M/S.Laxmi Starch Ltd, Cochin vs Department Of Income Tax

M/s. Laxmi Starch Ltd., Vs. The Assistant Commissioner of Rep. by Official Liquidator (High Income-tax,Circle-1(2), Kochi Court of Kerala), Company Law Bhavan, Thrikkakara, Kochi-682 021. [PAN: AAACL 3923E] (Assessee-Appellant) (Revenue-Respondent)

I.T.A. No.218 /Coch/2014 Assessment Year : 2005-06

The Assistant Commissioner of Vs. M/s. Laxmi Starch Ltd., Income-tax,Circle-1(2), Kochi Rep. by Official Liquidator (High Court of Kerala), Company Law Bhavan, Thrikkakara, Kochi-682 021.

(Revenue-Appellant) (Assessee-Respondent)

Revenue by Shri K.K. John, Sr. DR Assessee by Shri Vasudev Rajkumar N., CA

Date of hearing 11/12/2014 Date of pronouncement 06/03/2015

ORDER

Per CHANDRA POOJARI, Accountant Member:

These appeals filed by the assessee and the Revenue are directed against

the different orders passed by the CIT(A)-II, Kochi, for the assessment years

2004-05 and 2005-06 .

2 I.T.A. Nos.195&218/Coch/2014

2. The assessee is in appeal before us for assessment year 2004-05 with

regard to treating of the sale of properties at Kundara unit and Hyderabad unit as

slump sale as defined u/s. 2(42C) of the I.T. Act, though they were sold in

different lots and not on lumpsum basis. The Revenue is in appeal before us for

assessment year 2005-06 with regard to deletion of the addition made by the

Assessing officer in respect of sale of property at Kundara unit and Hyderabad unit

as slump sale as defined u/s. 2(42C) of the I.T. Act.

3. Since the issue is common in both the appeals, we shall consider the facts

as narrated by the CIT(A) in the assessee appeal in I.T.A. No. 195/Coch/2014 for

the assessment year 2004-05. The assessee is a defunct company and is in

liquidation. The company was represented by the Official Liquidator, High Court of

Kerala. The assessment u/s. 143(3) r.w.s.147 was completed on 27/12/2006.

The CIT set aside the order and directed the Assessing officer to redo the

assessment as per law bringing to tax the capital gain. As per the direction of the

CIT, Kochi, the assessment was completed u/s. 143(3) r.w.s. 263 on 29/12/2008.

The Assessing officer completed the assessment at a total income of

Rs.7,48,63,151/- by adding income from long term capital gain at Rs.7,48,00,321/-

in respect of sale of Kundara unit vide Court order dated 22-07-2003 and that of

Hyderabad unit vide Court order dated 23-05-2005 and the sale consideration

received for the Kundara unit was Rs.3,25,00,321/- and for the Hyderabad unit

was Rs.4,23,00,000/-.

3 I.T.A. Nos.195&218/Coch/2014

3.1 The Assessing officer has made this addition as it was found that the High

Court of Kerala vide its order dated 22/07/2003 and 23/05/2003 has confirmed the

order of sale of these concerns. Accordingly the Assessing officer went into the

details of the sale consideration of these concerns and addition of Rs.7,48,00,321/-

was made by observing that during the financial year relevant to the assessment

year 2004-05 the assets of the assessee company was sold by the Official

Liquidator as per the orders of the High Court of Kerala. The details of the assets

are as under:

i) Landed property extending 24.53 acres situated at Perinad Village in Kundara with all buildings thereon; plant and machineries lying in the Kundara unit of the company.

ii) Landed property known as Colony Land extending about 1 acre 80 cents situated at H.M.T. Junction, Habsiguda in Ranga Reddy District, Hyderabad together with all buildings and furniture therein.

3.2 The sale of the Kundara unit was confirmed by the Court vide order dated

22/07/2003 and that of Hyderabad unit was confirmed by the Court vide order

dated 23/05/2003, the sale consideration received for the Kundara unit was

Rs.3,25,00,321/- and for the Hyderabad unit was Rs.4,23,00,000/-. The Official

Liquidator vide letter dated 07/11/2007 have furnished the details of book value of

the assets and the liabilities as on date of the sale as under: 4 I.T.A. Nos.195&218/Coch/2014

Value of assets

Kundara Unit Rs.6,58,93.251 Colony Land Rs.3,13,00.000

Liabilities

i) Dena Bank Rs.48,39,57,050

ii) Indian Bank Rs.27,22,65,337

iii)Workmen Rs. 3,66,29,740

3.3 The assessee has furnished the audited balance sheet and profit and loss

account with the Income Tax Department up to the assessment year 1998-99 and

thereafter, the accounts were not furnished with the Department. As per the

audited accounts of the financial year 1997-98 the details of value of assets and

the liabilities are as under:

i) Fixed assets after depreciation as per books 962.31 lakhs (After revaluation it is increased to 1948.85 lakhs)

ii) Investment 0.23 lakhs

iii)Loan liability 2609.25 lakhs

iv)Net of current assets(liability) (511.98 lakhs)

3.4. According to the Assessing officer, as per section 50B(1) any profits or

gains arising from the slump sale effected in the previous year shall be chargeable

to income tax as capital gain 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 and accordingly, he determined the long term capital gain at

Rs.7,48,00,321/-.

5 I.T.A. Nos.195&218/Coch/2014

4. Before the CIT(A), the assessee objected to the way of computing the

income by treating the sale as slump sale and submitted that the sale of properties

at Kundara was made as per sale deed dated 15/03/2005 which cannot be taxed

in the assessment year 2004-05 and the possession was handed over to the

purchaser thereafter. According to the assessee, the execution of written

agreement and handing over the possession have to be cumulatively satisfied in

order to bring the case within the ambit of section 2(47)(v) of the I.T. Act r.w.s.

53A of the Transfer of Property Act. Therefore, it is to be held that the property

has not been transferred during the assessment year 2004-05. Since the

transaction of transfer/sale has not taken place in this assessment year, the

proceeds of the same cannot be brought to tax during this assessment year. The

assessee relied on the following case law:

1).CIT vs. Delhi Apartment P. Ltd. (2013) 352 ITR 322 (Del.)

2) CIT vs. Artex Manufacturing Co. (227 ITR 260) (SC).

3) CIT vs. Accelerated Freeze Drying Company Ltd. (2011) 337 ITR 440) (Ker.)

4) Jayantilal Bhogilal Desai vs. CIT (1981) (130 ITR 655) (Guj.).

5) Wiekfield Products Co. (I) (P) Ltd. vs. Dy.CIT (2001) 71 TTJ (Pune) 518.

6) Suraj Lamps and Industries P. Ltd. vs. State of Haryana & Anr. (2012) 340 ITR1 (SC).

7) Avaya Global Connect Ltd. vs. ACIT (2009) 122 TTJ 300 (Mum. Trib.).

8) Sadanand S. Varde vs. State of Maharashtra (2001) 247 ITR 609 (Bom.).

7) KTC Tyres (India) Ltd. vs. CIT (2003) 180 CTR 57 (Ker.)

5. According to the CIT(A), the word slump sale means the transfer of one or

more undertakings as a result of the sale for a lumpsum consideration without

values being assigned to the individual assets and liabilities in such sales". In this 6 I.T.A. Nos.195&218/Coch/2014

case, the company was ordered to be wound up by the order of the High Court

dated 08-06-1999 and the Official Liquidator was appointed with direction to take

charge of the assets, effects and records of the company. Accordingly, the Official

Liquidator has taken custody of the movable and immovable assets of the

company lying at Kundara unit and Hyderabad unit. During the course of the

winding up of the proceeding, the Official Liquidator disposed of all immovable and

movable assets of the company.

5.1. The CIT(A) observed that for the Kundara unit, vide High Court order dated

22-07-2003, this property was sold by way of tender conducted by Official

Liquidator. Subsequently, the High Court ordered that the whole unit be

transferred to Shri A. Abdul Salam for a consideration of Rs.3,25,00,321/- whose

bid was accompanied by earnest money of Rs. 40 lakhs. For the purchase of

entire assets of this unit, the High Court segregated the assets as under:

Lot No. 1 - Land and buildings Lot No. 2 to 17 - Movable assets Lot No.18 - All the assets described in Lot No. 1 to 17

5.2 The CIT(A) noticed that Shri Abdul Salam was offered the highest price for

Lot No. 18 and this unit was sold with all the assets including land and buildings

and movable assets of the unit as Lot No. 18 and included all the assets included

in Lot No. 1 to 17. Thus, according to the CIT(A), the assessee's contention that 7 I.T.A. Nos.195&218/Coch/2014

the property was sold in different lots was not correct as by way of bid/tender, the

highest bid was given for all the assets and therefore this would constitute slump

sale in the hands of the assessee.

5.3 The CIT(A) observed that the assessee has claimed that although the order

of the Court was dated 22-07-2003 but the sale deed of property was affected on

15-03-2005 and hence, this property should be assessable in the assessment year

2005-06. In this regard, the assessee furnished certificate of the Official

Liquidator which showed that the sale consideration of Rs.3,25,00,321/- was

remitted on different dates as follows:

Date of payment Mode of payment Amount (Rs.)

18/07/2003 By DD 40,00,000 02/09/2003 By DD 50,00,000 29/09/2003 By DD 20,00,000 12/11/2003 By DD 55,00,000 30/08/2004 By DD 1,60,00,321 3,25,00.321

5.4 The CIT(A) noticed from this certificate that various payments had been

made between 18/07/2003 to 30/08/2004 and these payments do not have a

specific bifurcation of land and building of Rs.2 lakhs or of the movable assets for

Rs.15 lakhs, but rather these payments have been made in a way that the whole

Kundara unit has been taken over by Shri A. Abdul Salam for a consideration of

Rs.3,25,00,321/-. Hence, the CIT(A) held that the assessee's claim that this unit 8 I.T.A. Nos.195&218/Coch/2014

was sold in different lots was not correct in view of consolidated payments made

for the whole concern.

5.5 The CIT(A) observed that the assessee's contention that this transaction

should be assessed in the assessment year 2005-06 was also not correct as in this

case the sale of the property was concluded by the order of the High Court dated

08/06/1999 wherein initially the company was ordered to be winded up by order

dated 08/06/1999, thereafter for the sale of Kundara unit, the High Court

confirmed the offer of Rs.3,25,00,321/- vide order dated 22/07/2003. Thus,

according to the CIT(A) even though the sale deed was made on 15th March,

2005, the sale was confirmed by order of the High Court in July, 2003 and the

payments against this offer were made from July, 2003 to August, 2004.

Accordingly, the CIT(A) held that the Assessing officer was right in assessing this

property in the assessment year 2004-05.

5.6. According to the CIT(A), the assessee has also objected to this transaction

being considered as slump sale as the assessee has not transferred the liabilities of

the concern and that only movable and immovable assets were transferred as a

going concern. The CIT(A) relied on the following case law :

1) Premier Automobiles Ltd. vs. ITO & Anr. 264 ITR 193 (Bom)

ii) CIT vs. Max India Ltd. (319 ITR 68) (P&H) 9 I.T.A. Nos.195&218/Coch/2014

5.7 The CIT(A) observed that in Premier Automobiles Ltd. (cited supra), it has

been held that in the case of a sale of an undertaking as a whole, on a going

concern basis, if some assets are retained by the transferor or some liabilities are

not taken over by the transferee this fact does not render the slump sale as not a

slump sale. According to the CIT(A), the word 'slump sale' as defined in sec.

2(42C) means 'transfer of one or more undertakings' as a result of the sale for a

lump sum consideration without values being assigned to any assets and liabilities.

Thus in view of the foregoing case law, the CIT(A) held that even though the

assessee has not sold this concern along with liabilities the same can still be

considered as slump sale and therefore the Assessing officer was correct in

assessing this property in assessment year 2004-05 as a slump sale in the hands

of the assessee. The addition made by the Assessing officer at Rs.3,25,00,321 was

confirmed in the A.Y. 2004-05.

5.8 Regarding the Hyderabad Unit, in this case also, the sale was affected due

to the order passed by the High Court on 23/05/2003 for a confirmed sale

consideration of Rs.4,23,00,000/-.

5.9 According to the CIT(A), in this case, the assessee contended that this

property and structure was sold in different slots and therefore it cannot be

considered as slump sale. However, the CIT(A) found from the sale deed and the

order of the High Court that the High Court ordered and concluded the sale of the 10 I.T.A. Nos.195&218/Coch/2014

property by way of tender conducted by the Official Liquidator on 28/02/2003 and

although there were different lots categorized the total sale consideration was

Rs.4,23,00,000/- for Lot No. 1 in favour of K. Sathyanarayana & Associates.

According to the CIT(A), the various amounts towards sale consideration that have

been paid by the assessee were consolidated sum of Rs.4,23,00,000/- paid as

below:

Date of payment Amount

27.02.2003 Rs. 5,00,000 07.07.2003 Rs.85,00,000 08.08.2003 Rs.18,00,000 16.09.2003 Rs.27,00,000 16.10.2003 Rs.72,00,000 17.11.2003 Rs.36,00,000 18.12.2003 Rs. 45,00,000 19.01.2004 Rs.1,35,00,000 Rs.4,23,00,000

From the dates on which various sale considerations have been deposited with the

Official Liquidator and also in view of the consolidated confirmation order of the

Hon'ble High Court dated 23/05/2003, the CIT(A) held that this transaction would

be assessable in the assessment year 2004-05 as was done by the Assessing

officer.

5.10 Although the assessee contended that since two sale deeds one for

Rs.1,75,50,000/- in the name of Creative Homes Pvt. Ltd and another for

Rs.2,47,50,000/- in favour of M/s. Udaya Homes were signed therefore these are 11 I.T.A. Nos.195&218/Coch/2014

two separate sale considerations and hence cannot be treated as consolidated

slump sale, the CIT(A) found that the order of the High Court for sale of

Hyderabad unit was a consolidated order of the High Court and it was only on the

request of the bidder after depositing the complete sale consideration of Rs. 4.23

crores that he requested the Official Liquidator vide letter dated 19-01-2004 to

register two sale deeds in favour of their nominee which was approved by the

High Court vide order dated 23-05-2003. However, the CIT(A) observed that the

offer of bid was for consolidated amount of Rs.4.23 crores and therefore, the

transactions have to be treated as consolidated transaction and therefore, the

Assessing officer has rightly treated this as a slump sale in the hands of the

assessee. Accordingly, the CIT(A) confirmed the addition of Rs.3,25,00,321/-

relating to Kundara property and that of Rs.4,23,00,000/- relating to Hyderabad

unit totaling to Rs.7,48,00,321/-.

5.11 Against this, for the assessment year 2004-05, the assessee is in appeal

before us. However, for the assessment year 2005-06, the CIT(A) has deleted the

above addition made by the Assessing officer, since this was sustained by him for

the assessment year 2004-05. Against this, the Revenue is in appeal before us.

6. We have heard both the parties and perused the record and gone through

the order of the lower authorities as well as various judgments cited by the

parties. The facts in a nutshell are that the assessee sold the Kundara unit in 12 I.T.A. Nos.195&218/Coch/2014

accordance with the Kerala High Court order dated 22-07-2003. As per the High

Court order, the asset belonged to the assessee in liquidation. For the purchase of

entire assets of this unit, the High Court segregated the assets as under:

Lot No. 1 - Land and buildings Lot No. 2 to 17 - Movable assets Lot No.18 -All the assets described in Lot No. 1 to 17

7. The above assets were sold to one Shri Abdul Salam who has been offered

the highest bid in Lot No. 18 for which the sale deed was entered into on 15th

March, 2005 for a consideration of Rs.2,50,00,000/- and the consideration was

bifurcated as Rs.2 crores for the property (land) and Rs. 50 lakhs for structures

therein. Clause 1 of the sale deed states that the assessee transferred to the

purchaser all that piece and parcels of land mentioned and fully described in the

schedule. Clause 3 of the sale deed states that the liabilities of the company in

liquidation charged or otherwise over scheduled properties, if found will be

discharged by the Official Liquidator in accordance with the provisions of the

Companies Act. Clause 4 of the sale deed states that the assessee has delivered

vacant possession of the property to the purchaser and the purchaser may

therefore peaceably and quietly possess and enjoy the said property without any

sort of let, hindrance claim or demand, interruption or disturbance either from the

assessee or any person claiming through or under the assessee or in trust for it.

The contention of the assessee is that the above sale of the asset cannot be 13 I.T.A. Nos.195&218/Coch/2014

constituted as slump sale and there was no sale of business as a whole. According

to section 2(42C), slump sale means the transfer of one or more undertakings for

a lumpsum consideration without values being assigned to the individual assets

and liabilities. And what section 50B makes chargeable to capital gains, is the

difference between slump price and the net worth of the undertaking without

giving the benefit of indexation and the net worth for this purpose is defined as

the sum total of paid up capital and free reserves by importing the definition of

section 3(1)(g) of the Sick Industrial Companies (Special Provisions) Act, 1985.

We are of the opinion that in order to apply the provisions of section 2(42C) in the

assessee's case, there should be sale of business as a running concern, i.e., the

sale of business as a whole comprising of assets as well as liabilities which is not

the case of the assessee herein. A reading of the agreement dated 15th March,

2005 which is placed on record in pg. nos. 17 to 27 of the paper book reveals that

the assessee did not enter into this transaction and what is sold is the property as

per Schedule situated at Sy. No. 622, 9 hectares, 51 ares and 25 sq. m. in Kollam

District, Kollam Taluk, Kundara Sub-District, Perinad village. It is also clear that

the Liquidator will be responsible for acquiring of liabilities. Thus, it was not a

slump sale, rather only the land and building were sold out and the liabilities

remained with the assessee. As per the judgment of the Supreme Court in the

case of CIT vs. Artex Manufacturing Co. (227 ITR 260), the sale of business as a

running concern involving both the assets and the liabilities, shall be treated as

slump sale. Being so, there was no slump sale in this case, Hence, from the 14 I.T.A. Nos.195&218/Coch/2014

impugned sale deed dated 15th March, 2005 and aforesaid agreement, the

consideration attributable to land and structures therein can easily be found out

and section 50(2) is to be applied. Thus, it is only land which is not a depreciable

asset and the consideration attributable to land will give rise to long term capital

gains u/s. 45 of the I.T. Act. The consideration attributable to the depreciable

asset will give rise to deemed capital gains in terms of sections 50 and 50A of the

I.T. Act. The Assessing officer is required to recompute the capital gain of this

transaction.

8. Now coming to the Hyderabad unit sold by the assessee, there were two

sale deeds one for Rs.1,75,50,000/- in the name of Creative Homes Pvt. Ltd and

another for Rs.2,47,50,000/- in favour of M/s. Udaya Homes as per Schedule of

Properties referred in pgs. 36 and 37 of the paper book which was consequent to

the High Court order dated 08/06/1999 in C.P. No. 34/1998. The total

consideration received by the assessee was Rs.4,23,00,000/- which was

attributable to the sale of assessee's land and building only and the liabilities were

not included so as to treat the sale as slump sale u/s. 2(42C) of the I.T. Act. As

discussed in the case of Kundara unit, we direct the Assessing officer to compute

the capital gain on this unit also accordingly.

9. Regarding assessment for assessment year 2004-05, the Ld. AR submitted

that the sale transactions took place as below:

15 I.T.A. Nos.195&218/Coch/2014

1. Hyderabad Unit as per sale deed dated 12/04/2004 for Rs.1,75,50,000/-.

2. Hyderabad Unit as per sale deed dated 18/04/2004 for Rs.2,47,50.000/-

Rs.4,23,00,000/-

3. Kundara Unit as per sale deed dated 15/03/2005 for Rs.2,50,00,000/-.

According to the Ld. AR, all these transactions took place in the financial year 2004-

05, and the taxability arises on these transactions in the assessment year 2005-06

and therefore, it cannot be taxed in the assessment year 2004-05.

10. We have carefully considered the submissions in this case. There was order

from Kerala High Court dated 22-07-2003 in respect of sale of Kundara unit and the

assessee received the consideration as below:

Date of payment Mode of payment Amount (Rs.)

18/07/2003 By DD 40,00,000 02/09/2003 By DD 50,00,000 29/09/2003 By DD 20,00,000 12/11/2003 By DD 55,00,000 30/08/2004 By DD 1,60,00,321 3,25,00.321

However, though the sale deed was dated 15-03-2005, the sale deed was confirmed

by the High Court on 22-07-2003 and the payment was also received between July,

2003 and August, 2004. Being so, the capital gain is to be taxed in the assessment

year 2004-05 only in respect of Kundara unit.

16 I.T.A. Nos.195&218/Coch/2014

10.1 Regarding the Hyderabad unit, the High Court passed order dated 23-05-

2005 for a sale consideration of Rs.4,23,00,000/- and two sale deeds were executed

on 12/04/2004 and 18/04/2004 and the payment has been received as below:

Date of payment Amount

27.02.2003 Rs. 5,00,000 07.07.2003 Rs.85,00,000 08.08.2003 Rs.18,00,000 16.09.2003 Rs.27,00,000 16.10.2003 Rs.72,00,000 17.11.2003 Rs.36,00,000 18.12.2003 Rs.45,00,000 19.01.2004 Rs.1,35,00,000 Rs.4,23,00,000

10.2 The substance is to be seen in this case as the transfer of property took

place in assessment year 2004-05 and only the formality has been completed vide

the above sale deeds, though the sale was completed and payment was also

received as per the Court order. Accordingly, the capital gain arising from the

Hyderabad unit is also to be taxed in the assessment year 2004-05. With this

observation, we remit the issue relating to assessment year 2004-05 to the file of

the Assessing officer to re-compute the capital gain arising on these transactions as

discussed in the earlier para.

11. Now coming to the assessment year 2005-06, since we have given direction

to the Assessing officer to compute the capital gain for the assessment year 2004-

05, the Department cannot have any grievance for the assessment year 2005-06 17 I.T.A. Nos.195&218/Coch/2014

otherwise sustaining the addition for assessment year 2005-06 would amount to

double taxation. Accordingly, the deletion of addition by the CIT(A) for the

assessment year 2005-06 is confirmed.

12. In the result, the appeal filed by the assessee in I.T.A. No. 195/Coch/2014

for the assessment year 2004-05 is partly allowed for statistical purposes and the

appeal filed by the Revenue in I.T.A. No. 218/Coch/2014 for the assessment year

2005-06 is dismissed.

Pronounced in the open court on 06-03-2015.

sd/- sd/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi Dated: 06/03/2015 GJ Copy to:

1. M/s. Laxmi Starch Ltd., Rep. by Official Liquidator (High Court of Kerala), Company Law Bhavan, Thrikkakara, Kochi-682 021.

2. The Assistant Commissioner of Income-tax, Circle-1(2) Kochi.

3. The Commissioner of Income-tax(Appeals)-II, Kochi.

4. The Commissioner of Income-tax, Kochi.

5. D.R., I.T.A.T., Cochin Bench, Cochin.

6. Guard File.

By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin