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2015 (10) TMI 2385 - KARNATAKA HIGH COURT

2015 (10) TMI 2385 - KARNATAKA HIGH COURT - [2015] 379 ITR 375 (Kar) - Entitlement to carry forward and set-off of business loss - assessee not owning 51% voting powers in the company as per Section 79 of the Act by taking the beneficial share holding of M/s. Amco Properties & Investments Ltd. - Held that:- Dealing with a case under Section 79(a) and (b) of the unamended Section [Clause (b) was deleted w.e.f. 01.04.1988] and while relating to Clause (a) of Section 79 of the Act, the Apex Court i .....

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3, yet, there was no change of control of the Company, as the control remained with the ABL as the voting power of ABL, along with its subsidiary Company APIL, remained at 51%. The Supreme Court further observed that the object of enacting Section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in the Companies which had sustained losses in earlier years. In the present case, the control over the Company, with 51% voting power, remained wi .....

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gh the amount was payable and paid in instalments on subsequent dates. This we say so, also because the law is well settled that while interpreting the provisions of taxing statutes, where two views are possible, the one which is in favour of the assessee should be adopted. - Decided in favour of assessee. - ITA No. 766 of 2009, ITA Nos. 769/2009, 1046/2008, 765/2009 & 767/2009 - Dated:- 7-10-2015 - Vineet Saran And B. Manohar, JJ. For the Appellant : Sri K. V. Aravind, adv A/w Sri. G. Kamaladha .....

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spondent-assessee M/s.AMCO Power Systems Limited is a Company engaged in the manufacture and sale of storage batteries. By an agreement dated 01.03.1998 between M/s.AMCO Batteries Limited (for short 'ABL') and the respondentassessee- M/s. AMCO Power Systems Limited (for short 'APSL'), the former had agreed to transfer the technical know-how and grant of non-exclusive license with effect from 01.03.1998 to the respondent-assessee to manufacture and sell Pocket Plate Nicad Batterie .....

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9. Before 31/5/2006 ₹ 90 lakhs 3. However, admittedly the payment for the entire consideration was not made by the assessee-APSL to ABL strictly as per the schedule but according to the details given herein below: i. 31/05/1998 ₹ 10,00,000 ii. 01/09/1999 ₹ 50,00,000 iii. 16/03/2002 ₹ 5,00,000 iv. 31/03/2002 ₹ 40,00,000 v. 25/04/2002 ₹ 5,00,000 vi. 17/01/2003 ₹ 5,00,000 vii. 03/04/2004 ₹ 30,000 viii. 13/04/2004 ₹ 1,60,000 ix. 13/07/2004 ₹ .....

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Section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short) and accepted on 06.02.2004. Subsequently, the case of the assessee relevant to assessment year 2003-04, was taken up for scrutiny and assessment under Section 143(3) of the Act, which was completed on 28.02.2006 and the income of the assessee for the said year was determined at ₹ 1,34,03,589/-. This was done so, primarily because the deduction under Section 35AB of the Act, as claimed by the .....

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r the assessment year 1998-99, in which also the benefit of Section 35AB of the Act had been claimed and granted, could not be reopened. 6. Aggrieved by the order of assessment passed under Section 143(3) of the Act, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) for the assessment year 2003-04, primarily on two grounds:- (1) disallowance of ₹ 83,33,333/- (being 1/6th of ₹ 5.00 crores claimed as deduction under Section 35AB of the Act) in respect of .....

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ing the change in beneficial holding of 51% or more, as provided under Section 79 of the Act. 7. Being aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee as well as Revenue, both filed appeals before the Income Tax Appellate Tribunal, Bangalore, Bench-B. (hereinafter referred to as 'the Tribunal' for short). The assessee challenged disallowance of the benefit claimed regarding set-off of brought forward losses, whereas the Revenue filed an appeal challenging .....

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is appeal raising two substantial questions of law, which, by consent of learned counsel for the parties are re-framed as under: 1. "Whether the Tribunal was correct in holding that the assessee would be entitled to carry forward and setoff of business loss despite the assessee not owning 51% voting powers in the company as per Section 79 of the Act by taking the beneficial share holding of M/s. Amco Properties & Investments Ltd.,? 2. Whether the Appellate Authorities were correct in ho .....

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evan J Neeralgi and Sri.K.V.Aravind, learned counsel for the Revenue in all the appeals; and Sri.A.Shankar, learned counsel appearing for the respondent-assessee in all the appeals, and have perused the records. 10. Question No.1: This question relates to whether the respondentassessee would be entitled to carry forward and set-off of business losses even though, as per the Revenue, the voting power of the respondent had been reduced below 51% of the shareholding, and consequently voting power o .....

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pments Limited (for short 'the 'TAFE') and consequently ABL retained only 6% shares and its subsidiary APIL held 45% shares and the remaining 49% shares were with TAFE. Similar shareholding continued for the assessment year 2003-04. For easy understanding, shareholdings of the respondent-Company for the relevant assessment years is given in the chart below: Financial Year 31/3/1999 31/3/2000 31/3/2001 31/3/2002 31/3/2003 Assessment Year 1999-2000 2000-01 2001-02 2002-03 2003-04 Share .....

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evious 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…….. Provided further ……&hell .....

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of the voting power on the last day of the year or years in which the loss was incurred. 14. The contention of the learned counsel for the Revenue is that, upto the assessment year 2001-02 there was no dispute that the ABL continued to have 51% or more shares as its shareholding. In the said assessment year, the ABL was holding 55% shares and that its subsidiary APIL was holding 45% shares. For the assessment year 2002-03, when the ABL transferred 49% shares (out of its 55%) to TAFE, then ABL w .....

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bsidiary of ABL, but both the companies would be separate entities and cannot be clubbed together. By transfer of its 49% shares to TAFE, the shareholding of ABL was reduced to 6% only, and the submission thus is that the provisions of Section 79 of the Act would be attracted for denying the benefit of carry forward losses to the respondent-assessee. 15. Per contra, Sri.A.Shankar, learned counsel appearing for the respondent-assessee, has submitted that it is not the shareholding which has to be .....

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r accepting the submission of the assessee, held that 51% of the voting power was beneficially held with the ABL during the assessment years 2002-03 and 2003-04 also, and would thus be entitled to carry forward and set-off of business losses for the previous years. 17. The fact that ABL is the holding Company of APIL, which is the wholly owned subsidiary of ABL and that Board of Directors of APIL are controlled by ABL, is not disputed. The submission of the learned counsel for the respondent-ass .....

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n, yet by virtue of being the holding Company, owning 100% shares of APIL, the voting power of ABL cannot be said to have been reduced to less than 51%, because together, both the companies had the voting power of 51% which was controlled by ABL. 17. The purpose of Section 79 of the Act would be that benefit of carry forward and set-off of business losses for previous years of a company should not be misused by any new owner, who may purchase the shares of the Company, only to get the benefit of .....

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ued to have even after transfer of 49% shares to TAFE, as it controlled the voting power of APIL, and together, ABL had 51% voting power. Meaning thereby, the control of the company remained with ABL as the change in shareholding did not result in reduction of its voting power to less than 51%. 18. While dealing with a case under Section 79(a) and (b) of the unamended Section [Clause (b) was deleted w.e.f. 01.04.1988] and while relating to Clause (a) of Section 79 of the Act, the Apex Court in C .....

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e was no change of control of the Company, as the control remained with the ABL as the voting power of ABL, along with its subsidiary Company APIL, remained at 51%. The Supreme Court further observed that the object of enacting Section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in the Companies which had sustained losses in earlier years. In the present case, the control over the Company, with 51% voting power, remained with ABL and, .....

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greement, the amount was payable between 31.5.1998 and 31.05.2006; and had actually been paid within time though not strictly as per the instalments provided in the agreement, the details of which have already been given earlier in this order. 21. The submission of learned counsel for the appellant-Revenue is that the benefit can be claimed only when the actual payment is made, and since no payment was made on the date of transfer of the technical know-how (which was 01.03.1998), as the first pa .....

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the date when it was responsible/liable to pay as per the agreement, and not on the date of transfer of the technical know-how. 22. Per contra, learned counsel for the respondent-assessee has submitted that the liability to pay would arise on the date of the agreement, when the know-how had been transferred, even though the assessee may be required to pay the amount on a later date, as per schedule in the agreement. It is contended that the 'liability to pay' is different from the ' .....

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vant Sections of the Income Tax are: S.32(1)(ii) (relating to depreciation); S.35AB (relating to expenditure on know-how); S.43(2) (relating to definition of paid); and S.43(B) (relating to certain deductions to be made on actual payment). The said Sections are reproduced below: "Depreciation. S.32(1)(ii) In respect of depreciation of - (i) xxxx (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangibl .....

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Provided……………." S.35AB. Expenditure on know- how (1) Subject to the provisions of sub- section (2), where the assessee has paid in any previous year [relevant to the assessment year commencing on or before the 1st day of April, 1998] any lump sum consideration for acquiring any know-how for use for the purposes of his business, one- sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and .....

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t;profits and gains of business or profession" (3) xxxxx (4) xxxxx (5) xxxxx (6) xxxxx Certain deductions to be only on actual payment S.43B- Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of - (a) any sum payable ……….. (b) any sum payable ………. (c) any sum referred ……… (d) any sum payable………. (e) any sum payable…… .....

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how was not a depreciable asset. But after 01.04.1998, because of amendment in Section 32 of the Act, know-how is now a depreciable asset. Know-how acquired after 01.04.1998 would be a depreciable asset. For the purpose of this case, it may be noted that know-how was acquired on 01.03.1998, which was prior to 01.04.1998, and hence the assessee would not be entitled to benefit of depreciation. The corresponding amendment was brought in Section 35AB of the Act, wherein it was provided that the ben .....

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ntangible assets, such as know-how, patent rights etc., were included for depreciation only after 01.04.1998, which was by the amendment in Section 32 of the Act. 25. In the present case, there is no dispute about the fact that know-how was acquired on 01.03.1998, which was prior to 01.04.1998. It is also not disputed that payment for acquiring such know-how was made only in instalments after 01.04.1998. The question now would be as to whether the benefit of Section 35AB of the Act would be avai .....

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f Section 43 of the Act defines "paid" to mean as 'actually paid' or 'incurred'. 'Actually paid' would be as per the cash system of accounting, and 'incurred' would be for the mercantile system of accounting. Admittedly, the assessee was following the mercantile system of accounting. The crucial word thus would be "incurred". According to the appellant- Revenue, the assessee would incur such liability to pay only as per the schedule given in th .....

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to pay would arise on the date when the technical know-how was transferred, which was 01.03.1998; and merely because the payment had been deferred, it cannot be said that the liability had not incurred on such date, as the assessee was following the mercantile system of accounting and not the cash system. Learned counsel has also submitted that 'actual payment' is different from 'incurring of liability to pay'. For this, reliance has been placed on Section 43 B of the Act which .....

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d using the know-how, it would become liable to pay on such date of transfer of know-how, even though the payment for the same may be due on a deferred date. 29. The payment, in the present case, had been deferred to such dates as provided in the agreement, which have been reproduced herein above. The Act itself contemplates certain deductions to be given only on 'actual payment' (as in case of Section 43B), even in case where mercantile system of accounting is followed. Such is not the .....

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wever, for the subsequent four years i.e., for assessment years 1999-2000, 2000-01, 2001-02, 2002-03, the cases have been re-opened, and the benefit which was granted by accepting the return under Section 143(1) of the Act has been withdrawn; and for the assessment year 2003-04 the same was denied by the Assessing Officer itself. 31. In support of their submissions, learned counsel for both parties have relied on the following three decisions of the Apex Court: i) Keshav Mills Ltd. -vs- Commissi .....

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tries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising o .....

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ws from the above that the mercantile system of accounting treats profits or gains as arising or accruing at the date of the transaction notwithstanding the fact that they are not received or deemed to be received and under that system, book profits are assessed as liable to tax". 33. In our view, the ratio of the decision would go in favour of the assessee and not the Revenue, as the moment a legal liability to pay arises, and before the actual disbursement is made, the assessee has incurr .....

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accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas under the mercantile system credit entries are made in respect of amounts due immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actua .....

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he liability to pay arises, such liability is incurred by the assessee. 36. The ratio in the case of Gajapathy Naidu (supra) would also go in favour of the assessee as it has been held that "an income accrues or arises when the assessee acquires right to receive the same" and it is further held that the mercantile system of accounting "brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amou .....

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e Revenue on the phrase 'lumpsum consideration' in Section 35AB of the Act. It is contended that the payment, or the incurred liability to pay, should be in lumpsum and if the payment is not made in lumpsum, but in instalments, as in the present case, the benefit of Section 35AB would not be given to the assessee. The said issue was considered by the Jharkand High Court in the case of Tata Yodogawa Ltd., -vs- Commissioner of Income-Tax (2011) 335 ITR 53 (Jharkhand) and in paragraph-16 of .....

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on 35AB of the Act, in the facts of the present case, would only mean that the liability to pay the entire amount or "lumpsum consideration" had occurred on the date of the agreement and transfer of know-how, even though the payment may not have been made in lumpsum, but deferred over a period of time. 40. While dealing with the said Section, the Bombay High Court, in the case of Commissioner of Income-Tax -vs- Raymond Ltd., (2012) 71 DTR (Bom) 258, which was also based on facts simila .....

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ng upon the basis of which the profits or gains are computed under the head 'Profits and gains of business or profession'. In a judgment of a Division Bench of this Court in Additional Commissioner of Income-tax Vs. Buckau Wolf New Indian Engineering Works Ltd. (1985) 46 CTR (Bom) 200: (1986) 157 ITR 751 (Bom), the issue arose in the context of an agreement under which an assessee was to pay an amount of ₹ 1,00,000/- to its German collaborators in annual instalments of ₹ 20,0 .....

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basis of the mercantile accounting system, and if the terms of the agreement were construed it would have to be held that the assessee had incurred the entire liability for the payment of ₹ 1,00,000/- in the assessment year under consideration though the actual payment was spread over five years. The judgment of the Division Bench also followed a decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971) 82 ITR 363 (SC) in holding that the issue as to whether the assesse .....

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lities. The assessee had evidently incurred the liability to pay the entire amount under the agreement dated 1st October 1993. In that view of the matter the finding of the CIT(A) that the assessee would be entitled to a deduction of one-sixth of the entire amount in respect of which the assessee had incurred a liability in the previous year relevant to the Assessment Year in question is correct. The finding is also justified having regard to the meaning of the expression "paid" in Sec .....

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