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2015 (10) TMI 2175 - ITAT MUMBAI

2015 (10) TMI 2175 - ITAT MUMBAI - TMI - Gifts made - whether transaction resulted into transfer of capital asset u/s 45 giving rise to capital gain? - CIT(A) confirming the application of provisions of Section 50B to the aforesaid gift made by the assessee - Held that:- Fact worth mentioning is that in the gift deed dated 31/12/2007, the signatories are the assessee on one part and in second part also the assessee and Ms. Neha Nitin Dessai (as Director of the Company), thus, the donor and the d .....

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his business and still is de-facto owner, having 49% shares being Chairman cum MD.

So far as the argument of the ld. counsel for the assessee that stamp duty of ₹ 60 lakh was paid, there is uncontroverted finding in the impugned order that the stamp duty was not paid by the donor but by the donee and the capital gain tax was not paid in lieu of this gift but for transfer of share by the assessee to RBE, thus, from this angle also, the assessee is not having a good case. Even ot .....

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taking the full value of asset at ₹ 23,52,49,025/-, as per section 50B of the Act, there was no valuation in books of the assessee and the valuation made in the case of transferee, on the date of gift is ₹ 23,52,49,025/-, meaning thereby, revalued asset has been transferred and not the book valued asset. It is also noted that the assessee claimed bad debt written off as on 31/12/2007, meaning thereby, the book value of asset and liability, so transferred, has been revalued on the dat .....

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long term capital gain will be at ₹ 1,26,41,695/-, thus, so far as, taxability of capital gain is concerned, we find no infirmity in the impugned order, in giving direction to the Assessing Officer. So from this angle also, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals). - Decided against assessee.

Depreciation disallowed - not considering that a gift of running business results into succession - Held that:- The share holding was red .....

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1% share of NDAW on 24/12/2007 to RBE and the transfer was a sham transaction, consequently, there is no succession of business as there was no asset in the balance sheet, therefore, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals). - Decided against assessee.

Disallowance of setting off of unabsorbed depreciation u/s 32 (2), against salary income - Held that:- Assessee sold out only part of the business of earlier years meaning thereby, the .....

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Decided against assessee.

Disallowance of right off of sundry debts, which were no longer realisable in the books of the assessee - Held that:- There is uncontroverted finding in the impugned order that the assessee has gifted/transferred all his asset and liabilities to NDAB as going concern, therefore, the claim of bad debts written off on the pretext that these were written off prior to 31/12/2007 is sham and part of colorful tax planning. We also note that, as claimed by the asses .....

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enuine and bona-fide debt, based on commercial expediency, thus, the decision in DIT vs Oman International Bank SAOG (2009 (2) TMI 54 - BOMBAY HIGH COURT ) supports our view. Since the entire claim of the assessee is a colorable device, therefore, we find force in the argument of the ld. DR - Decided against assessee.

Disallowance of preoperative project expenses and deferred revenue expenses written off - Held that:- Totality of facts clearly indicates that these expenses are not all .....

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mber, and Shri Ashwani Taneja, Accountant Member For The Assessee : Shri M.C. Naniwadekar For The Revenue : Shri Vijay Kumar Soni-DR ORDER Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 29/02/2012 of the ld. First Appellate Authority, Mumbai. Following grounds have been raised by the assessee:- 1. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming that gifts made by the assessee has resulted into transfer of capital a .....

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stances of the case and in law, the Ld. CIT(A) erred in not considering that a gift of running business results into succession and thus erred in confirming the disallowance of depreciation claim under section 32(1). 5. On facts and circumstances of the case and in law, the Ld. CIT(A) erred in not allowing setting off of unabsorbed depreciation against salary income, when such unabsorbed depreciation becomes part of current year depreciation and is eligible for set off u/s 71. 6. On facts and ci .....

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i, ld. DR. The crux of argument advanced on behalf of the assessee, with respect to grounds 1 to 3 is that the assessee gifted the amount to this private limited company. Section 50B of the Act is not applicable in the case of a gift. Our attention was invited to page 36 of the paper book containing the gift deed by pointing out that it is a registered gift deed on which stamp duty was paid. It was contended that section 50B speaks about slump sale, therefore, in the present appeal, it is not a .....

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it is a merely a sham transaction, therefore, the impugned order was strongly defended. 2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee provides services for erecting the sets of films, stage show, stages for marriage and other functions. The assessee (hereinafter the donor) was having almost 100% shares in a company called Nitin Dessai Art World Pvt. Ltd. (hereinafter in short NDAW ), incorporated in the year .....

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₹ 23,52,49,025/-, as per gift deed dated 31/12/2007 (para 1 & 13), it was stated as under:- 1. The Donor hereby transfers to the donee company, the said business undertaking as a going concern, including all assets and liabilities of his two proprietary concernviz Nitin Chandrakant Desai proprietary concern and Trimitik Construction Company as appearing in the balance sheet of the said concern as at 31/12/2007 in the schedule forming part of this deed. In addition to the assets and lia .....

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n Chandrakant Desai Proprietary concern and Trimitik Construction company on the terms and conditions herein before stipulated. 2.1. In view of the above, clauses in gift deed, the slump gift was claimed to be not taxable, as per section 47 (iii) of the Act, under the head capital gains. In para 3 of the gift deed, it was stated that said transferred is for nil consideration in view of the sentimental attachment . The ld. Assessing Officer raised the following questions:- (i) Can a gift be recei .....

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e otherwise a transfer, yet have been kept out of the preview of capital gains. 2.2. The ld. Assessing Officer considered the submissions of the assessee as contained in para 4.4 & 4.5 of the assessment order and further discussion made in para 4.6. The ld. Assessing Officer was of the view that company cannot receive a gift as there is no mutual love and affection. The Assessing Officer opined that it is not a gift as such and it is merely a colorable device, more specifically, the donor ha .....

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actual finding recorded by the ld. Commissioner of Income Tax (Appeals) is reproduced hereunder for ready reference:- 1.3. I have considered the facts and perused the material on record. It is seen that the assessee was 100% shareholder of NDAW as on 24-12-07 and proprietor of two concerns namely Nitin Desai Chandrakant Desai and Trimitik Construction Co. The appellant has suddenly sold his 51% shore in NDAW to Reliance Big Entertainment (RBE) on 24-12-07 and thereafter transfers assets and liab .....

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o is Chairman cum Managing Director of the said company and holds 49% share. These facts shows that the so called gift made by the appellant was sham, a mirage. chimera in the cloak by which a manipulated transaction is effected to avoid taxable long term capital gain. The alleged gift is colorable device as the gift is being made by the appellant to a company of which he was 100% owner before a week. and still holds 49% share and he is Chairman cum Managing Director of the donee company. Theref .....

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t a living thing: The gift is generally given out of love and affection, but in the case of the assessee there cannot be any love and affection attached to an artificial person created by statute. 1.3.2 Further, the gift has been made by the appellant on 31-12-07 to a company and before the amendment by Finance Act 2010, the company or firm was not recognized to receive a gift as per provisions of section 56(2) of the Act. Thus at the prevalent time when the gift was made by the appellant only I .....

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tax Act, only to make the transaction as taxable gift. Similarly clause (vii) in section 56(9) was inserted w.e.f. 1-6-2010 to make the gift taxable in the hand of a company. Therefore, the legislature s intention was to have a entity of company as taxable entity whenever there is a gift either under Gift Tax Act or Income-tax Act. Thus the company was not an entity or person at the relevant time when gift was made and therefore there was no taxability of gift to company. Thus gift made by the a .....

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lso Shri Nitin Chandrakant Desai and Mrs. Neha Nitin Desai (as directors of company). Thus in effect donor and done as a signatory are the same person, hence, one cannot make gift to himself and gift made by such manner is void. 1.3.4 Further gift means irrevocable transfer of all asset, whereas Para 6 of gift deed dated 31-12-07 stated that the appellant donor is still owner of the premises on which temple, and status are standing. Further, as per Para 3 and 6(iii) of gift deed the donor desire .....

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tax as stamp duty of ₹ 60 lacs is paid and tax on capital gain is paid at ₹ 40 lees. I find that the stamp duty is not paid by donor but donee and capital gain tax is not paid in lieu of this gift but in lieu of transfer of share of by the appellant to RBE. hence. these argument do not have any force and therefore immaterial in case of gift made by the appellant. 1.3.6 The provisions of section 47(xiv) are an exclusion clause for cases which are otherwise a transfer. Since the donor .....

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way of allotment of shares of company and retained , more than 51 per cent of shareholding in company for a period of six years, sale transaction was a transfer within meaning of section 47(xiv). Thus the appellant s case is squarely covered by aforesaid decision; hence, there is transfer within exclusion clause of section 47(xiv). The AO has relied in case of Vodafone Essar Gujarat Ltd. which laid down that gift is not an arrangement. The scheme of arrangement contemplates give and take between .....

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section 508 applies to slump sale and considers the net wealth as per explanation 1. The AR has worked out net worth at (-) ₹ 3,05,10,636/- (19, 20,96,694 - 22, 26,330). However, this working of the assessee is not-correct. It is seen that there is no valuation in books of assessee and valuation made in the case of transferee on the-day of gift at ₹ 23,52,49,025/-. Hence what have been transferred are the revalued asset and not the book value of the asset. Further the appellant have .....

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onsideration would be considered at ₹ 23,52,49,025/- minus liabilities transferred and valued at ₹ 22,26,07,330/-. Accordingly, long term capital gain would be at ₹ 1,26,41,695/- (23,52,49,025- 22,26,07,330). The AO is therefore directed to consider long term capital gain at ₹ 1,26,41,695/- instead of -Rs. 23, 52,49,025 considered by the AO. In the light of above facts and circumstances, the findings as related to taxability as capital gain is upheld, subject to recalcula .....

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o concern namely Nitin Dessai Chandrakant Dessai and Trimitik Construction Company. The assessee sold/transferred his 50% shares in NDAW to Reliance Big Entertainment (hereinafter in short RBE) on 24/12/2007 and thereafter, transferred asset and liabilities of his two proprietary concerns by way of gift. As per the Revenue, it is a colorable tax planning. Admittedly, the assessee made gift of two concerns to a third person/third concern of which he is still share holder to the extent of 49%, mea .....

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ing that the assessee even after the alleged gift is still the Chairman and the Managing Director of the donee company. In other words, it can be said that the donor and the donee are the same person. However, for making a valid gift, the donor and the donee are supposed to be different entity, consequently, it can be concluded that it is nothing but a colorable tax planning to avoid the incidence of tax. 2.5. If this issue is analyzed with respect to mutual love and affection, which is one of t .....

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ich is clearly before the amendment effected by the Finance Act, 2010. At the relevant time, when the gift was made, only the individual or HUF were entitled to receive gift, thus, such a arrangement cannot be recognized because it is not accordance with the provisions of Gift Tax Act. Even as per section 2(XVIII) of the Gift Tax Act, 1958, it includes company, as a person, and consider the gift as taxable, which clearly shows that the company, as a person, was included in the Gift Tax Act only .....

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C), clearly comes to the rescue of the Revenue, because, as discussed earlier, it is merely a colorable tax avoidance planning. Another fact worth mentioning is that in the gift deed dated 31/12/2007, the signatories are the assessee on one part and in second part also the assessee and Ms. Neha Nitin Dessai (as Director of the Company), thus, the donor and the donee, as a signatory, are the same person, thus, gift to himself, under the facts available on record, is quite unjustified. Further, as .....

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he assessee that stamp duty of ₹ 60 lakh was paid, there is uncontroverted finding in the impugned order that the stamp duty was not paid by the donor but by the donee and the capital gain tax was not paid in lieu of this gift but for transfer of share by the assessee to RBE, thus, from this angle also, the assessee is not having a good case. Even otherwise, the provision of section 47(v) of the Act is an exclusion clause for the cases which are otherwise a transfer. Under the present set .....

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sideration by way of allotment of shares of the company and retained more than 51% of the share holding in the company for a period of six years, the sale transaction was held to be a transfer within the meaning of section 47(XIV) of the Act, thus, from this angle also, the assessee is having no case at all. 2.7. So far as, computation of capital gain by the Assessing Officer taking the full value of asset at ₹ 23,52,49,025/-, as per section 50B of the Act, is concerned, the contention of .....

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ng thereby, the book value of asset and liability, so transferred, has been revalued on the date of transfer in the books of the assessee, thus, the value of consideration, for the purposes of capital gain, has to be at ₹ 23,52,49,025/-. However, the transfer was effected along with liability, therefore, the net worth is to be considered for the purpose of computation of the capital gain u/s 50B of the Act, consequently, the sale consideration would be considered at ₹ 23,52,49,025/-m .....

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dismissed. 3. Now, we shall take up the ground (ground no.4) with respect to not considering that a gift of running business results into succession and confirmation of disallowance and deprecation u/s 32(1) was challenged by the assessee. The crux of argument advanced on behalf of the assessee is identical to the ground raised by contending that if the gift is a sham transaction then what was transferred by the assessee. It was explained that the depreciation was claimed on proportionate basis. .....

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vide submissions dated 25/11/2010 revised the same to ₹ 1,66,18,172/-, wherein, assessee claimed proportionate depreciation till 31/12/2007, which was subsequently gifted/transferred to NDAW. The assessee was asked that since the assessee has already transferred the asset, therefore, how, proportionate depreciation can be allowed. The assessee claimed the depreciation as per 5th proviso to section 32(2) which provides that in the case of succession of business, proportionate depreciation w .....

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he assessee was given handsome remuneration. Even otherwise, depreciation is calculated on the written down value of the block of asset. Since, we have affirmed the stand of the ld. Commissioner of Income Tax (Appeals) that the claimed gift is a sham transaction/colorable device for the purposes of capital gains, thus, there is no question of proportionate depreciation. The fifth proviso to section 32(2) applies in case of succession of business as the assessee has transferred 51% share of NDAW .....

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when such unabsorbed depreciation becomes part of current year depreciation and is eligible for set off u/s 71 of the Act. At the outset, the ld. DR, contended that this issued is covered against the assessee in the case of Chandra Kumar vs ACIT (2010) 36 DTR 378 (Chennai) order dated 20/11/2009. On the other hand, the ld. counsel for the assessee contended that in the case of Shri V. Laxmanan vs ITO (ITA No.198/Mds/2010), vide order dated 10/12/2010, the issue has been decided in favour of the .....

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d 19/10/2010 claimed that it has to be read with section 71(2A) and also section 72 of the Act, which discuses about the treatment to be given to the business loss. Reliance was placed upon the decision in CIT vs Jaipuria Clay Mines Pvt. Ltd. 59 ITR 555, which deals with section 24(2) of the 1922 Act (corresponding to section 72 of the 1961 Act) and section 10(2) of 1922 Act (Corresponding to section 32(2) of the 1966 Act). The ld. Assessing Officer by following the decision in Chandra kumar vs .....

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in assessment was affirmed against which the assessee is in appeal before this Tribunal. 5.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that the assessee sold out only part of the business of earlier years meaning thereby, the assessee discontinued his business and the same was not .....

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Times Guarantee Ltd. (2010) 40 SOT 14 Mumbai (SB), wherein, it was held that provisions contained in section 32(2) is substantive and the same is applicable prospectively w.e.f. 2002-03 onwards. It was further held that brought forward and unabsorbed depreciation of earlier years cannot be included within the scope of section 32(2) of the Act, thereby, the assessee cannot claim set off of the same against the income of subsequent years i.e. A.Y. 2002-03 onwards. The loss under the head business .....

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by way of gift the asset and liabilities which existed as on 31/12/2007 in the balance sheet of the proprietary concern to NDAW and just standing in the books of accounts, on the asset side, without any real value. It was claimed that they are nothing but fictitious asset, therefore, gifting such fictitious and worthless would not have amounted to gift at all. On the other hand, the ld. DR, strongly opposed the contention of the assessee and defended the impugned order. 6.1. We have considered t .....

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e sundry debtors of earlier year cannot be written off as bad debts. There is further finding that the details of bad debts ledger and journal copy also shows that these bad debts were written off on 31/12/2007 and even the book entry was passed on 31/12/2007 in the books of the assessee, whereas, such asset and liabilities were transferred on 31/12/2007. We are of the view, the written off indeed should be genuine and bona-fide debt, based on commercial expediency, thus, the decision in DIT vs .....

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6,71,013/- and deferred revenue expenses written off amounting to ₹ 23,87,393/- in the books of accounts. The ld. counsel for the assessee contended that these are allowable expenses to be written off, whereas, the ld. DR strongly contended that the impugned expenses were claimed to be incurred for wrong and extraneous reason, therefore, cannot be allowed. 7.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee .....

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