TaxTMI 
TaxTMI 
2016 (6) TMI 1401
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....14,21,618/- 3. The ld. AR submitted that the assessee is a public limited company with objects, inter alia, of manufacturing yarn. The Assessee filed the return of income on 30/03/2011 for the Assessment year 2009-10, admitting a total income of Rs. 10,28,03,164/-. The return was initially processed u/s 143(1) of the Income Tax Act, 1961. The case was selected for scrutiny and a notice u/s 143 (2) was issued on 15/09/2011. It is observed that the Assessee company had been incurring losses, since late eighties. There was a strike resorted to by the Labour union of the Assessee Company, way back in 1993, which later resulted in a lockout declared by the Management. The Management could not continue to carry on the business, primarily owing to the continued strike by the labour union. Owing to the above the Company had gone sick and the Company was constrained to approach BIFR, for remedial measures. However, BIFR had passed an ex-parte order, ordering winding up of the Assessee Company and had accordingly sought to appoint an official receiver. 3.1 The Company challenged the order of the BIFR, by a writ petition before the Madras High Court, being WP No 19907 of 2001. In the me....
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....ce. The Assessee had paid these persons for such services, by way of commission, which totaled to about Rs. 1,98,17,992/-. These commission payments were made by account payee crossed cheques after duly deducting TDS from such payments. The recipients had also duly reflected / accounted for these sums in their respective accounts and returns as applicable. It will be pertinent to point out that this commission works out to less than 5% of the entire sale consideration. It was the contention of the assessee that it had to do all the above only to ensure that it continues to carry on the business after avoiding winding up, after such business was helplessly remained under lull. 3.4 In the course of the assessment proceeding the Assessee, claimed deduction u/s 48(i) for the following payments made: a) Payments made to workmen, of Rs. 8,07,43,083/- who had physically retained the possession (though the bank had taken token legal possession of the property) of the property by preventing the management from entering the property, by putting barricades etc; b) Payment made to secured creditor - Bank of Baroda, to the tune of Rs. 18.00 Crores/- to secure legal release ....
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....has to be seen in a wider manner and given a larger liberal interpretation. In the present case, the Assessee shall endeavor to prove that the expenditure incurred or paid was absolutely necessary to effect the transfer and such amounts paid will fall under clause (i). 4. Regarding payment to workmen, it is submitted that the payment made to the workmen should be treated as expenses wholly and exclusively in connection with the transfer as contemplated under section 48(i) of the Income Tax Act 1961. According to the ld. AR, the workmen had forcefully taken possession of the factory premises of the assessee company by erecting barbed wire fence and virtually preventing ingress and egress from the property. This finding of fact was recorded by the Learned Assessing Officer in his Assessment Order. Thus the forced possession by the workmen had become an encumbrance which was not created by the assessee company by itself but thrust upon it. The management thought it wise, on the grounds of prudence and commercial expediency, not to take back those employees who brought about the strike in the year 1993 and continued till 2007. It is a statutory liability imposed on the employer to r....
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....ompany, being workmen within the meaning of the industrial Disputes Act, 1947 (14 of 1947); (b) "workmen's dues", in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely: (i) to (iv) ... (c) "workmen's portion", in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of- (i) the amount of workmen's dues; and (ii) the amount of the debts due to the secured creditors. Illustration. - The value of the security of a secured creditor of a company is Rs. 1,00,000. The total amount of the workmen's dues is Rs. 1,00,000. The amount of the debts due from the company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of workmen's dues and of the amount of debts due to secured creditors is Rs. 4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the security, that is Rs. 25,000. e. Section 529A is crucial for consideration of these appeals and it is reproduced as it i....
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....tor of the company as stated in Clause (c) of Sub-section (3) of Section 529 of the Companies Act. 16.3. Where a secured creditor opts to realise the security then so much of the debt due to such secured creditor as could not be realized by him by virtue of the statutory charge created in favour of the workmen shall to the extent indicated in Clause (c) of the proviso to Sub-section (1) of Section 529 of the Companies Act rank pari passu with the workmen's dues for the purposes of Section 529-A of the Companies Act. 16.4. The workmen's dues and where the secured creditor opts to realize his security, the debt to the secured creditor to the extent it ranks pari passu with the workmen's dues under Clause (c) of the proviso to Sub-section (1) of Section 529 of the Companies Act shall be paid in priority over all other dues of the company. Section 529A was inserted by Companies (Amendment) Act, 1985. By incorporation of this provision, workmen's dues rank pari passu with secured creditors. In other words, the workmen of the company in winding up acquire the status of secured creditors. Pertinently, while inserting Section 529A in the Companies Act by the Comp....
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....ntion to the following judgments: 1. Gopeenath Paul & Sons and another vs DCIT 278 ITR 240 (Cal) 2. CIT vs Shakuntala Kantilal 190 ITR 56 (Cal) 3. CIT vs Bradford Trading Company Pvt. Ltd., 261 ITR 222 (Mad) & 4. CIT vs Abrar Alvi 247 TR 312 (Bom) 4.6 Alternatively he submitted that the payment also qualifies for deduction u/s. 37(1), as the same was made on the grounds of commercial expediency. The need for such payments was imposed by a statutory liability. As a corollary the existence and continuity of the business has to be inferred. It was a fact that the Assessee Company would not have been able to secure release/possession of the property but for the compromise reached and approved by Madras High Court and the payment made. Thus the payment made to secure the release of the property and further to comply with the compromise reached qualifies for deduction u/s. 48(1). He also relied on the judgment of the Madras High Court in the case of CIT vs A. Venkataraman (1982) 137 ITR 846, wherein it was held that retrenchment compensation paid to the employees in terms of the agreement to sell was an allowable deduction incurred wholly and exclus....
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....all rights in relation to the secured assets as if the transfer has been made by the owner of such secured asset. Therefore, Section 13(6) inter alia provides that once the bank/FI takes possession of the secured asset, then the rights, title and interest in that asset can be dealt with by the bank/FI as if it is the owner of such an asset. In other words, the asset will vest in the bank/FI free of all encumbrances and the secured creditor would be entitled to give a clear title to the transferee in respect thereof. Section 13(7) refers to recovery of all costs, charges and expenses incurred by the bank/FI for taking action under Section 13(4). Section 13(7) provides for priority in the matter of recovery of dues from the borrower . It inter alia provides for payment of surplus to the person entitled thereto. Section 13(8) inter alia states that if the dues of the secured creditor together with all costs, charges and expenses incurred are tendered to the secured creditor before the date fixed for sale/ transfer the secured asset shall not be sold or transferred by the Bank/FI to the asset reconstruction company and no further steps shall be taken in that regard. Section 13(9) inter....
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....tors. Section 13(10) fortifies our view that the remedies for recovery of debts under the DRT Act and the NPA Act are complementary to each other. Further, Section 13(10) shows that the First Proviso to Section 19(1) of DRT Act is an enabling provision and that the said provision cannot be read as a condition precedent to taking recourse to NPA Act. Section 13(11) of the NPA Act inter alia states that, without prejudice to the rights conferred on the secured creditor under Section 13, the secured creditor shall be entitled to proceed against the guarantor/pledger; that the secured creditor shall be entitled to sell the pledged assets without taking recourse under Section 13(4) against the principal borrower in relation to their secured assets under the NPA Act. Section 13(3) states that, no borrower shall, after receipt of notice under Section 13(2), transfer by way of sale, lease or otherwise any of secured assets referred to in the notice, without prior written consent of the secured creditor. Thus, Section 13(13) further fortifies our view that notice under Section 13(2) is not merely a show cause notice. In fact, Section 13(13) indicates that the notice under Section 13(2) in e....
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....roperty. According to the ld. AR, sec.13(13) indicates that the notice under sec.13(2) in effect operates as an attachment/injunction restraining the borrower from disposing of the secured assets and for that property to fetch a higher rate dues of the bank had to be settled. The notice under SARFAESI acted as an encumbrance and the expenditure incurred to remove the said encumbrance certainly would fall within sec.48(i) of the Act. It is well admitted fact that the payment was made to Bank of Baroda only to clear the encumbrance it held in its favour, to facilitate transfer. It is also a fact that without removing this encumbrance, which was enforceable and the bank had already initiated measure to enforce the same, the transfer of property would have been impossible. 5.5 In this regard, he made reference to the following judgments: 1. Gopeenath Paul & Sons and another vs. DCIT 278 ITR 240(Cal) 2. CIT vs. Shakuntala Kantilal 190 ITR 56 (Cal) 3 CIT vs. Bradford Trading Company Pvt. Ltd. 261 ITR 222 (Mad) & 4. CIT vs. Abrar Alvi 247 ITR 312 (Bom.) 6. Regarding payment made to the sales tax department to the tune of Rs. 97,49,342/- to secure/....
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....he assessee to make the payment. It should be seen that the assessee had produced all the evidences which are more than adequate to establish such fact, genuineness, necessity and purpose of such payment, which were further corroborated by the fact of filing of returns thereof by the recipients. 7.1 It was submitted that with the production of fairly reasonable evidences pointing to such fact or even raising probabilities thereof would amount to discharge of onus by the assessee and thereafter the onus shift to the Department to disprove the same with more cogent and material evidence, supporting rejecting of evidences produced by the assessee. Further it was submitted that no reasons have been recorded in the impugned order to show that the assessee has not utilized the services of the recipients, except predominant prevalence of presumption of bad faith about the assessee and conjectures that no services would have been rendered by those brokers, to reject the all the good evidences produced by the assessee and the confirmations thereon made by the respective recipients. Further the AO and the CIT(A) had not rejected the payments of commission on the grounds that the same was ....
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....f commission paid had been reflected by recipient of commission in his income tax returns and same was accepted by the department, disallowance of such commission while computing capital gain in assessee's hands was not justified. (iv) It was held in Dhansiram Agarwala vs. CIT 217 ITR 4 (Gau) that where the genuineness and regularity of the accounts have not been challenged, the accounts are prima facie proof of the entries and the correctness thereof under section 34 of the Evidence Act, 1872. 8. Regarding business lull, it was submitted that the assessee could not carry on its business, owing to factors beyond its control, as already stated supra. The Management was forced to sell the property only to pave the way for resumption of business, at the earliest. The Technological obsolescence was yet another primary factor that also forced the management of the assessee to dispose of the old and obsolete machineries. Just because certain properties were either sold or planned to be sold, it cannot be a ground to draw an inference that the Company is in the process of winding up. Winding up is a process of law and it cannot be assumed, unless the same has happened. 8.1 The Compa....
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....ness only. 9. Regarding disallowance of bad debts, it is submitted that CIT(A) had confirmed the disallowance of bad debts claimed on the ground that the assesse did not furnish details to show that these amounts were offered as income in the earlier years. 9.1 It is submitted that the Learned Commissioner of Income Tax (Appeals) failed to appreciate that the bad debt, considering its nature, would not have come up in the first place, without offering the same as income either in an earlier year or in the same year. It may be noted that the amount of debt, written off as bad debts, etc. on the genesis of this account/amount, before the Assessing Officer. 9.2 It is submitted that the only ground on which this amount was disallowed by the Assessing Officer was that there no manufacturing activity during the year. It is to be seen that the Learned Commissioner of Income Tax (Appeals), did not even allude to the same ground to confirm the disallowance made by the Assessing Officer, instead Learned Commissioner of Income tax(Appeals) has stated as his grounds of confirmation of disallowance that "the assessee could not furnish the details to show that these amounts were offered....
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....3. The additional ground raised by the assessee is as follows: "The Commissioner of Income-tax(Appeals) ought to have considered the legal position that the company has earned business income in the form of interest receipts and consequently the business loss arising out of the business activities should be set off against the capital gain on sale of business assets." He prayed that above additional ground to be admitted in view of the judgment of the Supreme Court in the case of NTPC v. CIT (229 ITR 383)(SC) and according to him, it was inadvertently not raised before the CIT(Appeals). 13.1 It was submitted that the Commissioner of Incometax(Appeals) ought to have considered the amount of Rs. 56.17 lakhs credited to profit and loss account as interest which has arisen in the course of carrying on of normal business activities. The Commissioner of Income-tax(Appeals) ought to have considered the fact that in the subsequent years the business activities of the company have been revived and consequently, as the business of the company has been started again, the loss from business activities should be allowed. The above sales have been supported by sale bills and TNVAT....
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....ofits and gains' represent plus 'income' whereas losses represent 'minus income'. In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee" 14. The ld. AR submitted that the CIT(Appeals) ought to have considered the amount of Rs. 56.17 lakhs credited to profit and loss account as interest which has arisen in the course of carrying on of normal business activities. The CIT(Appeals) ought to have considered the fact that in the subsequent years the business activities of the company have been revived and consequently, as the business of the company has been started again, the loss from business activities should be allowed. The above sales have been supported by sale bills and TNVAT Returns and which have been over looked by the assessing authority also. The Commissioner of Income Tax (Appeals) ought to have considered the fact that the licences and registrations such as Sales Tax (TIN) were all in currency and this indicates that the company is engaged in the process of revival activities. The CIT(Appeals) ought to h....
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....viding information or providing means for exchange of information required for proper evaluation of facts and / or for decision making, identification of parties / things / assets / properties concerned and providing assistance in bringing about transaction or conclusion of transaction on mutually acceptable terms and conditions. The AR has made elaborate submissions without specifically mentioning the services rendered by the 51 agents to whom brokerage / commission payments were made. One of the fundamental requirements for allowing deduction in respect of commission payment is that there should be evidence of some services being rendered. He relied on the order of the Kolkatta Bench, ITAT in the case of United Traders Vs TRO 27 Taxman.com 293 (2012), wherein it was held that "It is a compulsory requirement for allowing deduction in respect of commission payment that there should be evidence of some services being rendered". The AR could not specify the services rendered by any agents and also did not produce any of the agents to whom commissions were paid for necessary verification during the course of appellate proceedings. It is also surprising that 51 persons who are closely ....
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.... 575, wherein it was held that the assesse has to pay the interest to the lessor for the delayed payment of lease amount. It was held that it was not an expenditure incurred wholly and exclusively in connection with the transfer. In the case of the assessee also there were interest payments to the workers and this expenditure cannot be said to be wholly and exclusively incurred in connection with the transfer and cannot be allowed as deduction while computing the capital gain. Hence, the Assessing Officer has rightly disallowed the expenditure claimed on account of payments made to workmen and settlement of staff. 18. Regarding the disallowance of payment to the Bank of Baroda, the ld. DR submitted that from the details furnished by the assessee, it is seen that the dues as on 31.3.2007 with the Bank of Baroda as on 28.4.2007 was Rs. 34,83,76,311/-. It is also seen from the credit facilities of Bank of Baroda, the security agreement shows the hypothecation of stocks, book debts, plant and machinery, pledge of stocks, equitable mortgage of factor land and buildings. It is pertinent to see from the nature of loan obtained by the assessee that they were in the nature of cash credit....
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.... repayment needs to be allowed u/s 48(i). 18.2 The assessee did not furnish any details regarding utilization of term loan from which Plant and Machinery and other assets were purchased and also the details of depreciation claimed in the earlier years on all those assets. In the absence of these details, it is not possible to know whether the assessee has claimed deduction in the earlier years on account of depreciation on the assets purchased by utilizing the term loan. As discussed earlier, the assessee has approached the High Court for according permission to sell the vacant land of 14.68 acres out of the total extent of 25.66 acres. In the judgment of the Hon'ble High Court delivered on 3.12.2007 (at Page 4, Para 2), it is clearly mentioned that the bank has accepted the one time settlement and received the amount of Rs. 18 crores towards the one time settlement in no lien account. This clearly proves that the assesse has received Rs. 18 crores from the prospective buyer i.e., M/s Alliance Mall Developers Co. Pvt. Ltd. before approaching the High Court to sell the vacant lands. Since the BIFR proceedings are pending before the High Court, the assesse has filed the applicatio....
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....The High Court followed the decision of the Supreme Court in the case of Arunachalam Vs CIT (1997) 227 ITR 222. The Apex Court held that outstanding dues, against mortgaged property, not to be deducted (CIT Vs Attil N Rao (2001) 252 ITR 880 (SC)]. The CIT(Appeals) agreed with the Assessing Officer in disallowing the expenditure relating to the bank payment and the order is confirmed. 19. The other ground raised by the assessee is that the Commissioner of Income-tax(Appeals) erred in sustaining the disallowance made by the Assessing Officer regarding the claim of set off of business expenditure/loss against Long Term capital gain, on the ground that there was no business activity of spinning and manufacturing of yarn and the Departmental Representative supported the orders of the lower authorities. 20. We have heard both the parties and perused the material on record. The claim of the assessee in this appeal is with regard to payment of Rs. 18 crores to Bank of Baroda and Rs. 8,07,43,083/- to workmen as a deduction out of consideration received from sale of capital asset. 21. Under sec.48 of the Act, the income chargeable under the head "capital Gains" shall be computed by ....
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....fect the transfer will be an expenditure covered by this clause. In other words, if, without removing any encumbrance, sale or transfer could not be effected, the amount paid for removing that encumbrance will fall under clause (i). In this case, sale of transfer could not be effected and the amount paid for removing that encumbrance will fall under clause (i) of sec.48 of the Act. The same view was taken by the Bombay High Court in the case of CIT v. Shakuntala Kantilal (190 ITR 56). This decision is followed by the Madras High Court in the case of CIT v. Bradford Trading Co. P. Ltd. (261 ITR 222), wherein it was held that the amount paid by the assessee to a third party to settle the pre-existing claim against transfer of asset as also litigation expenses constitute the expenditure incurred wholly and exclusively for transfer of capital asset and was deductible in computation of capital gain; amount reimbursed by the vendee towards such claim constitute part of sale consideration but deductible while computing capital gain. Similar view was taken by the Bombay High Court in the case of CIT v. Abrar Alvi (247 ITR 312). Further, Calcutta High Court in the case of Gopee Nath Paul....
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....ients. Further, the contention of the ld. Departmental Representative is that most of the recipients of this commission are either relatives or associates of the Managing Director of Sivananda Mills, Mr. Murugesan. The AO has given a finding that none of the commission payments were involved in the brokering of the transfer with Alliance Mall Developers Co. P. Ltd. (purchaser). Most of the persons have filed revised return or accounted the receipts in the next year as they were following cash method of accounting. Further, the contention of the ld. DR is that the purchaser had a broker viz. M/s. Hind Wastra Bandar, who has received the payment of Rs. 25.15 lakhs as brokerage. From this, the DR inferred that there is no necessity of payment of commission by the assessee. In our opinion, the reason given by the AO to deny the payment of commission is not proper. It is not unusual that both, purchaser and seller having separate brokers or middlemen to complete the transaction of transfer. The CIT(Appeals) has given a finding that the assessee has not produced brokers to show that they have rendered services. The power of the CIT(Appeals) is coterminous that of the AO and he should hav....
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....eing and it was not wound up the business. Therefore, issue is to be reexamined by the AO, whether it is reasonable or excessive. Accordingly, he is directed to disallow only that portion of the expenditure if he finds any amount excessive or unreasonable. Further, regarding the claim of bad debts, the same to be examined in terms of sec.36(1)(vii) r.w.sec. 36(2) of the Act. With regard to statutory liability like sales tax, ESI, PF etc., is to be allowed on actual payment basis in the assessment year under consideration in terms of sec.43B of the Act. Hence, we remit this issue to the file of the AO for fresh consideration. 28. The assessee has raised the additional ground that the company has earned business income in the form of interest receipts and consequently the business loss arising out of the business activities should be set off against the capital gain on sale of business assets. 29. In our opinion, the assessee deposited certain fund out of the amount received from sale of land and interest earned from that deposit as income from other sources and in view of the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals And Fertilizers Ltd. v. CIT (2....
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....0 028. Similarly, Smt. Vidya Rahul Reddy and Mr. Dipur Krishnamurthi were also paid Rs. 8 lakhs and both are staying at 12, Sathyanarayana Avenue, R.A.Puram, Chennai - 600 028. This made suspicious in the mind of CIT(Appeals) and disallowed the claim of commission payment. Against this, the assessee is in appeal before us. 33. Regarding the payments made to the workers for clearing the premises, the facts are that the assessee claimed this expenditure for the land sold to M/s. Alliance Mall Developers Co. (P) Ltd. This amount was reduced from the total sale consideration of the land at Rs. 40.78 crores in the computation of income from long term capital gains by the assessee. According to the AO, that expenditure is not supported by proper evidence and disallowance Rs. 48,80,215/-. 34. On appeal, the CIT(Appeals) observed that these amounts are paid by cash. However, the vouchers have been made in the month of April to June 2009 but the ledger shows cash payments were made in March 2010. According to the CIT(Appeals), the daily wage labour does not wait for so much time to receive wages. However, there is no evidence to show that the assessee engaged in labour contract to car....
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....of the payments made. 35.4 The ld. Authorised Representative of assessee further submitted that the Assessee had engaged the persons, who had rendered services and the Assessee had also paid for their services. In the process of the sale of land, the assessees had to cause cleaning up of the land to enable exact measurement of land, marking of boundaries and present the subject matter of land for sale, comprehensive, clean and clear. In such process the assessees had to employ scores of personnel to cut, remove and weed out bushes, remove debris from the areas over several period of days, intermittently. The assessee had to engage personnel specially skilled in doing such kind of jobs who were illiterate and working in an unorganized manner. These personnel did not normally come and work regularly but were coming and working erratically. Besides they had to be paid in cash only. However the CIT (A) has allowed only 25% of the expenditure for the cleaning charges. The CIT (A) ought to have allowed fully the expenditure. According to the ld. AR the CIT (A) wrongly allowed only 25% Learned Assessing Officer has grossly erred in disallowing all the claims of the Assessee on the commiss....