2020 (7) TMI 221 - AT - Income Tax

Capital gain - scheme of merger - benefit of set off of carry forward losses in respect of the said capital gains both under the normal and MAT provision - HELD THAT - Conclusion of the ld. CIT(A) that the merger in question, approved by the Hon'ble High Court is a colourful device, is illegal and without any factual or legal base. Invoking GAAR provisions, when they are not applicable for the impugned assessment year is also bad in law. The dichotomy in the order of the ld. CIT(A) is clear from the fact, that he chooses to tax capital gains in question, in the hands of the assessee company, though he holds that the merger is a sham transaction. We are unable to approve this finding in view of the binding order of the Hon'ble High Court on the merger. Thus, we direct the AO to grant benefit of set off of carry forward losses in respect of the said capital gains both under the normal and MAT provisions. DR had argued that, for the purpose of indexation, the fact that the assessee had leasehold rights from the year 1966 and that these leasehold rights were converted into free hold rights w.e.f. 26.11.2010 by payment of ₹2.39 crores as cost of conversion has to be taken into consideration and hence the entire gain cannot be held as long term capital gain for the purpose of indexation. For this the ld. Counsel for the assessee submitted that no indexation has been clained by the assessee on this amount of ₹2.39 crores paid towards cost of conversion of leasehold property into free hold property. In the result, ground No. 1 of the assessee is allowed. Addition on account of house rent - Income from house property - HELD THAT - This issue is covered in favour of the assessee and against the Revenue by order of the Hon'ble Calcutta High Court in the case of CIT vs. Kishanlal and Sons 2002 (10) TMI 62 - CALCUTTA HIGH COURT rental is the rental received by the assessee from 1962 onwards, and also during the assessment years in question, as the genuine return on the assessee's property, as a genuine deed of lease entered into by the parties at arms length - Also in OBEROI HOTELS PVT. LTD. 2016 (1) TMI 169 - ITAT KOLKATA even as per the deeming provision of Section 23(l)(a), in the case of let out property, only the actual rent received was required to be considered as annual value of property. The AO failed to appreciate such estimation of annual letable value as per provision of Section 23(1 )(a) was called for only in case of vacant property and not where the property was actually let out since in the case of let out property, the assessee was not entitled to anything over and above the agreed rent. The said action of the AO has resulted in taxing notional income in the hands of the assessee, which never accrued and hence cannot be brought to tax. Accordingly, we are of the view that the CIT(A) has rightly deleted the addition . Capital gain from transfer of capital asset - LTCG or STCG - HELD THAT - Legislature has used the expression held as against owned . Therefore, the contention of the AO that ownership is relevant is not in accordance with the provision of the Act. The above view finds support from the recent judgement of Kolkata ITAT in the case of Stewarts Lloyds of India Ltd. vs. CIT 2016 (3) TMI 178 - ITAT KOLKATA where it was held that in computing capital gain ownership of the property not to be considered, in computing the capital gain from the date of asset held by the assessee is to be considered. Disallowance u/s 14A - as per CIT-A no interest expenses can be attributed while working out disallowance u/s 14A 'r.w.r 8D and disallowance under clause (iii) of Rule 8D has been rightly worked out by the AO - HELD THAT - This decision is in line with the proposition of law laid down by the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT and PCIT vs. Caraf Builders Constructions (P.) Ltd. 2018 (12) TMI 410 - DELHI HIGH COURT . The propositions of law laid down in these case laws that, when they are interest free funds available to the assessee then the presumption is that such interest free funds have been utilised for non-interest bearing investments. Thus, we uphold this finding of the ld. CIT(A). Disallowance of premium payable on redemption of FCCB - HELD THAT - Liability is not a contingent liability. Deduction is liable on yearly basis as the liability accrues on time basis. The Hon ble Calcutta High Court in the case of National Engg. Industries Ltd. v. Commissioner of Income-tax 1998 (9) TMI 65 - CALCUTTA HIGH COURT is relied in this regard. The Hon ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. 1997 (4) TMI 5 - SUPREME COURT laid down the principle that, deduction should be allowed on pro-rata basis over the terms of the bond. Employees contribution to PF ESIC to be decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction and validity of the amalgamation decision.
2. Set off of Long Term Capital Gain against unabsorbed depreciation.
3. Application of General Anti Avoidance Rule (GAAR) and piercing the corporate veil.
4. Computation of Income from House Rent.
5. Calculation of capital gain tax as long term or short term.
6. Disallowance under section 14A of the Income Tax Act.
7. Deduction of premium payable on redemption of FCCB.
8. Disallowance of employees' contribution to PF & ESIC.
9. Set off of unabsorbed depreciation for AY 1996-97 and AY 1997-98.

Detailed Analysis:

1. Jurisdiction and Validity of the Amalgamation Decision:
The assessee contested the CIT(A)’s jurisdiction in rejecting the amalgamation approved by the High Courts of Punjab & Haryana and Delhi. The CIT(A) deemed the amalgamation as a "colourable device" to avoid capital gains tax. However, the Tribunal held that the CIT(A)’s decision was against the High Court's sanctioned scheme of amalgamation, which is binding and cannot be disregarded. The Tribunal emphasized that once a scheme is sanctioned by the High Court, it becomes binding on all parties, including the tax authorities.

2. Set Off of Long Term Capital Gain against Unabsorbed Depreciation:
The CIT(A) disallowed the set off of long-term capital gains against unabsorbed depreciation, considering the amalgamation a tax avoidance device. The Tribunal overturned this, stating that the High Court's approval of the amalgamation scheme is binding and the set off should be allowed as per the sanctioned scheme.

3. Application of GAAR and Piercing the Corporate Veil:
The CIT(A) applied GAAR provisions retrospectively and pierced the corporate veil to deny the set off of capital gains. The Tribunal found this application inappropriate as GAAR provisions were not applicable for the assessment year in question. The Tribunal reiterated that the High Court's approval of the amalgamation scheme should be respected, and the CIT(A)’s actions were beyond his jurisdiction.

4. Computation of Income from House Rent:
The CIT(A) upheld the AO’s estimation of house rent income at ?450,000 based on the property’s sale value. The Tribunal disagreed, citing precedents where actual rent received should be considered for income computation under Section 23 of the Income Tax Act. The Tribunal allowed the assessee’s appeal on this ground.

5. Calculation of Capital Gain Tax as Long Term or Short Term:
The CIT(A) held that the gain from the sale of property should be treated as long-term capital gain, considering the holding period from 1966 when the property was acquired as leasehold. The Tribunal upheld this view, rejecting the AO’s treatment of the gain as short-term based on the conversion of leasehold to freehold in 2010.

6. Disallowance under Section 14A of the Income Tax Act:
The CIT(A) restricted the disallowance under Section 14A to ?3,65,110, deleting the interest expense disallowance. The Tribunal upheld this decision, aligning with the principle that if surplus funds exceed investments, no interest disallowance is warranted.

7. Deduction of Premium Payable on Redemption of FCCB:
The CIT(A) allowed the deduction of premium on FCCB on a pro-rata basis. The Tribunal upheld this, referencing the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd. and other relevant judgments, affirming that such deductions are allowable over the life of the bonds.

8. Disallowance of Employees' Contribution to PF & ESIC:
The CIT(A) deleted the disallowance of employees' contributions to PF & ESIC, following the jurisdictional High Court’s decision in CIT vs. Vijay Shree Ltd. The Tribunal found no infirmity in this decision and upheld it.

9. Set Off of Unabsorbed Depreciation for AY 1996-97 and AY 1997-98:
The CIT(A) allowed the set off of unabsorbed depreciation from AY 1996-97 and AY 1997-98. The Tribunal upheld this decision, consistent with its earlier ruling in the assessee’s case.

Conclusion:
The Tribunal allowed the assessee’s appeal and dismissed the Revenue’s appeal, directing the AO to grant the benefits of set off of carry forward losses and other deductions as per the High Court-sanctioned scheme of amalgamation and relevant legal precedents.