AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 1165
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.... cross appeals arise out of the same order of CIT(A), we dispose of the same by this consolidated order for the sake of convenience. 2. There is a delay in filing the appeals by the revenue for the Asst years 2006-07 and 2007-08 by 2 days . The reason adduced by the revenue in the condonation petition for the delay is convincing and hence we hereby condone the delay of 2 days and admit those appeals for adjudication. DISALLOWANCE U/S 14A OF THE ACT 3. The facts of Asst Year 2006-07 are adjudicated herein and the decision rendered thereon would apply with equal force for Asst Year 2007-08 also as the facts are identical except with variance in figures. 3.1. The brief facts of this issue is that the ld AO observed that the assessee had earned dividend income of Rs. 1,14,72,300/- and interest on tax free bonds for Rs. 4,94,677/- and claimed the same as exempt u/s 10 of the Act. The assessee did not disallow any expenditure incurred for the purpose of earning this income which do not form part of total income. Accordingly the provisions of section 14A read with Rule 8D was sought to be invoked. The assessee replied that investment in ICICI Bank Mutual Fund from where assess....
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....pute. 3.3. We have heard the rival submissions. The Provisions of Rule 8D of the Rules was introduced only with effect from 24.3.2008 and the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co Ltd vs DCIT reported in 328 ITR 81 (Bom) had held that the provisions of Rule 8D could be applied only from Asst Year 2008-09 and onwards and not for the earlier years. However, the provisions of section 14A of the Act has been introduced in the statute with retrospective effect from 1.4.1962 and accordingly some expenditure is required to be disallowed u/s 14A of the Act for asst years prior to Asst Year 2008-09. We find that the issue under dispute is settled by the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs R.R.Sen & Brothers (P) Ltd in GA No. 3019 of 2012 I.T.A.T. No. 243 of 2012 dated 4.1.2013 wherein it was held that 1% of exempted income should have to be disallowed u/s 14A of the Act for asst years prior to Asst Year 2008-09. Respectfully following the said decision, we hold that only 1% of exempted income is to be disallowed u/s 14A of the Act. We find that the ld CIT(A) in the instant case had rightly directed the ld AO to disall....
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....anuary 2007 at Nil value in view of PMC-RC not having met the aforesaid performance for 2005-06. The company also exercised its option to convert the optionally convertible debentures of face value Rs. 5,98,50,000 into 6,44,450 equity shares for a pre-agreed price of Rs. 92.87 per share. The realizable value of these shares were contingent on the achievement of certain performance parameters by PMC-RC during 2006-07. Based on the performance in 2006- 07, these shares have been considered at Nil value in the books of accounts. Pending completion of conversion formalities, the convertible debenture were shown in Schedule 4 of the published accounts at its original terms of issue. Pursuant to the above, the company's shareholding in PMC-RC stood reduced to 24% . In addition to the above, the company was also entitled to receive consideration as 'earn outs' aggregating to a maximum of Rs. 360 lakhs, if the performance of RMC-PC during the three year period 2005-06 to 2007-08 exceeded certain performance parameters. In respect of this, no earn out was earned for the year 2005-06 to 2007-08. 4.1. From the above, it would be clear from the developments subsequent to sale of the Rubber ....
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....slump sale in no way vitiates the nature of the transaction being slump sale of the business undertaking u/s 50B of the Act. 4.4. The ld AO adopted the sale consideration of Rubber Chemicals Business at Rs. 21.6 crores. In addition, he also considered the sale consideration for the land at Rs. 22.94 crores based on the conveyance deed dt 29.10.2007 for the said land and adjusted the same against the WDV of building and computed deemed short term capital gains u/s 50 of the Act. The ld AO did not agree to the contention of the assessee that the Rubber Chemicals Business undertaking was sold on slump sale basis. One of the reasons cited by the ld AO for disallowing the slump sale was registration of land by the assessee in favour of the purchaser post the slump sale. He accordingly proceeded to invoke the provisions of section 41(2) of the Act and brought the same as business income by increasing the sale consideration figure which apparently included consideration in the form of shares , optionally convertible debentures and 'earn outs' based on future performances. While working out the profit in terms of section 41(2) of the Act, the ld AO also included the sale consideration i....
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.... computation whereas as per reduced WDV adopted by the department, the depreciation comes to Rs. 14,53,81,853/-. It was also mentioned that the assessment made on this issue in the earlier years had not reached finality as the same is pending in appeal. In order to maintain consistency for the time being, the difference of Rs. 88,63,037/- (15,42,44,890 - 14,53,81,853) was disallowed on account of excess depreciation claimed by the assessee. 4.8. The ld AO invoked the provisions of section 41(2) of the Act and included the value of sale consideration of Belvedere Estate and that of Bangalore Land to the increased total sale consideration of Rubber Chemicals Business and arrived at the profit of Rs. 3,50,65,913/- u/s 41(2) of the Act. 4.9. Before the ld CIT(A), the assessee stated that the first allegation leveled by the ld AO that the transfer of its Rubber Chemical Business to PMC Rubber Chemical India Pvt Ltd as a going concern on slump sale basis can under no stretch of imagination be stated that the sale was made to self. It was argued that the said company is a joint venture between the assessee and PMC group with 49% stake of the assessee in the joint venture company and....
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.... and liabilities and hence, by no stretch of imagination, it could be stated that the present case is a case of itemized sale. Accordingly both the allegations leveled by the ld AO were assailed by the aforesaid arguments by the assessee. 4.9.1. With regard to the adoption of increased sale consideration of Rs. 21.6 crores by the ld AO as against the real cash consideration of Rs. 8.18 crores, the assessee argued that transferred undertaking did not ultimately reach the desired EBDITA margin due to which the assessee had to exercise PUT option and the shares were valued at Nil value. Further the assessee also did not receive any 'earn outs' for the same reason. Hence the consideration of Rs. 9.82 crores and Rs. 3.60 crores thereon respectively were never received by the assessee. The assessee placed reliance on the decision of the Hon'ble Apex Court in the case of CIT vs Gillanders Arbuthnot & Co reported in 87 ITR 407 (SC) wherein the Hon'ble Apex Court had held that the expression 'full value of consideration' cannot be construed as the market value but as the price bargained for by the parties to the sale. The dictionary meaning of the word 'full' is 'whole or entire or compl....
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....y, registration fees etc shall not be regarded as assignment of values for individual assets. Consequently, if the transaction is treated as a slump sale, the depreciation would revert to the amount originally claimed by the assessee in the return of income. The A.O. has also provided relief for AY 1995-96, AY 1996-97 and AY 1997-98 on the basis of the ITAT order for AY 1994-95. 4.9.3. In respect of treatment of sale of Bangalore land as business income, the ld AO in his remand report stated as under:- Additional Ground No. 13 Treating sale of Bangalore Land as business income For AY 2006-07 the assessee treated the gains arising from the sale of Bangalore property as income under the head 'Capital Gains". The AO while passing the order issued under section 143(3) of the Act treated the gains from the sale of the Bangalore Land as 'Business Income' by reducing the sale value of the land from the WDV of the Building used for the purpose of the business under section 41(2) of the Act without assigning any reasons in the order passed under section 143(3) of the Act. Assessee's Submission: 'Land' is a capital asset within the meaning of section 2(14) of the Act and an....
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....ng claim of assessee as slump sale of Rubber Chemical undertaking u/s. 50B considering the decision of the Hon'ble ITAT in the assessee's own case in ITA No. 1020/Kol/2007 dated 29.02.2008, whereas appeal was filed against the Hon'ble ITAT's decision for AY 1997-98. 3. Whether Ld. CIT(A)-XII, Kolkata was justified in accepting assessee's claim of depreciation Rs. 88,63,037/- on the basis of Hon'ble ITAT Kolkata's decision in assessee's own case for AY 1997-98, whereas appeal was filed against the Hon'ble ITAT's decision for AY 1997-98." 4.9.6. The assessee stated that the sale consideration of Rs. 98,35,830/- has been included in the total addition figure u/s 41(2) of the Act in the sum of Rs. 3,50,65,913/- by treating the sale consideration of Bangalore Land as part of sale of Rubber Chemicals Business. Infact the Rubber Chemicals Business was sold to PMC Group and where as Bangalore Land was sold to Advanta India Ltd, which is a separate legal entity and not connected with PMC Group. The ld AO erroneously clubbed both the sale transactions of Rubber Chemicals Business and sale of Bangalore Land and brought the same to tax u/s 41(2) of the Act. The assessee pleaded that the ....
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....C Group and accordingly the ld AO erred in clubbing both the sales together and making it part and parcel of the sale of undertaking and thereby taxing both u/s 41(2) of the Act. In respect of sale of Belvedere Estate, the assessee had both land as well as building and hence the consideration received in the sum of Rs. 70,00,000/- was apportioned between land to the tune of Rs. 67,04,937/- and towards building to the tune of Rs. 2,95,063/- . He argued that in any case, the ld CIT(A) having granted relief to the tune of Rs. 3,50,65,913/- which included the entire sale consideration of Rs. 70,00,000 towards Belvedere Estate and Rs. 98,35,830/- towards Bangalore land , ought not to have taken different stand by sustaining the said addition separately. He argued that the ground raised by the assessee before the ld CIT(A) specifically was for a totally different purpose with a prayer to treat the gains arising from sale of Bangalore land as capital gains instead of business income. 5.1. The ld AR relied on the decision of the Hon'ble Jurisdictional High Court in the case of East India Electric Supply and Traction Co Ltd vs CIT reported in ( 2003) 263 ITR 243 (Cal) for non-applicabili....
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....nd, the ld AO had accepted the contentions of the assessee in the remand report by stating that the contentions of the assessee may be considered as the ld AO had not adduced any reason in his assessment order for treating the same as business income u/s 41(2) of the Act. In view of this, we hold that the sale consideration of Bangalore Land to the tune of Rs. 98,35,830/- and towards Belvedere Estate at Rs. 70,00,000/- should not be treated as part and parcel of slump sale of Rubber Chemicals Business Undertaking and the gains arising from sale of Belvedere Estate and Bangalore Land should be assessed only as Capital Gains as reported by the assessee. 7.2. We find that the arguments advanced by the assessee before the ld CIT(A) and findings given thereon in respect of sale of Rubber Chemicals Business Undertaking on slump sale basis has not been refuted by the ld DR before us. We find that the decision relied upon by the ld AR on the Hon'ble Jurisdictional High Court in the case of East India Electric Supply and Traction Co Ltd reported in 263 ITR 243 (Cal) is well founded on the non-applicability of provisions of section 41(2) of the Act. 7.3. With regard to the disallowance....
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....ct. The ld AO disregarded the submissions of the assessee and made an adhoc disallowance to the extent of 20% of interest expenditure just to maintain consistency with the assessment order for Asst Year 2006-07 and added a sum of Rs. 59,00,000/- to the total income. The ld CIT(A) upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds :- Ground Nos. 2 to 2.4 of Assessee's appeal for AY 2007-08: "2. That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in upholding the disallowance of interest expenditure of Rs. 59,00,000/- made by the AO. 2.1.That on the facts and in circumstances of the case and in law, Ld. CIT(Appeals) erred in upholding disallowance of interest expenditure in the assessment year under consideration when he had deleted similar disallowance made by the AO in AY 2006-07. 2.2.That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in appreciating that during previous year relevant to assessment year under consideration, the appellant had not borrowed any funds and hence, no interest could be disallowed on the pretext that borrowed funds were ut....
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....eed with the contentions of the ld AO and did not draw any adverse inference with regard to the impugned issue . While this is so, there is no reason for the ld CIT(A) in the year under appeal to shift from his earlier decision rendered on the very same facts for the Asst Year 2006-07. In response to this, the ld DR vehemently relied on the orders of the lower authorities. 9.2. We have heard the rival submissions and perused the materials available on record including the relevant pages of the paper book of the assessee. We find that the ld AO had conceded in his assessment order that the assessee had demonstrated from its audited annual accounts which transpires that the assessee has not borrowed any funds during the year and that the amount of interest of Rs. 2.95 crores represented mainly bill discounting charges on account of supplier financing arrangements and collection charges of outstation cheques. We find that this issue has been decided by the ld CIT(A) for the Asst Year 2006-07 in favour of the assessee by placing reliance on the remand report given by the ld AO for Asst Year 2006-07. For the sake of convenience, the conclusions drawn by the ld AO in the remand report....
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.... convinced that in respect of loans to employee directors at concessional rate of interest, the difference in rate thereon as compared with Rule 3 of the Rules has been duly considered as perquisite in the hands of the said employee directors and tax is deducted in terms of section 192 of the Act. This fact has not been refuted by the ld DR before us. In view of the aforesaid findings and in the facts and circumstances of the case, we hereby direct the ld AO to delete the disallowance made in the sum of Rs. 59,00,000/- towards proportionate interest . Accordingly, the Ground Nos. 2 to 2.4 for the Asst Year 2007-08 raised by the assessee are allowed. 10. ADDITION TOWARDS PROFITS OF UNIQEMA BUSINESS - Rs. 10,84,00,000/- The brief facts of this issue is that the assessee company transferred its Uniqema business along with its risks and rewards to Croda Chemicals (India) Private Limited from 2.9.2006. However, for the period from 2.9.2006 to 4.1.2007, the business was run by the assessee company on behalf of Croda Chemicals (India) Private Limited (CCIPL). The income that arose from the operation of the Uniqema business during the period 2.9.2006 to 4.1.2007 was paid by the asses....
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....relevant note clearly stated that the business was carried on behalf of CCIPL for the period in question due to which such profits have not been accounted for in the books of the assessee. He placed reliance on the decision of the Hon'ble Delhi High Court in the case of Additional CIT vs Jay Engineering Works Ltd reported in 113 ITR 389 (Del) from which an inference can be drawn that when the audited annual accounts of the company clearly and unambiguously disclose the facts, the ld AO cannot state that no material was produced before him. He fairly stated that let this aspect be examined by the ld AO as to whether the said profits of Rs. 10.84 crores have been included in the returns of CCIPL as admittedly the assessee cannot be expected to have control over the affairs of CCIPL and their tax matters. He prayed that if on verification of the said fact, it is proved that CCIPL had accounted for the subject mentioned profits for the interregnum period in its books and then the same shall be directed to be deleted in the hands of the assessee company. In response to this, the ld DR vehemently relied on the orders of the lower authorities. 10.2. We have heard the rival submissions ....
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....s of the assessee clearly nullifies the various allegations made by the ld AO in his assessment order. We also find that this aspect was brought to the notice of the ld AO by the assessee by filing the tax audit report in Form 3CD wherein the tax auditor in reply to Clause 8(a) and 8(b) thereon had reported about this aspect (enclosed in page 140 of paper book). We find that the ld AO had not examined the aspect as to whether the subject mentioned profits of Rs. 10.84 crores have been reported in the total profits of Croda (CCIPL) in its books. Hence as fairly conceded by the ld AR in this regard, we deem it fit and appropriate, to set aside this issue to the file of the ld AO, with a limited direction to verify the books of CCIPL in order to know whether Rs. 10.84 crores of profits have been reported by them in their books, and if the same is found to be true, then the said addition made in the hands of the assessee company is to be deleted. Accordingly, the Grounds 3 to 3.2 raised by the assessee for the Asst Year 2007-08 are allowed for statistical purposes. 11. DISALLOWANCE OF BAD DEBTS - Rs. 14,43,106/- The brief facts of this issue is that the assessee wrote off bad deb....