CIT vs. Dharampal Satyapal (Delhi High Court)

The Assessee transferred its entire business by way of a slump sale to M/s Dharampal Satyapal Ltd at a net consideration of Rs. 2.75 crores. The Assessee had established the said business in the preceding financial year i.e. 1999-2000, and had commenced commercial production in March 2000. The Assessee had not claimed any depreciation on its assets for the previous year ended 31st March, 2000. Accordingly, the block of assets was reflected by the Assessee in its books of accounts at the actual cost of acquisition. The Assessee had also capitalised the indirect expenditure incurred prior to the commencement of commercial production and the same was included in the cost of plant and machinery. The Assessee computed the capital gains arising under Section 50B of the Act by calculating the net worth of the business undertaking on the basis of the cost of assets as on 31st March, 2000 without accounting for any depreciation, as none had been claimed. The AO did not accept the capitalisation of indirect expenses and reduced the same from the cost of assets. The AO was also of the view that for the purposes of calculating the net worth of the undertaking, depreciation allowable under sub-item (C) of item (i) of sub-clause (c) of clause (6) of Section 43 of the Act for the AY 2000-01 would have to be deducted even though no such depreciation had been claimed by the Assessee or allowed by the AO. Accordingly, the AO calculated short term capital gains arising out of the slump sale under Section 50B of the Act at Rs.2,26,89,866. This was confirmed by the CIT(A). However, the ITAT held that since the entire assets were transferred, the written down value of the assets would be the written down value of assets in the preceding year as reduced by the depreciation actually allowed. According to the ITAT, sub-clause (b) of
Clause C would have no application where the entire block of assets was transferred as a part of a slump sale of the business of an Assessee. On appeal by the department to the High Court HELD allowing the appeal:

(i) It is necessary to interpret the provisions of Section 43(6)(c) of the Act in the context in which the same were enacted. Clearly, the purpose of introducing Clause C in Section 43(6)(c)(i) of the Act was to address the manner in which the block of assets would be computed in case the block of assets was decreased on account of a slump sale. As is expressly clear from the definition of slump sale, that is, Section 2(42C) of the Act – slump sale means a transfer of one or more undertakings as a result of the sale for a lump sum consideration without separate values being assigned to individual assets and liabilities of the undertaking. Thus, in the cases of slump sale where no values have been assigned to the assets forming a part of the block of assets that are transferred, it would be necessary to provide for a machinery for computing the written down value of the block of assets that remains after the transfer of part of the assets. In our view, Clause C must be read only to address this situation. It is apparent that Clause C was introduced for the purpose of computing the written down value of a block of assets; clearly, no such computation would be warranted if the block of assets itself ceases to exist in the hands of the Assessee. This is also indicated by the plain language of Clause C inasmuch as the opening sentence indicates that the block of assets is to be decreased by the actual cost of asset falling within that block. Further, sub-clause (b) provides for a deeming fiction to reduce the depreciation allowable to the Assessee in respect of an asset “as if the asset was the only asset in the relevant block of assets”. This deeming fiction would not be necessary if Clause C was enacted to address a situation where the entire block of assets was transferred.

(ii) Plainly, the purpose of clause (a) of Explanation 2 to Section 50B of the Act is to provide a methodology to compute the written down value of the block of assets transferred by an Assessee as a part of the undertaking or division sold by way of a slump sale. The reference to Clause C is clearly not for the purposes of computing the block of assets remaining with the Assessee after the slump sale. It is apparent from the above that the intended object and scope of Clause C as used in Section 50B of the Act is totally different than the purpose of the said provision when read as a part of Section 43 of the Act. In the circumstances, clause (a) of Explanation 2 to Section 50B of the Act must be read in a manner to expressly include the computation provisions of Clause C without reference to other the import of the said provisions of Section 43 of the Act. In our view, the ITAT fell into error in importing the interpretation of Clause C read as a part of Section 43 of the Act, to interpret the scope of clause (a) of Explanation 2 to Section 50B of the Act.

(iii) The ITAT had accepted the Assessee’s contention that in case the entire block of assets was sold, the written down value of the block of assets as existing must be taken at the aggregate value of the total assets. We are unable to concur with the said view. First and foremost, for the reason that there is no provision which mandates adopting this method of computation, the machinery provisions provided in Section 50B of the Act exhaustively provide for determining the cost of acquisition of the undertaking or division sold by way of a slump sale. If one examines the three clauses of Explanation 2 to Section 50B of the Act, the same exhaust all categories of assets. Insofar as depreciable asset is concerned, clause (a) provides an extensive mechanism to compute its value. The working of clause (a) also does not yield results which are absurd or unreasonable so as to warrant looking for other aids to statutory interpretation for ascertaining the true legislative intent.