TMI Blog2017 (3) TMI 1165X X X X Extracts X X X X X X X X Extracts X X X X ..... h comprises of both land and building for ₹ 70,00,000/- and values have been distributed by the assessee towards land and building separately. Hence we hold that the ld AO had wrongly included the sale consideration of ₹ 98,35,830/- in respect of sale of Bangalore Land and ₹ 70,00,000/- towards Belvedere Estate while computing the business income u/s 41(2) of the Act. In respect of addition made towards Bangalore Land, the ld AO had accepted the contentions of the assessee in the remand report by stating that the contentions of the assessee may be considered as the ld AO had not adduced any reason in his assessment order for treating the same as business income u/s 41(2) of the Act. In view of this, we hold that the sale consideration of Bangalore Land to the tune of ₹ 98,35,830/- and towards Belvedere Estate at ₹ 70,00,000/- should not be treated as part and parcel of slump sale of Rubber Chemicals Business Undertaking and the gains arising from sale of Belvedere Estate and Bangalore Land should be assessed only as Capital Gains as reported by the assessee. Arguments advanced by the assessee before the ld CIT(A) and findings given thereon in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly nullifies the various allegations made by the ld AO in his assessment order. We also find that this aspect was brought to the notice of the ld AO by the assessee by filing the tax audit report in Form 3CD wherein the tax auditor in reply to Clause 8(a) and 8(b) thereon had reported about this aspect. We find that the ld AO had not examined the aspect as to whether the subject mentioned profits of ₹ 10.84 crores have been reported in the total profits of Croda (CCIPL) in its books. Hence as fairly conceded by the ld AR in this regard, we deem it fit and appropriate, to set aside this issue to the file of the ld AO, with a limited direction to verify the books of CCIPL in order to know whether ₹ 10.84 crores of profits have been reported by them in their books, and if the same is found to be true, then the said addition made in the hands of the assessee company is to be deleted. Disallowance of bad debts - Held that:- From the details of bad debts placed on record, we find that the assessee had duly complied with the provisions of section 36(2) of the Act by offering the income in respect of such debts in earlier years. We find that the decision of the Hon’ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned dividend income of ₹ 1,14,72,300/- and interest on tax free bonds for ₹ 4,94,677/- and claimed the same as exempt u/s 10 of the Act. The assessee did not disallow any expenditure incurred for the purpose of earning this income which do not form part of total income. Accordingly the provisions of section 14A read with Rule 8D was sought to be invoked. The assessee replied that investment in ICICI Bank Mutual Fund from where assessee had received dividend of ₹ 1,14,72,300/- was made out of own funds of the assessee and borrowed funds were not utilized for making investments. The ld AO however did not agree to the contentions of the assessee and proceeded to disallow under Rule 8D(2)(ii) to the tune of ₹ 18,59,422/- and under Rule 8D(2)(iii) to the tune of ₹ 2,12,31,500/-. Accordingly the total disallowance u/s 14A of the Act read with Rule 8D of the Rules worked out to ₹ 2,30,90,922/-. In appeal, the ld CIT(A) by placing reliance on the co-ordinate bench decision of this tribunal in the case of EIH Associated Hotels Ltd vs DCIT reported in 126 TTJ 246 (Kol Trib) held that only 1% of exempted income needs to be disallowed in the instant case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon ble Jurisdictional High Court in the case of CIT vs R.R.Sen Brothers (P) Ltd in GA No. 3019 of 2012 I.T.A.T. No. 243 of 2012 dated 4.1.2013 wherein it was held that 1% of exempted income should have to be disallowed u/s 14A of the Act for asst years prior to Asst Year 2008-09. Respectfully following the said decision, we hold that only 1% of exempted income is to be disallowed u/s 14A of the Act. We find that the ld CIT(A) in the instant case had rightly directed the ld AO to disallow 1% of exempted income. Hence we hold that the order of the ld CIT(A) in this regard does not call for any interference. Hence, Ground No.1 raised by the assessee for the Asst Years 2006-07 and 2007-08 is dismissed and Ground No. 2 raised by the revenue for the Asst Year 2006-07 and Ground No. 3 raised by the revenue for the Asst Year 2007-08 is dismissed. 4. ADDITION UNDER SECTION 41(2) OF THE ACT IN RESPECT OF SALE OF RUBBER CHEMICALS BUSINESS AND BANGALORE LAND AND DISALLOWANCE OF DEPRECIATION The brief facts of this issue is that the assessee during the year sold its rubber chemicals business to PMC Rubber Chemical India Ltd as a going concern on slump sale basis with effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l terms of issue. Pursuant to the above, the company s shareholding in PMC-RC stood reduced to 24% . In addition to the above, the company was also entitled to receive consideration as earn outs aggregating to a maximum of ₹ 360 lakhs, if the performance of RMC-PC during the three year period 2005-06 to 2007-08 exceeded certain performance parameters. In respect of this, no earn out was earned for the year 2005-06 to 2007-08. 4.1. From the above, it would be clear from the developments subsequent to sale of the Rubber chemicals business of the company as a going concern with effect from 28th Dec 2005 , the company did not realize any additional consideration and therefore the sale of Rubber Chemicals business as a going concern resulted only in the loss of ₹ 1857 lacs as per the computation sheet shown in the return of income. The assessee in support of his contentions filed the following documents before the ld AO :- a) Copy of Business Transfer Agreement between assessee and PMC Group International Inc for sale of Rubber Chemicals business as a going concern for a slump price b) Shareholders agreement pertaining to sale of Rubber Chemicals Business. c) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld AO for disallowing the slump sale was registration of land by the assessee in favour of the purchaser post the slump sale. He accordingly proceeded to invoke the provisions of section 41(2) of the Act and brought the same as business income by increasing the sale consideration figure which apparently included consideration in the form of shares , optionally convertible debentures and earn outs based on future performances. While working out the profit in terms of section 41(2) of the Act, the ld AO also included the sale consideration in respect of sale of Bangalore Land to the tune of ₹ 98,35,830/- and sale of Belvedere Estate to the tune of 70,00,000/- . 4.5. The brief facts in respect of sale of Bangalore Land and Belvedere Estate are that the assessee sold its vacant lands at Bangalore for ₹ 98,35,830/- and since the cost of acquisition of the said lands could not be traced in its books, the assessee offered the entire sale consideration to capital gains. Similarly the assessee had Land and Building at Belvedere Estate which was sold for ₹ 70,00,000/- and disclosed long term capital loss to the tune of ₹ 58,19,463/- pursuant to indexation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Bangalore Land to the increased total sale consideration of Rubber Chemicals Business and arrived at the profit of ₹ 3,50,65,913/- u/s 41(2) of the Act. 4.9. Before the ld CIT(A), the assessee stated that the first allegation leveled by the ld AO that the transfer of its Rubber Chemical Business to PMC Rubber Chemical India Pvt Ltd as a going concern on slump sale basis can under no stretch of imagination be stated that the sale was made to self. It was argued that the said company is a joint venture between the assessee and PMC group with 49% stake of the assessee in the joint venture company and was registered with the Registrar of Companies separately and as such it is a separate legal entity under the Companies Act, 1956. Thus the transfer of Rubber Chemical Business by the assessee to a separate company having a separate legal entity cannot be stated that the transfer was made by the assessee to self. In this regard, reliance was placed on the decision of the Hon ble Bombay High Court in the case of Premier Automobiles Ltd vs ITO reported in 264 ITR 193 (Bom) wherein the Hon ble Court approved the sale of the undertaking to a joint venture company in which seller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re valued at Nil value. Further the assessee also did not receive any earn outs for the same reason. Hence the consideration of ₹ 9.82 crores and ₹ 3.60 crores thereon respectively were never received by the assessee. The assessee placed reliance on the decision of the Hon ble Apex Court in the case of CIT vs Gillanders Arbuthnot Co reported in 87 ITR 407 (SC) wherein the Hon ble Apex Court had held that the expression full value of consideration cannot be construed as the market value but as the price bargained for by the parties to the sale. The dictionary meaning of the word full is whole or entire or complete . The word full has been used in this section in contrast to a part of the price . The expression full value means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for, nor has any necessary reference to the market value of the capital asset which is the subject matter of the transfer. The assessee also impressed upon the ld CIT(A) on the real income theory and placed reliance on the decision of the Hon ble Supreme Court in the case of CIT vs Shoorji Vallabhdas and Co rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Treating sale of Bangalore Land as business income For AY 2006-07 the assessee treated the gains arising from the sale of Bangalore property as income under the head Capital Gains . The AO while passing the order issued under section 143(3) of the Act treated the gains from the sale of the Bangalore Land as Business Income by reducing the sale value of the land from the WDV of the Building used for the purpose of the business under section 41(2) of the Act without assigning any reasons in the order passed under section 143(3) of the Act. Assessee s Submission: Land is a capital asset within the meaning of section 2(14) of the Act and any gains arising from the sale of Land is to be treated as income under the head Capital Gains . The AO without any reasons erroneously treated the proceeds as Business Income under section 41(2) of the Act. Comments There is no reasoning given by the AO in his order. The comments of the assessee may be considered. 4.9.4. In respect of disallowance of depreciation, it was pointed out that what has been sold always has been an undertaking along with all the related assets and liabilities with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the Hon ble ITAT s decision for AY 1997-98. 4.9.6. The assessee stated that the sale consideration of ₹ 98,35,830/- has been included in the total addition figure u/s 41(2) of the Act in the sum of ₹ 3,50,65,913/- by treating the sale consideration of Bangalore Land as part of sale of Rubber Chemicals Business. Infact the Rubber Chemicals Business was sold to PMC Group and where as Bangalore Land was sold to Advanta India Ltd, which is a separate legal entity and not connected with PMC Group. The ld AO erroneously clubbed both the sale transactions of Rubber Chemicals Business and sale of Bangalore Land and brought the same to tax u/s 41(2) of the Act. The assessee pleaded that the sale of Bangalore Land should be brought to tax only under the head capital gains . It was stated that the property at Bangalore comprised only of land and no building was attached thereon and hence the entire consideration of ₹ 98,35,830/- was rightly attributed towards land portion by the assessee. The ld AO treated the gains arising from sale of Bangalore land as business income as reducing the sale value of the land from the WDV of the building used for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in any case, the ld CIT(A) having granted relief to the tune of ₹ 3,50,65,913/- which included the entire sale consideration of ₹ 70,00,000 towards Belvedere Estate and ₹ 98,35,830/- towards Bangalore land , ought not to have taken different stand by sustaining the said addition separately. He argued that the ground raised by the assessee before the ld CIT(A) specifically was for a totally different purpose with a prayer to treat the gains arising from sale of Bangalore land as capital gains instead of business income. 5.1. The ld AR relied on the decision of the Hon ble Jurisdictional High Court in the case of East India Electric Supply and Traction Co Ltd vs CIT reported in ( 2003) 263 ITR 243 (Cal) for non-applicability of provisions of section 41(2) of the Act in the event of slump sale of Rubber Chemicals Business undertaking. 6. The ld DR vehemently relied on the order of the ld AO. He stated that the ld CIT(A) had granted relief to the assessee by placing reliance on the order of this tribunal in assessee s own case for the Asst Year 1994-95 in ITA No. 1020/Kol/2007 dated 29.2.2008. Since this order is contested by the revenue before the Hon ble Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be treated as part and parcel of slump sale of Rubber Chemicals Business Undertaking and the gains arising from sale of Belvedere Estate and Bangalore Land should be assessed only as Capital Gains as reported by the assessee. 7.2. We find that the arguments advanced by the assessee before the ld CIT(A) and findings given thereon in respect of sale of Rubber Chemicals Business Undertaking on slump sale basis has not been refuted by the ld DR before us. We find that the decision relied upon by the ld AR on the Hon ble Jurisdictional High Court in the case of East India Electric Supply and Traction Co Ltd reported in 263 ITR 243 (Cal) is well founded on the non-applicability of provisions of section 41(2) of the Act. 7.3. With regard to the disallowance of ₹ 88,63,037/- on account of depreciation claimed by the assessee on the WDV of the Block of Assets , the ld CIT(A) observed that the details filed by the assessee were sent to ld AO for remand who had agreed to the contentions of the assessee in the remand proceedings that the issue is covered in favour of the assessee by the order of this tribunal for Asst Years 1997-98 and 2004-05. Accordingly, the ld CIT(A) gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of Assessee s appeal for AY 2007-08: 2. That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in upholding the disallowance of interest expenditure of ₹ 59,00,000/- made by the AO. 2.1.That on the facts and in circumstances of the case and in law, Ld. CIT(Appeals) erred in upholding disallowance of interest expenditure in the assessment year under consideration when he had deleted similar disallowance made by the AO in AY 2006-07. 2.2.That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in appreciating that during previous year relevant to assessment year under consideration, the appellant had not borrowed any funds and hence, no interest could be disallowed on the pretext that borrowed funds were utilized for the purpose of investment and capital work in progress of the appellant 2.3.That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in not appreciating that interest expended was mainly on account of bill discounting charges for supplier financing arrangement and charges for collection of outstation cheques. 2.4. That on the facts and in circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have heard the rival submissions and perused the materials available on record including the relevant pages of the paper book of the assessee. We find that the ld AO had conceded in his assessment order that the assessee had demonstrated from its audited annual accounts which transpires that the assessee has not borrowed any funds during the year and that the amount of interest of ₹ 2.95 crores represented mainly bill discounting charges on account of supplier financing arrangements and collection charges of outstation cheques. We find that this issue has been decided by the ld CIT(A) for the Asst Year 2006-07 in favour of the assessee by placing reliance on the remand report given by the ld AO for Asst Year 2006-07. For the sake of convenience, the conclusions drawn by the ld AO in the remand report for Asst Year 2006-07 are reproduced hereunder which are enclosed in page 598 of paper book for Asst Year 2006-07 before us :- Comments On a perusal of the order of CIT(A) for AY 2002-03, it transpires that the CIT(A) has decided in favour of the assessee and stated that the investment was out of company s own funds. From a perusal of the assessment records, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the aforesaid findings and in the facts and circumstances of the case, we hereby direct the ld AO to delete the disallowance made in the sum of ₹ 59,00,000/- towards proportionate interest . Accordingly, the Ground Nos. 2 to 2.4 for the Asst Year 2007-08 raised by the assessee are allowed. 10. ADDITION TOWARDS PROFITS OF UNIQEMA BUSINESS ₹ 10,84,00,000/- The brief facts of this issue is that the assessee company transferred its Uniqema business along with its risks and rewards to Croda Chemicals (India) Private Limited from 2.9.2006. However, for the period from 2.9.2006 to 4.1.2007, the business was run by the assessee company on behalf of Croda Chemicals (India) Private Limited (CCIPL). The income that arose from the operation of the Uniqema business during the period 2.9.2006 to 4.1.2007 was paid by the assessee to CCIPL after adjusting the income tax thereon which was deposited with the income tax authorities. The ld AO sought to bring the profits of ₹ 10,84,00,000/- being the profit during the period 2.9.2006 to 4.1.2007 as income of the assessee on the following grounds :- (a) the assessee company did not bring any thing on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 113 ITR 389 (Del) from which an inference can be drawn that when the audited annual accounts of the company clearly and unambiguously disclose the facts, the ld AO cannot state that no material was produced before him. He fairly stated that let this aspect be examined by the ld AO as to whether the said profits of ₹ 10.84 crores have been included in the returns of CCIPL as admittedly the assessee cannot be expected to have control over the affairs of CCIPL and their tax matters. He prayed that if on verification of the said fact, it is proved that CCIPL had accounted for the subject mentioned profits for the interregnum period in its books and then the same shall be directed to be deleted in the hands of the assessee company. In response to this, the ld DR vehemently relied on the orders of the lower authorities. 10.2. We have heard the rival submissions and perused the materials available on record. We find that the assessee in his Note 11 to the Notes on Accounts enclosed vide page 34 of the Annual Report for the year ended 31.3.2007 had reported as under:- Notes to the Accounts 11.Exceptional Items 11. (a) (i) The Uniqema chemicals business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early nullifies the various allegations made by the ld AO in his assessment order. We also find that this aspect was brought to the notice of the ld AO by the assessee by filing the tax audit report in Form 3CD wherein the tax auditor in reply to Clause 8(a) and 8(b) thereon had reported about this aspect (enclosed in page 140 of paper book). We find that the ld AO had not examined the aspect as to whether the subject mentioned profits of ₹ 10.84 crores have been reported in the total profits of Croda (CCIPL) in its books. Hence as fairly conceded by the ld AR in this regard, we deem it fit and appropriate, to set aside this issue to the file of the ld AO, with a limited direction to verify the books of CCIPL in order to know whether ₹ 10.84 crores of profits have been reported by them in their books, and if the same is found to be true, then the said addition made in the hands of the assessee company is to be deleted. Accordingly, the Grounds 3 to 3.2 raised by the assessee for the Asst Year 2007-08 are allowed for statistical purposes. 11. DISALLOWANCE OF BAD DEBTS ₹ 14,43,106/- The brief facts of this issue is that the assessee wrote off bad debts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the revised return. From the details of bad debts placed on record, we find that the assessee had duly complied with the provisions of section 36(2) of the Act by offering the income in respect of such debts in earlier years. We find that the decision of the Hon ble Supreme Court in the case of Goetze India Ltd reported supra does not apply to appellate authorities wherein it has been opined that although it is not open for the ld AO to entertain the claim of the assessee unless the same has been made by a return / revised return , the appellate authorities have the powers to entertain the same. We also place reliance on the decision of the Hon ble Apex Court in the case of T.R.F Ltd vs CIT supra wherein it has been opined that it is not necessary for the assessee to establish that the debt, in fact , has become irrecoverable. It is enough if the bad debt has been written off as irrecoverable in the books of accounts of the assessee. Hence respectfully following the said decisions, we direct the ld AO to delete the disallowance of bad debts made in this regard. Accordingly, the Grounds 4 to 4.1 raised by the assessee for the Asst Year 2007-08 are allowed. 12. In the result, ..... 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