TaxTMI 
TaxTMI 
2025 (3) TMI 289
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.... income of Rs. 27,56,70,614/- under the normal provisions of the Act and book profit u/s 115JB of the Act of Rs. 1,28,80,47,039/-. The case of assessee was selected for scrutiny assessment and the assessment was subsequently framed by the Assessing Officer u/s 143(3) of the Act on 30.03.2015 determining total business income of the assessee at Rs. 84,94,28,649/-, against the returned income of Rs. 27,56,70,614/-, by making various additions/disallowances of Rs. 13,19,12,485/- as capital gains under normal provisions of the Act and Rs. 129,12,24,408/- as book profits u/s 115JB of the Act. 3. Aggrieved by the order of the Assessing Officer, the assessee has filed appeal before the ld. CIT(A) who confirmed/deleted some of the additions/ disallowances made by the Assessing Officer. ITA No. 1184/Ahd/2018 - Assessee's Appeal 4. Aggrieved by the order of the Ld. CIT(A) confirming the additions/disallowances made by the Assessing Officer, the Assessee is now in appeal before the Tribunal on the following grounds:- "Ground No. 1: Levy of capital gains under section 45 of the Act considering demerger of the treasury undertaking as non-qualifying demerger. 1.1 On th....
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....liabilities on the date of demerger of the undertaking, the same is required to be transferred to the resulting company. 1.4 Without prejudice to above, on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in observing that demerger of the undertaking was undertaken to avoid payment of taxes under the Act. 1.5 Without prejudice to above, on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in affirming the order of the learned AO seeking to tax fictional and non- existent income in the hands of the Appellant, which is against the principles of law. 1.6 Without prejudice to above, on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in affirming the order of the learned AO and failed to appreciate that in order to levy capital gains tax on the Appellant, it is a condition precedent that the alleged capital gains must arise from transfer of capital assets by the Appellant to its shareholders, which condition is not satisfied in the present case. 1.7 Without prejudice to above, on the facts and in the circumstances of the case and in law....
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....ces of the case and in law, the Hon'ble CIT(A) has erred in affirming the order of the learned AO and not appreciating that even if the allotment of shares of Sterling (resulting company) to the shareholders of Appellant is considered as distribution of dividend under section 2(22) of the Act, quantum of dividend which is paid by way of specie distribution of assets needs to be considered as market value on the date of distribution and not average book value of shares of resulting company. Ground No. 3: Disallowance under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 ('Rules') 3.1. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in disallowing expenses amounting to Rs 9,48,784 (in addition to Rs 17,39,793 voluntarily disallowed by the Appellant) under section 14A of the Act by applying provisions of Rule 8D the Rules since the Appellant has already identified and disallowed expenditure incurred in relation to income which does not form part of total income under the Act. 3.1.1. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in stating that no separate b....
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....cumstances of the case and in law, the Hon'ble CIT(A) has erred in adding back the allowance of Rs 9,48,784 under section 14A of the Act in the book profits under the provisions of section 115JB of the Act." 5. Ground No. 1 - Levy of capital gains under section 45 of the Act considering demerger of the treasury undertaking as non- qualifying demerger; Ground No. 2 - Levy of Dividend Distribution Tax 5.1 The facts relating to this issue are that, during the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed transfer of its so-called treasury unit to M/s. Sterling Addlife India Ltd. (herein and after referred to as 'Sterling') as per order of Hon'ble Gujarat High court in the petition no 88 of 2010. In response to said transfer, Sterling had given 2,68,01,557 of its shares to the shareholders of the assessee company. As the transfer of so-called treasury unit did not appear to be demerger of a unit, the Assessing Officer issued a show cause notice dated 05.03.2015 asking the assessee to show cause as to why the transfer of so called treasury unit, which was claimed as demerger by the assessee company, should be treated as not a dem....
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....have been transferred at book values immediately before the demerger. • Sterling has issued shares to the shareholders of the assessee in the ratio of 2,961 shares of Sterling for every 1000 shares held by them in of the assessee-company. • The scheme of demerger was approved by all the shareholders of the assessee; accordingly, all the shareholders of the assessee received shares of Sterling in the ratio as sanctioned by Hon'ble Gujarat High Court. • Regarding the transfer of the undertaking is on a going concern basis is concerned, it was submitted that treasury undertaking has been transferred on a going concern basis to Sterling. 5.3 The Ld. Counsel for the assessee, therefore, submitted that the Treasury Undertaking of the assessee fulfils all the conditions laid down in section 2(19AA) of the Act. Hence, demerger of the Treasury Undertaking by the assessee to Sterling should be held to be in compliance with provisions of section 2(19AA) of the Act and accordingly, the demerger of treasury undertaking be exempted from capital gains tax under section 47(vib) of the Act. 5.4 The Ld. DR, on the contrary, submitted that the transfer of ....
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....asury Segment as per the segment reporting in the audited balance sheet. However, as per the consolidated balance as on 31/3/2010 the investment in mutual fund was reflected at Rs. 1,00,09,392/- only. The appellant had admitted that the total assets of the Treasury Segment actually stood at Rs. 33,23,5,845/- and the figure of Rs. 36,24,90,963/- as total assets of the Treasury Segment reported in the audited accounts was a 'mistake'. On admission of the mistake the A.O has held that the appellant has failed to reconcile the difference between mutual funds held as on 31/3/2010 by the Treasury Segment. As on 7/10/2010 the value of mutual funds at market value has been reflected at Rs. 5,09,783/- before the Hon'ble High Court. This meant that there was redumption of mutual funds between the period 1/4/2010 to 6/10/2010. The A.O has rightly pointed out that the redumption of assets will only give rise to corresponding increase in some other assets like cash/bank balance of the treasury segment. However, no such assets have been reported to the Hon'ble Court in the trial balance of treasury segment. The appellant has admitted that the Treasury Segment did not have a separate bank acc....
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.... treated as an undertaking by the appellant. Thus, the A.O has questioned the action of the appellant that in one year the liabilities were accounted for in the trial balance of the Treasury unit but were not accounted for in the subsequent years. This has resulted into transfer of only assets and NIL liabilities to Sterling as on 07/10/2010. Thus, the A.O has concluded that the Treasury Segment has not been transferred as a going concern leading to violation of sections prescribed u/s.2 (19AA) (i), (ii) of the act. According to the appellant the income generated out of the activities of the Treasury Segment has been offered to tax under the head capital gain and dividend income is claimed as exempt and no income of Treasury Segment was offered as business income. A.O has correctly pointed out that the various investments made by the appellant in the shares of Blue Information, IDBI, Trent etc. were investments and cannot be considered as business activities and so were the investments in mutual funds. Thus, according to the A.O as per the stand taken by the appellant the investments made by the Treasury Segment were always treated by the appellant as capital assets and it never tr....
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....to and it is clear from the submission of the appellant as well as the findings of the A.O that the profit of Treasury Segment was not ascertainable. The investment activities of the appellant, as rightly pointed out by the AO, have continued even after the treasury segment that was suppose to handle these activities, was transferred to Sterling. Thus, the intention of the appellant was never to transfer the investment activities undertaken by the treasury segment but to transfer certain assets only to Sterling without any liabilities. The liabilities of the treasury segment were reduced to Nil on the ground that they pertain to different divisions/segments. If a Macro view is taken on the overall transaction that has been undertaken by the appellant then it appears that as per the order of Hon'ble High Court, Sterling had issued 2961 equity shares of Rs. 10 each in lieu of 1000 equity shares of Rs. 10 each to shareholders of the appellant. Accordingly, the shareholders of the appellant were issued 2,68,01,557 shares of Sterling. Further, by means of the so called demerger of Treasury Segment the appellant had ended up transferring the shares of Sterling i.e. it's assets, numbering....
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....nt has distributed its assets/receivable from Sterling to its shareholders thereby attracting Dividend Distribution Tax on Rs. 61,91,15,966/-. Accordingly, the ground of appeal 1 & 2 are hereby dismissed." 5.5 Heard both the parties on this issue and perused the material available on record. The provisions of Section 2(19AA) read as under:- "[(19AA) "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that- (i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger; (ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger; (iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values ....
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.... by the demerged company to the resulting company, if the resulting company is an Indian company;" 5.6 The elevation of the Assessing Officer was that the transfer of asset held by the Treasury Unit was not a demerger within the provisions of Section 2(19AA) of the Act which the Ld. CIT(A) has also affirmed. This is the fact on record that all the properties of the Treasury Undertaking immediately before the demerger became the properties of Sterling and it was submitted that no liabilities were existing on the date of demerger, it can be considered that the conditions of Section 2(19AA) are fulfilled. It cannot be disputed that the Treasury Unit is also a segment of the business activity. On this issue, the Ld. AR at page No. 1379 of the paper-book submitted as under:- "The schedules to the accounts for the year ended 31.03.2009 shows the Treasury Segment Assets at Rs 39,23,05,436 and the Treasury Segment Liabilities at Rs. 37,15,82,049. Similarly, schedules to the accounts for the year ended 31.03.2010 shows the Treasury Segment assets at Rs. 36,24,90,963 and Treasury Segment Liabilities at Rs. NIL Comparison of the Trial Balances as on 31.03.2009 and 31.03.2010 of th....
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....rence, the ratio of the Revenue Authorities detailing the entire events, facts and legal proposition is reproduced as under:- "According to A.O as per the Explanation-1 the undertaking shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Further sec.2(19AA)(vi) refers to the transfer of the undertaking on a going concern basis. According to the A.O the appellant has not transferred the treasury undertaking on a going concern basis to SAIL. The A.O. has pointed out too many deficiencies as well as shortcomings in the order which according to the A.O. goes on to prove that the transfer of treasury undertaking was only a transfer of capital asset and not a demerger of treasury undertaking as per section 2(19AA) of the Act. It is seen from the submissions of the appellant as well as the findings of the A.O. and as a matter of fact that the business of treasury undertaking was never well defined. The appellant itself has submitted that the investment that it had made in the two subsidiary comp....
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....f the Treasury Segment. The A.O has also verified the trial balance of the treasury segment for A.Y.2009-10. According to the A.O the shares of Blue Information Ltd., Trent Limited and bonus shares of IDBI Ltd. were not reflected as assets of Treasury Segment. Further the shares of Shivalik Waste Management Ltd., were also not reflected as assets of the Treasury Segment in the trial balance for FY 2008-09. However, the shares of Blue Information Ltd., Trent Ltd., bonus shares of IDBI Ltd. and shares of Shivalik Waste Management Pvt. Ltd. were shown as assets before the Hon'ble High Court. The A.O has observed that the appellant had shown market value of shares to Trent Ltd. at Rs. 500 per share whereas on 7/10/2010 the market value was Rs. 1,045/-. Similarly, the market value of Blue Information Ltd. does not correspond with the market value as on 7/10/2010. As the bonus shares of the IDBI too were shown as assets of the Treasury Segment before the Hon'ble High Court and other shares of IDBI were not reflected in the trial balance of the appellant. On enquiry by the A.O, the appellant submitted that as these were the bonus shares, their value was 'Zero' and they did not appear in t....
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.... a going concern, being demerged, has not been fulfilled. Further, the A.O has pointed out that out of total shares of SAIL i.e. 2,68,01,490 shares; 2,00,510 shares were purchased in F.Y.2006-07, 2,50,000 shares were purchased in F.Y.2007-08 and 31,000 shares were purchased in F.Y2009-10. The balance of 2,63,19,980 shares of SAIL were purchased before the Treasury Segment came into existence i.e. AY 2007-08. According to AO the appellant has not reflected the details of corresponding liability incurred for acquisition of shares of SAIL. Thus the AO has analysed the functioning of treasury segment as an 'undertaking' and the treatment given by the appellant for inclusion of certain assets and exclusion of liabilities from the treasury segment. Based on this AO has concluded that the appellant has never treated the treasury segment as an 'undertaking'. I agree with the finding of the AO based on facts discussed above. On the issue of 'liability' of Treasury segment, according to A.O., as on 31/3/2009, the Treasury Segment had assets of Rs. 39,23,05,436/- and the liabilities were at Rs. 37,15,82,049/-. The accounts for the year ending 31/3/2010 show the assets of Treasury seg....
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....nt. Therefore, the transfer of assets as per the petition No.88 of 2010 cannot be treated as qualifying demerger of undertaking by the appellant when read with section 2(19AA) of the Act. It has been held by the Bombay High Court in the case of Thomas Cook Insurance Services in the Company Scheme Petition No. 99 of 2015 with Company Summons for Direction No. 892 of 2014 dated 10/09/2015 that (para 5 of the order) "In any event, by sanctioning the present scheme, this court is not in any way accepting the company's case that the scheme, as framed, complies with the provisions of 'demerger' within the meaning of 2(19AA). In fact, this court is inclined to clarify that the sanction of the scheme, as proposed by this court, does not in any way bind the Income-tax Department to take any particular view of the scheme of arrangements sanctioned by this court insofar as the tax implications of the transaction are concerned." The A.O has also further pointed out that even after the demerger of the Treasury Segment the appellant has continued its investments in mutual funds etc. Thus, it appears that the treasury segment which had the holding of the shares of SAIL as its main assets was deme....
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....f Rs. 61,91,15,966/- of SAIL in return. I agree with the stand taken by the A.O and with due regards and respect to the order of Hon'ble High Court I hold that the said demerger was not as per the provisions of sec.2(19AA) of the Act for the reasons mentioned above. It is not a case wherein the AO is not accepting the order of Hon'ble High Court. It is case where the AO is applying section 2(19AA) of the Act to the appellant. Hon'ble High Court has not referred to section 2(19AA) of the Act in its order. With due respect the order of Hon'ble High Court, it is to be seen that for not considering a transaction as a transfer and thereby claiming exemption u/s 47(vib) r.w.s. 45 of the Act, whether the appellant has fulfilled all the conditions prescribed u/s 2(19AA) of the Act or not. I agree with the stand taken by the AO and based on the discussions above, hold that the appellant has not fulfilled all the conditions u/s 2(19AA) of the Act, thereby attracting tax under the head 'income from capital gain' on transfer of its assets. Transaction between the appellant company and SAIL will have to be treated as transfer of capital assets. Accordingly, I agree with the calculation of L....
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....61, a demerger involving transfer of capital assets by the demerged company to the resulting company (Indian Company). will not attract levy of capital gain tax. Similarly, under section 47(vid) of the Income Tax Act, 1961 if there is an issue or transfer of shares by the resulting company in consideration of the demerger of the said undertaking(s), to the shareholders of the demerged company, the transaction will not be amenable to capital gains tax. At the same time, a demerger as mentioned in Section 2(19AA) of the Income-Tax Act, 1961 is subject to fulfilling the conditions stipulated in Section 2(19AA) of the Act and shares have been allotted by the 'resulting company' to the shareholders of the 'demerged company' against the transfer of assets and liabilities. The process of demerger generally consists of following transactions: • Transfer of assets and liabilities by the transferor company to the resulting transferee company; • Transfer/ extinguishment of shares of the transferor company; and • Issuance of shares of resulting transferee company to the shareholders of the transferor company. All the abovementioned transactions have be....
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....e us, Ld. Counsel for the assessee contended that :- • As per section 14(1) of the Act only those expenses which have a proximate nexus with the exempt income can be disallowed under section 14A of the Act. Thus, expenses which are actually incurred for earning tax free income is to be disallowed and it cannot be assumed that the expenses may have been incurred for earning tax free income. • Reliance in placed on the Delhi Tribunal decision in case of Wimco Seedlings Limited vs DCIT (107 ITD 267), wherein it is held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. • All the investments yielding exempt income were made out of own funds. As per audited financial statements of RBHIL, RBHIL had own funds of Rs. 137,47,75,048 (share capital of Rs. 9,05,15,220plus free reserves of Rs. 128,42,59,828) for the year ended 31 March 2011. As against these owned funds, investment yielding exempt income amounted to only Rs. 37,54,06,040. • That RBHIL had generated net cash from its operating activities amounting to Rs. 104,15,44,432 whereas additional investment made during the year yiel....
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.... for the treasury division and it has also failed to furnish the relevant basis for allocation of this expenses and also failed to substantiate with relevant material for not allocating the common management expenses towards administrative expenses In the light of the above facts and circumstances we justify the decision of the Ld.CIT(A) for the disallowance u/s 14A r.w. Rule 8D to the extent of Rs. 19,491/- as computed by the assessing officer in para 8.11 of the assessment and we delete the other part of expenses in the category of interest disallowance to the amount of Rs. 23,28,570/- for the reason supra in this order. Accordingly, the appeal of the assessee is partly allowed." 6.7 During the year, the Assessing Officer made disallowance on account of interest expenses of Rs. 7,74,777/- (page No. 37 of Assessment Order). Respectfully following the decision of the Tribunal in assessee's own case for AY 2008-09 (supra), the disallowance made by the Assessing Officer u/s. 14A of the Act to the extent of interest expenses amounting to Rs. 7,74,777/- is hereby deleted. This ground of appeal of the assessee is partly allowed. 6.8. In the result, the appeal of the assessee is....
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....efit of enduring nature of registration of product has no merit. In the light of the above facts and circumstances we observed that Id. CIT (A) has correctly deleted the impugned addition, therefore, the appeal of the revenue is dismissed on this issue." In the absence of any change in the factual matrix and the legal preposition, we decline to interfere with the order of the ld. CIT(A) on this issue. This ground of appeal of the Revenue is dismissed. 8. Reduction of claim u/s 80IC - Rs. 48,95,15,652/- 8.1 This ground relates to the deletion of addition by the Ld. CIT(A) of Rs. 48,95,15,652/- made by the Assessing Officer on account of reduction of claim u/s 80IC of the Act. In this regard, the Assessing Officer observed that the assessee has claimed a sum of Rs. 98,94,80,551/- as deduction u/s.80IC of the Act for its unit at Baddi, Himachal Pradesh being 100% of the profit of the unit. On perusal of the accounts of the assessee, the Assessing Officer held that the turnover of this unit as per the P&L Account filed for the unit was shown at Rs. 326,34,37,682/-. He, thus, held that since the Baddi unit of the assessee-company only possesses manufacturing assets and is en....
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....R contended that :- • All the conditions of section 80IC of the Act has been complied with and hence profits derived by the business carried on by the Baddi unit is eligible for deduction in accordance with the provisions of the said section. AY 2008-09 is the second year of the claim of deduction under section 80-IC of the Act and the claim of the deduction was accepted by the Revenue in the scrutiny proceedings under section 143(3) of the Act. Further there is no dispute on compliance of conditions of section 80IC of the Act. • The Appellant is maintaining separate books of accounts for Baddi and Kalol unit and all the incomes and expenses of each unit have been accounted for directly in the respective books. Further, all the common expenses i.e. sales promotion, administrative and selling expenses etc. have been accounted for on actual/ allocated on the basis of sales. Further there is no dispute by the Revenue on allocation of expenses, between eligible unit and non-eligible unit. • Tax deduction is admissible on the profits earned from the business carried on by the undertaking and 'business' means group of organized activities with a....
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....his issue. The Baddi unit has derived profit from the selling of the product manufactured by it. The profit cannot be derived of only manufacturing activities unless the manufactured goods are sold. It is required to complete the whole cycle consisting of different components i.e. production, marketing and selling of product etc. It is undisputed facts that in most of the cases the manufacturing unit and its sale and marketing units are situated at different places in order to capture the market of the product on different geographical locations. We observe that assessee has carried all its business activities as a whole business and the same cannot be segregated from each other. After perusal of material on record we observe in the case of the assessee the sale and market division are the integral part of the manufacturing unit which cannot be separated on artificial basis. In the case of the assessee there are only two units located at Kalol and Baddi and while claiming tax benefits incomes and expenses incurred for Kalol units has been reduced from the total profits and deduction has been claimed on the basis of profit attributable to Baddi unit. The marketing and distribution c....
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.... the Act. 9.2 Aggrieved by the order of the Assessing Officer, the assessee has filed appeal before the ld. CIT(A) who deleted the addition. 9.3 Aggrieved by the order of the Ld. CIT(A), the Revenue filed appeal before the Tribunal. 9.4 Before us, Ld. DR contended that :- • The contentions of the assessee cannot be accepted in view of the fact that scrap income does not have first degree of nexus with the manufacturing profits. • Ld. DR has relied on the judgment of the Hon'ble Apex court in the case of Liberty India (317 ITR 216) wherein it was held that the profits of the business of the undertaking will include only those streams of income which have close and direct nexus with the undertaking. Relevant extract is reproduced as under: 14. Analyzing Chapter VI-A, we find that Sections 80-IB/80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that Section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business.....
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....cturing process were eligible for deduction u/s. 80IC. Again, the Gujarat High Court in the case of CIT vs. Shreeram Tech Ltd. 33 taxmann.com 194 has held that compensation received by industrial undertaking from insurance companies on account of loss raw materials and finished products in fire, would be eligible for deduction u/s. 80IA of the Act. In view of the above, we do not find any infirmity on the order of ld. CIT(A) in allowing the claim of deduction u/s. 80IC of the Act on scrap income. We accordingly hold that the assessee is eligible for deduction u/s. 80IC of the Act on income from sale of scrap." 9.7 Respectfully following the order of the co-ordinate bench of this Tribunal in assessee's own case in ITA No.1366/Ahd/2015 order dated 16.03.2022, and in the absence of any change in the factual matrix and the legal preposition, we decline to interfere with the order of the ld. CIT(A) on this issue. This ground of appeal of the Revenue is dismissed. 10. Disallowance u/s 40(a)(ia) of the Act - Rs. 2,06,85,173/- 10.1 Assessing Officer observed from Form 10CCB submitted by the assessee that the assessee's computation for eligible profits u/s 80IC included a sum of....
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....ct, total income of the Appellant will increase to the extent of addition made and consequently deduction under section 80IC of the Act is required to be enhanced to the extent of addition made. • There is no change is facts and circumstances as compared to AY 2008- 09 to AY 2010-11 and since, claim of deduction under section 80-IC was allowed by ITAT vide MA after due verification, therefore principle of consistency is applicable and claim of deduction under section 80-IC cannot be disturbed for the year under consideration 10.4 Heard both the parties and perused the material available on record. We have also gone through the CBDT Circular No. 37/2016, which reads as under:- CIRCULAR NO. 37/2016 F. No . 279/Misc./140/2015/ITJ Government of India Ministry of Finance, Department of Revenue Central Board of Direct Taxes New Delhi, Dated 2nd November 2016 Subject: Chapter VI-A deduction on enhanced profits- Reg. Chapter VI-A of the Income-tax Act, 1961 ("the Act"), provides for deductions in respect of certain incomes. In computing the profits and gains of a business activity, the Assessing Officer may make certain disallowa....