TaxTMI 
TaxTMI 
2014 (1) TMI 1123
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....ff of the loss pertaining to the rectified spirit Unit of Maruthi Organics Limited [MOL] even though the conditions specified u/s 72A of the Act had been duly complied with. II. ITA NO.1363/B/2011 - A Y 2007-08: 3. Though the assessee company has raised nine grounds, ground Nos. 1, 7 and 9 being general in nature, they do not survive for adjudication. Ground No.8 is not maintainable as charging of interest u/s 234B and 234C of the Act is mandatory and consequential in nature. The remaining grounds relate to the following issues, namely: (1) (Ground Nos.2 to 4) that the CIT (A) erred in sustaining the disallowance of interest to the extent of Rs.10,97,85,319/-; & (2) (Ground Nos.6 & 7) that the CIT (A) also erred in not allowing the prior period expenditure of Rs.10,58,536/-. 4. As the issues raised in both the appeals were pertaining to the same assessee, they were heard together and disposed of, for the sake of convenience, in this consolidated order. I. ITA NO.1362/B/2011 - A Y 2006-07: 5. Briefly stated, the facts of the issues are as under: The assessee company is engaged in the business of manufacturing of Indian Made Foreign Liqu....
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....it unit of MOL on the ground that as per the provisions of s. 72A of the Act which governs that the set off of losses doesn't warrant that the under-taking being transferred needs to be active etc, the AO had rejected the same on the premise that - "15. If the definition section gives the definition of demerger, the word 'demerger' wherever it appears in the Act is to be given that meaning, unless specifically stated in the Act that a transfer is deemed to be demerger or deemed not to be demerger. The mere blessing of the High Court for an amalgamation or demerger does not make it amalgamation or demerger as defined or as required by the I.T. Act. If that would have been the case, the Act wouldn't need to define the terms amalgamation or demerger. So the position taken by the assessee that as long as the merger is through Court approval, the assessee shall have the benefit of set-off of carry forward loss/unabsorbed depreciation is opposed to law. 5.2.1 The AO had, further, rejected the assessee's contention that MOL continues to be before BIFR and the order is awaited etc., for the following reasons: "20. The assessee's submissions have been exam....
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....production has been shown at all. In the meanwhile, in respect of 31 WEGs allegedly purchased by IEL from WIL and transferred to the appellant on the same day, the WIL has claimed that the ownership got transferred to IEL only on 17.4.2006 insomuch as on that day the conditions of devolution of these WEGs to KBDL, the appellant and since the title is defective, the appellant is not eligible for claim of depreciation thereon. I find justification in such allegation even if I hold that the concept of ownership embedded in s. 32(1) of I.T. Act has not been given a very liberal and loose interpretation even to include beneficial ownership far less the dejure or defacto ownership. However, I rely upon other documents also to conclude that ownership had not passed to the appellant in March 2006 and they were not utilized in March, 2006. The documents are tripartite agreements between IEL, the Asset manager, KBDL, the so called beneficiary owner and the customer or end-user of the product i.e., power. None of such documents have been executed in March 2006. All of them had paid charges on the supply of electricity from April, 2006 even if in the case of M/s Ashok Leyland it is claimed by ....
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....(19AAA) being beginning with the non-substantive clause 'notwithstanding'. Besides, the intention of both sections were revival of weak units/undertakings and here also the purpose of demerger and amalgamation is to revive the activities of rectified spirit unit of M/s Maruthi Organics Ltd by utilization of the financial strength and personnel of the appellant company. Therefore, the concept of 'going concern' is not at all applicable here to justify the denial of set off of brought forward loss of amalgamating company with the profit of the amalgamated appellant company. 18.3. I find in both cases the scheme of demerger and amalgamation has been approved by the High Courts of Andhra Pradesh & Karnataka respectively. Such scheme is intended to revive the weak concern but claim of set off of brought forward loss under Income-tax has to be allowed only when the conditions prescribed in s. 72A of I. T. Act are fulfilled. One of such condition(s) is that the amalgamating unit should be a going concern and must have incurred losses in past three or more years. Going concern means alive but may not be making profit. Here the rectified spirit Unit had stopped functioning s....
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....ncome arising out of the same in the AY 2006-07 itself; that WIL had stated that it would reverse the entry if it does get a favourable order in the arbitration proceeding; and that it was clear that WIL had itself accounted for the sale in the month of March, 2006. Had it seriously questioning the sale, it would not have accounted for the same in the year ended 31.3.2006; - that WIL had, in its letter, stated that even though it recorded the sale of WEGs in its books for the year-ended 31/3/2006 and had finalised its accounts accordingly, it would actually be jeopardising its dispute against IEL, if it were to admit the same. This amply shows that the statement of WIL was purely self-serving and thus, it cannot be relied upon; Journal entries passed on 15.3.2006 & 24.3.2006: - that the journal entries passed on 15th and 24th March 06 were not to be disbelieved as they have been confirmed by IEL the entity that actually sold the WEGs to the assessee; - that it was not necessary that all transactions of purchase/sale were made on cash basis. A purchase even by an oral contract was binding on the parties to the same. A purchase made ....
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....action was sham and an afterthought to avoid taxes etc., - that examining of the MD of the assessee company was paramount to establish the correct fact as the Accountant had, in his deposition, stated that only MD would be aware of the purchase of Wind Mills and that in the absence of any statement recorded from the MD, the conclusion reached by the AO was merely on suspicion and surmise. - that in response to the AO's queries, the end users have acknowledged that they came to know of the purchase of WEGs by the assesse from IEL only in the month of May, 2006 as they have made payments in lump sum only from the month of May, 2006, but, made payments to IEL in March for the powers supplied. Thus, the authorities below have considered the response received from the end-users as a vital evidence and came to the conclusion that no transaction of purchase of WEGs by the assessee took place in March 2006; - that the contract of purchase of WEGs was between the assessee and IEL who were knowing the terms, conditions and obligations of such contract and, thus, the end-users were not put to notice of the said contract simultaneously when the c....
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....er WEGs and also put to use during March, 2006 so as to allow the assessee's claim for depreciation. In furtherance, it was argued that the sale deeds were not registered. Hence, the transfer of Wind Mills was illegal and it cannot be back-dated to 15th & 24th March, 2006 to claim the date of transfer through journal entries, sales invoices and tripartite agreements. Since the ownership did not vest with the assessee, the disallowance of depreciation on Wind Mills was justified. It was, further, submitted that the CIT (A) had made out a case that the ownership was vested with the assessee only on 17.4.2006, the date of approval of transfer by WIL to IEL. Till then, it was argued, the issue of ownership was in suspense. The Directors' report as well as the auditors' report both were dated 6.9.2006 justify that the end-users have started paying to the assessee for Windmill electricity from September, 2006 for the period from April 2006 which shows no use of windmills generation of electricity in March, 2006. The Bank drafts dated 31.3.2006 made in the name(s) of financers evidenced that the assessee was in a serious doubt as to from whom it had to purchase the windmills. 6.2. Coun....
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....e closure of the FY and the very purpose of such a survey was to enquire into the genuineness of the purchase itself which shows that even the Revenue was aware of such a transaction on 23.3.2006 itself which evidence that the transaction did take place in the FY 2005-06 itself; 6.5. Rebutting the Revenue's claim that the assessee became the owner of wind mills only on 17.4.2006 being the date on which the share-holders of WIL approved the sale of windmills to IEL in their AGB meeting held on the said date and, thus, IEL could not have conveyed the titles to the windmills in the FY 2005-06 etc., the assessee contended that though the date of ratification of sale of the shareholders of WIL was on 17.4.2006, the sale came into effect on 15.3.2006 itself. WIL had accounted for the sale in the FY 2005-06 and offered the income arising out of the sale to tax for the AY 2006-07 itself. The relevant information is available on the records of the I.T. Department. The assessee had placed reliance on the judgment of the Hon'ble Supreme Court in the case of Marshall Sons & Co (India) Ltd v/s ITO reported in 223 ITR 809 (SC). 6.6. With regard to the observation of the learned DR that the....
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....fore AO, according to which, he appeared to have averred that the books of account were up-to-date. Taking into account the above facts, the AO came to the conclusion that the alleged transaction of purchase of WEGs on 15th and 24th March, 2006, as claimed by the assessee, cannot be considered to be genuine and that there was no credible evidence for the alleged purchase and subsequent use of Wind Mills as on 31.3.2006 so as to allow depreciation for the said WEGs. Moreover, it was the stand of the AO that the end-users, to whom power supplies were made, have stated that the payments were made only to the assessee from May, 2006 and the tripartite agreements between the assessee, IEL and the end-users were executed much later, say, in November, 2006. 7.2. It was, however, contended by the assessee that WIL had in its letter dated 28.10.2008 admitted that it had sold 28 WEGs to IEL by an Invoice dated 15.3.2006. In the said letter, WIL had, further, stated that though the invoice was dated 15.3.2006, the sale was approved in the EGM of WIL held on 15.4.2006 and the Board of Directors of IEL passed a resolution to approve the consideration payable by IEL only on 17.4.2006 and, the....
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.... there any person who knows about the maintenance of books of accounts or the transaction of purchase of windmill? Ans: No, there are no other persons other than me who knows the entire affairs of finance and accounts of M/s Karnataka Breweries & Distilleries Ltd. Only the Managing Director Shri D.K. Audikesavalu will know about the transaction of purchase of windmill." [Courtesy: Para 12 of CIT (A)'s order] 7.3. At this point of time, we refer to the letter of WIL dated 28.10.2008 addressed to the AO wherein, among others, it has been stated that- ".............................................................................. ........................We would like to inform you that there is a serious dispute pending between us and Indowind Energy Limited (hereinafter referred to as IEL) with regard to the sale of the 28 WEGs. The sale of the 28 WEGs was pursuant to an agreement dated 24.2.2006 between us and Subuthi Finance Ltd., who is the promoter of IEL and IEL, was the nominee for and whose behalf the agreement was entered into. It is pertinent to point out to you at this juncture that though the invoice for th....
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....th for your kind perusal. This clearly proves that the sale of the 28 WEGs in favour of KBDSDL is sham and nominal and that IEL continues to claim ownership of 28 WEGs. We therefore fail to understand as to how KBDSDL has claimed depreciation as if they are the owners of the WEGs. We further understand that after entering into the sham and nominal sale in favour of KBDSDL, IEL has entered into an operating lease agreement under which they are operating the WEGs and selling the power generated from the WEGs. This further confirms the fact that the sale in favour of KBDSDL is a complete sham and IEL continue to be in possession and enjoyment of the WEGs. In any event, we are disputing the sale of the WEGs to IEL itself and demanding reversal of the sale in the arbitration proceedings. Our plea before the Arbitrator is to reverse the sale of the WEGs to IEL and handover the WEGs back to Wescare (India) Limited. Though we had declared the entire sale as income in Wescare Books during the year 2005-06, we would be reversing the sale should we get the award in our favour." [Courtesy: Pages 17 & 18 of the PB AR] 7.4. It was a fact that WIL had sold 28 WEGs to IEL by an ....
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....k place on 15th and 24th March, 2006 and as such, the statements of the end-users have of no consequence to determine the date of sale/transaction of WEGs. 7.4.1. Further, rebutting the WIL's allegation of the sale of 28 WEGs to the assessee was a sham, the assessee had extensively quoted the judgment of the Hon'ble Apex Court in the case of Union of India v. Azadi Bachao Andolan reported in 263 ITR 706 [SC] wherein the Hon'ble Court had dealt with the issue of 'sham' transaction. For appreciation of facts, the relevant portions of the judgment of the Hon'ble Court are extracted as under: "(On page 754) In the classic words of Lord Sumner in IRC v. Fisher's Executors (1926) AC 395 at 412 (HL): 'My Lords, the highest authorities have always recognised that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the laws, and that he may legitimately claim the advantage of any expressed terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame.' Similar views were expressed by Lord Tomlin....
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....m the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v. Maclure (1882) 21 Ch. D 309; Stoneleigh Finance Ltd v. Phillips [1965] 1 All ER 513 (CA); [1965] 2 QB 537 (CA)) that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a 'shammer' affect the rights of a party whom he deceived. In Waman Rao v Union of India (1981) 2 SCC 362 at para. 45 and Minerva Mills Ltd v. Union of India (1980) 3 SCC 625 at para 91 this Court considered the import of the word 'device' with reference to article 31B which provided that the Acts and regulations specified in the Ninth Schedule shall not be deemed to be void or even to have become void on the ground that they are inconsistent with the fundamental rights. The use of the word 'device' here was not pejorative, but to describe a provision of law i....
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....hose WEGs, the AO cannot make a sweeping remark that IEL has been making a selfserving statement; * that the income from the sale of power generated from WEGs for the period from 15.3.2006 ending on 31.3.2006 has been duly accounted for and offered to tax by the assessee and NOT either by IEL or WIL. This assertion amply exhibits that the assessee was the legitimate owner of those WEGs in the month of March, 2006 itself; * surprisingly, in the instant case, the survey had taken place before the end of the previous year 2005-06 and also well before the due date for filing of the return of income for the relevant assessment year under dispute and that during the course of survey, the employees of the assessee were subjected to interrogation to ascertain as to whether they have any knowledge of the transaction of the purchase of WEGs by the assessee etc., lead to a feeling that the authority concerned was fully aware of the transaction of WEGs and was looking for any documentary proof of the same. 7.7. Taking into account the above facts and also in conformity with the judgment of the Hon'ble Supreme Court (supra) with regard to 'sham' or 'device', w....
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....eason that the rectified spirit under-taking belonged to MOL was dysfunctional since 1999 and, therefore, does not qualify to be a 'going concern'. The AO was of the view that the under-taking not being a 'going concern', the demerger does not satisfy the demerger as defined by s. 2 (19AA) of the Act inasmuch as sub-clause (vi) of s. 2 (19AA) of the Act stands violated and the CIT (A) termed it as a 'dead concern'; - that as per sub-clause (vi) of s. 2 (19AA), it only means that the under-taking shall be transferred in a manner similar to the transfer of an under-taking which is a 'going concern' as on the date of transfer; - that the words used 'on a going concern basis' hold the key to understanding the import of sub-clause (vi) of s. 2 (19AA). It only means that the transfer should be on the basis of a 'going concern' and it does not mean that the under-taking being transferred should be a 'going concern' as on the date of transfer; - that the 'scheme of demerger' which stands approved by the High Courts of Andhra Pradesh and the jurisdictional Court clearly establishes the fact that the transfer of the undertaking is indeed on a '....
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....ith effect from the appointed date, the demerged undertaking shall, pursuant to the provisions contained in the section 394(2) of the Act and other applicable provisions of law for the time being in force and without any further act or deed, be demerged from MOL, and be transferred to and vest in or be deemed to have been transferred to and vested in KSDL on the appointed date, on a going concern basis, so as to become as and from the appointed date, the undertaking of KSDL." 8.1.4. We shall now proceed to analyse the provisions of s. 72A (4) of the Act. For ready reference, the relevant section is extracted as under: "72A(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall- (a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to....
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....erusal and consideration of the provision of sections 2(19AA), 10A(1), 10A(7A) and 72A(4) of the Act, it is necessary to arrive at a harmonious construction to assume that the intention of Legislature is not frustrated especially in view of the decision of the Hon'ble Apex Court in the case of K.P. Varghese v. ITO reported in 131 ITR 597 wherein the Hon'ble Apex Court has ruled that a literal construction of a Statute that leads to an absurdity or unjust result or mischief is to be avoided." 8.1.7. The Hon'ble High Court of Delhi in the case of Indo Rama Textile Ltd., In re reported in (2012) 23 taxmann.com 390 (Del) had, while analysing section 2 (19AA) of the Act, held as under: "41. Upon reading of the aforesaid section, it is apparent that the definition of Demerger in Act, 1961, would be satisfied if the undertaking that is being demerged is hived off as a going concern that means, if it constitutes a business activity capable of being run independently for a foreseeable future. To ensure that it is a going concern, the Court while sanctioning a Scheme can certainly examine whether essential and integral assets like plant, machinery and manpower without whic....
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....4,02,628 Total 170,93,42,411 141,09,41,647 - that in the present case the last date of the relevant previous year was 31.3.2007. The non-interest bearing funds available with the assessee as on 31.3.2007 was Rs.170.93 crores whereas the non-interest bearing loans and advances deployed by the assessee was Rs.117.39 crores and, thus, the question of interest bearing funds being utilised to advance non-interest bearing loans does not arise; and that the opening balance of non-interest bearing funds available with the assessee at the beginning of the year i.e., as on 1.4.2006 was Rs.141.09 crores and that the amounts were sufficient to meet the outflow in the nature of non-interest bearing loans and advances of Rs.117.39 crores; - relies on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd 313 ITR 340 (BOM) ; 9.3. In conclusion, it was asserted that in consonance with the judgment of the Hon'ble Bombay High Court (supra), no disallowance of interest was warranted inasmuch as the non interest bearing funds available with the assessee as on 31.3.2006 was far in excess of the interest free loans m....
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....herefore, no disallowance was possible. 9.4.1. It was, therefore, pleaded that the stand of the AO as well as the CIT (A) requires to be sustained. 9.4.2. Disputing the learned DR's observation of commercial expediency, the assessee, in its rejoinder, submitted that the facts as prevailing in the assessee's case are entirely different from those in the case laws cited by the Revenue. It was argued that the question of proving commercial expediency will arise only after it is proved that the interest free loans were given out of interest bearing funds. There was no bar as such on giving interest free loans out of interest bearing funds provided there exists commercial expediency to do so. It was, further, submitted that in the case laws relied upon by the Revenue, the question of proving commercial expediency came up as in those cases interest free loans were made out of interest bearing funds. However, in the assessee's case, it was argued, it was clear that the non-interest bearing funds were quite sufficient to cover those interest free advances. Relies on the following case laws: (a) Woolcombers of India Ltd 134 ITR 219 (Cal); (b) CIT v. ....
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....d arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the finding the fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible." (b) We have, with due regards, perused the judgment of the Hon'ble Court (supra) and of the view that the ratio laid down by the Court is directly applicable to the present assessee as the issue under consideration is identical to that of the matter dealt by the Hon'ble Court. (ii) The Hon'ble High Court of Gujarat had an occasion to deal with a similar issue in the case of CIT V. Raghuvir Synthetics Ltd reported in (2013) 354 ITR 222 (Guj). The issue before the Hon'ble Court, in brief, was that the AO noticed that the assessee had incurred heavy interest expenses of Rs.59.83 lakhs and, on the other hand, it had given interestfree loans to the parties to the extent of Rs.19.45 crores. On examining the details furnished, the AO disallowed the interest to the extent of Rs.18.66 lakhs of the interes....
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.... in view of the fact that no new argument or new facts to refute the reasoning has been forwarded at the appellate hearing. Addition is upheld." 10.1. Before us, it was contended on behalf of the assessee that - Conveyance of Rs.20000/- and legal & professional charges of Rs.40000/- paid to Consultant: - that a consultant was engaged for the business during the previous year 2005-06 and the assessee had not made any provision for the same as no bill was received from the consultant and the amount was paid during the relevant previous year on receipt of the bill. Salary & wages paid to V.Vijay of Rs.1.89 lakhs: The said amount was expended during the year wholly and exclusively for the services rendered by him for the purpose of business from January 2004 to March, 2005. The same was not claimed as expenditure in the earlier AYs as no provision was made in respect of the same. Bonus paid to employees Rs.2,93,360/-: Certain employees who had left the services of the assessee during the previous year 2005-06 were pai....
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.... allowed as expenditure u/s 37 of the Act inasmuch as the section explicitly provides that 'Any expenditure (not being expenditure described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head 'profits and gains from business or profession'. 10.3. In conclusion, the assessee relies on the ratio of the findings of the Co-ordinate Bench of the ITAT, Bangalore, in the case of Hotel Paraag Limited in ITA No.471/B/2010. 10.4. On the other hand, the learned D.R fully supported the stand of the authorities below on the issue. As there is no any infirmity in the findings of the CIT (A), it was pleaded that the same requires to be sustained. 10.5. We have carefully considered the rival submissions and also perused the relevant materials on record. 10.6. At the outset, we would like to point out that the issue has not been dealt with properly either by the AO or the first appellate authority for that matter. As a matter of fact, the reasoning of the AO in disallowing the ....