2025 (4) TMI 643 - AT - Income Tax

Rejecting the claim for loss under the head Capital Gains on transfer of assets Land AND investments by the assessee pursuant to Scheme of Arrangement u/s 391 to 394 of the Companies Act - AR submitted that transfer of land and investments is not a demerger u/s 2(19AA) so as to attract exemption provisions of section 47(vib). HELD THAT - After careful consideration of the SOA it is only a restructure of the debt accordingly they have directed the assessee company to liquidate the assets to settle the liabilities and along with that scheme of restructure the company to function efficiently. Therefore if we have to treat all the options of restructure of the debts alike then the conditions of section 2(19AA) of the Act are not fulfilled in the options of transferring assets to SPVs. They have only taken the specific assets and liabilities and not allotted any shares back to the assessee also the assets are not transferred with the concept of going concern. Their limited purpose was to liquidate the debts only. Therefore as per the commercial transactions the assets and liabilities belong to the assessee and assessee has recorded the value of the assets at cost in their books of account and the assets were transferred at market value. Therefore once the conditions of definition of demerger are not satisfied then the transaction has to be treated as regular capital transactions. We observed that the assessee has rightly recorded the transaction at cost and determined the indexed cost of the respective assets and treated the transfer value of the land and shares as sale consideration. We also observed from the order of Ld CIT(A) that he has looked at the transactions differently. He observed that the assessee has transferred assets and liability at the same cost that means the assets were transferred at zero therefore there is no loss or gain to the assessee. Further he observed that the lenders had waived the interest therefore provisions of section 41(1) of the Act are applicable. He has missed the point of commercial aspect in these transactions the assessee recorded the value of the assets at cost in its Balance Sheet and transferred the assets at fair market value i.e. Value of land on the date of transfer was Rs. 15, 28, 41, 099/- and transferred at the value of Rs. 65, 00, 00, 000/- and liquidated the liabilities to that extent. On the date of transfer the indexed cost of the land was Rs. 68, 31, 99, 113/-. That means the assessee has settled the value of liabilities of Rs. 65 crores at the cost of Rs. 68.32 crores. How can we say that the assets were transferred at zero cost. It lakes commercial understanding. Similarly for the transfer of shares the book value of shares were Rs. 53.95 crores and its indexed cost was Rs. 77.23 crores on the date of transfer and settled the liabilities worth Rs. 35 crores. Therefore the transactions of transfer of assets and liabilities to its SPVs with the specific purpose of liquidating the assets and settling the liabilities cannot be equated with the demerger it does not satisfy the provisions of section 2(19AA) of the Act. Therefore we are inclined to agree with the method of transaction recorded by the assessee in their books and computation of income. Accordingly the grounds raised by the assessee are allowed. Disallowance of interest cost - assessee has made some investments and has also advanced loans to its group companies (which are outstanding during the year under consideration - HELD THAT - Disallowance of notional interest on the loans given to its sister concerns out of interest free and owned funds it is brought to our attention that the issue under consideration is settled in favour of the assessee by the Coordinate benches and orders of CIT(A) in the earlier assessment years. AR submitted a chart as per which the issue of notional interest was disallowed in AY 1998-99 and subsequent AYs the coordinate bench has remanded the matter to AO and in OGE the AO has deleted the additions as per the ratio of Meenakshi Synthetics 2002 (6) TMI 175 - ITAT LUCKNOW case. Since the similar issue was considered by the first appellate authorities in the subsequent AYs remanded the matter to the AO and in OGE the same were deleted. The issue was squarely settled in favour of the assessee in AYs 1999-00 to 2002-03 and from AYs 2004-05 onwards to 2007-08. Therefore the investments and loan/ advances lent to its sister concerns are squarely covered in favour of the assessee. In the current year the issue of Jay Engineering Works investments and further loans were raised by the AO. Since the issues under consideration is exactly similar tothe other transactions which are advanced in the earlier AYs. Since the facts in the present AY also similar we are inclined to allow the grounds in favour of the assessee. Accordingly the grounds raised by the assessee in this regard are allowed. Disallowance u/s 14A read with Rule 8D - HELD THAT - As respectfully following the decision of Era Infrastructure Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT we are inclined to delete the disallowance made by the AO and confirmed by the ld. CIT(A) and allow the ground of the assessee. Disallowance being 30% of staff welfare expenses incurred by the assessee - CIT(A) deleted addition - HELD THAT - After going through the submissions made by the AR and findings of ld. CIT (A) we do not find any infirmity in the order of the ld. CIT (A) and accordingly we affirm the same and delete the grounds taken by the Revenue as held disallowance without specific finding is not sustainable.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary legal issues considered in this judgment are:

• Whether the transfer of land and investments under a Scheme of Arrangement (SOA) constitutes a "transfer" under Section 2(47) of the Income Tax Act, thereby attracting capital gains tax.
• Whether the transactions under the SOA qualify as a "demerger" under Section 2(19AA) of the Income Tax Act, thereby exempting them from tax under Section 47(vib).
• The appropriateness of disallowances made by the Assessing Officer (AO) regarding interest costs claimed by the assessee, particularly in the context of loans and investments in group companies.
• Whether disallowance under Section 14A read with Rule 8D is applicable when no exempt income is earned during the year.
• The legitimacy of disallowing a portion of staff welfare expenses as not being incurred for business purposes.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer of Land and Investments:

• Relevant Legal Framework and Precedents: The key legal provisions involved are Sections 2(47) and 47(vib) of the Income Tax Act. Section 2(47) defines "transfer" for capital gains purposes, whereas Section 47(vib) exempts certain transfers in a demerger.
• Court's Interpretation and Reasoning: The Tribunal examined whether the transfer of land and investments to subsidiary companies under the SOA constituted a "transfer" under Section 2(47). It was argued that the SOA did not satisfy the conditions of a "demerger" under Section 2(19AA) because the transactions involved individual assets rather than an undertaking.
• Key Evidence and Findings: The Tribunal noted that the land and investments were transferred at market value, and the corresponding liabilities were assigned to the subsidiaries, which were self-liquidating entities.
• Application of Law to Facts: The Tribunal concluded that the transactions did not qualify as a "demerger" under Section 2(19AA) and were thus taxable as capital gains under Section 2(47).
• Treatment of Competing Arguments: The Tribunal rejected the argument that the transactions were exempt under Section 47(vib), as the conditions for a "demerger" were not met.
• Conclusions: The Tribunal allowed the assessee's claim for capital losses, recognizing the transactions as taxable transfers.

Disallowance of Interest Costs:

• Relevant Legal Framework and Precedents: Section 36(1)(iii) of the Income Tax Act allows interest deductions on borrowed funds used for business purposes.
• Court's Interpretation and Reasoning: The Tribunal considered past decisions where similar disallowances were deleted, emphasizing the need to establish a nexus between borrowed funds and non-business use.
• Key Evidence and Findings: The Tribunal found that the investments and loans were made in earlier years and were covered by non-interest-bearing funds.
• Application of Law to Facts: The Tribunal concluded that the disallowances were not justified, as the funds were not borrowed for non-business purposes.
• Treatment of Competing Arguments: The Tribunal rejected the AO's approach of disallowing interest based on a presumed nexus with non-business activities.
• Conclusions: The Tribunal allowed the appeal, deleting the disallowances of interest costs.

Disallowance under Section 14A:

• Relevant Legal Framework and Precedents: Section 14A disallows expenses incurred in relation to earning exempt income.
• Court's Interpretation and Reasoning: The Tribunal relied on precedents, including the Delhi High Court's decision in Era Infrastructure, holding that Section 14A does not apply if no exempt income is earned.
• Key Evidence and Findings: The assessee did not earn any exempt income during the relevant years.
• Application of Law to Facts: The Tribunal upheld the deletion of disallowances made under Section 14A.
• Treatment of Competing Arguments: The Tribunal dismissed the Revenue's arguments for applying Section 14A in the absence of exempt income.
• Conclusions: The Tribunal affirmed the CIT(A)'s decision to delete the disallowance under Section 14A.

Disallowance of Staff Welfare Expenses:

• Relevant Legal Framework and Precedents: Section 37 of the Income Tax Act allows deductions for business expenses.
• Court's Interpretation and Reasoning: The Tribunal found that the AO's disallowance lacked specific findings and did not consider the business necessity of the expenses.
• Key Evidence and Findings: The expenses were consistent with past practices and were minimal compared to total revenue.
• Application of Law to Facts: The Tribunal concluded that the expenses were incurred for business purposes and were allowable under Section 37.
• Treatment of Competing Arguments: The Tribunal rejected the AO's prudency argument, emphasizing the business expediency of the expenses.
• Conclusions: The Tribunal deleted the disallowance of staff welfare expenses.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The transactions of transfer of assets and liabilities to its SPVs with the specific purpose of liquidating the assets and settling the liabilities cannot be equated with the demerger, it does not satisfy the provisions of section 2(19AA) of the Act."
• Core Principles Established: The Tribunal emphasized the importance of distinguishing between individual asset transfers and demergers under tax law, reinforcing that only the latter qualifies for exemptions under Section 47(vib).
• Final Determinations on Each Issue: The Tribunal allowed the assessee's appeals concerning capital losses and interest disallowances, upheld the deletion of Section 14A disallowances, and deleted disallowances of staff welfare expenses.