2016 (12) TMI 356 - HC - Income Tax

SIC company - Benefit of exemption from Capital Gains Tax - granting extension of the time for set off the carry forward losses - whether claim can be denied to an undertaking sought to be revived by the BIFR - Held that - There is no denial of the fact that the company has shown profitability. Its liability to redeem the preference shares is in the future. In the circumstances, the possibility of its incurring losses in the event of payment of capital gains tax cannot be ruled out. That such losses might arise could also be within the normal course of any normal business enterprise s functioning. In the circumstances, the view of the respondents that exemption from payment of capital gains tax is not warranted cannot be held illegal. The Court is aware, at the same time that in the assessments completed till date, the petitioner s liability had not in one sense been crystallized. The remand to the income tax authorities on three occasions led to fresh orders based upon fresh assessment of the facts and circumstances on each occasion. Having regard to these peculiar facts, a direction is issued to the respondents not to charge interest or penalty on the capital gains tax amounts in the circumstances of the case for the duration that the matter remained pending in these proceedings and all prior proceedings. The writ petition is allowed in terms of the directions in the preceding paragraph even while upholding the liability to pay capital gains tax.

Summary

Issues Involved:
1. Denial of exemption from Capital Gains Tax to a company under BIFR revival scheme.
2. Consideration of the company's financial status and carried-over losses.
3. Evaluation of the company's actual financial performance versus projected figures.
4. Legality of the Income Tax authorities' orders denying the exemption.
5. Impact of the company's net worth turning positive on the exemption request.
6. Relevance of BIFR's directions and the overriding effect of Section 32 of the Sick Industrial Companies (Special Provisions) Act, 1985.

Detailed Analysis:

1. Denial of Exemption from Capital Gains Tax:
The primary issue is whether the benefit of exemption from Capital Gains Tax can be denied to a company under a BIFR revival scheme. The petitioner, a textile machinery manufacturer, was declared sick in 2001 and referred to BIFR. Despite a sanctioned revival scheme in 2003, the company failed to meet projected financial targets and sought exemption from Capital Gains Tax on asset sales as part of a Modified Rehabilitation Scheme in 2009. The BIFR directed the Directorate of Income Tax (Recovery) to consider this exemption, but the request was denied by the Joint Director of Income Tax (Recovery) based on projected future profits.

2. Consideration of Financial Status and Carried-Over Losses:
The petitioner argued that despite a positive net worth, the company had significant accumulated losses of ?887.23 lakhs as of 31.03.2015 and needed to create a Capital Redemption Reserve of ?850 lakhs. The company contended that the financial and liquidity strain from paying Capital Gains Tax would impede its revival. The income tax authorities, however, noted that the company's actual financial performance showed substantial surplus funds and profitability, negating the need for tax relief.

3. Evaluation of Actual Financial Performance vs. Projected Figures:
The income tax authorities' decision was based on the observation that the company's actual sales and cash accruals were less than 50% of the projected figures in the rehabilitation scheme. The authorities argued that the company's poor performance was its own responsibility, and the revenue could not be blamed. The petitioner countered that the financial strain from paying the tax would push the company back into sickness, contrary to the revival scheme's intent.

4. Legality of the Income Tax Authorities' Orders:
The court examined the legality of the orders denying the exemption. The income tax authorities had previously allowed the set-off of carried-forward losses but denied the Capital Gains Tax exemption, arguing that the company's financial health did not justify such relief. The court noted that the authorities' view was based on an objective assessment of the company's financial status and profitability.

5. Impact of Positive Net Worth on Exemption Request:
The petitioner argued that a positive net worth did not negate the need for exemption due to ongoing financial obligations and accumulated losses. The income tax authorities, however, emphasized that the company's profitability and surplus funds indicated it could absorb the tax liability without jeopardizing its revival.

6. Relevance of BIFR's Directions and Section 32 of the Act:
Section 32 of the Sick Industrial Companies (Special Provisions) Act, 1985, gives primacy to BIFR's directions. The BIFR had directed the income tax authorities to consider granting relief on carry-forward losses and Capital Gains Tax exemption. The court noted that while the authorities had granted relief on carry-forward losses, the refusal to grant Capital Gains Tax exemption was based on the company's improved financial performance and surplus funds.

Conclusion:
The court upheld the income tax authorities' decision to deny the Capital Gains Tax exemption, finding it justified based on the company's financial health and profitability. However, the court directed that no interest or penalty should be charged on the Capital Gains Tax amounts for the duration of the pending proceedings, acknowledging the peculiar facts of the case. The writ petition was allowed in terms of these directions, while upholding the liability to pay Capital Gains Tax.