ROHAN SOFTWARE (P) LTD. v. INCOME TAX OFFICER
[Citation -2007-LL-0830-2]

Citation 2007-LL-0830-2
Appellant Name ROHAN SOFTWARE (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 30/08/2007
Assessment Year 2000-01
Judgment View Judgment
Keyword Tags memorandum of understanding • transfer of capital asset • income chargeable to tax • reopening of assessment • short-term capital gain • intellectual properties • development of software • determination of value • long-term capital gain • lump sum consideration • intellectual property • software development • technical knowledge • revenue authorities • additional evidence • computer programmes • written down value • technical know-how • business activity • reason to believe • transfer of asset • trading activity • audited accounts
Bot Summary: Works Ltd. 1992 198 ITR 297, since the proceedings under section 147 are for the benefit of the revenue and not for the assessee, and it was aimed at gathering the 'escaped income' of the assessee, it cannot be allowed to be converted as 'revisional' or 'review' proceedings at the instance of t h e assessee, thereby making the machinery unworkable. Shri Manoj Kunkalienkar and Smt. Sudha Kunkalienkar have been restricted to associate themselves directly or indirectly to any business similar or identical with the present business of the assessee and IISL. Assessing Officer put again to the Director of the assessee that the perusal of Memorandum of Understanding reveals that the transfer of asset is for a specific period and clause 8 mentions about the ownership of IISL over the improvements in technology, designs and innovations made during the said period and he was asked to explain as to how it is transfer of IPR etc. Learned counsel submitted, the other reason given by the Assessing Officer, which was upheld by the learned CIT(A), is that the assessee developed specialized skills over a period of time and the professional fees earned by the assessee jumped drastically during the period from Rs. 2.71 lakhs to Rs. 84.09 lakhs and it is difficult to say that the said intangible assets were developed prior to three years period. Assessee developed various software, the rights of which belonged to RSPL. Assessee was doing commercial advertisement and billing system, financial accounting system, terminal emulator, data logas/manager for packing machine controllers etc. What is business activity of the assessee According to the Assessing Officer, in the reasons recorded for reopening, assessee's business includes intellectual properties, codes, formulae and designs, etc. In the instant case of the assessee, though in the purchaser's books of account the individual assets have been priced independently, assessee had not assigned separate values and consequently sold the items for independent price. Assessee contended further that there should be conscious concealment or conscious furnishing of inaccurate particulars of income, which was not there in the instant case of the assessee.


Per K.P.T. Thangal, Vice President: These appeals by assessee, pertaining to assessment year 2000-01, are disposed of by this consolidated order, for sake of convenience. 2. ITA No. 1429/Mum./2005 - first ground of objection by assessee i s directed against order of CIT(A) in upholding reopening of assessment under section 147 of Income-tax Act, 1961. 3. Assessee filed return on 29-5-2000 declaring income at Rs. 9,55,370 along with audited accounts and other documents. reopening was done under section 147 of Act, vide order sheet entry dated 12-1-2004. reasoning for reopening is reproduced at pages 1 and 2 of assessment order, which reads as under: "The assessee-company has filed return of income on 29-11-2000, which has been accepted under section 143(1) of Act. perusal of balance-sheet reveals that capital reserves have increased by Rs. 1.54 crores. Further, assessee has enclosed copy of Memorandum Of Understanding dated 24-8-1999 executed between assessee-company and M/s. ICICI Infotech ervices Ltd. On going through same, it is revealed that assessee-company has received Rs. 1.78 crores from M/s. ICICI Infotech Services Ltd. for transferring all assets and properties of assessee-company in its business including intellectual properties, codes, formulae and designs, etc. Further, it is also mentioned that assessee- company shall not transfer building, car and assets and liabilities regarding income-tax matters. assessee has considered receipt of this consideration as capital gain and invested same in mutual funds which are exempt from capital gain tax. Further, perusal of said MOU clearly reveals that consideration received by assessee is not in nature of capital gains. No assets, whatsoever, mentioned in balance-sheet of assessee- company has been transferred. This consideration has been received for utilizing services of two directors of assessee-company and their intellectual property. This is receipt of consideration for rendering off services by assessee-company to M/s. ICICI Infotech Services Ltd. Thus above receipt is revenue in nature and has to be treated as business income of assessee. Hence, this is in nature of business income and should be taxed accordingly. In view of above, I have reason to believe that income of Rs. 1.78 crores has escaped assessment. case of assessee is covered by Explanation 2(c) of section 147 of Income-tax Act, 1961 and, hence, I consider this as fit case to issue notice under section 148 of Income-tax Act, 1961." 4.Assessing Officer formed opinion that he had good reason to believe that income of Rs. 1.78 crores has escaped assessment and assessee's case is covered by Explanation 2(c) to section 147 of Act. Hence, he reopened assessment issuing notice under section 148 of Act, in response to above, assessee filed return on 1-3-2004 disclosing same income. 5. Assessee objected reopening before CIT(A). It was contended t h t Assessing Officer did not provide assessee reasons for reopening assessment, in spite of request made by assessee. Further, it was contended, there was absolutely no information or material which will lead to belief that income chargeable to tax has escaped assessment. After completion of assessment, nothing new has happened or fresh information came into possession of revenue. Hence, it was submitted, Assessing Officer went beyond his jurisdiction by resorting to section 148. It is baseless and unwarranted. 6. CIT(A) called for remand report from Assessing Officer on this point. It was submitted by Assessing Officer that assessee was aware of reasons for reopening and were very much in grip of issue in question. That is why, according to Assessing Officer; Director Shri Manoj Kunkalienkar avoided filing of return in response to notice under section 148 or avoided completion of statement under section 131 of Act. It was further submitted, if belief entertained by Assessing Officer is based on reasons, which are relevant and sufficient, then assessee cannot challenge sufficiency or insufficiency. For above proposition, Assessing Officer relied upon decision of Hon'ble Supreme Court in case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 and decision of Hon'ble Allahabad High Court in case of Ram Prasad v. ITO [1995] 82 TAXMAN 199. It was further submitted, relying upon decision of Hon'ble Supreme Court in case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297, since proceedings under section 147 are for benefit of revenue and not for assessee, and it was aimed at gathering 'escaped income' of assessee, it cannot be allowed to be converted as 'revisional' or 'review' proceedings at instance of t h e assessee, thereby making machinery unworkable. Relying upon decision of Hon'ble Delhi High Court in case of Rakesh Aggarwal v. Asstt. CIT [1996] 87 TAXMAN 306, it was submitted that under amended provision power of reopening is much wider and can be exercised even if assessee has disclosed fully and truly all material facts necessary for assessment. 7. Considering above submission of Assessing Officer and of assessee, CIT(A) upheld reopening. Aggrieved by above order, assessee is in appeal before Tribunal. 8. Learned counsel for assessee submitted, reasons recorded for reopening, first of all, was not furnished to assessee after issue of notice under section 148 of Act. Hence, assumption of jurisdiction by Assessing Officer under section 147 is unlawful in view of decision of Hon'ble Supreme Court in case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19. Learned counsel further submitted, if Assessing Officer had furnished copy of reasons recorded for reopening assessment, assessee would have had opportunity to present its view before him about legality of his action and could have even succeeded in persuading him to d r o p proceedings. Hence, learned counsel submitted, order of Assessing Officer as confirmed by CIT(A) should be held as beyond jurisdiction. 9. learned Departmental Representative, on other hand, supported orders of revenue authorities. 10. We heard rival submissions, gone through orders of revenue authorities and decisions cited. argument of learned counsel is to be rejected in light of Delhi Bench decision of Tribunal in case of ITO v. Smt. Gurinder Kaur [2006] 102 ITD189, wherein Tribunal held, earlier decision of larger Bench of Hon'ble Supreme Court in case of S. Narayanappa v. CIT [1967] 63 ITR 219, was not brought to notice of their Lordships while deciding case of GKN Driveshafts (India) Ltd. (supra). Hence, appeal by assessee on this ground fails and dismissed. 11. On merit, ground taken by assessee is directed against order of CIT(A) in upholding view taken by Assessing Officer that consideration of Rs. 178 lakhs for transfer of business to M/s. ICICI Infotech Services Ltd. was not made on account of "slump sale of business as going concern" but revenue receipt chargeable under section 28 of Act as business income. 12. Facts leading to dispute, briefly, is as under:- As we mentioned earlier hereinabove, in response to notice under section 148 dated 12-1-2004 and subsequent to return filed by assessee on 1-3- 2004 in response to above notice, statement from Director of assessee, Shri Manoj Kunkalienkar was recorded on oath on 29-1-2004 and 12- 3-2004. Answering to Question No. 3, it was stated that assessee-company came into existence in 1994 and till time of sale assessee was in field o f developing software IPRs and managed to acquire reputable clients like Indian Express, RCF, IIT Mumbai, etc. software which were developed for which rights belonged to assessee [M/s. Rohan Software Pvt. Ltd. ("RSPL" for short)], were commercial advertisement and billing system, financial accounting system, terminal emulator, data logas/manager for packing machine controllers etc. business along with all rights to IPRs (intangible assets) developed was taken over by M/s. ICICI Infotech Services Ltd. ("IISL" for short) in 1999. Consequent to this, assessee was prohibited from doing any business using/selling of any of these IPRs. But Director continued whole time employment in IISL as well. At same time, he continued to be Director of RSPL (assessee), which does not have any business. In response to further Question, it was stated that assessee (RSPL) would transfer all IPRs codes, formulae, designs to IISL for consideration of Rs. 1.78 crores and RSPL will make all arrangements to close business within time agreed with IISL. promoters of RSPL (assessee), viz., Shri Manoj Kunkalienkar and Smt. Sudha Kunkalienkar have been restricted to associate themselves directly or indirectly to any business similar or identical with present business of assessee and IISL. Assessing Officer put again to Director of assessee (Question No. 5) that perusal of Memorandum of Understanding ("MOU" for short) reveals that transfer of asset is for specific period and clause 8 mentions about ownership of IISL over improvements in technology, designs and innovations made during said period and he was asked to explain as to how it is transfer of IPR etc. forever? Answering to this Question, it was submitted, Point No. 1 of MOU - any intellectual properties, codes, formulae, designs, etc. shall be ermanent property of IISL forever. Any improvement done after transfer by IISL in IPR etc. will continue to be their own property. Three years period mentioned in clause 7 of MOU relates to employment, conditions of promoters of RSPL and it does not refer to transfer of IPR (intangible assets) etc. It was again put to Shri Manoj Kunkalienkar, Director of assessee as to whether MOU specifically restricts assessee-company from using assets claimed to have been transferred. It was stated, clause numbers 1, 4, 7 and 8 read together will show that all IPRs etc. are transferred to IISL forever. He was again asked to elaborate term assets and properties mentioned in clause 1 of agreement and its exclusions. In response to above Question, it was stated: "assets of any software company include intangible assets like IPRs codes, formulae, etc. Asset includes tangible and intangible assets. assets, which were excluded, were office and motor car and assets and liabilities relating to income-tax matters. In nutshell, all intangible assets and RSPL was transferred for consideration to IISL". As to Question whether intangible assets are reflected in Balance Sheet of assessee-company as per Companies Act, 1956, it was stated, it is not so because such inclusion is not mandatory as per Companies Act. Shri Manoj Kunkalienkar was asked to explain as to why transfer of intangible assets, which was not reflected in company's Balance Sheet, should not be treated as capital receipt. To this, it was stated, he is not in position to reply and asked for later date to explain. Subsequently assessee filed letter dated 8-3-2004, wherein it was stated that amount received by assessee at Rs. 178 lakhs from IISL is for sale of its business as going concern, which has to be treated as slump sale. consideration received on sale of going concern is invested under section 54EA of Income-tax Act, 1961. It was also stated that report in Form No. 3CAE of accountant under section 50B(3) relating to computation of capital gains in case of slump sale was also submitted. According to assessee, whether sale is slump sale or not, one has to look at overall transaction and ascertain whether basic structure of unit is transferred or not and one cannot go by individual items of assets being transferred unless particular test goes to root of matter, i.e., without intellectual properties, codes, formulae, designs, programs, etc., business of assessee has no existence. Assessee further stated that except for office premise, motor car, income-tax payable or receivable and cash and bank balance, all other assets and liabilities are transferred by RSPL to IISL for lump sum consideration of Rs. 178 lakhs as going concern, along with past, present and future business. It was submitted that what is not transferred has no importance. It was further submitted, there is no rule as such that in order to constitute slump sale, there should be, in every matter, transfer of entire business. For above proposition assessee relied upon decision of jurisdictional High Court in case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 (Bom.), which was case of publishing house, who sold only two of its branches to two different co-operative societies, yet Hon'ble High Court held it to be slump sale. 13. However, contention of assessee was not acceptable to Assessing Officer. While coming to above conclusion, in view of income and expenditure and fixed assets chart, which is given at page 5 of assessment order, Assessing Officer held, year by year income of assessee was increasing along with fixed assets and during year under consideration assessee entered into agreement with IISL to transfer intellectual property developed over years. agreement has been executed on 24-8-1999 with retrospective effect from 1-4-1999. Assessing Officer held, there was jump in t h e professional receipt and compensation received by assessee for using intellectual property, code, formulae, etc. for period of three years is justifiable. He held, assessee in fact had given licence to use said intellectual property, code, formulae, design, etc. and for that assessee has been compensated. transfer is for three years, during which promoters of assessee-company are in employment of IISL. Hence, he held, amount received by assessee is to be treated as revenue receipt, taxable. 14. Assessing Officer further noted, assessee has not transferred any capital asset that is reflected in Balance Sheet as on 31-3-2000. gross block of fixed asset as on 1-4-1999 is Rs. 28.31 lakhs, which includes motor c r , computers, office equipments, furniture and fixtures along with office premise. None of these assets has been transferred to IISL. In short, Assessing Officer held, consideration of Rs. 1.78 crores received by assessee- company has not been received for transferring any asset mentioned in Balance Sheet. 15. While coming to above conclusion, Assessing Officer had taken note of clause 1 of MOU, which specifically stated that "all assets and properties (except those specifically excluded in agreement) of RSPL in its business as of this date including intellectual properties, codes, formulae, designs etc., shall be transferred to IISL for consideration of Rs. 178 lakhs." He held, assessee is software company. intellectual property, codes, formulae, designs, etc. are trading commodities of assessee. They charge professional fees for such services. Assessee is engaged in software development and providing selected services. This conclusion was arrived at by Assessing Officer considering para 1, page 2 of MOU, which highlights activity of assessee, which reads as under:- "Whereas RSPL is engaged in business of software development and related services and has developed specialized skills and technical knowledge and know-how of its own." receipts, Assessing Officer held, assessee always credited as "professional income", which was clear from TDS certificates issued. He further held: "thus, in no way, IP, code, formulae, design, etc. are intangible assets. All these years, assessee-company was engaged in providing software related services, and received professional charges. software related services include transfer of specialized code, formulae, designs to customers. transfer of such specialized skill is made on condition that user will not further transfer to anybody else. Such transfer is governed by Copyrights Act. supplier is not barred from transferring same IP to other customer. In instant case, assessee-company was engaged in providing software related services such as transfer of their specialized skills, like any other software company. During previous year, assessee-company has entered into agreement with IISL that all their pecialized skills including code, formulae would be exclusively used by IISL. assessee-company has received consideration for such transfer of rights. This is transfer of licence to use specialized skill developed by assessee-company. However, this is not permanent transfer. perusal of clause 8 of said MOU reveals that all improvements in technology, designs and innovations made during period promoter are in employment of IISL shall be property of IISL. clause 5 reveals that promoter will be in employment at least for period of three years. Thus, it is clear that intellectual property, code, formulae, design, etc. transferred by assessee-company may be traded/used after period of three years from date of transfer. Further, clause 7 to said MOU clearly restricts promoter of assessee-company from any association or carrying out any business, which similar to or identical with business carried on by assessee- company or IISL. said restriction is also for period of three years from date of transfer. Thus, it is apparent that assessee may use said code, formulae, etc. after 3 years from date of transfer, i.e., 1-4-1999. In view of above, it would be wrong to term said transaction as sale/transfer. As already stated above, in no circumstances it is permanent transfer/sale. At most, it is transfer of licence fee use. Hence, it is trading activity and in no circumstances it can be taken as capital receipt." To come to above conclusion, Assessing Officer relied upon decision of Hon'ble Delhi High Court in case of CIT v. Dr. R.L. Bhargava [2002] 256 ITR 42. 16.Coming to alternate contention of assessee that it is slump sale, Assessing Officer rejected said contention. He held, licence to use skills has been transferred to IISL. There is no transfer of business as such in this case and transfer is for period of three years and after three years assessee could use skills as per their choice. When there is no transfer of business as such but only handing over licence to use skills developed by assessee-company, there cannot be question of slump sale. While coming to above conclusion, Assessing Officer further noted, IISL is single largest client of assessee. By virtue of new set up, employees of assessee- company have now become employees of IISL. Hence he held, there is transfer of business as such does not hold good. He held, in past, i.e., before signing of MOU, employees of assessee-company were working for client (IISL) virtually and this system continues. Hence, Assessing Officer rejected assessee's contention of slump sale also. 17. Without prejudice to above, Assessing Officer held, if at all transfer is of capital asset, it should be treated as short-term capital gain. Assessee-company was incorporated on 11-9-1995. transfer of intangible assets was effective from 1-4-1999. time span between incorporation of assessee-company and said transfer is of 3 years. Assessee developed specialized skills over period. Assessee's professional receipt increased subsequently, drastically from Rs. 2.71 lakhs to Rs. 84.09 lakhs. Hence, Assessing Officer held, it is difficult to say that intangible assets were developed prior to three years period. development of software is ongoing process. Hence, he held, skills transferred are probably developed within three years period. As such, at most, gain arising out of transfer of said intangible assets could be held as short-term capital gain. This short-term capital gain is not allowed exemption on account of investment made as per section 54EA of Act. For above reasons, Assessing Officer treated, alternatively, this is short-term capital gain. Aggrieved by above order, assessee approached first appellate authority. 18. Appeal by assessee was rejected by learned CIT(A) vide paras 7, 8 and 9 of his order, observing as under:- "7. I have carefully considered facts of case, submissions of appellant and arguments of Assessing Officer in assessment order as well as in Remand Report. It is evident from balance sheet as on 1-4-1999 that value have been assigned to other fixed balance sheet as on 1-4-1999 that value have been assigned to other fixed assets which are computers Rs. 3,66,657, office equipments Rs. 39,178 and furniture and fixture Rs. 3,16,574 which have been taken over by ICICI Infotech Services Ltd. This fact is also evident from copy of extract of corresponding general entry passed by M/s. ICICI Infotech Services Ltd. on acquisition of software business of assessee-company [filed as additional evidence before CIT(A) on page No. 35 of assessee's submissions dated 16- 10-2004]. extract very clearly brings out entries passed by M/s. ICICI Infotech Services Ltd. in its books of account, wherein particular price or value has been assigned to certain assets/liabilities taken over by it. Assessing Officer has rightly concluded that there is no transfer of all assets of appellant-company to M/s. ICICI Infotech Services Ltd. Secondly there are individual, separate and independent items of fixed assets to whom value have been assigned at their WDV appearing in balance sheet of appellant- company as on 1-4-1999, i.e., date of transfer and corresponding entries passed by taking over company in its books of account as discussed above. Assessing Officer has rightly relied on jurisdictional High Court in case of Anant Electrical Company Ltd. v. CIT 237 ITR 587. Whole case laws relied by appellant are distinguishable on facts. So it makes amply clear that receipt of Rs. 1,78,00,000 is not slump sale and it is revenue receipt, which is taxable as business income. Therefore, this ground of appeal is also dismissed. 8. In Ground No. 5 appellant has opposed alternate action of Assessing Officer without prejudice to his finding that receipt in question is revenue receipt taxable as business income and alternatively, if at all it is capital gain, then it should be taxed as short-term capital gain. In this regard findings of Assessing Officer are self-speaking which are as under: 'Without prejudice to above, if at all it is transfer of capital asset, gain is short-term capital gain. assessee-company was incorporated on 11- 9-1995. said transfer of intangible assets is with effect from 1-4-1999. time span between incorporation of company and said transfer is of 3 & years. Further, assessee has developed specialized skills over period of time. perusal of table of (as mentioned above) professional receipts etc. clearly shows that income has drastically jumped from Rs. 2.71 lakhs to Rs. 84.09 lakhs during this period. Hence, it is difficult to say that said intangible assets were developed prior to 3 years period. development of software is ongoing process. said skills transferred are probably developed within 3 years period. Hence, at most gain arising out of transfer of said intangible asset could be held as short-term capital gain and not as long-term capital gain. Further short-term capital gain is not allowed exemption on account of investment made as per section 54EA of Act. Thus, entire gain is taxable under head "Short-term capital gain".' 9. I am in agreement with findings of Assessing Officer that in case receipt in question are not taxable as business receipts, then in view of facts mentioned by Assessing Officer in assessment order, it should be taxed as short-term capital gain." Aggrieved by above order, assessee is in appeal before Tribunal. 19. Learned counsel for assessee recapitulated facts as under:- Counsel submitted, first of all, learned CIT(A) confirmed assessment order of Assessing Officer and held that business of assessee was not transferred on slump sale basis as value has been assigned to various fixed assets. Counsel further submitted, according to CIT(A), this is clear from entries passed by IISL in its books of account, wherein particular price/value has been assigned to certain assets/liabilities taken over by it. In alternative, counsel submitted, CIT(A) held that this should be taxed as capital gain in view of facts stated by Assessing Officer. Learned counsel brought our attention to relevant clauses of MOU entered into by assessee and IISL. He submitted, assessee-company is engaged in business of software development and developed technical knowledge and know-how of its own. As per MOU dated 24-8-1999, entered into between assessee and IISL, entire business of assessee was transferred to IISL. Clause 1 of MOU states inter alia: "1. All assets and properties (except those specifically excluded in this agreement) of RSPL in its business as of this date including intellectual properties, codes, formulae, designs etc. shall be transferred to IISL for consideration of Rs. 178 lakhs. valuation is based on business valuation reports submitted by M/s. C.C. Choksi & Co. and M/s. N.M. Raiji & Co." Counsel submitted, from above it is clear that all business assets of assessee-company were transferred, except few that were retained by assessee vide clause 2 of MOU, which reads as under:- "2. RSPL shall not transfer building, car and assets and liabilities relating to income-tax matters of RSPL to IISL." Learned counsel submitted, assets retained vide clause 2 of MOU, i.e., building, car and assets and liabilities relating to income-tax matters of assessee, has no role or little role to play in business of assessee, which entirely consisted of trading in specialized skills and technical know-how relating to software development and corporate training in areas such as re- engineering, business applications, building client server applications, migrating legacy systems to open distributed systems, device drivers for Win95, Win-NT, Y2K projects, auditing software and real time software. In fact, counsel submitted, technical knowledge and know-how developed by assessee in relation to all above activities were transferred to IISL in its entirety. It is clear from clause 4 and clause 13 of MOU, which read as under:- "4. All business transactions carried out by RSPL with effect from 1-4-1999 till date of actual execution of transfer, shall be considered as executed in trust for and on behalf of IISL. All rights and obligations under existing contracts between RSPL and others (not being contracts of employment) pursuant to which business transactions referred to above are carried out shall continue and IISL shall be entitled to enforce rights thereunder without any restriction whatsoever. ** ** ** 13. This arrangement is to be given effect to on or before 31-3-2000 and both parties shall obtain all requisite approvals necessary for purpose, including in particular requisite approvals of respective boards and shareholders. promoters of RSPL shall take all necessary steps for achieving winding up of RSPL not later than 31-3-2000, unless later date is agreed to by IISL in writing. Till such time RSPL is wound-up, IISL shall have right to nominate director on board of RSPL". [Emphasis supplied] Learned counsel particularly stressed importance of term "winding up" in clause 13 of MOU, which he submitted, could only refer to corporate body or business entity. There is no way that it could refer to intellectual property rights as such. RSPL was wound up and entire business of assessee was transferred to IISL except few assets like motor car etc., which remained with promoters of erstwhile RSPL. Such retention cannot negate fact of transfer. In support of above contention, learned counsel brought our attention to definition of "slump sale" as given in section 2(42C) and also to definition of word "undertaking" as given in Explanation 1 to section 2(19AA) of Act, which read as under:- "2(42C) 'slump sale' means transfer of one or more undertakings as result of sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales. Explanation 1 - For purposes of this clause, 'undertaking' shall have meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2 - For removal of doubts, it is hereby declared that determination of value of asset or liability for 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." "2(19AA)** ** ** Explanation 1 For purposes of this clause, 'undertaking' shall include any part of undertaking, or unit or division of undertaking or business activity taken as whole, but does not include individual assets or liabilities or any combination thereof not constituting business activity." [Emphasis supplied] From above, learned counsel submitted, even particular business activity of undertaking can be transferred on slump sale basis. In instant case of assessee, it is exactly what had happened. perusal of Schedule of block of assets furnished for purpose of calculation of depreciation (page 35 of Paper Book) would clearly indicate that entire software business of assessee has been transferred. Elaborating further, counsel submitted, entire block of computers, office equipments and cellular phones and furniture and fixtures have been transferred. only assets not transferred were motor car and office premise. Surely, transfer of business of software does not necessarily to transfer these two assets. In support of above contention, counsel again relied and stressed on italics portion of Explanation 1 to section 2(19AA). Counsel further submitted, as per clause 5 of MOU, promoter Directors of assessee, who were also software experts, were allowed to work as full time executives of IISL at least for three years after transfer of business. As per clause 6 of MOU, willing employees of assessee-company would be employed with IISL after transfer, if they were found suitable. Counsel submitted, as per clause 7 of MOU, promoters of assessee-company, who now became executives of IISL for limited period of three years from date of transfer, cannot undertake or associate themselves directly or indirectly with any business, which is similar to or identical with business carried on by RSPL or IISL. This in effect is non-compete clause and incorporation o f same in MOU clearly established that software business of assessee has been transferred. Apart from these tangible assets, host of intangible assets, for example, intellectual properties, codes, formulae, designs, etc. as mentioned in clause 1 of MOU and also accepted by Assessing Officer were transferred. These intangible assets are inseparably linked with software business of assessee-company. Learned counsel further submitted, no separate value has been assigned to any of these assets of software business, either tangible or intangible. It points out only one thing - that software business of assessee has been transferred as whole, on slump sale basis, within meaning of section 50B. Counsel further submitted, stand of revenue that separate values have been assigned to fixed assets is baseless. On other hand, in fact, sub- section (2) of section 50B provides that even in case of slump sale, it is necessary to separately determine value of each asset and liability for working out "net worth" of undertaking/division that is under slump sale. Inviting our attention to Item Nos. 2, 6 as well Notes (3 and 5) of Form No. 3CEA (vide Rule 6H of Income-tax Rules, 1962), counsel submitted, law itself requires determination of value of each individual asset and liability of undertaking or division that is transferred as going concern by way of slump sale. This is because unless written down value of depreciable assets and book value of other assets and relatable liabilities are not taken separately and then aggregated, it would not be possible to determine "net worth" of undertaking/division thereof within meaning of sub-section (2) of section 50B, which specifically requires determination of "net worth" for purpose of computation of capital gains in case of slump sale. Even otherwise, counsel submitted, assessee cannot be held responsible for entries made in books of account of purchaser company in this regard. There cannot be any bar for purchasing company to make entries in its books of account by estimating value of each asset of business that has been acquired on slump sale. Such entries in books of account of purchaser do not affect assessee's transfer, much less slump sale. only requirement is that slump sale should be sale of "undertaking" as whole and not each asset of undertaking separately. Learned counsel submitted, decision relied upon by Assessing Officer in his Remand Report in case of CIT v. Artex Mfg. Co. [1997] 227 ITR 260 (SC) was prior to insertion of section 50B by Finance Act, 1999 with effect from 1-4-2000. definition of "slump sale" is given in newly inserted effect from 1-4-2000. definition of "slump sale" is given in newly inserted section 2(42C), which also came into effect from 1-4-2000, replacing earlier definition, which was omitted by Finance Act, 1990 with effect from 1-4-1990. judgment of Hon'ble Supreme Court in case of Artex Mfg. Co. (supra) is dated 8-7-1997. Hence, decision relied upon by revenue authorities had no applicability, as law has been changed. Even if assessee has assigned different values to individual assets and liabilities of undertaking, it has no impact on slump sale. Section 2(42C) speaks only sale of undertaking for lump sum consideration. It does not prescribe mode of quantification of lump sum consideration. In support of above, counsel relied upon decision of Hon'ble Supreme Court in case of CIT v. Mugneeram Bangur & Co. [1965] 57 ITR 299. Learned counsel submitted, other reason given by Assessing Officer, which was upheld by learned CIT(A), is that assessee developed specialized skills over period of time and professional fees earned by assessee jumped drastically during period from Rs. 2.71 lakhs to Rs. 84.09 lakhs and it is difficult to say that said intangible assets were developed prior to three years period. This finding of Assessing Officer as upheld by learned CIT(A) is objected by counsel and he submitted that this is inference without any basis and it is probability. He particularly brought following observation of Assessing Officer to our notice:- "The development of software is ongoing process. said skills transferred are probably developed within three year period. Hence, at most gain arising out of transfer of said intangible asset could be held as short- term capital gain and not as long-term capital gain." Learned counsel submitted, this finding is without any merit and without any basis. Business of assessee, counsel submitted, as noted above, commenced from 11-9-1995. sale was effected from 1-4-1999. Assessee was in business for entire period. finding of Assessing Officer as confirmed by learned CIT(A) is only probability and imagination, without any basis. In support of above, counsel again brought our attention to proviso to section 50B(1), which reads as under:- "50B. Special provision for computation of capital gains in case of slump sale.-(1) Any profits or gains arising from slump sale effected in previous year shall be chargeable to income-tax as capital gains arising from transfer of long-term capital assets and shall be deemed to be income of previous year in which transfer took place: Provided that any profits or gains arising from transfer under slump sale of any capital asset being one or more undertakings owned and held by assessee for not more than thirty-six months immediately preceding date of its transfer shall be deemed to be capital gains arising from transfer of short-term capital assets." Learned counsel submitted, there is no doubt, assessee was in business of software for more than thirty-six months, precisely about forty-two months. Counsel again stressed importance of clause 5 and clause 7 of MOU, which clearly state that promoters of assessee-company cannot directly or indirectly do any business, which is similar to or identical with business of RSPL and IISL. promoters are employed for three years with IISL but this does not change character of sale any how. On contrary, counsel submitted, by inserting clause 5 and clause 7 in MOU, by which employment for three years was provided to promoter directors of assessee by IISL and thereafter prohibiting them vide clause 7 directly or indirectly doing any business in similar or identical to those carried on by either RSPL or IISL, eliminated any possibility of competition. Hence, counsel submitted, orders of revenue authorities are liable to be reversed. 20. Replying to above, learned Departmental Representative submitted, assessee is in business of software. Assessee had reputed clients like Indian Express, RCF, IIT Mumbai, etc. Assessee developed various software, rights of which belonged to RSPL (assessee). Assessee was doing commercial advertisement and billing system, financial accounting system, terminal emulator, data logas/manager for packing machine controllers etc. Assessee was earning revenue by doing these services. M/s. ICICI Infotech Services Ltd. was assessee's biggest client. By transfer of assets, claimed to be slump sale, assessee had only tried to save taxes. It is devise of avoidance of tax in light of decision of Hon'ble Supreme Court in case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148. Assessee not only transferred business to its biggest client, promoters Mr. and Mrs. Kunkalienkar have also along with other staff absorbed and continued to work in new entity, i.e., IISL. restriction is only for three years. After three years assessee is free again. It is clearly revenue receipt. Learned DR submitted, in reality, assessee's intention is to be seen. Assessee continued to get same kind of income doing entire business for biggest client, IISL, of course now exclusively. Learned DR also supported orders of revenue authorities. 21. In alternative, learned DR submitted, it is clearly short-term capital gain. Assessee started business, even according to learned counsel, only some forty and odd months earlier. Assessee's receipt in initial stage was meagre Rs. 2.71 lakhs, which shoot up in assessment year 1999-2000 to Rs. 84.09 lakhs. In between assessee developed so many techniques perhaps. All these techniques or innovation or development, whatever name called, has come into existence definitely within period of less than thirty six months. Learned DR submitted, Assessing Officer rightly treated t h e gain in alternative as short-term capital gain. Hence, learned DR submitted, orders of revenue authorities may be confirmed. In support of above contention, he relied upon decision of Hon'ble Kerala High Court in case of CIT v. F.X. Periera & Sons (Travancore)(P.) Ltd. [1990] 184 ITR 461. 22. In his rejoinder, learned counsel submitted, main plank of revenue's stand is that assessee had given separate value for some of items. Counsel submitted, even if it is so, it is slump sale. Assessee has transferred entire business. Such transfer in slump sale was long-term capital gain and it cannot be short-term capital gain. Isolation of two assets, i.e., motor car and building, from transaction, does not render slump sale transaction of sale of computer programmes yielding business profits. perusal of MOU, as recorded hereinabove, counsel submitted, would definitely show that IISL acquired assessee's business and intellectual property in form of software. Assessee is debarred totally and permanently in doing business that has Assessee is debarred totally and permanently in doing business that has already been transferred except building and motor car. sale was nothing but slump sale for slump price. Assets in form of software programmes developed from very inception had not been assigned any price by assessee. Every software programme being intellectual property of assessee-company was basketed and slump price determined on "profit earning capacity value method" by competent Chartered Accountants' firm in "valuation of business report". valuation was of total business as going concern. Assessee shut shop, so to say. embargo in clause 7 of MOU was on promoters. So far as assessee-company concerned, assessee sold business and ceased to exist for business purposes and that is permanent. Assessee-company obtained report of Chartered Accountants as contemplated under section 50B of Act in fitness of things. Explanation 2 to section 50B requires value of depreciable and other assets to be indicated. Such specification of value of assets in compliance with statutory provisions does not work to disadvantage of assessee. On t h e contrary, case of assessee is fortified. Hence, learned counsel submitted, orders of revenue authorities may be reversed. 23.We heard rival submissions, gone through orders of revenue authorities and decisions cited. We are of view that appeal by assessee is liable to be allowed. We find that decisions relied upon by learned DR and revenue authorities, i.e., Anand Electric Co. Ltd. v. CIT [1999] 237 ITR 587 (Bom.) and CIT v. Artex Mfg. Co. [1997] 227 ITR 260 (SC), were decided before introduction of section 50B by Finance Act, 1999, with effect from 1-4-2000 and also definition of "slump sale" in newly inserted section 2(42C), which came into effect from 1-4-2000. Therefore, decisions relied upon by learned revenue authorities cannot be applied in instant case of assessee. 24. definition of "slump sale" under section 2(42C) read with Explanation 1 to section 2(19AA) of Act has been reproduced hereinabove at page 16 of our order. Reading of above makes it clear that "slump sale" means transfer of one or more undertakings as result of sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales. For purpose of this section, "undertaking" has again been explained in Explanation 1 to section 2(19AA). It states that for purpose of this clause "undertaking" shall have meaning assigned to undertaking. Explanation 1 to section 2(19AA) was introduced with effect from 1-4-2000 by Finance Act, 1999. "Undertaking" includes, as per definition, any part of undertaking, or unit or division of undertaking or business activity taken as whole, but does not include individual assets or liabilities or any combination thereof not constituting business activity. What is business activity of assessee? According to Assessing Officer, in reasons recorded for reopening, assessee's business includes intellectual properties, codes, formulae and designs, etc. There is no dispute that assessee had transferred all these assets. only assets that assessee not transferred is building, motor car and assets and liabilities regarding income-tax matters. "Block of assets" is defined in section 2(11) of Act. There is change in definition after 1-4- 1999. Before substitution of definition by Finance (No. 2) Act, 1999, "block of assets" included group of assets falling within class of assets, being buildings, machinery, plant or furniture, in respect of which same percentage of depreciation is prescribed. However, substituted definition of "block of assets" has been divided into two parts - (a) tangible assets, being buildings, machinery, plant or furniture (which is similar to "block of assets" before substitution of definition with effect from 1-4-1999); and (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature; in respect of which same percentage of depreciation is prescribed. 25. We have noted hereinabove that assessee's business assets, even according to revenue, include intellectual properties, codes, formulae, designs, programmes, etc. This is transferred to IISL. That means assessee- company is no more doing business in this field. According to revenue, even if there is transfer, transfer is not permanent. It is for three years. We r e unable to subscribe to this view. Recital of MOU reads as under:- "Whereas RSPL is engaged in business of software development and related services and has developed specialized skills and technical knowledge and know-how of its own. And whereas RSPL has been rendering requisite services for meeting software needs of IISL regularly and this business has grown considerably so much so that IISL and its associates are single largest client of RSPL. And whereas RSPL is of view that interest of its promoters and employees will be secured better by transfer of its business to IISL. And whereas in view of nature and scale of dealings between parties, it is felt necessary to develop arrangement designed to satisfy long-term needs of both parties. And whereas parties have come to certain understanding in above matter for mutual benefit." 26.It is clear from above that assessee's business is software development and related services and assessee has specialized skills and technical knowledge in this field. Clause 1 of MOU states that assessee has agreed to transfer all assets and properties in its business including intellectual properties, codes, formulae, designs, etc. to IISL for consideration of Rs. 178 lakhs. Clause 4 of MOU states that all business transactions carried out by RSPL with effect from 1-4-1999 till date of actual execution of transfer shall be considered as executed in trust for and on behalf of IISL and once transfer is effective business transactions shall continue with IISL and IISL shall be entitled to enforce their rights thereunder without any restriction whatsoever. Coming to clause 7 of MOU, it makes clear that promoters of assessee for period of three years from date of transfer of assets, as per clauses 1 and 3, cannot associate themselves directly or indirectly with any business similar to or identical with business carried on either by RSPL or IISL. Clause 8 of MOU makes it clear that all improvements in technology, designs and innovations during period promoters are in employment of IISL shall be property of IISL. Contrary to stand of revenue, it curtails right or power of Directors of IISL, who were promoters of RSPL to take away any of improvements that took place after sale had taken place. This curtails power and does not give promoters liberty to do what they want. Clause 10 of MOU again puts restriction that in event of promoters of RSPL ceasing to be in employment of IISL, either by termination or by determination of period of their employment, except on reaching superannuation, they shall not for period of one year from date of ceasing to be in employment of IISL deal in any manner with any of clients of IISL. 27. According to revenue, transfer of intellectual properties, codes, formulae, designs, etc. to IISL is not permanent. We find it difficult to subscribe to this view. It is specifically stated that assets and properties of RSPL shall be transferred to IISL. Reading of clause 4 of MOU makes it clear that business transactions carried out by RSPL that was transferred to IISL shall continue with them and IISL shall be entitled to enforce their rights thereunder without any restriction. It means restrict-tion of time as well. To come to different conclusion as canvassed by revenue, it is very difficult. As rightly contended by learned counsel, clause 7 and clause 8 of MOU restrict promoters of RSPL to do similar or identical business carried out earlier by RSPL and now by IISL permanently and even all improvement in technology etc. shall be property of IISL. 28. According to revenue, by virtue of clause 2 of MOU, assessee has n o t transferred building, motor car and assets and liabilities relating to income-tax matters. This, according to revenue, falls short of slump sale for slump consideration. We are again unable to subscribe to view canvassed by revenue. jurisdictional High Court in case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 (Bom.) clearly held that sale of even branches along with their assets and liabilities amounts to sale as going concern for slump price. assessee's business assets are computers, furniture, etc. because assessee is in field of software business. It is difficult to hold that purchaser cannot continue activities purchased in absence of building and motor car, which had been kept apart. If purchaser perhaps prevented from continuing business, stand of revenue that this is not sale of going concern for slump price, would have been correct. question is whether business will continue in same line even without two assets. Reading of MOU, relevant clauses of which have been quoted hereinabove, makes it clear that assessee has transferred all properties of assessee in its business as of this date. Even according to revenue, of assessee in its business as of this date. Even according to revenue, assessee's business assets are in nature of intellectual properties, codes, formulae, designs, etc. It has been transferred for consideration. 29. In brief, as discussed hereinabove, "slump sale" has been defined as transfer of one or more undertakings as result of sale for lump sum consideration without values being assigned to individual assets and liabilities in such sales. In instant case of assessee, though in purchaser's books of account individual assets have been priced independently, assessee had not assigned separate values and consequently sold items for independent price. It is not revenue's case also that individual assets had price fixed separately and charged. "Undertaking" is explained in Explanation 1 to section 2(19AA). According to this Explanation, as we noted already above, includes any part of undertaking or unit or division of undertaking or business activity as whole. Revenue's case is that some of items like motor car and building has been retained by assessee; as such this cannot be treated as slump sale. But fact to be considered is assessee is in field of intellectual property rights. Computers, furniture, etc. which is linked with business of assessee has been sold. items that assessee kept separately, has nothing to do with assessee's business, which is sold/handed over to purchaser, i.e., IISL. business has been sold. purchaser could very well carry on business, which was carried by assessee before sale, without purchasing any independent items. In view of above, plea of revenue that assessee has not sold undertaking as whole, is difficult to accept. 30. Coming to alternative ground, one of objections of revenue is that when assessee started business, professional receipt was less than Rs. 3 lakhs. Now it is more than Rs. 84 lakhs. growth within short period of three and half years is commendable. Many of developments in field, definitely, according to revenue, would have taken place within period of less than thirty six months and, therefore, it cannot be treated as long-term capital gain. We are unable to accept this view of revenue as well. businessman does business every day. If some of items that are developed subsequently within less than thirty six months if sold, it cannot be taken independently. Assessee is selling business as whole. It is not part by part, bit by bit and as such, this contention of revenue is without merit. Hence, appeal by assessee on this ground is allowed. 31. In result, appeal of assessee stands allowed in part. 32. ITA No: 1676/Mum./2008: only effective ground urged by assessee is directed against order of CIT(A) in confirming penalty levied under section 271(1)(c) of Income-tax Act, 1961, amounting to Rs. 68,53,000 being minimum penalty leviable against addition made of Rs. 178 lakhs. 33. Assessee's declared income was Rs. 9,55,370. It was processed under section 143(1)(a) of Act on 19-3-2002. case was reopened under section 147 of Act and addition of Rs. 178 lakhs was made. Scrutiny assessment was completed under section 143(3) on 30-4-2004 fixing total income at Rs. 1,87,55,370. 34. Assessing Officer held, detection of concealed income was possible only because case was reopened under section 143(3), read with section 147. Assessee contended that reopening itself was bad in law as it was mere change of opinion. This plea of assessee was rejected by Assessing Officer. Assessee contended further that there should be conscious concealment or conscious furnishing of inaccurate particulars of income, which was not there in instant case of assessee. Assessing Officer held, this belief of assessee is to be rejected. Though assessee claimed that there was transfer of entire assets of assessee-company, it was not so in fact. There were individual, separate and independent items of fixed assets, to whom value was assigned at their WDV as on 1-4-1999, i.e., on date of transfer. He further held, by declaring receipt of Rs. 178 lakhs as slump sale and offering it as income under head "Long-term capital gains" and claiming exemption under section 54EA of Act. Assessing Officer held, by declaring said receipt of Rs. 178 lakhs as slump sale and offering it as income under head "Long-term capital gains" and claiming exemption under section 54EA of Act, assessee-company is guilty of furnishing inaccurate particulars of income. For above proposition, he relied upon decision of Hon'ble Gujarat High Court in case of A.M. Shah & Co. v. CIT [2000] 108 TAXMAN 137. Hence, Assessing Officer levied impugned penalty. Assessee carried matter before learned CIT(A). 35. Before CIT(A), it was contended that as per MOU dated 24-8- 1999 between assessee and IISL, entire business of assessee was transferred and receipt of Rs. 178 lakhs realized from IISL was declared as consideration for transfer of business as going concern and in view of provisions of section 50B of Act, long-term capital gain on slump sale was worked out and deduction under section 54EA was claimed. Hence, Assessing Officer was not justified in treating receipt as revenue receipt. It w s further submitted that assessee filed true, correct and complete particulars of income. Assessee has not concealed any particulars or furnished n y inaccurate particulars. Information was based on duly audited accounts. Even if assessee was not in position to substantiate explanation, this cannot be treated as concealment. 36. learned CIT(A) rejected contention of assessee. Aggrieved by above order, assessee is in appeal before Tribunal. 37. Suffice to say that on merit we have allowed assessee's appeal hereinabove in ITA No. 1429/Mum./2005. In view of above, impugned penalty does not survive. Appeal by assessee is liable to be allowed. It is allowed. *** ROHAN SOFTWARE (P) LTD. v. INCOME TAX OFFICER
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