2010 (3) TMI 895 - AT - Income Tax

Capital gain - assessee was engaged in the business of manufacturing sugar - it was closed and no manufacturing activity of sugar was undertaken - Government of Maharashtra while implementing its scheme to start closed private sugar factories in the State by way of co-operativisation of the sugar factories permitted M/s. Ninaidevi Sahakari Sakhar Karkhana Limited (NSSK) to purchase the plant and machinery of the assessee-company for a sum of Rs. 351.13 lakhs and to takeover the liabilities of Rs. 100.53 lakhs towards Government dues Assessee claimed that amount received by it were not taxable on plea that it was not towards plant and machinery but towards sale of industrial licence since without licence value of plant and machinery was akin to scrap value Held that - sum of Rs. 100.53 lakhs was granted to the assessee in kind by way of taking over its liabilities in consideration of the industrial license and sanctions and benefits . It becomes clear that the said consideration of Rs. 100.53 lakhs cannot be held to be anything but towards industrial license and sanctions. There is no dispute on the point that the license granted to the assessee had no cost of acquisition - capital gain could not be computed in respect of said consideration of Rs. 100.53 lakhs - plant and machinery and other capital assets constituted block of assets with effect from 1-4-1988 - Assessing Officer was justified in computing capital gain in respect of those assets by invoking provisions of section 50 Computation of capital gain - depreciable assets Held that - Plant and machinery and other capital assets of the assessee were allowed depreciation up to 1984 they constituted block of assets with effect from 1-4-1988. Since these assets become subject-matter of transfer in the instant year the provisions of section 50 clearly get attracted. As these are special provisions for computation of capital gain in case of depreciable assets general provisions of section 48 etc. for the computation of capital gain shall apply with necessary modification - Assessing Officer is directed to re-compute the short-term capital gain Capital gain - diversion of income - grievance of the assessee is that the sum of Rs. 160 lakhs directly paid by NSSK to Bank of Madurai be excluded from the sale consideration as that never became the income of the assessee as it stood diverted of overriding title and hence should be ignored for the purpose of calculating capital gain Held that - Sum of Rs. 160 lakhs was paid by NSSK to Bank of Madurai for and on behalf of the assessee in full and final settlement of the amount due to the bank over the period of time. It was in fact a liability of the assessee which was discharged by making direct payment through NSSK instead of routing it through the assessee. The said payment to the bank is only application of income not a charge on income - sum of Rs. 160 lakhs was rightly held to be not deductible out of the total consideration for the purpose of determining capital gain as there was no diversion of income as claimed by the assessee. Expenditure incurred in connection with the transfer of plant and machinery Held that - Provisions of section 50 are to be applied on the capital asset forming part of block of assets and short-term capital gain is to be computed in respect of such depreciable assets - assessee will be entitled to claim deduction of Rs. 92.61 lakhs as revenue expenditure against the business of trading/dealing in shares continued in the instant year from which the trading profit of Rs. 1, 06, 196 was earned. Interest under sections 234B and 234C Held that - Interest under sections 234B and 234C is required to be charged if the income is computed on the basis of the regular provisions of the Act. If on the other hand the income is computed under section 115J or section 115JA no interest shall be charged under sections 234B and 234C

Summary

Issues Involved:
1. Deduction of Rs. 269.13 lakhs as consideration paid for transfer of licenses for manufacturing sugar.
2. Deduction of Rs. 160 lakhs paid to Bank of Madura as expenses.
3. Levy of interest under section 234B.
4. Disallowance of Rs. 92,61,767 as expenditure incurred in connection with the transfer of Plant & Machinery and licenses within the meaning of section 48(1).

Detailed Analysis:

Issue 1: Deduction of Rs. 269.13 lakhs as consideration paid for transfer of licenses for manufacturing sugar
The Tribunal initially dismissed the appellant's claim for deduction of Rs. 269.13 lakhs, considering it as payment for plant and machinery rather than for licenses. The assessee argued that the entire proceeds were attributed to the sale of the industrial license, which had no cost of acquisition, implying no capital gain. The Assessing Officer, however, found that the sale consideration was for plant and machinery, not the license. The CIT(A) upheld this view, noting the valuation report did not include the cost of the license. The Tribunal concluded that the sum of Rs. 269.13 lakhs was rightly attributed to plant and machinery, and the claim for treating it as consideration for licenses was without foundation.

Issue 2: Deduction of Rs. 160 lakhs paid to Bank of Madura as expenses
The assessee argued that Rs. 160 lakhs paid to Bank of Madura should be excluded from the sale consideration, claiming it was diverted by an overriding title. The Assessing Officer and CIT(A) disagreed, stating it was a liability of the assessee discharged by NSSK, hence, no diversion of income by overriding title occurred. The Tribunal upheld this view, finding no merit in the claim that the payment to the bank was a charge on income, rather it was an application of income.

Issue 3: Levy of interest under section 234B
The Tribunal considered whether the assessee was liable to pay advance tax and consequently interest under section 234B. The assessee contended that no advance tax was payable as it filed a return of loss. The Tribunal referred to the Supreme Court judgment in CIT v. Kwality Biscuits Ltd., which held that interest under sections 234B and 234C is not leviable when income is computed under section 115J. However, if income is computed under regular provisions, interest is mandatory. The Tribunal directed the Assessing Officer to re-compute the income and decide on the interest based on whether the income is computed under regular provisions or section 115J.

Issue 4: Disallowance of Rs. 92,61,767 as expenditure incurred in connection with the transfer of Plant & Machinery and licenses within the meaning of section 48(1)
The Tribunal noted that the provisions of section 50 applied to the capital assets forming part of a block of assets, and the short-term capital gain should be computed accordingly. The assessee's claim for deduction of Rs. 92.61 lakhs as revenue expenditure was upheld as per the Tribunal's earlier order, allowing it against the business of trading/dealing in shares.

Conclusion:
The Tribunal partly allowed the assessee's appeal, upholding the findings of the Assessing Officer and CIT(A) on the major issues while allowing the deduction of Rs. 92.61 lakhs as revenue expenditure. The Tribunal directed the Assessing Officer to re-compute the income and decide on the levy of interest under sections 234B and 234C based on the final computation of income.