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TMI Blog2008 (12) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 and observed that M/s. Mafatlal group was beneficial owner of 40 per cent of the equity capital of the assessee-company during the financial years 1994-95 and 1995-96 and further continued to maintain its holding at 40 per cent during the financial year 1996-97, even though, there was certain issue of additional capital. The Assessing Officer further observed that during the financial year 1997-98, M/s. Mafatlal group increased its shareholding to 75 per cent. Thus, he held that there is a change of management in the financial year 1997-98. 2.1 The Assessing Officer had further observed that during the financial years 1995-96 and 1996-97 M/s. Federal Bank was holding 40 per cent of the share capital which was subsequently reduced to 35 per cent during the financial year 1996-97 and thereafter substantially reduced the same to only 5 per cent during the financial year 1997-98. The Assessing Officer further found that during the financial year 1997-98, Federal Bank had relinquished its right in the management of the company. The assessee-company had submitted details regarding the change in directorship in which the percentage of directors, who are Mafatlal group nominees had in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n over by a completely new management. The shareholding pattern is extracted by the Assessing Officer at pages 8 and 9 of the assessment order. Further, on the claim of the assessee that it is a domestic company in which the public are substantially interested, the Assessing Officer held that the assessee company does not qualify for the status that it is a domestic company in which public are substantially interested as the same is defined in section 2(18) of the Act. He further states that from the shareholding pattern the status of the assessee-company is that of closely held company and at best it is a domestic company in which public are not substantially interested. Thereafter, he invoked section 79 of the Act and denied the claim of carry forward of unabsorbed business loss and unabsorbed depreciation. 2.3 Further, the Assessing Officer disallowed the following expenses : (1)Deferred revenue expenditure of Rs. 49,56,422 incurred on account of renovation of leased premises. (2)Equipment lease rent paid of Rs. 13,97,234. (3)Disallowance under section 43B on interest and insurance charges. (4)Disallowance of salaries, director's remuneration as well as travelling and conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) of the Act as both Mafatlal Finance Co. Ltd. and Federal Bank Ltd. as well as Weizeman Ltd. are companies in which public are substantially interested and as these companies hold more than 50 per cent of the voting power of the assessee-company throughout the previous year. He pointed out that both Federal Bank Ltd. as well as Mafatlal Finance Co. Ltd. held 30 per cent each of the shares of the assessee-company till 16-9-1997 and thereafter Mafatlal Finance Co. Ltd. directly continued to hold 30 per cent of the share capital and whereas it was the beneficial owner of the balance 30 per cent shareholdings purchased from Sunanda Securities Ltd. Weizeman Ltd. continued to hold 10 per cent of the shares throughout the relevant previous year. He pointed out that Mafatlal Finance Co. Ltd., Weizeman Ltd. as well as Federal Bank Ltd. are companies which are listed in the Stock Exchange and are companies in which public are substantially interested. On the issue of Mafatlal Finance Co. Ltd. being the beneficial shareholder of 30 per cent of the shares of the assessee-company held by Sunanda Securities Ltd. since 16-9-1997, the assessee claims to have produced declarations filed under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forward and set off of losses in the case of certain companies.--Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless-- (a )on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred : Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift : Provided further that nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer on pages 8 and 9 of the assessment order, the holdings of Mafatlal Finance Co. Ltd. which is 30 per cent and Surekha Holdings Pvt. Ltd. which is 10 per cent and Weizeman Ltd. which is 10 per cent have not been transferred to any other concern nor has the ownership changed from 31-3-1995 to 31-3-1998. These three holdings put together constitute 50 per cent of the total equity share capital. In the case of Tudor Plastics Pvt. Ltd. it held 10 per cent of the total equity share as on 31-3-1995 and this got reduced to 5 per cent as on 31-3-1997. In any event, Tudor Plastics Pvt. Ltd. held 5 per cent of the equity shares from 31-3-1995 to 31-3-1998. Hence 55 per cent of the shareholders remained the same from 31-3-1995 to 31-3-1998. Just because Mafatlal Finance group has increased its shareholdings from 40 per cent to 70 per cent, it does not mean that 51 per cent of the shareholding pattern has undergone a change. Thus, on facts, we find that the Assessing Officer has also affirmed the claim of the assessee that there is no change in ownership of 51 per cent of the shareholders from 31-3-1995 to 31-3-1998. Sub-clause (a) of section 79 does not specify change in directorship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case as it deals with sub-clause (b) which is not in the statute during the impugned assessment year. In this case also, the test as far as the sub-clause (a) is concerned, is the same as mentioned by us. In the head note it is given as follows : ". . . The change in the shareholding which is contemplated by section 79 is one which is to be found on a comparison between the position of voting power on the last day of the previous year for which the assessment is sought to be made and the corresponding position of the earlier year in which the loss was incurred which is claimed to be set off." This case law in fact supports the case of the assessee. 9. Coming to the judgment of the Hon'ble Gujarat Court in the case of Shri Subhlaxmi Mills Ltd. (supra). This judgment was fortified by the Supreme Court judgment in the case of Italindia Cotton Mills (P.) Ltd. (supra) wherein the test of "intent to reduce or avoid tax liability" was declined to be proved by the department. As sub-clause (b) to section 79 has been omitted, this case law does not come to the rescue of the revenue. 10. The assessee raises an alternative ground that public are substantially interested in assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recognized stock exchange and also it has to lead evidence that Mafatlal Finance Ltd. is the beneficial owner of the shares purchased from Federal Bank by Sunanda Securities Ltd. on 16-9-1997. The assessee claims that it has filed additional evidence before the CIT(A) and that he has not admitted the same. It pleads that this additional evidence should be directed to be admitted as they go to the root of the matter. 10.2 As we have already adjudicated the issue in favour of the assessee by holding that the case falls under the exception to clause (a) of section 79 of the Income-tax Act and we do not propose to go into this issue as it would be academic in nature especially when the revenue authorities have not considered the evidences filed by the assessee on this issue. 11. Now as regards grounds 5 and 6, these are relating to the disallowance of renovation expenses of leased premises amounting to Rs. 49,56,420. The assessee had during the impugned assessment year has written off as deferred revenue expenditure of Rs. 49,56,422, being expenditure incurred on renovation of leased premises. The Assessing Officer issued a show-cause notice on 22-1-2001 seeking a reply as to why t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lities are no longer payable to Federal Bank. Thus, the assessee had itself shown the above amounts as income under the head "Extraordinary items" in the profit & loss account and offered the same to tax under section 41(1) of the Act. The total write back in the profit & loss account was Rs. 82,72,274 which includes the impugned amount. The case of the assessee is that as it has suo motu added the said amount under section 41(1), the question of once again disallowing the same is bad in law. 14. After considering the above submissions, we are of the considered opinion that the addition in question cannot be sustained as the assessee itself has suo motu offered the same as its income by invoking section 41(1). It is a case of double taxation. In any event, we set aside the issue to the file of the Assessing Officer for the limited purpose of verifying the claim of the assessee. No addition shall be made in case the assessee has itself added the expenditure back. In the result, grounds 7 to 9 are allowed, for statistical purpose. 15. The next ground, i.e., ground No. 10 is on the issue of disallowance of expenditure of Rs. 1,31,610. The finding of the Assessing Officer is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal that the expenses incurred were wholly and exclusively for the activities to earn income was a reasonable conclusion." The amount of Rs. 18,675 claimed as business expenditure in that case was therefore held to be deductible. 19. Here also, the expenditure was being claimed under section 57(iii). As the issue before us is not a claim under section 57(iii) and it is only under section 37 that this claim is being made, we agree with the findings of the revenue authorities and reject this ground of the assessee. 20. Grounds 11 and 12 are on an addition of Rs. 40,27,412 made under section 41(1) of the Act. The facts in brief are that the Assessing Officer examined the tripartite agreement executed on 16-9-1997 and specifically clause (a) therein wherein it is stated as follows : "(a)Mafatlal Finance Ltd. agrees and confirms that it shall make arrangement to set off amounts due from the company to various parties as set out in Schedule 2 hereunder." The Assessing Officer was of the opinion that in the process of the re-structuring exercise, and the take over of certain liabilities of Federal Bank as well as that of Mafatlal Finance, certain waivers were made by certain parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ltd. towards transfer of assets and liabilities as well as towards amounts paid by Mafatlal Finance Ltd. for and on behalf of the assessee. The main contention of the assessee is that section 41(1) applies to (a) where the assessee had incurred trading liability and such trading liability has been allowed as a deduction in the earlier year and (b) when such trading liability has ceased during the year or there was a remission of the same. The assessee disputes the figure arrived at by the Assessing Officer and submits that it was only an arithmetical calculation without regard to the principles that are application for invocation of section 41(1) of the Act. The finding of the first appellate are also disputed on the ground that he was in error in holding that there was a cessation or remission of liability as Mafatlal Finance Ltd. has taken over such liabilities. He points out that M/s. Mafatlal Finance Ltd. has only agreed to make arrangement to set-off amounts due by the assessee-company to various parties and that does not mean that Mafatlal Finance Ltd. has taken over the liabilities. He vehemently contends that if a creditor proposes to file a suit or other proceedings, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whether there has been a cessation or remission of each of the liabilities. In the result, we set aside the matter to the file of the Assessing Officer. This ground is allowed, for statistical purpose. 25. The next ground No. 13 deals with an addition of Rs. 2,29,99,690 being addition under section 41(1). The facts are that the assessee has taken certain credit facilities from Federal Bank Ltd. in the form of term loan and overdrafts. The assessee also owed lease rent in respect of certain equipments which have been taken on lease from Federal Bank. The total amount outstanding as on 15-9-1997 due to the Federal Bank was Rs. 3,12,71,964. In the books of account, the assessee credited an amount of Rs. 82,72,274 as a write back of liability. The balance amount of Rs. 2,29,99,690 remains. The break up of the amount of Rs. 82,72,274 is (a) interest on term loan upto March, 1997 Rs. 45,28,432; (b) equipment lease rent Rs. 24,63,624; and (c) interest on term loan from 1-4-1997 to 16-9-1997 Rs. 13,80,290. The assessee's case is that the balance amount written back, i.e., Rs. 2,29,99,690 pertains to the principal amount of the term loan and Rs. 9,99,690 pertains to the principal amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition in question made under section 41(1), in our humble opinion, is bad in law. Similarly, in our considered option, the CIT(A) was wrong in invoking section 28(iv). The jurisdictional High Court in the case of Mahindra & Mahindra Ltd. (supra) has held as follows: "Held, (i) that there were two important facts which had been overlooked by the Assessing Officer. Firstly, the assessee continued to pay interest at 6 per cent for a period of ten years on the loan amount. The agreement for purchase of toolings was entered into much prior to the approval of the loan arrangement given by the Reserve Bank of India. Therefore, the loan agreement, in its entirety, was not obliterated by such waiver. Secondly, the purchase consideration related to capital assets. The toolings were in the nature of dies. The assessee was manufacturer of heavy vehicles and jeeps. It required these dies for expansion. Therefore, the import was that of plant and machinery. The consideration paid was for such import. In the circumstances, section 28(iv) was not attracted. Lastly, the principal amount of loan had been forgone as a part of takeover arrangement to which the assessee was not a party. The waive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as current assets. It filed a valuation report dated 11-9-1997 of Bale & Associates, Government valuers, wherein the consideration attributable to fixed assets was put at Rs. 7,85,057. The first appellate authority pointed out that the Assessing Officer had rejected this valuation report but has not come out with any evidence in support of its conclusion that the valuation report is to be rejected as not true and correct. In the absence of any contrary material brought on by the Assessing Officer, the first appellate authority directed the Assessing Officer to adopt the sale consideration of Rs. 7,85,057.
32. On a careful consideration of the facts and circumstances of the case, we are of the considered opinion that this order of the first appellate authority needs to be upheld. The Assessing Officer has simply rejected the valuation report but has not brought out on record any contrary material in support of his findings. Thus, we uphold the order of the first appellate authority. The ground of the revenue is rejected.
33. In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the revenue is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X
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