ACIT, CHENNAI V. M/s. J.L.Builders (P) Ltd., CHENNAI

ITA 714/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64255 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 06-09-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 18-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Assessee Lawyers: S SRIDHAR
• Keywords: Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER] I.T.A.NO.714/MDS/2011 ASSESSMENT YEAR : 2006-07 THE ACIT CENTRAL CIRCLE-II(2) CHENNAI VS M/S J.L.BUILDERS(P) LTD A2, UMA RESIDENCY, NEW NO.75 HABIBULLAH ROAD, T. NAGAR CHENNAI 600 017 (APPELLANT) (RESPONDENT) APPELLANT BY : DR. S.MOHARANA, CIT/DR RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE DATE OF HEARING : 06-09-2012 DATE OF PRONOUNCEMENT : 12-09-2012 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A)-II, CHENNAI, DATED 08.12.2010, BY TAKING THE FOLLOWING GROUNDS: I.A. ON THE FACT AND IN THE CIRCUMSTANCES OF THE C ASE, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE LIABIL ITIES WERE NOT TRANSFERRED AND HENCE FOR THE PURPOSE OF ARRIVING A T NET WORTH OF THE UNDERTAKING LIABILITIES SHALL NOT BE INCLUDE D. I I B THE LEARNED CIT(A) HAS FAILED TO NOTE THAT TH ERE CANNOT ANY SLUMP SALE WITHOUT TRANSFER OF LIABILITIES AND THAT THE L A.O. HAS QUANTIFIED THE LIABILITIES TRANSFERRED AT RS.7, 90,36,852 WHICH OUGHT TO HAVE BEEN CONSIDERED BY THE LEARNED CIT(A) FOR QUANTIFICATION OF NET WORTH OF THE UNDERTAKING. I.T.A.NO.714-2011 :- 2 -: 2 THE APPELLANT CRAVES LEAVE TO, ADD TO AMEND OR ALTER THE ABOVE GROUNDS OF APPEAL AS MAY BE DEEMED NECESS ARY. RELIEF CLAIMED IN APPEAL THE ORDER OF THE LEARNED CIT (APPEALS) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 2. THE CIT/DR ARGUED AND SUBMITTED THAT THE ONLY ISSU E INVOLVED IN THE PRESENT APPEAL IS THAT THE CIT(A) F AILED TO NOTE THAT THERE CANNOT BE ANY SLUMP SALE WITHOUT TRANSFER OF LIABILITIES AND THE ASSESSING OFFICER HAD QUANTIFIED THE LIABILITIES TR ANSFERRED AT ` 7,90,36,852/- WHICH OUGHT TO HAVE BEEN CONSIDERED B Y THE CIT(A) FOR QUANTIFICATION OF NET WORTH OF THE UNDERTAKING. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-C OMPANY HAD SOLD ITS HOTEL DIVISION TO M/S INDRALOK HOTELS PVT. LTD. IN CONNECTION WITH THE TRANSFER OF THE ASSETS TO M/S I NDRALOK HOTELS PVT. LTD, THE ASSESSEE HAD ENTERED INTO A MEMORANDUM OF AGREEMENT. THE ASSESSING OFFICER FOUND FROM THE MEMORANDUM DA TED 22.9.2005 THAT IT WAS AGREED BY THE ASSESSEE-COMPANY TO SELL TO M/S INDRALOK HOTELS PVT. LTD THE ASSETS PERTAINING TO THE HOTEL KNOWN AS KINGS PARK FOR A TOTAL CONSIDERATION OF ` 12,50,00,000/-. THE ASSESSING OFFICER OBSERVED THAT THE READING OF THE MEMORANDUM OF AGRE EMENT SHOWED I.T.A.NO.714-2011 :- 3 -: THAT THE ASSESSEE SOLD ITS ENTIRE BUSINESS AS A GO ING CONCERN AND THEREFORE, THE TRANSACTION SHOULD BE TREATED AS A S LUMP SALE AS DEFINED IN SECTION 2(42C) OF THE ACT. 4. THE ASSESSEE IN REPLY TO THE SHOW CAUSE NOTICE IS SUED BY THE ASSESSING OFFICER, SUBMITTED THAT SLUMP SALE HA S BEEN DEFINED TO MEAN THE TRANSFER OF ONE OR MORE UNDERTAKINGS AS A RESULT OF SALE FOR A LUMP SUM CONSIDERATION WITHOUT VALUES BEING ASSIGNE D TO THE INDIVIDUAL ASSETS AND LIABILITIES. IN THE CASE OF THE ASSESS EE, ONLY CERTAIN ASSETS WERE TRANSFERRED AND NOT THE WHOLE UNDERTAKING WITH ALL ITS ASSETS AND LIABILITIES. FURTHER, SPECIFIC VALUES WERE ASSIGN ED TO ALL THE ASSETS. IT WAS ALSO SUBMITTED THAT THE LOAN FROM TFCI WAS SPEC IFICALLY FOR THE HOTEL UNIT BUT WAS NOT TRANSFERRED TO THE BUYER. F URTHER, OTHER THAN ELECTRICITY DEPOSITS, NONE OF THE DEPOSITS WERE TRA NSFERRED TO THE BUYER. EVEN ALL FIXED ASSETS WERE NOT TRANSFERRED AND ONLY THOSE CONNECTED WITH THE HOTEL BUSINESS WAS TRANSFERRED AND THEREFO RE, THE CONDITIONS PRESCRIBED UNDER THE SLUMP SALE ARE NOT ATTRACTED. 5. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATI ON ON THE GROUND THAT THE ENTIRE BUSINESS INCLUDING MOVEABLE AND IMMOVABLE ASSETS HAS BEEN TAKEN OVER BY THE NEW COMPANY. THE AMOUNT OF CONSIDERATION OF ` 12,50,00,000/- WAS TO BE PAID FOR TAKING OVER OF I.T.A.NO.714-2011 :- 4 -: ASSETS AND ALL LICENCES WHICH ARE DIRECTLY RELATABL E TO THE HOTEL. WHILE WORKING OUT THE CAPITAL GAINS THE ASSESSEE HAS ASS IGNED INDIVIDUAL VALUES TO THE ASSETS WHEREAS AS PER THE AGREEMENT, THE ASSETS MENTIONED IN SCHEDULE 1 WHICH ARE TO BE TAKEN OVER BY THE NEW COMPANY AND IN THE COPY OF THE SCHEDULE ANNEXED, DE TAILS OF INDIVIDUAL ASSETS ARE STATED AND NO VALUE HAS BEEN ASSIGNED. THUS, IT WAS CLEAR THAT THE ASSESSEE HAD ASSIGNED THE VALUES FOR INDI VIDUAL ASSETS FOR WORKING OUT CAPITAL GAINS BUT AS PER AGREEMENT NO V ALUE HAS BEEN ASSIGNED IN RESPECT OF INDIVIDUAL ASSETS AND THEREF ORE, THE ARGUMENTS OF THE ASSESSEE ARE NOT CORRECT. THEREFORE, THE ASSESSING OFFICER HELD THAT THE TRANSFER WAS A SLUMP TRANSFER LIABLE TO BE DEALT WITH U/S 50B OF THE ACT. 6. THE ASSESSING OFFICER ARRIVED AT THE NET WORTH OF T HE BUSINESS TRANSFERRED BY TAKING THE VALUE OF FIXED A ND CURRENT ASSETS AT ` 4,91,81,592/- AND SUBTRACTING THEREFROM SECURED AN D UNSECURED LOANS AS ON 31.3.2005 OF ` 7,90,36,852/- THEREBY ARRIVING AT A NEGATIVE NET WORTH OF ` 2,98,55,260/-. IN VIEW OF THIS, BY APPLYING THE PROVISIONS OF SECTION 50(1B), THE ASSESSING OFFICER TOOK THE NET WORTH AT ` NIL AND TAXED THE ENTIRE CONSIDERATION OF ` 12,50,00,000/- AS LONG TERM CAPITAL GAINS OF THE ASSESSEE. I.T.A.NO.714-2011 :- 5 -: 7. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BFORE T HE CIT(A). THE CIT(A) DETERMINED THE LONG TERM CAPITAL GAINS A T ` 7,58,18,408/- AFTER DEDUCTING NET WORTH OF THE UNDERTAKING I.E VA LUE OF FIXED ASSETS AND CURRENT ASSETS AS ON 31.3.2005 AS PER THE ASSES SMENT ORDER AT ` 4,91,81,592/- FROM THE SALE CONSIDERATION OF ` 12,50,00,000/-. WHILE DOING SO, THE CIT(A) HAS OBSERVED AS UNDER: 8. I HAVE CONSIDERED THE FACTS AND THE SUBMISSIONS OF THE LEARNED AR . SEC. 2(42C) DEFINES 'SLUMP SALE' AS BELOW: '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 (19 AA)' EXPLANATION (1) TO CLAUSE 19AA STATES AS BELOW: UNDERTAKING' SHALL INCLUDE ANY PART OF AN UNDERTAKI NG, OR A UNIT OR DIVISION OF AN UNDERTAKING OR A BUSINESS ACTIVITY TAKEN AS A WHOLE, BUT DOES NOT INCLUDE INDIVIDUAL ASSETS OR LI ABILITIES OR ANY COMBINATION THEREOF NOT CONSTITUTING A BUSINESS ACTIVITY.' 9. A. READING OF THE SECTION ALONG WITH EXPLANATION SHOWS THAT AN 'UNDERTAKING' SHALL INCLUDE ANY PART OF AN UNDER TAKING WHICH TAKEN AS A WHOLE CONSTITUTES A BUSINESS ACTIVITY BU T . DOES NOT INCLUDE INDIVIDUAL ASSETS OR LIABILITIES, IF THEY D O NOT CONSTITUTE A BUSINESS ACTIVITY. THE TEST THEREFORE IS TO SEE WHE THER 'HOTEL ASSETS' TRANSFERRED BY THE APPELLANT TAKEN AS A WHO LE CONSTITUTE A BUSINESS ACTIVITY OR NOT. THE APPELLAN T COMPANY HAS TRANSFERRED ALL THE ASSETS OF 'KING'S PARK' HOTEL ALONG WITH ALL THE LICENCES, EASEMENT RIGHTS AND INFRASTRUCTUR E FACILITIES FOR RUNNING THE HOTEL. IT HAS NOT TRANSFERRED SOME OF T HE DEPOSITS AND LIABILITIES. THE ASSETS WHICH ARE TRANSFERRED, DEFINITELY I.T.A.NO.714-2011 :- 6 -: CONSTITUTE A BUSINESS ACTIVITY OF RUNNING THE HOTE L. IN FACT M/ S. PRIDE HOTELS CONTINUED RUNNING THE HOTEL 'KING'S PARK' AFTER THE TRANSFER. NOT TRANSFERRING SOME OF THE DEPOSITS AND THE LIABILITIES WOULD NOT ALTER THE FACT THAT THE ASSET S TRANSFERRED TAKEN AS A WHOLE CONSTITUTE BUSINESS ACTIVITY OF RUNNING A HOTEL. 10. WHILE VALUES FOR ASSETS LIKE LAND, BUILDINGS, E TC. ARE MENTIONED IN THE INDENTURE OF SALE NO SUCH VALUATIO N WAS DONE FOR LICENSES, EASEMENT RIGHTS AND INFRASTRUCTURE FA CILITIES AND THE ASSETS ALONG WITH LICENSES, EASEMENT RIGHTS AND INFRASTRUCTURE FACILITIES WERE TRANSFERRED FOR A CO NSIDERATION OF RS.12.50 CRORES. THE TRANSFER WAS, THEREFORE, NOT O F INDIVIDUAL ASSETS BUT OF THE ASSETS ALONG WITH LICENSES, EASEM ENT RIGHTS AND INFRASTRUCTURE FACILITIES FOR RUNNING A HOTEL F OR A LUMP SUM CONSIDERATION OF RS.12.5 CRORES. I THEREFORE. AGREE WITH THE A.O THAT THE TRANSFER WAS DONE FOR A LUMP SUM CONSI DERATION, EVEN THOUGH INDIVIDUAL VALUES OF SOME OF THE ASSETS ARE MENTIONED IN THE INDENTURE OF SALE. THEREFORE, HOLD THAT THE ASSETS OF KING'S PARK HOTEL TRANSFERRED BY THE APPE LLANT TO M/S. IH THROUGH THE INDENTURE OF SALE OF ASSETS AND LICENCES, EASEMENT RIGHTS AND INFRASTRUCTURE FACILITIES FOR R UNNING A HOTEL CONSTITUTE AN 'UNDERTAKING' WITHIN THE MEANING OF S EC. 2(42C) R. W. EXPLANATION 1 TO SEC. 2(19 AA). 11. SEC 50B OF THE I.T. ACT PROVIDES THAT ON SLUMP SALE OF AN UNDERTAKING 'NET WORTH' OF THE UNDERTAKING SHALL BE DEEMED TO BE THE COST OF ACQUISITION AND COST OF IMPROVEMENT FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS FROM THE TR ANSFER OF THE UNDERTAKING. FOR THIS PURPOSE, THE 'NET WORTH' OF THE UNDERTAKING SHALL BE THE AGGREGATE VALUE OF TOTAL A SSETS OF THE UNDERTAKING AS REDUCED BY THE VALUE OF LIABILITIES OF SUCH UNDERTAKING AS APPEARING IN ITS BOOKS OF ACCOUNT. IN THE PRESENT CASE, THE CONSIDERATION FOR THE TRANSFER OF THE UNDERTAKING IS RS.12.50 CRORES. FOR COMPUTATION OF NET WORTH OF THE UNDERTAKING, THE TOTAL AGGREGATE VALUE OF TO TAL ASSETS OF THE UNDERTAKING HAS TO BE REDUCED BY THE LIABILITIE S OF SUCH UNDERTAKING. IN THE PRESENT CASE, THE UNDERTAKING I S ASSETS, LICENCES, ETC. OF KING'S PARK HOTEL AND THE UNDERTA KING DOES NOT INCLUDE ANY LIABILITIES. THE NET WORTH OF THE U NDERTAKING IS THEREFORE THE TOTAL VALUE OF ASSETS OF THE UNDERTA KING. ACCORDINGLY, THE CAPITAL GAINS FROM SLUMP SALE OF T RANSFER OF ASSETS OF KING'S PARK HOTEL WOULD BE AS BELOW: I.T.A.NO.714-2011 :- 7 -: SALE CONSIDERATION RECEIVED ` 12,50,00,000 LESS: NET WORTH OF THE UNDERTAKING (FIXED ASSETS AS ON 31.3.2005 AND CURRENT ASSETS, AS PER THE ASST. ORDER) ` 4,91,81,592 LONG TERM CAPITAL GAINS ` 7,58,18,408 THE A.O. IS ACCORDINGLY DIRECTED TO TAKE ` 7,58,18,408/- AS LONG TERM CAPITAL GAINS. 8. THE CIT/DR ARGUED THAT AS PER THE PROVISIONS OF S ECTION 50B, FOR DETERMINING CAPITAL GAIN, NET WORTH OF THE UNDERTAKING SHOULD BE REDUCED FROM THE SALE CONSIDERATION. IN THE INS TANT CASE, AS THE NET WORTH WAS NIL, THE ENTIRE SALE CONSIDERATION SHOULD HAVE BEEN TAXED AS CAPITAL GAIN. ACCORDING TO THE CIT/DR, THE CIT( A) WAS NOT JUSTIFIED IN DETERMINING THE NET WORTH OF THE UNDERTAKING AT ` 4,91,81,592/- AND THEREFORE, IN ARRIVING AT THE LONG TERM CAPITAL GAI N AT ` 7,58,18,408/-. 9. THE A.R, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE CIT(A) AND ARGUED THAT THE LIABILITIES AND ASSETS W HICH WERE NOT TRANSFERRED IN RESPECT OF WHICH SUCH CONSIDERATION WAS RECEIVED, COULD NOT FORM THE PART OF THE NET WORTH. I.T.A.NO.714-2011 :- 8 -: 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, WE FIND THAT THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE SOLD KINGS PARK HOTEL ON SLUMP SALE BASIS TO M/S INDRALOK HOTELS PVT. LTD FOR A CONSIDERATION OF ` 12,50,00,000/-. FURTHER, IT IS ALSO NOT IN DISPUTE THAT CERTAIN DEPOSITS AND ASSET S RELATING TO KINGS PARK HOTEL AND LIABILITIES OF KINGS PARK HOTEL WER E NOT TRANSFERRED TO M/S INDRALOK HOTELS PVT. LTD. ON THE ABOVE FACTS, THE ONLY DISPUTE BEFORE US IS WHAT SHOULD BE THE NET WORTH OF THE UN DERTAKING TRANSFERRED. IN OUR CONSIDERED OPINION, WHEN IT IS NOT IN DISPUTE THAT CERTAIN ASSETS OF KINGS PARK HOTEL AND LIABILITIES WERE NOT TRANSFERRED THEN THE VALUE OF THOSE ASSETS AND LIABILITIES CANN OT FORM PART OF UNDERTAKING WHICH WAS ACTUALLY TRANSFERRED AND THER EFORE, THE SAME CANNOT BE TAKEN INTO ACCOUNT FOR CALCULATING THE NE T WORTH OF THE UNDERTAKING WHICH WAS ACTUALLY TRANSFERRED. WE FIN D THE CONTENTION OF THE REVENUE THAT THOUGH THE LIABILITIES WERE NOT TR ANSFERRED AS A PART OF THE UNDERTAKING, BUT THE SAME STILL SHOULD BE RE DUCED FOR CALCULATING THE NET WORTH OF THE UNDERTAKING TRANSFERRED IS ABS URD AND DOES NOT STAND TO REASONS. NO MISTAKE IN CALCULATING THE NE T WORTH OF THE UNDERTAKING WHICH WAS ACTUALLY TRANSFERRED AS CALCU LATED BY THE CIT(A) COULD BE POINTED OUT BY THE CIT/DR. WE, THEREFORE, DO NOT FIND ANY I.T.A.NO.714-2011 :- 9 -: GOOD AND JUSTIFIABLE REASON TO INTERFERE WITH THE O RDER OF THE CIT(A) WHICH IS CONFIRMED AND THE GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 12 TH DAY OF SEPTEMBER, 2012, AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 12 TH SEPTEMBER, 2012 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR