THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 1(1), MYSURU vs. M/S. BHORUKA ALUMINIUM LIMITED, MYSURU

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No.2551/Bang/2019 Assessment Year : 2014-15 ACIT, Vs. M/s. Bhoruka Aluminium Ltd., No.427E, 2nd Floor, Hebbal Industrial Circle – 1(1), Mysuru. Area, Metagalli, Mysuru – 570 016. PAN : AAACB 8073 D APPELLANT RESPONDENT Assessee by : Shri. S. Ramasubramanian, CA Revenue by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. Date of hearing : 08.08.2022 Date of Pronouncement : 16.08.2022 O R D E R Per N. V. Vasudevan, Vice President :

This is an appeal filed by the Revenue against order dated 30.09.2019 of CIT(A), Mysuru, relating to Assessment Year 2014-15.

ITA No.2551/Bang/2019 Page 2 of 18 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. Section 50B of the Act, provides the mechanism for computation of capital gains arising on slump sale and is as follows:

Special provision for computation of capital gains in case of slump sale. 50B. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place : Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. (2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48. (3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section. Explanation 1.—For the purposes of this section, "net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account : Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth. Explanation 2.—For computing the net worth, the aggregate value of total assets shall be,— (a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (c) of item (i) of sub-clause (c) of clause (6) of section 43;

ITA No.2551/Bang/2019 Page 3 of 18 (b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and (c) in the case of other assets, the book value of such assets. A reading of Sec.50B (1) of the Act read with Sec.2(42C) of the Act, it is clear that taxability of capital gain on slum sale arises in the year of transfer of the undertaking. Sec.50B of the Act is a special provision for computation of capital gain on slum sale and excludes other provisions of the Act, in so far as it relates to charge and computation of capital gain on slump sale. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. The ‘aggregate value of total assets of the undertaking or division’ is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth.

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computation of capital gain, the assessee has adopted the slump sale consideration at Rs.103,47,21,564/-. The AO was of the view that since the slump sale consideration was Rs.110 Crores, that should have been the starting point of computation of capital gain. The AO therefore called upon the assessee to clarify as to how the capital gain of slump sale was computed by the assessee. 4. The assessee, in reply, submitted that Clause No.3.1.2. of the BTA it has been provided that out of the total enterprise value of Rs.110,00,000/- the Initial Business Transfer Consideration shall be only Rs.100,00,00,000/- (One Hundred Crore Only) and the remaining Rs.10,00,00,000/- (Ten Crore) shall be subsequent business transfer consideration which shall be payable in the matter mentioned below: a. Rupees Five Crores on achieving prescribed Sales and Collection Targets within first 2 years; _ b. Rupees Five Crores on clearing all the legal issues and other tax disputes. Accordingly, Rs.100,00,00,000/- of the Initial Business Transfer Consideration and Rs.3,47,21,564/- of Net Current Assets (NCA) difference were received immediately on sale. The legal case in connection Excise Duty has decided in favour of the Assessee by the Hon’ble High Court but the department has appealed to the Hon’ble Supreme Court and since it will take time for a decision in the remaining sum was not payable to the Assessee and hence not offered to tax in the present AY 2014-15. Hence, the Assessee did not consider the entire slump sale consideration of Rs.110 Crore, as full value of consideration received/or accrued on transfer. The Assessee submitted that the remaining sum will be offered to tax in the year in which the Assessee receives the said sum. vide another letter dt. 30.12.2016, the assessee submitted that it received a sum

ITA No.2551/Bang/2019 Page 5 of 18 of Rs.4,38,20,000/- during the Assessment Year 2015-16 and the same was offered to tax in AY 2015-16.

a. Rupees Five Crores on achieving prescribed Sales and Collection Targets within first 2 years; ,

b. Rupees Five Crores on clearing all the legal issues and other lax disputes.

ITA No.2551/Bang/2019 Page 6 of 18 According to the AO, the fulfillment of the aforesaid clauses is a not a condition precedent for the transfer of the undertaking from the Assessee to the transferee and are purely condition to be satisfied subsequent to slump sale and will therefore not postpone the year of transfer and chargeability of capital gain on slump sale. The AO also observed that the assessee offering to tax the remaining consideration in a subsequent year cannot alter the year of taxability since the capital gains had already accrued in the year of sale, there being no express clause to the contrary in case of non-fulfilment of the conditions under clause 3.1.2. of the BTA. He also observed that the Assessee has adopted a colourable device to postpone the tax liability. The AO therefore rejected the assessee's contention and proceeded to bring to tax the capital gains by adopting the entire sale consideration at Rs.110,00,00,000/- as per Business Transfer Agreement dated 01.3.2013, since it had accrued in the year of sale, i.e., AY 14-15. The long term capital gains was accordingly recomputed as under:- Slump sale consideration adopted as per 110,00,00,000 Business Transfer Agreement dated 01.03.2013 Add Difference in Net Current 3,47,21,564 Assets as adopted by the assessee Sale consideration on account of slump sales 113,47,21,564 Less Consultancy & post closing expenses as per 5,11,40,000 assessee Net proceeds of slump sale 108,35,81,564 Less Net Current Assets as per 8,43,83,680 54,87,45,026 assessee WDV of assets as per assessee 46,34,44,923 Book value of land 9,16,423 Long term capital gain on 53,48,36,538 slump sale

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ITA No.2551/Bang/2019 Page 8 of 18 the sales and collection target mentioned in Clause 3.1.2 (c)(i) above, subject to deduction of amounts pursuant to Clause 3.1.3. 3.1.3 it is agreed and understood that the Subsequent Business Transfer Consideration shall be payable by the purchaser to the seller, subject to adjustments of the following amounts, if applicable: a) Any claim of indemnity by any if the Purchaser Indemnified Parties against the seller and/or the Promoter Group under any of the Transaction Documents inclosing for breach of the provisions of this Agreement; b) Any loss to any Purchaser Indemnified Party arising out of or in connection With the pending tax disputes of the seller with the Governmental Authorities, the details of shall be set out in Schedule 10 ("Tax Disputes"). It being clarified that :(a) the seller shall be solely responsible for any liability arising out to Tax Disputes, and (B) in the event that the amount of loss or indemnity to nay of the Purchaser Indemnified Parties as contemplated under this Clause 3.1.2 exceeds the Subsequent Business Transfer Consideration, then the seller and/or promoter Group shall Separately indemnify the Purchaser Indemnified Parties for such excess amount also; and, c) Any other amounts and monies payable by the seller and/or the Promoter Group to the Purchaser or YKK under or in connection with this Agreement, inter alia, including for claims made by nay customers to the Purchaser for refund of die deposits." According to CIT(A), liability to pay tax arises in the year in which the conditions are fulfilled by the Assessee and the remaining sum is received by the Assessee. Since, the remaining sum is payable on fulfillment of certain conditions, it cannot be taken into taxable income until fulfillment of those conditions. He therefore allowed the appeal of the Assessee.

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ITA No.2551/Bang/2019 Page 10 of 18 also claimed the whole cost. Therefore, the order of the ld. CIT(Appeals) is set aside and that of the AO is restored.” Against the decision of the Hon’ble Tribunal, the assessee filed appeal before the Hon’ble Delhi High Court. The Hon’ble Delhi High Court agreed with the reasoning of the Tribunal and held as follows:

“7. The reasoning of the Tribunal is premised upon the fact that capital assets were transferred on a particular date the assessees passed on the execution of the agreement. There is no material on the record or in the agreement suggesting that even if the entire consideration or part is not paid the title to the shares will revert to the seller. In that sense the controlling expression of "transfer" in the present case is conclusive as to the true nature of the transaction. The fact that the appellant assessee adopted a mechanism in the agreement that the transferee would defer the payments would not in any manner detract from the chargeability when the shares were sold. 8. It was lastly submitted that the Tribunal's findings are based upon its understanding about the characterization of the receipt and it has not dealt with the deeming fiction about the accrual which is dealt with by Section 48. We are unable to agree. The tenor of the Tribunal's order is that the entire income by way of capital gains is chargeable to tax in the year in which the transfer took place. This is what is stated in Section 45(1). Merely because the agreement provides for payment of the balance of consideration upon the happening of certain events, it cannot be said that the income has not accrued in the year of transfer. 9. In view of the above reasoning we are of the opinion that no substantial question of law arises for consideration. We are in agreement with the decision of the Tribunal. The appeal is accordingly dismissed.”

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lead and in fact had led to a situation where no amount on account of deferred consideration for the sale of shares was receivable by the assessee in the immediate succeeding assessment year i.e. assessment year 2007-08. On the analysis of agreement, the Commissioner of Income-Tax (Appeals) concluded that the amount of Rs.20 crores is the maximum amount that could be received by all co-owners under the agreement from M/s. RKHS. However, on working of the formula there was no guarantee that this amount or for that matter any amount would be received. He therefore held that the amount received/ accrued alone be considered for compuitating capital gain. The Tribunal held that what amount has to be brought to tax is the amount which has been received and/or accrued to the assessee and not any notional or hypothetical income as the revenue is seeking to tax the assessee in the subject assessment year 2006-07. On further appeal, the revenue contended that in terms of section 45(1) of the Act that transfer of capital asset would attract the capital gains tax and the amount to be taxed under section 45(1) is not dependent upon the receipt of the consideration. The Hon’ble High Court held that in the subject assessment year no right to claim any particular amount gets vested in the hands of the assessee. Therefore, entire amount of Rs.20 crores which is sought to be taxed by the Assessing Officer is not the amount which has accrued to the assessee. The test of accrual is whether there is a right to receive the amount though later and such right is legally enforceable. The amounts to be received as deferred consideration under the agreement could not therefore be subjected to tax in the assessment year 2006-07 as the same has not accrued during the year. The following were the relevant observations of the Court:

“8. In the present case, from the reading of the above clauses of the agreement the deferred consideration is payable over a period of four years i.e. 2006-07, 2007-08, 2008-09 and 2009-10. Further the

ITA No.2551/Bang/2019 Page 13 of 18 formula prescribed in the agreement itself makes it clear that the deferred consideration to be received by the respondent-assessee in the four years would be dependent upon the profits made by M/s. Unisol in each of the years. Thus in case M/s. Unisol does not make net profit in terms of the formula for the year under consideration for payment of deferred consideration then no amount would be payable to the respondent-assessee as deferred consideration. The consideration of Rs.20 crores is not an assured consideration to be received by the Shete family. It is only the maximum that could be received. Therefore it is not a case where any consideration out of Rs.20 crores or part thereof (after reducing Rs.2.70 crores) has been received or has accrued to the respondent assessee. As observed by the Apex Court in Morvi Industries Ltd. vs. CIT (1971) 82 ITR 835. “The income can be said to accrue when it becomes due.... The moment the income accrues, the assessee gets vested right to claim that amount, even though not immediately.” In fact the application of formula in the agreement dated 25th January, 2006 itself makes the amount which is receivable as deferred consideration contingent upon the profits of M/s.Unisol and not an ascertained amount. Thus in the subject assessment year no right to claim any particular amount gets vested in the hands of the respondent-assessee. Therefore, entire amount of Rs.20 crores which is sought to be taxed by the Assessing Officer is not the amount which has accrued to the respondent- assessee. The test of accrual is whether there is a right to receive the amount though later and such right is legally enforceable. In fact as observed by the Supreme Court in E.D. Sassoon & Co. Ltd. Vs. CIT (1954) 26 ITR 27 “It is clear therefore that income may accrue to an assesee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro …. …. ….”. In this case all the co-owners of the shares of M/s.Unisol have no right in the subject assessment year to receive Rs.20 crores but that is the maximum which could be received by them. This amount which could be received as deferred consideration is dependent/contingent upon certain uncertain events, therefore, it cannot be said to have accrued to the respondent-assessee. The Tribunal in the impugned order has correctly held that what has to be taxed is the amount received or accrued and not any notional or

ITA No.2551/Bang/2019 Page 14 of 18 hypothetical income. As observed by the Apex Court in Commissioner of Income-Tax vs. M/s. Shoorji Vallabdas and Co. (1962) 46 ITR 144 “Income-Tax is a levy on income. No doubt, the Income-Tax Act takes into account two points of time at which liability to tax is attracted, viz., the accrual of its income or its receipt; but the substance of the matter is income, if income does not result, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialize.” In this case Rs.20 crores cap in the agreement is not income in the subject assessment year. It has been observed by the Apex Court in the case of K.P. Varghese vs. Income- Tax Officer, Ernakulam & Anr. 181 ITR Page 597 that one has to read capital gain provision along with computation provision and the starting point of the computation is “the full value of the consideration received or accruing”. In this case the amount of Rs.20 crores is neither received nor it has accrued to the respondent-assessee during the subject assessment year. We are informed that for the subsequent assessment year (save Assessment Year 2007-08 for which there is no deferred consideration on application of formula), the Assessee has offered to tax the amounts which have been received on the application of formula provided in the agreement dated 25th January, 2006 pertaining to the transfer of shares. 9. The contention of the Revenue that the impugned order is seeking to tax the amount on receipt basis by not having brought it to tax in the subject assessment year, is not correct. This for the reason, that the amounts to be received as deferred consideration under the agreement could not be subjected to tax in the assessment year 2006-07 as the same has not accrued during the year. As pointed out above, accrual would be a right to receive the amount and the respondent-assessee alongwith its co-owners have not under the agreement dated 25th January, 2006 obtained a right to receive Rs.20 crores or any specified part thereof in the subject assessment year. 10. In the above view there could be no occasion to bring the maximum amount of Rs. 20 crores, which could be received as deferred consideration to tax in the subject assessment year as it had not accrued to the respondent-assessee. 11. We find that both the Commissioner of Income-Tax (Appeals) and the Tribunal have in view of the clear clauses of agreement dated 25th January, 2006 have in the facts of the present case correctly held that

ITA No.2551/Bang/2019 Page 15 of 18 the respondent-assessee and the co-owners of the shares did not have a right to receive Rs.20 crores in the subject assessment year.”

ITA No.2551/Bang/2019 Page 16 of 18 15. In the facts and circumstances of the case, the computation of capital gain in tune with the provisions of Sec.50B of the Act has to be made in that year. The computation provisions of Sec.50B of the Act is also very clear and provides no lee way for parties to postpone recognizing capital gain in tune with the computation mechanism provided therein. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. The ‘aggregate value of total assets of the undertaking or division’ is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. There is no scope for any deviation from the aforesaid statutory provisions. Even the provisions of Sec.45(1) provides that any profit or gains arising from transfer of a capital asset effected in the previous year shall 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. The learned counsel for the Assessee referred to the provisions of Sec.48 of the Act and submitted that income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :— (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement6 thereto:

ITA No.2551/Bang/2019 Page 17 of 18 According to him the concept of receipt/accrual is relevant even for charge to tax of income in the form of capital gain. In this regard the learned counsel for the Assessee has placed reliance on the decision of the Hon’ble Bombay High Court in the case of Mrs.Hemal Raju Shete (supra). The decision rendered by the Hon’ble Bombay High Court in the case of Mrs.Hemal Raju Shete (supra) was a decision rendered in the context of provisions of Sec.45(1) of the Act and has to be read as a decision rendered on its peculiar facts. The ratio laid down therein cannot be extended to a case where computation of capital gain is made u/s.50B of the Act. As we have already explained the statutory provisions, are special provisions applicable to computation of capital gain on slump sale and these provisions specifically lay down the methodology of computation in Sec.50B(2) of the Act, in relation to computation of capital gain. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between ‘the aggregate value of total assets of the undertaking or division’ and ‘the value of its liabilities as appearing in books of account’. The ‘aggregate value of total assets of the undertaking or division’ is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth. Provisions of Sec.48 & 49 stand substituted by the provisions of Sec.50B(2) of the Act. The methodology contemplated by these provisions cannot be altered or tampered with by reading the terms of the slum sale agreement and deferred payments laid down therein. For these by laying down that when capital

ITA No.2551/Bang/2019 Page 18 of 18 assets being an undertaking or division is transferred by way of slump sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48. For the reasons given above, we are unable to agree with the view canvassed by learned Counsel for the assessee. We are of the view that the CIT(A) fell into an error in accepting the plea of the assessee and holding that the sum not received owing to clause 3.1.2 of the BTA cannot be brought to tax in AY 14-15. We therefore allow the appeal of the Revenue.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (LAXMI PRASAD SAHU) (N. V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 16.08.2022. /NS/*

Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.