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TMI Blog2008 (8) TMI 782X X X X Extracts X X X X X X X X Extracts X X X X ..... of finished goods. Subsequently, these parties, due to labour problems faced by them, showed their inability to meet the requirements of the assessee and also to refund the said amounts on being asked by the assessee to do so. These companies, however, mortgaged their property to the assessee at an agreed value of Rs. 15 crores and the value of which was reduced from the total sum of Rs. 44.02 crores given to both these parties and the balancing figure was thus arrived at Rs. 29.02 crores. The assessee also explained that there were receivables from the dealers amounting to Rs. 4.5 crores, hence, total amount receivable from these parties and dealers was Rs. 33.52 crores. The assessee, thereafter explained that it had availed sales tax benefit from the Government of Maharashtra wherein the sales tax collected from the customers was retained with it and which was to be paid after 10/15 years as per the sales tax deferred payment scheme of the Government of Maharashtra and the same was shown as liability in the balance-sheet. M/s. Adonis Electronics Pvt. Ltd. proposed to take over this sales tax liability on the condition that the assessee had to pay Rs. 17.64 crores in cash and ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment as per the Scheme of State Government hence, as per Circular No. 496 dated September 25, 1987 (see [1998] 169 ITR (St.) 53), the assessee was deemed to have discharged statutory liability under section 43B of the Act which meant that sales tax liability of Rs. 53.31 crores appearing in the books had been allowed under section 43B of the Act in the earlier years and if the assessee would have paid Rs. 26.64 crores, then, it would have gained Rs. 26.67 crores which would have been its income liable to be taxed and it is for this reason, the assessee entered into a colourable transaction with its associate concern specially when the assessee was aware that such sales tax liability could be redeemed by paying Rs. 26.64 crores at the time of entering into such transaction. The Assessing Officer, accordingly, held that the assessee in fact assigned its net receivables, i.e., Rs. 33.52 crores and sales tax liability at NPV of Rs.26.64 crores and the assessee also made a payment of Rs. 17.64 crores to M/s. Adonis Electronics P. Ltd., hence, the assessee actually incurred a loss of Rs. 24.32 crores (Rs. 6.68 crores, being the difference between receivables and NPV of sales tax liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antly influence the affairs of Adonis Electronics Pvt. Ltd. The Assessing Officer under these circumstances, held that it was not possible to accept that all the impugned intra group transactions were carried out at arm' s length. The Assessing Officer also held that when the advances were given by the assessee to M/s. Monica Electronics Ltd. and Onida Saka Ltd., these were also loss incurring companies, hence, it could not be said that the assessee was not aware of the fact that such conditions of these companies. The Assessing Officer also held that the assessee failed to prove the fact that the advances given to M/s. Monica Electronics Ltd. and Onida Saka Ltd. had become irrecoverable within two years from the date of giving advances. The Assessing Officer also held that Adonis Electronics P. Ltd. revalued the receivables at a lower value without giving any basis for such revaluation except stating that these were so estimated by the management and such step also reflected heavily on the genuineness of the transaction. The Assessing Officer held that the entire transaction was a colourable device to avoid tax on prepayment of sales tax liability, hence, squarely hit by the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section, it could not be said that Adonis Electronics P. Ltd., Onida Saka Ltd. and Monica Electronics Ltd. were not related to the assessee-company. The learned Commissioner of Income-tax (Appeals), thereafter, analysed the profits earned by the assessee-company for the last three years to ascertain the financial position of the assessee-company and held that there were sufficient funds and the assessee also made cash payment of Rs. 17.64 crores to M/s. Adonis Electronics P. Ltd., hence, there were no reasons why it could not arrange funds of Rs. 9 crores to pay the sales tax liability itself. The learned Commissioner of Income-tax (Appeals) also held that the assessee did not file any specific details regarding future expansion plans which could justify the assignment of assets and liabilities in this manner. Thereafter, the learned Commissioner of Income-tax (Appeals) relied on the decision of the hon ble Supreme Court in the case of CIT v. Durga Prasad More reported in [1971] 82 ITR 540 and held that when the Assessing Officer was of the opinion that apparent was not real, hence, it was permissible for the Assessing Officer to lift the corporate veil and decide the issue by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als) also held that the assessee failed to submit the evidences to show that the operations of Monica Electronics and Onida Saka Ltd. were adversely affected due to labour strike and in view of the observations of the Assessing Officer that financial conditions of these companies had not undergone any change from the date on which loans were advanced to these companies and the assessee also did not take measures to recover the debts, hence, the assessee' s claim to allow the irrecoverable loans as business loss was not tenable. The learned Commissioner of Income-tax (Appeals) also rejected the alternate claim of the assessee for taxing the income at Rs. 6.76 crores. Finally, he confirmed the action of the Assessing Officer treating the assignment agreement as sham transaction. Still aggrieved, the assessee is in appeal before us. Learned counsel for the assessee narrated the facts in brief and contended that M/s. Adonis Electronics P. Ltd. was not a related concern of the assessee in terms of guidelines provided in the Accounting Standards 18. Learned counsel also contended that directors and other relatives of the assessee-company did not own more than 20 per cent. of the Adonis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholding in GHL. Further, Shri Gulu Mirchandani who is holding 27.769 per cent. shares in GHL is holding only 10 shares in AEPL which is nominal 0.162 per cent. shareholding in AEPL. Further nei ther Shri Sonu Mirchandani, nor his sons Varun Mirchandani, Karan Mir chandani hold any shares in AEPL. 03 At page 41 para 28, the learned Assessing Officer has incorrectly stated, Further, Sri Gulu Mirchan dani his brother Shri Sonu Mirchan dani, their family members, and other persons acting in consort hold con trolling stake in GHL, which is the holding company of MIRC. Sri Gulu Mirchandani, his brother Sri Sonu Mirchandani, their family members, and other persons acting in consort are promoters of M/s. Monika Elec tronics Ltd. (MEL) and M/s. Onida Saka Ltd. (OSL) with 59.6 per cent. and 43.5 per cent. shareholding, respectively in MEL and OSL. Under these circumstances neither MIRC nor its managing director can deny the fact that they have control/influ ence over the affairs of OSL and MEL. M/s. MEL and M/s. OSL are in no way related concerns of M/s. Mirc Electronics Ltd. in terms of Account ing Standard 18 pertaining to related party disclosures or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, was not correct because provisions of section 41(1) of the Act were attracted only when a deduction or expenditure had actually been allowed in the course of assessment. Learned counsel further pointed out that except for the assessment year 1996-97, no deduction had been claimed by the assessee, hence, the provisions of section 41(1) of the Act were not applicable on the basis of rationale, of deemed deduction adopted by the Assessing Officer. Learned counsel, in this regard, placed reliance on the decision of the hon ble Supreme Court in the case of Madeva Upendra Sinai v. Union of India reported in [1975] 98 ITR 209. Learned counsel again referred to the provisions of section 41(1) of the Act and contended that if it was assumed that the assessee had been allowed deduction under section 43B of the Act, then, also M/s. Adonis Electronics Pvt. Ltd. made the payment after assignment, hence, advantage, if any, accrued to that the company and the assessee was not liable to taxation because the liability in the books stood at Rs. 53.31 crores and it was assigned on the same figure, hence, no gain accrued to the assessee attracting the provisions of section 41(1) of the Act. Lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading receipt as held by the hon ble Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 and if any profit, on cessation thereof, accrued to the assessee, then, the assessee was entitled to claim deduction under section 80-IA of the Act thereon as it pertained to unit eligible for deduction under that section. Based upon these facts and legal claims which the assessee could make, learned counsel contended that there was no necessity on the part of the assessee to enter into a sham transaction. Learned counsel also contended that the assessee, during the course of assessment proceedings, accepted that it was aware of the fact that it could make payment of sales tax liability at net present value, hence, it was not the case that the Assessing Officer discovered this fact subsequently on his own and, therefore, the conduct of the assessee was transparent. Learned counsel further reiterated that since the sales tax liability belonged to the assessee, though it was discharged by Adonis Electronics Pvt. Ltd., the Sales Tax Department issued the receipt acknowledging the payment received from the assessee and this fact could not be interpreted in a mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the decision in the case of Azadi Bachao Andolan [2003] 263 ITR 706 (SC) was originally delivered by the Bench consisting of two judges, however, a curative writ petition was filed by the petitioners which was heard by a Bench consisting of five judges and dismissed, hence, the decision of the Azadi Bachao Andolan was binding and, accordingly, the genuine transaction, though the same could result into saving of tax was liable to be upheld. Learned counsel also referred to the observations of Lord Atkin in the case of Duke of Westminster v. CIR reported in [1935 ]19 TC 490 at page 151 of the paper book to further substantiate its contentions in this regard. Learned counsel also drew our attention to the observations made by the hon ble Supreme Court in the case of Azadi Bachao Andolan [2003] 263 ITR 706 in para 118 to 120 of the order which at page 344 of the paper book to contend that the principle laid down in the Westminster' s case was valid and, accordingly, a transaction, valid in law, might not be ignored merely for the reason that it resulted in some gain to the assessee. Learned counsel further submitted that device was a mechanism where, generally, the tendency was to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative also contended that even the Sales Tax Department issued receipt in the name of the assessee which also supported the fact that assignee merely paid amount on behalf of the assessee and not in its own right. The learned Departmental representative, thereafter, contended that the sales tax liability was not treated as income only in view of the fact that the same was treated as discharged for the purpose of section 43B of the Act as per Circular No. 496 of the Central Board of Direct Taxes, hence, actual benefit resulted in the hands of the assessee and, therefore, the provisions of section 41(1) of the Act were attracted. The learned Departmental representative further contended that the assessee was aware of the net present value of such liability at all times and also gave sufficient cash to the assignee, hence, it was not acceptable that the assessee was under financial constraints and was not in a position to arrange another Rs. 9 crores approx. to discharge this liability, and, thus, the sole purpose of the transaction was to avoid the payment of tax. The learned Departmental representative also contended that for the purposes of deciding the genuineness of the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided out to write off bad debts and if the assessee' s contentions regarding validity of assignment agreement were not accepted, then, the assessee was eligible for set off of such debts from the gain. Learned counsel again reiterated the fact that the sales tax liability had been transferred at its book value, hence, the assessee had not earned any gain in terms of the provisions of section 41(1) of the Act. We have considered the submissions made by both the sides, material on record and orders of authorities below. It is noted that the assessee, during the year under consideration, has assigned sales tax liability worth Rs. 53.31 crores to the assignee along with receivables worth Rs. 33.52 crores. It is also noted that the assessee also paid Rs. 17.64 crores to the assignee as part consideration for taking over the said liability. All these facts emerge from the assignment agreement dated January 29, 2004. Thereafter, the assignee has paid the said sales tax liability at net present value of Rs. 26.63 crores which has given rise to the dispute between the assessee and the Department. The Revenue has treated the said assignment agreement as a sham transaction and held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out in a cohesive manner, hence, these contentions of the assessee are not tenable, hence, rejected. Having stated so, we, however, find that the assignee has taken over this liability and assets as a part of its factoring business activity, which fact has been accepted by both the Revenue authorities in the case of assignee, hence, fact of existence of commercial considerations gets established. It is also noted that the sales tax liability and receivables have been transferred at book value which shows that the assignee has also taken into consideration the fact that the quantum of ultimate liability to be paid, which at the net present value is factually less than such book value. Hence, the objects of factoring business also get fulfilled because in such type of business activity, the liabilities are generally overstated by the person who takes over the liabilities and the assets are generally undervalued so that such person can get the maximum benefit. If the transfer is viewed from the perspective of the assignor, i.e., assessee, it has got rid of sticky advances and has saved the immediate outflow of funds to the extent of Rs.9 crores. Hence, inspite of the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Adonis Electronics P. Ltd., (the assignee), being one of the parties to the same transaction, the learned Commissioner of Income-tax (Appeals) has held that the assignment agreement is genuine so far as it relates to accrued of income in the hands of assignee out of such transaction. We wonder how this is possible because if it is a genuine agreement in the hands of one of the parties to the same agreement, then, how it can become a sham agreement in the hands of the other party, particularly when the assignee has also offered income resulting from the transaction and the Assessing Officer has made a protective assessment at a higher figure which has been converted to substantive addition by the learned Commissioner of Income-tax (Appeals) on the basis of same agreement. The assessee has given plethora of judgments on the aspect of sham transaction and has also contended that it is the assessee' s right to plan its business affairs in a manner whereby it legitimately saves tax simultaneously and, in that situation, a genuine business transaction cannot be held as sham. However, in view of the fact that the agreement has been accepted as genuine in the hands of one of the partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial undertaking has been set up in that area after considering such facility provided by the Government. Hence, this facility and the industrial undertakings have got a direct nexus, and, such gain has to treated as derived from the industrial undertaking regardless of the fact that the sales tax collected by the assessee is a trading receipt which is inherently of the character of an income derived from industrial undertaking. There is another aspect of the matter though which is not of much significance because we have already decided that the assignment agreement is a valid agreement, however, for the sake of discussion, we deem it fit to deliberate on this aspect. Admittedly, the sales tax liability has been paid at its net present value which means that, in economic sense, there is no gain to the assessee because had this amount would have remained with the assessee, it would have utilised the same in its business and earned higher profits by way of more growth savings in the interest costs and the same would have been treated as income derived from the indus trial undertaking. We are further of the opinion that the character of a trad ing liability cannot be different ..... X X X X Extracts X X X X X X X X Extracts X X X X
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