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TMI Blog2007 (1) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... the income goes back to the date of transfer. Thus, provisions of section 47 are withdrawn on occurrence of the events mentioned u/s 47A and the transaction has to be treated as a transfer u/s 47(v) or (vi) of the Act as the case may be and the transferor company is liable to pay the capital gains tax. In the present case due to ceasure of the assessee-company being a subsidiary of the transferor company, the provisions of section 47(iv) have ceased to apply, and the transaction has to be considered as a transfer. Section 47A provides for the withdrawal of exemption and the resultant treatment to be given to the income in the hands of the transferor company. Sub-section (3) provides that in the hands of the transferee, the valuation/cost of the asset regarding which the exemption granted u/s 47(iv) has been withdrawn u/s 47A of the Act, it shall be the cost for which such asset was acquired by it. Thus, in the present case, the cost for which the assessee has acquired the asset should be the cost of acquisition for the purpose of computation of depreciation. Whether it is the transfer of a block of assets or individual assets - This issue is covered by the decision in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the reasons given by us in assessee s appeal in ground No. 1, this ground of appeal raised by the revenue is dismissed. In the result, both the appeals are partly allowed. - Smt. P. Madhavi Devi And K.K. Boliya, JJ. For the Appellant : Soli Dastur and Paras Kaka For the Respondent : Indra Kumar ORDER Smt. P. Madhavi Devi, Judicial Member. - The cross appeals [one each by the assessee and the revenue] are directed against CIT(A) s order dated 22-2-1996 for the assessment year 1993-94. 2. I.T.A. No. 3041/M/96 : The assessee has raised the following grounds of appeal 1. The learned Commissioner of Income-tax (Appeals)-VII Bombay [hereinafter referred to as the CIT(A) ] erred in directing DC to allow the depreciation by taking the actual cost to the transferor [Rs. 101.10 crore] of the transferred asset as against the actual amount paid [Rs. 130.52 crore] by the transferee company to transferor company. The appellant submit that depreciation should be allowed by considering the actual amount of Rs. 130.52 cr. paid for acquiring the assets. 2. The CIT(A) erred in upholding the disallowance of loss of Rs. 1,29,20,068 arising out of const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), whereby the provisions of section 43(1)(6) will not apply; ( b ) The Explanation 2 to section 43(6) is applicable only if the transferor company transfers all the assets comprised in the relevant block of assets and is not applicable where only one or some of the assets comprised in the block assets is transferred; and as M/s. Essar Gujarat Ltd. has transferred only part of the assets in 25% block, the assessee has rightly claimed depreciation on the value apportioned as consideration obtained on the basis of valuation; ( c ) On 30-9-1994, Essar Oil Ltd. ceased to be a wholly owned subsidiary of Essar Gujarat Ltd. and therefore section 49(3). ( d ) Would apply and the cost of acquisition would be the cost for which the assets were acquired by the assessee. The Assessing Officer was however not convinced by the assessee s submissions and holding that the assessee-company satisfied all the conditions laid down in section 47( iv ) read with Explanation 6 to section 43(1), took the WDV of the assets in the books of the Essar Gujarat Ltd. as the cost of acquisition and thereafter allowed depreciation upon the same. 3. Aggrieved, assessee filed an appeal before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he definition of WDV as given in sub-section (6) of section 43, wherein under clause ( a ) the meaning is given as in the case of assets required in the previous year, the actual cost to the assessee . He submitted that Explanation 6 to sub-section (1) of section 43 is applicable only where the conditions under section 47( iv ) are satisfied and continue to be so. But as the assessee has ceased to be the wholly owned subsidiary of its holding company from September 1994, i.e., well within the period stipulated under section 47A, the provisions of section 47( iv ) cease to apply and the transfer has to be considered as a transfer under section 2( 47 )( v ) of the Income-tax Act. He submitted that section 47 was intended to give exemptions to capital gains in respect of the transactions mentioned therein and section 47A withdraws the said exemptions on the happening of certain events thereafter. He also referred to the provisions of section 49, sub-section (3), wherein it is mentioned that where the provisions of section 47A apply and the income is chargeable as capital gain, the cost of acquisition of such asset to the transferee company shall be the cost for which such asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerns. Thus, the assessee has taken over the assets of the holding company as a division by lock, stock and barrel. A division as such is completely taken over by the subsidiary. The Assessing Officer has applied the provisions of section 47( iv ) of the Act to consider the nature of transfer and thereby applied the Explanation 6 to sub-section (1) of section 43 for the purpose of working out the actual cost to the subsidiary company. Explanation 6 to sub-section (1) of section 43 provides as under : Explanation 6 to sub-section (1) : When any capital asset is transferred by a holding company to its subsidiary company or by a subsidiary company to its holding company, then, if the conditions of clause ( iv ) or, as the case may be, of clause ( v ) of section 47 are satisfied, the actual cost of the transferred capital asset to the transferee company shall be taken to be the same as it would have been if the transferor company had continued to hold the capital asset for the purpose of its subsidiary. Where a 100 per cent holding company of a subsidiary company transfer certain assets to such subsidiary company even for a price or consideration higher than the WDV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 47A occur, the exemptions granted under section 47 of the Income-tax Act are withdrawn. What is the effect of such withdrawals? In the case of the transferor company, the income is to be treated as the income of the year in which the transfer has taken place. This shows that the subsequent event has the effect of withdrawing the exemption granted under section 47 and the income goes back to the date of transfer. Thus, provisions of section 47 are withdrawn on occurrence of the events mentioned under section 47A and the transaction has to be treated as a transfer under section 47( v ) or ( vi ) of the Act as the case may be and the transferor company is liable to pay the capital gains tax. In the present case due to ceasure of the assessee-company being a subsidiary of the transferor company, the provisions of section 47( iv ) have ceased to apply, and the transaction has to be considered as a transfer. Section 47A provides for the withdrawal of exemption and the resultant treatment to be given to the income in the hands of the transferor company. What is the consequential effect on the transferee company ? What should be the value of cost of acquisition in its hands ? Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognition was by percentage method. The assessee was asked to file project-wise completion working for the assessment year in progress. The assessee filed details whereby an amount of Rs. 4,43,89,780 on the RAVVA project was claimed as a loss. From the chart, the Assessing Officer noticed that the assessee had booked profits from PANNA and MDL projects for its offshore division on the basis of percentage completion method and with respect to the RAVVA project the assessee has booked the entire loss for this year itself. The assessee had also submitted that it was following the accounting Standard No. 7 issued by the Institute of Chartered Accountants of India, according to which the loss is to be provided for the stage of completion reached on the contract and in addition provision is usually made for losses on the remainder of the contract. The Assessing Officer however was not satisfied with the assessee s explanation and held that the assessee has been consistently following the project completion method with respect to all its projects and the same is to be followed even for RAVVA project and the losses on the entire contract will also have to be booked on the basis of perce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e activity progresses even though in certain circumstances it may not be realised. Thus, it is evident that under the percentage completion method the assessee is entitled to claim loss for the stage of completion reached and as the assessee had only completed 2/3rd of the contract, he was entitled to claim 2/3rd of the estimated loss only and not the entire loss as claimed by him. Thus, we are of the view that both the Assessing Officer and the CIT(A) were right in holding that future anticipated losses cannot be carried forward and allowing only 2/3rd of the estimated loss and making the addition of the balance to the income of the assessee. Hence, assessee s ground No. 2 raised in I.T.A. No. 3041/M/96 is rejected. 17. I.T.A. No. 3317/M/96 - [revenue s appeal] : Ground No. 1 raised by the revenue reads as under 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the contract with the bank by its parent company was in connection with purchase of foreign exchange to fulfil its obligation for payment towards import of machinery without reference to facts brought by the Assessing Officer on record. 18. Brief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the facts of the present case. It was a case where the assessee entered into an agreement with the Exim Bank and obtained a loan for the purpose of financing the purchase of its fixed capital assets, plant machinery in USA for the purpose of establishing a plant in India. Accordingly, assessee purchased the plant and machinery and instructed its bankers to make forward purchase of U.S. dollars to the bank. The bank thus entered into a forward contract with the assessee, but subsequently on the intimation of RBI that the said contract was in breach of RBI Manual, cancelled the agreement. Meanwhile, the assessee had to pay higher rate to its venders and thus claimed damages from the bank. The bank to meet its liability, which was likely to arise under the contract, and to avoid litigation had arrived at a settlement by paying to the assessee a sum of Rs. 24.19 lakhs and it was held that this payment is far removed from the payment made by the assessee towards the cost of assets acquired by him and that the cost of plant and machinery should not be reduced by the said sum. In the present case, it was the assessee who had cancelled the contracts and had received the sum of Rs. 8,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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