M/S. THE SUPREME INDUSTRIES LTD,MUMBAI vs. THE ACIT CEN CIR-29, MUMBAI

2. First grievance of the assessee relates to taxing of capital gains amounting to Rs.10,30,06,590/- u/s.50B r.w.s.2(42C) arising on the transfer of the BOPP films undertaking to Xpro India Ltd. (XIL).

Rival contentions have been heard and record perused. This ground relates to taxation of capital gains amounting to Rs.10,30,06,590/- u/s.50B read with section 2(42C) of the I.T. Act. The facts in brief relating to this addition are that during the previous relevant to the assessment year under appeal, the assessee entered into a Business Transfer Agreement (BTA) with Xpro India Ltd (XIL) for sale of its BOPP Films undertaking at Pithampur, Madhya Pradesh as a going-concern for a total 2 lump-sum consideration of Rs.14 crores. In the return of income, the assessee offered a sum of Rs.10,30,06,590/- as short term capital gains in respect of the said transfer in accordance with the provisions of section 50B of the IT. Act. However, subsequently, the assessee filed a revised return withdrawing the aforesaid income by way of short term capital gains on the ground that the impugned transfer of the BOPP Films undertaking was not in the nature of slump sales within the meaning contained in section 2(42C) of the Act and therefore, capital gains u/s. 50B would not be leviable. It was contended before the AO that the impugned sale can be treated as slump sales only if no value is ascribed to any individual asset/liability. It was argued in course of assessment that as per the BTA, the current assets and liabilities were to be taken over by XIL at a mutually agreed amount for which value of individual assets was to be determined at the time of conveyance. The AR of the assessee referred to Article 2.3, 4.3 and 5.26 of the BTA in support of this contention that the net current asset were to be valued individually and payment for the same was to be made over and above the lump-sum consideration. The AR submitted before the AO the details of individual items of assets and liabilities which were taken over by the XIL at mutually agreed price and it was accordingly argued that since individual values had been assigned to assets and liabilities, the BTA agreement for sale of the BOPP undertaking should not be treated as slump sale and accordingly, no capital gains will arise in respect of such transaction.

The AO however, after a detailed examination of the.BTA rejected the submission on the ground that the BTA clearly provided for sale of the entire undertaking as a going concern for a lump-sum consideration of Rs.14 crores. The AO has referred to Articles B to D of the BTA which has been reproduced in para 3.2 of the assessment order. As regards the submission of the assessee that individual values has been ascribed to net current asset, the AO has reproduced the individual items of assets/liabilities in para 3.6 and has held that most of the items have been taken over by the buyer at the book value with minor and negligible difference. The A.O. has also referred to the fact that in the list of current assets/liabilities, the assessee had also included loans and advances which were mostly in the nature of deposits with electricity board, local authority, as assets to which fresh value had been ascribed. It has been held by the AO that these deposits were in the nature of money advances and therefore, there was no question of assigning any value to them. The AO has further held that net current assets by nature are such that its value change from day to day and therefore, its exact value on the date of actual transfer can not be determined at the time of entering into contract which is usually much earlier than the date of conveyance (actual transfer). It has been observed by the AO that it is for this reason that all such agreements for sale of a going concern, including the impugned BT A, provides for valuation of current assets just before conveyance. The AO has accordingly held that such assignment of individual value to net current asset is only for the purpose of ascertaining the change in the 4 value of such assets in the intervening period i.e. the date of agreement and the date of conveyance. Such provision, according to the AO will not change the over all nature of the transaction which clearly fell within the definition of slump sale. The AO has also referred to the decision of Bombay High Court in the case of Premier Automobile Ltd. vs. ITO 264 ITR 193 (Bom) wherein the jurisdictional high court after considering a number of decisions on the issue of slump sale, has laid down certain tests for determining whether a transaction would be a slump sale or otherwise. The AO has examined the impugned sale on the basis of tests laid down by the Bombay High Court and has came to the conclusion that the impugned sale of the BOPP. undertaking was a slump sale. The AO has further referred to the decision of the ITAT, Hyderabad Bench in the case of Coromandel Fertilisers Ltd. 90 ITD 344 (Hyd) in which an identical issue came up for consideration of the ITAT wherein the value of the current assets were ascribed after the date of agreement and on that ground itself, it was claimed by the department that it was not a slump sale. The ITAT has clearly held that special procedures stipulated in the agreement for valuation of certain items do not detract from the concept of slump sale. It has further been observed by the ITAT that there is an intervening period between the sale agreement and the date of transfer. During this period, the value of items of current assets may fluctuate widely and it is to guard against such fluctuations that the agreement stipulated special procedures for valuation of such items just before the date of conveyance. Such valuation, it was held by the ITAT would not 5 detract from the fact that it was a slump sale of the unit as a whole and as a going concern. On the basis of these arguments as well as judicial pronouncement discussed above, the AO rejected the contention of the appellant that the sale of the BOPP undertaking was not a slump sale and accordingly, taxed the short term capital gains arising on the transfer 'of the said undertaking amounting to Rs.10,30,06,590/- u/s.50B of the I.T.Act.

By the impugned order the CIT(A) confirmed the action of AO after observing as under :- “I have considered the submission of the ARs and the facts on record. I have also carefully perused the decisions relied upon by the ARs. The decisions of the Supreme Court in the case of CIT vs. Artex Manufacturing Co. 227 ITR 260 (SC) and CIT vs. Electric Control Gear Manufacturing Co. 227 ITR 278(SC) does not help the case of the appellant as these decisions were given prior to the introduction of section 50B in the IT. Act and were with reference to section 41(2) of the IT. Act. As regards the decisions in the case of Karnbli Co-operative Sugar Factory Ltd. vs. JCIT 83 ITD 460 (Bangalore), it is found that the facts of that case are not at all comparable to the facts of the present case. In the case of Karnbli Co-operative Sugar Factory Ltd. vs. JCIT 83 ITD 460 the assessee was running a sugar mill which came under liquidation, and the liquidator called for tender for sale of assets of the assessee. As per agreement between the liquidator and the purchaser, only machineries, details of which were entered in the agreement were sold whereas all liabilities were the responsibility of the liquidator. It was further found that as per agreement for sale in that case, while the liquidator agreed to transfer the entire assets of the factory, the deposits made by the assessee with banks, local authority, electricity board and domestic gas authorities and investment in the shares of the BDCC bank were retained by the erstwhile factory. It was in this background that the Hon'ble Tribunal held that the agreement for sale was not for the factory as a going concern and was therefore, not a slump sale. It is also pertinent to note that this decision was also related to a period prior to introduction of section 50B on the statute. I am therefore, of the opinion that the case laws relied upon by the AR does not in any way help the case of the appellant. There is no dispute that the BOPP undertaking has been sold for a lumpsum amount of Rs. 14 crores alongwith all its assets and liabilities including outstanding contracts, licenses, intellectual.properties rights etc. The services of all the employees 6 of erstwhile BOPP undertaking have also been transferred to the buyer. The AO has rightly applied the ratio of the decision of the Bombay High Court in the case of Premier Automobiles Pvt. Ltd. vs. ITO 264 ITR 193 to the facts of the case for determining whether the impugned sale is slum sale or not. As discussed in para 3.8 of the assessment order, the facts of the present case fully satisfies the tests laid down by the jurisdictional high court for determining whether a transaction is a slum sale or not. As regards the objection of the appellant that the transfer of BOPP undertaking is not a slump sale as value of individual net current assets have been ascribed, I fully agree with the AO that issue is squarely covered by the decision of the ITAT, Hyderabad Bench in the case of Coromondal Fertilizer Pvt. Ltd. 90 ITD 344 (80AD(Hy). In that case also, value had been ascribed to net current assets and after considering this aspect of the transaction, the Hon'ble ITAT, Hyderabad Bench observed that when tangible asset situated at farflung areas are involved, , it would be nitpicking to say, on the basis of the valuation of few ancillary items, that the sale is not a slump sale. The Hon'ble ITAT Bench observed that what was to be examined was whether the cement unit as a functional unit had been transferred for a lumpsum price. The IT AT held that it was so transferred, and was therefore, a slump sale. There is no contrary decision on the issue. Therefore, following the decision of the IT AT, Hyderabad Bench mentioned above, there is no dispute that the impugned transfer of the BOPP undertaking shall not cease to be a slump sale just because value has been ascribed to a few items of current assets for the purpose of transfer. On the facts and in the circumstances, I am of the considered opinion that the impugned transfer was clearly a slum sale and therefore, capital gains was chargeable u/s.50B of the IT Act. The action of the AO is, therefore, upheld and the appeal on this issue is dismissed.”

Ld. AR relied on the order of Hon’ble Bombay High Court in the case of Bharat Bijlee Limited, 365 ITR 258, PNB Finance Limited, 307 ITR 75. It was contended by ld. AR that transaction cannot be considered as a slump sale within the meaning of Section 2(42C) of the Act.

On the other hand, ld. DR relied on the order of lower authorities.

We have considered rival contentions and deliberated on judicial pronouncements referred by lower authorities in their respective orders as well as judgments relied on by ld. AR and DR during the course of hearing 7 before us. From the record we found that during the year under consideration assessee had entered into a Business Transfer Agreement (BTA) with Expro India Ltd.(XIL) for sale of BOPP Films undertaking at Pithampur, Madhya Pradesh at a lump sum consideration of Rs.14 crores. The AO treated the capital gains so earned as short term capital gains liable to tax u/s.50B r.w.s.2(42C) of the I.T. Act. We had gone through the terms of BTA, which clearly provides that sale of undertaking as a going concern for a lump sum consideration of Rs.14 crores. With regard to the contention of ld. AR that individual values has been ascribed to net current asset, we found that the AO has reproduced the individual items of assets/liabilities in para 3.6 and has held that most of the items have been taken over by the buyer at the book value with minor and negligible difference. Further the net current assets by nature are such that its value change from day-to-day, and, therefore, its exact value on the date of actual transfer cannot be determined at the time of entering into contract, which is usually much earlier than the date of conveyance. We found that even assignment of individual value to net current asset was only for the purpose of ascertaining the change in the value of such assets in the intervening period i.e. the date of agreement and the date of conveyance. The CIT(A) has also analysed the terms of BTA agreement and after applying the verdict of Hon’ble Supreme Court in the case of Artex Manufacturing Co. 227 ITR 260 and Electric Control Gear Manufacturing Co., 227 ITR 278, reached to the conclusion that these cases were pertaining to the period prior to introduction of Section 50B in the Income 8 Tax Act and were with reference to section 41(2) of the Act. The decision relied on by the ld. AR in the case of Bharat Bijlee Limited (supra) is distinguishable on facts, insofar as assessee has transferred its one of its division of undertaking under scheme of arrangement without any monetary consideration. Transfer was in exchange for issue of preference share and bonus. The Hon’ble High Court held that it was an exchange and not a sale. Thus, this decision is of no help to the assessee. Similarly, the decision of Hon’ble Supreme Court in the case of PNB Finance Limited (supra), the case was related to assessment year 1970-1971, wherein provisions of Section 50C was not on the statute book, therefore of no help to the assessee. On the other hand, decision relied on by lower authorities are supporting their conclusions. Detailed analysis of the facts of the case was made with reference to the various judicial pronouncements as narrated at page 3 & 4 of the appellate order. The conclusion drawn by the AO and CIT(A) are as per material on record, therefore, did not require any interference on our part. Accordingly, we uphold the addition made by the AO u/s.50B on account of gain arising from transfer of BOPP Films Undertaking.

We have considered rival contentions and found that similar issue was dealt with by the Tribunal in assessee’s own case in the assessment year 1998-99, wherein, the Tribunal in ITA Nos.866 & 905/M/2005 vide its order dated 19.2.2008 made the following observations and restored the matter to the file of the Assessing Officer with the directions as contained at paras 7 to 9 of the order. The same is reproduced hereunder:- "7. We heard the parties and considered their rival submissions. Clause (baa) of Explanation to section 80HHC defines "profits of the business" as profits of the business as computed under the head "Profits and gains of business or profession" as reduced by 90% of any sum referred to in section 28 (ilia), (iiiib) and (iiic) or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits. First limb requires profits of the export business to be computed in terms of the provisions of sections 28 to 43 of the Income Tax Act, 1961. 'Second limb requires that 90% of independent incomes or non-operational business income referred to in Explanation (baa)(J) be excluded from the profits of the business. The distinction between the two limbs is quite clear in that the first limb covers only operational business income, which comes out of export turnover while the second limb refers to non- operational business income, which is in the nature of independent income having 170 element of export turnover. Explanation (baa) also makes it quite clear that any income which is not assessable under section 28 or which does not arise out of export business cannot be taken into account for working out the profits of the business for availing the relief under section 80HHC The view that we are taking in the matter is supported by the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Bangalore Clothing Co., reported in 260 ITR 371 (Born). 8. Next issue that comes for adjudication is as to whether 90% of net receipts falling tinder clause (baa(I) should be excluded or 90% of gross receipts should be excluded. In this connection also the judgment of the Hon'ble Bombay High Court in the case of Bangalore Clothing Co. (supra) is relevant. In the case of Bangalore Clothing Co. supra, it has been held that as some expenditure might be incurred in earning the incomes referred to in clause (baa)(I), an adhoc 10% deduction from such incomes has been provided for, to account for those expenses. The Hon'ble Supreme Court also taken the view that profit incentives and items like rent, commission, brokerage, charges, etc. though forms part of gross total income, has to be excluded, as they are "independent incomes" which has 170 element of export turnover. It has been further held that 90% of the said slim has to be reduced from the 10 gross total income to arrive at the business profits. In the case of Hero Exports (supra) it has been held that clause (baa) of the Explanation itself postulates that 10% of the income referred to in clause (baa)(I) would be the expenditures and therefore it is only 90% of such income which has to be excluded from the profits of the business. These authorities clearly indicate that the Legislature itself has fixed a ceiling of 10% to cover the expenses in earning the incomes referred to in clause (baa)(J) of Explanation to section 80HHC.

In view of the aforesaid, the Assessing Officer is directed to re- examine all the issues raised in Ground No.2a), b) and c) and adjudicate upon the same in the light of the following principles: (1) Net income, which is 110t assessable under section 28 of the Income Tax Act, will not be eligible for inclusion ill the profits of the business for computing the relief under section 80HHe. Therefore, items like dividend income, profit on sale of investments, etc., which are not assessable under section 28, will have to be excluded while computing the profits of the business for computing the relief under section 80HHC. (2) Any receipt, which has no element of export turnover, should be treated as independent income ill terms of the judgment of the Hon'ble Supreme Court in the case of Hero Exports (supra) and therefore 90% thereof should be excluded from the profits of the business. (3) The issue as to whether 90% if gross receipts or 90% of net receipts with reference to incomes falling under Explanation (baa)(1) should be considered. (4) Sales tax and excise duty would not form part of the total turnover in terms of the judgment of the Hon 'ble Supreme Court in the case of CIT vs. Lakshmi Machine Works, reported in 290 ITR 667 (SC). Assessing Officer shall give reasonable opportunity of hearing to the assessee before deciding upon the issues raised ill Ground No.

Hence. the appeal by the assessee on this ground is allowed for statistical purposes. " Respectfully following the same, we restore the matter to the file of the Assessing Officer to reexamine the issue in the light of the direction given by the Tribunal as reproduced above in A. Y. 1998- 99. Ground No.2 is allowed for statistical purposes.” In view of the above, respectfully following the decision of the coordinate bench, matter is restored back to the file of AO for deciding afresh as per the direction given by the Tribunal in assessee’s own case. We direct accordingly.

Ground No.3 with regard to deduction in respect of corporate dividend tax was not pressed by ld. AR, same is, therefore, dismissed in limine.

In the result, appeal of the assessee is allowed in part, in terms indicated hereinabove. Order pronounced in the open court on this 29/04/2016.