TMI Blog2008 (12) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... t M/s. Mafatlal group was beneficial owner of 40 per cent of the equity capital of the assessee-company during the financial years 1994-95 and 1995-96 and further continued to maintain its holding at 40 per cent during the financial year 1996-97, even though, there was certain issue of additional capital. The Assessing Officer further observed that during the financial year 1997-98, M/s. Mafatlal group increased its shareholding to 75 per cent. Thus, he held that there is a change of management in the financial year 1997-98. 2.1 The Assessing Officer had further observed that during the financial years 1995-96 and 1996-97 M/s. Federal Bank was holding 40 per cent of the share capital which was subsequently reduced to 35 per cent during the financial year 1996-97 and thereafter substantially reduced the same to only 5 per cent during the financial year 1997-98. The Assessing Officer further found that during the financial year 1997-98, Federal Bank had relinquished its right in the management of the company. The assessee-company had submitted details regarding the change in directorship in which the percentage of directors, who are Mafatlal group nominees had increased from 1/3r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken over by a completely new management. The shareholding pattern is extracted by the Assessing Officer at pages 8 and 9 of the assessment order. Further, on the claim of the assessee that it is a domestic company in which the public are substantially interested, the Assessing Officer held that the assessee company does not qualify for the status that it is a domestic company in which public are substantially interested as the same is defined in section 2( 18 ) of the Act. He further states that from the shareholding pattern the status of the assessee-company is that of closely held company and at best it is a domestic company in which public are not substantially interested. Thereafter, he invoked section 79 of the Act and denied the claim of carry forward of unabsorbed business loss and unabsorbed depreciation. 2.3 Further, the Assessing Officer disallowed the following expenses : (1)Deferred revenue expenditure of Rs. 49,56,422 incurred on account of renovation of leased premises. (2)Equipment lease rent paid of Rs. 13,97,234. (3)Disallowance under section 43B on interest and insurance charges. (4)Disallowance of salaries, director s remuneration as well as travelli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of application of section 2( 18 )( b )(B)( c ) of the Act as both Mafatlal Finance Co. Ltd. and Federal Bank Ltd. as well as Weizeman Ltd. are companies in which public are substantially interested and as these companies hold more than 50 per cent of the voting power of the assessee-company throughout the previous year. He pointed out that both Federal Bank Ltd. as well as Mafatlal Finance Co. Ltd. held 30 per cent each of the shares of the assessee-company till 16-9-1997 and thereafter Mafatlal Finance Co. Ltd. directly continued to hold 30 per cent of the share capital and whereas it was the beneficial owner of the balance 30 per cent shareholdings purchased from Sunanda Securities Ltd. Weizeman Ltd. continued to hold 10 per cent of the shares throughout the relevant previous year. He pointed out that Mafatlal Finance Co. Ltd., Weizeman Ltd. as well as Federal Bank Ltd. are companies which are listed in the Stock Exchange and are companies in which public are substantially interested. On the issue of Mafatlal Finance Co. Ltd. being the beneficial shareholder of 30 per cent of the shares of the assessee-company held by Sunanda Securities Ltd. since 16-9-1997, the assessee cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 79 of Income-tax Act. 8.1 Section 79 reads as follows : "79. Carry forward and set off of losses in the case of certain companies. Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless ( a )on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred : Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift : Provided further that nothing contained in this section shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 6,00,000 30.00 Tudor Plastics (P.) Ltd. 1,00,000 10.00 1,00,000 10.00 1,00,000 5.00 1,00,000 5.00 Weizman Ltd. 1,00,000 10.00 1,00,000 10.00 2,00,000 10.00 2,00,000 10.00 Surekha Holdings Pvt. Ltd. 1,00,000 10.00 1,00,000 10.00 2,00,000 10.00 2,00,000 10.00 6,99,990 69.99 6,99,990 69.99 11,99,990 59.99 11,99,990 59.99 8.4 Even going by the analysis given by the Assessing Officer on pages 8 and 9 of the assessment order, the holdings of Mafatlal Finance Co. Ltd. which is 30 per cent and Surekha Holdings Pvt. Ltd. which is 10 per cent and Weizeman Ltd. which is 10 per cent have not been transferred to any other concern nor has the ownership changed from 31-3-1995 to 31-3-1998. These three holdings put together constitute 50 per cent of the total equity share capital. In the case of Tudor Plastics Pvt. Ltd. it held 10 per cent of the total equity share as on 31-3-1995 and this got reduced to 5 per cent as on 31-3-1997. In any event, T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laxmi Mills Ltd. [1983] 143 ITR 863 and the decision of the Hon ble Madras High Court in the case of CIT v. Saravanabhava Mills (P.) Ltd. [1983] 143 ITR 856 wherein the Court has quoted from the text authored by Chaturvedi Pithisaria and observed that clause ( a ) refers to 51 per cent of the voting power beneficially held by a person or group of persons meaning thereby that such person or persons may or may not be registered shareholders. 8.7 Coming to the decision relied on by the learned Departmental Repre-sentative in the case of MD Traders Chit Fund Finance (P.) Ltd. ( supra ) we hold that the same does not apply to the facts of the case as it deals with sub-clause ( b ) which is not in the statute during the impugned assessment year. In this case also, the test as far as the sub-clause ( a ) is concerned, is the same as mentioned by us. In the head note it is given as follows : ". . . The change in the shareholding which is contemplated by section 79 is one which is to be found on a comparison between the position of voting power on the last day of the previous year for which the assessment is sought to be made and the corresponding position of the earlier year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year. Explanation. In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words not less than fifty per cent , the words not less than forty per cent had been substituted;" 10.1 To examine whether this clause applies, the assessee should have filed the basic documents such as the fact that Mafatlal Finance Ltd. and Federal Bank are listed in the recognized stock exchange and also it has to lead evidence that Mafatlal Finance Ltd. is the beneficial owner of the shares purchased from Federal Bank by Sunanda Securities Ltd. on 16-9-1997. The assessee claims that it has filed additional evidence before the CIT(A) and that he has not admitted the same. It pleads that this additional evidence should be directed to be admitted as they go to the root of the matter. 10.2 As we have already adjudicated the issue in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of custodial services was in existence atleast up to 16-9-1997 relevant to the impugned assessment year 1998-99. On this factual matrix, we allow the ground of the assessee and the Assessing Officer is directed to grant depreciation on the renovation expenses capitalized by him in his assessment order. 13. Grounds 7 to 9 is on the disallowance of equipment lease rent of Rs. 13,97,234 payable to Federal Bank. The assessee s case is that it had taken certain assets on lease from Federal Bank and it had to pay lease rentals of Rs. 13,97,234. This amount had been charged to the profit loss account. However, it is submitted that as a result of restructuring, this liability along with the other credit facilities are no longer payable to Federal Bank. Thus, the assessee had itself shown the above amounts as income under the head "Extraordinary items" in the profit loss account and offered the same to tax under section 41(1) of the Act. The total write back in the profit loss account was Rs. 82,72,274 which includes the impugned amount. The case of the assessee is that as it has suo motu added the said amount under section 41(1), the question of once again disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Ganga Properties Ltd. ( supra ) also, the Hon ble Calcutta High Court was considering a case where the company derived income from other sources. The Hon ble Court held that the company has to maintain its establishment for complying with the statutory obligations so long as it is in operation and its name was not struck off from the Register of Registrar of Companies or unless the company is dissolved which means cessation of corporate activities of the company for all practical purposes. The proposition that is laid down is as follows : "So long as it has to discharge certain legal obligations and, for that purpose, it is necessary to appoint clerical staff and a secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income was a reasonable conclusion." The amount of Rs. 18,675 claimed as business expenditure in that case was therefore held to be deductible. 19. Here also, the expenditure was being claimed under section 57( iii ). As the issue before us is not a claim under section 57( iii ) and it is only under section 37 that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Finance Co. (P.) Ltd. He also made a recording that the assessee had submitted that the amount is wrongly calculated but at the same time it had not filed any reconciliation in support of his claim that the amount should be Rs. 8,50,000. The learned CIT(A) upheld the findings of the Assessing Officer. Further aggrieved, the assessee is in appeal before the Tribunal. 22. The learned counsel for the assessee points out that a perusal of the ledger account of Mafatlal Finance Ltd. in the books of the assessee which is at pages 93 and 94 of the paper book shows an opening credit balance of Rs. 23 lakhs and a closing credit balance of Rs. 2,08,586. This amount has been disclosed under the head "Unsecured loans" in the balance-sheet. He also submits that the other entries in the account relate to amounts received by the assessee from M/s. Mafatlal Finance Ltd. towards transfer of assets and liabilities as well as towards amounts paid by Mafatlal Finance Ltd. for and on behalf of the assessee. The main contention of the assessee is that section 41(1) applies to ( a ) where the assessee had incurred trading liability and such trading liability has been allowed as a deduction in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make arrangements for settlement of amounts due by the assessee-company to various parties as set out in Schedule 2. If the assessee as well as M/s. Mafatlal Finance Ltd. had passed entries in pursuance to this clause, whereby it can be concluded that certain liabilities have been taken over by M/s. Mafatlal Finance Ltd., though it had agreed to make arrangements to settle the amount, then the conclusions drawn by the revenue authorities in principle may have to be approved. Be it as it may, as we are remitting the matter back to the Assessing Officer for fresh adjudication we do not give a finding on the issue. Suffice to say that the calculation made by the Assessing Officer need a revision and each liability has to be examined whether it is a trading liability or not and as to whether it has been allowed as an expenditure in the earlier years or not and also as to whether there has been a cessation or remission of each of the liabilities. In the result, we set aside the matter to the file of the Assessing Officer. This ground is allowed, for statistical purpose. 25. The next ground No. 13 deals with an addition of Rs. 2,29,99,690 being addition under section 41(1). The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Guj.). Chetan Chemicals (P.) Ltd. s case ( supra ). Ravinder Singh v. CIT [1994] 205 ITR 353 (Delhi). 27. The learned Departmental Representative, on the other hand relies on the order of the first appellate authority and submits that this is a clear case where the assessee has received a value of a benefit of perquisite which is convertible into money and section 28( iv ) is clearly attracted. 28. After hearing rival contentions, we are of the considered opinion that no addition can be made under section 41(1) where a term loan or cash credit loan availed by the assessee is written off and the assessee writes back the same in its books of account. At the time of receiving the cash credit or overdraft or the term loan, it is received on capital account. As discussed earlier section 41(1) applies only to cases where it is a trading liability and a deduction has been claimed and allowed in the earlier assessment years. Thus, the addition in question made under section 41(1), in our humble opinion, is bad in law. Similarly, in our considered option, the CIT(A) was wrong in invoking section 28( iv ). The jurisdictional High Court in the case of Mahindra Mahindra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Mumbai Tribunal in the case of J.K Chemicals Ltd. [IT Appeal Nos. 8206 and 8618 (Bom.) of 1989 for the assessment years 1986-87 and 1989-90, order dated 1-11-1993]. As no contrary decision is brought to our notice by the revenue, we respectfully following the same, direct the Assessing Officer to follow the decision of this Bench in the case of J.K. Chemicals Ltd. ( supra ) and grant set-off of the short-term capital loss against the income of the current year. Thus, this ground is allowed. 30. In the result, the appeal filed by the assessee is partly allowed. 31. That brings us to the revenue appeal in ITA No. 1452/Mum./2005. The sole ground raised by the revenue is against the direction of the CIT(A) wherein the Assessing Officer was directed to adopt the sale consideration at Rs. 7,85,057 for the purpose of computing capital loss under section 50. The assessee had received a lump sum consideration of Rs. 20 lakhs which related to both the fixed assets as well as current assets. It filed a valuation report dated 11-9-1997 of Bale Associates, Government valuers, wherein the consideration attributable to fixed assets was put at Rs. 7,85,057. The first appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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