2016 (10) TMI 1326 - AT - Income Tax

Capital gain computation - Consideration for de-merger of the telecom undertaking - value of consideration adopted for computation of capital gain - as per AO revaluation of assets e taken as a consideration for transfer of undertaking - HELD THAT - Full value of consideration has to be taken based on the price that has been commercially agreed between the parties and cannot be imputed on a notional basis. In case of transfer of a capital asset, what can be taxed in the hands of the seller under the Act is real or actual gain that accrues/ arises from transfer of the assets and hence, in absence of any sale consideration (and resultant profit from such transfer) no notional gain can be imputed in the hands of the seller to tax such transfer. The other two only Sections (Le. Section 50C and Section 50D of the Act), which provide for imputation of consideration are also not applicable to the present case and hence, no consideration can be imputed in the instant case. Wherever considered appropriate, the legislature has inserted specific provisions for assumption of sale consideration for transfer of assets in specified cases. It is therefore unjust and unwarranted to impute/ assume consideration in cases which clearly do not fall within the ambit of such specified Provisions. Allegation of AO for taking the revaluation of assets as a consideration for transfer of undertaking, the learned AO has failed to understand that the Business Restructuring Reserve created in the books of the assessee was merely an accounting entry passed in the books of the Appellant on account of revaluation of its investment and that, the amount representing an accounting entry could not be deemed to be the value of consideration for transfer of the telecom undertaking by the assessee. The fair valuation of the investments by the assessee in its books cannot by any stretch of imagination be considered as a consideration received by the assessee from ICL for de-merger of its telecom undertaking. The creation of such a reserve only represents an accounting entry passed by the assessee in its books of account and does not represent any consideration whatsoever received from ICL or any third person towards transfer of the telecom undertaking to ICL. Further, in case of any consideration being received or paid, there have to be atleast two parties and given that in the instant case the reserve was created on account of a unilateral action by the assessee, the same cannot be treated as a consideration received from ICL. It is unimaginable to assume that creation of reserve in the books of the assessee on account of revaluation of its own investments is the consideration paid by ICL. The Business Restructuring Reserve merely represented a notional reserve created to bring the value of the investment held in Indus to its fair value and does not in any manner represent any consideration received by the assessee. In the instant case, there is no nexus between transfer of telecom undertaking by the assessee and revaluation of the investment in Indus except that both the transactions are independent transactions arising from the same Scheme of Arrangement. Hence, as no consideration has accrued to the assessee on account of the said de-merger, no profit or gain can be said to have accrued or received by the assessee. Accordingly, on the short ground of no consideration having been accrued or received by assessee, AO was not justified in computing capital gain on the transfer of undertaking. We therefore, set aside the order of AO on this issue. As we are going to allow this ground of assessee‟s appeal regarding no capital gains in absence of any consideration for de-merger of the telecom undertaking, we are not going to deal with the other arguments of learned AR. Denial of amortization of telecom licence fees under section 35 ABB (2) is restored back to the file of AO for deciding afresh keeping in view our above observation of no capital gains on demerger of telecom undertaking to ICL. We direct accordingly.

Summary

Issues Involved:
1. Affirmation of the AO's order treating the demerger as liable to capital gains tax.
2. Treatment of the demerger of the telecom undertaking as a transfer chargeable to tax.
3. Imputation of consideration in the hands of the appellant.
4. Classification of the demerger as a slump sale under Section 2(42C) of the Act.
5. Taxation under Section 50B of the Act without consideration.
6. Disallowance of amortization of telecom license fees under Section 35ABB(2) of the Act.
7. Levy of interest under Section 234B of the Act.
8. Initiation of penalty proceedings under Section 271(1)(c) of the Act.

Detailed Analysis:

1. Affirmation of the AO's Order Treating the Demerger as Liable to Capital Gains Tax:
The appellant contended that the demerger of its telecom undertaking to Idea Cellular Limited (ICL) resulted in no liability under the Income-tax Act, 1961, as no consideration was received. The AO, however, treated the demerger as a slump sale under Section 50B and computed short-term capital gains based on the revaluation of the investment in Indus. The CIT(A) confirmed this view, but the Tribunal found that no consideration was received by the appellant, thus no capital gains could arise. The Tribunal relied on the principle that the charging section and computation provisions must constitute an integrated code, as upheld in various judicial precedents including B.C. Srinivasa Setty (128 ITR 294) and PNB Finance Ltd. (307 ITR 75).

2. Treatment of the Demerger as a Transfer Chargeable to Tax:
The appellant argued that the demerger did not qualify as a transfer chargeable to tax under Section 45 of the Act, citing specific exemptions under Sections 47(iii), 47(v), and 47(vib). The Tribunal agreed, emphasizing that the demerger was a valid business arrangement and no consideration was paid, thus it could not be taxed as a transfer.

3. Imputation of Consideration in the Hands of the Appellant:
The AO imputed consideration based on the revaluation of the appellant's investments, treating it as the full value of consideration for the transfer. The Tribunal rejected this, stating that the Business Restructuring Reserve created from revaluation was merely an accounting entry and did not represent actual consideration received. The Tribunal cited judicial precedents, including CIT vs George Henderson & Co. (66 ITR 622), which clarified that the full value of consideration must be the actual price agreed upon by the parties, not a notional or hypothetical value.

4. Classification of the Demerger as a Slump Sale:
The AO and CIT(A) classified the demerger as a slump sale under Section 2(42C), liable to tax under Section 50B. The Tribunal found that the demerger did not involve any monetary consideration, thus it could not be classified as a slump sale. Reliance was placed on judicial decisions, including Bharat Bijlee Ltd. (54 SOT 571), which held that a slump sale requires a lump sum monetary consideration.

5. Taxation under Section 50B of the Act Without Consideration:
The Tribunal noted that the demerger was carried out without any consideration, as explicitly stated in the Scheme of Arrangement approved by the High Courts. Therefore, the computation mechanism under Section 50B failed, and no capital gains tax could be levied. The Tribunal cited the decision in Avaya Global Connect Ltd v ACIT (122 TTJ 300), which held that in the absence of consideration, the provisions of Section 45 read with Section 48 were not applicable.

6. Disallowance of Amortization of Telecom License Fees:
The AO disallowed the amortization of telecom license fees claimed under Section 35ABB(2) on the grounds that it was already considered in computing short-term capital gains. The Tribunal restored this issue to the AO for fresh consideration in light of the finding that no capital gains arose from the demerger.

7. Levy of Interest under Section 234B:
The Tribunal did not specifically address this issue in detail, as the primary contention regarding the non-applicability of capital gains tax was upheld.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal also did not delve into this issue, given the primary finding that no capital gains tax was applicable.

Conclusion:
The Tribunal allowed the appeal in part, primarily on the grounds that no consideration was received for the demerger, thus no capital gains tax could be levied. The issue of amortization of telecom license fees was remanded to the AO for fresh consideration. The Tribunal's decision was pronounced on 19/10/2016.