TaxTMI 
TaxTMI 
TaxTMI 
2020 (5) TMI 78
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....orded in the assessment order, the assessee company sold 6749 shares of SDB Cisco India ltd., which were obtained by the assessee from M/s. Sical Logistics Ltd., under demerger scheme approved by the Hon'ble Madras High Court vide its order dated 20. 12. 2007. Pursuant of the share purchase agreement dated 04. 03. 2010, the assessee sold 6749 shares on 09. 08. 2010 to M/s. Innovative salary services and payroll advisory Pvt Ltd., for a total consideration of Rs. 94,65,83202/-. On this sale of shares, the assessee derived a long term capital gains of Rs. 84,59,77,432/-, which was admittedly offered to tax in the return of income. The assessee also sold immovable property at Pattinamarudur and derived a long term capital gains of Rs. 107,35,200/-. Hence, the total long term capital gains disclosed by the assessee in the return of income was Rs. 85,67,12,637/-. The assessee also had certain capital loss of Rs. 56,48,52,180/- on sale of debts due from certain debtors. This capital loss was sought to be set off by the assessee with the long term capital gains. 4. The assessee company entered into an agreement assigning the debts to M/s. Golden Star Asset Consultants (P) Ltd., Chennai ....
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....some small upside in the transaction provided the advance is assigned to it at a fractional price. Accordingly, the assessee company thought it fit to assign these advances in favour of M/s. Golden Star Asset Consultants (P) Ltd., and was able to get rid of these advances from its books and present a true and fair view of its accounts to its share holders. 6. 1 With regard to ICD and loans and advances figure due from M/s. MCC Finance Ltd. amounting to Rs. 10. 99 crores, the assessee submitted that the said company was in winding up at the time of signing of assignment agreement and all efforts of recovery of amount from the said company were in vain. The assessee submitted that by assigning the recoverability of the said dues to an independent specialist i. e. M/s. Golden Star Asset Consultants (P) Ltd., considerable time of management, which is valuable would be saved and the management of the assessee company would be able to focus on their own business rather than pursue legal cases and recovery of old advances. 7. A copy of aforesaid two Assignment Agreements were submitted before the Ld. A. O The Ld. A. O observed that one Mr. Rajamani, Director of M/s. Golden Star Asset C....
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....g in the books of API were assumed/taken over by the earlier promoters, namely M/s. South India Travels P Ltd. Accordingly, API replied that they had not shown claims payable to Sicagen India Ltd., i. e. assessee company in their books. API had further replied before the Ld. A. O that the assignee company i. e. M/s. Golden Star Asset Consultants (P) Ltd., had been advised to prefer their claims with M/s. South India Travels P Ltd., and not them. 9. Similarly information was called for u/s. 133(6) of the Act by the ld. A. O from M/s. MCC Finance Ltd., to understand the present position of the debts payable to the assessee company. In response thereto, M/s. MCC Finance Ltd., submitted that pursuant to the order of the Hon'ble Madras High Court in the matter of scheme of arrangement and revival of M/s. MCC Finance Ltd., the said company had requested the assessee company for exercising option with regard to dues of Rs. 10. 99 crores, which is as under:- "a) 3 year Zero Interest bonds for 40% of the amount outstanding at the time of winding up including intrest upto June 2000 will be allotted to the Creditors or their authorized nominess, in full settlement of their dues. Scuh bond....
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....sed the fact of allotment of shares in its books of accounts nor had admitted any profit on allotment of shares in their returns of income. Accordingly, the ld. A. O concluded that so called assignee company had no intention to take over the assigned debts from the assessee company. Accordingly, he concluded that the said transaction cannot be construed as a valid transfer i. e. extinguishment of rights within the meaning of Section 2(47) of the Act. The ld. A. O further held since it is not a property transfer, the capital loss claimed by the assessee on alleged assignment of debts to a third party is not allowable for set off against the long term capital gains derived by the assessee. 11. The ld. A. O further observed that API had been sent out of the purview of BIFR on 23. 02. 2004 itself. Hence, API is no longer a sick company as alleged by the assessee before us. Hence, the contention of the assessee that debt was not recoverable from API could not be accepted and based on this, the ld. A. O concluded that the assignment of such debt in favour of M/s. Golden Star Asset Consultants (P) Ltd., was done only with sole intention of reducing the capital gains tax by the assessee. ....
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....ed to a third party for a paltry sum. Accordingly he concluded that the entire exercise of assigned loans to the third party was a dishonest and fraudulent motive on the part of assessee-company to arrive at a bogus capital loss. Based on the aforesaid facts, the ld. AO concluded that the entire agreement entered into with M/s. Golden Star Asset Consultants (P) Ltd., was a clandestine arrangement and needs to be concluded as a sham transaction with a fraudulent motive to evade capital gains tax on sale of shares and sale of property. With these observations, the Ld. A. O disallowed the entire capital loss on sale of debts claimed by the assessee to the tune of Rs. 56,48,55,180/-. 13. The learned CIT(A) granted relied to the assessee by observing as under:- "5. 2. 2. Having gone through the various submissions and paper books filed with me, I shall now go into the adjudication of these grounds raised. I have perused the copy of agreement of assignment of debts, the statement recorded by the AO under section 131 of the IT Act from Shri M. Rajamani, Director of M/s Golden Star Assets Consultants Pvt. Ltd. on 07. 02. 2014 and 03. 02. 2014 and also perused the valuation report dt. ....
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.... South India Corporation Agencies Limited (Sical) advances money via lCD route to the extent of Rs. 39. 18 Crores towards the revival of the company. Sical had given this money to API in order to revive API and as under the belief, that upon the revival of API, its money's would be recovered in entirety. API had valuable property at Bhandup, Mumbal at that time. Within few years in 1999-2005 API'S properties were sold and liquidated and funds had to be used to settle a certain corporate guarantee. Sical continued to hold these balances in its books and in between the name was changed to Sical Logistics Limited. In 200 7-08, Sical Logistics Ltd did a demerger under the auspices of the High court of Madras and during the demerger these assets were transferred to Sicagen India Limited under Court order. Sicagen India Limited then followed up its balances with API and API was 1n discussion with them. In the meantime Sicagen India Limited came under pressure from various share holders and sold the asset to N/s. Golden Star Asset Consultants P. Ltd. Hence the loan at the time it was granted was given by Sical Logistics was a good one but subsequently the advance became bad owing to chang....
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....o the group to settle the depositors of MCC Finance Ltd. Also the following is the scheme submitted by the company in 2004 which details that public deposits of upto 3 lacs will be settled upto 65% deposits exceeding 3 lacs will settled at 50% and further deposits will he settled at 25%. We feel that since Sicagen India Ltd has got a claim which will rank below public deposits it will not get the same treatment and assurances of the promoters of MCC Finance Ltd. It is not within contemplation that the promoters will bring in their personal funds to repay amounts other than public deposit which itself they have repaid only partially. Hence we can only give a valuation of 5% of the value of advances given by Sicagen India Ltd which comes to around Rs. 11 crores comes to Rs. 55 lacs. However as the company is in liquidation and the process of winding up and making representations before the liquidator is cumbersome we have to give a 50% discount to this value. Hence we believe that a value of 27. 5 lacs shall be fair. Sical Ships Limited Sicagen India Limited had lent moneys to Sical Ships Limited to the extent of Rs. 388 crores among other amounts during 2001- 2005. Sical Shi....
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....nces were given to MAC Clothing & Profad during 1990s by Sical Logistics Limited. It was transferred to Sicagen India Limited during 2007-08 via demerger. At the time of grant of lCD, Profad was a viable advertising company & MAC Clothing was doing some viable garment business Both these business went into difficulty. Pro fad 2002 end / 2003 went into liquidation and these assets were sold to Golden Star Assets Consultants Pvt Ltd at agreed consideration. The relevant extract of valuation report is enclosed. b. MAC CLOTHING LTD Valuation of Advances given by Sicagen India Lid to MAC Clothing Ltd Recoverable value/replacement value/book value Based on last drawn estimates of accounts Fixed Asset Current Assets, Loans & Advances 25,000 ---- 400,000 25,000 Current liabilities & provisions 5,618 . . 425,000 5,618 Net asset value Total liabilities of Mac Clothing Ltd. Realisable value to lenders 419,382 13,875,000 419,832 Percentage vale of lenders 0. 030 Loans given by Sicagen IndIa Ltd to Mac Clothing Ltd amounts to Rs. 1,13,00,000/- The above table shows the percentage of assets available as against loan at 3. 0%. Based on this percentage....
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....gner company (i. e MIs Sicagen India Ltd.,) the valuation was 1 to 2% of total debts. Q. No. 8: What is the rational for making valuation? Ans: Since the collection risk was more, we have bargained to get the debts assigned for 1% of the value. " Shri M. Rajamani also explained before AC the existence of the debts by the companies, the quality of the debts and the existence of the legal rights for co!Iection of the debts possessed by M/s Golden Star Assets Consultants Pvt. Ltd., and the efforts made to recover the debts. Further, Shri M. Rajamani in reply to Question no. 16 to the statement recorded under section 131 of the IT Act on 03. 02. 2014 stated that he has agreed to the computation of the business income in the hands of the company for the AY 2013- 14 on the transactions done by M/s Golden Star Assets Consultants Pvt. Ltd. with M/s MCC Finance Limited for the AY 2013-14. The actual collection of the debts due from M/s MCC Finance Limited by M/s Golden Star Assets Consultants Pvt. LtcL, happened after one year from the date of assignment. Now coming to the issue of M/s. Golden Star Asset Consultants P Ltd not showing the debts in its books at full value and only a....
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....e assessee. Also the financial health of M/s API Ltd. at the time of transfer of debt was not satisfactory and even though the company has come out of BIFR, it appears to be suffering from financial hardship. It is also seen from various submissions made by the assessee that the change in promoters of M/s API Ltd. has happened after the date of assignment. On the date of assignment, there is no doubt that this debt was owed by M/s API Ltd and subsequently transferred to old promoters. Therefore, it can be concluded that the AO has brought on record, facts pertaining to change of promoter which are events occurring after the date of assignment, to arrive at conclusions as on the date of assignment, which is erroneous. The fact that Balance sheets of M/s API Ltd. did not re1ect the liability towards the assessee is not relevant in judging if there existed a valid debt in the books of the assessee. As regards the issue pertaining to M/s MCC Finance Ltd., the view taken by the AC that the arrangement between the assessee, M/s. Golden Star Asset Consultants P Ltd and M/s MCC Finance Ltd. appears premeditated is incorrect. Mr. Rajamani, a Director of MIs. Golden Star Asset Consultants ....
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....sion about the colorable devise adopted by M/s GKN Sinter metals Pvt. Ltd., on the ground that the same was done to compensate Mahindra and Mahindra for the surrender of the 51% share holding. In the present case, the assignee is collecting the entire debts from the parties and no amount is being paid to the assessee company i. e assignor, over and above the purchase consideration. The transactions entered by the appellant company with M/s Golden Star Assets Consultants Pvt. Ltd., are at arm's length. The quality of the debts being outstanding over long period were also not disputed. The facts of the present case are not identical to the facts in the case of M/s GKN Sinter Metals Limited. The facts of M/s GKN Sinter Metals Ltd. decided by Honourable ITAT PUNE 'A' BENCH cited (supra) have no bearing on the assessee's case. On the other hand, I find that the facts of the assessee's case are identical to facts contained in a decision of the Ahmedabad Tribunal in the case of M/s Torrent Pharmaceuticals Ltd Vs ACIT in ITA No. 333 and 346/AHD/2006. Here, the Tribunal has allowed capital loss oi sale of debts to an asset collection company. To sun up, I find the transactions between t....
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....s approved the decision of Madras High Court in the case of Mr. M. V. Valliappan Vs ITO [170 ITR 238]. Applying this ratio laid down in these decisions, I find that in the present case, the arrangement between the Appellant and M/s Golden Star Assets Consultants Pvt. Ltd., was perfectly legitimate and arrived at on the commercial considerations and on arm's length principle. On these facts, I do not find force in the AO's allegation that the assignment of debts was sham transaction, bogus transaction and was a colorable devise for tax evasion. Therefore, Ground nos. 2 to 10 dealing with the claim of Capital loss of Rs. 56,48,55,180/- is allowed. " Aggrieved, the Revenue is in appeal before us. 14. We have heard the rival submissions and perused the material available on record. The primary facts stated herein above remain undisputed and hence, the same are not reiterated for the sake of brevity. At the outset, we find that the assignee company M/s. Golden Star Asset Consultants (P) Ltd., is a related party with the assessee company, in view of the fact that Mr. Rajamani was earlier director in assessee company and also a founder director in M/s. Golden Star Asset Consultants ....
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....s of recovery of debts, the Revenue should take action in the hands of assignee company for those respective years in the manner known to law. That again, in our considered opinion, cannot come in the way of not accepting the stand of the assessee. To this extent, the argument of the Ld. DR is not accepted. The Ld. D. R. vehemently argued before us that the loans payable by API to the assessee company had been taken over by erstwhile promoters of API i. e. M/s. South India Travel Pvt Ltd., Hence, API as such, is not liable to make any payment to the assessee. This fact has been duly confirmed by them in response to notice under Section 133(6) of the Act directly before the Ld. A. O. in writing. In other words, the assessee should only recover the amounts from M/s. South India Travel Pvt Ltd., and not from API. The Ld. D. R. vehemently argued that while this is so, where is the need for the assessee to assign this particular debt in favour of M/s. Golden Star Asset Consultants (P) Ltd., for a paltry sum and incur capital loss thereon and consequently set off of the same with long term capital gains on sale of shares and property. To buttress this argument, the Ld. A. R. drew our att....
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.... Finance Ltd., allotted shares in lieu of the debt outstanding towards M/s. Golden Star Asset Consultants (P) Ltd., shortly after transfer. Also Mr. Rajamani was one of the Directors on the board of the assessee company became a Director in MCC Finance Ltd. This sequence of event of Mr. Rajamani leaving the assessee company, floating a new company and joining the board of MCC Finance Ltd., appears to be a preplanned strategy adopted by the assessee, in order to arrive at bogus capital loss especially since the assignment was done at a paltry sum. 18. We find from the sequence of events narrated herein above, Mr. Rajamani became a Director of M/s. Golden Star Asset Consultants (P) Ltd., only on 15. 11. 2012 i. e. after the date of assignment of debt in favour of assignee company. It is an undisputed fact that MCC Finance Ltd., was under liquidation till November 2011 and there was no directors during liquidation and that the company was only managed by official liquidator. We find that learned CIT(A) had given a categorical finding in page- 22 of his order that MCC Finance Ltd., came out of liquidation by an order of Madras High Court dated 09. 11. 2012, Mr. Rajamani became a direc....