2021 (10) TMI 505 - AT - Income Tax

Tribunal Decisions on Tax Appeals: Depreciation, Deductions, Losses, Capital Gains, Expenses

The Tribunal partly allowed the Revenue's appeal in ITA No. 4345/Mum/2007 and partly allowed the Assessee's appeals in ITA No. 4000/Mum/2007 and ITA No. ... Depreciation on the basis of computation made by the assessee - itemized sale of assets or slump sale - HELD THAT:- We find that both the parties before us fairly agreed that this issue is already covered in favour of the assessee by the order of this Tribunal in [2019 (5) TMI 689 - ITAT MUMBAI] as is discernible from the order of the DRP, the issue as to whether the sale of the aforesaid two divisions was to be construed as itemized sale of assets or slump sale is pending before the ITAT in the preceding years of the assessee. Accordingly, the DRP had directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal regarding slump sale vs. itemized sale. In the backdrop of the aforesaid fact situation, now when the matter as to whether the sale of the aforesaid two divisions by the assessee is to be treated as an itemized sale or a slump sale is pending in the case of the assessee for the preceding years, therefore, we find no infirmity in the order of the DRP who had rightly directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal - Decided against revenue. MAT computation - Computation of deduction u/s.80HHC of the Act for the purpose of calculating book profits u/s.115JB - HELD THAT:- We find that this issue is no longer res integra in view of the decision Bhari Information Technology Systems (P) Ltd. [2011 (10) TMI 19 - SUPREME COURT] wherein the decision of the Syncom Formulations India Pvt. Ltd. [2007 (3) TMI 288 - ITAT BOMBAY-H] had been duly approved by the Hon’ble Apex Court. Though this decision was rendered by the Hon’ble Apex Court in the context of claiming deduction u/s.80HHE of the Act vis-à-vis computation of book profits u/s.115JA of the Act, the same analogy would apply to the issue in dispute before us. We find that the Hon’ble Apex Court had held that deduction u/s.80HHE had to be worked out on the basis of adjusted book profit u/s.115JA of the Act and not on the basis of profits computed under regular provisions of law applicable to computation of profits and gains of business. Respectfully following the same, we do not find any infirmity in the order passed by the ld. CIT(A). Accordingly, the ground No.1(b) raised by the Revenue is dismissed. Deduction for provision of bad and doubtful debts while computing book profits u/s.115JB - HELD THAT:- Section 115JB of the Act is a self-contained code by itself starting with a non-obstante clause. The Hon’ble Supreme Court in the case of Apollo Tyres [2002 (5) TMI 5 - SUPREME COURT] had already held that the book profits reported by the assessee which has been approved by their shareholders in the Annual General Body meeting could not be tinkered with by the ld. AO other than those additions or deductions specified in Explanation-1 to Section 115JB (2) of the Act. Clause (i) of Explanation to Section 115JB(2) of the Act specifically mandates that provision for diminution in value of any asset should be added back while computing book profits u/s.115JB of the Act. It is not in dispute that the provision for doubtful debts in the instant case does represent provision made for diminution in value of asset. There is absolutely no quarrel that the case does not fall under Clause “C” of Explanation 1 to Section 115JB(2) of the Act. We hold that the issue in dispute falls in Clause (i) of Explanation 1 to Section 115JB(2) of the Act. We are not inclined to make this provision redundant or otiose - we hold that provision for bad and doubtful debts is required to be added back while computing book profits u/s.115JB Set off of Losses of amalgamating company in the hands of the assessee company - Slump sale - whether the assessee had complied with the provisions of Section 72A of the Act r.w.rule 9C of the Rules which alone would enable it to get the benefit of set off of accumulated losses of amalgamating company in addition to the scheme of merger approved by the Hon’ble Bombay High Court? - HELD THAT:- The income tax dispute cannot be determined based on newspaper reports. But in the instant case, the facts stated in the newspaper reports stood subsequently ratified by the actual events that had taken place post merger. We are completely in agreement with the argument advanced by the ld. AR that since assessee was not in control of the operations of GBDFC prior to the merger including the sale of ibuprofen undertaking on 01/11/2002 by way of slump sale, the assessee cannot be held responsible for the same. The act of GBDFC prior to merger, to sell any of its undertaking to its sister concern Alpex for a paltry consideration is of absolutely no relevance to the assessee company herein. In view of the aforesaid observations, we hold that the ld. CIT(A) had rightly directed the ld. AO to allow set off of losses of amalgamating company in the hands of the assessee. Accordingly, ground No. 1(d) raised by the revenue is dismissed. Allowability of capital loss on sale of shares - AO has alleged that the assessee has not furnished any tenable reason for the loss that it has incurred by selling off its share holding - HELD THAT:- Revenue did not point out any facts which would evidence that the transaction was not genuine. In such a case where the genuineness is not disputed with any evidence, it is not open to discard the documents and/or transaction on the basis of some supposed object/intent. In the present facts the Revenue accepts the documents but only substitutes the consideration. Therefore, the issue is whether such substitution of full consideration received by fair market value of the asset is permissible. As held by the Tribunal at the relevant time there was no power vested in the authorities under the Act to substitute a full value of consideration received for sale of shares by fair market value in respect of stocks and shares. The power to substitute full consideration with fair market value in respect of shares came into the statute only on introduction of Section 50D with effect from 1st April, 2013. Moreover, such a power under Section 50D of the Act is only to be exercised if the Assessing Officer comes to a finding that the consideration received is not ascertainable or cannot be determined - we do not find any infirmity in the action of the ld. CIT(A) allowing capital loss on sale of shares of Reckitt Piramal Pvt. Ltd., and Charak Piramal Pvt. Ltd. Allowability of bad debts as deduction - HELD THAT:- As it is no longer necessary for the appellant to establish that the debt which is written off has become bad during the year. The A.O. is therefore directed to allow bad debts. Addition in respect of unutilized MODVAT credit u/s.145A - HELD THAT:- As relying on own case [2019 (5) TMI 689 - ITAT MUMBAI] we restore this issue to the file of the ld. AO to decide the same in the light of directions issued by this Tribunal for A.Y.2009-10. Accordingly, the ground No. I raised by the assessee is allowed for statistical purposes. Disallowance of interest expenditure paid to various banks u/s.36(1)(iii) - payment was made for the loan which was utilized for acquiring the capital asset and an amount expended in the sum of ₹ 9.47 Crores which was upheld by the ld. CIT(A) by placing reliance on the order passed by his predecessor in assessee”s own case for A.Y.2002-03 - HELD THAT:- We find that the appeal preferred to this Tribunal in assessee”s own case for A.Y.2002-03 had been adjudicated already by this Tribunal in [2020 (4) TMI 812 - ITAT MUMBAI] to hold that the payment of prepayment charges also partakes the character of interest . We find that there cannot be any iota of doubt that the entire transaction of acquisition of business assets by the assessee has been done on the grounds of commercial expediency and hence the entire interest payment and prepayment charges would be squarely allowable as deduction u/s 36(1)(iii) of the Act itself. Accordingly, the Ground raised by the assessee is allowed. Granting deduction only in respect of 1/5th of the expenditure in respect of payment made to M/s. Accenture by applying the provisions of section 35DD of the Act as against the claim of deduction of the whole expenditure u/s.37(1) by assessee - HELD THAT:- We find that the very same issue was the subject matter of adjudication by this Tribunal in assessee”s own case for A.Y.2002-03 wherein it was held that assessee would be eligible for deduction u/s.37(1) - We hold that the provisions of Section 35DD of the Act as alleged by the ld. CIT(A) cannot be made applicable in the instant case as admittedly the same only refers to expenses incurred pursuant to amalgamation. Hence, we direct the ld. AO to grant deduction of the said expenditure u/s.37(1) of the Act. Computation of deduction u/s.80HHC - AO show-caused the assessee with regard to claim of deduction u/s.80HHC of the Act to explain as to why the profits of the business should not be recomputed in view of Explanation (baa) of Section 80HHC(4) - HELD THAT:- While computing the 90% of interest together with rent, miscellaneous income, service charges, commission etc., for the purpose of reducing the same from profits from business eligible for deduction u/s.80HHC of the Act in order to arrive at the adjusted profits of the business, whether the gross interest income or net interest income is to be considered. We find that this issue is no longer res integra in view of the decision of ACG Associated Capsules (P) Ltd., [2012 (2) TMI 101 - SUPREME COURT] wherein it was held that net interest is to be considered. We find that the Hon’ble Apex Court in para 10 of its order had held that 90% of net amount of receipt of nature of interest, rent, commission etc. which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining “profits of the business” of the assessee under Explanation (baa) of Section 80HHC. Correct head of income - Treatment of rental income from let out portion of Rhone Poulenc House (RPIL) as “income from other sources” instead of “income from house property” - HELD THAT:- We find that the ownership of the RPIL House vests with the assessee for four years and hence, assessee continued to be the owner of the part premises of RPIL House and hence, the rental income thereon should be assessed only under the head “income from house property” and assessee would be entitled for statutory deduction @30% u/s.24(a) of the Act for the same. Enhancing the income of the assessee by disallowing the loss on redemption of shares by treating it as not a legitimate commercial transaction - AO accepted the claim of long term capital loss in the order passed by him u/s.143(3) - HELD THAT:- We hold that the ld. CIT(A) grossly erred in making enhancement of income by disallowing the claim of long term capital loss on redemption of preference shares. Levy of penalty u/s 271(1)(c) of the Act in respect of professional fees to Accenture - HELD THAT:- We find that we have already held that the professional fees paid to Accenture would be allowable as deduction u/s.37(1) of the Act. Since in the quantum appeal, it has already been held to be revenue expenditure, the levy of penalty would have no legs to stand. Accordingly, the grounds raised by the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether depreciation claimed on assets acquired by amalgamation/acquisition is to be allowed on the assessee's computation (recurring issue of depreciation on transferred blocks). 2. Whether deduction under section 80HHC for computing book profits under section 115JB/115JA should be computed by reducing 'profits eligible for deduction' or by reference to deductions claimed; and whether 90% of receipts under Explanation (baa) are to be computed on gross or net interest. 3. Whether provisions for bad and doubtful debts set aside (but not written off) are to be added back in computing book profits under section 115JB (Explanation 1 Clauses). 4. Whether an amalgamated company is entitled to set off unabsorbed business losses and unabsorbed depreciation of the amalgamating company under section 72A where statutory/Rule 9C conditions and court-sanctioned scheme are complied with, and whether pre-amalgamation slump sale affects genuineness. 5. Whether capital loss on sale/redemption of shares (including unlisted JVs) is allowable where sale consideration is low or token and whether substitution by market value or characterisation as sham can be made by AO. 6. Whether specific bad debts written off during the year are allowable deduction under section 36(1)(vii) without proving the debt became bad (post-amendment practice and relevant decisions). 7. Whether MODVAT/CENVAT (valuation under section 145A) adjustments for unutilised credit reflected under exclusive accounting method require reassessment of opening/closing stock and profit impact. 8. Whether interest and prepayment charges incurred for loans used in expanding business / acquiring business/assets are allowable as revenue deduction under section 36(1)(iii) (and whether proviso excluding pre-use interest applies to the year). 9. Whether payments to consultants (Accenture) for integration/ professional services are deductible wholly under section 37(1) (or to be spread under section 35DD), and whether penalty under section 271(1)(c) arises when the expenditure is held to be revenue. 10. Miscellaneous: (a) tax treatment of rental receipts - whether to be taxed under 'income from house property' or 'other sources'; (b) whether redemption of preference shares constitutes transfer giving indexation benefit (long-term capital loss) and whether such loss may be disallowed as a colourable device. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Depreciation on assets taken over by amalgamation/acquisition Legal framework: Section 32 and principles governing written down value (WDV) of blocks of assets post transfer under sanctioned schemes. Precedent treatment: Tribunal's earlier decisions in the assessee's own matters and coordinate benches (including reliance on Supreme Court in Mahendra Mills) held that where transferor had not claimed depreciation for earlier years, AO cannot notionally reduce WDV when transferee claims depreciation unless depreciation was actually claimed by transferor. Interpretation and reasoning: The Tribunal follows earlier coordinate bench rulings that claiming or not claiming depreciation is an option under Section 32 and cannot be thrust upon transferee by notionally reducing WDV; where DRP/Tribunal/earlier orders directed allowance, AO must follow. Ratio vs. Obiter: Ratio - recurring ratio that WDV should not be notionally reduced for unclaimed depreciation of transferor. Conclusion: Depreciation as computed by the assessee on transferred assets is to be allowed; Revenue ground dismissed. Issue 2 - Computation of section 80HHC deduction and scope of Explanation (baa) (including net vs gross interest) Legal framework: Section 80HHC and Explanation (baa) governing reduction of receipts like interest/rent/commission (90% rule) when computing eligible business profits; interaction with book profit computation under section 115JB/115JA where analogous issues arise. Precedent treatment: Special Bench and Supreme Court authority approving approach that deduction under analogous export incentives provisions must be computed with reference to adjusted book profit and that net interest (not gross) is to be considered (Supreme Court decision in ACG Associated Capsules). Special Bench Syncom decision upheld by Apex Court for analogous provision. Interpretation and reasoning: The Tribunal applies the Supreme Court's analogy - profits eligible for deduction should be adjusted on the basis of profits as computed for book profit purposes (i.e., adjusted book profit), and 90% to be applied to net interest (net of interest expense) where net interest is the figure actually included in profits. Ratio vs. Obiter: Ratio - 90% deduction under Explanation (baa) applies to net amount included in profits; deduction under 80HHC must be recomputed accordingly. Conclusion: Direction to AO to recompute 80HHC deduction treating net interest per Supreme Court authority; assessee's ground allowed in part and recomputation ordered. Issue 3 - Add-back of provisions for bad and doubtful debts under section 115JB (Explanation 1 clause (i) and clause C) Legal framework: Section 115JB is a self-contained code with Explanation 1 listing specific additions/deductions for computing book profits; Finance Act (No.2) 2009 inserted retrospective Clause (i) to include amounts set aside as provision for diminution in asset value. Precedent treatment: Calcutta Tribunal Special Bench in Usha Martin held provisions for bad debts constitute diminution in asset value and are not Clause-C liabilities; jurisdictional High Court decisions (Tainwala) applied Vijaya Bank in particular factual settings where debts had been written off. Interpretation and reasoning: Tribunal distinguishes cases where debts were written off from mere provisions. Since section 115JB is non-obstante and Explanation (i) mandates add-back of provision for diminution in asset value (retrospectively effective), mere provision (not written off) must be added back to book profits unless fact shows write-off; where assessee itself disallowed provision under normal provisions, it evidences provision not yet written off. Ratio vs. Obiter: Ratio - provisions for diminution in value (including provisions for bad and doubtful debts not written off) are to be added back under Explanation (i) to section 115JB(2). Conclusion: Provision for bad and doubtful debts in the sum claimed is required to be added back in computing book profits; Revenue ground allowed. Issue 4 - Set-off of unabsorbed losses and unabsorbed depreciation of amalgamating company under section 72A where scheme sanctioned by court and conditions in Rule 9C satisfied Legal framework: Section 72A (as applicable for AY under consideration) and Rule 9C conditions (installed capacity utilisation, continuity of business, holding of book value etc.), Companies Act scheme sanction effect under section 391(1) principles. Precedent treatment: High Court and Supreme Court authorities confirm that a court-sanctioned scheme is binding on parties and authorities and may only be assailed under dedicated statutory appeals; Tribunal decisions require fulfilment of statutory/Rule conditions for set-off. Interpretation and reasoning: Tribunal finds amalgamation was qualifying; assessee complied with Rule 9C (50% installed capacity within 4 years and continuity) and other conditions; the slump sale of a unit by the amalgamating company pre-merger occurred before scheme filing and was outside assessee's control; court sanction (no objection from Union/Revenue at sanction stage) lends finality and precludes collateral attack. Revenue allegation of colourable device rejected on facts (petition filed after slump sale; no appeal under section 391(7) by Revenue). Ratio vs. Obiter: Ratio - where court-sanctioned scheme exists and section 72A/Rule 9C conditions are met, set-off of amalgamating company's losses/ depreciation is permissible; pre-amalgamation disposal does not automatically negate genuineness if statutory conditions are satisfied. Conclusion: AO directed to allow set-off; Revenue ground dismissed. Issue 5 - Allowability of capital loss on sale of shares and substitution of consideration by AO / requirement of valuation report Legal framework: Capital gains tax computation; absence (for the year in issue) of statutory provision authorising AO to substitute consideration by FMV for shares (Section 50D came later); burden on revenue to prove receipt of higher consideration (K.P. Varghese principle). Precedent treatment: Jurisdictional High Court and Tribunal decisions hold AO cannot substitute contract consideration by FMV for sale of unlisted shares in absence of statutory provision; revenue must prove declared consideration is incorrect. Interpretation and reasoning: On facts buyer was unrelated, sale at disclosed consideration not shown to be tainted; AO produced no comparables or contrary material; absence of statutory power to substitute market value for shares in that assessment year means declared sale consideration must be accepted unless Revenue proves otherwise. Ratio vs. Obiter: Ratio - declared sale consideration for unlisted shares cannot be replaced by FMV by AO in absence of statutory power; revenue must prove contrary. Conclusion: Capital loss of Rs. 11,75,06,652 allowed; Revenue ground dismissed. Issue 6 - Allowability of bad debts written off under section 36(1)(vii) Legal framework: Section 36(1)(vii) (post-amendment practice) allows deduction where amount is actually written off in books; earlier case law requires honest judgment by assessee; Special Bench (Oman International Bank) held proof of becoming bad not obligatory where written off. Precedent treatment: Special Bench and High Court decisions cited support allowance where debts are written off and requisite conditions complied with. Interpretation and reasoning: On facts amount was written off in books and conditions of section 36(2) complied with; therefore AO's demand for demonstrative infallible proof is inappropriate; deduction allowed. Ratio vs. Obiter: Ratio - actual write-off in books and compliance with statutory conditions suffice for deduction; AO cannot demand proof of absolute impossibility of recovery. Conclusion: Bad debts of Rs. 46,00,000 allowed; Revenue ground dismissed. Issue 7 - MODVAT/CENVAT and valuation under section 145A (exclusive vs inclusive accounting) Legal framework: Section 145A requires valuation of purchases/sales/inventory inclusive of taxes/duties for income computation; interaction with accounting practice (exclusive method) and ICAI guidance/tax audit formats. Precedent treatment: Tribunal in assessee's earlier years remanded to AO for verification where assessee's tax audit clause indicated nil impact; Hawkins Cookers, guidance note and prior Tribunal directions considered. Interpretation and reasoning: Tribunal respects that assessee followed AS-2/ICAI guidance using exclusive approach; where tax audit declares nil impact, AO must verify workings; matter remanded for readjudication with opportunity to substantiate claim. Ratio vs. Obiter: Ratio - section 145A adjustments must be adjudicated on verified workings; where tax audit produces computation showing nil net impact, AO must examine but cannot make arbitrary additions without verification. Conclusion: Issue remitted to AO for readjudication per directions in earlier Tribunal order; assessee's ground allowed for statistical purposes. Issue 8 - Interest and prepayment charges treated as revenue expenditure under section 36(1)(iii) Legal framework: Section 36(1)(iii) allows deduction of interest on borrowed capital for business purposes; proviso excluding pre-use interest was applicable only prospectively (not to year under consideration). Precedent treatment: Supreme Court decisions on commercial expediency (S.A. Builders, Atherton) applied to section 36(1)(iii); Tribunal earlier allowed interest/prepayment where loan used for business acquisition/expansion. Interpretation and reasoning: Tribunal accepts that loans were raised for acquisition/expansion to acquire business assets and commercial expediency test satisfied; proviso not applicable to that assessment year; prepayment charges treated as interest component. Ratio vs. Obiter: Ratio - interest and prepayment charges for loans used to acquire business/assets may be revenue deductible where incurred for commercial expediency and proviso excluding pre-use interest does not apply retrospectively. Conclusion: Interest and prepayment charges allowed as deduction; assessee's ground allowed. Issue 9 - Deductibility of consultant fees (Accenture) under section 37(1) vs capitalization/spreading under section 35DD and penalty under section 271(1)(c) Legal framework: Section 37(1) allows business expenditure wholly and exclusively for business; Section 35DD relates to amalgamation expenditure spread; penalty under section 271(1)(c) penalises concealment/furnishing inaccurate particulars. Precedent treatment: Tribunal in assessee's earlier year held Accenture fees were professional services relating to pre-proposal/integration and allowable as revenue expenditure under section 37(1); where expenditure held revenue, penalty for concealment cannot stand. Interpretation and reasoning: Fees related to professional services for integration/pre-merger studies are revenue in nature and incurred for commercial expediency; therefore full deduction under section 37(1) warranted rather than amortisation under section 35DD; in consequence, penalty based on disallowance is unsustainable. Ratio vs. Obiter: Ratio - genuine professional fees for business integration are deductible under section 37(1); penalty cannot be sustained where quantum issue resolved in favour of assessee. Conclusion: Deduction under section 37(1) allowed in full; penalty under section 271(1)(c) quashed in respect of that item. Issue 10(a) - Classification of rental receipts as income from house property or other sources Legal framework: Income from house property provisions (section 22-24) vs income from other sources (section 56/57) - depends on ownership at relevant time. Interpretation and reasoning: Where ownership of premises continues in assessee for relevant period (even if sale occurred, continued ownership for four years or other relevant facts), receipts to be treated as income from house property and eligible for standard deduction under section 24; factual finding sustained. Ratio vs. Obiter: Ratio - tax characterisation depends on legal ownership in the assessment year; where ownership exists entitlement to section 24 deduction follows. Conclusion: Rental income treated as income from house property where ownership continued; statutory deduction allowed. Issue 10(b) - Redemption of preference shares, transfer, indexation benefit and challenge as colourable device Legal framework: Redemption of preference shares considered a 'transfer' under section 2(47) per authoritative precedents; section 48 indexation provisos deny indexation to bonds/debentures but not to preference shares which are capital; burden on revenue to show transaction sham. Precedent treatment: High Court and Supreme Court authorities (Anarkali Sarabhai and subsequent High Court decisions) hold redemption of preference shares is a transfer attracting capital gains treatment and indexation unless the instrument is bond/debenture; revenue must adduce material to impugn genuineness. Interpretation and reasoning: On facts redemption was bona fide, arose due to indexation rules and prevailing losses in the investee; related party allegations lacked evidentiary support; preference shares are legally distinct from debentures/bonds; indexation benefit allowable. Ratio vs. Obiter: Ratio - redemption of redeemable preference shares constitutes transfer and indexation is available; absence of convincing material of sham prevents denial. Conclusion: Long-term capital loss on redemption allowed; enhancement by CIT(A) disallowed and assessee's ground allowed.