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TMI Blog2006 (6) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Hon'ble Bombay High Court vide order dated 12-1-2001. This scheme was effective from 1-4-2000. In the return filed for the year under consideration, it was stated that net worth of cement division as per computation done under section 50B was in negative sum of Rs. 150.46 crores. As such, in the absence of cost which is necessary limb for computing capital gain, the relevant section for computing capital gain fails. Thus, consideration received amounted to capital receipt not chargeable to tax. Such claim of assessee was rejected by Assessing Officer as he was of the view that formula given in section 50B for determining net worth was nothing but a mathematical calculation totally dependent upon the amount of liabilities and assets. He further opined that net worth so determined has to be used in determining the capital gain in the form of a mathematical formula. So, if net worth was in positive, it was to be reduced from the sale consideration but where net worth was in negative, it should be added to the sale consideration. Consequently, he computed the capital gain at Rs. 226.4399 crores by adding the net worth to the sale consideration. He also relied on the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which provides that it shall be the aggregate value of the assets of the undertaking or the division as reduced by the value of liabilities of such undertaking or division as appearing in the books of account. He then drew our attention to Explanation 2 which provides mechanism for adopting the value of assets. According to this Explanation, depreciable assets are to be valued at written down value as per section 43(6)(c) of the Act and non-depreciable assets are to be valued as per book value. He then pointed out that as per Balance Sheet of the division, there was positive net worth but because of value of depreciable assets at written down value, its net worth has been worked out in negative. 4. Proceeding further, it was submitted that the expression "net worth" in respect of any asset either can be positive figure or in the alternative as "Nil" but in no circumstances, it cannot be negative. He also drew our attention to the words "reduced by" used by the Legislature in Explanation 1 to contend that value of an asset can be reduced up to "Nil" and in no case, it can be negative. 5. The Learned CIT-D.R., Mr. Dave, has vehemently supported the order of the Learned CIT(A) by r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the lower authorities. Accordingly, we hold and proceed on the footing that profit arising on the transfer of cement division by way of slump sale is chargeable to tax under the head "Capital gain". 7. Now the dispute between the parties is narrowed down to the computation of capital gain since as per Revenue, it amounts to Rs. 226.443 crores as computed by Assessing Officer while as per assessee's Counsel, it cannot exceed Rs. 75.98 crores being the sale consideration. To appreciate the controversy, it would be appropriate to reproduce the relevant provisions of section 50B as under: "50B. Special provision for computation of capital gains in case of slump sale.- (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.... (2) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while value of non-depreciable assets shall be taken as per books. The net worth so computed is to be certified by the report of accountant as defined in section 288(2) of the Act. 8. The question for our consideration is whether "net worth" so computed can be in negative so as to increase the sale consideration by such negative figure of "net worth" for computing capital gain. In other words, can the capital gain be more than the sale consideration received by the assessee. In our humble opinion, the answer is in negative for the reasons given hereafter. Firstly, capital gain is always a portion of sale consideration and, therefore, portion can never be higher than the whole. Gain would arise only where sale consideration is more than the cost. By no stretch of imagination, it can be said that capital gain would be more than the sale consideration. No man of prudence can ever think of capital gain higher than the sale consideration. Capital gain can either be excess of sale consideration over the cost or "nil" if sale consideration is equal to cost. Where the cost is more than sale consideration, it would be a case of loss. No other situation can be visualized. Therefore, capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the liabilities. It is because of written down value of assets under section 43(6)(c) of the Act, that value of depreciable assets had to be computed at substantially low figure which resulted in the value of assets lesser than liabilities but on that account net worth cannot be reduced below the "Nil" account since such process would be contrary to the scheme of the section itself. Therefore, in view of the above discussion, it is held that "net worth" of the cement division would be taken as "Nil" which shall be deemed to be the cost of acquisition for the purpose of computing capital gain under section 48 of the Act. 10. Coming to the contention of Mr. Dave, the next question for our consideration is whether the amount of consideration received by the assessee should be increased by the amount of liabilities of the cement division for ascertaining the full value of consideration in view of the judgment of the Hon'ble Supreme Court in the case of Attili N. Rao. In our opinion, such contention cannot be accepted for the reasons given hereafter. Firstly, it was never the case of Assessing Officer or the learned CIT(A). Secondly, no additional ground has been raised by the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed irrespective of the fact whether used for day-to-day running of the business or for acquisition of business assets. Both the authorities have not given any specific reason for not following this judgment. The claim of the assessee cannot be disallowed merely on the ground that it has been capitalised in the books of account. Entries in the books of account are not relevant for rejecting the claim of the assessee if it is otherwise allowable. Reference can be made to the judgment of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. Respectfully following the above judgments, we set aside the order of the Learned CIT(A) on this issue and delete the disallowance confirmed by him. 14. The next issue arising in this appeal is whether interest received by the assessee on refund received from Income Tax Department for the year under consideration is chargeable to tax in this year or not. The Learned Counsel for the assessee has fairly stated that this issue is covered against him by the decision of the Special Bench in the case of Avada Trading Co. (P.) Ltd., wherein it has been held that interest accrues in the year in which interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y purpose, except covered by section 36(1)(iv/v). There is no finding by the Assessing Officer that such payments were made towards the purposes mentioned in sub-section (9) of section 40A. The list of expenditures is given in Para 7.1 of the assessment order and the perusal of the same shows that such expenditures were incurred either by way of subsidy or by way of reimbursement of expenditure. Therefore, such expenditure cannot be considered as contribution to such Club towards set-up or formation of such Clubs. In our opinion, the provisions of section 40A(9) are not applicable and, therefore, no disallowance was justified. The order of the Learned CIT(A) is, therefore, set aside on this issue and the disallowance sustained by him is hereby deleted. 18. The next and the last issue arising in this appeal relates to disallowance of interest of Rs. 6,34,49,000 on the ground that such interest on borrowings were relatable to tax free dividend income. The deduction has been made by the Assessing Officer in Para 8 of the assessment where it has been mentioned that assessee had invested huge amount in purchasing of shares during the year in 4 companies namely Chambal Fertilizers & Che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division transfer by the assessee to Zuari Cement Ltd. by way of slump sale. Thus, the finding of the Assessing Officer that borrowed funds were utilised for acquiring such shares is without any basis and, therefore, has to be vacated. If this amount is excluded, then the balance amount comes to Rs. 6,48,36,000 only. The assessee has specifically contended before the Assessing Officer that no borrowed funds were utilised in such investments and further no dividend has been received on investment made during the year. This contention remains uncontroverted. It has been held by the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi) (Mag.) that onus is on the Department to prove that any expenditure was incurred for earning tax free income. The entire books of account were before the Assessing Officer who has not brought any material on record to prove that any interest was paid for earning tax free income under section 10(33). Therefore, following the said decision, the disallowance sustained by the Learned CIT(A) is hereby deleted. ITA No. 75/Mum/2005 The revenue has raised two grounds challenging the deletion of two additions of Rs. 43,500 in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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