TaxTMI 
TaxTMI 
2011 (3) TMI 1012
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.... directed to delete the aforesaid disallowance and to quash the directions of CIT(A) for applying Rule 8D." 2. The assessee is a company. It is engaged in the business of manufacture and marketing of Motors, Pumps, Transformers, Lifts, Industrial Electronic Products, CRC and execution of turnkey projects. The assessee earned dividend income. The dividend income did not form part of the total income of the assessee and in view of the provisions of section 14A of the Act the AO was of the view that expenditure incurred for earning dividend income should be disallowed and added to the total income of the assessee. The assessee submitted before the AO that no expenses were incurred in making investment in shares which yielded the dividend income and, therefore, no disallowance could be made under section 14A of the Act. The Assessee also pointed out that in A.Y 2004-05 the Hon'ble ITAT in 1999- 00 in ITA No.6017/M/03 has decided similar issue in favour of the assessee and that decision has also been followed by the CIT(A) in A.Y 2004-05. The AO however, held that the assessee did not identify the source of funds used for making investment and he held that part of the borrowed fun....
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....leted. We accordingly direct that the addition made by the AO under section 14A be deleted. Ground No.1 raised by the assessee is allowed. 8. Ground No.2 raised by the assessee reads as follows: "Ground.2: Disallowance of provision for warranty amounting to Rs. 78,91,000/-/ 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO of disallowing Rs. 78,91,000/- being the claim towards provision for warranty. 2. The appellant prays that the foregoing disallowance of Rs. 78,91,000/- made by the AO in respect of provision for warranty ought to be deleted." 9. The assessee had debited in the P&L Account a sum of Rs. 78.91 lacs on account of anticipated liability that may arise in future in respect of the goods sold. The assessee explained before the AO that in keeping with the Accounting Standard (AS 29) issued by the Institute of Chartered Accountants of India which was applicable for the period commencing from 1/4/2004 it had made a provision on account of warranty claim that may be raised against the assessee in respect of the warranty obligations given by the assessee at the time of sale of th....
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.... the cost of making good under the warranty products sold before the balance sheet date. 10. In note No.5 to the computation of total income filed along with the return of income the assessee gave the following note: "An amount of Rs. 78.91 lakhs has been provided for the costs of anticipated liabilities under outstanding warranties in respect of goods sold during the previous year. Relying on the decisions in the following cases, the Company has treated this amount as the deductible expenditure for the previous year: CIT vs, Mistubishi Motors (222 ITR 697) (Privy Council) Bharat Earth Movers v. CIT (245 ITR 428)(SC) Calcutta Co. Ltd. vs. CIT (37 ITR 1)(SC) Metal Box Co. of India Ltd. v. Workmen (73 ITR 53)(SC)" 11. The AO was of the view that the liability in question is only contingent liability. The AO also distinguished the decision relied upon by the assessee in the case of Bharat Earth Movers Ltd.(supra) by pointing out that the liability in the said case was on account of Earned Leave of Employees covered under ESIC Scheme and the facts of the assessee's case was different. 12. The CIT(A) held that in the earlier years AS....
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.... contingent liability. The Hon'ble Supreme Court held that in a case where there was warranty obligation such obligation was part of the sale price and stood attached to the sale price of the product. Warranty obligation is a present obligation as a result past events resulting in an out flow of resources and a reliable estimate could be made of the amount of obligation. If it is so made it is a liability allowable as deduction under section 37 of the Act. The Hon'ble Supreme Court has also laid down that the estimate of liability has to be on the basis of statistical data of the assessee available in the past. Applying the above principle the claim of the assessee in the present case has to be allowed. In the present case the assessee had field the necessary data before the AO but the AO did not think it fit to examine the claim made by the assessee on its merits. As we have already seen the provision on account of warranty cost was made by the assessee based on the past experience and the AO did not find any fault in such estimation made by the assessee. In such circumstances we are of the view that the request of the ld. D.R to remand the matter to the AO for fresh consideration....
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.... V. CIT (107 ITR 483)(Mad) 2. Syndicate Bank v. CIT (155 ITR 681)(Kar) 3. Karvalves Ltd. vs. CIT (197 ITR 95)(Ker) and 4. CIT vs. Master Raghveer Trusts ( 151 ITR 368)(Kar) The plea of the Assessee was that if the undertaking is treated as a capital asset then the transfer is of the various assets, business contracts etc., of the transferor. Since the price for transfer is a lump sum consideration without any value assigned to individual items, the sale consideration as well as the cost of acquisition of the various assets comprised in the transfer could not be ascertained. In such case, the computation provisions would fail and therefore there can be no charge to tax on capital gain. In other words, it was submitted that the cost of the Undertaking is not ascertainable and, therefore, the machinery for computing capital gains fails. Reliance was placed on the decision of the Hon'ble Adhmedabad Tribunal in the case of Industrial Machinery Associates Vs. CIT (81 ITD 482). The Assessee also pointed out that transfer of the undertaking took place in exchange for Preference shares and Bonds issued by Tiger Elevator Pvt. Ltd. Therefore, the assessee claimed that the transfer....
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....e. It remains in insubstantial in form and nebulous in Character. A going concern is a dynamic concept characterized by perennial change influenced by socio-economic ecology. A going concern is essentially a functioning living organism possessing attributes of vitality, growth and evolution. Obviously, it would not be possible to conceptualize the cost of acquisition of such a going concern as well as date of acquisition thereof. If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern, consideration realized by the assessee would be outside the purview of capital gains under section 45. The Assessee relied on the decision of the Hon'ble Karnataka High Court in the case of Syndicate Bank Ltd. Vs. Addl. CIT, 155 ITR 681 wherein it was held that there is a transfer of whole concerns and where no part of the agreed price is indicated against different and definite items having regard to that valuation and consideration cannot be apportioned on capital assets in spec....
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....al gain and in this regard, the Assessee relied on decision of Hon'ble Supreme Court in the case of Commissioner of Income-tax v. Ramakrishna Pillai (R.R.) 66 ITR 725 (SC). In the said decision the question was when shares are allotted in consideration of transfer of assets, that would be a case of exchange and not sale. The question arose in the context of proviso (ii) to section 10(2)(vii) of the Indian Income-tax Act, 1922, which provided that if there is a sale of capital asset and if the sale consideration exceeded the if the price paid for or attributable to an asset exceeds the written down value of the asset, the difference was chargeable to tax. The Hon'ble Court further observed "A transaction by which a person carrying on business transfers the assets of that business to another assessable entity may take different forms and may have different legal effects. The assets of a business may be sold at a fixed price to a company promoted by a person who carried on the business: Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale, and the true nature of the ....
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....erein it has been clearly held that "the presence of money consideration is an essential element in a transaction of sale. If the consideration is not money but some other valuable consideration it may be an exchange or barter but not a sale. The Assessee submitted that this decision, in fact, supports its case in all respect. 2. CIT vs. Amar Transport Services, 162 ITR 1(MP). It was submitted that this decision, as well, supports its case and not the case of the Department. It was a case where the agreement for transfer in its schedule gave the particulars of each motor vehicle transferred and mentioned its price against it. The total price of Rs. 1,51,565/- was calculated on the basis of particulars specified against each of these motor vehicles in the said schedule. Thereafter, the agreement provided that the sale price would be paid to the assessee firm by the company in the form of shares of the company of the value of Rs. 500 each in the names of the partners of the assessee firm as indicated in the agreement. The Assessee pointed out that it is on this basis that the MP High Court held that the transaction is in the nature of sale and not an exchange. The Assessee p....
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....a going concern and the transfer has been approved by Bombay High Court. 27. Further according to the AO, the facts of the case of the decision Orient Trading co. Ltd.(supra) and the facts of the Assessee's case were also similar and the surplus on transfer of shares by way of exchange has been held to be taxable. Similarly in Supreme Court in Anarkali Sarabhai vs. CIT (224 ITR 422) has held that redemption of preference shares squarely comes within sale as defined in Section 2(47) and therefore it is liable to capital gain tax. Considering the above, the claim of the assessee that transfer of its lift division is an exchange and not sale and therefore not liable to tax was held by the AO to be not correct and the same was hence rejected. The AO held that in Section 2(42C) of the I.T. Act, slump sale means the transfer of one or more undertaking as a result of the sale for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sales. The transaction of the assessee fits into the above definition of slump sale square. Therefore, the AO held that the transaction of transfer of lift division as a transaction of slump sale and this was....
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....ransfer of capital asset could be in several forms; but Legislature while defining slump sale has thought it fit to include only transfer by way of sale and not in any other mode of transfer. It was submitted by him that expression sale has not been defined in the Act; and therefore, the definition of term 'sale' as appearing in section 54 of the Transfer of Property Act 1882 and section 4 of the Sale of Goods Act, 1930 have to be looked into. Under the Transfer of Property Act, the expression 'sale' has been defined as a transfer of ownership in exchange for a price paid or promised or part paid and part promised. The definition of the 'sale' under the 'Sales of Goods Act, sale has been defined as contract, whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The agreement to sale become a sale when the time elapses or the conditions are fulfilled subject to which the property in goods is to be transferred. Section 2(1) of the Sales of Goods Act, defines price to means, the money consideration for a sale of goods. 32. Referring to the aforesaid definition of sale, learned counsel for the assessee submitted that sale is always a cont....
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....mines the value in terms of money and only the mode of discharge that liability was by issue of preference shares and therefore it is not a case of exchange. It was his submission that the agreement between the parties by which preference shares were issued was a veil and the real nature of the transaction is sale. In this regard he pointed out that immediately after the transaction the preference shares were redeemed. It was also submitted that it could be considered as itemized sale of assets as the Assessee has listed individual items of assets transferred and computed capital gain. Learned DR of the revenue placed strong reliance on the decisions of Hon'ble Bombay High Court in the case of Premier Automobile Ltd. Vs. ITO, 264 ITR 193 (Bom).The aforesaid decision relates to the assessment year prior to insertion of section 50B of the Act. The transfer of capital assets in the form of an undertaking was sought to be brought to tax by the revenue. The stand of the revenue was that there was a sale of individualized items of assets; whereas, the stand of the assessee was that there was a sale of the entire undertakings for a lump sum consideration. The Court held that it was a ....
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....result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation 1 :- For the purpose of this clause 'undertaking' shall have the meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2 :- For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities." 38. From the reading of the above definition, it is clear that, it is only a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise then as a result of sale will not qualify as a slump sale. The question that arises for consideration is as to whether transfer of TFD by the assessee to ITEL could be construed as a sale. 39. Hon'ble Supreme Court in the case of Motor General Stores Pvt. Ltd. (supra) was concerned with the case, where the assessee company transferred all assets of Cinema House to one 'A' and in exchange got pref....
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.... or reversion, corporal or incorporal, tangible or intangible ,real, personal or mixed , accrued or otherwise and whether shown or reflected on the books and records of the Transferor company(excluding only the Excluded Assets), including all of the Transferor company's right, title and interest in and to the following, as the same may exist at the Appointed Date. 1.36.1 All movable assets, that is to say, vehicles, equipment furniture, computer hardware, tools, machines and other items of moveable assets of every kind owned or leased by the Transferor Company, together with any warranty by the manufacturers or the sellers or lessors of any item thereof and all maintenance records and other documents relating thereto; 1.36.2 All accounts receivables, net of provisions as shown in 2004 Financial Statements, sundry debtors, bills of exchange, deposits including security deposits, earnest moneys and down-payments from customers, loans and advances, prepaid expenses and other current assets (other than cash and cash equivalents) of the Transferor Company arising from the operation of the Transferred Business; 1.36.3 All inventories of raw materials, work-in-p....
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...."Employee Assets") and 1.36.11 All other interest in connection with or relating to the Transferred Business." Clause-14.1 of the scheme provides as follows: "14.1 "In consideration for the transfer of the Transferred Business, the Transferee Company shall allot to the Transferor Company; 14.1.1 24,750,000 preference shares of the face value of Rs. Each at par in the capital of the Transferee Company, redeemable at par at the option of the Transferor company or the Transferee Company at any time after the Effective Date; and 14.1.2 990 bonds of the face value of Rs. 50,000 each carrying an interest rate of 0% p.a. from the date of issue till date of redemption redeemable by the Transferee Company at the option of the Transferor Company or the Transferee Company at any time within a period of 4 months from the effective date on such terms and conditions as are or may be mutually agreed by and between Transferor Company and the Transferee Company; and 14.1.3 660 bonds of the face value of Rs. 50,000 each carrying an interest rate of 0% p.a from the date of issue until date of redemption, redeemable by the Transferee Company at the....
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....evy of capital gains namely profits or gains arising from the transfer of the undertaking, it is seen that no part of consideration was indicated against different and definite items having regard to their valuation on the date of transfer. There is no basis for even apportioning any consideration for various assets comprised in the transfer. Since, individual items of capital assets have not been transferred and aggregate of individual assets in the form of an undertaking was a capital asset which was transferred. The transfer being one of the going concerns, it is not possible to ascertain the profit or gain from transfer of undertaking. Cost of acquisition and the cost of improvement of the undertaking cannot be ascertained. It, therefore, becomes difficult to apply computation under provisions of section 48. A business undertaking as a going concern includes all rights, assets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as part of organization including the potentiality of the organization to grow. It contains a variety of elements, both tangible....
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.... that prior to insertion of section 50B of the Act in the event of transfer of business undertaking as a going concern, there was impossibility of computation of cost of acquisition, date of acquisition etc.; and therefore, computation provisions could not be applied. Consequently, levy of capital gains could also fail. The decisions of the Tribunal referred to above are based on the decision rendered by Hon'ble Karnataka High Court and Hon'ble Madras High Court in the case of Syndicate Bank Ltd. (supra) & K.P.V. Shaikh Mohammed Rowther (supra). These decisions in turn have been rendered by following the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Shetty (supra). With regard to the submission of learned DR of the revenue by placing reliance on the decision of Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra), we are of the view that the same cannot be accepted. In the case of Premier Automobiles Ltd. (supra), the issue before the Hon'ble Bombay High Court was whether there was a slump sale of business as going concern or was it a case of an itemized sale of assets and their Lordships held, in the facts and circumstance....
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....edit in closing stock of raw materials. The AO has relied on the working published in an article authorized one Mr. K.L.Jhanwar in the month of December, 2007 issue of the ICAI magazine. For the purpose of statutory accounts the assessee has followed the AS-2 on valuation of Inventories and the Guidance note on Accounting Treatment for Modvat/Cenvat issued by ICAI and accordingly it followed the exclusive method for accounting. However for the purpose of tax return the assessee has worked out the impact of grossing up of tax duty cess etc. by restating the values of purchases and inventories by including, interalia the effect of cenvat credit. The working given on page No.143 of the PB-1 comparing the exclusive method followed and section 145A provisions. Therefore, since the assessee also draws the attention to page nos.140 - 143 of PB-1 which aptly brings out that since the adjustment as per section 145A has already been done, there is no further adjustment required. Further the assessee also relies on the decision of the Delhi High Court in case of CIT vs. Mahavir Aluminium Ltd. (Del)(Spl Bench) wherein it is held that for the purpose of section 145A the modvat element in openin....
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....nbsp; 2. Less: Closing stock 14,110,643 (6,36,807) D. Finished Goods 1. Opening Stocks 4,947,568 2. Purchases - 3. Less: Closing Stock 7,929,290 (29,79,722) 22,47,29,796 Less: Modvat & ST Set off utilized on Materials consumed 22,47,29,796 Add: Excise Duty Payable on Closing Stock 1,42,81,881 Net Impact on Profit & Loss Account 1,42,81,881" 50. The assessee has also not claimed deduction on account of excise duty on closing stock amounting to Rs. 86,28,214/-. Thus the assessee had duly given effect to the provisions of section 145A as well as the provisions section 43B of the Act. In our view the AO ignored the submissions and has proceeded on the basis that only closing stock ought to have been revalued. In our view this is contrary to the decision relied upon by the assessee before the CIT(A). Even the Hon'ble Bombay High Court in the case of Mahalaxmi Glass Works has taken the view as was taken by the Hon'ble Delhi....