2011 (1) TMI 66 - AT - Income Tax

Capital gains - Transfer of business - assessee company transferred its business to its hundred per cent subsidiary company - resulted in capital loss - assessee was in the process of setting up of another plant - total value of the plant was Rs. 37,93,64,000 which was transferred at Rs. 38,77,18,694 resulting into profit of Rs. 83,54,694 - return of income net capital loss was not claimed - assessing officer, however, assessed the capital gains of Rs. 83,54,694 chargeable to tax under capital gains ignoring the loss suffered by the assessee on transfer of business assets - assessee has transferred business and work in progress to hundred per cent subsidiary company and the subsidiary company is an Indian company - both the conditions of section 47(iv) are satisfied - capital gain arising on transfer of capital work in progress will not be chargeable to capital gains - At the same time the loss arising on transfer of business assets will not be allowable as deduction. - appeal filed by the Revenue dismissed

Summary

Issues Involved
1. Deletion of disallowance of salary paid to non-resident staff outside India under section 40(a)(iii).
2. Deletion of addition of short-term capital gain.

Detailed Analysis

1. Deletion of Disallowance of Salary Paid to Non-Resident Staff Outside India Under Section 40(a)(iii)
Facts:
The assessees paid salaries to staff in the Netherlands without deducting tax at source. The Assessing Officer disallowed these salary payments under section 40(a)(iii) for non-deduction of TDS.

Arguments:
- Revenue: The Revenue argued that under section 40(a)(iii), any salary payment chargeable under the head 'Salaries' and payable outside India without TDS is not eligible for deduction. They cited the ITAT decision in Van Oord ACZ India Pvt. Ltd. and the Gujarat High Court decision in CIT v. Vijay Ship Broking Corporation.
- Assessee: The assessee contended that the salaries were neither received nor earned in India as services were rendered outside India. They cited the overruled decision of Van Oord ACZ by the Delhi High Court and the Supreme Court ruling in GE India Technology Centre (P.) Ltd. v. CIT, which stated that TDS is required only if the payment is chargeable to tax in India.

Tribunal's Decision:
The Tribunal held that for section 40(a)(iii) to apply, the salary payment must be chargeable to tax under the head 'Salaries'. Since the services were rendered outside India, the salaries were not chargeable to tax in India. Therefore, no TDS was required, and the disallowance under section 40(a)(iii) was not applicable. The CIT(A)'s deletion of the addition was upheld.

2. Deletion of Addition of Short-Term Capital Gain
Facts:
The assessee transferred business assets to its wholly-owned subsidiary and incurred a capital loss, which was set off against a short-term capital gain arising from the transfer of capital work in progress. The Assessing Officer disallowed the set-off and taxed the short-term capital gain.

Arguments:
- Revenue: The Revenue argued that under section 50, the short-term capital gain on depreciable assets is taxable and cannot be set off against the capital loss exempt under section 47(iv).
- Assessee: The assessee argued that both the capital gain and loss arose from the same transaction and should be netted off. They cited section 47(iv), which exempts transfers of capital assets between a parent company and its wholly-owned subsidiary.

Tribunal's Decision:
The Tribunal noted that section 47(iv) exempts transfers of capital assets between a parent company and its wholly-owned subsidiary from being treated as transfers. Therefore, both the capital gain and loss should not be considered for tax purposes. The CIT(A)'s decision to delete the addition was upheld.

Conclusion
All three appeals filed by the Revenue were dismissed. The Tribunal upheld the CIT(A)'s decision to delete the disallowance of salary payments to non-resident staff outside India and the addition of short-term capital gain, citing the relevant provisions and judicial precedents. The order was pronounced on January 28, 2011.