Background
Section 50B of the Income Tax Act, 1961 (the Act) is a special provision for the computation of capital gains in case of slump sale of an undertaking for a lump sum consideration without values being assigned to individual assets and liabilities. The gains arising from such slump sale are considered as Long Term Capital Gains (LTCG) if the undertaking is owned and held by the taxpayer for more than 36 months prior to its sale. The net worth of the undertaking is deemed as the cost of acquisition while determining such gains.
The term 'undertaking' has been defined to include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole. However, it does not include individual assets or liabilities or any combination thereof not constituting a business activity.
An issue often arises as to whether a transaction would qualify as a slump sale if certain assets and/or liabilities are not sold to the buyer. In a recent judgment1, the Kolkata Tribunal accepted the taxpayer's transaction as a slump sale despite the fact that certain assets and liabilities were not transferred to the buyer.
Facts of the case
- The taxpayer sold its edible oil manufacturing unit at Haldia (business undertaking) to K. S. Oils Ltd (Buyer) for a lump sum consideration pursuant to the Memorandum of Understanding (MoU) dated 23 August 2008 and Business Transfer Agreement (BTA) dated 22 November 2008.
- The taxpayer claimed the sale as slump sale and reported the gains arising from the same as LTCG in its tax return of the tax year 2008-092.
- The Assessing Officer (AO) accepted the claim of the taxpayer in the original assessment order.
- However, the Principal Commissioner of Income Tax (PCIT) treated the AO's order as erroneous and prejudicial to the interests of revenue. Accordingly, PCIT passed the revision order taking a view that the sale effected pursuant to BTA was not a slump sale.
- The taxpayer filed an appeal before the Kolkata Tribunal against the revision order of the PCIT.
Ruling of the Kolkata Tribunal
The Kolkata Tribunal quashed the revision order of the PCIT. The observations of the PCIT in the revision order and Tribunal's views on these observations are summarised below:
Observations of the PCIT in the
revision order |
Kolkata Tribunal's views on
these observations |
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Finally, the Kolkata Tribunal held that:
- The CIT erred in viewing certain clauses of the contract in isolation. In order to ascertain the intention of the parties involved, the contract should be read as a whole and intention between the parties has to be seen from the view point of the businessman.
- A close analysis of the MOU and BTA leaves no doubt that the business undertaking as a whole was sold as a going concern for a lump sum consideration and it was not an itemised sale of assets.
- As the action of the AO, in accepting the taxpayer's claim of transaction in question as slump sale, was after a detailed enquiry and was a plausible view, the PCIT ought not to have exercised his revisional jurisdiction.
Footnotes
1 Ambo Agro Products Ltd vs Principal Commissioner of Income Tax [2017] 81 taxmann.com 305 (Kolkata Tribunal) in ITA No. 676 (Kol.) of 2016 dated 19 May 2017
2 Assessment Year 2009-10
3 The Institute of Chartered Accountants of India
SKP's comments
The Kolkata Tribunal has taken a pragmatic view while accepting the sale of business undertaking as slump sale under the Act. This judgment emphasises the importance of transactional documents such as MOU, BTA, etc. and gathering intention of the parties involved in the transaction from the wholesome reading of these documents before adopting any tax position.
It is crucial to demonstrate from the facts and circumstances of each case that the buyer of the undertaking for a lump sum consideration is in a position to carry on the underlying business on a going concern basis in order to justify any transaction as slump sale under the Act. If this crucial factor can be demonstrated, then it may be irrelevant if certain assets and/or liabilities are not transferred as a part of the sale of undertaking for certain commercial reasons or certain other reasons (such as claims/obligations arising from the legally binding commitments of the taxpayer in the instant case).
After referring certain landmark rulings, the Kolkata Tribunal also revisits certain important principles to be followed for the exercise of revisional power by the PCIT. If the AO has conducted enquiry after issuance of notices to the taxpayer, collected facts/documents from the taxpayer, etc. and thereafter, he has taken a plausible view on the issue involved, then it should be possible to challenge the powers of the PCIT to revise AO's order as erroneous and prejudicial to the interest of revenue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.