TMI Blog2022 (4) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... are not incline to agree with the findings of Ld PCIT in this regard. Therefore, we are inclined to accept the submissions made by the assessee in this regard. Adjustment of the above said profit in the book profit and the assessee has treated the same as capital profit without routing the transaction thru profit and loss account - On careful consideration, we observe that the assessee has to prepare the annual account by following the Accounting Policies, Accounting Standards as provided in the Act and prepare the accounts as per the Schedule III to the Companies Act, 2013 to determine the book profit. The provisions of section 115JB allows certain adjustments as given Explanation 1 in section 115JB(2) of the Act. We observe that the assessee has treated the above income as capital as the same is between the subsidiary company, which will not be part of book profit. However, we are in agreement with Ld.PCIT that the above adjustment made by the assessee is not the adjustment mentioned in the Explanation 1 to section 115JB. However, we observe that the courts have held that when the receipt or profit earned by the assessee are in the nature of capital receipt or capital prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and book profits u/s. 115JB of the Act at a loss of ₹.16,91,83,098/-. Subsequently, revised return of income was filed on 30.03.2017 revising the book profits u/s. 115JB of the Act at loss of ₹.17,04,50,098/-. Subsequently scrutiny assessment was made u/s. 143(3) of the Act on 28.12.2017 at total income at ₹.35,46,83,760/- under normal provisions of the Act after making the following disallowances: - (i) Provision for Bhavishya Kalyan Yojana ₹ 77,82,000/- (ii) Provision for DMA commission ₹ 1,13,25,899/- (iii Interest on perpetual debentures ₹ 39,86,33,662/- (iv) Provision for Medicare ₹ 36,80,000/- 3. Tata Motors Finance Ltd (TMFL), wholly owned subsidiary of Tata Motors Ltd (TML) and registered as Non-Banking Financial Company (NBFC) is engaged in business of vehicle financing for the vehicles manufactured by TML. Tata Motors Finance Solutions Ltd. (TMFSL), wholly owned subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout enquiry into the claim and without verifying the same. Further, he observed that assessee has made investment in equity shares of subsidiary company Tata Motors Finance Solutions Pvt. Ltd and he observed that the above investment in equity shares were capable of yielding exempt income, no disallowance u/s 14A was made by the Assessing Officer while computing the total income of the assessee company. Accordingly, he issued notice u/s. 263 of the Act. In response assessee filed the following submissions: 1. During the financial year under consideration, the company transferred its vehicle financing portfolios MGB (Manufacturer Guaranteed Business) and UVFB (Used Vehicle Financing Business) under a slump agreement on a going concern basis to TMFSL. The sale is effective on 31/03/2015. As a result of the slump sale, TMFL had recognised a gain of ₹ 74,282.74 lakhs which has been recorded as an Exceptional item by TMEL in its Audited financial statement for the financial year ended 31st March 2015. 2. As per the provisions of section 47(iv), any transfer of a capital asset by the parent company to its 100% Indian subsidiary is not considered as transfer for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 143(3) of the Act on 28.12.201 as erroneous in so far as interest to the revenue, with the following observations: - 9. The relevant facts on record and the factual and legal position has been discussed in the foregoing paragraphs. It is an admitted position that the transfer under consideration is a slump sale without values being assigned to the individual assets and liabilities and therefore the claim that such transfer was covered by the provisions contained in clause (iv) of section 47 was clearly misplaced. Any transfer in the nature of a slump sale is not covered by section 45 and consequently the exceptions laid down in section 47 are not applicable to such transfer. Instead, the transfer has to be considered as slump sale as defined in section 2(42C) and therefore the provisions of section 50B are clearly attracted in the present case which provides the charge to tax as well as the method for computing the gain which is taxable accordingly. 9.2 Moreover, the gain on such transfer being clearly part of the net profit had to be essentially included while computing the book profit u/s 115JB. I draw strength from the ratio laid down by the jurisdictional High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant provisions of law in computing the total income of the assessee under the normal provisions as well as under section 115JB which has clearly rendered the impugned assessment erroneous in so far as it is prejudicial to the interests of the revenue. I note that the assessee during the course of assessment proceedings filed without prejudice details regarding applicability of section 50B in the present case but surprisingly, even such material available on record failed to prompt the AO to at least examine the application of section 50B in the present case. In other words, while the assessee played safe and placed without prejudice material on application of section 50B in course of the assessment proceedings, the AO did not even bother to examine such material which was available before him. The AO also failed to make necessary inquiries for disallowance u/s 14A in respect of fresh investments of ₹ 1501,16.95 lakhs in equity shares of wholly owned subsidiary. Further, it is found that the AO passed the impugned assessment order without making inquiries which should have been made and therefore the said order shall also be deemed to be erroneous in so far as it is prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 263 of the Act, without appreciating that revisionary proceedings under section 263 cannot be invoked unless the conjunctive conditions that assessment order passed is erroneous in law as well as prejudicial to the interests of the revenue, are satisfied; 2. erred in initiating revisionary assessment proceedings under section 263 of the Act, with a view to set aside the assessment order by conducting fresh enquiries into the matter by holding that the order passed by the AO is not in accordance with law, without appreciating that AO adopted one of the two views possible after examining all the facts of case and documents available on record and therefore the initiation of revisionary assessment proceedings is bad in law; 3. erred in initiating revisionary assessment proceedings under section 263 of the Act, without appreciating that section 263 cannot be invoked in case where Assessing Officer had done adequate enquiry after calling for all information unless it is established that the order passed by AD is unsustainable in law 4. erred in initiating revisionary assessment proceedings, even after acknowledging the fact that, the 'without prejudice mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable to the case of the appellant 12. erred in revising the order and directing to make addition of the gain of ₹ 742,82,74,000 while computing book profits under section 115JB of the Act, without appreciating that the same is arising from slump sale transaction with wholly owned subsidiary, which is not taxable as per section 47(iv) of the Act and hence such sum is not taxable under section 115JB of the Act; 13. should have appreciated the fact that while computing book profits under section 115JB of the Act only those receipts which are in nature of 'income' and which is otherwise chargeable to tax can only be brought to tax and not 'capital receipt' which is not in nature of income; 14. erred in not appreciating the fact that, the AO has correctly followed the jurisdictional Tribunal which was binding on him. Disallowance of expenditure in respect of exempt income earned under section 14A the Act 15. erred in making revisionary proceedings to direct the Assessing Officer to make that it has been properly disallowance under section under section 14A, without appreciating that it has been properly enquired and acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be erroneous in nature. Further, the CIT has not established how the order of AO is unsustainable in the eyes of law. 15. In view of the said decisions, it is clear that twin conditions of order being 'erroneous' and 'prejudicial to the interests of the revenue' are to be cumulatively satisfied to invoke 263 proceedings. Accordingly, since both the conditions are not satisfied in the present case, revision under section 263 of the Act is not valid and should be quashed. B. Revisionary proceedings are not valid where AO has adopted one of two possible views 16. Where there are two views possible and the AO has adopted one of the two possible views, then his order cannot be held to be erroneous/ prejudicial to the interest of the revenue and thereby proceedings under section 263 of the Act will not be sustained. 17. Reliance is placed on following decisions where it is held that where two views are possible on a particular issue and the AO has adopted one view, then the same shall not be termed as prejudicial to the interest of the Revenue only because CIT disagrees to the view, unless the view taken by the AO is unsustainable in law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT has not referred to the said decisions which clearly lay down that view taken by AO is only view and it is legally sustainable view and therefore revision made is not valid. 19. On the basis of the aforesaid facts, it is clear that the learned AO had made sufficient enquiries and after considering all submissions and material on record, arrived at a possible view basis the information/ documents on record at the time of conclusion of assessment proceedings and accordingly, we submit that the proceedings under section 263 of the Act are invalid and without jurisdiction in the current case. Disclosures with respect to Disallowance under section 14A of the Act and enquiry done by AO 20. In this regard, it is submitted that the learned AO had enquired in respect of applicability of disallowance under section 14A of the Act vide notice under section 142(1) of the Act dated 9 November 2017 (Refer point 6 at page 56 of Paperbook). In response, the Assessee, vide submission dated 21 November 2017 (Refer page 90 to 93 of Paperbook) has submitted a detailed response. Further, the learned AO had thoroughly examined the copy of the Financial Statements which discl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 194 to 207 of the legal paperbook) wherein the Tribunal considered an identical issue, in light of newly inserted Explanation (2) to section 263 and after considering the decision of Hon'ble Supreme Court in the case of Malabar Industrial Company limited vs CIT (243 ITR 81) (SC) held as under:- '26. The CIT has made reference to Explanation 2 to sec. 263 of the Act introduced by the Finance Act, 2015. Explanation-2 so introduced sets out cases in which order of the AO can be deemed as erroneous. The said explanation does not dispense with compliance or existence of N there being no enquiry made by the Ld. AO; (ii) the AO's conclusion being contrary to CBDT Circular or (iii) against decision of jurisdictional High Court or Supreme Court. In the present case the C/T in the impugned order has not brought facts to show the existence of absence of enquiry especially when the AO has already concluded that the purchases by the assesee from four parties mentioned by the DIT (Investigation) Mumbai in its report were bogus. The decision of the Mumbai and Delhi ITAT in the case of M/s. Shri Narayan Tatu Rane (supra) and M/s. Amira Pure Foods (P) Ltd. (supra) cited by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onary order under section 263, should be treated as bad in law and should be quashed. Merits of the Case Without Prejudice to the ground of appeal No. 1 to 5, the Assessee hereby submits the following in respect of merits of the case: Ground No 6-7: Disallowance of exemption claimed under section 45 read with section 47(iv) of the Act on slump sale of business of ₹ 742,82,74,000 32. The learned AO after perusing the computation of total income along-with the MAT computation and the letter dated 1 December 2015 (Refer page 51 to 55 of Paperbook) which was on record at the time of assessment proceedings, sought an inquiry in respect of the capital gains claimed and declared the same as not chargeable under section 47(iv) of the Act. 33. However, the PCIT invoked proceedings under section 263 of the Act in this regard and denied the exemption claimed under section 45 read with section 47(iv) of the Act on gain on slump sale of business of ₹ 742,82,74,000 vide order dated 24 March 2020 by stating that any transfer in the nature of 'slump sale' is covered by section 50B (and not covered by section 45) and therefore the exception l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 45 of the Act. This is supported by the decision of Hon'ble Supreme Court in the case of PNB Finance Ltd. v. CIT (175 Taxman 242) (SC) dated 6 November 2008 (for AY 1970-71) (Refer page 208 to 213 of the legal paperbook) wherein it was held that section 50B is a machinery provision. 41. The Hon'ble Supreme Court held that in the absence of the cost of acquisition, it was impossible to determine capital gains, therefore, it was held that the gains from transfer of business undertaking on a slump basis cannot be brought to tax under the head Capital gains. The Supreme Court had clearly held that Section 45 applies in the case of transfer by way of slump sale. It is only because of the reason that cost of acquisition of business undertaking could not be ascertained, the Court held that computation mechanism fails in such case. 42. Further, the CBDT Circular No. 779 dated 14 September 1999 (Refer page 214 to 221 of the legal paperbook) explaining the provision of section 50B of the Act reads as under: (xx) A new section 50E3 has been inserted in the Income-tax Act containing special provision for computation of capital gains in the case of slump sale. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded to section 48, the computation provision in the later section is activated for determining the income chargeable under the head Capital gains' in accordance with the mode of such computation as prescribed therein. 46. Relying on the aforesaid case, the Hon'ble Bombay High Court in case of PCIT vs Wockhardt Hospitals Ltd dated 16 March 2020 (316 CTR 157) affirmed the decision of the Hon'ble Mumbai Tribunal in Wockhardt Hospitals Limited vs ACIT (ITA No. 7454/Mum/2013) dated 6 January 2017 (Refer page 238 to 254 of the legal paperbook) dated 6 January 2017 in holding that section 50B only determines cost of acquisition and cost of improvement of the undertaking. (Refer para 4.9-4.10 at page 241 of legal paperbook). 47. In view of the above, the assessee wishes to submit that section 50B of the Act is a machinery provision which provides the mechanism for computing the capital gain chargeable to tax under section 45 of the Act. The above arguments have been upheld in various judicial pronouncements, some of which are as follows: Shri Madan Mohan Chandak (ITA No. 1256/Mds/2009) dated 19 May 2011(Refer page 255 to 259 of the legal paperbook) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer is to a wholly owned subsidiary, there is no actual gain accrued to the transferor company and hence, this exclusion is specifically provided from the charging section under the Act. 53. In light of the above, the assessee submits that the transfer in the nature of 'slump sale' is covered by section 45 of the Act and therefore the exception laid down in section 47(iv) of the Act is applicable to such transfer (irrespective of the computation mechanism provided under section 50B). Ground No 8-9: Addition of gain on slump sale transaction while computing book profits under section II5JB of the Act of ₹ 742,82,74,000 A. Capital receipt not subject to MAT under section 115JB of the Act 54. It has been time and again held as a fundamental principle by various Courts that all receipts cannot be termed as 'income' and hence cannot be taxed under the Act. It is a settled position that a capital receipt not being in the nature of the income cannot be considered as part of book-profit for the purpose of levy of MAT under section 115JB of the Act. 55. The transfer of capital asset by a Holding Company to its 100% Wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business undertaking and had subscribed to equity shares of ₹ 1,501.17 crores of the subsidiary TMFSL. 60. The fact that the investment was made almost towards the end of the Financial Year was also known to the learned AO during the course of assessment proceedings basis which, the Assessing Officer has taken a view that disallowance under section 14A ought not to apply in respect of investment in equity shares of TMFSL. A. Disallowance under section 14A of the Act is not warranted in absence of income 61. The assessee wishes to submit that disallowance under section 14A of the Act should be restricted to the actual exempt income received by the Company during the year under consideration. Reliance in this regard is placed on the following decisions wherein it is held that no disallowance under section 14A of the Act is warranted in absence of exempt income:- South Indian Bank (112 CCH 0005) dated 9 September 2021 CIT v. Chettinad Logistics (P.) Ltd. [2018] 95 taxmann.com 250 (SC) (Refer page 434 of the legal paperbook) Oil Industry Development Board (2019) (103 taxmann.com 326) SC) (Refer page 439 to 440 of the legal p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mahanagar Telephone Nigam Ltd (2020) (109 CCH 120) (Refer page 449 to 452 of the legal paperbook) D. No disallowance under section 14A should be made if sufficient own funds are available 66. The assessee wishes to submit that the assessee's interest free funds, i.e. Equity share capital and Reserves and Surplus were sufficient to cover the value of investments. The share capital and reserves position as at 31 March 2015 is as under: - Particulars Particulars Amount (Rs. In crores) As on 31 March 2015 As on 1 April 2014 Equity Share Capital 1,319.02 1,289.34 Reserves and Surplus 1,857.24 1,654.88 75. Therefore, since sufficient own funds were available during the year, no disallowance under section 14A of the Act is warrant. In this regard, reliance is placed on the following decisions Reliance Utilities and Power Limited v. CIT [2009] 313 ITR 340 (Bombay) (Refer page 457 to 460 of the legal paperb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 13. Considered the rival submissions and material placed on record. We observe that Ld PCIT invoked the provisions of section 263 by observing that assessee has transferred all the assets to its wholly owned subsidiary TMFSPL as a going concern on a slump sale basis, while computing its business income, it has reduced the profit earned in the above said slump sales and considered the same under the head Capital Gains at the same time claimed exemption u/s 47(iv) of the Act. Ld PCIT raised objections on treating the slump sales under the head Capital gains as well as treatment given by the assessee to compute the book profit u/s 115JB of the Act. After careful consideration, we observe that the assessee has transferred the whole business under slump sale basis and it is fact on record that it is transferred the business on going concern basis to its own subsidiary company. The transaction is covered u/s 47(iv) of the Act and accordingly it is not transfer within the provisions of the Act. Therefore, we are not incline to agree with the findings of Ld PCIT in this regard. Therefore, we are inclined to accept the submissions made by the assessee in this regard. 14. Coming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by these assessees. Hence, the assessing officer was held to be not justified in including the income that was directly credited to Capital reserve account in the Book Profits. The Tribunal, in the case of M/s Arundhati Traders Pvt Ltd and others (supra) concluded as under:- 19. In view of the ratio laid down by the Hon ble Supreme Court in Appollo Tyres Ltd Vs. CIT (supra) and by the jurisdictional High Court in CIT Vs. M/s Akshay Textiles Trading Agencies Pvt Ltd (supra), we hold that where the accounts of a Company are maintained as per the Provisions of Companies Act and are Certified by the Auditors to the effect that the same are maintained as per the requirements of the Companies Act and the same are approved by the shareholders of the company in its annual general meeting and filed before the Registrar of companies, the authenticity of such accounts has to be accepted by the Assessing Officer, while computing the book profits under section 115J/115JA/115JB of the I.T. Act. The assessing officer is however empowered to make such adjustments as provided for in the Explanation to the respective section. We have earlier expressed the view that the Net profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, which, inter alia, includes the sale, exchange or relinquishment of the asset. Hence the sale of a Capital asset by the assessee to its subsidiary company should normally fall under the definition of transfer given in sec. 2(47) of the Act. However, the provisions of sec. 47 of the Act provides certain exceptions by holding that certain transactions shall not be regarded as transfer , meaning thereby, even if a transaction falls under the definition of transfer as per the provisions of sec. 2(47) of the Act, yet they shall not be chargeable to tax u/s 45 of the Act, in view of the provisions of sec. 47 of the Act. For the sake of convenience, we extract below the provisions of sec. 47 of the Act. 47 Nothing contained in section 45 shall apply to the following transfers:- (iv) any transfer of a capital asset by a company to its subsidiary company, if- (a) the parent company or its nominees hold the whole of the share capital of the subsidiary company, and (b) the subsidiary company is an Indian Company. It can be noticed that the transaction involving any transfer of capital asset by a company to its wholly owned Indian su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of total income and book profit , in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of income at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in book profit u/s 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point. 27. A careful perusal of the decision rendered by the Special bench in the case of Rain Commoditites Ltd (supra) would show that the above said legal contentions were not considered by the Special bench. We notice that the Special bench considered the following decisions:- (a) Malayala Manorama Co. Ltd Vs. CIT (2008)(300 ITR 251)(SC) (b) N.J. Jose Co. (P) Ltd (321 ITR 132)(Ker) (c) CIT Vs. Veekaylal Investment Co. (P) Ltd (249 ITR 597)(Bom) In all these cases, the Courts were dealing with the issue of inclusion of Capital gains in the computation of Boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we set aside the order passed by Ld CIT(A) on this issue and direct the AO to exclude the above said profit from the computation of Book Profit for the reasons discussed above. 15. Respectfully following the above decision, we are incline to accept the submissions of the assessee on merit. 16. With regard to disallowance on section 14A of the Act, we observe that the assessee has made the investments at the end of the year i.e., 26.03.2015 and Ld PCIT of the view that irrespective of the earning of any exempt income, the AO was duty bound to make inquiries in view of CBDT Circular no 5/2014. After considering the detailed submissions of both the parties, it is fact on record that the assessee has made the investment at the fag end of the year and there is no chance of earning any exempt income out of the above said investment, hence the courts have held that where there is no exempt income, Assessing Officer cannot make any disallowance, the disallowance has to be relating to the earning of exempt income. Therefore, in the given case, there is no exempt income earned by the assessee out of the fresh investments, in our considered view, the assessee has a valid case on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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