2022 (1) TMI 1052 - HC - Income Tax

Computation of capital gains - Slump sale u/s 2(42C) - transfer of capital assets u/s 2(47) - Whether surplus amount is covered an exchange under section 2(47) as against long term capital gains under section 50B and section 2(42C) of the Income Tax Act? - HELD THAT - Tribunal took note of the argument of the assessee with regard to computation of capital gains and found that there cannot be any controversy that each of the specified hotels is an undertaking and, therefore, constituted a long term capital asset. Further, the Tribunal took note that it is not in dispute that the transfer of the business undertaking as a going concern constitutes transfer of capital asset. The Tribunal proceeded to take note of the decision of the High Court of Bombay in the case of CIT Vs. Bharat Bijlee Limited, 2014 (5) TMI 512 - BOMBAY HIGH COURT and granted relief to the assessee by observing that two specified hotels of the assessee were transferred to EIH Associated Limited for consideration to be settled by issuance of preference shares and debentures were a transfer of capital by way of exchange and, therefore, the provisions of Section 50B of the Act cannot be made applicable to the facts of the case on hand. We find that the finding recorded by the Tribunal to be perfectly right. In fact, the Tribunal rightly took note of the decision in the case of R.R. Ramakrishna Pillai 1967 (5) TMI 7 - SUPREME COURT That apart, we took note of the submissions of the learned Senior Counsel for the respondent/assessee that the definition of slump sale as defined under Section 2(42C) was amended with effect from 1st April, 2021. The unamended provision defined slump sale to mean transfer of one or more undertaking as a result of sale. By Finance Act, 2021 the amendment made was by defining slump sale to mean the transfer of one or more undertaking by any means. This significant change by way of amendment would also aid the case of the assessee and would convince us to uphold the finding of the Tribunal. - Decided against revenue.

Summary

Issues:
1. Interpretation of provisions related to capital gains under the Income Tax Act.
2. Disallowance of expenditure incurred on running and maintenance of aircrafts.
3. Disallowance of professional and consultancy charges to non-residents.
4. Disallowance of advertisement publicity and sales promotion expenses to non-residents.
5. Disallowance of expenses related to dividend income and tax-free interest.
6. Disallowance of interest on advances given to subsidiary companies.
7. Disallowance of commission and sitting fees to directors without TDS deduction.
8. Disallowance of commission paid to non-residents without TDS deduction.

Analysis:
1. The High Court considered the appeal by the revenue against the ITAT order for the assessment year 2007-08. The main issue was whether the surplus amount of a transaction should be treated as long term capital gains or as an exchange under the Income Tax Act. The court analyzed the definition of slump sale and transfer under the Act, referring to relevant case laws. It concluded that the transaction in question was an exchange and not subject to section 50B, ruling against the revenue.

2. The court addressed the disallowance of expenditure on aircraft maintenance, stating that the aircrafts were used for personal purposes of directors. This disallowance was upheld as the expenses were not solely for business purposes.

3. The disallowance of professional and consultancy charges to non-residents under section 40(a)(i) was considered. The court noted the tax implications under section 9(1) and section 195 and upheld the disallowance as the fees were subject to tax in India.

4. Similarly, the disallowance of advertisement expenses to non-residents was analyzed in light of tax implications. The court upheld the disallowance under section 40(a)(i) as the expenses were subject to tax in India.

5. The disallowance of expenses related to dividend income and tax-free interest was challenged. The court affirmed the disallowance under section 14A as per rule 8D of income tax rules.

6. The disallowance of interest on advances given to subsidiary companies for non-business purposes was reviewed. The court upheld the addition of interest amount based on the presumption that the advances were made from interest-free funds.

7. The disallowance of commission and sitting fees to directors without TDS deduction was discussed. The court upheld the disallowance under section 40(a)(ia) as tax was not deducted at source.

8. Finally, the disallowance of commission paid to non-residents without TDS deduction was addressed. The court upheld the disallowance under section 40(a)(i) as the commissions were subject to tax in India.

The court dismissed the appeal and affirmed the decisions of the ITAT, providing detailed reasoning for each issue raised by the revenue.