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[2011] 14 taxmann.com 27 (Chennai) IN THE ITAT CHENNAI BENCH 'D' Assistant Commissioner of Income-tax, Circle-I, Erode v.

Madan Mohan Chandak* DR. O. K. NARAYANAN, VICE-PRESIDENT HARI OM MARATHA, JUDICIAL MEMBER IT APPEAL NO. 1256 (MAD.) OF 2009 [ASSESSMENT YEAR 2003-04] MAY 19, 2011

Section 47, read with section 50B, of the Income-tax Act, 1961 - Capital gains - Transactions not regarded as transfer - Assessment year 2003-04 - During previous year relevant to assessment year 2003-04, assessee had sold his proprietary concern as a going concern for a consideration to a company Assessee received sale consideration by way of allotment of shares of company and did not admit any tax liability on sale transaction on plea that it was covered under provisions of section 47(xiv) - Assessing Officer held that transfer of proprietary concern would fall under provisions of section 50B as slump sale - He, therefore, treated difference between net worth of proprietary concern and sale proceeds as profit on sale of business and finally brought differential amount to tax under head capital gains - Whether since (i) proprietary concern of assessee was taken over by company as a going concern, (ii) from financial year 2002-03 to 2007-08, assessee had retained more than 51 per cent of shareholding in company, (iii) no consideration from company had passed to assessee other than by way of allotment of shares, assessee had fully adhered to conditions laid down in sub-clauses (a), (b) and (c) of section 47(xiv) - Held, yes - Whether therefore, sale transaction in question was a transfer within meaning of section 47(xiv) and surplus over net worth was exempt from income-tax - Held, yes [In favour of assessee] FACTS During the previous year relevant to the assessment year 2003-04, the assessee had sold his proprietary concern as a going concern for a certain consideration to a company. He did not admit any tax liability on the sale transaction on the plea (i) that the sole proprietary concern had been purchased as a going concern by the company, (ii) that he had not received any consideration or benefit directly or indirectly other than by way of allotment of shares in the company, (iii ) and that, therefore, the transaction in question was covered under the provisions of section 47(xiv ). The Assessing Officer held that the transfer of the proprietary concern would fall under section 50B as slump sale. He, therefore, treated the difference between the net worth of the proprietary concern and the sale proceeds as profit on sale of business and finally brought the differential amount to tax under the head 'capital gains'. On appeal, the Commissioner (Appeals) held that the transaction in question was covered under the provisions of section 47(xiv) and, therefore, the surplus over the net worth was exempt from income-tax. On second appeal by the revenue: HELD The Assessing Officer had simply opined that the transfer of the proprietary concern would fall under section 50B as slump sale. He had not cared to examine if the conditions as stipulated regarding transfer as a slump sale were satisfied or not. The proprietary concern was taken over by the company as a going concern for a certain consideration. The difference between the net worth and the sale consideration was to be considered as a goodwill. Admittedly, the transfer of the proprietary concern was made as a going concern for a consideration only by way of allotment of shares of the company, which could not be regarded as transfer for the purpose of charging capital gains. [Para 4] Further, the shareholding pattern of the company from the financial year 2002-03 to 2007-08 showed that the assessee had retained more than 51 per cent of shareholding in the company all through these years as stipulated in section 47(xiv). In the net worth statement of the assessee, the investment in the company was found to be intact as shareholding and, admittedly, no consideration from the company had passed to the assessee other than by way of allotment of shares, which is also one of the requirement of section 47(xiv). Thus, the assessee had fully adhered to the conditions laid in clauses (a), (b ) and (c) of section 47(xiv). Hence, the

assessee was eligible to claim the transaction in question as exempt from income-tax in view of section 47(xiv). [Para 5] The term 'sole proprietary concern sells or otherwise transfers any capital assets' used in section 47(xiv) purportedly establishes that 'sale' is also exempt under section 47(xiv). When there is a specific provision, i.e., section 47(xiv) in the Act dealing with a particular case, it is not advisable to shift to other similarly worded provision. Hence, section 50B would not apply to the instant case. It is true that the assets and the liabilities of the proprietary concern cannot become the assets and liabilities of the company before the succession. The term 'immediately before' used in clause (a ) of section 47(xiv) cannot be taken to mean that they should precede the succession. The transfer can take place only at the time of succession and not before, which is impossible. Consequently, the sale transaction in question was a transfer within the meaning of section 47(xiv ) and the surplus over the net worth was exempt from income-tax. [Para 6] Therefore, the appeal of the revenue was liable to be dismissed. [Para 7] CASE REVIEW K.V. Mohammed Zakir v. Asstt. CIT [2010] 36 SOT 433 (Coch.) (para 5) followed. CASES REFERRED TO K.V. Mohammed Zakir v. Asstt. CIT [2010] 36 SOT 433 (Coch.) (para 4). Anirudh Rai for the Appellant. Philip George for the Respondent. ORDER Hari Om Maratha, Judicial Member. - This appeal of the Revenue, for assessment year 2003-04, is directed against the order of the ld. CIT(A), Coimbatore, dated 11.6.2009. The sections mentioned in this order are that of Income-tax Act, 1961. 2. Briefly stated, the facts of the case are that the assessee namely, Shri Madan Mohan Chandak, filed his return of income for assessment year 2003-04 on 1.12.2005 admitting total income of Rs. 8,55,290. This return of income was processed u/s 143(1) on 25.3.2004. Subsequently, the Assessing Officer noticed that during the previous year relevant to assessment year 2003-04, the assessee had sold a proprietary concern, M/s Maya Agencies as a going concern for a consideration of Rs. 5 crores to M/s Sri Manmaya Textiles Private Ltd., Erode (hereinafter referred to as the 'Company'). The Assessing Officer was of the view that the assessee had earned profit on the sale of this concern but did not include profit in the computation of income and also did not make any claim regarding exemption/deduction of the said income of Rs. 4,62,10,283, therefore, income chargeable to tax had escaped assessment. Consequent upon this view, the Assessing Officer took action u/s 147 by issuing notice u/s 148 on 20.7.2007. The assessee filed return of income on 11.9.2007 admitting the same income as admitted in the original return filed on 1.12.2003. It was found by the Assessing Officer that the assessee had sold a going concern to the company and the net worth of which was only Rs. 37,89,717. He invoked Explanation 1 of section 50B by treating the difference between the net worth of the concern and the sale proceeds as 'profit' on sale of business and finally brought the differential amount to tax. The submission of the assessee was that the sole 'proprietary concern' had been purchased as a going concern by the company and the assessee had submitted the entire details called for through letter dated 17.12.2008, and also clarified that the assessee had complied with the provisions of section 47(xiv) and that he had not received any consideration or benefit directly or indirectly, other than by way of allotment of shares in the company. In view of the assessee, the sale transaction cannot be considered as a 'slump sale' or 'transfer' of a capital asset, so, the surplus by way of allotment of shares should not be treated as income from capital gains. But the Assessing Officer was not agreeable and he has taxed the differential amount as Long Term Capital Gains (LTCG). Being aggrieved, the assessee preferred appeal and was able to convince the ld. CIT(A) that this case fell u/s 47(xiv) and the factual and legal matrix conjointly go to establish that the conditions stipulated in this section stand fulfilled and therefore, this transfer has to be considered in terms of section 47(xiv) by holding the surplus of net worth as exempt from income tax. Now the Revenue is aggrieved. 3. The main plea of the Revenue before us is that the transaction in question is not covered under the provisions of section 47(xiv) because the transfer of 'assets and liabilities', as a going concern, was not preceded by succession of the business of proprietary concern by the company which is a pre-condition u/s 47(xiv). According to the ld.DR, it is a case of slump sale covered u/s 50B as has been held by the Assessing Officer. The ld.AR has reiterated the reasons given by the ld. CIT(A) and also further submitted that section 47(xiv) says where sale of proprietary concern is succeeded by a company, this means the company steps into the shoes of the sole proprietor. The succession is to the business qualified by the phrase "as a result of which" - which refers to the 'act of succession'. This 'succession' terminates into 'transfer of the assets, etc." Hence, the succession itself states that the transfer is a result of succession meaning thereby the succession has already taken place and as

a result of this the company acquires the assets by way of vesting. There can be no case of any transfer of assets and liabilities preceding the succession. It was argued that succession in itself means the process of succeeding. Therefore, in the case of succession, transfer is simultaneous. 4. We have considered the rival submissions. There is no dispute regarding the factum of sale of proprietary concern and the consideration etc. In fact, the Assessing Officer has tilted towards the provisions of section 50B and has ignored to consider the conditions stipulated in section 47(xiv ), which is directly applicable to the facts of this case. In case there are more than one provision concerning one subject, the one which is favourable to the assessee has to be given precedence. In our opinion, the Assessing Officer has simply opined that this transfer will fall u/s 50B as 'slump sale' and thus, he has proceeded to charge capital gains as stipulated in that section r.w.s 2(42C). The Assessing Officer has not cared to examine if the conditions as stipulated regarding transfer as a 'slump sale' are satisfied or not. The proprietary concern was taken over by the company as a going concern for a consideration of Rs. 5 crores. The difference between the net worth and the sale consideration is to be considered as a goodwill. Admittedly, the transfer of the proprietary concern was made as a going concern for a consideration only by way of allotment of shares of the company which according to us cannot be regarded as transfer for the purpose of charging capital gains. In this regard, the ld.AR has relied on the decision of Cochin Bench of the ITAT in the case of K.V. Mohammed Zakir v. Asstt. CIT [2010] 36 SOT 433 , in which one of us (Hon'ble VP) was constituting the Bench and the Bench held as thus: "In terms of provisions of s. 47(xiv) any transfer of a capital asset will not be regarded as transfer liable to capital gains tax, if the conditions under cls. (a), (b) and (c ) of the said section are complied with. Sub-cl(a) specifies that all assets and liabilities have to be transferred by the sole proprietary concern to the company. This is what has been done in the instant case. The liabilities of the proprietary concern have been taken as including the amount of loan payable by the proprietary concern to the proprietor as on 1st Oct., 2000. The balance in the current account of the proprietor as on 30th Sept., 2000 was treated as the liability of the sole proprietary concern to the proprietor, which he is entitled to withdraw on demand. The current account is very much a current liability, to be paid by the sole proprietary concern to the proprietor. Otherwise, the balance need not have been kept under current account in liabilities. All current accounts whether in sole proprietary concern or in a partnership firm due to the proprietor/partner as the case may be, are current liabilities. This is the well accepted position in accountancy and also has been settled in law by judicial decisions. When the assets and liabilities of the sole proprietary concern have been transferred to the company, there was a clear agreement between the proprietor and the company (both are different legal entities) as to what constitute the assets and liabilities for the purpose of the transfer and what is the "consideration" payable. In determining the liabilities for the purpose of transfer, it has been agreed that the current account balances of the proprietor in the books of the sole proprietary concern will be taken over as a liability on loan account by the limited company and to be discharged as loan as such. Thus, under sub-cl. (a ) of the section, such loan has to be necessarily to be transferred as a liability along with all other liabilities to comply with the provisions of sub-cl. (a). This is also a matter of agreement/contract relating to the transfer and also in accordance with well-accepted principles in accountancy. Now, after transferring the liabilities as above, what remains as balance only can be the "consideration" for purpose of the transfer. No part of the liability can enter into the computation of consideration. The AO cannot convert the part of liability transferred as loan by the proprietary concern into consideration or part of the consideration. In this case, there is no receipt of any benefit involved in the transfer of the undertaking for the agreed values. What is to be received is only the consideration for the transfer, as agreed upon between the transferor and the transferee. The expression "consideration" is not defined in the IT Act. Therefore, the meaning assigned in the Indian Contract Act has to be applied. Sec. 23 of the Indian Contract Act, 1872 defines "consideration" as follows : "When, at the desire of the promisor the promisee or any other person has done, or abstained from doing, or does or abstain from doing something, such act or abstinence or promise is called a consideration for the promise." So, "consideration" is something which arises on the basis of an agreement in a contract between the two persons for doing certain act or thing. The consideration, therefore, is what is agreed upon between the two parties. Thus, where the consideration for transfer of an undertaking, is agreed upon as certain amount to be paid for transfer of the assets and liabilities such amount of consideration as agreed is to be applied/adopted in all cases. In the instant case, it has been agreed between the two parties that the consideration for the transfer of all the assets and liabilities of the undertaking, as determined and for which the shares are to be allotted was Rs. 2,55,00,000 which, initially was to be treated as an "advance" towards share capital against which shares are to be allotted by the company to the proprietor of the sale proprietary concern. The proprietor in this context, per se, is different and distinct from the sale proprietary concern. The assets and liabilities are those of the sole proprietary concern. The balance to the credit of the proprietor in the current account treated as loan due to the proprietor, therefore, will be a genuine liability of the sole proprietary concern to the proprietor. Thus, there could be no scope for any confusion, as to the nature of the liability due on loan account and as to the

amount of consideration payable to the proprietor by the proprietary concern. The consideration is payable by the limited company (transferee) to the sole proprietary concern which is the transferor, for the limited purpose of the transfer envisaged under this section, since the undertaking transferred to the company is that of the sale proprietary concern." 5. In our view, the facts of the above case and the case in hand are exactly identical. The conditions under clauses (a), ( b) and (c) of this section stand fulfilled by the assessee. The ld. CIT(A) has found that business purchase agreement revealed that the proprietary concern was taken over by the company as a going concern and this fact has not been disputed by the Revenue. It is also seen that the shareholding pattern of the company from the year 2002-03 to 2007-08, as submitted before the Registrar of Companies shows that the assessee had retained more than 51% of shareholding in the company all through these years as stipulated in section 47(xiv). This fact was verified from the net worth statement of the assessee in which investment in the company is found to be in tact as shareholding and admittedly, no consideration from this company has passed to the assessee other than by way of allotment of shares which is also one of the requirement of section 47(xiv ). These facts clearly go to evince that the assessee has fully adhered to the conditions laid in section 47( xiv). Thus, by respectfully following the above noted decision of ITAT Cochin Bench, the assessee is eligible to claim this transaction as exempt in view of section 47(xiv). We are also in agreement with the other reasonings given by the ld. CIT(A) in this regard and ld.AR's submission regarding the intention of the legislation in enacting section 47(xiv). Section 47(xiv) reads as under: "47. Transactions not regarded as transfer.Nothing contained in section 45 shall apply to the following transfers : (xiv) where a sole proprietary concern is succeeded by a company in the business carried on by it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset or intangible asset to the company : Provided that (a)all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company; (b)the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and (c)the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company;" 6. Even in a case of sale, this section would apply. The term 'sole proprietary concern sells or otherwise transfers any capital asset" purportedly establishes that 'sale' is also exempt. When there is a specific provision i.e. 47(xiv) in the Act dealing with a particular case, it is not advisable to shift to other similarly worded provision. Hence, section 50B will not apply to the facts of the given case. It is true that the assets and the liabilities of the proprietary concern cannot become the assets and liabilities of the company before the succession. The term "immediately before" cannot be taken to mean that they should precede the succession. The transfer can take place only at the time of succession and not before, which is impossible. Consequently, we do not find any infirmity in the order of the ld. CIT(A) and we are also of the considered opinion that this transaction has to be treated as a transfer within the meaning of section 47(xiv) and the surplus over the net worth is held to be exempt from income tax. 7. In the result, the appeal of the Revenue stands dismissed. *In favour of assessee.

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