TMI Blog2021 (10) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter as to whether the sale of the aforesaid two divisions by the assessee is to be treated as an itemized sale or a slump sale is pending in the case of the assessee for the preceding years, therefore, we find no infirmity in the order of the DRP who had rightly directed the A.O to allow depreciation to the assessee on the basis of the outcome of the main appeal - Decided against revenue. MAT computation - Computation of deduction u/s.80HHC of the Act for the purpose of calculating book profits u/s.115JB - HELD THAT:- We find that this issue is no longer res integra in view of the decision Bhari Information Technology Systems (P) Ltd. [ 2011 (10) TMI 19 - SUPREME COURT] wherein the decision of the Syncom Formulations India Pvt. Ltd. [ 2007 (3) TMI 288 - ITAT BOMBAY-H] had been duly approved by the Hon ble Apex Court. Though this decision was rendered by the Hon ble Apex Court in the context of claiming deduction u/s.80HHE of the Act vis- -vis computation of book profits u/s.115JA of the Act, the same analogy would apply to the issue in dispute before us. We find that the Hon ble Apex Court had held that deduction u/s.80HHE had to be worked out on the basis of adjusted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrol of the operations of GBDFC prior to the merger including the sale of ibuprofen undertaking on 01/11/2002 by way of slump sale, the assessee cannot be held responsible for the same. The act of GBDFC prior to merger, to sell any of its undertaking to its sister concern Alpex for a paltry consideration is of absolutely no relevance to the assessee company herein. In view of the aforesaid observations, we hold that the ld. CIT(A) had rightly directed the ld. AO to allow set off of losses of amalgamating company in the hands of the assessee. Accordingly, ground No. 1(d) raised by the revenue is dismissed. Allowability of capital loss on sale of shares - AO has alleged that the assessee has not furnished any tenable reason for the loss that it has incurred by selling off its share holding - HELD THAT:- Revenue did not point out any facts which would evidence that the transaction was not genuine. In such a case where the genuineness is not disputed with any evidence, it is not open to discard the documents and/or transaction on the basis of some supposed object/intent. In the present facts the Revenue accepts the documents but only substitutes the consideration. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Act itself. Accordingly, the Ground raised by the assessee is allowed. Granting deduction only in respect of 1/5th of the expenditure in respect of payment made to M/s. Accenture by applying the provisions of section 35DD of the Act as against the claim of deduction of the whole expenditure u/s.37(1) by assessee - HELD THAT:- We find that the very same issue was the subject matter of adjudication by this Tribunal in assessee s own case for A.Y.2002-03 wherein it was held that assessee would be eligible for deduction u/s.37(1) - We hold that the provisions of Section 35DD of the Act as alleged by the ld. CIT(A) cannot be made applicable in the instant case as admittedly the same only refers to expenses incurred pursuant to amalgamation. Hence, we direct the ld. AO to grant deduction of the said expenditure u/s.37(1) of the Act. Computation of deduction u/s.80HHC - AO show-caused the assessee with regard to claim of deduction u/s.80HHC of the Act to explain as to why the profits of the business should not be recomputed in view of Explanation (baa) of Section 80HHC(4) - HELD THAT:- While computing the 90% of interest together with rent, miscellaneous income, servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant Member For the Assessee : Shri Ronak Joshi For the Revenue : Shri Rahul Raman ORDER PER M. BALAGANESH (A.M): These cross appeals in ITA Nos. 4000/Mum/2007 4345/Mum/2007 for A.Y.2003-04 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XIX in appeal No.CIT(A)XIX/IT-206/06-07 dated 30/03/2007 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/03/2006 by the ld. Addl. Commissioner of Income Tax, Range- 7(1), Mumbai (hereinafter referred to as ld. AO). ITA No.4345/Mum/2007- Revenue Appeal 2. The primary facts of the assessee are that it is engaged in manufacturing and sale of pharmaceuticals dealing in both prescription and OTC products as well as bulk drugs, chemicals and skin care products. The company has its registered office and head office at Lower Parel, Mumbai and its units at Deonar, Pithampur, Malad, Thane, Mulund, Bhandup and Paithan. 2.1. During the A.Y.2002-03, the assessee company has amalgamated Rhone Poulenc (India) Limited (RPIL), Super Pharma Limited (SPL) and assets and liabilities (excluding ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.03.1994. Similarly, the assessee company had taken over the assets of PHL w.e.f 01.06.1996 under a scheme of arrangement duly sanctioned by the Hon ble High Court of Bombay, vide its order dated 14.08.1997. In respect of the assets of PHL also the WDV was adopted by the assessee on the basis of the Income Tax records. Further, the assessee in the period relevant to A.Y. 1999-2000 had sold its glass division and bulk drug division. The A.O declined to accept the claim of the assessee that it was a slump sale transaction and considering the same as an itemised sale of assets worked out the WDV of the block of assets by reducing the sale value as recorded in the books of the purchasing company. 18. Insofar the disallowance of the claim of depreciation pertaining to BMIL is concerned, we find that the same being a recurring issue is covered by the order of the Tribunal in the assesses own case for A.Y. 2008-09 in favour of the assessee. We find that the Tribunal while disposing off the appeal of the assessee for A.Y. 2008-09, had observed that it was an admitted fact that BMIL before its merger had not claimed depreciation on the assets in the A.Y. 1995-96 A.Y 1996-97. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on its assets, however, the A.O while framing the assessment in its hands for A.Y 1996-97 had allowed the same. Apart there from, the assessee had during the year relevant to A.Y 1999- 2000 sold its two divisions viz. (i). Glass Division (GGL); and (ii). Bulk Drug Division (BDD) on a slump sale basis. As such, the assessee company in A.Y 1999-2000 while computing the deprecation had dropped the WDV of the aforesaid two undertakings from the respective block of assets on the date of such slump sale. As observed hereinabove, the A.O declined to accept the claim of the assessee that it was a slump sale transaction and considered the same as an itemised sale of assets. On the basis of his aforesaid observations, the A.O worked out the WDV of the block of assets by taking the values of the assets as were recorded in the books of accounts of the purchasing company, as the sale value, and reduced the same from the different block of assets. In the backdrop of his aforesaid reworking of the WDV the A.O scaled down the assesses claim of depreciation in respect of assets of PHL. 20. On a perusal of the records, we find that it is the claim of the assessee that the CIT(A) while disposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard. We find that this issue is no longer res integra in view of the decision of the Hon ble Supreme Court in the case of CIT vs. Bhari Information Technology Systems (P) Ltd., reported in 340 ITR 593 (SC) wherein the decision of the Mumbai Tribunal Special Bench in the case of Syncom Formulations India Pvt. Ltd., referred to supra had been duly approved by the Hon ble Apex Court. Though this decision was rendered by the Hon ble Apex Court in the context of claiming deduction u/s.80HHE of the Act vis- -vis computation of book profits u/s.115JA of the Act, the same analogy would apply to the issue in dispute before us. We find that the Hon ble Apex Court had held that deduction u/s.80HHE had to be worked out on the basis of adjusted book profit u/s.115JA of the Act and not on the basis of profits computed under regular provisions of law applicable to computation of profits and gains of business. Respectfully following the same, we do not find any infirmity in the order passed by the ld. CIT(A). Accordingly, the ground No.1(b) raised by the Revenue is dismissed. 5. Ground No.1(c) raised by the Revenue is challenging the action of the ld. CIT(A) in directing the ld. AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a provision in the accounts of the assessee? 5.3. We find that the Hon ble Jurisdictional High Court had disposed of the aforesaid two questions by observing as under:- 3. In so far as question (c) is concerned, the Tribunal by the impugned order has followed the decision of the Apex court in the matter of Vijaya Bank Ltd. v. CIT [2010] 323 ITR 166/190 Taxman 257, wherein it has been held that once the provision of doubtful debt has been debited to the profit and loss account and corresponding provision has been credited or reduced from the debtors account in the balance-sheet, then, this would amount to writing off. In the present case, the Tribunal recorded a finding of fact that the respondent-assessee has debited the provision of doubtful debt to the profit and loss account and correspondingly reduced the assets by reducing the amount of unsecured loans. On the aforesaid facts, the Tribunal held that this would amount to writing off of the debt. Thus, on examination of facts it concluded that the respondent-assessee has written off the loan and would be entitled to the claim of bad debts. The Tribunal by the impugned order also recorded a finding of fact that on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that in that case, the debt / loan was written off by the assessee in the books, whereas in the instant case before us, assessee had merely made provision for bad and doubtful debts. It is also pertinent to note that assessee itself had indeed disallowed the provision made for bad and doubtful debts while computing its income under normal provisions of the Act. This fact itself goes to prove that assessee had only made provision for bad and doubtful debts and had not written off the debt in its books. We find that Finance (No.2) Act, 2009 had brought in an amendment with retrospective effect from 01/04/2001 by introducing Clause (i) in Explanation 1 to Section 115JB(2) of the Act as under:- Clause (i)- the amount or amounts set aside as provision for diminution in the value of any asset 5.5. We find that this amendment has been brought in the statute by Finance Act, 2009 with retrospective effect from 01/04/2001. As stated earlier, Section 115JB of the Act is a self-contained code by itself starting with a non-obstante clause. The Hon ble Supreme Court in the case of Apollo Tyres reported in 255 ITR 273 had already held that the book profits reported by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of Section 72A of the Act as under:- AY Unabsorbed Depreciation Business Loss Total 1999-2000 13,35,11,363 6,14,68,798 19,49,80,161 2000-2001 11,27,92,461 12,11,07,238 23,38,99,699 2001-2002 9,99,20,784 4,11,60,772 14,10,81,556 2002-2003 8,45,82,127 3,78,08,118 12,23,90,245 2003-2004 3,09,59,523 6,00,90,387 9,10,49,910 6.2. It was pointed out that both assessee as well as GBDFC were engaged in the business of pharmaceuticals. The ld. AO while examining the claim, called for certain data and compliance conditions u/s.72A of the Act as it stood then and as applicable to A.Y.2003-04 i.e. the year under consideration. The assessee provided all the data as required by the ld. AO. The ld. AO n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules, the amalgamated company i.e. the assessee had to achieve 50% of the installed capacity existing as on the date of amalgamation (which in present case is January 1, 2003) before the end of 4 years from the end of amalgamation and has to continue the minimum level of production till the end of 5 years from the date of amalgamation. The ld. CIT(A) further noted that the assessee had submitted Form No. 62 duly verified by the Accountant. The ld. CIT(A) noted that the assessee company had achieved the level of production of the installed capacity on the date of amalgamation well within time and a certificate to this effect from the accountant has also been furnished. The ld. CIT(A) also noted that other conditions to be satisfied by the amalgamating company i.e. GBDFC which includes a condition that the amalgamating company should have held as on the date of amalgamation, 3/4th of the book value of assets held by it two years prior to the date of amalgamation, were introduced in the statute only by the Finance Act, 2003 w.e.f April 1, 2004 i.e. A.Y. 2004-05 and hence these new conditions could not apply for A.Y. 2003-04 (i.e the year under consideration). 6.5. Before us, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofen Unit to Alpex with effect from November 1, 2002. 6.6. Post the Slump Sale, the total installed capacity of GBDFC was reduced from 870 MT. to 150 MT. In fact, the resolution to consider the merger of GBDFC into assessee by the Board of Directors of the assessee was passed only on November 29, 2002 and the final order of the Hon ble Jurisdictional High Court approving the merger was passed only on February 20, 2003. Thus, the assessee was not in control of GBDFC or its decision to slump sale the Ibuprofen Unit to Alpex. Further, since the Hon ble Jurisdictional High Court Order was passed only on February 20, 2003 after convening meeting of all the stakeholders, it is inconceivable to accept the allegations of the ld. AO that Ibuprofen Unit was sold only to facilitate the amalgamation. He argued that all the conditions provided in Section 72A(2) of the Act r.w.r. 9C of the Rules had been complied with by the assessee. 6.7. Per contra, the ld. DR vehemently argued that in the instant case, the purpose of amalgamation of GBDFC with assessee was only to buy losses. He argued that normally the purpose of amalgamation would only be for revival of amalgamating company which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. DR that amalgamation process was already initiated prior to the date of slump sale on 01/11/2002 is factually incorrect and deserves to be dismissed. Hence, the allegation levelled by the ld. DR that these transactions tantamount to colourable device in this aspect is also dismissed. It is not in dispute that GBDFC got merged with the assessee company with appointed date effective from 01/01/2003 pursuant to the order of the Hon ble Bombay High Court approving the scheme of amalgamation on 20/02/2003. It is not in dispute that pursuant to such amalgamation, all the assets and liabilities of GBDFC as on the date of amalgamation got vested with the assessee company with effect from the appointed date. Hence on the date of amalgamation, what is to be seen is whether GBDFC had accumulated losses in its kitty or not, along with other assets and liabilities. It is not in dispute that GBDFC had accumulated losses in the form of unabsorbed business losses and unabsorbed depreciation on the date of amalgamation with assessee. It could not be brushed aside that the assets and liabilities on the date of amalgamation together with the details of losses available thereon in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme and can judiciously x-ray the same. 7.1. We also find that the Hon ble Madras High Court in the case of Penta Media Graphics Ltd. vs. ITO reported in 236 CTR 204 had categorically held that once the merger scheme had been sanctioned with effect from the particular date by the Hon ble Court, it is binding on everyone including the statutory authorities. Similar is the view rendered by the Hon ble Jurisdictional High Court in the case of Casby CFS (P) Ltd., In Ra reported in 231 Taxman 89 (Bom) dated 19/03/2015. 7.2 Further, we also find that the Hon ble Supreme Court in the case of J.K.(Bombay) P. Ltd., vs. New Kaiser-I- Hind Spinning Weaving Company reported in AIR 1970 AIR 1041 had held as under:- The principle is that a scheme sanctioned by the court does not operate as a mere agreement between the parties; it becomes binding on the company, the creditors and the shareholders and has statutory force, and therefore, the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of sec. 391 of the Act, a scheme is statutorily binding even on creditors, and shareholders who dissented from or opposed to its being sanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference, the relevant provisions of Section 72A(2) as applicable for A.Y.2003-04 are reproduced as under:- (2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company- (i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; (ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation; (iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. 7.7. There is absolutely no dispute that assessee in the instant case had fulfilled all the three conditions cumulatively. There is absolutely no dispute that assessee has also fulfilled the requirement stipulated in Rule 9C of the rules by using minimum 50% of installed capacity of amalgamating company within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .07.2001. Initially the Joint Venturers restructured the JVC. However, the JVC continued to run into losses and so the assessee decided to exit from the JVC. RBIL agreed to purchase all the equity shares held by the assessee in JVC for a total consideration of ₹ 75,00,000/-. Accordingly, an agreement was proposed to he entered into between the assessee, RBIL and RBP setting out the terms and conditions for disinvestments. On 13.3.2006, a Board Resolution was passed authorizing the above disinvestments. Accordingly, the assessee took sale value of shares at ₹ 75,00,000/-. However, due to typographical error, the sale value was taken as 7,50,000/- in the original return of income. Hence, the assessee vide letter dated March 29, 2006 informed the ld. AO that the correct capital loss is ₹ 4,43,40,171/- and not ₹ 5,01,90,171/-. 8.2. As regards Charak Piramal P. Ltd (JVC), the said JVC was also incurring losses. Hence, its capital and reserves had been completely eroded. In order to prevent further losses for the company and instead of contributing to further capital of the Joint venture, the assessee decided to quit the Joint Venture and accordingly, entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reckitt Piramal Pvt. Ltd; 1998-99 4,000,000 10.00 40,000,000 0.19 750,0000 50,940,171 (4,34,40,171) Charak Piramal Healthcare Pvt. Ltd. 1999-00 1,000,000 42.70 42,700.000 0.00 29 49,066,581 (49,066,552) Charak Piramal Healthcare Pvt. Ltd. 2002-03 2,500,000 10.00 25,000,000 0.00 71 25,000,000 (24,999,929) Total Short Term Gain / (Loss) (11,75,06,652) 8.6. We find that the ld. CIT(A) in para 14.2 of his order had categorically held that the transactions on sale of shares of aforesaid two companies were made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the ld. AR rightly placed reliance on the decision of Hon ble Jurisdictional High Court in the case of CIT vs. Tainwala Chemicals and Plastics India Ltd., reported in 215 Taxman 153 (Bom). The relevant question raised before the Hon ble Jurisdictional High Court was as under:- (f) Whether, on the facts and circumstances of the case, the Tribunal was justified in deleting the disallowance of ₹ 3,06,75,058/- on account of long term capital loss claimed by the assessee even though the loss had arisen due to the transfer of unquoted shares of group companies which had been sold to other companies at abysmally low prices to contrive the loss ? 8.8. The said question was disposed of by the Hon ble Bombay High Court by observing as under:- 6. In so far as question (f) is concerned, it is the case of the Revenue that the shares were sold due to family arrangement at very low prices and, hence, the loss is alleged to have been contrived. The Tribunal referred to the decision of the Apex Court in the matter of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13, wherein it is held that it is not sufficient for the Revenue to merely allege that the assessee has rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /or buildings. The impugned order makes a reference to Section 50D of the Act which provides for substitution of full value of consideration received/accruing on a transfer of a capital asset being substituted by a fair market value. However this came into force only with effect from 1st April, 2013. Therefore it cannot be relied upon for the subject Assessment year. The impugned order of the Tribunal further placed reliance upon the decision of its Coordinate bench in the case of MGM Shareholders Benefit Trust (Income Tax Appeal No.316/Mum/2009) rendered on 26th November, 2009 in case of a group company of the respondent assessee on a similar issue of revaluation of shares by substitution of full value of consideration by fair market value and held the same to be impermissible. (b) The grievance of the Revenue before us is that these transactions are all between companies belonging to the same group. Therefore it is urged that the transaction are colourable transaction and different considerations would apply. (c) At the hearing of the admission, the Revenue did not point out any facts which would evidence that the transaction was not genuine. In such a case where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations of ld. CIT(A) in this regard for adjudication of this issue:- 17. Ground no. 17 deals with disallowance of bad debts of ₹ 46.00.000/- on the ground that the appellant has not established that the debt hail become bad. The facts in this regard arc that during the year under consideration, the Appellant had written off bad debts amounting to ₹ 46.00.000/-, being the amount of sales proceeds not received pertaining to earlier years and which had been offered to tax in the respective years in which they were made. However the A.O. disallowed the Appellants claim for deduction on the ground sufficient documentary evidences were not filled. 17.1. Before me the appellant has submitted as under:- a. the debt was actually written-off in the books: b. all the conditions stipulated in section 36(2) for claiming deduction of bad debt were complied with: the appellant had taken adequate steps to claim to recover the debt. Appellant craves to rely upon the decision of the Hon ble Bombay High Court in the case of Jethabhai Hirji and Jethabhai Ramdas vs. CIT (120 ITR 792) wherein it has been held that: As to when a debt becomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s own case for A.Y. 2002-03 in ITA No.3927/Mum/2006 dated 20/02/2020 wherein it was held as under:- 5.1. We have heard rival submissions. We find that the ld. AO had recorded in the assessment order that in the tax audit report, the Tax Auditor mentioned that assessee is following EXCLUSIVE method of accounting for MODVAT with regard to inventory, purchases and consumption. The assessee vide letter dated 29/11/2004 had also contended that the aforesaid treatment had no impact on the profit at all. The ld. AO observed that unutilised balance of MODVAT credit on stock in trade is reflected in the balance sheet as an asset amounting to ₹ 152.83 lakhs and as per the proviso of Section 145A of the Act, the unutilised MODVAT needs to be included in the value of closing stock. During the course of assessment proceedings, the assessee, without prejudice, claimed that the amount which was added to the closing stock in A.Y.2001-02 on similar lines as above i.e. ₹ 86.56 lakhs should be allowed as part of the opening stock in A.Y.2002-03. This claim of the assessee was allowed by the ld. AO by increasing the opening stock to the extent of ₹ 86.56 lakhs and the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, the raw material, packing material, stores and works-in-progress was valued at cost, while for the finished goods were valued at cost or net realisable value, whichever was lower. In fact, it is the claim of the assessee that the cost has consistently been taken at net of MODVAT credit. On the basis of the aforesaid facts, it is stated by the assessee that the element of MODVAT was neither included in the consumption nor into cost for valuation of closing stock . As such, it is the claim of the assessee that as it has debited its profit loss a/c with purchases of raw material net of MODVAT Excise duty, therefore, the valuation of closing stock of raw material was also made at cost net of such excise duty. In sum and substance, it is the claim of the assessee that the costs which have not been debited to the profit and loss account at all, cannot be used for valuation of closing stock . On the basis of its aforesaid submissions, it is the claim of the assessee that the deviation on the profit of the year on account of method of valuation prescribed under Sec. 145A is Rs. Nil, which formed part of the tax audit report as Annexure B . 22. We have deliberated at length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to decide the same in the light of directions issued by this Tribunal for A.Y.2009-10. Accordingly, the ground No. I raised by the assessee is allowed for statistical purposes. 12. The ground No. II raised by the assessee is challenging the disallowance of interest expenditure paid to various banks u/s.36(1)(iii) of the Act on the ground that payment was made for the loan which was utilized for acquiring the capital asset and an amount expended in the sum of ₹ 9.47 Crores which was upheld by the ld. CIT(A) by placing reliance on the order passed by his predecessor in assessee s own case for A.Y.2002-03. We find that the appeal preferred to this Tribunal in assessee s own case for A.Y.2002-03 had been adjudicated already by this Tribunal in ITA No.3927/Mum/2006 dated 20/02/2020 (authored by the undersigned) wherein this issue has been decided in favour of the assessee by holding as under:- 6.9. We find that in the instant case, the expenditure on interest and prepayment charge had been incurred by the assessee to expand the existing business of the assessee company. It was submitted by the ld AR that it was with the intent of acquiring the business of M/s RPIL t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 ITR 1, CIT Vs. Chandulal Keshavlal and Co. [1960] 38 ITR 2 601 etc. 26. The expression Commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. [Emphasis Supplied] 6.12. We hold that the payment of prepayment charges also partakes the character of interest . We find that there cannot be any iota of doubt that the entire transaction of acquisition of business assets by the assessee has been done on the grounds of commercial expediency and hence the entire interest payment of ₹ 27.11 crores and prepayment charges of ₹ 8.62 crores would be squarely allowable as deduction u/s 36(1)(iii) of the Act itself. Accordingly, the Ground No. III raised by the assessee is allowed. 12.1. Respectfully following the same, the ground No. II raised by the assessee is allowed. 13. The ground No.III raised by the assessee is with regard to challenging the action of the ld. CIT(A) granting deduction on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to ensure the realization of further value to the group through the proposed integration between NPIL and RPIL. Thus, team of Accenture consultants had conducted a detailed pre-proposal study spanning over five weeks to revive NPIL and RPIL operations with a view to identify synergy and cost reduction opportunities across the merged entity. A preliminary assessment of various opportunities identified with a focused profit improvement initiation could potentially yield in which recurring benefits of about ₹ 20 to 30 Crores in the short and medium term. From the aforesaid scope of services to be rendered by Accenture, it could be seem that Accenture had purely rendered professional services by way of pre-proposal study to understand the viability of the merger by integrated operations of RPIL with NPIL and the resultant profitability that the resultant merged entity would derive in short to medium term. Hence, it is a clear case of simple professional services rendered by Accenture to the assessee which at any cost cannot be considered as a capital in nature. We find that the said expenditure has to be considered as wholly and exclusively as deduction u/s.37(1) of the Act. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.In Crores a) Processing charges received 2.93 b) Services Commission 8. 64 Miscellaneous- Income c) Scrap Sales 1.62 d) Cash discount 0.37 e) Sales Tax Refund 0.08 f) Export Incentives 0.26 g) Insurance claim 0.93 h) Misc. Income 2.06 5.32 14.2. The ld. AO observed from the above that assessee company has not reduced 90% amount of following items of other income to work out the profits of the business as under:- Rs. Rent received 6,21,82,807 Misce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... am of the view that receipts such as rent received, misc. income, service and commission charges and interest received are of the nature of receipts covered by [Explanation (baa) and therefore has to be excluded from the profits of the business while computing deduction u/s. 80HHC. However, looking into the nature, the amount received by the assessee on account of processing charges in my view, is not of the nature covered by Explanation (baa) and therefore should not be excluded while computing the deduction u/s. 80HHC. The A.O. is directed to re-compute the deduction u/s, 80HHC accordingly. 14.5. We find that the short dispute in this regard which is to be addressed before us is that while computing the 90% of interest together with rent, miscellaneous income, service charges, commission etc., for the purpose of reducing the same from profits from business eligible for deduction u/s.80HHC of the Act in order to arrive at the adjusted profits of the business, whether the gross interest income or net interest income is to be considered. We find that this issue is no longer res integra in view of the decision of the Hon ble Supreme Court in the case of ACG Associated Capsule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uous. 18. The ground No. VIII is with regard to treatment of payment made for settlement of dispute to Danisco USA Inc as capital expenditure. We find that this ground was stated to be not pressed by the ld. AR at the time of hearing. The same is reckoned as statement made from the Bar and accordingly, the ground No. VIII raised by the assessee is dismissed as not pressed. 19. The ground No. IX raised by the assessee is with regard to treatment of rental income from let out portion of Rhone Poulenc House (RPIL) as income from other sources instead of income from house property . 19.1. We have heard rival submissions and perused the materials available on record. We find that assessee company had declared the income from house property in respect of rent received from RPIL House and Centre Point. The ld. AO observed that RPIL House has been sold by the assessee company in A.Y.2002-03 and capital gains offered thereon and registration of the said property was also done in A.Y. 2002-03, the ownership of the said property does not vest with the assessee company. Similarly, the assessee company had entered into a purchase agreement with Morarjee Goculdas Spinning and W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Jurisdictional High Court only on 20.2.2003 with effect from Appointed Date 01.01.2003. The redemption of preference shares is a taxable transfer and since the shares were held for more than 3 years, the assessee had computed Long Term Capital Loss of ₹ 10.80 Cr (purely due to indexation) and claimed the same in the Return of Income. 21.2. We find that the ld. AO accepted the claim of long term capital loss in the order passed by him u/s.143(3) of the Act. However, the ld. CIT(A) in the first appellate proceedings sought to issue a notice of enhancement on the ground that the loss claimed on redemption of preference shares was not genuine and the entire transaction has been carried out by the assessee as a measure of colourable device. In response to the notice of enhancement issued by the ld. CIT(A), the assessee explained that the said loss claimed by it is not fictitious and that the loss arose only because of indexation benefit provided in the statute and the redemption was made at par. The ld. CIT(A) however, completely ignored the contentions of the assessee and denied the claim of long term capital loss on the following grounds:- 1 . GBDFC was a loss makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee could recoup its investment in preference shares by way of redemption only at par, thereby resulting in no loss no profit situation. Admittedly, there is no dispute that preference shares was held by the assessee company for more than three years and hence, the transfer of said shares would result only in long term capital gain / loss, as the case may be. Admittedly, the long term capital loss had arose to the assessee company in the instant case only due to the fact of indexation which is statutorily provided to the assessee. Hence, at the first instance, we hold that the loss claimed by the assessee cannot be treated as a measure of colourable device as pointed out by the ld. CIT(A). We hold that the entire method adopted by the ld. CIT(A) to classify this transaction as a colourable device is absolutely without any basis. We find lot of force in the argument of the ld. AR that had the preference shares not been redeemed at par, considering the fact of losses incurred by GBDFC, then the assessee company could not have even got back its investment value. Hence, it could be safely concluded that assessee had taken due cognizance of the fact of incurring huge losses in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th regard to the argument advanced by the ld. DR that through a circuitous route of transfer of funds i.e. BMK Loan NIDUS; NIDUS Equity GBDFC; GBDFC Redemption of preference shares to assessee company is concerned, as stated earlier, those parties are not related parties with the assessee company, and assessee is not bothered as to how the funds are getting arranged in the books of GBDFC to redeem the preference shares held by the assessee company in GBDFC. Further, the ld. CIT(A) also grossly erred in stating that assessee is holding 87% equity stake in GBDFC, which is factually incorrect. 21.7. As pointed out earlier, the entire loss arising on account of redemption of preference shares had arose only due to the fact of indexation statutorily provided in the Act to the assessee. Hence, the same cannot be denied to the assessee. We find that the Hon ble Jurisdictional High Court in the case of CIT vs. Enam Securities Pvt. Ltd., reported in 345 ITR 64 had an occasion to look into the similar issue on allowability of long term capital losses arising due to indexation at the time of redemption of preference shares. In the said case before the Hon ble Bombay High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the sale of other shares on the ground that (i) Both the assessee and the Company in which the assessee held the preference shares, were managed by the same group of persons; and (ii) There was no transfer and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. The CIT(A) on the other hand, allowed the benefit which was claimed by the assessee. The Tribunal has affirmed the view of the CIT(A) holding that the genuineness and credibility of the capital transaction was not disputed for the previous ten years. Both the Companies were juridical entities; the fact that the Companies were under common management would not indicate that the transfer was sham and that the view of the Appellate Authority was purely based on surmises and conjectures. The Tribunal has followed the judgment of the Supreme Court in Anarkali Sarabhai v. CIT [1997] 224 ITR 422/90 Taxman 502 in holding that the redemption of preference shares results in a transfer within the meaning of Section 2(47). Finally, the Tribunal has held that the non-cumulative redeemable preference shares cannot be equated with debentures or bonds. According to the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds or debentures other than capital indexed bonds issued by the Government. The Assessing Officer was of the view that the principal characteristic of a bond is a fixed holding period and a fixed rate of return. According to him, the four percent non-cumulative redeemable preference shares which the assessee redeemed also had a fixed holding period and a fixed rate of return and on this basis denied the benefit of cost indexation to the assessee. 8. The entire basis on which the Assessing Officer denied the benefit of cost indexation was in our view flawed and was justifiably set right in the order of the Tribunal. The Income Tax Act, 1961, does not contain a definition of bonds or debentures. Both those concepts have a well settled connotation in law, particularly in the provisions of the Companies' Act, 1956. Section 2(12) of the Companies' Act, 1956 defines the expression debenture to include debenture stock bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. Under Section 80(1) a company limited by shares may, if so authorised by its articles, issue preference shares which are, or at the option of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med, as the case may be [P. Ramanatha Aiyar's Advanced Law Lexicon 3rd Edition 2005 page 565 Debt] securities typically are regarded as consisting of notes, debentures and bonds. Technically, a 'debenture' is an unsecured corporate obligation while a 'bond' is secured by a lien or mortgage on corporate property. However, in commercial parlance, the expression bond is often used indiscriminately to cover both bonds and debentures. As a matter of fact, the Companies' Act, 1956 in Section 2(12) defines 'debenture' to include debenture stock bonds and any other securities of a company, whether or not they constitute a charge on the assets of the Company. A bond is a formal document constituting the acknowledgement of a debt by an enterprise and normally contains a provision regarding repayment of principal and interest. There is a clear distinction between bonds and share capital because a bond does not represent ownership of equity capital. Bonds are in essence interest bearing instruments which represent a loan. This distinction has been accepted by the Supreme Court in R.D. Goyal v. Reliance Industries Ltd. [2003] 113 Comp. Cas. 1/[2002] 40 SCL 503 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Commissioner of Income Tax (Appeals)-XIX in appeal No.CIT(A)VII/DCIT-7(1)/IT-10/2008-09 dated 30/01/2009 (ld. CIT(A) in short) against the order levying penalty passed u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 28/03/2007 by the ld. Deputy Commissioner of Income Tax, Circle 7(1), Mumbai (hereinafter referred to as ld. AO). 24. The only effective issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in upholding the levy of penalty us/271(1)(c) of the Act in respect of professional fees to Accenture of ₹ 13,60,400/- on which penalty of ₹ 4,99,947/- was levied. 24.1. We have heard rival submissions and perused the materials available on record. We find that we have already held that the professional fees paid to Accenture would be allowable as deduction u/s.37(1) of the Act. Since in the quantum appeal, it has already been held to be revenue expenditure, the levy of penalty would have no legs to stand. Accordingly, the grounds raised by the assessee are allowed. 25. In the result, appeal of the assessee in ITA No.2238/Mum/2009 for A.Y.2003-04 is allowed. 26. To Sum Up ..... X X X X Extracts X X X X X X X X Extracts X X X X
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