2019 (7) TMI 84 - AT - Income Tax

Tribunal ruling: Revenue wins on transfer date, Section 50B applies. Interest disallowed under Section 43B.

The Deputy Commissioner of Income-tax, Circle-1, Alleppey Versus M/s. Accelerated Freeze Drying Co. Ltd. And (Vice-Versa)

The Tribunal ruled in favor of the Revenue regarding the effective date of transfer and upheld the applicability of Section 50B for slump sale assessment. ... Slump sale u/s 50B - AO assessed sale of the industrial units with the land, building, plant and equipments as going concerns to another company - assessee claim capital gain as sale of depreciable assets u/s 50 - HELD THAT:- As decided in own case [2010 (10) TMI 673 - KERALA HIGH COURT] sale of the undertaking is a slump sale within the meaning of Section 2(42C) assessable under Section 50B and assessee also rightly styled the transaction as such as 'slump sale' in the sale documents and even got the Auditor's report prepared and filed along with return in terms of Section 50B(3). - assessment was rightly made by the Officer u/s 50B treating the transaction as 'slump sale'. Addition u/s.43B being interest accrued on loans from Banks/Financial Institutions - sum not been paid before the due date of filing the return - HELD THAT:- As per the provisions of section 43B(d) and (e) of the Act, the assessee has to pay the interest on any loan or borrowings in accordance with the terms and conditions of agreement governing such loan or borrowings when it was borrowed from the public financial institution or a State financial corporation or a State industrial investment corporation or a scheduled bank. However, in the present case, the Ld. AR has fairly conceded that the assessee has not paid interest on loan or borrowings made from such institutions and shown as income in the subsequent year on its waiver. According to the Ld. AR, it cannot be added in the assessment year under consideration. In our opinion, offering of income on waiver in the subsequent assessment year cannot be a reason to allow non-payment of interest as deduction when it was not paid in accordance with the provisions of section 43B. Hence, we are in full agreement with the finding of the CIT(A) and the same is confirmed. Thus, this ground of appeal of the assessee is dismissed. Disallowance of part of interest claimed - diversion of funds to sister concerns - HELD THAT:- In view of the judgment of the Jurisdictional High Court in the case of V.I. Baby & Co. [2001 (10) TMI 58 - KERALA HIGH COURT] CIT(A) had confirmed the disallowance of the interest made by the AO. However, we make it clear that AO has to compute interest on diversion of funds to sister concerns on outstanding balances on day to day basis. With this observation, we remit this issue to the file of the AO for re-computation of interest. This ground of appeal of the assessee is partly allowed for statistical purposes. Re-instatement of foreign exchange loans procured for working capital requirements - capital or revenue - HELD THAT:- If the transactions undertaken are on account of revenue items, the gain is clearly taxable and so the loss also is clearly allowable. The assessee except making bald assertion that the transactions were undertaken on account of capital items no evidence was brought on record to establish that the foreign currency transactions were undertaken on capital items. The AO also had failed to undertake this exercise. The Hon'ble Supreme Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd. [2009 (4) TMI 4 - SUPREME COURT] had clearly held that the actual payment was not a condition precedent for making adjustment in respect of foreign currency transactions as the end of the closing year. We are therefore, unable to concur or agree with the view of the CIT(A), that liability could arise only when the contract would have matured, as such a stand is totally divorced from the accounting principles and is in variance with the principle upheld by the Apex Court in the case Woodward Governor India (P.) Ltd. (supra) - we restore the matter to the file of AO with the direction that to re-do the assessment keeping in view the principles enunciated above Issues Involved:1. Determination of the effective date of transfer of the Taloja property for capital gains computation.2. Applicability of Section 50B for the computation of capital gains on the sale of industrial units.3. Disallowance of interest accrued on loans under Section 43B.4. Disallowance of interest on funds diverted to sister concerns.5. Disallowance of loss on re-instatement of foreign exchange loans.Detailed Analysis:1. Determination of the Effective Date of Transfer of the Taloja Property:The Revenue contended that the CIT(A) erred in holding that the effective date of transfer of the Taloja property was when the assessee took possession and made entries in the books on 31/03/1997, rather than the registration date of 05/08/1999. The Tribunal referred to the Supreme Court decision in Alappattu Venkitaraman vs. CIT, which held that entries in the books are not relevant for determining the date of transfer; the effective date is the registration date. Therefore, the holding period was less than 36 months, making the gains short-term.2. Applicability of Section 50B for Computation of Capital Gains:The Tribunal referenced a similar case involving the assessee where the Jurisdictional High Court held that the sale of an industrial unit as a going concern is a 'slump sale' under Section 2(42C) and should be assessed under Section 50B. The High Court emphasized that the sale was for a lump sum consideration without assigning individual values to assets and liabilities, fitting the definition of a slump sale. Consequently, the Tribunal allowed the Revenue's appeal, reversing the CIT(A)'s decision and confirming the assessment under Section 50B for slump sale.3. Disallowance of Interest Accrued on Loans under Section 43B:The AO disallowed Rs. 2,07,99,000/- of accrued interest on loans from banks/financial institutions not paid before the due date for filing the return. The CIT(A) upheld this disallowance, noting that Section 43B allows deduction only on payment basis. The Tribunal agreed with the CIT(A), stating that offering the interest as income in a subsequent year does not justify allowing the deduction in the current year without payment. Thus, this ground of appeal by the assessee was dismissed.4. Disallowance of Interest on Funds Diverted to Sister Concerns:The AO disallowed Rs. 1,03,50,000/- of interest on the grounds that the assessee had given interest-free loans to sister concerns while paying interest on secured loans. The CIT(A) upheld this disallowance, referencing the Kerala High Court decision in V.I. Baby & Co., which held that interest-free advances to partners or sister concerns are not for business purposes and should be disallowed. The Tribunal concurred but remitted the issue to the AO for re-computation of interest on a day-to-day basis, partly allowing the appeal for statistical purposes.5. Disallowance of Loss on Re-instatement of Foreign Exchange Loans:The assessee claimed a loss of Rs. 84,06,770/- on re-instatement of foreign exchange loans for working capital. The AO disallowed this, considering it a capital receipt. The CIT(A) upheld the disallowance, stating that the loss was contingent and related to capital expenditure. The Tribunal, however, referred to the Supreme Court decision in Sutlej Cotton Mills Ltd. and CIT vs. Woodward Governor India Pvt. Ltd., which held that the nature of the transaction (capital or revenue) determines the taxability of foreign exchange gains or losses. The Tribunal remitted the matter to the AO for re-assessment in line with these principles, partly allowing the appeal for statistical purposes.Conclusion:The Tribunal allowed the Revenue's appeal regarding the effective date of transfer and the applicability of Section 50B for slump sale. It upheld the disallowance of interest under Section 43B and remitted the issues of interest on funds diverted to sister concerns and loss on re-instatement of foreign exchange loans to the AO for re-computation and re-assessment, respectively. The appeals were thus partly allowed for statistical purposes.