TMI Blog2020 (5) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... would be MCC Finance Ltd., pursuant to the assignment of debt. Hence, the event that had happened after the date of assignment of debt, cannot be used to judge the transaction, which had happened on the date of assignment in assessment year 2011-12. Accordingly, the argument of the Ld. D. R. is dismissed. To sum up, the transactions in respect of assignment of debt recoverable from API, is remitted back to the file of A. O. and transactions in respect of debt recovery from MCC Finance Ltd., is decided in favour of the assessee. Accordingly, the grounds raised by the Revenue are disposed off in the aforesaid manner. - Appeal of Revenue is allowed for statistical purposes. - I.T.A.No.2608/Chny/2014 - - - Dated:- 28-2-2020 - Shri Mahavir Singh, Vice President And Shri M. Balaganesh, Accountant Member For the Appellant : Mr. Sinnivasa Rao, C.I.T, D.R For the Respondent : Mr. S. Sridhar, Advocate ORDER PER M. BALAGANESH, ACCOUNTANT MEMBER: The Revenue filed this appeal against the order of the Commissioner of Income Tax (Appeals)-VI, Chennai in ITA No. 1744/13-14/A-VI, dated 30. 07. 2014 for the assessment year 2011-12. 2. The only effective issue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were transferred to the assessee company and accordingly, all the assets liabilities of transferred undertaking were transferred to the assessee at the values appearing in the books of account of M/s. Sical Logistics Ltd., As a resut of this, the loans and advances to the tune of ₹ 24,728. 67 lakhs got vested with the assessee. The aforesaid loans and advances admittedly included Inter corporate deposits (ICDs) and other loans and advances given to the following five parties to the tune of ₹ 57 crores. Name of companies Amounts in crores Purpose Automobile Products of India (APP) 39. 18 ICD-Inter Corporate Deposit Mac Clothing 1. 13 ICD Sical ships 3. 88 ICD Profad 1. 82 ICD MCC Finance 10. 99 ICD loans and advances 57. 00 5. The assessee submitted befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect, the said company is basically asset re-construction company incorporated for recovery of debts. Mr. Rajamani, director of the assignee company was examined on oath by the ld. A. O during the course of assessment proceedings u/s. 131 of the Act. Mr. Rajamani in his statement stated that he was working in SPIC Ltd. for more than 30 years and knows most of the executives in the group. Hence, he started the company along with Mr. P. L. Palaniappan for collection of corporate debts. When specifically asked by the Ld. A. O about the collections made so far, out of these debts, Mr. Rajamani stated that the shares were allotted by M/s. MCC Finance Ltd. worth ₹ 10. 99 crores and ₹ 25 crores in lieu of debts outstanding to the assessee company and M/s. Express Carriers Pvt Ltd respectively on 27. 03. 2013. When asked whether the said recovery of debt in the form of allotment of shares had been offered to tax as a business income for assessment year 2013-14, he replied that no such income was admitted in the returns filed for A. Y 2013-14. On a question as to how the assigned debts were treated in the books of accounts of M/s. Golden Star Asset Consultants (P) Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty shares of ₹ 10/- each a a premium of ₹ 15/- per share will be allotted to the creditors or their authorized nominees for the amount outstanding at the time of winding up including interest upto June 2000 in full settlement of the dues. The creditors shall exercise either of the above options within thirty days of the sanction of the scheme by this Hon ble Court, Upon such exercise of option by the creditors, the Board of Directors of the company shall, act accordingly to give effect to the same. Pursuant to this option given by M/s. MCC Finance Ltd., the assessee company had written a letter to M/s. MCC Finance Ltd., nominating M/s. Golden Star Asset Consultants (P) Ltd., i. e. the assignee company for allocation of equity shares in its favour to the extent eligible for an amount of ₹ 10. 99 crores. 10. In view of the aforesaid facts, the A. O observed that: a)The amount paid by M/s. Golden Star Asset Consultants (P) Ltd., to the assessee company were only shown as loans and advances in the asset side of the balance sheet without acknowledging the debts it had purchased from the assessee company pursuant to the assignment agreement. In other word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance on the reply given by API u/s. 133(6) of the Act wherein they had categorically stated that they did not owe any money to the assessee company and that the debt had already been taken over by their earlier promoters, M/s. South India Travels P Ltd., The ld. AO even cross verified these facts from the annual reports published by the API from A. Ys 2008-09 to 2012-13. Based on the perusal of the balance sheets of API for the aforesaid periods, the Ld. A. O concluded that if the assignment of debts were genuine, then the assignee company taking over the debt would have definitely done due diligence to verify the claim of the assignor. Based on this, he observed that this clearly shows that so called assignment of debts to a third party as submitted by the assessee was only a mutual arrangement to arrive at bogus capital loss for consequential set off with long term capital gains. Accordingly, the ld. AO concluded that the assessee has misrepresented the facts and did not reveal the true nature of transactions that took place between API and assessee company. 12. With regard to debts recoverable from M/s. MCC Finance Ltd., the A. O observed that assessee company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010 prepared by M/s Banyan Consultancy Services Pvt. Ltd., in respect of valuation of the debts as on 20. 08. 2010. The assessee company has assigned debts (ICDs) during the assessment year which are no doubt a capital asset u/s 2(14) of the Act. I have perused the agreement of assignment of debts entered by the appellant on 09. 09. 2010 and 25. 03. 2011 with M/s Golden star assets consultants Pvt. Ltd. The company has executed a valid assignment deeds duly entered between two parties and evidenced by necessary Board resolutions. The agreement of assignment of debts dt. 09. 09. 2010 and 25. 03. 2011 also show that the valid consideration was passed vide cheque No. 173684 of ₹ 50,00,000/- and Cheque No. 173688 of ₹ 3,00,000/- between the parties and the rights contained in these debts has been effectively transferred within the definition of section 2(47) of the IT Act. As per the section 18(d) of the registration Act 1908, the registration of movable property is not mandatory. It is only optional. There is also no doubt that M/s. Golden Star Asset Consultants P Ltd. has recorded these transactions in its books and hence the transfer is complete in all respects. The Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essure from various share holders and sold the asset to N/s. Golden Star Asset Consultants P. Ltd. Hence the loan at the time it was granted was given by Sical Logistics was a good one but subsequently the advance became bad owing to change in business circumstances. We also enclose the extract from the valuation report for your reference. a. AUTOMOBILE PRODUCTS OF INDIA LTD. Valuation of Advances given by Sicagen India Ltd to Automobile Products of India Ltd. Recoverable value/replacement value/book value Fixed Asset Current Assets, Loans Advances 6,093,503 6,667,226 Current liabilities provisions Adjusted unsecured loans 21,927,517 466,373,433 12,760,729 488,300,960 Percentage of assets available as against loans 0. 026 Loans given by Sicagen India Ltd to Automobile Products of India Ltd amounts to ₹ 39,18,00,000/-. The above table shows the percentage of assets available as against loan at 2. 6%. Based on this percentage we m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Sicagen India Ltd which comes to around ₹ 11 crores comes to ₹ 55 lacs. However as the company is in liquidation and the process of winding up and making representations before the liquidator is cumbersome we have to give a 50% discount to this value. Hence we believe that a value of 27. 5 lacs shall be fair. Sical Ships Limited Sicagen India Limited had lent moneys to Sical Ships Limited to the extent of ₹ 388 crores among other amounts during 2001- 2005. Sical Ships Limited was a very good shipping company and had tremendous business during 1990 s. During the year 2003 the company went into liquidation and the business of Sical Ships Ltd collapsed. These advances given by Sical Logistics Limited were transferred to Sica gen India Limited at the time of demerger and Sicagen India Limited pursued claims with Official Liquidator. But the list of unsecured debts were too many and included leasing dues to foreign chartering companies and fuel dues to various companies. There was great uncertainty on the realisability of these debts and Sicagen India Limited felt that it was better to dispose this advance rather than collect these debts. A brief extract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by Sicagen India Lid to MAC Clothing Ltd Recoverable value/replacement value/book value Based on last drawn estimates of accounts Fixed Asset Current Assets, Loans Advances 25,000 ---- 400,000 25,000 Current liabilities provisions 5,618 . . 425,000 5,618 Net asset value Total liabilities of Mac Clothing Ltd. Realisable value to lenders 419,382 13,875,000 419,832 Percentage vale of lenders 0. 030 Loans given by Sicagen IndIa Ltd to Mac Clothing Ltd amounts to ₹ 1,13,00,000/- The above table shows the percentage of assets available as against loan at 3. 0%. Based on this percentage we may say that the loan can be valued at ₹ 3,41,550/-. However as the process involved in debt collection is long drawn and may involve heavy collection cost the advance is valued at 50% of the same. This works out to ₹ 3,41,550*50% which is Rs,1,70,775/- c. PROFAD LIMITED Valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Ltd.,) the valuation was 1 to 2% of total debts. Q. No. 8: What is the rational for making valuation? Ans: Since the collection risk was more, we have bargained to get the debts assigned for 1% of the value. Shri M. Rajamani also explained before AC the existence of the debts by the companies, the quality of the debts and the existence of the legal rights for co!Iection of the debts possessed by M/s Golden Star Assets Consultants Pvt. Ltd., and the efforts made to recover the debts. Further, Shri M. Rajamani in reply to Question no. 16 to the statement recorded under section 131 of the IT Act on 03. 02. 2014 stated that he has agreed to the computation of the business income in the hands of the company for the AY 2013- 14 on the transactions done by M/s Golden Star Assets Consultants Pvt. Ltd. with M/s MCC Finance Limited for the AY 2013-14. The actual collection of the debts due from M/s MCC Finance Limited by M/s Golden Star Assets Consultants Pvt. LtcL, happened after one year from the date of assignment. Now coming to the issue of M/s. Golden Star Asset Consultants P Ltd not showing the debts in its books at full value and only at purchase price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Also the financial health of M/s API Ltd. at the time of transfer of debt was not satisfactory and even though the company has come out of BIFR, it appears to be suffering from financial hardship. It is also seen from various submissions made by the assessee that the change in promoters of M/s API Ltd. has happened after the date of assignment. On the date of assignment, there is no doubt that this debt was owed by M/s API Ltd and subsequently transferred to old promoters. Therefore, it can be concluded that the AO has brought on record, facts pertaining to change of promoter which are events occurring after the date of assignment, to arrive at conclusions as on the date of assignment, which is erroneous. The fact that Balance sheets of M/s API Ltd. did not re1ect the liability towards the assessee is not relevant in judging if there existed a valid debt in the books of the assessee. As regards the issue pertaining to M/s MCC Finance Ltd., the view taken by the AC that the arrangement between the assessee, M/s. Golden Star Asset Consultants P Ltd and M/s MCC Finance Ltd. appears premeditated is incorrect. Mr. Rajamani, a Director of MIs. Golden Star Asset Consultants P L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to conclusion about the colorable devise adopted by M/s GKN Sinter metals Pvt. Ltd., on the ground that the same was done to compensate Mahindra and Mahindra for the surrender of the 51% share holding. In the present case, the assignee is collecting the entire debts from the parties and no amount is being paid to the assessee company i. e assignor, over and above the purchase consideration. The transactions entered by the appellant company with M/s Golden Star Assets Consultants Pvt. Ltd., are at arm s length. The quality of the debts being outstanding over long period were also not disputed. The facts of the present case are not identical to the facts in the case of M/s GKN Sinter Metals Limited. The facts of M/s GKN Sinter Metals Ltd. decided by Honourable ITAT PUNE A BENCH cited (supra) have no bearing on the assessee s case. On the other hand, I find that the facts of the assessee s case are identical to facts contained in a decision of the Ahmedabad Tribunal in the case of M/s Torrent Pharmaceuticals Ltd Vs ACIT in ITA No. 333 and 346/AHD/2006. Here, the Tribunal has allowed capital loss oi sale of debts to an asset collection company. To sun up, I find the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mc Dowell Co. case, has approved the decision of Madras High Court in the case of Mr. M. V. Valliappan Vs ITO [170 ITR 238]. Applying this ratio laid down in these decisions, I find that in the present case, the arrangement between the Appellant and M/s Golden Star Assets Consultants Pvt. Ltd., was perfectly legitimate and arrived at on the commercial considerations and on arm s length principle. On these facts, I do not find force in the AO s allegation that the assignment of debts was sham transaction, bogus transaction and was a colorable devise for tax evasion. Therefore, Ground nos. 2 to 10 dealing with the claim of Capital loss of ₹ 56,48,55,180/- is allowed. Aggrieved, the Revenue is in appeal before us. 14. We have heard the rival submissions and perused the material available on record. The primary facts stated herein above remain undisputed and hence, the same are not reiterated for the sake of brevity. At the outset, we find that the assignee company M/s. Golden Star Asset Consultants (P) Ltd., is a related party with the assessee company, in view of the fact that Mr. Rajamani was earlier director in assessee company and also a founder directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness income as stated by the Ld. D. R. in the subsequent years of recovery of debts, the Revenue should take action in the hands of assignee company for those respective years in the manner known to law. That again, in our considered opinion, cannot come in the way of not accepting the stand of the assessee. To this extent, the argument of the Ld. DR is not accepted. The Ld. D. R. vehemently argued before us that the loans payable by API to the assessee company had been taken over by erstwhile promoters of API i. e. M/s. South India Travel Pvt Ltd., Hence, API as such, is not liable to make any payment to the assessee. This fact has been duly confirmed by them in response to notice under Section 133(6) of the Act directly before the Ld. A. O. in writing. In other words, the assessee should only recover the amounts from M/s. South India Travel Pvt Ltd., and not from API. The Ld. D. R. vehemently argued that while this is so, where is the need for the assessee to assign this particular debt in favour of M/s. Golden Star Asset Consultants (P) Ltd., for a paltry sum and incur capital loss thereon and consequently set off of the same with long term capital gains on sale of shares and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. A. O. took the view that this assignment was premediated as MCC Finance Ltd., allotted shares in lieu of the debt outstanding towards M/s. Golden Star Asset Consultants (P) Ltd., shortly after transfer. Also Mr. Rajamani was one of the Directors on the board of the assessee company became a Director in MCC Finance Ltd. This sequence of event of Mr. Rajamani leaving the assessee company, floating a new company and joining the board of MCC Finance Ltd., appears to be a preplanned strategy adopted by the assessee, in order to arrive at bogus capital loss especially since the assignment was done at a paltry sum. 18. We find from the sequence of events narrated herein above, Mr. Rajamani became a Director of M/s. Golden Star Asset Consultants (P) Ltd., only on 15. 11. 2012 i. e. after the date of assignment of debt in favour of assignee company. It is an undisputed fact that MCC Finance Ltd., was under liquidation till November 2011 and there was no directors during liquidation and that the company was only managed by official liquidator. We find that learned CIT(A) had given a categorical finding in page- 22 of his order that MCC Finance Ltd., came out of liquidation by an or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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