TaxTMI Updates e-Newsletter
Mar 16,2012

Slump sale - net worth as deemed cost of acquisition under section 50B - full value of consideration received or accruing - deducting from in section 48 (deduction of negative net worth results in addition) - deeming provision and statutory computation under section 50B - reference to Valuation Officer under section 55A for determination of fair market value

Slump sale - full value of consideration received or accruing - reference to Valuation Officer under section 55A for determination of fair market value - Whether the Assessing Officer was right in treating the sale consideration as Rs.300 crore by adding the negative net worth (or by substituting fair market value) instead of accepting the declared sale consideration of Rs.143 crore. - HELD THAT: - The Tribunal held that for a slump sale the full value of consideration received or accruing denotes the amount actually received or accruing unless a specific statutory substitution applies. There is no provision in section 50B or section 48 to substitute the agreed lump sum consideration of an undertaking with its fair market value; where fair market value is to be substituted, the statute prescribes specific mechanisms (and, for valuation, section 55A contemplates reference to a Valuation Officer). The AO's unilateral approach of treating the declared consideration as inadequate by adding the negative net worth or by relying on a valuer's report without following the procedure in section 55A lacked statutory sanction. Applying these principles to the facts, the Tribunal held that the full value of consideration for the PTB is Rs.143 crore (the amount actually received), and the AO was not justified in treating it as Rs.300 crore. [Paras 16]

The full value of consideration for the slump sale is to be taken as Rs.143 crore (the amount actually received); the AO was not right in enhancing it to Rs.300 crore.

Net worth as deemed cost of acquisition under section 50B - deeming provision and statutory computation under section 50B - deducting from in section 48 (deduction of negative net worth results in addition) - Whether the negative figure of net worth as computed under section 50B should be ignored (treated as nil) for computing capital gains on a slump sale, or must be taken as negative (thereby increasing the capital gain). - HELD THAT: - Section 50B is a deeming provision that prescribes how the net worth of an undertaking (aggregate value of assets reduced by liabilities as per books) is to be treated as the cost of acquisition and cost of improvement for sections 48 and 49. The Tribunal held that the deeming language contemplates net worth being either positive or negative depending on the relative amounts of assets and liabilities; the statutory formula must be applied as given and cannot be judicially converted into a further fiction (i.e. forcing a negative to zero) absent legislative mandate. Further, the expression in section 48 of 'deducting from' the full value of consideration operates mathematically to mean that where the deemed cost (net worth) is negative, deduction of a negative figure results in addition to the full value of consideration. Applying these principles and the facts (net worth being a negative figure as per the auditor's section 50B report), the Tribunal held that the negative net worth cannot be ignored and must be taken at the negative amount, which yields a higher capital gain (Rs.300 crore on the facts). [Paras 17, 20]

The negative net worth ascertained under section 50B is not to be ignored; it must be taken as a negative figure for computing capital gains, and on the facts the net worth remains negative leading to capital gain of Rs.300 crore.

Final Conclusion: The Revenue's appeal is allowed in part: the Assessing Officer was not justified in augmenting the declared sale consideration to Rs.300 crore (the full value of consideration is Rs.143 crore), but the CIT(A) was incorrect in treating the negative net worth as nil - the negative net worth under section 50B must be taken as such, resulting in an aggregate capital gain of Rs.300 crore for Assessment Year 2006-2007.

Surrounding circumstances and human probabilities - sham transaction / not genuine transaction - concurrent findings of fact - remand for fresh consideration - principles of natural justice - reliance on judicial precedent without notice - perverse finding / no evidence or conjecture

Principles of natural justice - reliance on judicial precedent without notice - surrounding circumstances and human probabilities - Whether the Tribunal committed a breach of natural justice by referring to and applying the test in Sumati Dayal without giving notice to the parties - HELD THAT: - The Court held that the Sumati Dayal principle - that surrounding circumstances and human probabilities may be employed to test the genuineness of transactions - states a well settled test of evidence applicable in civil proceedings and in tax fact finding. Reference to that decision by the Tribunal (and by CIT(A)) merely reiterated established law and did not amount to the Tribunal resting its decision on a new ground without giving the affected party an opportunity to be heard. Reliance on the Supreme Court precedent for stating the settled legal test could not be said to have caused prejudice to the assessee; accordingly no substantial question of law arose from the contention of breach of the proviso to Rule 11 of the ITAT Rules. [Paras 11]

No breach of natural justice in the Tribunal's reference to Sumati Dayal; no substantial question of law arises on this ground.

Sham transaction / not genuine transaction - concurrent findings of fact - surrounding circumstances and human probabilities - Whether the disallowance of claimed short term and long term capital losses arising from sale of shares (including Killick Halco and the four subsidiary companies and Pelican Paints) was unsustainable and liable to interference - HELD THAT: - The Court examined the record and the authorities' findings. All three authorities (Assessing Officer, CIT(A), and the Tribunal) found, on the basis of documentary evidence and surrounding circumstances, that the purchases and sales of the relevant shares were sham transactions effected to create artificial losses. The Court treated these as questions of fact and, in the presence of concurrent findings, found no ground for judicial interference. The Court also noted the principle that a colourable device cannot form part of legitimate tax planning and that where a transaction is found to be sham the authorities are entitled to deny tax benefits; having regard to the materials and the possible conclusions open on the evidence, no question of law was held to arise to warrant upsetting those findings. [Paras 15]

The disallowances and factual conclusions as to non genuineness of the share transactions are upheld; no question of law warranting interference.

Remand for fresh consideration - surrounding circumstances and human probabilities - Whether the Tribunal was correct in rejecting the claim of a business loss arising from the Appellant's guarantee business (loss claimed on transfer of land to Vysya Bank) and whether that issue requires remand - HELD THAT: - The Court acknowledged that a single transaction can constitute business, and that the Memorandum of Association permitted guarantee business. It further acknowledged that the Tribunal permissibly examined surrounding circumstances in testing genuineness. However, the Court found that the Tribunal failed to consider some evidentiary material put forward by the assessee (notably particulars of suits filed and the nature of such proceedings) before rejecting the loss claim solely on surrounding circumstances. Given that the Tribunal did not examine certain evidence material to the genuineness and character of the guarantee transaction, the Court concluded that the matter should be reconsidered. The Court therefore set aside the Tribunal's rejection of the claimed guarantee loss and remanded the issue to the Tribunal for fresh hearing and decision after considering the evidence afresh. [Paras 16, 18]

Remitted to the Tribunal for fresh consideration and decision on the genuineness and allowability of the claimed business loss from guarantee activities.

Perverse finding / no evidence or conjecture - concurrent findings of fact - Whether the Tribunal's order is perverse or vitiated by reliance on conjecture, surmise or irrelevant considerations so as to invalidate findings on issues (ii)-(vi) - HELD THAT: - The Court considered the submission that the Tribunal's conclusions were perverse or based on conjecture. It found that the authorities had considered the documentary record and surrounding circumstances and reached conclusions that were possible on the evidence. Given concurrent findings on the factual issues and absence of demonstration that the findings were based solely on suspicion or without evidence, the contention of perversity did not arise. Accordingly, no interference was warranted on that ground. [Paras 17]

Tribunal's findings are not perverse; the contention of perversity does not warrant interference.

Final Conclusion: The appeal is partly allowed: the Tribunal's order dated 6 April 2010 is set aside only insofar as it rejected the claimed business loss of Rs.105 crores for providing guarantees; that issue is remanded to the Tribunal for fresh hearing and decision. All other grounds (reliance on Sumati Dayal, disallowance of capital loss claims, and alleged perversity) do not give rise to substantial questions of law and are not interfered with. No costs.

Penalty under Section 271D of the Income Tax Act, 1961 - characterisation of receipt as loan or deposit - requirement of tribunal to record and examine factual findings - application of this Court's decision in ITA No.1192/2011

Penalty under Section 271D of the Income Tax Act, 1961 - requirement of tribunal to record and examine factual findings - Whether the Income Tax Appellate Tribunal was justified in allowing the appeal and deleting the penalty under Section 271D without dealing with the factual findings recorded by the Assessing Officer and the CIT(A). - HELD THAT: - The Tribunal's order was cryptic and did not address or re-examine the specific factual findings recorded by the Assessing Officer and the CIT(A) regarding the nature of the receipt. The Court emphasised that the Tribunal was obliged to consider the factual matrix and record its own findings before determining whether the receipt amounted to a deposit attracting penalty under Section 271D. Because the Tribunal failed to undertake this exercise and merely relied upon a coordinate-bench decision without engaging with the facts of the present case, its deletion of the penalty could not stand. The substantial question of law is answered in favour of the Revenue and against the assessee on this ground. [Paras 5, 6, 8]

Tribunal's order deleting the penalty set aside insofar as it failed to consider and record findings on the factual matrix; the substantial question is answered in favour of the appellant.

Characterisation of receipt as loan or deposit - application of this Court's decision in ITA No.1192/2011 - Whether the amount received by the assessee was a loan or a deposit and whether penalty under Section 271D should be imposed (remanded for fresh adjudication). - HELD THAT: - The Court held that the determinative factual question-whether the receipt constituted a loan or a deposit-was not examined by the Tribunal despite findings by the Assessing Officer and the CIT(A). The matter is remitted to the Tribunal to decide afresh: it must record factual findings on the nature and character of the receipt, apply the principles articulated by this Court in ITA No.1192/2011, and then determine the applicability of penalty under Section 271D. The order of remit is not a decision on the merits of the factual question, but a direction for fresh consideration and reasoned findings by the Tribunal. [Paras 6, 7, 8]

Matter remitted to the Tribunal for fresh adjudication on whether the receipt was a loan or a deposit and for consequent application of law, including this Court's decision in ITA No.1192/2011.

Final Conclusion: The Tribunal's order deleting the penalty is set aside because it failed to examine and record findings on the factual matrix; the substantial question is answered for the Revenue. The matter is remitted to the Tribunal to record factual findings on whether the receipt was a loan or deposit and to decide the applicability of penalty under Section 271D afresh, applying this Court's decision in ITA No.1192/2011.

Stay of recovery proceedings pending adjudication of appeals - garnishee notice under Section 226(3) of the Income Tax Act - attachment of bank accounts - conditional interim relief by deposit - expeditious disposal of pending appeals

Garnishee notice under Section 226(3) of the Income Tax Act - attachment of bank accounts - conditional interim relief by deposit - Stay of operation of Ext.P5 garnishee notice attaching bank accounts subject to deposit of specified amount in installments - HELD THAT: - The Court granted interim relief in respect of Ext.P5, the garnishee notice issued under Section 226(3) attaching the petitioners' bank accounts, by staying its operation on the condition that the petitioners pay a specified sum in two equal monthly installments. The court recorded that appeals against the assessment orders (Ext.P1) are pending before the appellate authority and observed that it would be premature to adjudicate the merits of those appeals. Taking into account the pendency of the appeals and the substantial demand reflected in Ext.P5, the Court exercised its discretionary power to grant conditional interim relief to prevent complete cessation of the petitioners' business operations, while preserving the contest on merits for the appellate forum. The stay was ordered to operate on payment of the first installment within the time directed, and subject to payment of the further installment as specified by the Court. [Paras 5, 6]

Ext.P5 notice is stayed on the petitioners paying the stipulated amount in two equal installments payable on or before the dates directed; the stay is operative on payment of the first installment.

Expeditious disposal of pending appeals - stay of recovery proceedings pending adjudication of appeals - Direction to the appellate authority to dispose of the pending appeals within a fixed time-frame - HELD THAT: - The Court directed the appellate authority (the 2nd respondent) to proceed to dispose of the Ext.P2 appeals, which challenge the assessment orders (Ext.P1), with notice to the petitioners and to conclude the appeals expeditiously. A specific time-limit of eight weeks from receipt of a copy of the judgment was imposed to ensure timely adjudication, thereby aligning the interim measures (the conditional stay) with the requirement that the appellate forum decide the merits without undue delay. The Court expressly refrained from dealing with the substantive contentions raised before it as those issues are to be urged before and decided by the appellate authority. [Paras 7]

The appellate authority is directed to dispose of the Ext.P2 appeals with notice to the petitioners within eight weeks of receipt of a copy of this judgment.

Final Conclusion: Writ petitions disposed of by granting a conditional stay of the garnishee notice on payment of the directed installments and by directing the appellate authority to decide the pending appeals within eight weeks; the court declined to adjudicate the merits of the appeals as premature.

Provisional release of seized goods - conditions for provisional release - show cause notice under Section 124 of the Customs Act - allegation of undervaluation - judicial direction to complete proceedings within time

Provisional release of seized goods - conditions for provisional release - allegation of undervaluation - Validity of the conditions imposed in the provisional release order (Ext.P7) and whether those conditions warranted interference with the Single Judge's order. - HELD THAT: - The appellant contended that the conditions in Ext.P7 were onerous and inconsistent with the principles laid down by the Apex Court in the law governing provisional release. The High Court noted the appellant's grievance but, taking into account the pendency of the proceedings and the consequence of heavy demurrage charges, declined to disturb the interim arrangement made by the Single Judge. The Court did not find sufficient basis to interfere with the conditions imposed in Ext.P7 or with the Single Judge's exercise of discretion in granting provisional release subject to conditions. [Paras 3, 4]

The conditions in the provisional release order were not interfered with and the Single Judge's order granting provisional release subject to conditions is upheld.

Show cause notice under Section 124 of the Customs Act - judicial direction to complete proceedings within time - Whether the proceedings initiated under Section 124 should be completed within a specified timeline and the appropriate judicial direction to ensure disposal. - HELD THAT: - Having regard to the appellant's grievance about delay and the prospect of heavy demurrage charges, the High Court endorsed the Single Judge's remedial direction. The Court observed that requiring the respondent to proceed without undue delay would serve the ends of justice and therefore directed completion of the show-cause proceedings within a narrowly prescribed period measured from receipt of the judgment copy. [Paras 4]

The respondent is directed to complete the proceedings initiated by issuing the show-cause notice within three weeks from receipt of the copy of the judgment.

Final Conclusion: The High Court declined to interfere with the Single Judge's order granting provisional release subject to conditions and directed the respondent to issue the show-cause notice and complete the proceedings within three weeks; the writ appeal is dismissed.

Manipulation of chassis and engine numbers - confiscation of imported goods - release of seized goods on payment of duty and redemption fine - personal penalty under Section 112(a) of the Customs Act, 1962 - valuation for assessment of imported goods

Manipulation of chassis and engine numbers - Findings of tampering with the vehicle's chassis and engine numbers and the importer's role in the same. - HELD THAT: - The Court accepted the factual findings that the chassis number was damaged and repaired and that an effort was made to obscure the original engine number by fixing a metal plate which came off during examination. The Court noted admission of tampering in the statement recorded in Malayalam and the expert examination including reference to the authorised Toyota dealer's opinion. Although the importer disavowed personal involvement, the tampering itself was not retracted and was attributed to persons using the importer as a name-lender. These findings support the conclusion that manipulation of identification numbers occurred and materially affected the adjudication. [Paras 2, 5]

Tampering with the chassis and engine numbers was established and accepted by the Court.

Valuation for assessment of imported goods - Acceptance of the valuation and model-year determination relied upon for assessment and duty calculation. - HELD THAT: - The Court treated the authorised dealer's information identifying the vehicle as of 2004 make as conclusive for the purposes of valuation and duty assessment, noting that the Department had not established the vehicle to be of 2007 make or that it was a new vehicle. Given the nature of the vehicle (a right-hand drive Land Cruiser) and the lack of proof to the contrary, the Tribunal and Commissioner (Appeals) valuation as adopted by the lower authorities was accepted for assessment purposes. [Paras 2, 6]

The vehicle was held to be of 2004 make and the valuation adopted in adjudication is accepted for duty assessment.

Confiscation of imported goods - release of seized goods on payment of duty and redemption fine - personal penalty under Section 112(a) of the Customs Act, 1962 - Appropriate remedial order: whether vehicle should be confiscated or released, and the quantum of redemption fine and personal penalty. - HELD THAT: - While acknowledging force in the Department's contention that manipulations justified action, the Court identified that the principal ground for absolute confiscation would be disentitlement due to lack of clear identification, which was not established to the extent of sustaining confiscation. The Court considered practical consequences of confiscation (including likely lower auction realisation) and therefore upheld in principle the orders permitting release on payment. However, on the question of monetary sanctions, the Court found that leniency was not warranted given the manipulations and delay caused, and accordingly allowed the appeals in part by restoring the redemption fine and personal penalty to the higher amounts fixed by the adjudicating authority and Commissioner: redemption fine restored to the Commissioner's figure and personal penalty restored to the adjudicating officer's original amount. The vehicle was directed to be released on payment of duty (based on the adopted valuation), the restored redemption fine and the restored personal penalty. [Paras 3, 5, 6]

The vehicle is to be released on payment of duty based on adjudicated value, redemption fine as fixed by the Commissioner, and personal penalty as fixed by the adjudicating officer; absolute confiscation was not ordered.

Final Conclusion: The Court accepted that the vehicle's chassis and engine numbers were tampered with, upheld the valuation/make determination for assessment as 2004, refused absolute confiscation, and directed immediate release of the vehicle upon payment of import duty (per adjudication), the redemption fine restored to the Commissioner's figure and the personal penalty restored to the adjudicating officer's original amount.

Approval of scheme under Sections 391-394 of the Companies Act - Scheme of amalgamation - Interests of shareholders and employees - Official Liquidator's report and scrutiny by appointed auditors - Dissolution of transferor-company without winding up - Filing of sanctioned scheme with Registrar of Companies

Approval of scheme under Sections 391-394 of the Companies Act - Scheme of amalgamation - Interests of shareholders and employees - Official Liquidator's report and scrutiny by appointed auditors - Whether the scheme of amalgamation between the Transferor-Company and the Transferee-Company should be sanctioned - HELD THAT: - The Court considered the scheme placed at Annexure-A and the statutory remit under Sections 391-394. The petitioner's compliance with notice requirements and publication was noted and no objections were received from persons likely to be affected. The Regional Director's observation regarding non-filing of audited accounts as on the petition filing date was addressed by subsequent production of audited accounts and a memo. The Court had appointed chartered accountants to scrutinize the Transferor-Company's records; the report so produced, as considered by the Official Liquidator, recorded that the affairs of the Transferor-Company were not conducted in a manner prejudicial to members or public interest. The scheme provides for allotment of Transferee-Company shares to shareholders and for staff, workmen and employees; no objections to these provisions were shown on the record. In light of the scrutiny, absence of adverse findings from the competent authorities, and lack of objections from affected persons, the scheme was found to meet the basic requirements for sanction and was approved, subject to the corresponding petition of the Transferee-Company being allowed by the jurisdictional court.

The petition is allowed and the scheme of amalgamation is sanctioned, subject to sanction of the Transferee-Company's petition.

Dissolution of transferor-company without winding up - Filing of sanctioned scheme with Registrar of Companies - Consequences following sanction of the scheme: dissolution and filing obligations - HELD THAT: - The Court directed that upon sanction of the scheme and subject to the Transferee-Company's petition being allowed, the Transferor-Company shall stand dissolved without a winding up order. The Court further directed that a copy of the order be filed with the Registrar of Companies within thirty days from receipt of a copy of the order.

On sanction, the Transferor-Company shall be dissolved without winding up and a copy of the order must be filed with the Registrar of Companies within thirty days.

Final Conclusion: The scheme of amalgamation between the petitioner-Transferor-Company and the Transferee-Company is sanctioned by the Court (subject to the Transferee-Company's petition being allowed); the Transferor-Company shall stand dissolved without winding up upon such sanction, and a copy of the order is to be filed with the Registrar of Companies within thirty days.

Deemed Modvat credit - compounded levy scheme - Rule 96ZP(3) - invoice declaration as proof of duty discharge - liability of supplier versus entitlement of input receiver - equivalent deemed duty under notification

Deemed Modvat credit - invoice declaration as proof of duty discharge - compounded levy scheme - Rule 96ZP(3) - liability of supplier versus entitlement of input receiver - Whether deemed Modvat credit under Notification No.58/97-CE is available to the input receiver where the supplier operates under the compounded levy scheme and invoices declare duty liability to be discharged under Rule 96ZP(3) - HELD THAT: - The Tribunal held that Notification No.58/97-CE deems duty to have been paid on inputs, calculated at the prescribed percentage of the invoice price, where inputs are accompanied by an invoice declaring that appropriate excise duty has been paid under the provisions applicable to units under the compounded levy scheme. Units working under Rule 96ZP(3) discharge duty at month-end; therefore, invoices issued during the month will not show duty mechanically paid at clearance but may declare that the supplier is working under Rule 96ZP(3). The Court accepted the view in earlier authorities, including the Punjab & Haryana High Court decision in Vikas Pipe and Tribunal decisions such as CCE, Jalandhar vs. Jullundher Engineering Co. , that where the supplier issues invoices declaring operation under Rule 96ZP(3) (or similar wording), such declaration is sufficient proof for the input receiver to claim deemed Modvat credit under the Notification. A dispute over actual payment of duty by the supplier does not permit denial of credit to the input receiver; revenue's remedy lies against the supplier. The Tribunal rejected the distinction drawn in other decisions relied upon by the Commissioner(Appeals) that different invoice wording (e.g., "duty liability to be discharged" versus "duty liability discharged") should defeat the receiver's claim, reasoning that both formulations arise from the same legal position of month-end discharge under the compounded levy scheme and therefore do not alter entitlement under the Notification. [Paras 6, 8, 10, 11, 12]

Deemed Modvat credit was allowable to the appellants for the inputs in question; denial of credit on the ground that the input supplier had not discharged duty was unwarranted, and the impugned order was set aside with consequential relief to the appellants.

Final Conclusion: Appeal allowed; deemed Modvat credit under Notification No.58/97-CE is available to the input receiver where inputs are accompanied by invoices declaring the supplier s operation under the compounded levy scheme (Rule 96ZP(3)), and the revenue remedy for non-payment of duty lies against the supplier rather than by denying credit to the receiver.

Dispensation of departmental inquiry under Article 311(2)(b) where it is not reasonably practicable to hold an enquiry - pre conditions for invoking Article 311(2)(b) - reasons to be recorded in writing - doctrine of pleasure under Article 310 subject to safeguards of Article 311 - disciplinary and supervisory power of the High Court over subordinate judiciary and Governor's power to remove on recommendation

Dispensation of departmental inquiry under Article 311(2)(b) where it is not reasonably practicable to hold an enquiry - pre conditions for invoking Article 311(2)(b) - reasons to be recorded in writing - Validity of dispensing with inquiry and removal of the appellant by invoking proviso (b) to Article 311(2) of the Constitution - HELD THAT: - The Court held that Article 311 protects public servants from punitive action without a proper inquiry but permits exceptions under clause (2)(b) where an enquiry is not reasonably practicable provided reasons are recorded in writing. In the present case the Full Court considered the inspecting judge's confidential report and recorded that holding an enquiry might call into question the validity of several judgments rendered by the appellant; that reason was held to be a legally valid ground for dispensing with an inquiry. The Governor acted on the Full Court's recommendation and the procedure and pre conditions for invoking Article 311(2)(b) were found to have been complied with; accordingly the order of removal could not be impeached for want of jurisdiction or for violation of natural justice where enquiry was validly dispensed with. [Paras 6, 10, 11, 12]

Dispensation of inquiry under Article 311(2)(b) and consequent removal were valid as the required reasons were recorded and procedure followed.

Disciplinary and supervisory power of the High Court over subordinate judiciary and Governor's power to remove on recommendation - doctrine of pleasure under Article 310 subject to safeguards of Article 311 - Competence of the High Court to recommend dispensation of enquiry and the Governor to remove a subordinate judge on that recommendation - HELD THAT: - The Court observed that subordinate judges fall within the constitutional scheme governing appointment, promotion and discipline of district judiciary (Arts. 233, 234-236) and that the High Court is entrusted with maintaining standards of the judiciary. The High Court may therefore hold disciplinary proceedings or recommend that an enquiry be dispensed with for valid reasons; the Governor, acting on such recommendation and within the parameters of Article 311(2)(b), is competent to issue an order of removal. The doctrine of pleasure under Article 310 does not override the safeguards in Article 311 and cannot be used to justify bypassing the prescribed procedure. [Paras 13, 14, 15]

High Court could recommend, and the Governor could act upon, dispensation of enquiry and removal of a subordinate judge in accordance with Articles 233-236 read with Article 311(2)(b).

Final Conclusion: Appeal dismissed; the Court found no infirmity in the High Court's conclusion that the Full Court validly dispensed with an enquiry under Article 311(2)(b) for reasons recorded in writing and that the Governor was competent to remove the appellant on that recommendation.