2018 (7) TMI 42 - AT - Income Tax

Disallowance on account of provision for gratuity and leave wages transferred to Oriental Containers Ltd. (OCL) on account of transfer of packing divisions - Held that - We find that the assessee had claimed that the payment of gratuity and the leave wages by OCL should be considered as constructive payment of these liabilities by it. We find that the basic question of treatment given by OCL in its books of accounts has not been considered by both the lower authorities. It is one of the established principle of taxation that for one payment deduction cannot be claimed by two entities. Besides, nothing is on record as to what was decided by the purchaser and the seller of the packing divisions about the gratuity and leave wages. In short, issue needs further verification. Therefore, in the interest of justice we remit back the issue to the file of the AO for fresh adjudication. Disallowance u/s. 14A read with rule 8D - Held that - The principle governing the 14A is that no expenditure should be allowed to an assessee if he claims exemption for such income. Thus, the first and foremost pre- condition to invoke section 14A r. w. r. 8D is incurring of expenditure for exempt income. In the case under consideration the AO has mechanically applied the formula without bringing the basic facts i. e. amount of expenditure incurred for earning exempt income. Therefore, we are of the opinion, that matter should be restored back to the file of the AO for fresh adjudication. Here, we would like to mention that a reasonable disallowance can be made if it is found that expenditure was incurred for earning tax free income. The disallowance should not be more than 2% of the exempt income. We order accordingly. Ground no. 3 is partly allowed. Reopening of assessment - Computing and charging to tax Long-Term Capital Gain (LTCG) u/s. 50B on transfer of packing division - whether the assessee could have raised the sale versus exchange controversy in the reassessment proceedings at appellate stage-especially when it had made no such claim before the AO - Held that - After the judgment of Bharat Bijlee 2014 (5) TMI 512 - BOMBAY HIGH COURT it has to be held that transactions involving exchange were not covered by the provisions of section 50B of the Act. Therefore, the assessee was entitled to raise the additional ground about the sale versus exchange controversy. The failure of the assessee to raise the issue before the AO or in the original grounds of appeal filed before the FAA cannot deprive it of its legitimate claim. In the earlier paragraphs, we have held that there cannot be any estoppels in tax proceedings. So, as far as taxability of ₹ 24. 40 crores is concerned, the assessee was entitled to raise it before the FAA for the first time in form of additional grounds. We find that there is no mention of any money, in the BTA, to be received or paid by the parties concerned. The BAT speaks of issue of 29, 90, 000 fully paid up shares . Therefore, we have no hesitation in holding that shares cannot be termed cash and that until and unless money is paid a transaction cannot be termed a sale. In commercial and business worlds, it is a well recognised principle that one of the mode to transfer of assets is exchange and it is different from sale. In other words, both the terms cannot be equated. Section 2(42C)and section 50B talk of sale consideration. As the assessee had received shares and not money in lieu of the transferred packaging divisons, so, the disputed transaction cannot be termed a sale or slump sale. We also hold that it was legally justified post Bharat Bijalee Ltd. case to argue before the FAA that it was a case of exchange of assets and that it was not liable to pay tax on ₹ 24. 40 crores. We find that while issuing notice u/s. 148 the AO had observed that income had escaped on three counts. It is found that on two issues no queries were made during the original assessment proceedings. So, there is no question of changing of opinion, as argued by the assessee. On those two issues no opinion was formed. For initiating proceedings u/s. 147-148, there should be prima facie satisfaction that income had escaped assessment. At that stage the AO is not supposed to have concrete proof of escapement. The reasons to believe should be such that a common man in similar circumstances would fell that stand taken by the AO is possible view. Considering the peculiar facts of the case under consideration, we are of the opinion that the order of the FAA does not suffer from any legal infirmity. So, upholding the same, we decide ground no. 1 against the assessee.

Summary

Issues Involved:
1. Validity of Reopening of Assessment.
2. Disallowance of Provision for Gratuity and Leave Wages.
3. Disallowance under Section 14A read with Rule 8D.
4. Computation and Taxation of Long-Term Capital Gain (LTCG) under Section 50B.

Detailed Analysis:

1. Validity of Reopening of Assessment:
The first issue is the validity of reopening the assessment. The assessee challenged the reopening of the assessment, asserting that no new material had come into the possession of the Assessing Officer (AO) to justify the issuance of the notice under Section 148. The AO had stated that upon verification of records, it was concluded that taxable income had escaped assessment. The assessee argued that it was a case of change of opinion and relied on the case of Kelvinator of India Ltd. (320 ITR 561). However, the Tribunal found that on two of the three issues raised in the reassessment proceedings, no queries were made during the original assessment proceedings, and thus, no opinion was formed by the AO. The Tribunal upheld the reopening of the assessment, stating that the reasons to believe should be such that a common man in similar circumstances would feel that the stand taken by the AO is a possible view. Therefore, the reopening of the assessment was deemed valid.

2. Disallowance of Provision for Gratuity and Leave Wages:
The second issue pertains to the disallowance of ?1.23 crores for provision for gratuity and ?39.80 lakhs for provision for leave wages transferred to Oriental Containers Ltd. (OCL). During reassessment, the AO observed that the liability was transferred to OCL and considered as paid/discharged. The assessee claimed deductions under sections 40A(7) and 43B, which the AO rejected. The First Appellate Authority (FAA) upheld the AO's decision, stating that the assessee had not made actual payment of the statutory liabilities as required under section 36(1)(v). The Tribunal found that the treatment given by OCL in its books of accounts was not considered by the lower authorities and remitted the issue back to the AO for fresh adjudication, directing the AO to decide the issue after considering the judgment of W T Suren & Co. Ltd. (230 ITR 643) and affording a reasonable opportunity of hearing to the assessee.

3. Disallowance under Section 14A read with Rule 8D:
The third issue involves the disallowance of ?45.70 lakhs under Section 14A read with Rule 8D. During reassessment, the AO observed discrepancies in the interest expense figures used in the original assessment and made a disallowance of ?51.98 lakhs. The FAA provided some relief by directing the AO to replace the interest expenditure figure. The Tribunal found that the AO had mechanically applied the provisions of Rule 8D(2)(ii) without establishing the amount of expenditure incurred for earning exempt income. The Tribunal restored the matter back to the AO for fresh adjudication, stating that a reasonable disallowance should be made if it is found that expenditure was incurred for earning tax-free income, and such disallowance should not exceed 2% of the exempt income.

4. Computation and Taxation of Long-Term Capital Gain (LTCG) under Section 50B:
The fourth issue concerns the computation and taxation of LTCG on the transfer of the packing division. The AO computed the LTCG at ?27.35 crores, considering the transfer of liabilities and the receipt of equity shares. The assessee argued that the transaction was not a slump sale but an exchange and relied on the judgment in Bharat Bijlee Ltd. (365 ITR 258). The FAA rejected the additional ground raised by the assessee, stating that the transaction was a slump sale and the provisions of section 50B were applicable. The Tribunal, however, found that the transaction was indeed an exchange and not a sale, as the consideration involved the issue of shares and not money. The Tribunal held that the provisions of section 2(42C) and section 50B were not applicable and decided the issue in favor of the assessee, stating that the transaction could not be taxed as LTCG under section 50B.

Conclusion:
The Tribunal's judgment provided a detailed analysis of each issue, ultimately allowing the appeal in part. The issues of reopening the assessment and disallowance under Section 14A were remitted back to the AO for fresh adjudication, while the disallowance of provisions for gratuity and leave wages and the computation of LTCG were decided in favor of the assessee.