TMI Blog2002 (8) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... plication before the Hon ble High Court of Delhi under s. 394 of the Companies Act seeking approval of the scheme of arrangement which provided that assessee-company was to spin off the entire property, rights and powers including the technical assistance and know-how agreement for the manufacture of colour television receivers under the name of "National Panasonic" of Panasonic division to MTAIC. All the liabilities, duties and obligations of the Panasonic division of the assessee-company were to be made over to MTAIC. Copy of petition, appearing at pp. 1 to 252 of the paper book was submitted before the Hon ble High Court. A copy of application moved under s. 391 of the Companies Act for holding of separate meeting of the shareholders and secured creditors of Salora International Ltd., and to consider the scheme of arrangement appears at pp. 253 to 265 with copy of affidavit at pp. 266 to 267 of the paper book. The Hon ble High Court was pleased to pass an order on8th May, 1996, for convening the meeting of equity shareholders of the applicant company on5th July, 1996, and copy of that order is appearing at pp. 273 to 274. The assessee convened a meeting acordingly after issuing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IL itself shall be entitled as of right to claim and receive from MTAIC an allotment of Rs. 48,60,000 (forty eight lakhs sixty thousands only) equity shares of Rs. 10 each credited as fully paid up and MTAIC shall issue and allot the same; (c) SIL shall, in addition, be paid by MTAIC, a sum of Rs. 27,62,00,000 (Rupees twenty seven crores sixty two lakhs only) within a period of 90 days from the effective date or on such date or dates as may be mutually agreed between the board of directors of SIL and MTAIC and in the meanwhile the said amount of Rs. 27,62,00,000 (rupees twenty seven crores sixty two lakhs only) will stand credited to the account of SIL in the books of accounts of MTAIC." 2.2 For the assessment year under consideration the assessee filed return at an income of Rs. 1,97,47,720. During assessment proceedings the AO noted that assessee had returned short-term capital loss of Rs. 11,14,31,696 which was computed as under: Short-term capital loss Consideration received on spin off of "Panasonic division" Rs. Rs. a. Cash received 27,62,00,000 b. 48,60,000 shares at 10 each recd. 4,86,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r overriding title or decree of some Court by reasons of which the income does not reach the hands of the assessee-company. While in the case of assessee there was no such overriding title or overriding charge or any decree of any Court due to which Rs. 17.64 crores were diverted in the form of shares allotted to shareholders. It was noted by the AO that it was on account of conscious design of the board of directors to divert a part of its income to the shareholders by inserting a clause in the scheme of arrangement. It was also the view of the AO that Hon ble Delhi High Court had not imposed any precondition for spin off of the Panasonic division of the assessee-company. It was concluded that shares worth Rs. 17.64 given to shareholders were nothing but application of income and total sale consideration which accrued in the hands of assessee was Rs. 50.12 crores as per scheme of arrangement, and assessee was liable to pay capital gain on this whole amount of spin off transaction. 2.4 Before CIT(A) learned counsel for the assessee reiterated the same submissions and pointed out that Hon ble Delhi High Court has approved the payment made to the shareholders and that was important ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee after negotiation with MTAIC and it was for the Hon ble High Court to approve such a scheme in case understanding between the parties was proper. 2.6 The learned counsel in reply submitted further that Hon ble High Court was not working merely a rubber stamp or post office as it was incumbent upon the Court to satisfy prima facie that the transaction was bona fide and it was in the interest of creditors, shareholders, etc., of the company. The scheme of arrangement was to be passed by minimum 75 per cent of shareholders favouring the scheme, otherwise it could not be approved by the Hon ble High Court. 2.7 Learned CIT(A) considered all the facts and noted that assessee-company was to receive Rs. 50.12 crores on account of transfer/spin off of the Panasonic division. Rs. 17.64 crores were given to shareholders by way of shares and the amount was paid and could not be taken as overriding title/charge on the sale consideration as shareholders did not have any inherent right to receive a part of such consideration till the company goes into liquidation. The right of shareholders was limited to receive the dividend in case the company earns profit. The amount given to sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Act, the learned counsel for the assessee submitted that income chargeable under the head "capital gains" would be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset. The learned counsel submitted that question for consideration was as to what was the "full value of consideration, received or accrued to the assessee-company". On this, learned counsel argued that assessee-company received Rs. 32.48 crores and it could not be justifiably argued or held that what is accrued to the shareholders as a result of arrangement is a sum which also accrued to the assessee as a result of transaction. The contention is that what accrued to the shareholders would be outside the scope of s. 48 of the Act. 3.1 Next argument from the side of the learned counsel for the assessee was that AO and learned CIT(A) did not find favour with the plea of the assessee that Rs. 17.64 crores received by the shareholders were not received by the assessee and while the true position is that it is not a case of diversion of income at a source, but it is a clear case of diversion of receipt at source. The amount of Rs. 17.64 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that once a scheme becomes sanctioned by the Court, it ceases to operate as a mere agreement between the parties and becomes binding on the company, the creditors and the shareholders, and has statutory operation by virtue of the provisions of s. 391 of the Companies Act. The contention is that once scheme of arrangement about the transaction between assessee and MTAIC was approved by the Hon ble High Court the same is sacrosanct and binding on all including the Department. 3.3 About the observation of the learned CIT(A) that shareholders have right to receive dividend and share on liquidation of the company and no other right, it was submitted by the learned counsel for the assessee that scheme of arrangement no doubt provides vide cl. 9 that total consideration would be Rs. 50.12 crores but the amount shall be paid as per cl. 12 and each shareholder will be entitled as a matter of right to claim and receive from MTAIC allotment of two equity shares of Rs. 10 each. The contention is that each shareholder was given an entitlement as a right to claim and receive two equity shares. The entitlement could only result when each shareholder had an existing right. The shareholders were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst point, the learned Departmental Representative submitted that Hon ble High Court no doubt had approved the scheme of administration but that approval has got nothing to do with the income-tax proceedings which are independent proceedings and have to be proceeded as per provisions of the Act. About the scope of phrase "full value of consideration received or accrued as a result of transfer of the capital asset", used in s. 48, the learned Departmental Representative submitted that words "received" and "accruing" have wide import and it includes, right to receive under law and enforceable under the law. To support this, the learned Departmental Representative had placed reliance on the ratio of decision of apex Court in the case of E.D. Sasoon Co. Ltd. Ors. vs. CIT (1954) 26 ITR 27 (SC). Next contention of the learned Departmental Representative was that shareholders have got right to receive dividend on their shares and are entitled to their share in the assets of the company only when company goes in liquidation. Shareholders have no right to share as provided under the scheme of arrangement. Once shareholders had no right in assets, company and MTAIC cannot transfer the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the concept of diversion of income by an overriding title before it reached the assessee and if we apply the ratio of that decision to the facts of the case, it was not a case of diversion of income at source but it was a mere case of application of the income. 4.4 About binding nature of the sanction accorded by the Hon ble Delhi High Court about the scheme of administration it was submitted that IT Department was not party to the scheme of arrangement. Had it been a party, Department would have contested the case and stated that whole amount was to be treated as consideration for capital gain. But as the Department was not contesting party, whatever is in between the two parties, viz., assessee and MTAIC, that is not binding on IT Department. Learned Departmental Representative placed reliance on the ratio of decision in the case of Keshavlal Punja Ram Anr. vs. CIT (1983) 35 CTR (Cal) 202 : (1983) 141 ITR 486 (Cal), wherein it was observed by Their Lordships that finding in civil suit was not conclusive and ITO was to form his own opinion. Another citation by learned Departmental Representative is that of V. Dattchimamurthy Anr. vs. Union of India (1982) 27 CTR (Mad) 106 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p. In the case in hand the assessee had satisfied the Hon ble Court, necessary requirement were duly complied with and thereafter going through all factual and legal prepositions the Hon ble High Court was satisfied and necessary sanction was accorded. It is wrong on the part of AO to note that there was some device adopted by assessee-company and MTAIC to defray IT authorities. 5.1 About the rights of shareholders the learned counsel referred to the decision of Hon ble Supreme Court in the case of LIC vs. Escorts Ltd. 59 Comp cases 548 in which Their Lordships have opined at p. 617 that shareholders had an undoubted interest in a company, an interest which is represented by his shareholding. Share is a movable property, with all the attributes of such property and rights of shareholders included to elect directors and thus to participate in the management through them, etc. Referring to ss. 391 to 395 of the Companies Act the learned counsel submitted that these are special provisions. While deciding even the tax liability of an assessee, due regard is to be given to all the acts done in pursuance to the above provisions of Companies Act. Reliance on the decision of apex Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies Act for seeking sanction of Hon ble High Court of Delhi. The Hon ble High Court as per requirement of s. 391 directed the assessee-company to convene a general meeting of the shareholders, creditors, secured and unsecured, and after going through the scheme of arrangement and hearing the necessary parties, accorded the approval. The contention of the learned Departmental Representative that Department was not a party to the proceedings before the Hon ble High Court is not tenable in view of the provisions of s. 394A of the Companies Act which provides that notice is to be given to Central Government in respect of application under ss. 391 and 394. The very purpose of issuance of such notice is that Central Government shall also watch its interest and file its objection if any of the provision of scheme of arrangement is prejudicial to the interest of Central Government. It has not come on record that Central Government had filed any objection about the same. After the scheme of arrangement is approved by the Hon ble High Court, it acquires statutory recognition as laid down by Their Lordships of Bombay High Court in the case of Sadanand S. Varde Ors. vs. State ofMaharashtra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.4 We have already observed that scheme of arrangement as approved by the Hon ble High Court acquires statutory binding effect and scheme of arrangement provides that amount of Rs. 32.64 crores was to be given to the shareholders. Whether it is diversion at source or it was application of money is to be looked into. In this connection we may refer to the decision of Hon ble Supreme Court in the case of Seetal Das Tirath Das vs. CIT in which concept of rule of diversion of income had been defined by Their Lordships by noting as under: "The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and if the board of directors of assessee-company and MTAIC chalk out the preposition that shareholders may also be given their respective shares out of this spin off of Panasonic division from assessee-company to MTAIC then it cannot be said that it was with any ulterior motive. 6.8 Not only this, cl. 12 of scheme of arrangement is quite specific as each shareholder was entitled as a right to claim and receive from MTAIC an allotment of two equity shares of Rs. 10 each credited as fully paid. This clause is specific and creates a right in favour of each shareholder and this entitlement had existing right. It is also under the provisions of Companies Act that Hon ble High Court which accorded the permission is to see that scheme of arrangement is enforced as per the provision of s. 392 of the Companies Act. The section is specific on this point and it gives powers to Hon ble High Court to enforce the terms of arrangement. If a right is created in shareholders to get two shares of Rs. 10 each that right was enforceable under the scheme of arrangement and Hon ble High Court would have stepped in if there was any violation. Accordingly, the shareholders were entitled to get the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of CIT vs. Shiv Prakash Janak Raj (P) Ltd., where Their Lordships have observed as under: "The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room nor would it be permissible for the Court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules. The principles applicable are: (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation, (2) The concept of real income would apply where there has been a surrender of income which in theory might have accrued but in the reality of the situation, no income had resulted because the income did not really accrue, (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed, (4) Where the Act applies the concept of real income should not be so real as to defeat the provisions of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel for the assessee submitted that learned CIT(A) has erred in adopting the WDV of the fixed assets as cost of acquisition for computing the short-term capital gain. It was contended that the capital gain has to be computed in accordance with the provisions contained in s. 48 of the IT Act, 1961. It was, therefore, submitted that under sub-cl. (ii) of s. 48 of the Act, the "cost of acquisition of the asset" and the "cost of any improvement" thereto, are only required to be deducted from the full value of consideration received or accruing as a result of the transfer of the capital asset. It was, therefore, stated that in the instant case, since the full value of consideration received or accruing as a result of the transfer aggregated to Rs. 32,48,00,000 and the cost of acquisition of fixed assets, as reflected in the balance sheet, aggregated to Rs. 59,94,36,171 and, the net value of the assets transferred on the basis of the book value aggregated to Rs. 43,62,31,696, therefore, there was a loss suffered of Rs. 11,14,31,696 (Rs. 43,62,31,696 less Rs. 32,48,00,000), and as such there was no capital gain, liable for assessment under s. 45 of the IT Act. 8.1 Learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed by the assessee and adopted by the learned Dy. CIT is concerned, it will be seen that the same will have only consequential effect. In other words, the value of the fixed assets, if adopted at Rs. 59,94,36,171, there will be a capital loss of Rs. 11,14,31,696 and if the same is adopted at Rs. 41,09,32,331, there would be a capital gain of Rs. 7,70,72,144 (Rs. 32,48,00,000 minus Rs. 24,77,27,856). 8.4 He further submitted that there is absolutely no justification in having adopted the WDV of the fixed assets instead of having adopted the cost of the fixed assets as reflected in the balance sheet in view of the clear and unambiguous provisions contained in s. 48 r/w s. 45 of the Act and, as interpreted by Their Lordships of the Hon ble Delhi High Court in the case of P.N.B. Finance vs. CIT (2001) 168 CTR (Del) 509 : (2001) 252 ITR 491 (Del). 8.5 Learned counsel further submitted that the very marginal note to s. 50 of the Act would show that the same was required to be applied or invoked which was made applicable only for the purposes of computation of capital gains in the case of depreciable assets. It was submitted that in the instant case there was no dispute that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent assets and liabilities have been also transferred, which too form part of the financial statements. In such a situation and only for the purpose of determining the capital gain, the assessee-company, without considering the value of the depreciable assets, as it was not possible to determine the value thereof, adopted the value of the assets being the cost of acquisition, as reflected in the balance sheet. 8.7 Learned counsel submitted that in the case in hand the learned Dy. CIT while framing the assessment did not get the value of even the land evaluated so as to have adopted the WDV of the fixed assets only at Rs. 41,09,32,331 let alone to have evaluated or have estimated the value of all other assets which had been transferred and did not form part of financial statement, but nonetheless the assets were having substantial value. In other words, if the value of the land would have been higher the WDV of the fixed assets including the value of the land would have been obviously of a sum in excess of the value adopted by him of Rs. 41,09,32,331 besides the value of other assets. It was, therefore, clear that there had been no attempt to find out the market value of the land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn and no part of sale price was attributable to the cost of the land, no part of slump price was taxable. According to learned counsel, on examination of scheme of arrangement, in the instant case, it cannot be held that the amount received by the assessee or accruing as a result of transfer, could be said to be specifically attributable to any asset transferred including depreciable asset. He submitted that on the authority of Hon ble Supreme Court, supra, which had followed the ratio of decision in CIT vs. West Coast Chemicals Industries Ltd. (1962) 46 ITR 135 (SC), no capital gain arose to the assessee as a result of such transfer. 8.11 It was further stated that s. 50A of the IT Act was introduced by the Finance (No. 2) Act, 1998, w.e.f.1st April, 1998, wherein it was clearly provided that the said amendment will take effect prospectively from1st April, 1998, and would accordingly apply in relation to asst. yr. 1998-99 and subsequent assessment years. In view thereof, there is no justification to have invoked the provisions of s. 50A of the IT Act for the purpose of determining the cost of acquisition in respect of depreciable asset and so far as the instant year is concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable. 9.2 It was submitted that though there were various items in the block of assets, the AO had disturbed the value of fixed assets only. It was stated that for the purposes of working out the cost of fixed assets, the WDV has to be adopted. Sec. 48 was a general section and s. 50 is like a proviso to s. 48 which was applicable to the depreciable assets. It was stated that existence or non-existence of s. 41(2) on the statute was irrelevant. What was the WDV will be considered under s. 50 of the Act. It was also stated that it was not the company as a whole but only one division of the assessee which was being spinned off. The division has fixed assets as well as other assets. Admittedly, there were certain depreciable assets and non-depreciable assets. As per provisions of s. 50, the bifurcation of block of assets has to be done in respect of depreciable assets and non-depreciable assets. It was also stated that assessee was not justified in stating that it was the case of slump sale. In case of slump sale, it is the whole business which is to be sold off. But in the case in hand, only one division of the assessee has been spinned off. While relying on the decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred. The AO felt that as the fixed assets transferred by the assessee was depreciable asset, its WDV should be adopted as the cost of acquisition. But while doing so, the AO clearly omitted the fact that s. 50 of the Act was a special provision for computation of capital gains in the case of depreciable assets only. The general provisions regarding the mode of computation of capital gain are provided in s. 48 of the Act. Sec. 50 on which the reliance is placed by the learned Departmental Representative reads as under: 50. "Special provision for computation of capital gains in case of depreciable assets. Notwithstanding anything contained in cl. (42A) of s. 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian IT Act, 1922 (11 of 1922), the provisions of ss. 48 and 49 shall be subject to the following modifications: (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or computation of capital gains in the case of slump sale. The proposed new section provides that any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place. The Hon ble Finance Minister had also stated that this new section will take effect from1st April, 2000, and will accordingly apply in relation to the asst. yr. 2000-2001 and subsequent years. From the reading of the above provisions, it is clear that s. 50B of the Act cannot be made applicable to the assessee s case during the asst. yr. 1997-98. Such provision being not retrospective in nature cannot, therefore, be relied upon. Similarly, s. 50A of the Act which provides for special provision for cost of acquisition in case of depreciable asset has been brought on the statute w.e.f.1st April, 1998. As this section has also not been made operative from retrospective effect this provision was also not applicable in the year under consideration. 10.3 Similar issue was considered by Ahmedabad Bench of the Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly unworkable nature of these provisions in relation to slump sale. What had been sold was the entire business undertaking as a going concern. Cost of acquisition, cost of improvement as well as date of acquisition of the going concern were not capable of determination. Hence, computation provisions failed and no capital gain could be chargeable under s. 45. If the law fails to bring the subject within the letter, the Department cannot succeed with the argument that the subject falls within the spirit of the law. In the absence of the three essential ingredients, namely, cost of acquisition, cost of improvement and date of acquisition which are fundamental to the computation provision under s. 48, the slump sale is outside the purview of s. 45." 10.3.3. We find that the AO/CIT(A) has adjusted the cost of acquisition of the fixed assets only. They have not disturbed the value of other assets. Sec. 48 which provides for the computation of capital gains in such cases, reads as under: 48. "Mode of computation. The income chargeable under the head "capital gains" shall be computed by deducting from the full value of the consideration received or accruing as a result of the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... swer to the fourth question is in the affirmative, i.e., in favour of the assessee and against the Revenue. 10.5 We have also noted the submissions of the learned Departmental Representative to the effect that s. 50(1) of the Act was extension of s. 41(2) of the Act which was omitted from the statute. Sec. 41(2) of the Act operated in different field as under the aforesaid provision, where as a result of transfer, any excess sum was realised to the WDV the difference between the sale value and the WDV only to the extent of the depreciation allowed could be brought to tax, whereas s. 50 of the IT Act is applicable only in respect of taxability of the entire difference resulting from the transfer of depreciable assets, irrespective of the fact that the depreciation that might have been allowed to an assessee was lower than the amount of gain, arising from the transfer of the asset. In such a situation, as per the provisions contained in s. 50 of the IT Act, as amended from1st April, 1998, the entire difference between the sale consideration and the WDV in respect of the depreciable asset only has been made liable for short-term capital gain. 10.6 We have also perused the ratio of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of Delhi Bench of the Tribunal reported in Dy. CIT vs. Haryana Oxygen Ltd. (2001) 73 TTJ (Del) 575 : (2001) 76 ITD 32 (Del) and by the decision of Hon ble Gujarat High Court reported in Sayaji Iron Engg.Co.vs. CIT (2002) 172 CTR (Guj) 339. Respectfully following the same, we hold that the addition sustained by the CIT(A) is not justified and the same is deleted. 12. Ground No. 4 relates to the sustenance of the addition of Rs. 2,00,020 on account of irrecoverable advances. 12.1 Briefly, the facts of the case are that assessee-company had written off a sum of Rs. 2,00,020 as irrecoverable expenses under the head miscellaneous expenses. Details of these expenses are as under: (a) Kartikeya Engineering Co. Rs. 1,00,020 (b) I.C.R.A. Rs. 1,00,000 12.2 The AO observed that the complete details of these advances were not submitted before him. He stated that the advances given by assessee to some persons were not debts in the normal course of carrying on the business activities. The loans and advances were not business transactions and, therefore, the same could not be allowed as deduction under s. 36(1)(vii) of the Act. On appeal, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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