TMI Blog2011 (3) TMI 1012X X X X Extracts X X X X X X X X Extracts X X X X ..... ions undertaking - appellant prays that in the absence of ascertainable cost of acquisition / cost of improvement of the undertaking, the machinery for computation of capital gain fails, and therefore capital gains are not chargeable at all - sale or exchange - Held that:- In present case, transfer of the undertaking by the assessee consequent to scheme of arrangement approved by Hon'ble Bombay High Court cannot said to be a sale of undertaking by the assessee. Therefore, we hold that computation provisions fail in the present case and consequently there can be no capital gain that could be brought to tax Addition - adjustment in the value of stock u/s. 145A by including the unutilized Cenvat credit in closing stock of raw materials - assessee has valued its inventory exclusive of taxes, duties etc. paid or incurred on such closing stock - Held that:- Assessee has also not claimed deduction on account of excise duty on closing stock. Thus the assessee had duly given effect to the provisions of section 145A as well as the provisions section 43B. We accordingly direct that the addition made be deleted. Addition of income under various heads such as technical services, intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The AO however, held that the assessee did not identify the source of funds used for making investment and he held that part of the borrowed funds can be attributed to the making of investment in shares which yielded the dividend income. The AO accordingly disallowed proportionate interest of ₹ 12.89 lacs and the same was added to the total income of the assessee. 3. On appeal by the assessee the CIT(A) directed the AO to apply the provisions of Rule 8D of the IT Rules 1962 and make suitable disallowance under section 14A of the Act. 4. Aggrieved by the order of the CIT(A) the assessee has raised ground No.1 before the Tribunal. 5. Before us ld. Counsel for the assessee submitted that in A.Y 2004-05 in ITA No.6359/M/07 this Tribunal by its order dated 30/7/2009 held that no expenditure was incurred to earn the dividend income and, therefore, disallowance of interest expenses under section 14A could not be made. The ld. Counsel for the assessee drew our attention to the balance sheet of the assessee as on 31/3/2004 and 31/3/2005 and submitted that the investment that considered in A.Y. 2005 and the investment in the present assessment year (A.Y. 2005-06) are identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision on account of warranty claim that may be raised against the assessee in respect of the warranty obligations given by the assessee at the time of sale of the products manufactured by it. According to the assessee the obligation under the warrantee is a liability in presenti and only the discharge of such liability is at a future date. The assessee therefore, submitted that it is entitled to make a fair estimate of such liability and the same should be allowed as a deduction. The assessee explained that it was manufacturing electrical motors, transformers and industrial components,(mainly Elevator components). These products have a long life cycle and are generally capital goods for the purchasers. These products carries manufacturers guarantee for 2-3 years i.e. the faults in the products within the warranty period have to be rectified by the manufacturers free of cost. The assessee also pointed out that it provides Bank Guarantee to its customers covering 5-10% of the contract price towards warrantee performance. In case the assessee does not fulfill the warranty obligation to customers will invoke the Bank Guarantee. The assessee also gave a table of chart showing the liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deductible expenditure for the previous year: CIT vs, Mistubishi Motors (222 ITR 697) (Privy Council) Bharat Earth Movers v. CIT (245 ITR 428)(SC) Calcutta Co. Ltd. vs. CIT (37 ITR 1)(SC) Metal Box Co. of India Ltd. v. Workmen (73 ITR 53)(SC) 11. The AO was of the view that the liability in question is only contingent liability. The AO also distinguished the decision relied upon by the assessee in the case of Bharat Earth Movers Ltd.(supra) by pointing out that the liability in the said case was on account of Earned Leave of Employees covered under ESIC Scheme and the facts of the assessee s case was different. 12. The CIT(A) held that in the earlier years AS 29 was not followed by the assessee and no provision was made on account of warrantee cost. He was of the view that there was no justification for allowing deduction by way of provision for warrantee cost from this year. 13. Aggrieved by the order of the CIT(A) the assessee has raised Ground No.2 before the Tribunal. 14. We have heard the submissions of the ld. Counsel for the assessee and the ld. D.R. The ld. Counsel for the assessee relied on the decision of the Hon ble Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down that the estimate of liability has to be on the basis of statistical data of the assessee available in the past. Applying the above principle the claim of the assessee in the present case has to be allowed. In the present case the assessee had field the necessary data before the AO but the AO did not think it fit to examine the claim made by the assessee on its merits. As we have already seen the provision on account of warranty cost was made by the assessee based on the past experience and the AO did not find any fault in such estimation made by the assessee. In such circumstances we are of the view that the request of the ld. D.R to remand the matter to the AO for fresh consideration cannot be accepted. We are of the view that prima facie the estimate of liability based on which the provision for warrant cost was made by the assessee is reasonable and has to be accepted. We, therefore, direct that the deduction claimed by the assessee be allowed. Ground No.2 is accordingly allowed. 16. Ground No.3 4 raised by the assessee reads as follows: Ground 3: Transfer of Lift Division Whether liable for Capital Gains Addition of ₹ 1,83,61,060/-. 1. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the various assets comprised in the transfer could not be ascertained. In such case, the computation provisions would fail and therefore there can be no charge to tax on capital gain. In other words, it was submitted that the cost of the Undertaking is not ascertainable and, therefore, the machinery for computing capital gains fails. Reliance was placed on the decision of the Hon ble Adhmedabad Tribunal in the case of Industrial Machinery Associates Vs. CIT (81 ITD 482). The Assessee also pointed out that transfer of the undertaking took place in exchange for Preference shares and Bonds issued by Tiger Elevator Pvt. Ltd. Therefore, the assessee claimed that the transfer is an exchange and not a sale and therefore does not fall within the purview of the definition of slump sale u/s. 2(42C) of the Act. Reliance was placed on the decision of the Hon ble Supreme Court in the case of R.R.Ramkrishna Pillai (66 ITR 725). 18. Without prejudice to the above the assessee calculated the indexed cost of acquisition of the Undertaking and computed the Long Term Capital Gains. The assessee deposited an amount of ₹ 15.50 crores in the Bonds notified u/s. 54EC of the Act within six m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e determined, then it cannot be brought within the purview of section 45 for levy and computation of capital gains. Looking to the nature and character of the capital asset being the going concern, consideration realized by the assessee would be outside the purview of capital gains under section 45. The Assessee relied on the decision of the Hon'ble Karnataka High Court in the case of Syndicate Bank Ltd. Vs. Addl. CIT, 155 ITR 681 wherein it was held that there is a transfer of whole concerns and where no part of the agreed price is indicated against different and definite items having regard to that valuation and consideration cannot be apportioned on capital assets in specie. In such cases, capital assets consisting of business of whole concerns are transferred, in such case, the consideration realized by an assessee would outside the purview of capital gains u/s. 45. The Hon'ble High Court in coming to the above conclusion followed the decision of Hon'ble Supreme Court in the case of CIT Vs.B.C. Srinivasa Shetty, 128 ITR 294. (SC). 20. The assessee submitted that the consideration is received for the integrated bunch of assets and liabilities, which constituted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale consideration exceeded the if the price paid for or attributable to an asset exceeds the written down value of the asset, the difference was chargeable to tax. The Hon ble Court further observed A transaction by which a person carrying on business transfers the assets of that business to another assessable entity may take different forms and may have different legal effects. The assets of a business may be sold at a fixed price to a company promoted by a person who carried on the business: Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale, and the true nature of the transaction will not be altered, because of stamp duty or other reasons the value of the assets transferred is shown as equivalent to the face value of the shares allotted. A person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor. In that case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement for transfer in its schedule gave the particulars of each motor vehicle transferred and mentioned its price against it. The total price of ₹ 1,51,565/- was calculated on the basis of particulars specified against each of these motor vehicles in the said schedule. Thereafter, the agreement provided that the sale price would be paid to the assessee firm by the company in the form of shares of the company of the value of ₹ 500 each in the names of the partners of the assessee firm as indicated in the agreement. The Assessee pointed out that it is on this basis that the MP High Court held that the transaction is in the nature of sale and not an exchange. The Assessee pointed out that in its case, the consideration was not measured in monetary terms at all. Attention of the AO was invited to clause 14.1 of the Court approved scheme of arrangement which provided for issuance of preference shares and bonds in consideration of the transfer of the relevant business. Thus the Assessee distinguished its case from that of the MP High Court. 3. Orient Trading Co. Ltd., 224 ITR 371 (SC). This is also a Supreme Court decision. Here the assessee was a dealer in shares. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to capital gain tax. Considering the above, the claim of the assessee that transfer of its lift division is an exchange and not sale and therefore not liable to tax was held by the AO to be not correct and the same was hence rejected. The AO held that in Section 2(42C) of the I.T. Act, slump sale means the transfer of one or more undertaking as a result of the sale for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sales. The transaction of the assessee fits into the above definition of slump sale square. Therefore, the AO held that the transaction of transfer of lift division as a transaction of slump sale and this was taxable as per provisions of Section 50B of I.T. Act and the same was taxed accordingly. 28. Thereafter AO based on the computation of capital gain which was given by the Assessee without prejudice to its contention that no capital gain is not chargeable to tax in its case, determined capital gain. 29. The CIT(A) confirmed the order of the AO observing as follows: 4.3 I have duly considered the submission of the A.R. However, I do not agree that the transfer of lift division amounts to exchange. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined as a transfer of ownership in exchange for a price paid or promised or part paid and part promised. The definition of the sale under the Sales of Goods Act, sale has been defined as contract, whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The agreement to sale become a sale when the time elapses or the conditions are fulfilled subject to which the property in goods is to be transferred. Section 2(1) of the Sales of Goods Act, defines price to means, the money consideration for a sale of goods. 32. Referring to the aforesaid definition of sale, learned counsel for the assessee submitted that sale is always a contract between 2 persons. He submitted that in the case of the assessee, the undertaking was transferred in consideration of issue of preference shares and not for monetary consideration. In the circumstances, he submitted that there was no sale of the undertaking; and therefore, the transfer of undertaking of could not said to be a slump sale for the proposition that transfer of undertaking. Pursuant to the orders of Court cannot said to be a sale. He relied on the decision of Hon'ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s listed individual items of assets transferred and computed capital gain. Learned DR of the revenue placed strong reliance on the decisions of Hon'ble Bombay High Court in the case of Premier Automobile Ltd. Vs. ITO, 264 ITR 193 (Bom).The aforesaid decision relates to the assessment year prior to insertion of section 50B of the Act. The transfer of capital assets in the form of an undertaking was sought to be brought to tax by the revenue. The stand of the revenue was that there was a sale of individualized items of assets; whereas, the stand of the assessee was that there was a sale of the entire undertakings for a lump sum consideration. The Court held that it was a case of sale of undertaking as a whole and that the sale of an undertaking as a whole would be sale of a capital asset. The Court, therefore, held that it was slump sale and remanded the matter to the Tribunal for fresh consideration regarding computation of capital gains. According to the learned DR of the revenue, the aforesaid decision is an authority for proposition that even prior to insertion of section 50B of the Act, slump sale of the business undertaking as a whole is liable to tax to charge of capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as assignment of values to individual assets or liabilities. 38. From the reading of the above definition, it is clear that, it is only a transfer as a result of sale that can be construed as a slump sale. Therefore, any transfer of an undertaking otherwise then as a result of sale will not qualify as a slump sale. The question that arises for consideration is as to whether transfer of TFD by the assessee to ITEL could be construed as a sale. 39. Hon'ble Supreme Court in the case of Motor General Stores Pvt. Ltd. (supra) was concerned with the case, where the assessee company transferred all assets of Cinema House to one A and in exchange got preference shares in a Sugar Company in consideration of transfer of assets. Under the provisions of section 10(2)(vii) of the I.T. Act, 1922, profits or gains on sale of building where the amount of sale consideration exceeds the written down value of the assets can be brought to tax as business income. The company of the assessee was that there was no sale and the transaction in question was only a exchange; and therefore, the same cannot be brought to tax. Hon'ble Supreme Court held as follows :- Sale is a transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transferor Company, together with any warranty by the manufacturers or the sellers or lessors of any item thereof and all maintenance records and other documents relating thereto; 1.36.2 All accounts receivables, net of provisions as shown in 2004 Financial Statements, sundry debtors, bills of exchange, deposits including security deposits, earnest moneys and down-payments from customers, loans and advances, prepaid expenses and other current assets (other than cash and cash equivalents) of the Transferor Company arising from the operation of the Transferred Business; 1.36.3 All inventories of raw materials, work-in-progress, spare parts, replacement and component parts (including inventories held by customers on a consignment basis) and office, packaging and other supplies; 1.36.4 All Permits that are transferable and are relating to the Transferred business as listed in Schedule SOA 1.36.4. 1.36.5 All tenancies, leaseholds and leasehold improvements listed in Schedule SOA 1.36.5 ( to the extent such tenancies leaseholds are transferable by virtue of the contracts of tenancy). 1.36.6 All trade marks, service marks, business names, trade names (includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 50,000 each carrying an interest rate of 0% p.a. from the date of issue till date of redemption redeemable by the Transferee Company at the option of the Transferor Company or the Transferee Company at any time within a period of 4 months from the effective date on such terms and conditions as are or may be mutually agreed by and between Transferor Company and the Transferee Company; and 14.1.3 660 bonds of the face value of ₹ 50,000 each carrying an interest rate of 0% p.a from the date of issue until date of redemption, redeemable by the Transferee Company at the option of the Transferor Company or the Transferee Company at any time within a period of 15 months after the effective date on such terms and conditions as are or may be mutually agreed by and between Transferor Company and the Transferee Company. 41. A reading of the above clauses in the scheme of arrangement, in our view, would mean that the transfer of the undertaking had taken place in exchange for issue of preference shares and bonds. The fact that there was a quantification when bonds/preference shares were issued would not mean that the monetary consideration was determined and its discharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or gain from transfer of undertaking. Cost of acquisition and the cost of improvement of the undertaking cannot be ascertained. It, therefore, becomes difficult to apply computation under provisions of section 48. A business undertaking as a going concern includes all rights, assets, contingent or definite, corporeal and incorporeal and all interest in advantage, present or future. It also includes the management, executive employees and anything which goes as part of organization including the potentiality of the organization to grow. It contains a variety of elements, both tangible and intangible. It remains in insubstantial in form and nebulous in Character. A going concern is a dynamic concept characterized by perennial change influenced by socioeconomic ecology. A going concern is essentially a functioning living organism possessing attributes of vitality, growth and evolution. Obviously, it would not be possible to conceptualize the cost of acquisition of such a going concern as well as date of acquisition thereof. If the cost of acquisition and/or the date of acquisition of the asset cannot be determined, then it cannot be brought within the purview of section 45 for levy a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Shetty (supra). With regard to the submission of learned DR of the revenue by placing reliance on the decision of Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra), we are of the view that the same cannot be accepted. In the case of Premier Automobiles Ltd. (supra), the issue before the Hon'ble Bombay High Court was whether there was a slump sale of business as going concern or was it a case of an itemized sale of assets and their Lordships held, in the facts and circumstances of that case, that entire business was sold by the assessee as a going concern without any intention of sale of itemized assets. As regards the computation of capital gains arising from the sale of a going concern, Hon'ble Bombay High Court, however, did not render my verdict and sent back the matter to the Assessing Officer with a direction to decide whether any capital gains tax liability arises from such sale and if so, to compute the quantum of capital gains under section 45 to 50. Thus, the issue pertaining t the chargeability of profit arising from slump sale of business as a going concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including, interalia the effect of cenvat credit. The working given on page No.143 of the PB-1 comparing the exclusive method followed and section 145A provisions. Therefore, since the assessee also draws the attention to page nos.140 143 of PB-1 which aptly brings out that since the adjustment as per section 145A has already been done, there is no further adjustment required. Further the assessee also relies on the decision of the Delhi High Court in case of CIT vs. Mahavir Aluminium Ltd. (Del)(Spl Bench) wherein it is held that for the purpose of section 145A the modvat element in opening stock should also be adjusted and the addition only to closing stock is not appropriate. Besides, the Bombay ITAT has held in the case of J.B.Chemicals v. ACIT (10 SOT 362) that for giving effect to Section 145A, the adjustment should be made not only to the closing stock but also to purchases. The assessee submits that the working shown in Tax audit report is in accordance with these two decisions and hence the addition made by the AO only to closing stock deserves to be deleted. Hence the assessee prays that the aforesaid adjustment be deleted. 47. The CIT(A) however did not agree with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. Work in Progress 1. Opening stock 13,473,836 2. Less: Closing stock 14,110,643 (6,36,807) D. Finished Goods 1. Opening Stocks 4,947,568 2. Purchases - 3. Less: Closing Stock 7,929,290 (29,79,722) 22,47,29,796 Less: Modvat ST Set off utilized on Materials consumed 22,47,29,796 Add: Excise Duty Payable on Closing Stock 1,42,81,881 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) erred in upholding the action of the AO of making an addition of ₹ 17,15,222/- as Income under various heads such as technical services, interest, dividend etc. as per AIR without explaining any basis for such addition and without considering the various submissions made by the appellant. 2. The appellant prays that the addition of ₹ 17,15,222/- ought to be deleted. 54. The AO based on the Annual Information Report (AIR) database noticed that on the following income tax has been deducted at source by the person making payment to the assessee but the assessee has not offered such receipts to tax. The details may be summarized as follows: (i) Fees for profession technical services ₹ 16,46,102 (ii) Dividend ₹ 55,620 (iii) Interest ₹ 12,500 (iv) Total ₹ 17,14,222 Out of the above, the assessee had actually reconciled and explained the amount of ₹ 12,27,826/- vide its letter to the AO dated November, 30, 2007. The reconciliation so provided is completely ignored b ..... 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