2006 (5) TMI 135 - AT - Income Tax

Additional Ground - capital gains - chargeability of profit arising from slump sale - manufacturing division - Interest on borrowed capital - HELD THAT - In the case of Coromandal Fertilizers Ltd. 2003 (11) TMI 303 - ITAT HYDERABAD-B is directly on the point in issue wherein it was held that the slump sale of an individual unit as a going concern does not attract capital gains tax as the computation provisions fail to compute the capital gain arising from such sale. It was also held that there was a lacuna in the statute to provide for such computation provisions which has been removed by insertion of s. 50B by the Finance Act, 1999 w.e.f. 1 April, 2000 and this provision being a substantive one is not retrospective in operation. To the similar effect is the decision of Ahmedabad Bench of Tribunal in the case of Industrial Machinery Associates 2001 (1) TMI 201 - ITAT AHMEDABAD-A wherein it was held that prior to insertion of s. 50B effective from asst. yr. 2000-01, it was not possible to conceptualize the cost of acquisition of a going concern as well as date of acquisition thereof and since the cost of acquisition and or the date of acquisition of the asset could not be determined, it could not be brought within the purview of s. 45 for levy and computation of capital gains. Since the assessment year involved in the present case is 1995-96, the issue raised in the cross-objection filed by the assessee is squarely covered by the aforesaid decisions of the Tribunal in favour of the assessee and respectfully following the same, we hold that the gain arising from the slump sale of its manufacturing division by the assessee-company was not liable to tax. Accordingly, we allow the cross-objection filed by the assessee. Thus, assessee holding that the gains arising from the slump sale of the manufacturing division were not liable to tax, the issue raised by the Revenue in its appeal for asst. yr. 1995-96 in ground Nos. 1 and 2 has become infructuous. The same is accordingly dismissed. Disallowance of interest paid on borrowed funds - HELD THAT - In the present case, the facts involved are entirely different inasmuch as the details of availability of funds and application thereof furnished by the assessee were sufficient to establish that the advances were given by the assessee to its sister-concerns mainly after 31st Jan., 1995 from the sale proceeds of its manufacturing division and not from the funds borrowed on interest as alleged by the AO. After verifying the said details, the learned CIT A) also found that the advances to its sister-concerns had been given by the assessee-company out of such sale proceeds and there was no diversion of borrowed funds for non-business purpose. Before us the ld DR has not been able to show that these findings recorded by the learned CIT A) are factually incorrect and this being so as well as considering the fund-flow position reflected in the details furnished by the assessee before the learned CIT(A) and reproduced by him in his impugned order, we hold that the disallowance of interest made by the AO was not justified. The impugned order of learned CIT A) deleting the same is, therefore, upheld and ground No. 3 of the Revenue's appeal is dismissed. The only issue raised by the Revenue in its appeal for AY 1996-97 relating to the disallowance of interest is similar to the one raised in ground No. 2 of its appeal for AY 1995-96. Since the facts involved in AY 1996-97 as well as the arguments advanced by both the sides are similar to that of AY 1995-96, we follow our decision rendered in AY 1995-96 on a similar issue and uphold the impugned order of the learned CIT(A) deleting the disallowance made by the AO on account of interest. In the result, both the appeals of the Revenue are dismissed whereas the cross-objection of the assessee is allowed.

Summary

Issues Involved:
1. Computation of capital gain on the sale of the manufacturing division.
2. Disallowance of interest attributable to interest-free loans given to sister concerns.

Detailed Analysis:

1. Computation of Capital Gain on Sale of Manufacturing Division:

The first common issue pertains to the computation of capital gain on the sale of the manufacturing division of the assessee. The assessee agreed to sell its entire undertaking to Kelvinator of India Ltd. for Rs. 6.30 crores, declaring a long-term capital gain of Rs. 4,29,38,582. The AO contended that the capital gain should be treated as short-term under section 50, as the assets transferred were depreciable and part of the block of assets. The AO calculated a short-term capital gain of Rs. 5,81,11,261 by reducing the WDV of the block of assets from the sale consideration.

The CIT(A) held that the transfer was a long-term capital gain under section 45, as the entire business was transferred as a going concern which existed for more than 36 months. However, the CIT(A) denied the benefit of indexation, allowing a deduction of Rs. 1,95,93,802 as the net worth of the business, resulting in a long-term capital gain of Rs. 4,34,06,198.

The Revenue challenged this decision, arguing that the gain should be short-term and that section 50B, which allows for the cost of acquisition, was not applicable for the assessment year 1996-97. The assessee filed a cross-objection, claiming that the gains from the slump sale were not liable to tax, as the cost of acquisition and improvement could not be precisely computed prior to the insertion of section 50B effective from 1st April 2000.

The Tribunal, after considering the arguments and relevant case laws, agreed with the assessee that the gains from the slump sale were not liable to tax for the assessment year 1995-96, as the computation provisions for such gains were not in place before section 50B was introduced. Thus, the cross-objection was allowed, and the Revenue's appeal on this issue was dismissed as infructuous.

2. Disallowance of Interest Attributable to Interest-Free Loans Given to Sister Concerns:

The second issue involves the disallowance of interest amounting to Rs. 54,68,872, which the AO attributed to interest-free loans given by the assessee to its sister concerns. The AO disallowed the entire interest expenditure claimed by the assessee, arguing that the borrowed funds were diverted for non-business purposes.

The CIT(A) found that the advances to sister concerns were made from the proceeds of the sale of the manufacturing division and not from borrowed funds. Therefore, the CIT(A) deleted the disallowance.

The Tribunal upheld the CIT(A)'s decision, noting that the details provided by the assessee established that the advances were given from the sale proceeds and not from borrowed funds. The Tribunal found no factual errors in the CIT(A)'s findings and dismissed the Revenue's appeal on this issue.

For the assessment year 1996-97, the issue was similar, and the Tribunal followed its decision from the previous year, upholding the CIT(A)'s order deleting the disallowance of interest.

Conclusion:
Both appeals of the Revenue were dismissed, and the cross-objection of the assessee was allowed. The gains from the slump sale of the manufacturing division were held not liable to tax, and the disallowance of interest on borrowed funds was deleted.