1. OS ITXA 1393-17.doc R.M. AMBERKAR (Private Secretary) IN HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. INCOME TAX APPEAL NO. 1393 OF 2017 Pr. Commissioner of Income Tax - 14 Aayakar Bhavan, M. K. Road, Mumbai - 400020. Appellant Versus Wockhardt Hospitals Limited Wockhardt Towers, Bandra Kurla Complex, Bandra (E), Mumbai - 400051. PAN : AAACW3342G. Respondent Mr. Suresh Kumar a/w Ms. Priyanka Tiwary for Appellant Mr. Niraj Sheth a/w Mr. Atul K. Jasani for Respondent CORAM: UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE:MARCH 16, 2020. ORDER [PER UJJAL BHUYAN, J] : 1. Heard Mr. Suresh Kumar, learned standing counsel, revenue for appellant and Mr. Niraj Sheth along with Mr. Atul K. Jasani, learned counsel for respondent - assessee. 2. This appeal under Section 260A of Income Tax Act, 1961 ("the Act" for short) is preferred by revenue assailing legality and correctness of order dated 1 of 251. OS ITXA 1393-17.doc 6.1.2017 passed by Income Tax Appellate Tribunal, Mumbai "G" Bench, Mumbai ("Tribunal" for short) in Income Tax Appeal No. 7021/Mum/2013 for assessment year 2010-11. 3.The appeal has been preferred on following questions projecting same as substantial questions of law:- "a) Whether, on facts and in circumstances of case, Tribunal was correct in law in confirming CIT(A)'s order deleting disallowance of Rs.18,43,30,378/- incurred by assessee in relation to slump sale without appreciating that Section 50B of Act is complete code in itself and expenses related to slump sale cannot be allowed? b)Whether on facts and in circumstances of case, Tribunal was correct in law in confirming CIT(A)'s order deleting enhancement of slump sale consideration from Rs.143,21,082 to Rs.186,58,21,669/-? c) Whether on facts and in circumstances of case, Tribunal was correct in law in confirming CIT(A)'s order deleting addition of Rs 2,79,53,000 from lump sum consideration without appreciating fact that said consideration routed through escrow account being part of agreement between Wockhardt Hospitals Limited and Fortis Hospitals Limited and claim would be tantamount to double deduction which is incurred during transaction? 2 of 25 1. OS ITXA 1393-17.docd) Whether on facts and in circumstances of case, theTribunal was correct in law in treating amount of Rs.317,21,09,994 on slump sale as long term capital gain instead of short-term capital gain as property was heldless than year overlooking first proviso to section 50B(1) of Act? e) Whether on facts and in circumstances of case, Tribunal was correct in law in deleting addition made by Assessing Officer of Rs 48,71,169 u/s 14A r/w Rule 8D of Income Tax Rules, 1962 on account of expenditure incurred for earning exempt income?" 4. first question i.e Question (a) deals with order of Tribunal confirming order of Commissioner of Income Tax (Appeals) - 21, Mumbai [briefly, 'the CIT(A)'or'the First Appellate Authority' herein after] deleting disallowance of Rs. 18,43,30,378.00 made by Assessing Officer under Section 50B of Act. 4.1. In assessment proceedings leading to assessment order dated 28.3.2013 passed under Section 143(3) of Act for assessment year 2010-11, Assessing Officer disallowed claim of expenditure of Rs. 18,43,30,378.00 claimed by assessee. It may be 3 of 25 1. OS ITXA 1393-17.doc mentioned that assessee is engaged in business of running various hospitals in India.During assessment year under consideration, assessee had sold 12 hospitals under slump sale vide business transfer agreement dated 24.8.2009 to Fortis Hospitals Ltd. Assessing Officer disallowed claim of expenditure stating that Section 50B of Act itself was separate code and no further deduction was required for purpose of said expenditure. 4.2. When matter came up in appeal before First Appellate Authority i.e CIT(A), it vide appellate order dated 25.9.2013 allowed said claim of assessee and deleted disallowance made. 4.3. On appeal before Tribunal, it was found by Tribunal that this issue was earlier dealt by it in case of DCIT Vs. Summit Securities Ltd 1. Following said order, Tribunal decided this question against revenue and in favour of assessee vide order dated 6.1.2017. 1 ITA 4977/Mum/2009 dated 7.3.20124 of 251. OS ITXA 1393-17.doc 4.4. To appreciate rival contentions on this issue, it is apposite to deal with certain relevant provisions of law. 4.5.'Slump sale' is defined under Section 2(42C) of Act to mean transfer of one or more undertakings as result of sale for slump sum consideration without values being assigned to individual assets and liabilities in such sales. As per Explanation 1, term 'undertaking' used in aforesaid provision would have same meaning assigned to it in Explanation 1 to clause (19AA) of Section 2. As per 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. 4.6. Section 48 is included in Chapter IV - E which deals with computation of income from capital gains. Section 48 deals with mode of computation. It says that income chargeable under head "capital gains" shall be 5 of 25 1. OS ITXA 1393-17.doc computed,by deducting from full value of consideration received or accruing as result of transfer of capital asset amounts mentioned therein i.e expenditure incurred wholly and exclusively in connection with such transfer; and cost of acquisition of asset and cost of any improvement thereto. 4.7.Section 49 deals with cost with reference to certain modes of acquisition. As per Section 49(1), where capital asset became property of assessee in any of manner provided therein, such as, on distribution of assets following partition of Hindu undivided family or under gift or will; or by succession, inheritance or devolution etc., cost of acquisition of asset shall be deemed to be cost for which previous owner of property acquired it, as increased by cost of any improvement of assets incurred or borne by previous owner or assessee, as case may be. 4.8.This brings us to Section 50B of Act which provides for special provision for computation of capital gains 6 of 251. OS ITXA 1393-17.doc in case of slump sale. This provision being relevant, same is extracted herein under in its entirety;"Special provision for computation of capital gains in case of slump sale. 50B. (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. (2) In relation to capital assets being undertaking or division transferred by way of such sale, "net worth" of undertaking or division, as case may be, shall be deemed to be cost of acquisition and cost of improvement for purposes of sections 48 and 49 and no regard shall be given to provisions contained in second proviso to section 48.(3) Every assessee, in case of slump sale, shall furnish in prescribed form along with return of income, report of accountant as defined in Explanation below sub-section (2) of section 288, indicating computation of net worth of undertaking or division, as case may be, and certifying that net worth of undertaking or division, as case may be, has been correctly arrived at in accordance with provisions of this 7 of 25 1. OS ITXA 1393-17.doc section.Explanation 1. For purposes of this section, "net worth" shall be aggregate value of total assets of undertaking or division as reduced by value of liabilities of such undertaking or division as appearing in its books of account :Provided that any change in value of assets on account of revaluation of assets shall be ignored for purposes of computing net worth.Explanation 2. For computing net worth, aggregate value of total assets shall be,(a) in case of depreciable assets, written down value of block of assets determined in accordance with provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43;(b) in case of capital assets in respect of which whole of expenditure has been allowed or is allowable as deduction under section 35AD, nil; and(c) in case of other assets, book value of such assets. 4.9. Referring to Section 50B of Act, CIT(A) observed that Section 50B only provides for computation of net worth which is deemed to be cost of improvement and cost of acquisition.As cost of improvement and cost of acquisition which is provided under Section 50B as net worth cannot be equated with capital gains.For computation of 8 of 25 1. OS ITXA 1393-17.doc capital gains, recourse has to be made to Section 48 as per which capital gains would be computed by taking into account full value of consideration reduced by cost of improvement and cost of acquisition and also expenditure incurred for transfer.Therefore, it was held that for computation of capital gains, Section 48 has to be adopted and computed.All components of Section 48 have to be considered. Referring to decision of Tribunal in case of Summit Securities Ltd., it was held that Section 50B only determines cost of acquisition and cost of improvement of undertaking; evidently capital gain has to be computed under Section 48. Section 50B is code for itself only for determination of cost of acquisition and cost of improvement of undertaking but not for computation of capital gains in case of slum sale. Therefore, disallowance made by Assessing Officer was interfered with and claim of expenditure incurred for purpose of transfer amounting to Rs. 18,43,30,378.00 was allowed. 4.10. Tribunal relied upon its own decision in case of Summit Securities Ltd and upheld findings of CIT(A). 9 of 251. OS ITXA 1393-17.doc Relevant portion of order passed by Tribunal in case of Summit Securities Ltd. is extracted herein below:-"(e) Sub-section (2) of section 50B makes it abundantly clear that undertaking or division as whole is considered as one capital asset and net worth of this capital asset is considered as cost of acquisition and cost of improvement for purposes of sections 48 and 49. Therefore, it becomes patent that section 50B is code in itself only for determination of cost of acquisition and cost of improvement of undertaking but not for computation of capital gains in case of slump sale. object of section 50B is to simply determine and supply figure of cost of acquisition and cost of improvement of undertaking or division, being its net worth alongwith decision as to whether undertaking is long term or short term capital asset is decided and forwarded to section 48, computation provision in later section is activated for determining income chargeable under head "capital gains" in accordance with mode of such computation as prescribed therein. modusoperandi to compute capital gain from transfer of undertaking thus provides for reducing cost of acquisition and cost of improvement of capital asset from full value of consideration received or accruing as result of transfer of capital asset.Coming back to nature of capital asset being undertaking, which comprises of "all assets minus all liabilities" of undertaking, amount of capital gain means reducing net worth, being cost of acquisition and cost of improvement of "all assets minus all liabilities"of undertaking from full value of consideration of "all assets minus all liabilities" of undertaking.(f)In computing net worth of undertaking or division,as case may be, benefit of indexation as provided in second proviso to section 48 has been withheld. possible reason 10 of 251. OS ITXA 1393-17.doc may be quid pro quo. By extending benefit of lower rate of taxation on long term capital gain as provided under section 112 to undertaking as whole notwithstanding fact that there maybe several assets held by assessee for period of not more than 36 months, Legislature though it to curtain benefit of indexation to cost of acquisition and cost of improvement. 4.11. On thorough consideration of matter, we do not find any error or infirmity in view taken by Tribunal. Tribunal was fully justified in confirming view taken by First Appellate Authority. In circumstances, we see no good reason to entertain this question for consideration. 5. Question No. (b) deals with decision of Tribunal in confirming order of First Appellate Authority deleting enhancement of slum sale consideration from Rs. 143.21 crores to Rs. 186.58 crores. 5.1. agreement was entered into between assessee and Fortis Hospitals Ltd dated 24.8.2009. Clause (3) of agreement made it clear that Rs. 186.58 crores was negotiated value to which further adjustment was required to be done in case liability of undertaking 11 of 251. OS ITXA 1393-17.doc exceeded Rs. 599.62 crores. This clause further provided for opening of escrow account for 2 years for amount of Rs. 15 crores and if any further claim arose, that was to be deducted from said amount. 5.2. Assessing Officer did not allow deduction which occurred during course of transaction stating that it amounted to double deduction of liabilities which was incurred during transaction and hence, assessee was not eligible for such deduction. 5.3. CIT(A) in first appeal held that during slump sale transaction excess liability of Rs. 43,36,86,617.00 arose. This amount was not paid by Fortis Hospitals Ltd but was adjusted from Rs. 186.58 crores.After adjustment, lump sum consideration received by assessee was Rs. 143.21 crores.Therefore, addition made by Assessing Officer was deleted. 5.4. In further appeal, Tribunal referred to agreement entered into between parties and held that 12 of 25 1. OS ITXA 1393-17.doc during process of transaction, liability of Rs. 43.36 crores arose which was required to be deducted from Rs. 186.58 crores where after lump sum consideration became Rs. 143.21 crores, rightly determined by First Appellate Authority. Therefore, this ground of appeal by revenue was answered against revenue. 5.5.Since clause (3) of agreement is relevant, same is extracted herein under:-"3.1 In consideration for transfer of Business Division by Seller to Purchaser, in accordance with terms and conditions of this Agreement, Purchaser shall pay:(A) in case amount paid by Purchaser to lenders pursuant to Clause 6.2(o) below is equal to or exceeds Rs. 599,61,78,301(Rupees Five Hundred Ninety nine crore sixty one lakhs seventy eight thousand three hundred and one only);(a) lump sum consideration of Rs. 186,58,21,669 (Rupees One Hundred Eight six crore fifty eight lakhs twenty one thousand six hundred and ninety nine only) minus (b) difference between amounts payable by Purchaser to lenders pursuant to Clause6.2(o) below and Rs. 599,61,78,301 (Rupees Five Hundred Ninety Nine Crore Sixty One Lakhs Seventy Eight thousand Three hundred and one only);OR(B) In case Rs 599,61,78,301 (Rupees Five Hundred Ninety Nine13 of 25 1. OS ITXA 1393-17.doc Crore Sixty One Lakhs Seventy Eight thousand Three hundred andone only) exceeds amounts payable by Purchaser to lenders pursuant to clause 6.2(o) below:(a) lump sum consideration of Rs 186,58,21,699 (Rupees One Hundred Eighty six crore fifty eight lakhs twenty one thousand six hundred and ninety nine only) plus (b) difference between Rs599,61,78,301 (Rupees Five Hundred Ninety Nine Crore Sixty OneLakhs Seventy Eight thousand Three hundred and one only) and amounts payable by Purchaser to lenders pursuant to Clause 6.2 (o) below; clause 6.2(0) below;( amount arrived in (A) or (B), as case may be, is hereinafter referred to as "Consideration") to seller.The consideration shall be paid on closing date in following manner:(a) Rs 15,00,00,000 (Rupees Fifteen Crores Only) ('Escrow amount')shall be deposited with escrow agent mutually appointed by parties under Escrow Agreement ('Escrow Agent'); and(b) difference between Consideration and Escrow amount shall be paid by way of wire transfer to bank account of Seller to be notified in writing by Seller to Purchaser at least five (5)business days prior to Closing Date." 5.6.Ona reading of above clause of agreement, it is evident that though lump sum consideration was fixed at Rs. 186.58 crores, provision was made for deducting / adjusting any liability exceeding Rs. 599.62 crores. It was noticed by First Appellate Authority that in14 of 25 1. OS ITXA 1393-17.doc process of transaction, total liability exceeded Rs. 599.62 crores and excess liability was quantified at Rs. 43.36 crores which amount was not paid by Fortis Hospitals Ltd to assessee but was adjusted against Rs. 186.58 crores. First Appellate Authority held that amount of Rs. 43.36 crores had to be accounted on liability side and had to be deducted from lumpsum consideration. Therefore, when this amount was deducted from Rs. 186.58 crores, figure arrived at was Rs. 143.21 crores. Therefore, it was held that Assessing Officer was not justified in enhancing lumpsum consideration from Rs. 143.21 crores to Rs. 186.58 crores. 5.7. Tribunal noticed that assessee and Fortis Hospitals Ltd had entered into business agreement and as per agreement, excess liability arising during transition period had to be adjusted from lumpsum amount of Rs. 186.58 crores.It was further noted by Tribunal that during process of transaction, excess liability of Rs. 43.36 crores arose which had to be deducted from lumpsum amount of Rs. 186.58 crores to arrive at15 of 251. OS ITXA 1393-17.doc lumpsum consideration received by assessee which was Rs. 143.21 crores. Accordingly, order of First Appellate Authority was affirmed. 5.8.On due consideration, we do not find any error or infirmity in order passed by Tribunal. Besides, this is finding of fact, rather concurrent finding of fact and revenue is unable to point out any perversity in conclusion reached.In circumstances, no question of law, much less any substantial question of law, arises from such finding of Tribunal. 6.The third question deals with deletion by First Appellate Authority of addition of Rs. 2.79 crores from lumpsum consideration made by Assessing Officer, which decision of First Appellate Authority was affirmed by Tribunal. 6.1.As noticed above, in clause (3) of agreement entered into between assessee and Fortis Hospitals Ltd, assessee and Fortis Hospitals Limited were required to open 16 of 251. OS ITXA 1393-17.doc escrow account of Rs. 15 crores from lumpsum consideration of Rs. 186.58 crores for period of 2 years, and in event of any further claim, such amount had to be deducted from above lumpsum consideration. 6.2.During assessment proceedings, Assessing Officer observed that assessee had claimed Rs. 2.79 crores as deduction in computation of income. According to Assessing Officer, said amount was lying in escrow account and by making said claim, assessee was resorting to claim of double deduction.Accordingly, such claim of assessee was declined by Assessing Officer. 6.3.First Appellate Authority, on consideration of clause (3) of agreement, took view that there was no double deduction by assessee for said amount and accordingly, deleted disallowance holding that assessee was eligible for said deduction. 6.4.On further appeal, Tribunal affirmed view taken by First Appellate Authority. 17 of 251. OS ITXA 1393-17.doc 6.5.First Appellate Authority on reading of clause (3) of agreement observed that there was provision for escrow account for two years by both parties to agreement for Rs. 15 crores from amount of lumpsum consideration of Rs. 186.58 crores. It was observed that if there were any further claims, that would be adjusted from Rs. 15 crores. It was further observed that when claim of Rs. 2.79 crores was received, that amount was paid through escrow account. escrow account was for period of two years. On thorough examination, CIT(A) held that there was no double deduction from aforesaid amount by assessee. Assessing Officer had made error by adding said amount in assets and liabilities side by including it in lumpsum consideration which was against principles of accounting. 6.6.When matter came up before Tribunal, it was noticed that following agreement, escrow account was opened and Rs. 15/- crores was kept in said account for settling future liabilities and that assessee was to receive 18 of 25 1. OS ITXA 1393-17.doc said amount from escrow account after period of two years. It was noticed that liability amounting to Rs. 2.79 crore arose and was settled during year following which assessee filed revised return raising claim of deduction for said amount. Tribunal held that there was no doubt about incurring of expenditure. Necessary evidence in this regard were produced and were found to be genuine. Therefore, there was no need to interfere with order of First Appellate Authority. 6.7. In light of discussions made above, we are of view that no question of law arises out of such order passed by Tribunal which is basically finding of fact. Consequently, we decline to admit appeal on Question (c) as framed. 7. fourth question deals with treating capital gain on slump sale as long term capital gain instead of short term capital gain initially held by Assessing Officer.19 of 25 1. OS ITXA 1393-17.doc 7.1. Assessee had 12 hospitals and 2 nursing schools which it had sold under slump sale basis to Fortis Hospitals Ltd. Out of these hospitals, 4 were owned for more than three years and rest were below three years. 7.2. Assessing Officer took view that percentage of hospitals on long term basis was less than number of hospitals under short term.Therefore, Assessing Officer assessed income of assessee from slump sale of hospitals as short term capital gain. 7.3. In appeal before First Appellate Authority, CIT(A) referred to sub-section (1) of Section 50B and proviso thereto and took view that for assets to be assessed under short term capital gain, all assets should be existing below 36 months; if even one asset exists for more than 36 months, then it had to be treated as long term in nature. Referring to decision of Tribunal in Summit Securities Ltd., CIT(A) held that if at least one asset was more than three years, then it was long term in nature. It was found that four of assets were more than three years20 of 25 1. OS ITXA 1393-17.doc old. Therefore, capital gain accruing out of slum sale had to be assessed as long term capital gain. Since reliance was placed on Summit Securities Ltd., relevant portion thereof is extracted herein under:- "(b) Where an, industrial undertaking is transferred under slump sale which was owned and held by assessee for not more than 36 months immediately preceding date of its transfer, profit or gains arising from such transfer is deemed to be capital gain arising from transfer of short term capital assets. relevant criteria for considering whether undertaking is short-term or long term is period of owning and holding undertaking as whole and not individual assets of such undertaking. Suppose undertaking was set up four years ago and some of assets were purchased and held for period of not more than 36 months, it is entire undertaking which will be treated as long- term capital asset for purposes of computing capital gain on its transfer. period of holding of separate assets of undertaking were purchased day before its transfer, they will also form part of undertaking as long-term capital asset. So long as undertaking is owned and held by assessee for period of more than 36 months, capital gain arising from its slump sale is considered as long term capital gain notwithstanding period for which its individual assets were owned and held. 7.4.In further appeal before Tribunal, above decision in Summit Securities Ltd. was again adverted to where after Tribunal held that there was no need to interfere with order of First Appellate Authority as four hospitals of assessee were owned by it for period of 21 of 251. OS ITXA 1393-17.doc more than 36 months. Therefore, capital gain accruing out of slump sale was nothing but long term capital gain. 7.5. We do not find any reason to disturb such finding of Tribunal. Rather we concur with view taken by Tribunal which affirmed decision of CIT(A). question framed by revenue, therefore, does not arise for consideration. 8. last question framed is regarding deletion by lower appellate authorities of addition made by Assessing Officer of amount of Rs. 48,71,169.00 under Section 14A read with Rule 8D of Income Tax Rules, 1962 (briefly "the Rules" hereinafter). 8.1. Assessee had invested in form of shares in Kanishka Housing Development Co Pvt Ltd, which was subsidiary company of assessee. Assessing Officer held that no exempt income was earned by assessee though investment made by it was capable of earning exempt income in future. Invoking provisions of Rule 22 of 251. OS ITXA 1393-17.doc 8D(2) of Rules, Assessing Officer disallowed Rs. 48.71 lakhs under Section 14A read with 8D of Rules. 8.2. In appellate proceedings before First Appellate Authority, CIT(A) held that Kanishka Housing Development Co Pvt Ltd was holding land on which assessee haderected hospital.For purpose of business expediency, assessee had invested in shares of Kanishka Housing Development Co Pvt Ltd so that land could be utilized for purpose of hospital. As investment was for purpose of business expediency, no addition was required to be made under Section 14A of Act. Accordingly, First Appellate Authority deleted addition made by Assessing Officer. 8.3. When matter came up before Tribunal, Tribunal confirmed view taken by First Appellate Authority. 8.4. Section 14A deals with expenditure incurred in relation to income not includible in total income. As per sub- 23 of 25 1. OS ITXA 1393-17.doc section (1), for purpose of computing total income, no deduction shall be allowed in respect of expenditure incurred by assessee in relation to income which does not form part of total income under Act. 8.5. Rule 8D lays down method for determining amount of expenditure in relation to income not includible in total income. 8.6. Tribunal held that assessee had not earned any exempt income during assessment year under consideration, nor it had claimed any expenditure against any tax free income.Thus,the twin pre-conditions for invoking provisions of Section 14A read with Rule 8D of Rules i.e earning of exempt income and claiming expenditure to earn same were absent. Therefore, order passed by First Appellate Authority was affirmed. 8.7. We are in agreement with view taken by Tribunal. As rightly held by Tribunal, assessee had neither earned any exempt income nor claimed any 24 of 251. OS ITXA 1393-17.doc expenditure for earning such exempt income. That being position, Assessing Officer was not justified in making disallowance by invoking aforesaid two provisions. same was rightly deleted by First Appellate Authority which order has been affirmed by Tribunal. Therefore,this question proposed by revenue also fails. 9. Consequently, we do not find any merit in appeal which is accordingly, dismissed. However, there shall be no order as to cost.[MILIND N. JADHAV, J.] [UJJAL BHUYAN, J.] Digitally signed by Ravindra Ravindra M. Amberkar M. Date: Amberkar 2020.03.20 15:16:48 0530 25 of 25 Pr. Commissioner of Income-tax-14, Mumbai v. Wockhardt Hospitals Limited