2022 (4) TMI 1176 - AT - Income Tax

Tribunal rules in favor of assessee, overturning section 263 order.

The Tribunal held in favor of the assessee, ruling that the conditions for invoking section 263 were not met. It found that the AO had conducted thorough ... Revision u/s 263 by CIT - slum sale - section 50B is applicable in the case of the assessee and order passed by the Assessing Officer is erroneous - As per CIT assessee has transferred all the assets to its wholly owned subsidiary TMFSPL as a going concern on a slump sale basis, while computing its business income, it has reduced the profit earned in the above said slump sales and considered the same under the head Capital Gains at the same time claimed exemption u/s 47(iv) - HELD THAT:- PCIT raised objections on treating the slump sales under the head Capital gains as well as treatment given by the assessee to compute the book profit u/s 115JB of the Act. After careful consideration, we observe that the assessee has transferred the whole business under slump sale basis and it is fact on record that it is transferred the business on going concern basis to its own subsidiary company. The transaction is covered u/s 47(iv) of the Act and accordingly it is not transfer within the provisions of the Act. Therefore, we are not incline to agree with the findings of Ld PCIT in this regard. Therefore, we are inclined to accept the submissions made by the assessee in this regard. Adjustment of the above said profit in the book profit and the assessee has treated the same as capital profit without routing the transaction thru profit and loss account - On careful consideration, we observe that the assessee has to prepare the annual account by following the Accounting Policies, Accounting Standards as provided in the Act and prepare the accounts as per the Schedule III to the Companies Act, 2013 to determine the book profit. The provisions of section 115JB allows certain adjustments as given Explanation 1 in section 115JB(2) of the Act. We observe that the assessee has treated the above income as capital as the same is between the subsidiary company, which will not be part of book profit. However, we are in agreement with Ld.PCIT that the above adjustment made by the assessee is not the adjustment mentioned in the Explanation 1 to section 115JB. However, we observe that the courts have held that when the receipt or profit earned by the assessee are in the nature of capital receipt or capital profit, these profit has to excluded from the book profit for the purpose of section 115JB also - see M/S SHIVALIK VENTURE PVT. LTD. VERSUS DY. COMMISSIONER OF INCOME TAX-8 (3) , MUMBAI [2015 (8) TMI 979 - ITAT MUMBAI] - thus we are incline to accept the submissions of the assessee on merit. Disallowance on section 14A - We observe that the assessee has made the investments at the end of the year i.e., 26.03.2015 and Ld PCIT of the view that irrespective of the earning of any exempt income, the AO was duty bound to make inquiries in view of CBDT Circular no 5/2014. After considering the detailed submissions of both the parties, it is fact on record that the assessee has made the investment at the fag end of the year and there is no chance of earning any exempt income out of the above said investment, hence the courts have held that where there is no exempt income, Assessing Officer cannot make any disallowance, the disallowance has to be relating to the earning of exempt income. Therefore, in the given case, there is no exempt income earned by the assessee out of the fresh investments, in our considered view, the assessee has a valid case on merit. Thus the assessee has placed all the above facts before Assessing Officer and Assessing Officer has accepted the view and which is one of the possible view under this circumstances, the Ld PCIT cannot impose other possible view and moreover, the issues involved under consideration is in favour of the assessee on merit. Therefore, there is no prejudice caused to the interest of the revenue, therefore, the twin condition is not fulfilled to invoke the provisions of section 263 of the Act. Appeal of assessee allowed. Issues Involved:1. Validity of proceedings under section 263 of the Income Tax Act.2. Disallowance of exemption claimed under section 45 read with section 47(iv) on slump sale of business.3. Addition of gain on slump sale transaction while computing book profits under section 115JB.4. Disallowance of expenditure in respect of exempt income earned under section 14A.Detailed Analysis:1. Validity of Proceedings under Section 263:The assessee challenged the invocation of section 263 by the Ld. Pr.CIT, arguing that the twin conditions of the order being 'erroneous' and 'prejudicial to the interest of the revenue' were not satisfied. The assessee cited several precedents, including Malabar Industrial Co. Ltd vs. CIT, and argued that the AO had made adequate inquiries and adopted one of the possible views, which should not be termed erroneous simply because the Ld. Pr.CIT disagreed. The assessee also contended that the AO had examined all relevant details and documents, including the slump sale agreement and capital gains computation, during the assessment proceedings.2. Disallowance of Exemption Claimed under Section 45 Read with Section 47(iv):The Ld. Pr.CIT denied the exemption claimed under section 47(iv), asserting that the transfer in the nature of a slump sale is covered by section 50B and not section 45, thus making the exceptions in section 47 inapplicable. The assessee argued that section 50B is merely a computational mechanism and not a charging section, asserting that the transaction falls under section 45, and thus, the exemption under section 47(iv) is applicable. The assessee cited various judicial precedents supporting their view that section 50B determines the cost for computing capital gains under section 45.3. Addition of Gain on Slump Sale Transaction While Computing Book Profits under Section 115JB:The Ld. Pr.CIT included the gain on slump sale in the book profits under section 115JB, contending that it was not amongst the items that could be reduced in computing book profits. The assessee argued that the gain was a capital receipt, not income per se, and thus should not be included in the book profits. The assessee cited decisions like Shivalik Ventures Pvt. Ltd. vs. DCIT, which held that capital receipts not in the nature of income should be excluded from book profits under section 115JB.4. Disallowance of Expenditure in Respect of Exempt Income Earned under Section 14A:The Ld. Pr.CIT directed the AO to make inquiries and compute disallowance under section 14A, despite no exempt income being earned during the year. The assessee argued that disallowance under section 14A should be restricted to actual exempt income received and cited several decisions supporting that no disallowance is warranted in the absence of exempt income. The assessee also contended that no expenditure was incurred towards the investments made at the end of the financial year, and thus no disallowance should be made.Conclusion:The Tribunal found merit in the assessee's contentions and held that the twin conditions for invoking section 263 were not satisfied. The AO had made adequate inquiries and adopted a possible view, which should not be termed erroneous. The Tribunal also agreed with the assessee on the merits of the case, holding that the exemption under section 47(iv) was applicable, the capital receipt should not be included in book profits under section 115JB, and no disallowance under section 14A was warranted in the absence of exempt income. Consequently, the order passed under section 263 was set aside, and the appeal filed by the assessee was allowed.