Regular Vs. Slump Sale: Assessee cannot be allowed to take shifting stands

Emil Pharmaceutical Industries Private Limited Vs DCIT (ITAT Mumbai)

In this case learned CIT(A) has noted that the assessee has not produced supporting documents such as the list of employees at the time of the sale, electricity bills and other details necessary to establish the existence of an undertaking in a continuous business. Furthermore, we note that learned counsel has produced before us valuation report giving valuation of the items sold. This is additional evidence not produced before the authorities below. We note that this additional evidence in the shape of valuation report itself states that as the assessee’s unit was established in a delayed manner and it was no longer eligible for incentives available there. The valuer himself states that there are no comparative sales instances. The said report while discussing fair market rate has clearly mentioned that “we find that there was no buyer for industrial unit, not eligible for incentive.” This amply casts doubt over the claim of the assessee that this was slump sale of an undertaking. It is settled law that assessee cannot be allowed to take shifting stands while it is claiming that is a sale of an undertaking it is giving evidence that there cannot be a buyer for such unit. In our considered opinion, since the authorities below have not examined this additional evidence, we deem it appropriate to remit this issue also to the file of the Assessing Officer. The Assessing Officer shall examine this issue afresh after taking into account additional evidence. The assessee is directed to produce necessary evidence in support of the claim that it was an ongoing concern.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against the order of learned CIT(A) dated 29.3.2019 pertaining to assessment year 2014-15.

2. The grounds of appeal read as under :

1) In the proceeding u/s 143(3) of the Act, the Ld AO as well as CIT (A) erred in adding a sum Rs.2,38,58,286/- as long term capital gain for sale of property.

2) Ld. A.O as well as CIT (A) erred in denying the slum sales of the appellant and consider the sale transaction under the head long term capital gain and accordingly added a sum of Rs.2,38,58,286/-.

3) The Ld CIT(A) is erred in not appreciating the fact that the appellant company had 2 going concern units and all the details were already filed before the Ld AO.

4) Ld. A.O as well as CIT(A) erred in applying sec 50C of the I.T. Act on sale of going concern unit of appellant under the provision of slum sale.

5) The Appellant prays to delete the addition made on this account.

3. Brief facts of the case as under :

During the previous year 2013-14, the assessee sold its unit at Roorkee comprising of land, building and plant & machinery for a consideration of Rs. 1,72,00,000/-. As per sale deed, the Stamp Valuation Authority valued the Land, RCC building and the compound wall as under:-

In its return of income the assessee claimed the sale as slump sale and declared long term capital gain of Rs.95,60,095/-. The assessee claimed that Section 50C of the Act is not applicable in the case of slump sale. In the course of the assessment proceedings, the Assessing Officer found that the unit was not carrying on any commercial activities or the production activities; that there were no significant assets or liabilities except immovable property consisting of land and building; that the assessee sold the entire unit (including land and building) at a price lower than the value of the land, building and the compound wall as determined by the Stamp Valuation Authority. The assessee wrote off deposit of Rs. 51,110/- and written back the Creditors of Rs.14,54,594/-relating to Roorkee Unit. The Assessing Officer held that the sale was in substance sale of the land, the RCC building in the compound wall and not sale of any undertaking. Therefore, the Assessing Officer contended, it was not a slump sale. The Assessing Officer observed that no business was carried out in the Roorkee unit for the preceding 2 years. The Assessing Officer held that the sale of the land, factory building along with the plant and machinery was not a slump sale rather it was a regular sale. The Assessing Officer contended that the unit was not sold as an ongoing concern because no production activity was carried out in the unit for the preceding two years. Accordingly, the Assessing Officer computed long-term capital gain after invoking the provisions of Section 50C of the Act at Rs.2,38,58,286/-.

4. Upon assessee’s appeal learned CIT(A) upheld the order of the Assessing Officer by agreeing with him as under :-

I have considered the submissions of the assessee. Slump sale is defined in section 2(42C) of the Act. The same is reproduced below:

(42C) “slump sale” 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.

Explanation 1.— For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2.— For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.”

4.4.2 As per Explanation 1 to clause 19AA, “undertaking” shall include any part of the undertaking or a unit or a division of an undertaking or a business activity as whole, but does not include individual assets or liabilities or any combination thereof not constituting business activity.

4.4.3 I find that for a sale to qualify as slump sale of the asset which is transferred must be one or more undertakings. The word “Undertaking” connotes a working enterprise, project or business. In the State of Bombay & others versus the Hospital Mazdoor & others AIR 1960 SC 610) the word “Undertaking” was held to connote activity systematically undertaken for production and distribution of goods and for rendering material services with the help of employees. Therefore, the word undertaking connotes an organization engaged in production of service. In other words, an undertaking is more than just a factory. The essence of an undertaking is the ongoing organized activity rather than the factory where the activity takes place. In the instant case what was sold was definitely not an undertaking but a factory. As the AO has pointed out, there was no continuity of business. The appellant has contended that it had produced some sales bills before the AO and has contended that those sales prove that the unit was running and was an ongoing business concern. The claim is not correct. A few instances of sale cannot prove that production was going on; it is quite possible that the sale was made from stock of unsold finished goods. The appellant did not produce the P&L account and the balance sheet of the Roorkee unit in support of its claim that the production activities were continuing when the unit was sold.

The appellant has not been able to prove with supporting documents such as the list of employees at the time of the sale, the electricity bills, the details of purchases and sales during the year under consideration, details of inventory at the time of sale etc. to prove that production activities was going on when the sale took place.

4.4.4 I, therefore, hold that the AO was justified in treating the sale as a regular sale and not a slump sale. Consequently I also uphold the addition made by the AO.”

5. Against this order assessee is in appeal before us.

6. We have heard both the counsel and perused the records. We find in this case the claim of the assessee is that it has engaged into slump sale as such it is claiming that provisions of section 50C are not applicable. However, on the other hand it is the finding of the authorities below that the assessee’s business which is sold was never carried out and in fact was closed since inception. As a result, learned CIT(A) has found that the sale claimed by the assessee to be slump sale does not fulfill the slump sale as defined in section 2(42C) of the Act. He has found that sale was not of an undertaking as per Explanation (1) to Clause 19AA of the Act. Learned CIT(A) has found that the essence of an undertaking is the ongoing organized activity. In the instant case what was sold was definitely not an undertaking but a factory. Learned CIT(A) has noted that the assessee has contended that it has produced some sale bills before the Assessing Officer and has contended that those sales to prove that the unit was running and was an ongoing business concern. However, learned CIT(A) has noted that a few instances of sale cannot prove that production was going on. That it is quite possible that the sale was made from stock of unsold finished goods. That the assessee did not produce the profit and loss account and the balance-sheet of the Roorkee unit in support of its claim that the production activities were continuing where the unit was sold.

7. In this regard, before us learned counsel of the assessee has pointed that in page No. 75 of the paper book before us is note forming part of the balance-sheet of the assessee-company wherein following financials of Roorkee unit are as under :-

8. We note that this is note about the operations at Roorkee unit needs examination with relation to profit and loss account of the assessee. Here we note that in the cost of material consumed in the profit and loss account of the assessee there was no purchase of material at Roorkee Unit. So prima facie learned CIT(A)’s finding is correct that no manufacturing activity has taken place and assessee has only shown opening raw material as consumed. Moreover, we find that in the profit and loss account while closing stock of Roorkee unit shown as nil, opening stock for that year for raw material at Rs. 98,897/-. In such circumstances, how financial note reflects raw material consumed at Rs. 24,000/- clearly shows an anomaly in the preparation of financial account. In our considered opinion this aspect needs examination at the level of Assessing Officer.

9. Furthermore learned CIT(A) has noted that the assessee has not produced supporting documents such as the list of employees at the time of the sale, electricity bills and other details necessary to establish the existence of an undertaking in a continuous business. Furthermore, we note that learned counsel has produced before us valuation report giving valuation of the items sold. This is additional evidence not produced before the authorities below. We note that this additional evidence in the shape of valuation report itself states that as the assessee’s unit was established in a delayed manner and it was no longer eligible for incentives available there. The valuer himself states that there are no comparative sales instances. The said report while discussing fair market rate has clearly mentioned that “we find that there was no buyer for industrial unit, not eligible for incentive.” This amply casts doubt over the claim of the assessee that this was slump sale of an undertaking. It is settled law that assessee cannot be allowed to take shifting stands while it is claiming that is a sale of an undertaking it is giving evidence that there cannot be a buyer for such unit. In our considered opinion, since the authorities below have not examined this additional evidence, we deem it appropriate to remit this issue also to the file of the Assessing Officer. The Assessing Officer shall examine this issue afresh after taking into account additional evidence. The assessee is directed to produce necessary evidence in support of the claim that it was an ongoing concern.

10. In the result, this appeal by the assessee stands allowed for statistical purposes.

Pronounced in the open court on 25/3/2021.