2006 (6) TMI 136 - AT - Income Tax

Slump Sale - computation of net worth on slump sale - Disallowance of interest under section 36(1)(iii) of the Act - interest received by the assessee on refund received from Income Tax Department for the year under consideration is chargeable to tax in this year or not - Disallowance being payments made to Clubs - Disallowance being payments to various clubs by way of reimbursement - Deletion of two additions in respect of refund of income tax and interest in the case of foreign concern - deletion of disallowance being expenditure incurred on acquiring bus as well as education expenses in respect of employees' children. Slump Sale - transfer of cement division by way of slump sale - Computation of capital gains - whether net worth so computed can be in negative so as to increase the sale consideration by such negative figure of net worth for computing capital gain? - HELD THAT - he answer is in negative for the reasons given hereafter. Firstly, capital gain is always a portion of sale consideration and, therefore, portion can never be higher than the whole. Gain would arise only where sale consideration is more than the cost. By no stretch of imagination, it can be said that capital gain would be more than the sale consideration. No man of prudence can ever think of capital gain higher than the sale consideration. Capital gain can either be excess of sale consideration over the cost or nil if sale consideration is equal to cost. Where the cost is more than sale consideration, it would be a case of loss. No other situation can be visualized. Therefore, capital gain can never be more than the sale consideration. Secondly, the Legislature has used the expression net worth which by deeming fiction is to be considered as cost of acquisition and cost of improvement for the purpose of computing capital gain under section 48. Section 48 of the Act provides for deduction of cost of acquisition/improvement from the full value of consideration received or accruing as a result of transfer of capital assets. The cost of a property, as per dictionary meaning, means the price paid by a buyer to the seller. Therefore, it must be a positive figure. Thirdly, had the Legislature also intended negative cost of acquisition, it would have used the words by deducting from or adding to, as the case may be in section 48 of the Act instead of the words by deducting from actually used by it. The language used by Legislature in section 48, thus, itself shows that it never intended negative cost of acquisition. Since net worth in section 50B is deemed to be the cost of acquisition as per sub-section (2) thereof, it must also have been intended by the Legislature in positive. Therefore, the expression reduced by used by the Legislature in Explanation 1 to section 50B has been used in the sense that net worth should be arrived at positive figure or at best be reduced to Nil . Consequently, where the liabilities are more, then the value of assets as computed under section 50B, the net worth would be considered as Nil . In the present case, the value of assets as per books of account is much more than the value of liabilities. No prudent person would have acquired the unit unless the value of assets or benefits attached to the division is more than the liability - The division was purchased since value of assets was more than the liabilities. It is because of written down value of assets under section 43(6)(c) of the Act, that value of depreciable assets had to be computed at substantially low figure which resulted in the value of assets lesser than liabilities but on that account net worth cannot be reduced below the Nil account since such process would be contrary to the scheme of the section itself - net worth of the cement division would be taken as Nil which shall be deemed to be the cost of acquisition for the purpose of computing capital gain under section 48 of the Act. Whether the amount of consideration received by the assessee should be increased by the amount of liabilities of the cement division for ascertaining the full value of consideration in view of the judgment of the Hon'ble Supreme Court in the case of COMMISSIONER OF INCOME TAX VERSUS ATTILI N. RAO 2001 (10) TMI 5 - SUPREME COURT ? - HELD THAT - If liability is to be added to the sale consideration then, the same has also to be excluded from the computation of net worth since otherwise it would amount to double jeopardy. Such process would amount to re-writing of the provisions of section 50B which is not permissible in law since such process is within the exclusive domain of the Legislature. Therefore, considering the scheme of section 50B, the judgment of the Apex Court cannot be applied to the present case. The order of the Learned CIT (Appeals) is modified and the Assessing Officer is directed to assess the capital gain at Rs. 75.98 crores. Disallowance of interest of Rs. 21,06,849 under section 36(1)(iii) of the Act - HELD THAT - This issue is no more res integra since covered by the judgment of the Hon'ble Supreme Court in the case of India Cement Ltd. v. CIT 1965 (12) TMI 22 - SUPREME COURT , wherein it has been held that interest on borrowed funds would be allowed irrespective of the fact whether used for day-to-day running of the business or for acquisition of business assets. Both the authorities have not given any specific reason for not following this judgment. The claim of the assessee cannot be disallowed merely on the ground that it has been capitalised in the books of account. Entries in the books of account are not relevant for rejecting the claim of the assessee if it is otherwise allowable. Whether interest received by the assessee on refund received from Income Tax Department for the year under consideration is chargeable to tax in this year or not? - HELD THAT - The Learned Counsel for the assessee has fairly stated that this issue is covered against him by the decision of the Special Bench in the case of Avada Trading Co. (P.) Ltd., 2006 (1) TMI 465 - ITAT MUMBAI wherein it has been held that interest accrues in the year in which interest on refund is received by the assessee. Therefore, following the said judgment, we decide the issue against the assessee. However, the Assessing Officer is directed to delete the addition, if any, on the basis of income offered by the assessee in subsequent years. Disallowance of Rs. 1,66,329 being payments made to Clubs - HELD THAT - There are no merit in the appeal of the assessee on this issue in absence of any details - the order of the Learned CIT(A) is modified and the Assessing Officer is directed to work out the disallowance considering the above expenditures as entertain expenditure. Disallowance of Rs. 10,61,528 being payments to various clubs by way of reimbursement - HELD THAT - The provisions of section 40A(9) of the Act provides that no deduction shall be allowed in respect of any sum paid by the assessee as an employee towards the set-up or formation of or as a contribution to any fund, trust, company, association of persons, body of individuals, society, or other institution for any purpose, except covered by section 36(1)(iv/v). There is no finding by the Assessing Officer that such payments were made towards the purposes mentioned in sub-section (9) of section 40A - the provisions of section 40A(9) are not applicable and, therefore, no disallowance was justified. The order of the Learned CIT(A) is, therefore, set aside on this issue and the disallowance sustained by him is hereby deleted. Disallowance of interest of Rs. 6,34,49,000 on the ground that such interest on borrowings were relatable to tax free dividend income - HELD THAT - The assessee has specifically contended before the Assessing Officer that no borrowed funds were utilised in such investments and further no dividend has been received on investment made during the year. This contention remains uncontroverted. It has been held by the Tribunal in the case of MARUTI UDYOG LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX. 2004 (10) TMI 278 - ITAT DELHI-A that onus is on the Department to prove that any expenditure was incurred for earning tax free income. The entire books of account were before the Assessing Officer who has not brought any material on record to prove that any interest was paid for earning tax free income under section 10(33). Therefore, following the said decision, the disallowance sustained by the Learned CIT(A) is hereby deleted. Deletion of two additions of Rs. 43,500 in respect of refund of income tax and interest in the case of foreign concern - deletion of disallowance of Rs. 5,76,025 being expenditure incurred on acquiring bus as well as education expenses in respect of employees' children - HELD THAT - The said appeals are still pending. In these circumstances, both the parties are agreed that the matter may be remitted to the file of Assessing Officer for fresh adjudication in accordance with the final verdict of the Tribunal in the appeals relating to the earlier years. In view of the same, we set aside the order of the Learned CIT(A) on these two issues and remit the matters to the file of Assessing Officer for fresh adjudication in accordance with the decision of the Tribunal pertaining to the earlier years. The appeal of the assessee stands partly allowed while the appeal of the revenue stands allowed for statistical purposes.

Summary

Issues Involved:
1. Computation of capital gains under section 50B of the Income-tax Act, 1961.
2. Disallowance of interest under section 36(1)(iii) of the Act.
3. Taxability of interest received on refund from the Income Tax Department.
4. Disallowance of payments made to clubs under section 37 of the Act.
5. Disallowance of payments to clubs by way of reimbursement under section 40A(9) of the Act.
6. Disallowance of interest on borrowings related to tax-free dividend income under section 14A of the Act.
7. Deletion of additions related to refund of income tax and interest in the case of a foreign concern and expenditure on acquiring a bus and education expenses for employees' children.

Issue-wise Detailed Analysis:

1. Computation of Capital Gains Under Section 50B:
The assessee sold its cement division and computed the net worth as negative, claiming no capital gain tax liability. The Assessing Officer (AO) disagreed, adding the negative net worth to the sale consideration, resulting in a capital gain computation of Rs. 226.4399 crores. The Tribunal held that "net worth" cannot be negative and should be considered "Nil" if liabilities exceed assets. Consequently, the capital gain should be Rs. 75.98 crores, the sale consideration.

2. Disallowance of Interest Under Section 36(1)(iii):
The AO disallowed interest of Rs. 21,06,849 on loans borrowed for the expansion of the NPK plant, which the assessee had capitalized but claimed as a deduction. The Tribunal, referencing the Supreme Court's judgment in India Cement Ltd. v. CIT, allowed the interest deduction, stating that the entries in the books of account are irrelevant if the claim is otherwise allowable.

3. Taxability of Interest Received on Refund:
The Tribunal upheld the decision that interest on refunds from the Income Tax Department is taxable in the year it is received, following the Special Bench decision in Avada Trading Co. (P.) Ltd. The AO was directed to delete any addition based on income offered in subsequent years.

4. Disallowance of Payments Made to Clubs:
The AO disallowed Rs. 1,66,329 paid to clubs, which the assessee claimed were for business purposes but failed to provide details. The Tribunal rejected the claim under section 37(1) due to lack of evidence but directed the AO to consider these expenditures as entertainment expenditure.

5. Disallowance of Payments to Clubs by Way of Reimbursement:
The AO disallowed Rs. 10,61,528 under section 40A(9), which the Tribunal found unjustified as the payments were subsidies or reimbursements, not contributions to club formation. The Tribunal deleted the disallowance.

6. Disallowance of Interest on Borrowings Related to Tax-Free Dividend Income:
The AO disallowed Rs. 6,34,49,000 of interest, assuming it related to tax-free dividend income. The Tribunal found no basis for this assumption, especially since the major investment was from slump sale proceeds, not borrowed funds. The Tribunal deleted the disallowance.

7. Deletion of Additions Related to Refund of Income Tax and Interest in the Case of a Foreign Concern and Expenditure on Acquiring a Bus and Education Expenses for Employees' Children:
The Tribunal remitted these issues to the AO for fresh adjudication in accordance with the final verdict of the Tribunal in the appeals relating to earlier years.

Conclusion:
The Tribunal provided detailed reasoning for each issue, modifying or upholding the AO's decisions based on legal precedents and the specifics of the case. The appeal of the assessee was partly allowed, and the revenue's appeal was allowed for statistical purposes.