ACIT CENTRAL CIRCLE 7 4, MUMBAI vs. ZYTEX BIOTECH PRIVATE LIMITED, MUMBAI

"Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is justified in concluding that the reopening of assessment under Section 147 was based on a "change of opinion," despite the fact that fresh tangible material emerged after the original assessment under Section 143(3), specifically from the survey action under Section 133A, thereby validating the reopening as per the provisions of the Income Tax Act.

"Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is justified in law and on facts by holding that the transaction between Zytex Biotech Pvt. Ltd. and M/s Brenntag Ingredients (India) Pvt. Ltd. qualified as a slump sale under Section 2(42C), despite the absence of a transfer of a complete business undertaking as a "going concern." The transaction involved only the selective transfer of client lists, contracts, and employees, failing to meet the statutory criteria of an "undertaking" under Section 2(42C) and thereby rendering Section 50B inapplicable. Consequently, the transaction should have been classified under Section 50(2) as Short-Term Capital Gains (STCG) arising from the cessation of a "block of assets."

"Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is justified in law and on facts by upholding the classification of the transaction as a slump sale under Section 2(42C), despite the deficiencies in Form 3CEA submitted by the assessee. The Chartered Accountant's (CA) certificate was materially defective, failing to compute the net worth in accordance with Rule 6H of the Income Tax Rules, 1962, and omitting key details such as the address of the undertaking, thereby rendering the certificate invalid.”

The assessee is a company and filed the return of income for AY 2014-15 on 25.09.2014 declaring a total income of Rs.58,04,71,900/-. The assessment under section 143(3) of the Act in assessee's case was completed vide order dated 28.12.2016 accepting the income returned by the assessee. Subsequently there was a survey operation under section 133A in assessee's case on 08.02.2019 and during the post survey proceeding, it is noticed that the assessee has entered into a slump Zytex Biotech Private Ltd. sale transaction with M/s Brenntag Ingredients (I) Pvt. Ltd. for a total consideration of Rs. 62,94,56,979/- against which the assessee has offered a Long Term Capital Gain (LTCG) of Rs. 57,72,08,137/-. The AO held that in the post survey proceedings, it was found that no business undertaking or division has been transferred and only few employees, assets and clients have been transferred treating them as slump sale of an undertaking. The AO further held that no details pertaining to the division or undertaking is mentioned in the audit report and there is no network computation is being done. Accordingly, the AO held that he has reason to believe that the income has escaped assessment and therefore reopened the assessment by issue of notice under section 148 of the Act. The assessee in response filed the return on 23.04.2021 declaring the same income as in the original return of income. The AO after disposing of the objection raised by the assessee completed the assessment where he treated the LTCG declared by the assessee as Short Term Capital Gain (STCG). Aggrieved the assessee filed further appeal before the CIT(A). Before the CIT(A) the assessee raised the legal contention that the reopening of assessment under section 147 is merely based on change of opinion in respect of taxability of the transfer of trading business of the assessee without bringing any fresh material or evidence on record. The CIT(A) allowed the contention of the assessee by holding that –

4.3. I have gone through the reasons for reopening, as recorded by the AO. As per the reasons, the reopening was done on basis of the findings of the survey action and post survey enquiries. The findings, as given in the paras 4, 5, and 9 of the reasons, are reproduced for reference.

In the instant case, during the course of post-Survey proceedings it was found that no business undertaking or division has been transferred because there was none! Only a few employees, assets and clients have been transferred treating them as a slump sale of an undertaking/division. The same is brought out from the fact that in Form 3CEA, no details for the address or location of this division or undertaking is mentioned. Also, no net worth computation has taken place as mandated under Rule 6H of the Income Tax Rules, 1962. The Form 3CEA submitted by the assessee only has amount of consideration received whereas net worth computation has not been carried out. Without carrying out the net worth calculation of the ‘purported’ undertaking, the CA has certified in the Form 3CEA that the net worth has been correctly computed as per provisions of Section 50B of the IT Act, 1961, which is not only incorrect but fraudulent in nature.

I have gone through the findings of the survey and the evidences found during the course of Survey. A notice calling for information u/s 133(6) of the Act was issued to the assessee for calling details related to slump sale made by the assessee in relevant AY along with the agreement with Zytex Biotech Private Ltd. Brenntag Ingredients (India) Pvt. Ltd dated 17.09.2013. From the submissions of the assessee against 133(6) notice it is found that the term ‘undertaking’ has been defined under Schedule 1 of the said agreement. The definition of the same itself reveal that the supposed undertaking was not a separate business unit but are conveniently put up facade to justify whatever was being transferred and to put it under the definition of undertaking. For instance, the definition states that “The transferred employees” and not “all the employees in the undertaking”! In terms of assets and properties, no listing is done and only their usage/deployment for operations has been stated. This also proves that there was no clear- cut definition or categorisation of an undertaking and the same has been done to evade taxes. In view of the above, it is evident that the aforesaid transaction squarely falls under section 50(2) of the IT Act, 1961”.

4.4. I find that the reasons recorded do not bring out any new facts which were not earlier available with the AO. The details mentioned in the reasons for reopening are available in the agreement dated 7/10/2013 with M/s Brenntag Ingredients (India) Pvt ltd and the said agreement was examined at the time of original assessment proceedings. Considering that the facts recorded in the reasons were already examined by the earlier AO and on the same set of facts, the present AO has taken a different view. I find merit in the argument of the appellant that the reopening is result of ‘change of opinion’.

4.5. As per the proviso to section 147,

4.6. I am of the considered view that the reopening beyond four years is in violation to proviso to section 147 of the Act and therefore is bad in law. Further the reopening is based on change of opinion of the AO on same set of facts.”

The ld. DR submitted that the assessee's case was reopened based on post survey findings and therefore the claim of the assessee that the reopening is merely based on change of opinion is not correct. The ld. DR drew our attention to the order under section 143(3) where the AO has not discussed anything with regard to the slump sale carried out by the assessee and the AO has merely accepted the income returned by the assessee. Therefore, it is argued by the ld. DR that the AO has not formed any opinion with regard to the impugned transaction and therefore there is no change of opinion on the part of the AO during the course of reassessment.

The ld. AR on the other hand submitted that the reopening in assessee's case is beyond four years and therefore the proviso to section 147 is applicable. Since the assessee has disclosed truly and fully all material facts with regard to the slump sale, the AO could not reopened the assessment based on the same materials without bringing anything new on record. The ld. AR placed reliance on the decision of the Hon'ble Bombay High Court in the case of Ananta Landmark Pvt. Ltd. vs. DCIT [2021] 131 taxmann.com 52 (Bom.). The ld. AR argued that all the details pertaining to the slump sale was submitted before the AO and that the AO raised specific query with regard to the details submitted by the assessee. Our attention in this regard is drawn to the various notices issued by the AO raising query and seeking clarifications with regard to the impugned transactions and the reply filed by the assessee (page 182 to 234 of PB). The ld. AR invited our attention to the specific details submitted before the AO with regard to the slump Zytex Biotech Private Ltd. sale explaining the sequence of events (page 211 to 219 of PB) and that each of the event is supported by the evidences as per the table. The ld. AR accordingly argued that the AO in the original proceedings has considered all the relevant documents pertaining to slump sale and has decided to allow the claim of the assessee. The ld. AR further argued that no new materials were found during the course of search and that the AO has placed reliance on the same set of documents filed by the assessee during the course of original proceedings and therefore the AO's reason for reopening is merely based on change of opinion. The ld. AR relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC) to submit that the AO cannot reopen without any tangible material which has come to his possession that there is an escapement of income.

We heard the parties and perused the material on record. The assessee in the return of income has offered the LTCG from the sale of one of its undertaking as slump sale. The AO reopened the assessee based on post survey proceeding to hold that the slump sale is not a genuine transaction since the audit report does not mention about the existence of the undertaking. The AO inspite of raising questions about the genuineness of the transaction proceeded to treat the gain as STCG instead of LTCG as offered by the assessee. From the perusal of AO's order we notice that the AO has not mentioned any reason for treating the gain as STCG except that the audit report does not mention the existence of the undertaking. Be that as may be, in assessee's case the reopening is beyond a period of 4 years and therefore as per the proviso to section 147 the AO can reopen only when the assessee fails to disclose fully and truly all material facts necessary for the assessment for that assessment year. We notice that in assessee's case the assessment under section 143(3) was completed vide order dated 28.12.2016 Zytex Biotech Private Ltd. accepting the income returned by the assessee. We further notice that the AO has called for the details pertaining to the slump sale during the course of the assessment proceedings and the assessee has been filing various details from time to time. We also notice that though the AO has not given any finding with regard to the slump sale, the AO has raised several queries with regard to the impugned transactions and therefore there is merit in submission that the AO during the assessment proceedings has done a detailed enquiry. The AO has stated that in the post survey proceedings it is noticed that in Form 3CEA, no details for the address or location of this division or undertaking is mentioned and no net worth computation as mandated under Rule 6H of the Income Tax Rules, 1962. In our considered view the audit report is already part of records along with the return of income and therefore cannot be considered as a new material found during survey proceedings. As already mentioned, the AO during assessment proceedings has carried out a thorough verification of the transaction and therefore we are of the view that observation of the AO that there is no details of the undertaking in the audit report cannot be considered as a new tangible material. It is relevant mention that during the course of hearing the ld AR drew our attention to the division wise income details furnished before the lower authorities which substantiates the claim that the undertaking was in operation until being transferred under a slump sale transaction. In view of these discussion, we find no infirmity in the decision of CIT(A) that the reopening beyond four years as bad in law when there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment and without unearthing any new tangible material during the survey warranting reopening. Zytex Biotech Private Ltd. 6. In result, the appeal of the revenue is dismissed.