1993 (7) TMI 104 - AT - Income Tax

Tribunal Rules in Favor of Assessee on Capital Gains; Upholds CIT(A)'s Decision

The Tribunal ruled in favor of the assessee, holding that capital gains chargeable to tax had not arisen due to the benefit of section 47(v) in a transfer ... Capital Gains, Certain Assets, Voluntary Liquidation Issues Involved:1. Rejection of assessee's main contention regarding capital gains.2. Department's appeal against CIT(A)'s direction on cost substitution under section 49(1)(iii)(e).3. Levy of interest under sections 139(8) and 215.4. Taxation of interest income on a cash basis.5. Deletion of addition out of service charges.Detailed Analysis:1. Rejection of Assessee's Main Contention Regarding Capital Gains:The primary issue in the assessee's appeal was the rejection of its contention that capital gains should not be computed due to the applicability of section 47(v). The facts are straightforward: KPPL transferred shares to the assessee, which later received assets upon the liquidation of Arvalli. The Assessing Officer computed capital gains by invoking section 46(2), while the CIT(A) rejected the assessee's main contention but accepted an alternative argument under section 49(1)(iii)(e). The Tribunal noted that section 46(2) prescribes capital gains on receipt of assets upon liquidation, while section 47(v) exempts transfers between a subsidiary and its holding company from capital gains. The Tribunal concluded that the interaction of sections 46(2) and 47(v) had not been addressed in any cited decisions and that a harmonious construction favored the assessee's view. Therefore, it was held that capital gains chargeable to tax had not arisen due to the benefit of section 47(v).2. Department's Appeal Against CIT(A)'s Direction on Cost Substitution Under Section 49(1)(iii)(e):The department appealed against the CIT(A)'s direction to substitute the cost to the previous owner under section 49(1)(iii)(e). The Tribunal found no error in the CIT(A)'s view, rejecting the department's argument that section 49(1)(iii)(e) applied only when no consideration had passed. The Tribunal upheld the CIT(A)'s decision that the cost to the previous owner should be substituted, leading to no capital gains.3. Levy of Interest Under Sections 139(8) and 215:The assessee's grounds II and III contended that the CIT(A) had not addressed the levy of interest under sections 139(8) and 215. The Tribunal held that the assessee could approach the CIT(A) for a decision on these points if permissible by law. For statistical purposes, these grounds were treated as rejected.4. Taxation of Interest Income on a Cash Basis:The department's first ground in its appeal was against the CIT(A)'s direction to tax interest income on a cash basis. The Tribunal noted that the assessee had consistently adopted the cash system for interest income in preceding years and the current year. The Tribunal rejected the department's ground, emphasizing that the cash system had been accepted in prior assessments and was consistently followed by the assessee.5. Deletion of Addition Out of Service Charges:The department's third ground was against the deletion of an addition out of service charges. The Tribunal agreed with the CIT(A) that no disallowance was warranted, as service charges were shown at Rs. 2,000 only. The Tribunal upheld the CIT(A)'s decision to delete the addition.Conclusion:In summary, the Tribunal ruled in favor of the assessee on the primary issue of capital gains and upheld the CIT(A)'s decision on cost substitution under section 49(1)(iii)(e). The grounds related to the levy of interest were left open for the assessee to pursue with the CIT(A). The Tribunal also upheld the CIT(A)'s decision to tax interest income on a cash basis and agreed with the deletion of the addition out of service charges. Consequently, the assessee's appeal was partly allowed, and the department's appeal was dismissed.