2019 (8) TMI 734 - HC - Income Tax

Deduction granted u/s 32AB - whether deduction can be withdrawn since the appellant was amalgamated with its parent company? - HELD THAT - In Shaw Wallace Co.Ltd. Vs. CIT 1978 (7) TMI 57 - CALCUTTA HIGH COURT the Court examined the effect of amalgamation and it was held that the entire capital and assets of the transferor-companies having vested in the assessee, as a result of the said amalgamations, the assessee became the sole owner of the capital of the transferor-companies. There was, therefore, no extinguishment of the right of the assessee in participating in the capital on the liquidation of the transferor-companies. The share held by the assessee in the transferor-companies represented the capital invested by the assessee in the said companies and by the said amalgamation the assessee became the sole owner of the entire capital of the transferor companies. By virtue of the said amalgamations the assessee as the transferee-company became the sole repository of all the rights which flowed from or were embedded in the shares held by the assessee in the transferor-companies. For all the above reasons it was held that, there was not extinguishment of any right of the assessee as holder of the shares in the transferor-companies. The CIT(A) while allowing the appeal filed by the assessee and rightly held that the assets in respect of which relief was allowed u/s 32AB are still held by the amalgamating company even after amalgamation and gets fused by one company. - Decided in favour of the assessee. Machinery maintenance charges which was paid by LGB - AO disallowed the same for want of proof - HELD THAT - A perusal of paragraph no.(iv) of the assessement order dated 23.03.1994 shows that the AO at no point of time accepted the stand taken by the assessee, in fact, the AO comes to the conclusion that the assessee has not been able to place any material to substantiate the stand and in the absence of any evidence the amount was disallowed and added back. Therefore, the findings of the CIT(A) is contrary to record. CIT(A) further states that there can be no benefit of any kind whatsoever in the assessee's accounting the expenditure for repairs at an inflated figure and paying the tax at a reduced quantum. In our view, this can be a test to be applied to decide, as to whether, the machinery maintenance charges is allowed as expenditure. CIT(A) applied a wrong test and came to the a conclusion. The Tribunal, therefore, rightly reversed the order passed by the CIT(A) and we find no good grounds to interfere with the order of the Tribunal. Accordingly, substantial question of law no.3 is answered against the assessee. Addition for payments made to LGB, which the assessee claimed as expenditure - HELD THAT - This issue is discussed by the AO as after examining the entire facts, including the reply given by the assessee dated 12.12.1991, held that the claim made by the assessee was arbitrary and there is no scientific basis for such a claim and consequently worked out the expenses based on the system followed by the assessee for the AY 1989-90. CIT(A) could not controvert the finding recorded by the AO which was done by him after taking note of the factual position but proceeded on the basis that what was done by the AO is not realistic. In our view, that could not be the manner in which the CIT(A) could have reversed the finding of the AO, rendered after examining the entire facts. Tribunal, on appeal, for its part re-examined the factual issue and set aside the findings of the CIT(A) and restored the order of the AO. As rightly pointed out by the learned Senior Standing Counsel for the Revenue, this issue revolves entirely on facts and there is no substantial question of law arising for consideration. No substantial question of law

Summary

Issues:
1. Deduction under Section 32AB withdrawn due to amalgamation with parent company.
2. Treatment of machinery maintenance charges paid to parent company as allowable expenditure.
3. Disallowance/addition of expenditure for payments made to parent company.

Analysis:
1. The Tax Case Appeal challenged the Income Tax Appellate Tribunal's order withdrawing the deduction under Section 32AB due to the assessee's amalgamation with its parent company. The Commissioner of Income Tax (Appeals) accepted the assessee's case, ruling that amalgamation did not constitute a transfer of assets. However, the Tribunal reversed this decision, emphasizing the effect of amalgamation. Legal principles from previous cases were cited, highlighting the impact of amalgamation on asset ownership. The Court referenced cases like Meenu Equipments and Shaw Wallace & Co. Ltd. to support its conclusion that amalgamation did not extinguish the assessee's rights in the transferred assets. The Tribunal's decision was overturned, favoring the assessee.

2. Regarding machinery maintenance charges paid to the parent company, the Assessing Officer disallowed the expenditure for lack of proof. The Commissioner of Income Tax (Appeals) overturned this decision, but the Court found the CIT(A)'s conclusion contrary to the record. The Court noted that inflated repair expenditure without substantiation cannot be allowed as a deduction. The Tribunal correctly reversed the CIT(A)'s decision, applying the appropriate test for expenditure eligibility. Consequently, substantial question of law no.3 was answered against the assessee.

3. The issue of disallowance/addition for payments made to the parent company was discussed extensively. The Assessing Officer deemed the claim arbitrary and lacking scientific basis, leading to a recalculated expense based on previous years. The Commissioner of Income Tax (Appeals) disagreed with the Assessing Officer, but the Court found the CIT(A)'s reasoning insufficient to overturn the original decision. The Tribunal re-examined the facts and sided with the Assessing Officer, emphasizing the factual nature of the issue. As no substantial question of law was identified, substantial question of law no.4 was rejected. In conclusion, the appeal was partly allowed, with substantial questions of law 1 and 2 answered in favor of the assessee, question 3 against the assessee, and question 4 rejected.