assessee company has received Rs. 1.78 crores from M/s ICICI Infotech Services Ltd. for transferring all assets and properties of the assessee company in its business including intellectual properties, codes, formulae and designs, etc. Further, it is also mentioned that the assessee company shall not transfer the building, car and the assets and liabilities regarding income-tax matters. The assessee has considered the receipt of this consideration as capital gain and invested the same in mutual funds which are exempt from the capital gain tax. Further, the perusal of the said MOU clearly reveals that consideration received by the assessee is not in the nature of capital gains. No assets, whatsoever, mentioned in the balance-sheet of the assessee company has been transferred. This consideration has been received for utilizing the services of two directors of the assessee company and their intellectual property. This is a receipt of consideration for rendering off the services by the assessee company to M/s ICICI Infotech Services Ltd. Thus the above receipt is revenue in nature and has to be treated as business income of the assessee. Hence, is in the nature of business income and should be taxed accordingly.
In view of the above, I have the reason to believe that the income of Rs. 1.78 crores has escaped assessment. The case of the assessee is covered by Explanation 2(c) of Section 147 of the I. T. Act, 1961 and hence, I consider this as a fit case to issue Notice Under Section 148 of the I.T. Act, 1961.
4. AO formed the opinion that he had a good reason to believe that income of Rs. 1.78 crores has escaped assessment and assessee's case is covered by Explanation 2(c) to Section 147 of the Act. Hence, he reopened the assessment issuing notice under Section 148 of the Act. In response to the above, assessee filed the return on 01.03.2004 disclosing the same income.
5. Assessee objected the reopening before the CIT(A). It was contended that the AO did not provide the assessee the reasons for reopening the assessment, in spite of request made by the assessee. Further, it was contended, there was absolutely no information or material which will lead to the belief that income chargeable to tax has escaped assessment. After the completion of the assessment, nothing new has happened or fresh information came into the possession of the revenue. Hence, it was submitted, AO wont beyond his jurisdiction by resorting to Section 148. It is baseless and unwarranted.
6. CIT(A) called for a remand report from the AO on this point. It was submitted by the AO that the assessee was aware of the reasons for reopening and were very much in the grip of the issue in question. That is why, according to the AO, Director Shri Manoj Kunkalienkar avoided filing of the return in response to notice under Section 148 or avoided completion of the statement under Section 131 of the Act. It was further submitted, if the belief entertained by the AO is based on reasons, which are relevant and sufficient, then the assessee cannot challenge sufficiency or insufficiency. For the above proposition, AO relied upon the decision of the Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das reported in 103 ITR 437 (SC) and the decision of the Hon'ble Allahabad High Court in the case of Ramprasad v. ITO reported in 82 Taxman 199 (All). It was further submitted, relying upon the decision of the Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works Pvt. Ltd. reported in 198 ITR 297 (SC), since the proceedings under Section 147 are for the benefit of the revenue and not for the assessee, and it was aimed at gathering the "escaped income" of the assessee, it cannot be allowed to be converted as 'revisional' or 'review' proceedings at the instance of the assessee, thereby making the machinery unworkable. Relying upon the decision of the Hon'ble Delhi High Court in the case of Rakesh Aggarwal v. ACIT reported in 87 Taxman 306 (Del), it was submitted that under the amended provision the power of reopening is much wider and can be exercised even if an assesses has disclosed fully and truly all material facts necessary for the assessment.
7. Considering the above submission of the AO and of the assessee, the CIT(A) upheld the reopening. Aggrieved by the above order, assessee is in appeal before the Tribunal.
8. Learned Counsel for the assessee submitted, the reasons recorded for reopening, first of all. was not furnished to the assessee after issue of notice under Section 148 of the Act. Hence, the assumption of jurisdiction by the AO under Section 147 is unlawful in view of the decision of the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd., reported in 259 ITR 19 (SC). Learned Counsel further submitted, if the AO had furnished copy of the reasons recorded for reopening the assessment, the assessee would have had an opportunity to present its view before him about the legality of his action and could have even succeeded in persuading him to drop the proceedings. Hence, learned Counsel submitted, the order of the AO as confirmed by the CIT(A) should be held as beyond jurisdiction.
9. The learned Departmental Representative, on the other hand, supported the orders of the revenue authorities.
10. We heard the rival submissions, gone through the orders of the revenue authorities and the decisions cited. The argument of the learned Counsel is to be rejected in the light of the Delhi Bench decision of the Tribunal in the case of ITO v. Smt Gurinder Kaur reported in 102 ITD 189 (Del), wherein the Tribunal held, the earlier decision of a larger Bench of the Hon'ble Supreme Court in the case of S Narayanappa v. CIT reported in 63 ITR 219 (SC), was not brought to the notice of their Lordships while deciding the case of GKN Driveshafts (India) Ltd. v. ITO (supra). Hence, the appeal by the assessee on this ground fails and dismissed.
11. On merit, the ground taken by the assessee is directed against the order of the CIT(A) in upholding the view taken by the AO that the consideration of Rs. 178 lakhs for transfer of business to M/s ICICI Infotech Services Ltd. was not made on account of "slump sale of business as a going concern" but a revenue receipt chargeable under Section 28 of the Act as business income.
12. Facts leading to the dispute, briefly, is as under:
As we mentioned earlier hereinabove, in response to notice under Section 148 dated 12.01.2004 and subsequent to the return filed by the assessee on 01 03.2004 in response to the above notice, a statement from the Director of the assessee, Shri Manoj Kunkalienkar was recorded on oath on 29.01.2004 and 12.03.2004. Answering to Question No. 3, it was stated that the assessee company came into existence in 1994 and till the time of sale the assessee was in the field of developing software IPRs and managed to acquire reputable clients like Indian Express, RCF, IIT Mumbai, etc. The software which were developed for which the rights belonged to assessee [M/s Rohan Software Pvt. Ltd. ("RSPL" for short)], were commercial advertisement and billing system, financial accounting system, terminal emulator, data logas/manager for packing machine controllers etc. The business along with all the rights to IPRs (intangible assets) developed was taken over by M/s ICICI Infotech Services Ltd. ("IISL" for short) in 1999. Consequent to this, assessee was prohibited from doing any business using/selling of any of these IPRs. But the Director continued whole time employment in IISL as well. At the same time, he continued to be a Director of RSPL (assessee), which does not have any business. In response to further Question, it was stated that the assessee (RSPL) would transfer all IPRs codes, formulae, designs to IISL for the consideration of Rs. 1.78 crores and RSPL will make all arrangements to close the business within the time agreed with IISL. The promoters of RSPL (assessee), viz. Shri Manoj Kunkalienkar and Smt Sudha Kunkalienkar have been restricted to associate themselves directly or indirectly to any business similar or identical with the present business of the assessee and IISL. AO put again to the Director of the assessee (Question No. 5) that the perusal of Memorandum Of Understanding ("MOU" for short) reveals that the transfer of asset is for a specific period and clause 8 mentions about the ownership of IISL over the improvements in technology, designs and innovations made during the said period and he was asked to explain as to how it is transfer of IPR etc. forever? Answering to this Question, it was submitted, Point No. 1 of the MOU - any intellectual properties, codes, formulae, designs, etc. shall be permanent property of IISL forever. Any improvement done after transfer by IISL in IPR etc. will continue to be their own property. Three years period mentioned in clause 7 of MOU relates to employment, conditions of the promoters of RSPL and it does not refer to transfer of IPR (intangible assets) etc. It was again put to Shri Manoj Kunkalienkar, Director of the assessee as to whether MOU specifically restricts the assessee company from using the assets claimed to have been transferred. It was stated, clause numbers 1, 4, 7 and 8 read together will show that all IPRs etc. are transferred to IISL forever. He was again asked to elaborate the term assets and properties mentioned in clause 1 of the agreement and its exclusions. In response to the above Question, it was stated: "assets of any software company include intangible assets like IPRs codes, formulae, etc. Asset includes tangible and intangible assets. The assets, which were excluded, were office and motor car and assets and liabilities relating to income-tax matters. In a nutshell, all the intangible assets and RSPL was transferred for a consideration to IISL". As to the Question whether intangible assets are reflected in the Balance Sheet of the assessee company as per Companies Act, 1956, it was stated, it is not so because such inclusion is not mandatory as per the Companies Act. Shri Manoj Kunkalienkar was asked to explain as to why transfer of intangible assets, which was not reflected in the company's Balance Sheet, should not be treated as capital receipt. To this, it was stated, he is not in a position to reply and asked for a later date to explain.
Subsequently the assessee filed a letter dated 08.03.2004, wherein it was stated that the amount received by the assessee at Rs. 178 lakhs from IISL is for sale of its business as a going concern, which has to be treated as a slump sale. The consideration received on sale of going concern is invested under Section 54EA of the Income Tax Act, 1961. It was also stated that the report in Form No. 3CAE of an Accountant under Section 50B(3) relating to computation of capital gains in case of slump sale was also submitted. According to the assessee, whether the sale is slump sale or not, one has to look at the overall transaction and ascertain whether the basic structure of the unit is transferred or not and one cannot go by individual items of the assets being transferred unless the particular test goes to the root of the matter, i.e. without intellectual properties, codes, formulae, designs, programs, etc., the business of the assessee has no existence. Assessee further stated that except for office premise, motor car, income-tax payable or receivable and cash and bank balance, all other assets and liabilities are transferred by RSPL to IISL for lump sum consideration of Rs. 178 lakhs as a going concern, along with past, present and future business. It was submitted that what is not transferred has no importance. It was further submitted, there is no rule as such that in order to constitute a slump sale, there should be, in every matter, transfer of the entire business. For the above proposition assessee relied upon the decision of the jurisdictional High Court in the case of CIT v. Narkeshari Prakashan Ltd. reported in 196 ITR 438 (Bom), which was a case of publishing house, who sold only two of its branches to two different cooperative societies, yet the Hon'ble High Court held it to be a slump sale.
13. However, the contention of the assessee was not acceptable to the AO. While coming to the above conclusion, in view of income & expenditure and fixed assets chart, which is given at Page 5 of the assessment order, AO held, year by year the income of the assessee was increasing along with fixed assets and during the year under consideration the assessee entered into agreement with IISL to transfer intellectual property developed over the years. The agreement has been executed on 24.08.1999 with retrospective effect from 01.04.1999. AO held, there was a jump in the professional receipt and the compensation received by the assessee for using the intellectual property, code, formulae, etc. for a period of three years is justifiable. He held, assessee in fact had given licence to use the said intellectual property, code, formulae, design, etc. and for that the assessee has been compensated. The transfer is for three years, during which the promoters of the assessee company are in employment of IISL. Hence, he held, the amount received by the assessee is to be treated as revenue receipt, taxable.
14. AO further noted, assessee has not transferred any capital asset that is reflected in the Balance Sheet as on 31.03.2000. The gross block of the fixed asset as on 01.04.1999 is Rs. 28.31 lakhs, which includes motor car, computers, office equipments, furniture & fixtures along with office premise. None of these assets has been transferred to IISL. In short, AO held, the consideration of Rs 1.78 crores received by the assessee company has not been received for transferring any asset mentioned in the Balance Sheet.
15. While coming to the above conclusion, AO had taken note of clause 1 of MOU, which specifically stated that "all assets & properties (except those specifically excluded in the agreement) of RSPL in its business as of this date including intellectual properties, codes, formulae, designs etc., shall be transferred to IISL for a consideration of Rs. 1.78 lakhs". He held, assessee is a software company. The intellectual property, codes, formulae, designs, etc. are trading commodity of the assessee. They charge professional fees for such services. Assessee is engaged in software development and providing selected services. This conclusion was arrived at by the AO considering Para 1, Page 2 of MOU, which highlights the activity of the assessee, which reads as under:
WHEREAS RSPL is engaged in the business of software development and related services and has developed specialized skills and technical knowledge and know how of its own.
The receipts, AO held, assessee always credited as "professional income", which was clear from the TDS certificates issued. He further held: "thus, in no way, IP, code, formulae, design, etc. are intangible asset. All these years, the assessee company was engaged in providing software related services, and received professional charges. The software related services includes transfer of specialized code, formulae, designs to the customers. The transfer of such specialized skill is made on condition that the user will not further transfer to anybody else. Such transfer is governed by copyrights Act. The supplier is not barred from transferring the same IP to other customer. In the instant case, the assessee company was engaged in providing software related services such as transfer of their specialized skills, like any other software company. During the previous year, the assessee company has entered into an agreement with IISL that all their specialized skills including code, formulae would be exclusively used by IISL. The assessee company has received consideration for such transfer of rights. This is a transfer of licence to use the specialized skill developed by the assessee company. However, this is not a permanent transfer. The perusal of the clause 8 of the said MOU reveals that all improvements in technology, designs and innovations made during the period the promoter are in employment of IISL shall be the property of IISL. The clause 5 reveals that the promoter will be in employment at least for period of three years. Thus, it is clear that the intellectual property, code formulae, design, etc. transferred by the assessee company may be traded/used after the period of three years from the date of transfer. Further, clause 7 to the said MOU clearly restricts the promoter of the assessee company from any Association or carrying out any business, which similar to or identical with the business carried on by the assessee company or IISL The said restriction is also for a period of three year from the date of transfer. Thus, it is apparent that the assessee may use the said code, formulae, etc. after 3 years from the date of transfer i.e. 01.04.1999. In view of the above, it would be wrong to term the said transaction as sale/transfer. As already stated above, in no circumstances it is a permanent transfer/sale. At the most, it is a transfer of licence fee use. Hence, it is a trading activity and in no circumstances it can be taken as capital receipt". To come to the above conclusion, AO relied upon the decision of the Hon'ble Delhi High Court in the case of CIT v. Dr RL Bhargava reported in 256 ITR 42 (Del). 16. Coming to the alternate contention of the assessee that it is a slump sale, AO (ejected the said contention. He held, the licence to use the skills has been transferred to IISL. There is no transfer of business as such in this case and the transfer is for a period of three years and after three years the assessee could use the skills as per their choice. When there is no transfer of business as such but only handing over the licence to use the skills developed by the assessee company, there cannot be a question of slump sale. While coming to the above conclusion, AO further noted, IISL is a single largest client of the assessee. By virtue of new set up, employees of assessee company have now become employees of IISL. Hence he held, there is transfer of business as such does not hold good. He held, in the past, i.e. before signing of MOU, employees of assessee company were working for the client (IISL) virtually and this system continues. Hence, AO rejected assessee's contention of slump sale also.
17. Without prejudice the above, AO held, if at all the transfer is of a capital asset, it should be treated as short term capital gain. Assessee company was incorporated on 11.09.1995. The transfer of intangible assets was effective from 01.04.1999. The time span between incorporation of assessee company and the said transfer is of 3 1/2 years. Assessee developed specialized skills over the period. Assessee's professional receipt increased subsequently, drastically from Rs. 2.71 lakhs to Rs. 84.09 lakhs. Hence, AO held, it is difficult to say that intangible assets were developed prior to three years period. The development of software is an ongoing process. Hence, he held, the skills transferred are probably developed within three years period. As such, at the most, the gain arising out of transfer of the said intangible assets could be held as short term capital gain. This short term capital gain is not allowed exemption on account of investment made as per Section 54EA of the Act. For the above reasons, AO treated, alternatively, this is short term capital gain. Aggrieved by the above order, assessee approached the first appellate authority.
18. Appeal by the assessee was rejected by the learned CIT(A) vide Para 7, 8 and 9 of his order, observing as under:
7. I have carefully considered the facts of the case, submissions of the appellant and the arguments f AO in assessment order as well as in Remand Report. It is evident from the balance sheet as on 01.04.1999 that value have been assigned to other fixed assets which is computers Rs. 3.66,657/-, office equipments Rs. 39,178/- and furniture & fixture Rs. 3,16,574/- which have been taken over by the ICICI Infotech Services Ltd. This fact is also evident from the copy of extract of the corresponding general entry passed by M/s ICICI Infotech Services Ltd. on acquisition of the software business of the assessee company [filed as additional evidence before CIT(A) on page No. 35 of the assessee's submissions dt. 16.10.2004]. The extract very clearly brings out the entries passed by M/s ICICI Infotech Services Ltd. in its books of accounts, wherein particular price or value has been assigned to certain assets/liabilities taken over by it. The AO has rightly concluded that there is no transfer of all the assets of the appellant company to M/s. ICICI Infotech Services Ltd. Secondly there are individual, separate and independent items of fixed assets to whom value have been assigned at their WDV appearing in the balance sheet of the appellant company as on 01.04.1999 i.e. date of transfer and corresponding entries passed by the taking over company in its books of accounts as discussed above. The AO has rightly relied on the jurisdictional High Court in the case of Anant Electrical Company Ltd. v. CIT 237 ITR 587. Whole case laws relied by the appellant are distinguishable on facts. So it makes amply clear that the receipt of Rs. 1,78,00,000/- is not a slump sale and it is a revenue receipt, which is taxable as business income. Therefore, this ground of appeal is also dismissed.
8. In Ground No. 5 the appellant has opposed the alternate action of the AO without prejudice to his finding that the receipt in question is a revenue receipt taxable as business income and alternatively, if at all it is a capital gain, then it should be taxed as a short term capital gain. In this regard the findings of the AO are self-speaking which are as under:
Without prejudice to the above, if at all it is a transfer of capital asset, the gain is short term capital gain. The assessee company was incorporated on 11.09.1995. The said transfer of intangible assets is w.e.f. 01.04.1999. The time span between the incorporation of the company and the said transfer is of 3 & 1/2 years Further, the assessee has developed specialized skills over a period of time. The perusal of the table of (as mentioned above) professional receipts etc clearly shows that the income has drastically jumped from Rs. 2.71 lacs to Rs. 84.09 lacs during this period. Hence, it is difficult to say that the said intangible assets were developed prior to 3 years period. The development of software is an ongoing process. The said skills transferred are probably developed within 3 years period. Hence, at the most the gain arising out of transfer of said intangible asset could be held as short term capital gain and not as long term capital gain. Further the short term capital gain is not allowed exemption on account of investment made as per Section 54EA of the Act. Thus, the entire gain is taxable under the head 'short term capital gain'.
9. I am in agreement with the findings of the AO that in case the receipt in question are not taxable as business receipts, then in view of the facts mentioned by the AO in the assessment order, it should be taxed as short term capital gain.
Aggrieved by the above order, assessee is in appeal before the Tribunal.
19. Learned Counsel for the assessee recapitulated the facts as under:
Counsel submitted, first of all, learned CIT(A) confirmed the assessment order of the AO and held that the business of the assessee was not transferred on slump sale basis as value has been assigned to various fixed assets. Counsel further submitted, according to the CIT(A), this is clear from the entries passed by IISL in its books of account, wherein particular price/value has been assigned to certain assets/liabilities taken over by it. In the alternative, counsel submitted, the CIT(A) held that this should be taxed as capital gain in view of the facts stated by the AO.
Learned counsel brought our attention to the relevant clauses of MOU entered into by the assessee and IISL. He submitted, assessee company is engaged in the business of software development and developed technical knowledge and know how of its own. As per the MOU dated 24.08.1999, entered into between the assessee and IISL, the entire business of the assessee was transferred to IISL. Clause 1 of the MOU states inter alia:
1. All assets and properties (except those specifically excluded in this agreement) of RSPL in its business as of this date including intellectual properties, codes, formulae, designs etc. shall be transferred to IISL for a consideration of Rs. 178 lakhs. The valuation is based on the business valuation reports submitted by M/s C C Choksi & Co. and M/s N M Raiji & Co..
Counsel submitted, from the above it is clear that all the business assets of the assessee company were transferred, except a few that were retained by the assessee vide clause 2 of the MOU, which reads as under:
2. RSPL shall not transfer the building, car and the assets and liabilities relating to income tax matters of RSPL to IISL.
Learned counsel submitted, the assets retained vide clause 2 of the MOU, i.e. building, car and the assets and liabilities relating to income tax matters of the assessee, has no role or little role to play in the business of the assessee, which entirely consisted of trading in specialized skills and technical know how relating to software development and corporate training in areas such as re-engineering, business applications, building client server applications, migrating legacy systems to open distributed systems, device drivers for Win95, Win-NT, Y2K projects, auditing software and real time software. In fact, counsel submitted, technical knowledge and know how developed by the assessee in relation to all the above activities were transferred to IISL in its entirety. It is clear from clause 4 and clause 13 of the MOU, which read as under:
4. All business transactions carried out by RSPL w.e.f. 01.04.1999 till the date of actual execution of transfer, shall be considered as executed in trust fore and on behalf of IISL. All rights and obligations under existing contracts between RSPL and others (not being contracts of employment) pursuant which the business transactions referred to above are carried out shall continue and IISL shall be entitled to enforce the rights thereunder without any restriction whatsoever.
13. This arrangement is to be given effect to on or before March, 31, 2000 and both parties shall obtain all the requisite approvals necessary for the purpose, including in particular the requisite approvals of the respective boards and shareholders. The promoters of RSPL shall take all the necessary steps for achieving winding up of RSPL not later than March, 31, 2000, unless a later date is agreed to by IISL in writing. Till such time RSPL is wound-up, IISL shall have a right to nominate a director on the board of RSPL.
(underlining by us) Learned counsel particularly stressed the importance of the term "winding up" in clause 13 of the MOU, which he submitted, could only refer to a corporate body or a business entity. There is no way that it could refer to intellectual property rights as such. RSPL was wound up and the entire business of the assessee was transferred to IISL except few assets like motor car etc., which remained with the promoters of erstwhile RSPL. Such retention cannot negate the fact of transfer. In support of the above contention, learned Counsel brought our attention to the definition of "slump sale" as given in Section 2(42C) and also to definition of the word "undertaking" as given in Explanation 1 to Section 2(19AA) of the Act, which read as under:
2(42C) "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 such sales.
Explanation 1 - For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to Clause (19AA).
Explanation 2 - For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.
2(19AA) ...
Explanation 1 - For the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
(emphasis supplied) From the above, learned Counsel submitted, even a particular business activity of an undertaking can be transferred on slump sale basis. In the instant case of the assessee, it is exactly what had happened. A perusal of Schedule of block of assets furnished for the purpose of calculation of depreciation (Page 35 of the Paper Book) would clearly indicate that the entire software business of the assessee has been transferred. Elaborating further, counsel submitted, the entire block of computers, office equipments & cellular phones and furniture & fixtures have been transferred. The only assets not transferred were motor car and office premise. Surely, the transfer of business of software does not necessarily to transfer these two assets. In support of the above contention, counsel again relied and stressed on the underlined portion of Explanation 1 to Section 2(19AA). Counsel further submitted, as per clause 5 of the MOU, promoter Directors of the assessee, who were also software experts, were allowed to work as full time executives of IISL atleast for three years after the transfer of business. As per clause 6 of the MOU, the willing employees of assessee company would be employed with IISL after the transfer, if they were found suitable. Counsel submitted, as per clause 7 of the MOU, the promoters of assessee company, who now became the executives of IISL for limited period of three years from the date of transfer, cannot undertake or associate themselves directly or indirectly with any business, which is similar to or identical with the business carried on by RSPL or IISL. This in effect is a non-compete clause and the incorporation of the same in the MOU clearly established that the software business of the assessee has been transferred. Apart from these tangible assets, a host of intangible assets, for example, intellectual properties, codes, formulae, designs, etc. as mentioned in clause 1 of the MOU and also accepted by the AO were transferred. These intangible assets are inseparably linked with the software business of the assessee company.
Learned counsel further submitted, no separate value has been assigned to any of these assets of software business, either tangible or intangible. It points out only one thing - that the software business of the assessee has been transferred as a whole, on slump sale basis, within the meaning of section SOB. Counsel further submitted, the stand of the revenue that separate values have been assigned to fixed assets is baseless. On the other hand, in fact, subsection (2) of Section 50B provides that even in case of slump sale, it is necessary to separately determine the value of each asset and liability for working out the "net worth" of the undertaking/division that is under slump sale. Inviting our attention to Item Nos. 2, 6 as well the Notes (3 and 5) of Form No. 3CEA (vide Rule 6H of Income Tax Rules, 1962), counsel submitted, law itself requires determination of value of each individual asset and liability of the undertaking or division that is transferred as a going concern by way of slump sale. This is because unless the written down value of depreciable assets and book value of other assets and relatable liabilities are not taken separately and then aggregated, it would not be possible to determine the "net worth" of the undertaking/division thereof within the meaning of Sub-section (2) of Section 50B, which specifically requires determination of "net worth" for the purpose of computation of capital gains in the case of slump sale. Even otherwise, counsel submitted, assessee cannot be held responsible for the entries made in the books of account of the purchaser company in this regard. There cannot be any bar for the purchasing company to make entries in its books of account by estimating the value of each asset of business that has been acquired on slump sale. Such entries in the books of account of the purchaser do not affect assessee's transfer, much less a slump sale. The only requirement is that the slump sale should be the sale of the "undertaking" as a whole and not each asset of the undertaking separately.
Learned counsel submitted, the decision relied upon by the AO in his Remand Report in the case of CIT v. Artex Manufacturing Co. reported in 227 ITR 260 (SC) was prior to insertion of Section 50B by the Finance Act, 1999 with effect from 01.04.2000. The definition of "slump sale" is given in the newly inserted Section 2(42C), which also came into effect from 01.04.2000, replacing the earlier definition, which was omitted by the Finance Act, 1990 with effect from 01.04.1990. The judgment of the Hon'ble Supreme Court in the case of CIT v. Artex Manufacturing Co. (supra) is dated 08.07.1997. Hence, the decision relied upon by the revenue authorities had no applicability, as the law has been changed. Even if the assessee has assigned different values to individual assets and liabilities of the undertaking, it has no impact on the slump sale. Section ?(42C) speaks only sale of an undertaking for a lump sum consideration. It does not prescribe the mode of quantification of lump sum consideration. In support of the above, counsel relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Mugneeram Bangur & Co. reported in 57 ITR 299 (SC).
Learned counsel submitted, the other reason given by the AO, which was upheld by the learned CIT(A), is that the assessee developed specialized skills over a period of time and the professional fees earned by the assessee jumped drastically during the period from Rs. 2.71 lakhs to Rs. 84.09 lakhs and it is difficult to say that the said intangible assets were developed prior to three years period. 1 his finding of the AO as upheld by the learned CIT(A) is objected by the counsel and he submitted that this is an inference without any basis and it is probability. He particularly brought the following observation of the AO to our notice:
The development of software is a ongoing process. The said skills transferred are probably developed within three year period. Hence, at the most the gain arising out of transfer of said intangible asset could be held as short term capital gain and not as long term capital gain.
Learned counsel submitted, this finding is without any merit and without any basis. Business of the assessee, counsel submitted, as noted above, commenced from 11.09.1995. The sale was effected from 01.04.1999. Assessee was in business for the entire period. The finding of the AO as confirmed by the learned CIT(A) is only a probability and imagination, without any basis. In support of the above, counsel again brought our attention to proviso to Section 50B(1), which reads as under:
50B. Special provision for computation of capital gains in case of slump sale,:
(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place:
Provided that any profits gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
Learned counsel submitted, there is no doubt, assessee was in the business of software for more than thirty-six months, precisely about forty-two months. Counsel again stressed the importance of clause 5 and clause 7 of the MOU, which clearly state that the promoters of the assessee company cannot directly or indirectly do any business, which is similar to or identical with the business of RSPL and IISL. The promoters are employed for three years with IISL but this does not change the character of the sale any how. On the contrary, counsel submitted, by inserting clause 5 and clause 7 in the MOU, by which employment for three years was provided to the promoter Directors of the assessee by IISL and thereafter prohibiting them vide clause/directly or indirectly doing any business in similar or identical to those carried on by either RSPL or IISL, eliminated any possibility of competition. Hence, counsel submitted, the orders of the revenue authorities are liable to be reversed. 20. Replying to the above, the learned Departmental Representative submitted, assessee is in the business of software. Assessee had reputed clienls like Indian Express, RCF, IIT Mumbai, etc. Assessee developed various software, the rights of which belonged to RSPL (assessee). Assessee was doing commercial advertisement and billing system, financial accounting system, terminal emulator, data logas/manager for packing machine controllers etc. Assessee was earning the revenue by doing these services. M/s ICICI Infotech Services Ltd. was assessee's biggest client. By transfer of the assets, claimed to be a slump sale, assessee had only tried to save the taxes. It is a devise of avoidance of tax in the light of the decision of the Hon'ble Supreme Court in the case of McDowell and Co. Ltd. v. Commercial Tax Officer reported in 154 ITR 148 (SC). Assessee not only transferred the business to its biggest client, the promoters Mr. and Mrs. Kunkalienkar have also along with other staff absorbed and continued to work in the new entity, i.e. IISL. The restriction is only for three years. After three years the assessee is free again. It is clearly a revenue receipt Learned DR submitted, in reality, assessee's intention is to be seen. Assessee continued to get the same kind of income doing the entire business for the biggest client, IISL, of course now exclusively. Learned DR also supported the orders of the revenue authorities.
21. In the alternative, learned DR submitted, it is clearly a short term capital gain. Assessee started the business, even according to the learned Counsel, only some forty and odd months earlier. Assessee's receipt in the initial stage was a meager Rs. 2.71 lakhs, which shoot up in the assessment year 1999-2000 to Rs. 84.09 lakhs. In between the assessee developed so many techniques perhaps. All these techniques or innovation or development, whatever name called, has come into existence definitely within a period of less than thirty six months. Learned DR submitted, AO rightly treated the gain in the alternative as short term capital gain. Hence, learned DR submitted, the orders of the revenue authorities may be confirmed. In support of the above contention, he relied upon the decision of the Hon'ble Kerala High Court in the case of CIT v. F X Periera and Sons (Travancore) Pvt. Ltd., reported in 184 ITR 461 (Ker).
22. In his rejoinder, learned Counsel submitted, the main plank of revenues stand is that the assessee had given separate value for some of the items. Counsel submitted, even if it is so, it is a slump sale. Assessee has transferred the entire business. Such transfer in a slump sale was long term capital gain and it cannot be short term capital gain. Isolation of two assets, i.e. motor car and building, from the transaction, does not render the slump sale a transaction of sale of computer programmes yielding business profits. A perusal of the MOU, as recorded hereinabove, counsel submitted, would definitely show that IISL acquired assessee's business and intellectual property in the form of software. Assessee is debarred totally and permanently in doing the business that has already been transferred except building and motor car. The sale was nothing but slump sale for a slump price. Assets in the form of software programmes developed from the very inception had not been assigned any price by the assessee. Every software programme being intellectual property of the assessee company was basketed and the slump price determined on the "profit earning capacity value method" by a competent Chartered Accountants' firm in the "valuation of business report". The valuation was of total business as a going concern. Assessee shut the shop, so to say. The embargo in clause 7 of the MOU was on the promoters. So far as assessee company concerned, assessee sold the business and ceased to exist for business purposes and that is permanent. Assessee company obtained the report of the Chartered Accountants as contemplated under Section 50B of the Act in the fitness of things. Explanation 2 to Section 50B requires the value of depreciable and other assets to be indicated. Such specification of the value of assets in compliance with statutory provisions does not work to the disadvantage of the assessee. On the contrary, the case of the assessee is fortified. Hence, learned Counsel submitted, the orders of the revenue authorities may be reversed.
23. We heard the rival submissions, gone through the orders of the revenue authorities and the decisions cited. We are of the view that the appeal by the assessee is liable to be allowed. We find that the decisions relied upon by the learned DR and the revenue authorities, i.e. Anant Electrical Company Ltd. v. CIT 237 ITR 587 (Bom) and CIT v. Artex Manufacturing Co. reported in 227 ITR 260 (SC), were decided before the introduction of Section 50B by the Finance Act, 1999, with effect from 01.04.2000 and also the definition of "slump sale" in the newly inserted Section 2(42C), which came into effect from 01.04.2000. Therefore, the decisions relied upon by the learned revenue authorities cannot be applied in the instant case of the assessee.
24. The definition of "slump sale" under Section 2(42C) read with Explanation 1 to Section 2(19AA) of the Act has been reproduced hereinabove at Page 16 of our order. Reading of the above makes it clear that "slump sale" means transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. For the purpose of this section, "undertaking" has again been explained in Explanation 1 to Section 2(19AA) It states that for the purpose of this clause "undertaking" shall have the meaning assigned to the undertaking. Explanation 1 to Section 2(19AA) was introduced with effect from 01.04.2000 by the Finance Act, 1999. "Undertaking" includes, as per the definition, any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. What is business activity of the assessee? According to the AO, in the reasons recorded for reopening, assessee's business includes intellectual properties, codes, formulae and designs, etc. There is no dispute that the assessee had transferred all these assets. The only assets that the assessee not transferred is building, motor car and assets and liabilities regarding income tax matters. "Block of assets" is defined in Section 2(11) of the Act. There is a change in the definition after 01 04 1999 Before the substitution of the definition by Finance (No. 2) Act, 1999. "block of assets" included a group of assets falling within a class of assets, being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed. However, the substituted definition of "block of assets" has been divided into two parts - (a) tangible assets, being buildings, machinery, plant or furniture (which is similar to "block of assets" before the substitution of the definition with effect from 01.04.1999); and (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature; in respect of which the same percentage of depreciation is prescribed.
25. We have noted hereinabove that the assessee's business assets, even according to the revenue, include intellectual properties, codes, formulae, designs, programmes, etc. This is transferred to IISL. That means assessee company is no more doing the business in this field. According to the revenue, even if there is a transfer, the transfer is not permanent. It is for three years. We are unable to subscribe to this view. Recital of the MOU reads as under:
WHEREAS RSPLs engaged in the business of software development and related services and has developed specialized skills and technical knowledge and know how of its own.
AND WHEREAS RSPL has been rendering the requisite services for meeting the software needs of IISL regularly and this business has grown considerably so much so that IISL and its associates are the single largest client of RSPL.
AND WHEREAS RSPL is of the view that the interest of its promoters and employees will be secured better by transfer of its business to IISL.
AND WHEREAS in view of the nature and scale of dealings between the parties, it is felt necessary to develop an arrangement designed to satisfy the long-term needs of both the parties.
AND WHEREAS the parties have come to certain understanding in the above matter for mutual benefit.
26. It is clear from the above that the assessee's business is software development and related services and the assessee has specialized skills and technical knowledge in this field. Clause 1 of the MOU states that the assessee has agreed to transfer all assets and properties in its business including intellectual properties, codes, formulae, designs, etc. to IISL for a consideration of Rs. 178 lakhs. Clause 4 of the MOU states that all the business transactions carried out by RSPL with effect from 01.04.1999 till date of actual execution of transfer shall be considered as executed in trust for and on behalf of IISL and once the transfer is effective the business transactions shall continue with IISL and IISL shall be entitled to enforce their rights thereunder without any restriction whatsoever. Coming to clause 7 of the MOU, it makes clear that the promoters of assessee, for a period of three years from the date of transfer of assets, as per clause 1 and 3, cannot associate themselves directly or indirectly with any business similar to or identical with the business carried on either by RSPL or IISL. Clause 8 of the MOU makes it clear that all improvement in technology, designs and innovations during the period the promoters are in the employment of IISL shall be the property of IISL. Contrary to the stand of the revenue, it curtails the right or power of the Directors of IISL, who were promoters of RSPL to take away any of the improvements that took place after the sale had taken place. This curtails the power and does not give the promoters the liberty to do what they want. Clause 10 of MOU again puts a restriction that in the event of promoters of RSPL ceasing to be in employment of IISL, either by termination or by determination of period of their employment, except on reaching superannuation, they shall not for a period of one year from the date of ceasing to be in employment of IISL deal in any manner with any of the clients of IISL.
27. According to the revenue, the transfer of intellectual properties, codes, formulae, designs, etc. to IISL is not permanent. We find it difficult to subscribe to this view. It is specifically stated that assets and properties of RSPL shall be transferred to IISL. Reading of clause 4 of the MOU makes it clear that the business transactions carried out by RSPL that was transferred to IISL shall continue with them and IISL shall be entitled to enforce their rights thereunder without any resection. It means restriction of time as well. To come to a different conclusion as canvassed by the revenue, it is very difficult. As rightly contended by the learned Counsel, clause 7 and clause 8 of the MOU restricts the promoters of RSPL to do similar or identical business carried out earlier by RSPL and now by IISL permanently and even all improvement in technology etc. shall be the property of IISL.
28. According to the revenue, by virtue of clause 2 of the MOU, assessee has not transferred the building, motor car and assets and liabilities relating to income tax matters. This, according to the revenue, falls short of the slump sale for slump consideration. We are again unable to subscribe to the view canvassed by the revenue. The jurisdictional High Court in the case of CIT v. Narkeshari Prakashan Ltd. reported in 196 ITR 438 (Bom) clearly held that the sale of even branches along with their assets and liabilities amounts to sale as a going concern for a slump price. The assessee's business assets are computers, furniture, etc. because the assessee is n the field of software business. It is difficult to hold that the purchaser cannot continue the activities purchased in the absence of building and motor car, which had been kept apart If the purchaser perhaps prevented from continuing the business, the stand of the revenue that this is not sale of a going concern for a slump price, would have been correct. The question is whether the business will continue in the same line even without the two assets. Reading of MOU, relevant clauses of which have been quoted hereinabove, makes it clear that the assessee has transferred all the properties of the assessee in its business as of this date. Even according to the revenue, assessee's business assets are in the nature of intellectual properties, codes, formulae, designs, etc. It has been transferred for a consideration.
29. In brief, as discussed hereinabove, "slump sale" has been defined as transfer of one or more undertakings, as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. In the instant case of the assessee, though in the purchaser's books of account the individual assets have been priced independently, assessee had not assigned separate values and consequently sold the items for independent price. It is not the revenue's case also that individual assets had the price fixed separately and charged. "Undertaking" is explained in Explanation 1 to Section 2(19AA). According to this Explanation, as we noted 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 intellectual property rights. Computers, furniture, etc. which is linked with the business of the assessee has been sold. The items that the assessee kept separately, has nothing to do with assessee's business, which is sold/handed over to the purchaser, i.e. IISL. The business has been sold. The purchaser could very well carry on the business, which was carried by the assessee before the sale, without purchasing any independent items. In view of the above, the plea of the revenue that the assessee has not sold the undertaking as a whole, is difficult to accept.
30. Coming to the alternative ground, one of the objections of the revenue is that when the assessee started the business, the professional receipt was less than Rs. 3.00 lakhs. Now it is more than Rs. 04.00 lakhs. The growth within a short period of three and half years is commendable. Many of the developments in the field, definitely, according to the revenue, would have taken place within a period of less than thirty six months and therefore it cannot be treated as long term capital gain. We are unable to accept this view of the revenue as well. A businessman does the business every day. If some of the items that are developed subsequently within less than thirty six months if sold, it cannot be taken independently. Assessee is selling the business as a whole. It is not part by part, bit by bit and as such, this contention of the revenue is without merit. Hence, the appeal by the assessee on this ground is allowed.
31. In the result, appeal of the assessee stands allowed in part,
32. I T A No: 1676/Mum/2008: The only effective ground urged by the assessee is directed against the order of the CIT(A) in confirming the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961, amounting to Rs. 68,53,000/- being minimum penalty leviable against addition made of Rs. 178.00 lakhs.
33. Assessee's declared income was Rs. 9,55,370/-. It was processed under Section 143(1)(a) of the Act on 19.03.2002. The case was reopened under Section 147 of the Act and addition of Rs. 178.00 lakhs was made. Scrutiny assessment was completed under Section 143(3) on 30.04.2004 fixing total income at Rs. 1,87,55,370/-.
34. AO held, the detection of concealed income was possible only because the case was reopened under Section 143(3) read with Section 147. Assessee contended that the reopening itself was bad in law as it was mere change of opinion. This plea of the assessee was rejected by the AO. Assessee contended further that there should be conscious concealment or conscious furnishing of inaccurate particulars of income, which was not there in the instant case of the assessee. AO held, this belief of the assessee is to be rejected. Though the assessee claimed that there was transfer of entire assets of the assessee company, it was not so in fact. There were individual, separate and independent items of fixed assets, to whom the value was assigned at their WDV as on 01.04.1999, i.e. on the date of transfer. He further held, by declaring the receipt of Rs. 178.00 lakhs as slump sale and offering it as income under the head "long term capital gains" and claiming exemption under Section 54EA of the Act. AO held, by declaring the said receipt of Rs. 178.00 lakhs as slump sale and offering it as income under the head "Long term capital gains" and claiming exemption under Section 54EA of the Act, assessee company is guilty of furnishing inaccurate particulars of income. For the above proposition, he relied upon the decision of the Hon'ble Gujarat High Court in the case of A M Shah & Co. v. CIT reported in 108 Taxman 137 (Guj). Hence, AO levied the impugned penalty. Assessee carried the matter before the learned CIT(A).
35. Before the CIT(A), it was contended that as per the MOU dated 24.08.1999 between the assessee and IISL, the entire business of the assessee was transferred and the receipt of Rs. 178.00 lakhs realized from IISL was declared as consideration for transfer of business as a going concern and in view of provisions of Section 50B of the Act, long term capital gain on the slump sale was worked out and deduction under Section 54EA was claimed. Hence, AO was not justified in treating the receipt as revenue receipt. It was further submitted that the assessee filed true, correct and complete particulars of income. Assessee has not concealed any particulars or furnished any inaccurate particulars. Information was based on duly audited accounts. Even if the assessee was not in a position to substantiate the explanation, this cannot be treated as concealment.
36. The learned CIT(A) rejected the contention of the assessee. Aggrieved by the above order, assessee is in appeal before the Tribunal. Suffice to say that on merit we have allowed the assessee's appeal hereinabove in ITA No: 1429/Mum/2005. In view of the above, the impugned penalty does not survive. Appeal by the assessee is liable to be allowed. It is allowed.
Pronounced in the Open Court on 30th August 2007.