2019 (6) TMI 234 - AT - Income Tax

Computation of Long Term Capital Gain u/s 50B - Total Consideration for transfer of undertaking - HELD THAT - When the Agreement itself provides for the manner of computing Total Consideration for transfer of undertaking, the same should govern the manner of adopting Total Consideration and no other method should be substituted for the same. The consideration is the amount that is determined to be payable by the buyer to the seller and is agreed upon by the seller, as such. The manner of determination of the consideration is mutually decided by the buyer and seller and stated in the Agreement and once it is adopted by the assessee, the same cannot be faulted by the income tax authorities. It is not the case of the AO that assessee has made adjustments to Total Consideration over and above what is provided for in the Agreement. The observation of the CIT(A) that no adjustment to Total Consideration is permissible in terms of section 50B of the Act is not relevant in deciding the present controversy. Assessee furnished documents in the form of Master Agreement dated 31.07.2010, financial statements of the assessee for Financial Year 2010-11 and Financial Year 2011-12, Bank guarantee, letter for invocation of bank guarantee, etc. to support the claim of adjustments stipulated in the Master Agreement. Assessee has correctly reduced the secured liabilities and bank guarantee, which was invoked by the purchaser, while arriving at total consideration for the purpose of computation of capital gains in terms of section 50B Disallowance of repairs and maintenance expenses - HELD THAT - Admittedly, it is not the case of the Assessing Officer that the impugned expenditure has resulted into creation of a new asset. The quantum of expenditure cannot be the guiding factor to decide whether the expenditure is in the nature of capital expenditure or revenue expenditure. The expenditure incurred by the assessee is towards maintenance of the existing godown and was thus in the nature of current repair. Further more, the benefit to the assessee is in the revenue field in as much as assessee is earning income which is being assessed as business income. We, thus, set-aside the order of the CIT(A) and allow the assessee s claim of repairs and maintenance expenses. In result, this Ground of the appeal is allowed. Disallowance of depreciation on motor car - purchased in the name of Director and expenses incurred by the assessee - HELD THAT - It is a well settled proposition that merely because the asset is purchased in the name of director, the company cannot be denied depreciation on the same, if the asset is otherwise found to be used for the purpose of business. The decision relied upon by the assessee in the case of CIT vs. Dilip Singh Sardarsingh Bagga 1992 (9) TMI 74 - BOMBAY HIGH COURT clearly supports the stand of the assessee. We, thus, set aside the order of CIT(A) and direct the AO to allow depreciation on the motor vehicle and related expenses on motor vehicle. Accordingly, this Ground of appeal is also treated as allowed.

Summary

Issues Involved:
1. Computation of Long Term Capital Gain under section 50B of the Income Tax Act, 1961.
2. Disallowance of repairs and maintenance expenses.
3. Disallowance of depreciation on motor car and related expenses.

Detailed Analysis:

1. Computation of Long Term Capital Gain under section 50B of the Income Tax Act, 1961
The primary issue in this case revolves around the computation of Long Term Capital Gain (LTCG) under section 50B of the Income Tax Act, 1961. The assessee company demerged its manufacturing unit at Ankleshwar and transferred it to a wholly owned subsidiary, which was then sold to Huntsman Investments (Netherlands) B.V. The Assessing Officer (AO) computed the LTCG at ?41,16,73,633/- as against ?9,01,94,288/- declared by the assessee, rejecting the assessee’s method of computation. The AO did not allow reductions for liabilities, bank guarantees, and loss on sale of vehicles due to lack of details and filed two different Accountant reports in Form 3CEA. The CIT(A) upheld the AO’s decision, stating no adjustments are permissible under section 50B.

The Tribunal analyzed the Master Agreement, which provided a specific method for determining the ‘Total Consideration’ involving adjustments like reduction of debts and bank guarantees. The Tribunal found that the assessee correctly reduced these amounts as per the agreement. The Tribunal held that the computation method in the agreement should govern the determination of ‘Total Consideration’ and set aside the orders of the lower authorities, allowing the assessee’s computation method.

2. Disallowance of Repairs and Maintenance Expenses
The second issue pertains to the disallowance of repairs and maintenance expenses amounting to ?94,11,574/-. The AO disallowed these expenses, considering them capital in nature, as the company did not carry out any business activity during the year and the expenses were significantly higher than the previous year. The assessee argued that the expenses were for repairing a godown to provide warehousing services to Laffans Fine Chemicals Pvt. Ltd., generating business income.

The Tribunal noted that the repairs were necessary for maintaining the godown and were in the nature of current repairs, not creating any new asset. The Tribunal referred to the decision of the Hon’ble Bombay High Court in CIT v. Chowgule & Co. Pvt. Ltd., emphasizing that current repairs do not necessarily mean petty repairs and can include substantial replacements. The Tribunal concluded that the expenses were revenue in nature and allowed the assessee’s claim, setting aside the CIT(A)’s order.

3. Disallowance of Depreciation on Motor Car and Related Expenses
The third issue involves the disallowance of depreciation of ?4,06,641/- on a motor car purchased in the name of the director and related expenses. The AO disallowed the depreciation, stating the car was not in the company’s name and the assessee did not provide the RC book or evidence of the car’s use for business purposes. The CIT(A) upheld this disallowance.

The Tribunal reiterated that depreciation cannot be denied merely because the asset is in the director’s name if it is used for business purposes. The Tribunal referred to the decision in CIT vs. Dilip Singh Sardarsingh Bagga, supporting the assessee’s claim. The Tribunal directed the AO to allow depreciation and related expenses, setting aside the CIT(A)’s order.

Conclusion
The Tribunal allowed the assessee’s appeal on all grounds, directing the AO to recompute the LTCG considering the adjustments as per the Master Agreement, allow the repairs and maintenance expenses as revenue expenditure, and grant depreciation on the motor car and related expenses. The appeal was partly allowed.