TaxTMI 
TaxTMI 
2018 (2) TMI 730
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....capital gain of Rs. 51.22 crores on sale of equity shares and equity oriented mutual funds which was exempt from tax. The said dividend income and long term capital gains have been claimed as exempt from income tax under section 10(34) and 10(38) of the Act respectively. The Assessing Officer (hereinafter referred to as the AO) held that in the preceding year 1% of the dividend income has been disallowed under section 14A after assessee has explained his position. The assessee has also filed the computation of allocation of indirect expenses attributable to earning the exempt income which worked out to Rs. 1.18 Cr. However, after insertion of rule 8D there is no occasion for estimation of disallowance under section 14A of the Act by any other method which too is only an estimated allocation of expenses. According to the AO that assessee has incurred interest expenditure and has not given exact details of the sources of the investments in shares and mutual funds. The AO concluded that it could not be ruled out that part of the interest incurred had a proximate connection with the investments in tax free securities. Therefore, AO, after giving show cause notice, calculated the disall....
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....s a vis investments right from 31.3.2006 to 31.3.2008 which showed that assessee has sufficient interest free own funds to make investments in tax free income yielding securities. The Ld. A.R. submitted that assessee has not incurred any expenses in relation either making of investments or earing of exempt income. The test which has been enunciated in Walfort for attracting the provisions of 14A of the Act. There has to be a proximate cause for disallowance with its exempt income. Once the test of proximate cause, based on the relationship of the expenditure with exempt income is established, a disallowance would have to be effected under section 14A of the Act. The company over the last few years has been on a rapid growth path. The potential of steep growth in print business encourage the management to embark on a detailed expansion plan. The company has made additions of Rs. 510 crores to its fixed assets and its turnover has also increased and the capital borrowing has come down to very nominal level. During the A.Y. 2008-09 the company has incurred an interest expense of Rs. 23.04 crores, out of which Rs. 20.77 crores pertained to aforesaid borrowings and the balance pertained....
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....the case of "CIT vs. Reliance Utilities and Power Ltd." (supra) there was a clear finding that assessee has own funds wherein this fact is not established in this case. 6. We have heard the rival contentions of both the parties. We find that assessee has produced the chart showing the summary of source and application of funds which was also available before the AO and is extracted as under for the sake of better understanding of the facts: Sources 31.03.2006 31.3.2007 31.3.2008 31.3.2009 Share Capital 32 32 32 32 Reserves and Surplus 2625 3119 3973 4347 Depreciation Reserve 523 669 843 1002 A 3180 3819 4848 5381 Application Investments on which tax-free income received 882 982 1996 2187 Investments in unlisted shares of subsidiary 313 374 514 807 Other Investments 173 324 613 812 B 1368 1680 3123 3806 SURPLUS (A-B) 1812 2139 1725 1575 It is clear from the records that the assessee has replied to show cause notice issued by the AO and furnished details before the lower authorities by me....
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....e for more than the investments in shares and securities yielding tax free income. We notice that the assessee had sufficient own funds and is squarel covered by the ratio laid down by the decision of the Hon'ble Bombay High Court in the case of "CIT vs. Reliance Utilities and Power Ltd." (2009) 313 ITR 340 (Bom) which reads as under: "16. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had conside....
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....,00,000 6% Redeemable Unsecured Debentures 1,25,00,000 Rs.100 each 125,00,00,000 125,95,50,000 The difference between the value of the shares allotted in exchange and the value of the net assets of the business transferred amounting to Rs. 82,87,31,848 has been included in Computation of Income as income u1s.50B of the Income Tax Act out of abundant caution and without prejudice to the contention of the assessee that the difference is not chargeable to tax under the provisions of the Income Tax Act, 1961. In the opinion of the assessee, the transaction of hiving off the business of Planet M division is not a "Sale" but is an "Exchange". The same not being a sale therefore does not fall within the definition of "Slump Sale" u/s 2(42C) of the Income Tax Act, 1961. In the circumstances, the transfer of the division on a going concern basis being a "slump Exchange", no value can be ascribed to any asset that was transferred as part of the business. So also the cost of acquisition of the undertaking that was transferred on "Exchange" cannot be arrived at since what has been exchanged is the entire undertaking comprising of t....
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....ompany. It is not the case of exchange of goods or assets owned or held by two parties. The payment of consideration by way of shares is very common in cases of mergers, demergers, takeovers etc and merely for this incidental fact the whole substance of the transaction cannot be equated with that of an exchange. In the elaborate business transfer agreement entered into by the assessee with Planet M Retail Limited ("the transferee"), the assessee has agreed to transfer the entire business of retailing music and other products as a going concern to the transferee on a slump exchange basis.While the assessee has taken care to use the word 'exchange' in the agreement,nowhere else in the agreement there is any reference to any 'exchange'. The substance of the agreement is that of transfer of all assets and liabilities of the running business including intangible assets described in the agreement under 'Art icle 2-Sale and Transfer of the business' for a "consideration" detailed in Article 3 of the agreement The consideration includes the shares and debentures listed above The shares are transferable and the debentures are redeemable after a period of 10 years. Th....
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....written down value and the actual cost being the depreciation actually allowed would be chargeable to tax as deemed business profits under section 41 (2) and the excess over the actual cost of the capital asset realized would be taxable as capital gain. If, however, there is no evidence to indicate the price of the plant, machinery, building, etc., and the depreciation already allowed to the firm is not determinable, the depreciation so allowed cannot be taxed as balancing charge. This is because of the fact that the price identifiable and attributable to each machinery, plant or building will have to be ascertained and then only the question of computation of balancing charge under section 41(2) would arise for consideration. 5.7 In the case of Artex Mfg. Co, the transfer of business was for a net consideration of Rs. 11,50,400/- which was paid by allotment of Rs. 11,504 equity shares of Rs. 100 each fully paid up allotted to the partners in their respective profit sharing ratio. The assets of the firm were taken at Rs. 41,73,973 and liabilities at Rs. 30,23,573/- the difference being the net consideration of Rs. 11,50,400. The debt stock was revalued at Rs. 15,87,296/- a....
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....e decision of the High Court that it was chargeable to tax as capital gain cannot be upheld. But the liability under section 41(2) is limited to the amount of surplus to the extent of difference between the written down value and the actual cost. If the amount of surplus exceeds the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess will have to be treated as capital gain for the purpose of taxation. 5.8 In the case of Electric Control Gear Mfg. Co the net consideration of Rs. 8,00,000/- payable by the company by allotment of shares of equivalent value to the partners of the firm in proportion to their share of profits and in the assessment of the firm an aggregate sum of Rs. 3,32,863/- was the depreciation allowed in the past years which the Assessing Officer, wanted to be taxed as balancing charge under section 41(2) and such a levy imposed by the Revenue authorities was cancelled by the Tribunal holding that there was no possibility of identification of the consideration for transfer of each capital asset and hence, no amount could be identified or attributed as the price for each depreciable asset and acc....
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....1955] 28 ITR 928 Further the Supreme Court in B M Kharwar's case held that the observations in Sir Kikabhai's case to the effect that in revenue cases regard must be held to the substance of the transaction rather than to its mere form and it cannot be read as throwing any doubt on the principle that the true legal relation arising from a transaction alone determines the taxability of a receipt arising from a transaction. 5 12 The recent decision of Mumbai ITAT in the case of Bharat Bijilee Ltd v Additional Commissioner of Income Tax, ITA No.6410/Mum/2008 heavily relied upon by learned AR does not discuss the decisions of Hon'ble Supreme Court in Artex Mfg. Co. and Electric Control Gear Mfg. Co. It is also noticed that the plea that the case could also be covered under the provisions of capital gain was not discussed and debated before Hon'ble ITAT. In view thereof relying on the decisions of Apex Court and agreeing with view of AO, the additional ground raised is dismissed." 13. The Ld. A.R. vehemently submitted before us that the order of the Ld. CIT(A) is blatantly wrong and against the provisions of the Act as it affirmed the order of AO of not treat....
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....equently the capital gain of Rs. 84,26,04,286/- could not be brought to tax. Therefore, the Ld. A.R. prayed for reversal of order of Ld. CIT(A) and issuing necessary direction to the AO to exclude the said amount from the computation of income. 15. The Ld. D.R., on the other hand, vehemently submitted that the amount of Rs. 84,26,04,286/- has already been taxed as there has been transfer by hiving off Planet M. division consisting of leisure and retail products, on a going concern basis. The Ld. D.R. relied upon the orders of the authorities below. The Ld. D.R. relied on the decision of CIT vs. Artex Manufacturing Co. (1997) 227 ITR 260 (SC) and CIT vs. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (SC) in which the Hon'ble Apex Court has held that surplus realized on sale of depreciable asset to the extent of the difference between the written down value and the actual cost being the depreciation actually allowed would be chargeable to tax as deemed business profits under section 41 (2) and the excess over the actual cost of the capital asset realized would be taxable as capital gain. The Ld. D.R. further argued that even if the contention of Ld. A.R. is accepted for a mome....
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....entions of the assessee are that the computation provisions qua capital gain are incapable of being applied and therefore the charging of provisions of capital gain cannot be applied. For the purpose of better understanding of provision 2(42C) is extracted below: "(42C) "slump sale"72 means the transfer of one or more undertakings as a 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 purposes 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 ;]" 19. The above definition has to be analysed in the light of the ratio laid down in the various decisions infra.In the case of CIT v/s Motor & General Stores (P) Ltd (66 ITR 692) the assessee company entered into an "exchange deed" pursuant to which it transferred a cinema h....
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....on of section 45. It is further held that the charging section and the computation provisions together constitute an integrated code and when in a case the computation provisions cannot apply, such a case would not fall within section 45. In the present case, the banking undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On the facts, we find that item-wise earmarking was not possible. On the facts, we find that the compensation (sale consideration) of Rs. 10.20 crores was not allocable item-wise as was the case in Artex Manufacturing Co. [1997] 227 ITR 260. For the aforesaid reasons, we hold that on the facts and circumstances of this case, which concerns the assessment year 1970-71, it was not possible to compute capital gains and, therefore, the said amount of Rs. 10.20 crores was not taxable under section 45 of the 1961 Act. Accordingly, the impugned judgment is set aside. The Hon'ble Supreme Court in the case of CIT vs. B.C. Srinivasa Shetty (128 ITR 294) laid down the following ratio at page 299: "Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacte....