Lifestyle International Pvt. Ltd. Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that where the assets and liabilities of an undertaking are sold as a group or lumped together, such a sale would qualify as a slump sale. Accordingly, capital gain on the same should be computed as section 45 to 50 of the Income Tax Act.
Facts- During the year, Splash, a division of the Assessee which was engaged in retailing of apparels to youth segment was moved to a separate legal entity i.e, Splash Fashions India Private Limited (“Splash India”) w.e.f. 01.10.2012. This transfer the business of the assessee carried under “Splash” brand as a going concern was on ‘slump sale’ basis to Splash India.
Statutory notices u/s. 143(2) along with 142(1) were issued to assessee. AO noted that the assessee transferred its assets amounting to Rs.22,35,71,677/-, based on the book values at the consideration of Rs.28,16,00,000/- and recorded a profit of Rs.5,80,28,323/-. The assessee also submitted that, the company expenses were allocated and the transfer was held to be a slump sale.
AO made addition towards profits earned from slump sale as ‘business income’ instead of LTCG on transfer of splash business.
Conclusion-
Held that where the assets and liabilities of an undertaking are sold as a group or lumped together, such a sale would qualify as a slump sale.
In our opinion to conclude that a transaction is a slum sale or not is not only based on interpretation of terms and conditions of the entire agreement but it is also based on the manner in which the gains has been accounted by assessee in its books of accounts.
From the extracts of the accounts of assessee it is clear that it has not accounted for profits on itemised assets. In the instant case there is a sale of an entire undertaking as a going concern and assessing officer should have computed the capital gains under section 45 to 50 of Income tax Act. We note that there is no evidence with the Ld.AO that the items were sold independently.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present cross appeals appeal has been filed by assessee as well as revenue against the order passed by Ld.CIT(A)-4, Bengaluru dated 04/11/2019 for Assessment Year 2013-14 on following grounds of appeal.
Assessee’s appeal:
“The grounds mentioned hereinafter are without prejudice to one another.
1. Computing profits earned from “slump sale” as business income instead of long-term capital gains on transfer of Splash division
1.1. The learned CIT(A) has erred in rejecting the business transfer of Splash division of the Appellant as slump sale and upholding the findings of learned AO without providing any basis.
1.2. The learned CIT(A) has erred in not appreciating the fact that the Appellant has furnished additional evidence under Rule 46A of the Income-tax Rules,1962 [“the Rules”]. Further, the Appellant has also furnished a copy of additional evidence before the learned AO at the time of issuance of remand report.
1.3. The learned CIT(A) and learned AO has erred in not considering the submissions/ documentary evidences furnished before them from time to time.
1.4. The learned CIT(A) has erred in accepting the treatment given by the learned AO that the transfer of Splash brand is a business income, when the division was in existence for more than 36 months and qualified as a long term capital asset.
1.5. The learned CIT(A) and learned AO has erred in concluding that the provision of section 50B of the Act are not applicable to the Appellant without providing any reasons as to why the transfer is not a slump sale.
1.6. The learned CIT(A) has failed to appreciate that transfer of Splash division is a slump sale as per provisions of section 2(42C) of the Act as the entire division including stores, computers, employees and stock-in-trade was transferred on a going concern basis and not only “Splash” brand as alleged by the learned AO.
1.7. The learned CIT(A) has failed to appreciate that as per Business Transfer Agreement the Appellant has agreed to sell all the assets for a lump sum consideration without any values being assigned to individual assets and it was intended as slump sale as per the provision of section 50B of the Act.
1.8. The learned CIT(A) has erred in confirming the action of the learned AO, wherein the learned AO has considered book value of the division instead of net-worth of the division as per section 50B of the Act for the purpose of computing capital gains.
1.9. The learned CIT(A) upheld the order of the learned AO and has considered section 43(6)(c)(ii) of the Act instead of section 43(6)(c)(i)(c) of the Act, as specifically stated under section 50B of the Act for the purpose of computing WDV for slump sale.
1.10. The learned CIT(A) and the learned AO has erred in not relying on the net-worth certificate issued by Chartered Accountant in Form 3CEA.
1.11. The learned CIT(A) and the learned AO has erred in not appreciating the fact that the Act does not mandate for maintaining separate books of account for a division/ unit. 1.12. Notwithstanding and without prejudice to above, even if the transaction is to be considered as itemized sale, then the value of fixed assets transferred or sold should be reduced from the block of assets and only if the block ceases to exist, capital gains would arise.
2. Considering hedging losses as notional or speculative and disallowed under section 37 of the Act:
2.1. The learned CIT(A) has erred in confirming the disallowance of hedging losses without providing any basis for the same.
2.2. The learned CIT(A) upheld the order passed by the learned AO in disallowing hedging loss, by treating the same as speculative loss.
2.3. The learned CIT(A) and the learned AO failed to appreciate that the definition of a “speculative transaction” does not include a derivative transaction and hence Mark to Market [“MTM”] losses from derivative transactions is not a speculative loss.
2.4. The learned CIT(A) and the learned AO failed to appreciate the view of the Appellant that instruction no. 17/2008 dated 26 November 2008 and 03/2010 dated 23 March 2010 issued by the CBDT are not binding on the Appellant.
2.5. Notwithstanding and without prejudice to the above, the learned CIT(A) failed to appreciate that if such MTM losses be treated as speculative in nature, the same should be allowed to be carried forward and set off against the MTM gains, if any in the subsequent years
The Appellant craves to leave/ to add to / to alter/ to amend/ to rescind/ to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal.”
Revenue’s appeal:
“1. Whether the Ld. CIT(A) is right in deleting the disallowance of premium of Rs.2,61,37,084/- paid by the assessee towards forward cover and allowing the expenditure u/s 37 of the I.T Act, when the expenditure was disallowed by the AO by treating the same as speculative loss u/s.43(5) of the I.T Act.
2. Whether on the facts and circumstances of the case, Ld.CIT(A) was justified in allowing ESOP expenses to the assessee ignoring the fact that it is not a revenue expenditure actually incurred by the company, as per the provisions of the I.T Act.
3. Whether on the facts and circumstances of the case, Ld.CIT(A) was justified in following the decision of the Special Bench of the Bangalore Tribunal in the case of M/s.Biocon Ltd vs DCIT(2013) 25 ITR (T)602 which has not been accepted by the department and against which further appeal has been filed in Hon’ble High Court, which is pending.
4. Reliance is also placed on the decision of the Delhi Bench of the Tribunal in the Ranbaxy Laboratories Case where it has been held that ESOP expense is not allowable thereby disallowing the expenditure claimed by the assessee.
5. Further the SLP has been admitted in the Case of Lemon Tree Hotels (P) Ltd [2019] 104 taxmann.com 27 (SC) in favour of Revenue on the same issue of ESOP treatment and matter is pending for adjudication.
6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
7. The appellant craves leave to add, alter, amend and / or delete any of the grounds that may be urged.”
2. Brief facts of the case are as under:
The Assessee is a private limited company engaged in the business of retail trade of apparels and accessories, toys, baby basics, footwear, leather products, furniture and household, and other accessories. It operates stores across India under the brand name “Lifestyle” and “Max”.
During the year, Splash, a division of the Assessee which was engaged in retailing of apparels to youth segment was moved to a separate legal entity i.e, Splash Fashions India Private Limited (“Splash India”) w.e.f. 01.10.2012. This transfer the business of the assessee carried under “Splash” brand as a going concern was on ‘slump sale’ basis to Splash India.
2.1 Subsequent to the transfer of ‘Splash’ division on slump sale basis, the Assessee filed its return of income for the Assessment Year (“AY”) AY 2013-14 on 30.11.2013, declaring a total income of Rs.597,189,260/- (including capital gains amounting to Rs.44,931,206/- arising on slump sale of Splash division). The return of income filed by the Assessee for AY 2013-14 was selected for scrutiny and notice under section 143(2) of the Income-tax Act (“the Act”) was issued on the Assessee.
2.2 Statutory notices u/s. 143(2) along with 142(1) were issued to assessee in response to which representatives of assessee appeared before the Ld.AO and filed various details, produced books of accounts. The Ld.AO observed that the assessee debited sum of Rs.2,61,37,084/- as premium on forward cover in its P&L account. Details were sought in respect of the same and assessee filed vide letter dated 11/01/2006 wherein it had submitted that the expenses were incurred towards hedging of foreign currency payables on merits of trade merchandise etc. Assessee submitted that to secure itself from uncertainties in the rate of foreign currencies, the assessee entered into forward contract with Indian Overseas Bank, and fixed the rate for foreign currency as on the date of the payment to the suppliers of merchandise. It was submitted that the assessee in this manner secures itself from any increase in the rates of foreign currency payables. The assessee also submitted that, for entering into such forward contract, the bank charges certain premium which is the expenses incurred by the assessee that was booked under the head “premia on forward cover”. Assessee filed various submissions which were considered by the Ld.AO. However, the Ld.AO treated the forward cover charged amortized during the year by the assessee as speculative loss u/s. 43(5) r.w.s. 73 of the Act.
2.3 The next issue considered by the Ld.AO was in respect of the expenditure incurred towards ESOP option exercised during the year amounting to Rs.18,44,375/-. It was submitted that, the assessee made claim of ESOP during the assessment proceeding which was denied by the Ld.AO. The assessee relied on the decision of Hon’ble Special Bench of this Tribunal in case of Biocon Ltd. vs. DCIT reported in 35 taxmann.com 335. The Ld.AO, however, rejected the claim of assessee by submitting that, the assessee did not file revised return in respect of the claim, and therefore the assessing officer was precluded from considering the claim. The Ld.AO relied on the decision of Hon’ble Supreme Court in case of Goetz India Ltd reported in 284 ITR 323.
2.4 The next issue considered by the Ld.AO was in respect of the transfer agreement entered into with Splash Fashions India Pvt. Ltd. by the assessee wherein ‘splash’ brand was transferred.
2.4.1 The Ld.AO noted that the assessee transferred its assets amounting to Rs.22,35,71,677/-, based on the book values at the consideration of Rs.28,16,00,000/- and recorded a profit of Rs.5,80,28,323/-. The assessee also submitted that, the company expenses were allocated and the transfer was held to be a slump sale. The Ld.AO after considering various submissions by assessee observed as under:
“6. Business Transfer
………… The argument of Sri Jagadish Solanki, the authorised representative is that as the accounting standards did not require the reporting of Splash as a separate segment it was reported under the Lifestyle segment but separate accounts and establishment as far as the brand was concerned were maintained. The company claims that the accounts and establishments were maintained separately but no conclusive evidences are furnished in this respect. The only evidence that could be furnished as to the identification of any assets of Splash brand is the details of fixed assets as per the inventory prepared by SS Industrial consultants. The value of the inventory at Rs 15.23 crores is based only on the adjustments made in the books of accounts as reported in the summary of the valuation report of the consultant. The company has admitted a profit on account of slump sale at Rs 4,49,31,206. Further, WDV of the addition should be arrived at as determined under section 43(6)(c)(ii) while the accountant has determined the value u/s 43(6)(c)(i)(C). In view of the above arguments it is doubtful that the company has transferred the brand on a slump sale basis as what was transferred was only a brand and not an undertaking or division Hence, the transfer on account of sale of Splash brand is charged to capital gains under the normal provisions as transfer / sale of individual assets and not as a slump sale. The profit from the sale is therefore computed as under:
