2008 (8) TMI 782 - AT - Income Tax

Tribunal upholds assignment agreement validity, allows deduction under Section 80-IA

Mirc Electronics Ltd. and Adonis Electronics P. Ltd. Versus Deputy Commissioner of Income-tax

Mirc Electronics Ltd. and Adonis Electronics P. Ltd. Versus Deputy Commissioner of Income-tax - [2009] 319 ITR (A. T.) 130 Issues Involved:1. Cessation of Sales Tax Liability and its Taxability under Section 41(1) of the Income-tax Act.2. Validity and Genuineness of the Assignment Agreement.3. Deduction under Section 80-IA of the Income-tax Act.Detailed Analysis:1. Cessation of Sales Tax Liability and its Taxability under Section 41(1) of the Income-tax Act:The assessee was aggrieved by the addition of Rs. 26,66,79,260 arising on the cessation of sales tax liability under Section 41(1) of the Income-tax Act. The assessee had assigned its sales tax liability to M/s. Adonis Electronics Pvt. Ltd. and claimed a net gain of Rs. 2.15 crores. The Assessing Officer (AO) held that the assessee had entered into a sham transaction to avoid tax, as the sales tax liability could be redeemed by paying Rs. 26.64 crores, resulting in a gain of Rs. 26.67 crores. The AO deemed that the sales tax collected was a trading receipt and treated it as discharged under Section 43B, thus making the cessation of liability taxable under Section 41(1). The Commissioner of Income-tax (Appeals) upheld this view, stating that the transaction was not at arm's length and was a colorable device to avoid tax.2. Validity and Genuineness of the Assignment Agreement:The assessee contended that the assignment agreement was genuine and entered into out of commercial considerations. The AO and the Commissioner of Income-tax (Appeals) held that the transaction was not genuine, citing the relationship between the parties and the lack of commercial expediency. The Tribunal, however, noted that the assignment of liabilities and assets is a common commercial practice and that the transaction was commercially reasonable. The Tribunal rejected the Revenue's contention that the statutory liability could not be assigned and held that the genuineness of the agreement could not be doubted.3. Deduction under Section 80-IA of the Income-tax Act:The assessee claimed a deduction under Section 80-IA on the profit of Rs. 2.15 crores arising from the assignment of sales tax liability. The Tribunal held that the gain from the assignment of sales tax liability was derived from the industrial undertaking and was eligible for deduction under Section 80-IA. The Tribunal noted that the sales tax collected by the assessee was a trading receipt and that the gain from the assignment of this liability had a direct nexus with the industrial undertaking.Conclusion:The Tribunal concluded that the assignment agreement was genuine and commercially reasonable, rejecting the Revenue's contention that it was a sham transaction. It held that the cessation of sales tax liability was taxable under Section 41(1) of the Income-tax Act. However, the Tribunal allowed the assessee's claim for deduction under Section 80-IA on the profit arising from the assignment of sales tax liability, treating it as derived from the industrial undertaking. The order was pronounced on 22nd August 2008.