Section 147, read with section 148, of the Income-tax Act

IN THE ITAT MUMBAI BENCH, ‘D’ Rohan Software (P.) Ltd. v. Income Tax Officer, Ward 9(3)(4), Mumbai K. P. T. THANGAL, VICE PRESIDENT AND J. SUDHAKAR REDDY, ACCOUNTANT MEMBER IT APPEAL NOS. 1429 (MUM) OF 2005 AND 1676 (MUM) OF 2007 [Assessment year 2000-01] August 30, 2007 Section 147, read with section 148, of the Income-tax Act, 1961 - Income escaping assessment - Nondisclosure of primary facts - Assessment year 2000-01- Assessee-company was engaged in business of software development and related service - Pursuant to a MOU entered with ‘IISL’, it transferred its entire business assets, namely, intellectual properties, codes, formulae, designs, programme, etc., to IISL for a consideration - This consideration was treated as capital gains and same was invested in mutual funds - Assessment was completed accordingly - Assessing Officer on finding that alleged sale consideration was received by assessee for utilizing services of its two directors and in intellectual property which was business income of assessee re-opened assessment of assessee - Assessee objected to reopening of assessment on ground that reasons recorded for re-opening was not supplied to assessee - Whether in view of decision of Delhi Bench of Tribunal in case of ITO v. Smt. Gurinder Kaur [2006] 102 ITD 189 objection of assessee was to be rejected and reopening was to be held - Held, yes Section 2(42C) read with sections 50B and 28(i) of the Income-tax Act, 1961 - Capital gains - Slump sale - Assessment year 2000-01 - Assessee-company was engaged in business of software development and related services - It entered into a Memorandum of Understanding (MOU) with ‘IISL’ whereby it transferred its business assets, intellectual property, code, formulae, design, etc., to IISL for a consideration - Assessee claimed that amount received by it from ITSL was for sale of its business assets as a going concern which had to be treated as a slumpsale - According to revenue assessee had not transferred building, motor car and assets and liabilities relating to income tax matters which fell short of slump sale for slump consideration and, therefore, held that consideration for transfer of business to IISL was not made on account of slump sale of business as a going concern but a revenue receipt chargeable under section 28(i) as business income - Whether sale of even branches of an undertaking along with their assets and liabilities amounts to sale as a going concern for a slump price - Held, yes - Whether since relevant clauses of Mou clearly showed that entire business assets of assessee viz computer, furniture, etc. were transferred for consideration to IISL by aid of which IISL could very well carry its business, therefore, non transfer of items like motor car and building would not make any difference to transaction as it had nothing to do with assessee’s business - Held, yes - Whether therefore, consideration received by assessee on sale of its business to IISL was to be treated as sale of a going concern for slump price - Held, yes FACTS The assessee-company was engaged in the business of software development and related services. It entered into a Memorandum of Understanding (MOU) with ‘IISL’ whereby it transferred its business assets, intellectual property, code, formulae, design, etc., to IISL for a consideration. This consideration was treated by the assessee as capital gain and invested same in the mutual funds. The assessment for relevant assessment was completed accordingly. Later the Assessing Officer finding that consideration received by the assessee on said sale of business assets was nothing but for utilizing the services of its two directors and its intellectual property issued a notice under section 148 stating that alleged sale consideration was business income of the assessee. The assessee replied that the amount received by it from IISL was for sale of its business assets as a going concern which had to be treated as a slump sale. The Assessing Officer however, rejected claim of the assessee. He held that the assessee had not transferred building, motor car and assets and liabilities relating to income tax matters which fell short of the slump sale for slump consideration and, accordingly, concluded that consideration for transfer of business to IISL was not made on account of slump sale of business as a going concern but a revenue receipt chargeable under section 28 as business income. Further, the Assessing Officer had also levied penalty under section 271(1)(c). The Commissioner (Appeal) upheld the reopening of the assessment and order of the Assessing Officer. In the instant appeal, the assessee objected to the re-opening of the assessment on the ground that the reasons recorded for reopening, was not furnished to the assessee after issue of notice under section 148 and, therefore, the assumption of jurisdiction by the Assessing Officer under section 147 was unlawful. HELD In the light of the decision of the Delhi Bench of the Tribunal in the case of ITO v. Smt. Gurinder Kaur [2006] 102 ITD 189 the objection of the assessee regarding reopening of the assessment was to be set aside. [Para 10] The definition of ‘slump sale’ is provided under section 2(42C), said definition makes it clear that ‘slump sale’ 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. For the purpose of this section, ‘undertaking’ has again been explained in Explanation 1 to section 2(19AA). It states that for the purpose of this clause ‘undertaking’ shall have the meaning assigned to the undertaking. Explanation 1 to section 2(19AA) was introduced with effect from 1-4-2000 by the Finance Act, 1999. ‘Undertaking’ includes, as per the definition, 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. According to the Assessing Officer, the assessee’s business included intellectual properties, codes, formulae and designs, etc. There was no dispute that the assessee had transferred all these assets. The only assets that the assessee not transferred was building, motor car and assets and liabilities regarding income tax matters. ‘Block of assets’ is defined in section 2(11). There is a change in the definition after 1-4-1999. Before the substitution of the definition by the Finance (No. 2) Act, 1999, ‘block of assets’ included a group of assets falling within a class of assets, being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed. However, the substituted definition of ‘block of assets’ has been divided into two parts - (a) tangible assets, being buildings, machinery, plant or furniture (which is similar to ‘block of assets’ before the substitution of the definition with effect from 1-4-1999); and (b) intangible assets, being know - how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature; in respect of which the same percentage of depreciation is prescribed. [Para 24] As noted hereinabove that the assessee’s business assets, even according to the revenue, included intellectual properties, codes, formulae, designs, programmes, etc. This was transferred to IISL. That meant the assessee company was no more doing the business in this field. According to the revenue, even if there was a transfer, the transfer was not permanent. It was for three years. Such a view could not be accepted. [Para 25] It was clear from the MOU that the assessee’s business was software development and related services and the assessee had specialized skills and technical knowledge in this field. Clause 1 of the MOU stated that the assessee had agreed to transfer all assets and properties in its business including intellectual properties, codes, formulae, designs, etc., to IISL for a consideration of Rs. 178 lakhs. Clause 4 of the MOU stated that all the business transactions carried out by the assessee with effect from 1-4-1999 till date of actual execution of transfer shall be considered as executed in trust for and on behalf of IISL and once the transfer was effective the business transactions shall continue with IISL and IISL shall be entitled to enforce their rights thereunder without any restriction whatsoever. Coming to clause 7 of the MOU, it made clear that the promoters of the assessee, for a period of three years from the date of transfer of assets, as per clauses 1 and 3, could not associate themselves directly or indirectly with any business similar to or identical with the business carried on either by the assessee or IISL. Clause 8 of the MOU made it clear that all improvement in technology, designs and innovations during the period the promoters were in the employment of IISL shall be the property of IISL. Contrary to the stand of the revenue, it curtailed the right or power of the directors of IISL, who were promoters of the assessee to take away any of the improvements that took place after the sale had taken place. This curtailed the power and did not give the promoters the liberty to do what they wanted Clause 10 of MOU again put a restriction that in the event of promoters of the assessee ceasing to be in employment of IISL, either by termination or by determination of period of their employment, except on reaching superannuation, they shall not for a period of one year from the date of ceasing to be in employment of IISL deal in any manner with any of the clients of IISL. [Para 26] According to the revenue, the transfer of intellectual properties, codes, formulae, designs, etc., to IISL was not permanent. It was difficult to subscribe to this view. It was specifically stated that assets and properties of the assessee shall be transferred to IISL. Reading of clause 4 of the MOU made it clear that the business transactions carried out by the assessee that was transferred to IISL shall continue with them and IISL shall be entitled to enforce their rights thereunder without any resection. It meant restriction of time as well. To come to a different conclusion as canvassed by the revenue, was not acceptable. Clauses 7 and 8 of the MOU restricted the promoters of the assessee-company to do similar or identical business carried out earlier by assessee and now by IISL permanently and even all improvement in technology, etc., shall be the property of IISL. [Para 27] According to the revenue, by virtue of clause 2 of the MOU, the assessee had not transferred the building, motor car and assets and liabilities relating to income tax matters. This, according to the revenue, fell short of the slump sale for slump consideration. It was not possible to subscribe to the view canvassed by the revenue. The jurisdictional High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 (Bom) clearly held that the sale of even branches of an undertaking along with their assets and liabilities amounts to sale as a going concern for a slump price. The assessee’s business assets were computers, furniture, etc., because the assessee was in the field of software business. It was difficult to hold that the purchaser could not continue the activities purchased in the absence of building and motor car, which had been kept apart. If the purchaser perhaps prevented from continuing the business, the stand of the revenue that this was not sale of a going concern for a slump price, would have been correct. The question was whether the business will continue in the same line even without the two assets. Reading of MOU, relevant clauses of which had been quoted hereinabove, made it clear that the assessee had transferred all the properties relating to its business. Even according to the revenue, the assessee’s business assets were in the nature of intellectual properties, codes, formulae, design, etc. It had been transferred for a consideration. [Para 28] As already held that ‘slump sale’ means as transfer of one or more undertakings as a result of sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. In the instant case of the assessee, though in the purchaser’s books of account the individual assets had been priced independently, the assessee had not assigned separate values and, consequently, sold the items for independent price. It was not the revenue’s case also that individual assets had the price fixed separately and charged. ‘Undertaking’ is explained in Explanation 1 to section 2(19AA). According to this Explanation, it includes any part of an undertaking or a unit or division of an undertaking or a business activity as a whole the revenue’s case was that some of the items like motor car and building had been retained by the assessee; as such this could not be treated as a slump sale. But the fact to be considered was the assessee was in the field of intellectual property rights. Computers, furniture, etc. which was linked with the business of the assessee had been sold. The items that the assessee kept separately, had nothing to do with the assessee’s business, which was sold / handed over to the purchaser, i.e., IISL. The business had been sold. The purchaser could very well carry on the business, which was carried by the assessee before the sale, without purchasing any independent items. In view of the above, the plea of the revenue that the assessee had not sold the undertaking as a whole, could not be accepted. [Para 29] As regards the other objection of the revenue that when the assessee started the business, the professional receipt was less than Rs. 3 lakhs. Now it was more than Rs. 84 lakhs. The growth within a short period of three and half years was commendable. Many of the developments in the field, definitely, according to the revenue, would have taken place within a period of less than thirty six months and, therefore, it could not be treated as long term capital gain. This view of the revenue could not be accepted as well. A businessman does the business every day. If some of the items that are developed subsequently within less than thirty six months if sold, it cannot be taken independently. The assessee was selling the business as a whole. It was not part by part, bit by bit and as such, this contention of the revenue was without merit. Thus, the claim of the assessee was to be allowed and that of the revenue was to be rejected. [Para 30] Since on the merit the claim of the assessee was allowed, the penalty levied on the assessee did not survive. [Para 37] CASE REVIEW: ITO v. Smt. Gurinder Kaur [2006] 102 ITD 189 (Delhi) [Para 10] - Followed.