ITA Nos.417 of 2007 & 1069 of 2007 Page 1 of 22 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No.417 of 2007 with ITA No.1069 of 2007 % DECISION DELIVERED ON: DECEMBER 24, 2010 1) ITA No.417 of 2007 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate. VERSUS ECE Industries Limited . . .Respondent through: Mr. Ajay Vohra, Advocate with Ms. Kavita Jha, Advocate and Mr. Somnath Shukla, Advocate. 2) ITA No.1069 of 2007 Commissioner of Income Tax . . . Appellant through : Ms. Prem Lata Bansal, Advocate. VERSUS ECE Industries Limited . . .Respondent through: Mr. Ajay Vohra, Advocate with Ms. Kavita Jha, Advocate and Mr. Somnath Shukla, Advocate. CORAM :- HON’BLE MR. JUSTICE A.K. SIKRI HON’BLE MR. JUSTICE SURESH KAIT 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. (ORAL) 1. Between common parties, identical issues arise for determination in these two appeals; albeit for two assessment years, viz., Assessment Years 1999-2000 and 2000-01. ITA 1069 OF 2007 relates to Assessment Year 1999-2000 and since it is prior in point ITA Nos.417 of 2007 & 1069 of 2007 Page 2 of 22 of time, we have taken note of the facts of this appeal to understand the issues involved and to answer the same. 2. For this year, the respondent assessee filed the return declaring a loss of `4,70,40,396. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had sold its Lamp Division at Sonepat to M/s. Osram India (P) Ltd. for `42.50 crores on 09.11.1998. In the computation of capital gain, the assessee showed cost of Lamp Division at `59.33 crores and declared the long term capital loss at `16.83 Crores to be adjusted against the profit for the current year. The AO invoked the provisions of Section 50 of the Income Tax Act (hereinafter referred to as „the Act‟) and issued a show cause notice to the assessee to explain as to why the capital gain earned on sale of Lamp Division be not treated as short term capital gain under Section 50(2) of the Act. The assessee submitted that the Sonepat Unit was sold as a going concern vide agreement dated 20.05.1998 against lump sum consideration of `42.50 Crores as consideration for all the tangible and intangible assets as well as contracts and rights sold and transferred to M/s. Osram India (P) Ltd. It was contended that no part of the price of `42.50 Crores was attributable to any particular asset including any depreciable asset and therefore provisions of Section 50(2) were not attracted. It also contended that it was an old concern for more than 36 months, its transfer would give long term capital gain. The assessee also relied on Commissioner of Income-Tax, Gujarat v. M/s. Artex Manufacturing Co. [227 ITR 260 (SC)] Sarabhai M. Chemicals Private Ltd. and Telerad Private Ltd. v. P.N. Mittal, Competent Authority, Inspecting Assistant ITA Nos.417 of 2007 & 1069 of 2007 Page 3 of 22 Commissioner of Income-tax, Acquisition Range-II and Anr. [126 ITR 01 (Guj)]. However, the AO was not convinced with the contentions made by the assessee and observed that the case law relied upon by the assessee was distinguishable. He held that the capital gain on depreciable asset was to be treated as short term capital gain and required the assessee to quantify the consideration received by it for sale of tangible and intangible assets but the assessee did not furnish the same. Accordingly, he took the written down value (WDV) of the assets of Lamp Division at `5,15,75,131 as on 01.04.1998 declared by the assessee out of which he segregated the value of land and indexation was applied. Consequently, he computed the short term capital gain at `36,89,23,393. 3. Aggrieved by this order, the assessee filed an appeal before the CIT(A) who confirmed the order passed by the AO holding that the assessee had merely made a “Unit Sale” i.e. sale of its Lamp Division which was a part of its overall business concern and that the assessee still continued as a business concern. The assessee was not treating the Sonepat Unit as a separate and independent business but was treating it as a part of the integrated whole business and therefore, the sale of Lamp Division was not in the nature of a “slump sale” as a going concern. The CIT(A) further observed that the judgment of the Supreme Court in the case of Commonwealth Trust Ltd., Calicut, Kerala v. Commissioner of Income-tax Kerala II, Ernakulam [228 ITR 01], squarely applied to the present case in which it was held that the provisions of Section 50 of the Act would apply to sale of depreciable assets. The CIT(A) also rejected the contention of the ITA Nos.417 of 2007 & 1069 of 2007 Page 4 of 22 assessee that no break-up of sale consideration between tangible and intangible asset was possible and even if the sale was to be treated as slump sale, the gain would be taxable as laid out by the Supreme Court in the case of Commissioner of Income-tax, Gujarat II v. B.M. Kharwar [72 ITR 603] and in the case of Commissioner of Income-Tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd. [41 ITR 290]. 4. Aggrieved by the order of the CIT (A), the assessee filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as „the Tribunal‟), who held that the transaction of sale of Sonepat Unit by the assessee was a transaction in the nature of slump sale of a going concern as a whole. Since the Sonepat unit was a capital asset within the meaning of Section 2(14) of the Act, the profit arose on transfer of such capital asset is to be treated as long term capital gain. Neither the provisions of Section 50 nor the provisions of Section 50B shall be attracted in the present matter. Rather provisions of Section 45 and 48 shall be applied. Accordingly, the Tribunal directed the AO to recomputed the capital gain in the light of observations made by the Tribunal after providing full opportunity to the assessee in accordance with law. 5. In support of its view, the Tribunal in Para 35 of its order has given as many as 17 reasons, which will be taken note of at an appropriate stage. While remanding the case back to the AO, directions to undertake the exercise afresh on the lines suggested by the Tribunal are stated as under: “63. In view of the above, we accept the contentions raised on behalf of the assessee in support of ground numbers 1 to 8 of this appeal, referred to above, and held that the transaction of sale of Sonepat unit is a transaction ITA Nos.417 of 2007 & 1069 of 2007 Page 5 of 22 in the nature of slump sale of a going concern as a whole. The transfer of Sonepat undertaking is, therefore, to be treated as a slump sale and since the transfer of this undertaking is to be treated as a transfer of capital asset in view of various authorities, referred to above, and also in view of the definition contained under section 2(14) of the Income Tax Act, the long term capital gains has to be computed in relation to transfer of this unit. The assessee has given a computation of capital gain which has been reproduced by us in para 22 of this order. Since neither the Assessing Officer nor ld. CIT (A) have undertaken the exercise of computation of long term capital gain as per provision of section 45 and 48 of Income Tax Act in our view, this exercise has to be undertaken afresh. 64. On the basis of our observations and findings recorded above, we reverse the view taken by the departmental authorities and hold that neither the provisions of section 50 nor the provisions of section 50B shall be attracted in the present matter. Rather the provisions of section 45 and 48 shall be applied. We, therefore, set aside the finding of the ld. CIT (A) and after holding that the impugned sale transaction is to be treated as transaction of slump sale, we direct the Assessing Officer to recomputed the capital gain as per the relevant provisions of law and in the light of our observations made above. While doing so, the Assessing Officer shall also take into consideration the computation of capital gain furnished by the assessee which has been reproduced above after due verification and shall decide the issue after providing full opportunity of being heard to the assessee and as per law.” 6. Challenging this view taken by the Tribunal and the nature of directions issued consequent thereto by the Tribunal, present appeals are admitted on the following substantial questions of law: “(1) Whether ITAT was correct in law in holding that the profit arose on transfer of Sonepat Unit by the assessee was to be treated as long term capital gain and not the short term capital gain as treated by the Assessing Officer? (2) Whether ITAT was correct in law in holding that the transaction of sale of Sonepat Unit was a transaction in the nature of slump sale of a going concern or its was a transaction of sale of depreciable asset? (3) Whether provisions of Section 50 were applicable to the transfer of sale of Sonepat Unit by the assessee?” 7. As the counsel for the parties were ready to argue the matter at that point of time, simultaneously with the admission of the ITA Nos.417 of 2007 & 1069 of 2007 Page 6 of 22 appeals, we heard the counsel for both the parties at length on the aforesaid questions. 8. It is clear from the questions of law as formulated, the dispute, as to whether profits which have accrued to the assessee on the transfer of Sonepat Unit are to be treated as long term capital gain or short term capital gain, whereas the Revenue holds that these profits are in the realm of short term capital gain. Answering to this depends on the question as to whether transaction of sale is to be treated in the nature of slump sale and applicability of Section 50(2) of the Act, in the process. This would show that though three questions of law are framed, they are all interconnected and overlapping and the discussion of one aspect will have bearing on the other. According to the learned counsel for the Revenue, the Lamp Division at Sonepat unit was sold for `42.50 Crores on 09.11.1988, i.e., during the financial year 1998- 99. Lamp Division was having a total WDV of assets amounting to `5.15 Crores as on 01.04.1998. The index cost was worked out as `59.33 Crores and since unit was sold at `42.50 Crores, in the return of income filed for assessment year 1999-2000 the assessee had claimed long term capital loss 16.83 Crores, which the assessee wanted to be adjusted against the profits for the current year. The AO was of the opinion that as per Section 50 of the Act, which is the special provision for computation of capital gain in the case of depreciable assets, the sale of Lamp Division was treated as capital gain arising out of transfer from depreciable asset and the capital gain was to be calculated under the said provisions. The AO, on the other hand, had submitted that the provisions of Section 50 are not applicable as the Sonepat ITA Nos.417 of 2007 & 1069 of 2007 Page 7 of 22 unit was sold as going concern or as a slump sale and therefore, no part of consideration of `42.50 Crores was attributable to any particular asset including depreciable assets. The AO had not accepted this contention and held that Section 50 was applicable and he, therefore, computed short term capital gain at `36.89 Crores on the sale of the said division, which is as under: “COMPUTATION OF SHORT TERM CAPITAL GAIN OF SALE OF LAMP DIVSIION AS PER SECTION 50[2] Sale consideration received on transfer of lamp division at Sonepat ` 42,50,00,000/- WDV of lamp division ` 5,15,75,131/- Less: Value of land ` 17,93,417/- ` 4,97,81,714/- Add: Indexation of land: 1793417x351 100 `62,94,893/- `5,60,76,607/- Capital Gain: `36,89,23,393/-“ 9. Learned counsel for the Revenue submitted that whether it was a slump sale or not was of no consequence and therefore, various case laws cited by the assessee in support of this proposition were not applicable. The learned counsel referred to the judgment in the case of Commonwealth Trust Ltd., Calicut, Kerala Vs. Commissioner of Income-tax Kerala II, Ernakulum [228 ITR 1] for this purpose. She also submitted that the assessee had itself taken the position that it was a case of long term capital gain which was clear from the ground of appeal before the Tribunal and in case of slump sale, no question of any capital gain would arise as held in Brindavan Beverages Limited, rep. by its Managing Director, S.N. Ladhani Vs. The Deputy Commissioner of Income Tax [321 ITR 197]. ITA Nos.417 of 2007 & 1069 of 2007 Page 8 of 22 10. Mr. Ajay Vohra, learned counsel appearing for the assessee, on the other hand, highlighted the fact that the entire Sonepat division was sold as a going concern – lock, stock and barrel for slump consideration – and therefore, it was a slump sale as per the provisions of Section 50B of the Act. He also argued that the undertaking was to be treated as different from other assets and where entire undertaking is sold, no value was attributable to any particular assets including any depreciable assets. The learned counsel referred to the agreement of sale with M/s. Osram India Pvt. Ltd. to which the aforesaid unit was sold and this clearly reveals that the entire unit was to be sold in a blocked manner. He drew the attention to the preamble of the agreement discussing the intention of the party, which was in the following term: “WHEREAS ECE intends to sell all its lamp activities, as a going concern, namely, the lamp manufacturing activities in Sonepat and the sales activities for lamps according to the terms and conditions of this agreement to OSRAM; and WHEREAS OSRAN intends to buy from ECE all the lamp activities, namely, the lamp manufacturing activities in Sonepat and the sales activities for lamps according to the terms and conditions of this Agreement.” 11. He also pointed out to the following portion of the supplemental sale and purchase agreement to buttress his submission: “I. Chapter – 4 of the Principal Agreement shall be amended to read as under:- The total purchase consideration of all the tangible and intangible assets as well as the contracts and rights to be sold and transferred according to Chapter 1, 2 and 3 above as well as any goodwill, know-how or benefit connected therewith shall amount to INR 425 MILLION.” 12. The learned counsel also referred to the resolution passed in the General Body Meeting of the assessee company wherein ITA Nos.417 of 2007 & 1069 of 2007 Page 9 of 22 resolution of the Board of Directors passed on 28.01.1998 was adopted. This resolution was the following effect: “that the company be and is hereby authorized to sell/dispose off and/or transfer the Lamp Division of the company at Sonepat as a going concern to M/s. OSRAM India Ltd. for a consideration of `42.5 crores subject to verification of assets by the buyer. The transfer of assets inter alia will include Land & Building, Plant and Machinery – both immovable and movable, Furniture/Fixtures, Fittings, office Equipments, Computers, Vehicles and all other movable and balance intangible assets.” 13. His submission was that in the light of the aforesaid facts appearing on record, the learned Tribunal had rightly appreciated that the provisions of Section 50 were not attracted and instead Section 50B was applicable. Leaned counsel pressed his strong reliance upon the reasoning given by the Tribunal and also pressed into service various judgments which are taken note of the Tribunal in this behalf. Particular reference was made to the following judgments: (1) R.C. Cooper Vs. Union of India [AIR 1970 SC 564]; (2) Premier Automobiles Ltd. Vs. Commissioner of Income Tax [264 ITR 193 (Bom)]; (3) Commissioner of Income Tax Vs. Max India Ltd. [319 ITR 68 (P & H)] (4) Commissioner of Income Tax Vs. Narkeshwari Prakashan Ltd. [196 ITR 438 (Bom.)] 14. We have given our due consideration to the aforesaid submissions made by counsel for the parties on either side. Before we embark on the discussion on the issue that qua for consideration and deal with our comments, we deed it proper to take note of the relevant statutory provisions. Chapter IV which deals with „Computation of ITA Nos.417 of 2007 & 1069 of 2007 Page 10 of 22 Total Income‟ starts with Section 14 which delineates „Heads of Income‟. These „heads of income‟ are thereafter categorized from various parts, i.e., from (A) to (F). Income arising out of capital gains is one such head discussed in (E) starts from Section 45 and goes up to Section 55A of the Act. Section 45 defines capital gains and sub-section (1) thereof reads as under: “Section 45 (1) (1) Any profits or gains arising from the transfer 737 of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of - (i) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) Riot or civil disturbance; or (iii) Accidental fire or explosion; or (iv) Action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation. - For the purposes of this sub-section, the expression "insurer" shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).” 15. Thus broadly speaking when profits or gains arise from the transfer of capital asset effected in the previous year, these profits are chargeable in income tax under the head „Capital Gains‟. To mean property of any account held by an assessee is ITA Nos.417 of 2007 & 1069 of 2007 Page 11 of 22 whether or not effected in his business or profession. Certain assets are, however, specifically excluded from the definition of capital asset and these are: (a) Any stock in trade simply stocks or raw material held for the business or profession; (b) Presently, agricultural land in India (excluding land situates at certain places specified in the provision. 16. Special provisions are made for computation of capital gain in certain circumstances. We are concerned herein with two such events and to decide as to whether which of the two is applicable. First stage is provided in Section 50 which deals with computation of capital gains in case of depreciable assets. Other special provision is contained in Section 50B which provides for computation of capital gains in case of slump sale. We may point out at this stage that insofar as the AO is concerned, he had only considered the Section 50 of the Act and held that to be applicable. While doing so, he had also observed that the assessee had not furnished the details of consideration received on loan and therefore, capital gain was computed on the block of assets as a whole. However, he neither considered the conveyance deeds, relied upon by the assessee, nor on the detailed written submissions of the assessee, arguing that Section 50 of the Act was not applicable. The CIT(A), no doubt, examined these documents and the submissions of the assessee. He, however, held that Section 50 was applicable in case of depreciable assets and rejected the submission of the assessee about the applicability of Section 50B of the Act on the ground that this provision came into effect only from 01.04.2000, i.e., ITA Nos.417 of 2007 & 1069 of 2007 Page 12 of 22 Assessment Year 2000-01. The Tribunal, on the other hand, held that Section 50 would not be applicable in the instant case, as it was not a case of transferring depreciable asset, but for transferring the entire unit as a whole and the sale consideration settled between the parties was not only the depreciable assets but for all intangible or tangible assets including goodwill, licenses and liabilities. Even the stamp duty for transferring the land and building was part of sale consideration, as the same was to borne out by the transferring. The sale of Sonepat Unit was thus, a composite sale and therefore, it was a case of slump sale. Detailed reasoning as provided by the Tribunal in this behalf are as under: “(i) From the terms and stipulations contained in the agreement and the supplementary agreement as well as on the basis of certificate of possession, referred to above, the intention of the parties to sale is clearly decipherable. This intention was to have the business sold as a going concern. On transfer, the assessee transferred the entire undertaking in its working condition as a going concern and the transferee acquired absolute ownership and full control over the running business of the undertaking. (ii) There was no separate sale of building or plant or machinery nor any price was attributable to land, building or immovable properties. (iii) At the time of transfer, the employees along with statutory liabilities relating to them, were transferred. (iv) 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. (v) The learned AO as well as learned CIT(A) have attributed the entire sale consideration only to depreciable assets and land for working out capital gain. There is no basis for such approach in absence of any material on record; (vi) Section 50 of IT Act cannot be attributed to the facts of the present case because the title of this section is "a special provision for computation of capital gains in the case of depreciable asset". As pointed out above, the agreement to sell was not for transferring depreciable assets only but for transferring the entire unit as a whole and the sale consideration settled between the parties was not only for depreciable assets but for all the tangible and intangible assets including goodwill, licenses and liabilities. ITA Nos.417 of 2007 & 1069 of 2007 Page 13 of 22 (vii) As per the terms of transfer, since no part of consideration was attributable even to land and building, plant or machinery hence it was a case of slump sale and not a case of sale of separate asset or piecemeal sale. (viii) The approach adopted by the learned CIT(A) for