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
 
  • All the activities of the taxpayer revolved around the main business of edible oil refining and there was no separate reportable segment as per Accounting Standard 17 (AS 17) of ICAI3. As per the auditor's report, the going concern status of the taxpayer was still not affected despite the disposal of its business undertaking.
 
  • The other activities like trading of the taxpayer were not significant and core segments, which need to be reported separately under AS-17. The auditor's opinion that the sale of business undertaking had not affected the going concern status of the taxpayer was correct since other activities of the taxpayer were not affected. However, such opinion makes no difference and it cannot alter the character of the taxpayer's slump sale transaction carried out as per the MOU and BTA.
  • Certain liabilities, obligations and assets were not transferred under BTA and schedule thereto. The name/trademark/logos/tradename/product name, etc. were also not transferred to the Buyer.
 
  • All the rights, title and interest in the business undertaking were transferred, as a going concern, free and clear of any encumbrances. 
     
  • Perusal of BTA reveals that the liabilities and obligations, which were retained by the taxpayer, were not related to the business undertaking. Furthermore, the rights, claims and obligations, which were flowing from legally binding commitments wherein the taxpayer is a party, could not be transferred to the Buyer. All other rights, claims, obligations, fixed assets, inventories, trade receivables, other current assets, personnel, etc. were transferred to the Buyer.
     
  • The Buyer was already in the same business (namely manufacturing of edible oil) and it wanted to sell the products manufactured from Haldia unit in its own name and brand.  Accordingly, the Buyer was not keen to buy the name/trade mark/logos/trade name/product name, etc. of the taxpayer. This cannot, in any way, affect the slump sale of the business undertaking in the facts and circumstances of the case.
  • Certain new plants, which were not a part of the business undertaking, cannot form a part of the going concern since these plants were never utilised for the business of the business undertaking.
 
  • If the taxpayer has expanded its business in the very same business undertaking, then it has to sell all the items of such business undertaking. The taxpayer has sold the entire business undertaking (wherein it had started expansion projects) as a going concern to the Buyer. This in no way can affect the character of the slump sale transaction of the business undertaking. 

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.