SHAMS MEHMOOD MIRZA, J. This reference application was filed under section 133(1) of the Income Tax Ordinance, 2001 (the Ordinance) seeking opinion of this Court on the following question of law set to have arisen out of order dated 08.12.2007 passed by the Income Tax Appellate Tribunal.
Whether under the facts and in the circumstances of the case, the learned ITAT was justified to hold that sale/transfer of 51% shares by the taxpayer to M/s BD Limited is a slump transaction.
2. The relevant facts of the case are that the assessing officer made an addition of Rs.96,177,786/- while passing the assessment order for the tax year 1999-2000 on account of sale of syringe division of the respondent to M/s Becton Dickinson Services (Pvt.) Limited. A challenge was made by the respondent to the assessment order by filing an appeal before the Commissioner of Income Tax (Appeals) who dismissed the same on 07.09.2005. The respondent filed an appeal before the Income Tax Appellate Tribunal which was allowed on 08.12.2007 by declaring the transaction of sale as a slump transaction and by deleting the addition made by the assessing of ficer.
3. Learned counsel for the applicant submitted that the sale of syringe division by the respondent in favour of joint venture company in lieu of issuance of shares came within the mischief of section 7 (b)(i) of the erstwhile Income Tax Ordinance, 1979. It was also submitted that the transaction in question could not be described as a slump transaction. Reference in this regard was made to the judgment reported as 1993 PTD (T rib.) 1 175.
4. Learned counsel for the respondent, on the other hand, supported the order passed by Income Tax Appellate Tribunal and also placed reliance on judgments reported as M/s Crescent Pak. Soap & Oil Mills Limited v.
Commissioner of Income Tax (East) PTCL 1985 (CL) 73, Commissioner of Income Tax v. national Agriculture Ltd., Karachi 2000 PTD 2173 , Commissioner of Income-T ax (EAST), Karachi v. Messrs Forbes Cambell & Company Ltd. PLD 1978 Karachi 1047, 2002 PTD (Trib) 257, 2003 PTD (Trib) 2321 and 2006 PTD
(Trib) 2291 .
5. It is apparent from the record that the respondent entered into a master agreement with Becton, Dickinson and Company (a Corporation incorporated under the laws of State of New Jersey , USA) on 18.08.1998 for the purposes of formation of a joint venture company namely M/s Becton Dickinson Service (Pvt.) Limited in which the respondent was to hold 49% of the share s. One of the purposes of the joint venture company was to acquire the syringe division of the respondent. Article 3 of the Master agreement related to consideration and stipulated for payment of US $ 3,500,000 to the respondent as acquisition price of the syringe division.
6. The Income Tax Appellate Tribunal by placing reliance on a number of judgments including the judgment referred to by the learned counsel for the applicant came to the conclusion that the transaction in question between the respondent and the joint venture company was a slump sale transaction on which tax could not be charged. The Income Tax Appellate Tribunal also drew the following conclusions from the various clauses of the Master agreement:
(i) That it is a contract between two parties to do business together and is not cessation of the money earning apparatus.
(ii) That it is not a sale transaction in the strict sense of handing over the assets to a second party and receiving cash against the transfer .
(iii) That this transaction is obviously not on sale of the manufactured products except for a negligible part in terms of stock. It includes transfer of land build ing, machinery and a lot of other auxiliar y and ancillary items. However , since the assesse remains owner of the same by virtue of having shares against its value there is no actual transfer .
(iv) It is in actuality a transaction with its own self.
7. The concept of slump sale is derived from section 2(42C) of Indian Income Tax Act 1961 according to which 'slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales . The idea of a slump sale is the transfer of an undertaking as a whole. In case where liabilities have not been transferred, it cannot be said that the 'undertaking' has been transferred as a whole and consequently the provisions of slump sale shall have no applicability to such a transfer . Previously , the cases of slump sales and the applicability of tax thereon were dealt with under section 10(2) of the 1922 Act [section 41(2) of the Income Tax Act, 1961]. Slump sale was finally given statutory recognition when section 2(42C) and section 50B were introduced in the Income Tax Act, 1961 through Finance Act, 1999. The former provision defined slump sale and the later provision lays down special provisions for computation of capital gains in the case of a slump sale. As per Explanation 1 to section 2(19AA), 'undertaking' shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity . Under section 50B, the net amount of profit earned in respect of a slump sale shall be taxable under 'capital gains'. The income shall, however , not be taxable as income from business if the transfer has duly complied with the conditions being a slump sale. According to section 50B, capital gains arising on transfer of an undertaking are deemed to be long-term capital gains. However , if the undertaking is 'owned and held' for not more than 36 months immediately before the date of transfer , gains shall be treated as short-term capital gains. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improve ment for section 48 and section 49 of the Act as per section 50B. The purpose of narrating the statutory provisions of Indian Income Tax Act, 1961 is to highlight the fact that there is a complete code in the said enactment relating to slump sale transactions.
8. Learned counsel for the respondent relied on the following passage from the judgment reported as M/s Crescent Pak. Soap & Oil Mills Limited v. Commissioner of Income Tax (East) PTCL 1985 CL 73, in which a reference was made to what was held by the Gujrat High Court in (1980) 1261 ITR 1.
When an undertaking as a whole is transferred as a going concern together with its goodwill and all other assets , what is sold is not the individual itemw ised property but the capital assets consisting of the business of the undertaking and any tax that can be attached to such transaction for a slump price at book value would be merely capital gains tax and nothing else but capital gains tax. Plant or machinery or any fixture or furniture is not being sold as such . What is sold is the business of the undertaking for a slump price. (Emphasis supplied)
In addition to the above, the learned Division bench of the Sindh High Court also placed reliance on several judgments from the Indian jurisdiction.
9. Notwithstanding the position of law as stated above, the Indian Supreme Court in case of Commissioner of Income Tax v. Artex Manufacturing Company (1997) 227 ITR 260 held that if item-wise allocation is possible then charging section can be brought into operation. In the case of Punjab Finance Ltd v. Commissioner of Income Tax-I [2008] 307 ITR 75 (SC), the Indian Supreme Court enunciated important principles relating to the slump sales. It was held as follows: The second test which needs to be applied is the test of allocation/attribution. This test is spelt out in the judgment of this Court in Mugneeram Bangur & Co. (supra). This test applies to a slump transaction. The object behind this test is to find out whether the slump price was capable of being attributable to individual assets, which is also known as item-wise earmarking. The third test is that there is a conceptual differen ce between an undertaking and its components. Plant, machinery and dead stock are individual items of an Undertaking. Business Undertaking can consists of not only tangible items but also intangible items like, goodwill, man power, tenancy rights and value of banking licence. However , the cost of such items (intangibles) is not determina ble. In the case of CIT v. B.C.
Srinivasa Setty reported in (1981) 128 ITR 294, this Court held that Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. In other words, it charges surplu s which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, this Court held that the "asset" must be one which falls within the contemplation of Section 45. It is further held that the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions cannot apply , such a case would not fall within Section 45. In the present case, the Banking Undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On facts, we find that item-wise earmarking was not possible. On facts, we find that the compensation (sale consideration) of Rs. 10.20 cr. was not allocable item- wise as was the case in Artex Manufacturing Co.
(supra). (Emphasis supplied)
10. Reference may also be made to the case of Commissioner of Income Tax v. B.M. Kharwar [1969] 72 ITR 603 (SC), which shall have important bearing on the question of law involved in this reference application. In that case a partnership concern transferred the machinery of its manufacturing division in favour of a company in which its partners were the shareholders. The sale price of the machinery was more than its written down value and it was accordingly assessed under proviso (ii) of section 10(2)(vii) of the 1922 Act as amended by Act 8 of 1946 and Act 17 of 1949. The Income Tax Appellate Tribunal as well as the High Court held that no profit in a business sense could be deemed to have accrued to the partnership by the transfer and accordingly held that the second proviso to section 10(2) (vii) of the 1922 Act was not applicable. The Indian Supreme Court, however , did not agree with the findings of the High Court. It was held that the taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. It was furthermore observed by the Indian Supreme Court as under: In the present case the machinery of the factory belonging to the firm was transferred to the private limited company . Assuming that thereby readjustment of the business relationship was intended; the liability to be taxed in respect of the readjustment had to be determined according to the strict legal form of the transaction. The company was a legal entity distinct from the partne rship under the general law. Transfer of the machinery was by the firm to the company; and the legal effect of the transaction was to convey for considera tion the rights of the firm in the machinery to the company . The transaction resulted in excess realization over the written down value of the machinery to the firm, and the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery......... In our judgment, by virtue of the amendment made in Section 10(2)(vii), proviso (ii), of the Indian Income-tax Act, 1922, by section section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 67 of 1949, even under a 'realisation sale' excess over the written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax. (Emphasis supplied)
11. The entire purpose of the above discussion is to state the obvious that the judgments from the Indian jurisdiction had been rendered in a particular statutory context and that various provisions in the Indian Income Tax Act, 1961 progressively brought slump sales into the tax net.
12. The concept of slump sale, however , is alien to the erstwhile Income Tax Ordinance, 1979 or the Income Tax Ordinance, 2001 which do not contain any provision in this regard. The principles of taxation laid down in the Indian Income Tax Act, 1961 relating to slump transaction shall have no applicability to the transfer of the Syringe division of the respondent in favour of the joint venture company .
13. In fact, Clause 7 (b)(i) of the Third Schedule of the erstwhile Income Tax Ordinance, 1979 is fully applicable to the facts of the present case which reads as under:
7. Disposal of assets and treatment of resultant gains or losses:- Notwithstanding anything contained in this Ordinance or the repealed Act, where, in any income year:
(a) ........
(b) any (asset) is disposed of by an assesse:
(i) if the sale proceeds thereof exceed the written down value, the excess shall be deemed to be the income of the assesse of that year chargeable under the head "Income from business or profession";
(ii) if the sale proceeds are less than the written down value, the deficit shall be deemed to be an expenditure deductible from the profits and gains of the business or profession of that year; and the business or profession for the purposes of which the said asset was used before its disposal, shall be deemed to be carried on by the assess ee during that year and all the provision s of this Ordinance shall apply accordingly: Similarly , Clause 8(5) (a) (b) & (c) of the Third Schedule defines the term "sale proceeds" as follows:
(5) "sale proceeds" means-
(a) where the asset is actually sold, the sale price thereof or the fair market value, whichever is the higher;
(b) where the asset is transferred by way of exchange, the fair market value of the asset acquired through such transfer;
(c) where the asset is transferred otherwise than by sale or exchange, the consideration for such transfer; It can be seen that the transaction in question is squarely covered by Clause 7 read with Clause 8 of the Third Schedule to the Income Tax Ordinance, 1979. The exemption from payment of tax could only be sought with reference to the Second Schedule of the said Act. The respondent, however , could not pinpoint to any provision therein granting it exemption from payment of tax on sale of its syringe division.
14. The term 'Income' is defined in sectio n 2 (24) of the erstwhile Income Tax Ordinance, 1979 which includes "(a) any income, profits or gains, from whatever source derived , chargeable to tax under any provision of this Ordinance under any head specified in section 15; (b) any loss of such income, profit or gains; and". Section 15 specifically mentioned "Capital gains" under head of 'Income". It is thus apparen t that capital gains form part of income of a person and is liable to tax.
15. Even if the concept of slump transac tion is deemed applicable to our jurisdiction on the terms as it has been enunciated by the Indian judgments, the transaction in question would not qualify as a transfer of an undertaking. In order to qualify as a slump transaction, it needs to be proved that the undertaking of a business as a whole is transferred as a going concern along with its goodwill, assets, liabilities etc. A simple sale of assets shall not suffice. From the record, it is not apparent that apart from the plant, machinery and building the transfer also included the intangible assets including the liabilities, if any. The Income Tax Appellate Tribunal did refer to some of the stipulations of the Master Agreement which do not demonstrate that the necessary ingredients of slump sale were met with. The basic question is whet her the transaction in question was in fact a sale in the commercial sense between two different entities. The answer is in affirmative. As per the ratio of B.M. Kharwar , it is open to Revenue to unravel the device and to determine the true character of the relationship if the parties chose to conceal their legal relation in the contract. As noted above, Clauses 7 and 8(5) of the Third Schedule of the Income Tax Ordinance, 1979 were squarely applicable to the facts of the present case.
16. In this view of the matter , the assessing officer was right in making the addition whereas the Income Tax Appellate Tribunal did not take into account the relevant provisions of the Income Tax Ordinance, 1979 in allowing the appeal of the respondent. We accordingly hold that the transaction in question was not a slump sale. This reference application is allowed with the result that the decision rendered by Income Tax Appellate Tribunal is set aside and decisions of the Assessing Of ficer and Commissioner Income Tax (Appeals) are upheld.
17. Office shall send a copy of this order under seal of the Court to the Appellate Tribunal as per section 133(5) of the Ordinance.