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Transaction Tax Alert – Exclusion of intangibles does not disqualify transaction as slump sale

24 May 2017

EXCLUSION OF INTANGIBLE ASSET DOES NOT DISQUALIFY SLUMP SALE U/S 50B

Background

Section 50B of the Income-tax Act, 1961 (‘the Act’) provides for computation of capital gains arising on slump sale of undertaking.

Recently, the Kolkata Income-tax Appellate Tribunal (‘ITAT’), in the case of Ambo Agro Products Limited[1], has held that Section 50B of the Act would continue to apply even in situation where intangible assets such as trade name/logos/trademarks etc. related to the business undertaking are not transferred under the slump sale arrangement.

We, at BDO, have summarised the findings of the said ruling.

Facts of the Case

Ambo Agro Products Limited (‘Ambo’) was engaged in the business of manufacturing of edible oil from its only manufacturing unit situated at Haldia (‘business undertaking’).

Ambo entered into a Business Transfer Agreement (‘BTA’) to sell the said business undertaking, on slump sale basis, to M/s K. S. Oil Limited for a lump sum consideration of INR 125,00,00,000.

The Assessing Officer (‘AO’) examined the sale of the said unit and accepted the claim of the assessee.

The Commission of Income -tax (‘CIT’) invoked provisions of Section 263 of the Act and disqualified the transaction as slump sale under Section 50B of the Act on the following basis: -

  • The going concern status of Ambo, as an entity, was affected by sale of the only business undertaking it had;
  • No separate segmental accounts were reflected in the audit report of Ambo for the said business undertaking;
  • BTA excluded the transfer of name / trade name / logos / trademarks, which was related to the business undertaking.

Aggrieved by the order of CIT, Ambo filed an appeal before  the ITAT

ITAT Ruling

The Hon’ble ITAT held that pursuant to slump sale of business undertaking, the assessee survives (i.e. the company does not dissolve), as a legal entity. It’s other activities are not affected by slump sale. Hence, it is still a going concern post sale of the business undertaking. The inference drawn by CIT was held to be unacceptable.

With respect to no separate segmental accounts being reflected, the Hon’ble ITAT held that if the auditor omits to report a segment, that simply means that according to the auditors, other activities (trading in current case) from where the assessee earns income is not significant and does not constitute the core segment which needs to be reported as per Accounting Standard 17. Thus, non-reporting of separate segment cannot be used by the CIT against the assessee to draw adverse inferences.

The Hon’ble ITAT also disregarded CIT’s basis of holding that exclusion of intangible assets such as name / trade name / logos / trademarks related to business undertaking from BTA disqualifies the transaction as a slump sale under Section 50B of the Act. It was observed that the purchaser i.e. M/s K.S. Oil Limited was already in the same line of business and wanted to utilise the unit to manufacture and sell edible oil under its own name and brand. Thus, purchasing the name / trade name / logos / trademarks of the assessee did not make commercial sense to the buyer and hence, was not purchased under the BTA. An exclusion of the said intangible cannot in any way affect the character slump sale transaction of the entire business undertaking.

Considering the above, the Hon’ble ITAT squashed the CIT’s order and held that the sale of business undertaking was covered under the purview of Section 50B of the Act albeit the name / trade name / logos / trademarks related to business not being transferred.

BDO’s comment

The Hon’ble ITAT’s judgement fortifies the view mere carve out of some assets / liabilities which are related to business but not transferred, due to business exigencies, cannot alter the essence of transaction in so far as the buyer is able to carry on the acquired business on a going concern basis without any interruptions.

 

[1] Ambo Agro Products Limited vs CIT – Kolkata Bench  - [2017] 81 taxxmann.com 305