TMI Blog2020 (3) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of capital asset. Coming back to the nature of capital asset being undertaking, which comprises of all assets minus all liabilities of the undertaking, the amount of capital gain means reducing the net worth, being cost of acquisition and cost of improvement of all assets minus all liabilities of the undertaking from the full value of consideration of all assets minus all liabilities of the undertaking. In computing the net worth of the undertaking or the division, as the case may be, the benefit of indexation as provided in the second proviso to section 48 has been withheld. The possible reason may be quid pro quo. By extending the benefit of lower rate of taxation on long term capital gain as provided under section 112 to the undertaking as a whole notwithstanding the fact that there may be several assets held by the assessee for a period of not more than 36 months, the Legislature though it to curtain the benefit of indexation to the cost of acquisition and cost of improvement. Enhancement of slum sale consideration from ₹ 143.21 crores to ₹ 186.58 crores - HELD THAT:- Tribunal noticed that the assessee and Fortis Hospitals Ltd had entered into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which does not form part of the total income under the Act. Rule 8D lays down the method for determining the amount of expenditure in relation to income not includible in total income. Tribunal held that assessee had not earned any exempt income during the assessment year under consideration, nor it had claimed any expenditure against any tax free income. Thus, the twin pre-conditions for invoking the provisions of Section 14A read with Rule 8D of the Rules i.e. earning of exempt income and claiming expenditure to earn the same were absent. Therefore, the order passed by the First Appellate Authority was affirmed. We are in agreement with the view taken by the Tribunal. As rightly held by the Tribunal, assessee had neither earned any exempt income nor claimed any expenditure for earning such exempt income. That being the position, Assessing Officer was not justified in making the disallowance by invoking the aforesaid two provisions. The same was rightly deleted by the First Appellate Authority which order has been affirmed by the Tribunal. Therefore, this question proposed by the revenue also fails. - INCOME TAX APPEAL NO. 1393 OF 2017 - - - Dated:- 16-3-2020 - UJJAL BHU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,71,169 u/s 14A r/w Rule 8D of Income Tax Rules, 1962 on account of expenditure incurred for earning exempt income? 4. The first question i.e Question (a) deals with the order of the Tribunal confirming the order of the Commissioner of Income Tax (Appeals) - 21, Mumbai [briefly, the CIT(A) or the First Appellate Authority hereinafter] deleting the disallowance of ₹ 18,43,30,378.00 made by the Assessing Officer under Section 50B of the Act. 4.1. In the assessment proceedings leading to the assessment order dated 28.3.2013 passed under Section 143(3) of the Act for the assessment year 2010-11, Assessing Officer disallowed claim of expenditure of ₹ 18,43,30,378.00 claimed by the assessee. It may be mentioned that assessee is engaged in the business of running various hospitals in India. During the assessment year under consideration, assessee had sold 12 hospitals under slump sale vide business transfer agreement dated 24.8.2009 to Fortis Hospitals Ltd. Assessing Officer disallowed the claim of expenditure stating that Section 50B of the Act itself was a separate code and no further deduction was required for the purpose of the said expenditure. 4.2. When t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. 4.8. This brings us to Section 50B of the Act which provides for special provision for computation of capital gains in case of slump sale. This provision being relevant, the same is extracted herein under in its entirety; Special provision for computation of capital gains in case of slump sale. 50B. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place : Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. (2) In relation to capital assets being an undertaking or division transferred by way of such sale, the net worth of the unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the components of Section 48 have to be considered. Referring to the decision of the Tribunal in the case of Summit Securities Ltd., it was held that Section 50B only determines cost of acquisition and cost of improvement of the undertaking; evidently capital gain has to be computed under Section 48. Section 50B is a code for itself only for determination of cost of acquisition and cost of improvement of the undertaking but not for the computation of capital gains in case of slum sale. Therefore, disallowance made by the Assessing Officer was interfered with and the claim of expenditure incurred for the purpose of transfer amounting to ₹ 18,43,30,378.00 was allowed. 4.10. Tribunal relied upon its own decision in the case of Summit Securities Ltd and upheld the findings of the CIT(A). Relevant portion of the order passed by the Tribunal in the case of Summit Securities Ltd. is extracted herein below:- (e) Sub-section (2) of section 50B makes it abundantly clear that the undertaking or division as a whole is considered as one capital asset and the net worth of this capital asset is considered as cost of acquisition and cost of improvement for the purposes of sections 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the First Appellate Authority deleting the enhancement of slum sale consideration from ₹ 143.21 crores to ₹ 186.58 crores. 5.1. An agreement was entered into between the assessee and Fortis Hospitals Ltd dated 24.8.2009. Clause (3) of the agreement made it clear that ₹ 186.58 crores was the negotiated value to which further adjustment was required to be done in case liability of the undertaking exceeded ₹ 599.62 crores. This clause further provided for opening of an escrow account for 2 years for an amount of ₹ 15 crores and if any further claim arose, that was to be deducted from the said amount. 5.2. Assessing Officer did not allow the deduction which occurred during the course of transaction stating that it amounted to double deduction of liabilities which was incurred during the transaction and hence, the assessee was not eligible for such deduction. 5.3. CIT(A) in first appeal held that during the slump sale transaction excess liability of ₹ 43,36,86,617.00 arose. This amount was not paid by Fortis Hospitals Ltd but was adjusted from ₹ 186.58 crores. After adjustment, the lump-sum consideration received by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 15,00,00,000 (Rupees Fifteen Crores Only) ( Escrow amount ) shall be deposited with an escrow agent mutually appointed by the parties under the Escrow Agreement ( Escrow Agent ); and (b) the difference between the Consideration and the Escrow amount shall be paid by way of wire transfer to the bank account of the Seller to be notified in writing by the Seller to the Purchaser at least five (5) business days prior to the Closing Date. 5.6. On a reading of the above clause of the agreement, it is evident that though lump-sum consideration was fixed at ₹ 186.58 crores, provision was made for deducting / adjusting any liability exceeding ₹ 599.62 crores. It was noticed by the First Appellate Authority that in the process of transaction, total liability exceeded ₹ 599.62 crores and the excess liability was quantified at ₹ 43.36 crores which amount was not paid by Fortis Hospitals Ltd to the assessee but was adjusted against ₹ 186.58 crores. The First Appellate Authority held that the amount of ₹ 43.36 crores had to be accounted on the liability side and had to be deducted from the lump-sum consideration. Therefore, when this amount wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that there was no double deduction by the assessee for the said amount and accordingly, deleted the disallowance holding that assessee was eligible for the said deduction. 6.4. On further appeal, Tribunal affirmed the view taken by the First Appellate Authority. 6.5. First Appellate Authority on reading of clause (3) of the agreement observed that there was a provision for escrow account for two years by both the parties to the agreement for ₹ 15 crores from the amount of lum-psum consideration of ₹ 186.58 crores. It was observed that if there were any further claims, that would be adjusted from ₹ 15 crores. It was further observed that when the claim of ₹ 2.79 crores was received, that amount was paid through the escrow account. The escrow account was for a period of two years. On thorough examination, CIT(A) held that there was no double deduction from the aforesaid amount by the assessee. Assessing Officer had made an error by adding the said amount in the assets and liabilities side by including it in lump-sum consideration which was against the principles of accounting. 6.6. When the matter came up before the Tribunal, it was noticed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racted herein under:- (b) Where an, industrial undertaking is transferred under slump sale which was owned and held by the assessee for not more than 36 months immediately preceding the date of its transfer, the profit or gains arising from such transfer is deemed to be capital gain arising from the transfer of short term capital assets. The relevant criteria for considering whether the undertaking is a short-term or long term is the period of owning and holding the undertaking as a whole and not individual assets of such undertaking. Suppose the undertaking was set up four years ago and some of the assets were purchased and held for a period of not more than 36 months, it is the entire undertaking which will be treated as long-term capital asset for the purposes of computing capital gain on its transfer. The period of holding of separate assets of the undertaking were purchased a day before its transfer, they will also form part of the undertaking as a long-term capital asset. So long as the undertaking is owned and held by the assessee for a period of more than 36 months, the capital gain arising from its slump sale is considered as long term capital gain notwithstanding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by the assessee in relation to income which does not form part of the total income under the Act. 8.5. Rule 8D lays down the method for determining the amount of expenditure in relation to income not includible in total income. 8.6. Tribunal held that assessee had not earned any exempt income during the assessment year under consideration, nor it had claimed any expenditure against any tax free income. Thus, the twin pre-conditions for invoking the provisions of Section 14A read with Rule 8D of the Rules i.e. earning of exempt income and claiming expenditure to earn the same were absent. Therefore, the order passed by the First Appellate Authority was affirmed. 8.7. We are in agreement with the view taken by the Tribunal. As rightly held by the Tribunal, assessee had neither earned any exempt income nor claimed any expenditure for earning such exempt income. That being the position, Assessing Officer was not justified in making the disallowance by invoking the aforesaid two provisions. The same was rightly deleted by the First Appellate Authority which order has been affirmed by the Tribunal. Therefore, this question proposed by the revenue also fails. 9. Consequ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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