2025 (5) TMI 1546 - AT - Income Tax

LTCG computation - considering the cost of acquisition against sale of immovable property by the assessee during the A.Y.2015-16 - whether the revenue is right in passing the order i.e. the AO and the ld.CIT(A) who have adopted the value of Rs. 23, 872/- as the cost of acquisition of the impugned asset which has been recorded by the Company KICL (before the transfer of business of textile unit) for the purpose of computing the long term capital gain on the sale of immovable property in the hands of assessee for a consideration of Rs. 10.00 Crores HELD THAT - In light of the withdrawal of exemption under section 47A(1)(ii) of the Act for the transactions of the earlier years of the transferor (KICL) claimed exemption u/s. 47(iv) of the Act and the revenue has failed to tax the transferor in the asst. year 1998-99. The failure of the revenue to tax the income in the hands of the transferor of the asset cannot be a reason for denial of cost of acquisition as recorded in the books of the assessee as per the transfer deed and hence the action of the AO and that of the CIT(A) is devoid of merits and unsustainable in law. Therefore cost of acquisition of land and building recorded in the books of accounts of the assessee is to be considered for deduction from the sale consideration for computing the capital gain Long term capital on land and short term capital gain on building as the depreciation has been claimed on building and accordingly we direct the AO to re-compute long term capital gain. Thus the assessee succeeds in all the grounds raised on this issue. Waiver of loan from bank of Ceylon brought to tax u/s. 41(1) - Firstly the waiver of loan outstanding shown in the balance sheet of the assessee cannot be brought to tax u/s. 41(1) of the Act as held in CIT Vs. Mahindra and Mahindra Ltd. 2018 (5) TMI 358 - SUPREME COURT . Further the unpaid interest on loan waived if any cannot be termed as expenditure claimed under the Act since section 43B of the Act prohibits the deduction of such interest unless it is actually paid in the respective assessment year. Hence waiver of amount by the Bank of Ceylon whether it is principal or interest component cannot be brought to tax u/s. 41(1) of the Act. Thus we direct the AO to delete the same by allowing the related grounds of appeal filed by the assessee.

The core legal questions considered by the Tribunal in this appeal include:

1. Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] were justified in adopting the cost of acquisition of the immovable property as reflected in the books of the holding company (KICL) rather than the cost recorded in the books of the subsidiary company (KOIL/PLI) for computing long-term capital gains in the hands of the assessee following amalgamation.

2. Whether the AO's order giving effect to the earlier ITAT directions was sustainable, particularly regarding the computation of income and adherence to the ITAT's remand instructions.

3. Whether the addition made under section 41(1) of the Income Tax Act, on account of waiver of loan by Bank of Ceylon, was justified and taxable in the hands of the assessee.

4. Whether the order of the AO was barred by limitation and whether the CIT(A) erred in confirming the AO's order.

Issue-wise Detailed Analysis

1. Cost of Acquisition for Capital Gains Computation

Relevant Legal Framework and Precedents: The provisions of sections 47(iv), 47A, 49(1)(iii)(e), and 49(3) of the Income Tax Act were central to this issue. Section 47(iv) exempts capital gains on slump sale of a business between holding and subsidiary companies. Section 47A withdraws such exemption if the subsidiary ceases to be a subsidiary within seven years. Section 49(1)(iii)(e) deals with cost of acquisition in case of amalgamation, and section 49(3) provides that if exemption under section 47(iv) is withdrawn, cost of acquisition shall be the actual cost to the transferee.

Court's Interpretation and Reasoning: The Tribunal examined the chain of transactions: KICL transferred the textile undertaking to KOIL (its wholly owned subsidiary) by slump sale in 1996-97, initially exempt under section 47(iv). Subsequently, KICL sold its shareholding in KOIL to promoters of the assessee company in 1997, causing KOIL to cease to be a subsidiary within seven years, thus withdrawing exemption under section 47A. Consequently, capital gains became taxable in the hands of KICL for AY 1997-98.

Following this, under section 49(3), the cost of acquisition in the hands of KOIL/PLI is the actual cost at which the assets were transferred from KICL, i.e., Rs. 6.07 crores as valued by the Stamp Authorities and reflected in KOIL's books. The assessee company acquired these assets through amalgamation with KOIL/PLI in 1997, and accordingly, under section 49(1)(iii)(e), the cost of acquisition in the hands of the assessee is the cost as recorded in KOIL's books.

The AO and CIT(A) had instead adopted the original cost of acquisition as recorded in KICL's books (Rs. 23,872), ignoring the slump sale transaction and subsequent share transfer that made the initial exemption under section 47(iv) inapplicable. The Tribunal found this approach erroneous.

Key Evidence and Findings: The Tribunal relied on the transfer deed dated 03.02.1997, the stamp valuation of Rs. 6.07 crores, the share transfer documents dated 06.05.1997, the scheme of amalgamation approved by the High Court, and notes to the balance sheet confirming KOIL ceased to be a subsidiary of KICL. The ITAT's earlier order (ITA No.584/Mds/2017) had accepted the assessee's claim regarding cost of acquisition but had remanded the matter for verification, which was not complied with by the assessee.

Application of Law to Facts: The Tribunal held that the failure of the revenue to tax the capital gains in the hands of KICL for AY 1997-98 cannot be a reason to deny the assessee the correct cost of acquisition recorded in KOIL's books. The cost of acquisition for the assessee must be Rs. 6.07 crores with appropriate indexation, not the nominal cost recorded in KICL's books prior to the slump sale. The Tribunal directed the AO to recompute the capital gains accordingly.

Treatment of Competing Arguments: The revenue argued that the cost of acquisition should be the original book value in KICL, ignoring the subsequent transactions. The Tribunal rejected this, emphasizing the statutory provisions and the factual matrix showing the transfer of shares and cessation of subsidiary status, which triggered capital gains in KICL and altered the cost base in KOIL/PLI and consequently in the assessee post-amalgamation.

Conclusion: The Tribunal concluded that the cost of acquisition as per the books of KOIL/PLI (Rs. 6.07 crores) is the correct figure for computing capital gains in the hands of the assessee. The AO's and CIT(A)'s orders adopting the lower cost were unsustainable in law.

2. Compliance with ITAT Directions and Validity of AO's Order

Relevant Legal Framework: The AO was directed by the ITAT in its earlier order to reconsider the additions and verify certain factual aspects. The principles of natural justice and adherence to appellate directions were relevant.

Court's Interpretation and Reasoning: The Tribunal noted that the AO issued a notice seeking details from the assessee but received no response. The AO thus sustained the additions made in the original order dated 30.12.2010. The CIT(A) confirmed the AO's order, finding no fault as the assessee failed to furnish evidence.

Key Evidence and Findings: The Tribunal observed that the assessee had submitted detailed written submissions and documents during the appeal but did not respond to the AO's notice post-remand. The ITAT in the first round had accepted the assessee's contentions regarding cost of acquisition and loan waiver but remanded for verification.

Application of Law to Facts: The Tribunal found that the AO and CIT(A) were justified in confirming the additions due to the assessee's failure to provide further clarifications or evidence as directed. However, the Tribunal also held that the AO erred in not recomputing capital gains as per the accepted cost of acquisition.

Treatment of Competing Arguments: The assessee contended that no further clarification was required and the AO erred in reiterating the original findings. The revenue maintained the AO's order was in line with ITAT's directions.

Conclusion: The Tribunal partially upheld the AO's order in sustaining additions due to lack of evidence but directed recomputation of capital gains on correct cost of acquisition, thereby partially allowing the appeal.

3. Taxability of Loan Waiver under Section 41(1)

Relevant Legal Framework and Precedents: Section 41(1) deals with income chargeable on cessation of a trading liability. The Supreme Court's decision in CIT vs. Mahindra and Mahindra Ltd. (404 ITR 1) held that waiver of a loan is not taxable as income under section 41(1). Section 43B prohibits deduction of interest unless actually paid.

Court's Interpretation and Reasoning: The Tribunal noted that the AO had not examined whether the interest component of the waived loan had been allowed as deduction earlier. The Tribunal relied on the Apex Court ruling that waiver of loan principal is not taxable under section 41(1). The interest component, if unpaid, would not have been allowed as deduction earlier, and thus cannot be taxed as income now.

Key Evidence and Findings: The loan waiver amount was Rs. 2,39,57,911/-. The AO and CIT(A) had brought this to tax under section 41(1) without detailed analysis. The Tribunal found this approach contrary to settled law.

Application of Law to Facts: The Tribunal held that the waiver of loan amount, whether principal or interest, could not be brought to tax under section 41(1) in the absence of proof that interest was allowed as deduction earlier. The Tribunal directed deletion of this addition.

Treatment of Competing Arguments: The revenue relied on AO and CIT(A) orders to sustain the addition. The Tribunal rejected this, relying on the Apex Court precedent.

Conclusion: The Tribunal allowed the ground of appeal relating to deletion of addition under section 41(1) on loan waiver.

4. Limitation and Validity of AO's Order Giving Effect to ITAT Directions

Relevant Legal Framework: The provisions relating to limitation for reassessment and giving effect to appellate orders were considered.

Court's Interpretation and Reasoning: The assessee contended that the AO's order dated 31.12.2018 giving effect to the ITAT's order was barred by limitation. The Tribunal observed that the AO's order was within the time prescribed for giving effect to appellate orders and was not barred by limitation.

Key Evidence and Findings: The delay in filing appeal was condoned due to Covid-19 pandemic, and the AO's order was passed pursuant to remand from ITAT.

Application of Law to Facts: The Tribunal found no merit in the contention that the AO's order was barred by limitation.

Treatment of Competing Arguments: The revenue supported the validity of the AO's order. The Tribunal agreed with the revenue.

Conclusion: The Tribunal held that the AO's order giving effect to the ITAT's directions was valid and not barred by limitation.

Significant Holdings

"The failure of the revenue to tax the income in the hands of the transferor of the asset, cannot be a reason for denial of cost of acquisition as recorded in the books of the assessee as per the transfer deed and hence the action of the AO and that of the ld.CIT(A) is devoid of merits and unsustainable in law."

"The cost of acquisition of land and building recorded in the books of accounts of the assessee is to be considered for deduction from the sale consideration for computing the capital gain - Long term capital on land and short term capital gain on building as the depreciation has been claimed on building and accordingly we direct the AO to re-compute long term capital gain."

"The waiver of loan outstanding shown in the balance sheet of the assessee cannot be brought to tax u/s. 41(1) of the Act as held by the Hon'ble Apex court in CIT Vs. Mahindra and Mahindra Ltd. 404 ITR 1 (SC). Further, the unpaid interest on loan waived, if any, cannot be termed as expenditure claimed under the Act, since section 43B of the Act prohibits the deduction of such interest unless it is actually paid in the respective assessment year."

"The AO and the ld.CIT(A) were justified in confirming the additions made due to the assessee's failure to furnish evidence in response to the notice issued post remand."

"The AO's order giving effect to the order of the Hon'ble ITAT was not barred by limitation."

← Previous Next →