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Income Tax Appellate Tribunal, ‘A’ BENCH, MUMBAI
Before: SHRI G.S. PANNU, AM & SHRI RAVISH SOOD, JM
P a g e | 2 & L & T Finance Ltd. Vs. DCIT आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeals filed by the assessee are directed against the respective orders passed by the CIT(A)-5, Mumbai, dated 02.02.2010 and 08.06.2012, which in itself arises from the orders passed by the A.O u/s 143(3)(ii), dated 14.03.2006 and under Sec. 271(1)(c), dated 29.03.2011, respectively. That as the aforementioned appeals are found to be interrelated, therefore, the same are being disposed by way of a consolidate order. We shall first take up the quantum appeal of the assessee. The assessee assailing the order of the CIT(A) wherein the latter had partly allowed the appeal of the assessee, had raised before us the following grounds of appeal: “1. On the facts and circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming the treatment of transfer of business leads of the appellant as assessable under the head „Capital Gains‟ instead of „Business Income‟.
2. On the facts and circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest and finance charges by treating the same as non-revenue expenditure.
3. The appellant company craves leave to add to, alter or modify any of the above grounds of appeal.”
2. Briefly stated, the facts of the case are that the assessee company which is engaged in the business of software development activities had filed its return of income on 14.11.2003, declaring total income of Rs. Nil. The return of income filed by the assessee company was processed as such under Sec. 143(1) of the „Act‟ on 02.09.2004. The case of the assessee was thereafter selected for scrutiny assessment u/s 143(2).
3. That as per the facts averred by the assessee before the lower authorities which are available on record, the assessee company was P a g e | 3 & L & T Finance Ltd. Vs. DCIT incorporated in May, 2000 with the main object of providing web based financial services. It commenced its operation by way of a joint venture with Blue Stone Capital Partners, USA. The assessee had in the backdrop of the very nature of its business of providing web based financial services had therein employed qualified and experienced staff which had specialized skills and domain knowledge of wide spectrum of financial services. That during the year 2001-02 the assessee company had launched a full fledged financial services portal for securities transactions which evoked good response from the market. The growth in the business of the assessee in itself could be appreciated from the very fact that its revenues had increased from Rs. 6.75 lacs in the year of incorporation, viz. 2000-01 to an amount of Rs. 40.49 lac in the year 2001-02. The services rendered by the assessee were acknowledged by reputed organizations such as UTI Securities Exchange Ltd., BNP Paridas, ABN Amro Bank etc. who were in the business of financial services/capital market intermediaries. The assessee company was approached by reputed organizations, viz. UTI Securities Exchange Ltd, BNP Paridas, ABN Amro Bank, UBS Warburg and City Bank with proposals for specialized software for financial services. That as the aforesaid proposals involved heavy amounts, therefore, series of discussions and negotiations were held by the assessee with the said prospective customers. The aforesaid business leads were of vital importance for the business of the assessee. That while for the negotiations of the assessee company with the aforementioned reputed organizations had reached an advanced stage, luck however did not favour the assessee and it received a set back when its technical partner, viz. Blue Stone Capital Partners filed for bankruptcy in a court in USA. That in the backdrop of the aforesaid development it became difficult for the assessee to handle P a g e | 4 & L & T Finance Ltd. Vs. DCIT the large customer base all on its own. Thus, the assessee being of the considered view that the requirements of the aforesaid customers could be handled by its sister concern, viz. L&T Infotech Ltd., which alike the assessee was also a wholly owned subsidiary company of Larsen & Turbo Ltd., and was engaged in software development with necessary technical expertise and infrastructure, therefore, initiated dialogue with the latter concern for the passing of the said business leads to it. That it was finally agreed that all the negotiations would be concluded by L&T Infotech Ltd. and as such contracts if awarded would be signed by, given to and executed by L&T Infotech Ltd. That pursuant to the aforesaid arrangement the contracts which otherwise would have been awarded to and executed by the assessee company were ultimately awarded to L&T Infotech Ltd. That on the transfer of the aforesaid potential customers, L&T Infotech Ltd. benefitted to a very large extent not only in terms of its existing business, but also in terms of potential business in future. That the consideration for parting with the opportunity to execute the contracts and major source of income, as well as considering the order value and generation of future revenues, was determined at Rs. 9,80,50,000/-, which was paid by L & T Infotech Ltd. to the assessee.
4. That during the course of the assessment proceedings the A.O called upon the assessee to show cause as to why the consideration of Rs. 9,80,50,000/- (supra) received by it from L&T Infotech Ltd. may not be treated as a consideration received on slump sales. The assessee submitted before the A.O that as unlike in a case of slump sale which would involve transfer of one or more undertaking, the assessee had only transferred some of its customers and business leads to L&T Infotech Ltd., and as such had not transferred any undertaking as defined u/s 2(42C) of the „Act‟. The assessee taking P a g e | 5 & L & T Finance Ltd. Vs. DCIT support of the definition of the term “Slump sale” as contemplated in Sec. 2(42C) of the „Act, along with the definition of the term “Undertaking” as defined in Explanation 1 of Sec. 2(19AA) of the „Act‟, therein submitted before the A.O that there was no justification for treating the transfer of the customers and the business leads as a slump sale in the hands of the assessee. The A.O however not finding favour with the submissions of the assessee, therein being of the view that as the main technical partner of the assessee, viz. Blue Stone Capital Partner had filed for bankruptcy in a court in the USA, therefore, it could safely be concluded that the assessee thereafter had no technical competency to carry out the business activity in terms of converting the business leads into contracts and earning income there from. The A.O being of the view that now when it was a conceded factual position that pursuant to the dialogue initiated by the assessee with L&T Infotech Ltd., all the business leads of the assessee were passed on to the latter, pursuant whereto all the contracts which otherwise would have been awarded to and executed by the assessee were awarded to L&T Infotech Ltd. The A.O thus observed that from the submissions of the assessee it could safely be gathered that it had not only transferred its potential customers in terms of its existing business, but also in terms of potential business in future. That as per the A.O the entire business activity of software development taken as a whole was transferred by the assessee to L&T Infotech Ltd., in consideration whereof the assessee had received an amount of Rs. 9,80,50,000/-. The A.O in the backdrop of his aforesaid observation thus concluded that as the entire business activity taken as a whole and comprising of business leads which were developed and the future revenue streams that would flow therefrom were transferred to L&T Infotech Ltd., would thus squarely bring the aforesaid transaction P a g e | 6 & L & T Finance Ltd. Vs. DCIT within the sweep of Sec. 50B r.w. Sec. 2(42C) and Explanation 1 of Sec. 2(19AA) of the „Act‟. The A.O on the basis of his aforesaid deliberations characterized the aforesaid transaction as a “Slump sale”, and reduced the amount of Rs. 9,80,50,000/- (supra) from the business income of the assessee and brought the same to tax in terms of the provisions of Sec. 50B of the „Act‟. The A.O after treating the amount of Rs. 9,80,50,000/- (supra) as an amount received on “Slump sale”, therefore, disallowed the amount of Rs. 22,11,152/- paid by the assessee towards interest and finance charges on Intercompany deposits held by it, and claimed by the assessee as revenue expenditure, by concluding that the same were relatable to the slump sale transaction.
5. The assessee being aggrieved with the order of the A.O therein carried the matter in appeal before the CIT(A). It was submitted by the assessee before the CIT(A) that as there was transfer of only one asset, namely business leads without any other assets and liabilities based on its present value of future cash flows, therefore, the same had wrongly been characterized as a “Slump sale” by the A.O and as such brought to tax as per the provisions of Sec. 50B. It was submitted by the assessee that as per Sec. 2(42C) slump sale was defined as 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. It was thus submitted by the assessee before the CIT(A) that the subject matter in the case of a slump sale was an undertaking, which as per Explanation 1 of Sec. 2(19AA) included any part of an undertaking, or a unit or division of an undertaking or a business or a business activity taken as a whole, but did not include individual assets or liabilities or any combinations thereof not constituting a business activity. The assessee in the P a g e | 7 & L & T Finance Ltd. Vs. DCIT backdrop of his aforesaid contentions therein submitted that as in its case only business leads were transferred, and the assessee had received itemised consideration only in respect of one asset, viz. business leads, as well as value was assigned only in context of the said individual assets, therefore, the provisions of Sec. 50B were clearly ousted. It was further submitted by the assessee that it was also as a matter of fact borne from the record that the assessee had not transferred any liabilities to the acquirer of the aforesaid asset. Thus, on the basis of the aforesaid contentions it was submitted by the assessee that as it stood clearly revealed that as the assessee had not transferred any undertaking/unit as a whole, therefore, none of the basic criteria for attracting the provisions of Sec. 50B for characterizing the aforesaid transaction as a “Slump sale” stood attracted. It was further submitted by the assessee that as the right to continue the business was neither lost permanently in part or in full, therefore, the amount of Rs. 9,80,50,000/- had rightly been held by the assessee as a “Business income” and not a “Capital receipt”. It was further averred by the assessee that sale of business leads is not assets which could be converted into cash or cash could be generated out of it readily, therefore, the transfer of the business leads by the assessee for a consideration of Rs. 9,80,50,000/- (supra) had rightly been characterized by the assessee as “Business receipts”.
6. The CIT(A) after deliberating on the facts of the case was however not persuaded to be in agreement with the contentions of the assessee. The CIT(A) after perusing the contentions of the assessee raised before him in the backdrop of the facts of the case, therein upheld the treating of the amount of Rs. 9,80,50,000/- (supra) received by the assessee as consideration received in lieu of “Slump sale” under Sec. 50B. The CIT(A) further upheld the disallowance of P a g e | 8 & L & T Finance Ltd. Vs. DCIT the revenue expenditure in the nature of interest cost of Rs. 22,11,622/-which was paid by the assessee on the intercompany deposits which were held by the assessee.
7. The assessee being aggrieved with the order of the CIT(A) upholding the treating of amount of Rs. 9,80,50,000/- (supra) as consideration received in lieu of slump sale, as well as disallowance of the interest cost expenditure of Rs. 22,11,622/- as claimed by it, had therein carried the matter in appeal before us. That at the very outset of the hearing of the appeal it was submitted by the Learned Authorized Representative (for short „A.R.‟) for the assessee that as the latter had not sold its business as a going concern, therefore, the provisions of Sec. 50B were not attracted. The Ld. A.R. in order to fortify her aforesaid contention drew our attention to Schedule-3, i.e. „Fixed assets‟ Schedule (Page 50) of „Paper book‟ (for short „APB‟) forming part of the balance sheet of the assessee on 31.03.2003, which therein revealed that the „Block of assets‟ (Computer) held by the assessee as on 01.04.2002 at a W.D.V. of Rs. 60,58,927/-, after claim of deprecation stood reflected at a net W.D.V. of Rs. 45,33,228/- . The Ld. A.R. further took us through a chart placed at Page 22 of „APB‟, which reflected the projected discounted expected revenue of the assessee for the next five years. It was vehemently submitted by the Ld. A.R. that as on the end of the year under consideration, after the aforesaid transaction stood concluded, the assessee was left with certain assets, therefore, it could safely be concluded that the transaction under consideration could not be characterized as a slump sale and had rightly been claimed by the assessee as a „Business profit‟ for the year under consideration. The Ld. A.R. in order to drive home her aforesaid contention, therein submitted that even the liabilities of the assessee remained with the assessee and P a g e | 9 & L & T Finance Ltd. Vs. DCIT were not transferred pursuant to the aforesaid transaction of transfer of business leads. Per contra, it was submitted by the Ld. Departmental Representative (for short „D.R.‟) that as the assessee had transferred its unit, therefore, the amount of Rs. 9,80,50,000/-(supra) had rightly been brought to tax by holding the same as a slump sale under Sec. 50B. It was further averred by the Ld. D.R. that even if the assessee had not transferred a going concern, the provisions of Sec. 50B would be attracted. The Ld. D.R. took us through the observations recorded by the CIT(A) at Para 5.2 of his order and therein submitted that even if some of the assets were retained by the assessee, the applicability of the provisions of Sec. 50B would not be ousted. The Ld. D.R. further relied on the judgment of the Hon’ble High Court of Punjab & Haryana in the case of CIT Vs. Max India Ltd. (2009) 319 ITR 68 (P&H).
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We have given a thoughtful consideration to the facts of the case and are of the considered view that “Slump sale” as defined in Sec. 2(42C) 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. We further find that the term „Undertaking‟ has been defined in the Explanation 1 of Sec. 2(19AA), which therein encompasses within its gamut any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include assets and liabilities or any combination thereon not constituting a business activity. We shall in the backdrop of the aforesaid statutory provisions now adjudicate as to whether the amount of Rs. 9,80,50,000/- (supra) received by the assessee in lieu P a g e | 10 & L & T Finance Ltd. Vs. DCIT of transfer of the business leads to L & T Infotech Ltd. could be categorized as an amount received in lieu of a slump sale transaction, which thus could be brought within the sweep of Sec. 50B. We are of the considered view that as contemplated u/s 2(42C) a slump sale presupposes the transfer of one or more undertakings for a lump sum consideration without values being assigned to the individual assets and liabilities. We further find that the term „Undertaking‟ as defined in Explanation 1 of Sec. 2(19AA) includes any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. We have deliberated on the facts of the present case and are of a firm conviction that as per the facts available on record, the assessee in the backdrop of the fact that its business partner, viz. Blue Stone Capital Partners, USA had filed for bankruptcy in USA court, thus remained in no position to handle the large customer base all on its own. That it was in the backdrop of the aforesaid facts that the assessee keeping in view the requirements of the prospective customer base that it had generated, therein transferred the said business leads to L & T Infotech Ltd. which was already engaged in software development and had the necessary technical expertise and infrastructure, and in lieu thereof was in receipt of an amount of Rs. 9,80,50,000/- (supra). We are of the considered view that the aforesaid transaction of transfer of business leads can neither be characterized as a transfer of an undertaking or any part of a unit or division of an undertaking or a business activity by the assessee. We are of the considered view that a very important aspect which had been lost sight of by both of the lower authorities while characterizing the receipt of the amount of Rs. 9,80,50,000/- (supra) as a slump sale transaction, was that the said P a g e | 11 & L & T Finance Ltd. Vs. DCIT authorities had failed to appreciate the genesis of the transaction under consideration. We find that it remained as a matter of fact that the assessee along with its counterpart, viz. Blue Stone Capital Partners, USA had embarked on the business of providing web based financial services w.e.f. May, 2000 in joint venture. The assessee undoubtedly as stands gathered from the records had concededly within a short span made its name in the trade line, as a result whereof it had a good prospective customer base who were in negotiations with the assessee. That pursuant to approaching by Blue Stone Capital Partners for bankruptcy in USA, it became difficult for the assessee to handle the large customer base all on its own. We are of the view that the unexpected withdrawal of Blue Stone Capital Partners (supra) from the joint venture business had left the assessee crippled in its business, as a result whereof, as observed by the A.O, the assessee was unable to carry on the business all on its own. Rather, it can safely be concluded that the aforesaid event had led to the collapse of the aforesaid business. We are of the view that as stands gathered from the records, it can safely be concluded that after the withdrawal of Blue Stone Capital Partners (supra) the business of the assessee had ceased and it was only left with the aforementioned business leads. We find that the facts of the case revealed that the assessee had received an amount of Rs. 9,80,50,000/- (supra) in lieu of transfer of its business leads to L & T Infotech Ltd., which would in no way be held to constitute a „Business activity‟ in itself. We are of the considered view that the facts that the aforesaid amount of Rs. 9,80,50,000/- (supra) was received by the assessee only for transfer of an individual asset, viz. its business leads can safely be gathered beyond doubt from the very fact that the other assets, viz. Computers (forming part of the block of assets) remained as such with the P a g e | 12 ITA No. 2577/Mum/2010 & ITA No. 5286/Mum/2012 L & T Finance Ltd. Vs. DCIT assessee. Similarly, we find that the business liabilities of the assessee, viz. Sundry Creditors of Rs. 1,03,68,351/- (Page 51 of „APB‟) also remained with the assessee on 31.03.2003. We further find that the assessee had in the notes forming part of its accounts as on 31.03.2003, had in terms of Accounting Standard 18 (AS-18) in its „Related party disclosures‟ therein categorically disclosed that the aforesaid amount of Rs. 9,80,50,000/- (supra) was received by it in lieu of transfer of its business rights to L& T Infotech Ltd. (Page 55 of „APB‟). We have deliberated on the facts of the case and after giving a thoughtful consideration to the same, are of the considered view that as the assessee had neither transferred an undertaking or any part of an undertaking, or a unit or division of undertaking or a business activity taken as a whole, but what have been transferred is an individual asset, viz. business leads, which does not constitute a business activity on its own, therefore, are unable to persuade ourselves to subscribe to the view of the lower authorities which had held that the amount of Rs. 9,80,50,000/- (supra) received by the assessee was liable to be characterized as a consideration received by the assessee pursuant to a slump sale as per the provisions of Sec. 50B of the „Act‟. That our aforesaid view finds substantial force from the very fact that now when the implicit withdrawal from the business of Blue Stone Capital Partners, USA, which was prompted by the aforesaid compelling circumstances, the very business of the assessee which was in itself based on the aforesaid joint venture arrangement had collapsed, therefore, it would be beyond comprehension to conclude that the assessee would be in a position to have transferred a business activity. We are of the considered view that neither the facts of the case as can be gathered from the record inspire any confidence that the amount of Rs. 9,80,50,000/- (supra) could be held P a g e | 13 & L & T Finance Ltd. Vs. DCIT as an amount received in lieu of a slump sale transaction, nor any such material had been placed on our record by the Ld. D.R. to fortify his aforesaid contention. That before parting we may herein observe that we have perused the judgment of the Hon‟ble High Court of Punjab & Haryana in the case of Max India Ltd. (supra) as had been relied upon by the Ld. D.R., and are of the considered view that as observed by us hereinabove, as the assessee had not transferred any undertaking or any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, therefore, the facts involved in the case before the Hon‟ble High Court are distinguishable as against the facts involved in the case of the present assessee. Thus, the reliance placed by the Ld. D.R. on the aforesaid judicial pronouncement would not be of any assistance in the backdrop of the facts of the present case before us. We thus in the backdrop of our aforesaid observations set aside the order of the CIT(A) and therein conclude that the amount of Rs. 9,80,50,000/- (supra) had rightly been reflected by the assessee as a business income. The Ground of appeal No. 1 is allowed.
That in the backdrop of our aforesaid observations, now when we have held that the amount of Rs. 9,80,50,000/- (supra) was liable to be brought to tax under the head business income, therefore, the disallowance by the A.O of the interest cost of Rs. 22,11,622/- on the intercompany deposits held by the assessee, for the reason that the same were attributable to the earning of income from transfer of business leads, which had been held to be liable to be assessed as “Slump sale”, thus, cannot be sustained. We therefore set aside the disallowance of the aforesaid expenditure of Rs. 22,11,622/-, which we find is allowable as an expenditure. The Ground of appeal No. 2 is allowed P a g e | 14 & L & T Finance Ltd. Vs. DCIT
The appeal of the assessee is allowed.
We shall now take up the appeal of the assessee wherein the latter had assailed the order of the CIT(A) upholding the penalty imposed under Sec. 271(1)(c). The assessee had raised before us the following grounds of appeal :-
1. On the facts and circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in upholding the penalty u/s 271(1)(c) of the Act disregarding the appellant‟s submissions.
The appellant company craves leave to add to, alter or modify any of the above grounds of appeal
12. That as observed by us hereinabove, the A.O assessed the amount of Rs. 9,80,50,000/- as amount received by the assessee in lieu of “Slump sale”, brought the same to tax as the latters income under the head „Capital Gains‟, as against that reflected as „Business income‟ by the assessee. The A.O thereafter initiated penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961, and vide his order dated 29.03.2011, being of the view that the assessee had concealed and furnished inaccurate particulars of income, therein imposed a penalty of Rs. 3,43,00,000/- in the hands of the assessee. The assessee assailed the order of the A.O imposing penalty u/s 271(1)(c) before the CIT(A), who vide his order dated 08.06.2012 dismissed the appeal. The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us.
The Ld. A.R. taking us through the facts of the case therein submitted that no penalty u/s 271(1)(c) was liable to be imposed in the hands of the assessee. The Ld. A.R. in support of her aforesaid P a g e | 15 & L & T Finance Ltd. Vs. DCIT contention relied on the judgment of the Hon’ble High Court of Bombay in the case of CIT-I, Mumbai Vs. Bennett Coleman & Co. Ltd. (Income Tax Appeal (LOD) No. 2117 of 2012;dt 26.02.2013). Per contra, the Ld. D.R relied on the orders of the lower authorities.
We have heard the Learned Authorized Representatives, perused the orders of the lower authorities and the material available on record. That as we have set aside the order of the CIT(A) while disposing the quantum appeal of the assessee, marked as for A.Y. 2003-04, and therein concluded that the amount of Rs. 9,80,50,000/- was not liable to be assessed as amount received by the assessee in lieu of a slump sale transaction and had rightly been brought to tax by the assessee as its business income, as well as had set aside the disallowance of the interest and finance charges of Rs. 22,11,152/- paid by the assessee on ICD‟s, therefore, the penalty imposed by the A.O u/s 271(1)(c) on the aforesaid issues, which thereafter had been sustained by the CIT(A) cannot be upheld and is therefore quashed.
The appeal of the assessee is allowed.
That both the appeals of assessee, viz. and are allowed.