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TMI Blog2018 (2) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... equity shares and equity oriented mutual funds which was exempt from tax. The said dividend income and long term capital gains have been claimed as exempt from income tax under section 10(34) and 10(38) of the Act respectively. The Assessing Officer (hereinafter referred to as the AO) held that in the preceding year 1% of the dividend income has been disallowed under section 14A after assessee has explained his position. The assessee has also filed the computation of allocation of indirect expenses attributable to earning the exempt income which worked out to Rs. 1.18 Cr. However, after insertion of rule 8D there is no occasion for estimation of disallowance under section 14A of the Act by any other method which too is only an estimated allocation of expenses. According to the AO that assessee has incurred interest expenditure and has not given exact details of the sources of the investments in shares and mutual funds. The AO concluded that it could not be ruled out that part of the interest incurred had a proximate connection with the investments in tax free securities. Therefore, AO, after giving show cause notice, calculated the disallowance by observing as under: CALCULATION B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.R. submitted that assessee has not incurred any expenses in relation either making of investments or earing of exempt income. The test which has been enunciated in Walfort for attracting the provisions of 14A of the Act. There has to be a proximate cause for disallowance with its exempt income. Once the test of proximate cause, based on the relationship of the expenditure with exempt income is established, a disallowance would have to be effected under section 14A of the Act. The company over the last few years has been on a rapid growth path. The potential of steep growth in print business encourage the management to embark on a detailed expansion plan. The company has made additions of Rs. 510 crores to its fixed assets and its turnover has also increased and the capital borrowing has come down to very nominal level. During the A.Y. 2008-09 the company has incurred an interest expense of Rs. 23.04 crores, out of which Rs. 20.77 crores pertained to aforesaid borrowings and the balance pertained to statutory interest payments and interest on deposits. So far as other expenses are concerned, the assessee has carried out investments activities and said expenditure has to be alloc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival contentions of both the parties. We find that assessee has produced the chart showing the summary of source and application of funds which was also available before the AO and is extracted as under for the sake of better understanding of the facts: Sources 31.03.2006 31.3.2007 31.3.2008 31.3.2009 Share Capital 32 32 32 32 Reserves and Surplus 2625 3119 3973 4347 Depreciation Reserve 523 669 843 1002 A 3180 3819 4848 5381 Application Investments on which tax-free income received 882 982 1996 2187 Investments in unlisted shares of subsidiary 313 374 514 807 Other Investments 173 324 613 812 B 1368 1680 3123 3806 SURPLUS (A-B) 1812 2139 1725 1575 It is clear from the records that the assessee has replied to show cause notice issued by the AO and furnished details before the lower authorities by means of above chart that the own funds over the years were sufficient to cover the investments in the shares and securities yielding exempt income. We also note that the borrowings of the assessee company have been utilised for other business requirements and not for making the investments as such. The en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which reads as under: "16. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.' s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Act out of abundant caution and without prejudice to the contention of the assessee that the difference is not chargeable to tax under the provisions of the Income Tax Act, 1961. In the opinion of the assessee, the transaction of hiving off the business of Planet M division is not a "Sale" but is an "Exchange". The same not being a sale therefore does not fall within the definition of "Slump Sale" u/s 2(42C) of the Income Tax Act, 1961. In the circumstances, the transfer of the division on a going concern basis being a "slump Exchange", no value can be ascribed to any asset that was transferred as part of the business. So also the cost of acquisition of the undertaking that was transferred on "Exchange" cannot be arrived at since what has been exchanged is the entire undertaking comprising of the entire division of the Planet M retail. Consequently, since the computation provisions relating to capital gain are incapable of being applied, following the ratio of the decision of the Hon'ble Supreme Court in B.C. Srinivasa Shetty (128 ITR 294), the charging provisions of capital gains are not attracted. The said ratio has also been followed by the Hon'ble M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee with Planet M Retail Limited ("the transferee"), the assessee has agreed to transfer the entire business of retailing music and other products as a going concern to the transferee on a slump exchange basis.While the assessee has taken care to use the word 'exchange' in the agreement,nowhere else in the agreement there is any reference to any 'exchange'. The substance of the agreement is that of transfer of all assets and liabilities of the running business including intangible assets described in the agreement under 'Art icle 2-Sale and Transfer of the business' for a "consideration" detailed in Article 3 of the agreement The consideration includes the shares and debentures listed above The shares are transferable and the debentures are redeemable after a period of 10 years. The debentures are nothing but a liability of the transferee to actually pay for the transfer of the business at a later date with interest. As regards shares in the transferee company they represent investment of the assessee in the transferee company which has a value. Further,there are other incidental conditions in the agreement like transfer of employees to the transferee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation so allowed cannot be taxed as balancing charge. This is because of the fact that the price identifiable and attributable to each machinery, plant or building will have to be ascertained and then only the question of computation of balancing charge under section 41(2) would arise for consideration. 5.7 In the case of Artex Mfg. Co, the transfer of business was for a net consideration of Rs. 11,50,400/- which was paid by allotment of Rs. 11,504 equity shares of Rs. 100 each fully paid up allotted to the partners in their respective profit sharing ratio. The assets of the firm were taken at Rs. 41,73,973 and liabilities at Rs. 30,23,573/- the difference being the net consideration of Rs. 11,50,400. The debt stock was revalued at Rs. 15,87,296/- as against Rs. 4,36,896/- - in the books. The assessee pleaded that no liability to tax on balancing charge under section 41(2) was attracted as the depredation assets were not sold item wise for an identified price for each The Tribunal upheld the levy of income-tax on the surplus as business profit under section 44 thereupon the assessee sought a reference to the High Court which hel4havour of the assessee that no balancing charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of taxation. 5.8 In the case of Electric Control Gear Mfg. Co the net consideration of Rs. 8,00,000/- payable by the company by allotment of shares of equivalent value to the partners of the firm in proportion to their share of profits and in the assessment of the firm an aggregate sum of Rs. 3,32,863/- was the depreciation allowed in the past years which the Assessing Officer, wanted to be taxed as balancing charge under section 41(2) and such a levy imposed by the Revenue authorities was cancelled by the Tribunal holding that there was no possibility of identification of the consideration for transfer of each capital asset and hence, no amount could be identified or attributed as the price for each depreciable asset and accordingly no question of balancing charge would arise for consideration. But the surplus on sale of capital asset was held to taxable as capital gain. 5.9 It is not denied that subsequent to the aforesaid decisions of Hon'ble Supreme Court, provision of section 50B came into the statute. Thus, even If the contention of learned AR is accepted that the transfer of net assets against allotment of equity or debt instruments of the other company wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT in the case of Bharat Bijilee Ltd v Additional Commissioner of Income Tax, ITA No.6410/Mum/2008 heavily relied upon by learned AR does not discuss the decisions of Hon'ble Supreme Court in Artex Mfg. Co. and Electric Control Gear Mfg. Co. It is also noticed that the plea that the case could also be covered under the provisions of capital gain was not discussed and debated before Hon'ble ITAT. In view thereof relying on the decisions of Apex Court and agreeing with view of AO, the additional ground raised is dismissed." 13. The Ld. A.R. vehemently submitted before us that the order of the Ld. CIT(A) is blatantly wrong and against the provisions of the Act as it affirmed the order of AO of not treating the slump exchange of assets in consideration of equity shares and 6% redeemable unsecured debentures and treated the same as slump sale thereby bringing Rs. 84,26,04,286/- as long term capital gain. The Ld. A.R. referred to para B of the business transfer agreement which is placed at page No.59 to 83A of the paper book wherein the assessee specifically pointed out that it was mentioned in the said agreement that the transferor has agreed to transfer on a going concern o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . relied upon the orders of the authorities below. The Ld. D.R. relied on the decision of CIT vs. Artex Manufacturing Co. (1997) 227 ITR 260 (SC) and CIT vs. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (SC) in which the Hon'ble Apex Court has held that surplus realized on sale of depreciable asset to the extent of the difference between the written down value and the actual cost being the depreciation actually allowed would be chargeable to tax as deemed business profits under section 41 (2) and the excess over the actual cost of the capital asset realized would be taxable as capital gain. The Ld. D.R. further argued that even if the contention of Ld. A.R. is accepted for a moment that transfer of net assets in consideration of allotment of equity/debt instruments of the other company would be a case of an "exchange" and not a "sale" the case would still be covered under the provisions of capital gains simpliciter as held by the Hon'ble Court in the two cases (supra). 16. The Ld. A.R. submitted that in the case of sale,the consideration is often discharged or settled by issuance of shares/debentures and in that case it could not be taken to mean that the said is a case of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2.-For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities ;]" 19. The above definition has to be analysed in the light of the ratio laid down in the various decisions infra.In the case of CIT v/s Motor & General Stores (P) Ltd (66 ITR 692) the assessee company entered into an "exchange deed" pursuant to which it transferred a cinema house owned by it to a company for a consideration of Rs.l,20,000. The consideration was discharged by the transferee company by way of allotment of 5% cumulative preference shares in the transferee company. The question before the Apex court was whether the transaction was a "sale" or an "exchange" and consequently whether it was liable to tax under the Income Tax Act. After observing that the expressions "sale", "price", and "exchange" were not defined in the Income Tax Act, the Apex court relied on the definitions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not allocable item-wise as was the case in Artex Manufacturing Co. [1997] 227 ITR 260. For the aforesaid reasons, we hold that on the facts and circumstances of this case, which concerns the assessment year 1970-71, it was not possible to compute capital gains and, therefore, the said amount of Rs. 10.20 crores was not taxable under section 45 of the 1961 Act. Accordingly, the impugned judgment is set aside. The Hon'ble Supreme Court in the case of CIT vs. B.C. Srinivasa Shetty (128 ITR 294) laid down the following ratio at page 299: "Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head................ All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge.................. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and computation provisions together constitute an integrated code. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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