CIT Vs. ECE INDUSTRIES LTD.

JUDGEMENT

(1.) Between common parties, identical issues arise for determination in these two appeals; albeit for two assessment years, viz., Assessment Years 1999-2000 and 2000-01. ITA 1069 of 2007 relates to Assessment Year 1999-2000 and since it is prior in point of time, we have taken note of the facts of this appeal to understand the issues involved and to answer the same. For this year, the respondent assessee filed the return declaring a loss of Rs. 4,70,40,396. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had sold its Lamp Division at Sonepat to M/s. Osram India (P) Ltd. for Rs. 42.50 crores on 9-11-1998. In the computation of capital gain, the assessee showed cost of Lamp Division at Rs. 59.33 crores and declared the long term capital loss at Rs. 16.83 Crores to be adjusted against the profit for the current year. The AO invoked the provisions of section 50 of the Income Tax Act (hereinafter referred to as the Act) and issued a show cause notice to the assessee to explain as to why the capital gain earned on sale of Lamp Division be not treated as short term capital gain under section 50(2) of the Act. The assessee submitted that the Sonepat Unit was sold as a going concern vide agreement dated 20-5-1998 against lump sum consideration of Rs. 42.50 Crores as consideration for all the tangible and intangible assets as well as contracts and rights sold and transferred to M/s. Osram India (P) Ltd. It was contended that no part of the price of Rs. 42.50 Crores was attributable to any particular asset including any depreciable asset and therefore provisions of section 50(2) were not attracted. It also contended that it was an old concern for more than 36 months, its transfer would give long term capital gain. The assessee also relied on Commissioner of Income-tax, Gujarat v. M/s. Artex Manufacturing Co., 1997 227 ITR 260, Sarabhai M. Chemicals Private Ltd. and Telerad Private Ltd. v. P.N. Mittal, Competent Authority, Inspecting Assistant Commissioner of Income-tax, Acquisition Range-II and Anr.,1980 126 ITR 1. However, the AO was not convinced with the contentions made by the assessee and observed that the case law relied upon by the assessee was distinguishable. He held that the capital gain on depreciable asset was to be treated as short term capital gain and required the assessee to quantify the consideration received by it for sale of tangible and intangible assets but the assessee did not furnish the same. Accordingly, he took the written down value (WDV) of the assets of Lamp Division at Rs. 5,15,75,131 as on 1-4-1998 declared by the assessee out of which he segregated the value of land and indexation was applied. Consequently, he computed the short term capital gain at Rs. 36,89,23,393.

(2.) Aggrieved by this order, the assessee filed an appeal before the CIT (A) who confirmed the order passed by the AO holding that the assessee had merely made a 'Unit Sale' i.e. sale of its Lamp Division which was a part of its overall business concern and that the assessee still continued as a business concern. The assessee was not treating the Sonepat Unit as a separate and independent business but was treating it as a part of the integrated whole business and therefore, the sale of Lamp Division was not in the nature of a 'slump sale' as a going concern. The CIT (A) further observed that the judgment of the Supreme Court in the case of Commonwealth Trust Ltd., Calicut, Kerala v. Commissioner of Income-tax Kerala II, Ernakulam, 1997 228 ITR 1, squarely applied to the present case in which it was held that the provisions of section 50 of the Act would apply to sale of depreciable assets. The CIT (A) also rejected the contention of the assessee that no break-up of sale consideration between tangible and intangible asset was possible and even if the sale was to be treated as slump sale, the gain would be taxable as laid out by the Supreme Court in the case of Commissioner of Income-tax, Gujarat II v. B.M. Kharwar, 1969 72 ITR 603 and in the case of Commissioner of Income-tax, Bombay City v. Bipinchandra Maganlal & Co. Ltd., 1961 41 ITR 290.

(3.) Aggrieved by the order of the CIT (A), the assessee filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal), who held that the transaction of sale of Sonepat Unit by the assessee was a transaction in the nature of slump sale of a going concern as a whole. Since the Sonepat unit was a capital asset within the meaning of section 2(14) of the Act, the profit arose on transfer of such capital asset is to be treated as long term capital gain. Neither the provisions of section 50 nor the provisions of section 50B shall be attracted in the present matter. Rather provisions of section 45 and 48 shall be applied. Accordingly, the Tribunal directed the AO to recomputed the capital gain in the light of observations made by the Tribunal after providing full opportunity to the assessee in accordance with law.