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TMI Blog2013 (11) TMI 1313X X X X Extracts X X X X X X X X Extracts X X X X ..... to set off and carry forward the brought forward business losses and unabsorbed depreciation of the amalgamating company from the very first year of the amalgamation. If, however, the conditions given in clause (b) of section 72A(2) are not fulfilled with in the prescribed time, then the set off as allowed in the earlier year(s) shall be deemed to be the income of the amalgamated company of the last year stipulated for compliance of such conditions – Set- off of losses allowed – Decided in favor of Assessee. Classification of heads of income on sale of shares of Bayer (India) Ltd. as income under the head ‘Capital gain’ of ‘Income from business and profession’ – Held that:- No material has been considered or referred to verify as to whether such shares were held as 'Investment’ or 'Stock in trade’ – Matter is restored to the file of A.O for verification - If such verification divulges that the shares were held as investment, then the income from their transfer should be considered under the head ‘Capital gains’ otherwise ‘Business income’. The relevant year of transfer(sale) of Harmer & Reimmer (H&R) Business - H&R Business was transferred to Symrise Ltd. on 30.9.2002. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he genuineness of the agreement has not been questioned. In such circumstances, the only conclusion which can be logically drawn is that the assessee transferred its stock at the market value recorded in the agreement at ₹ 1.18 crore. When the transferee company has paid total sale consideration of ₹ 7.12 crore, which includes a sum of ₹ 1.18 crore towards the value of inventories, then it is beyond our comprehension as to how the Assessing Officer can presume the market value of such inventories at ₹ 4.43 crore without any cogent reason – Decided in favor of Assessee. Classification of head of Income on sale of HR business – Held that:- AO took item wise value of assets (both fixed and current) of the H&R business. He considered all other assets of H&R business as having been transferred by the assessee at book value - No chargeable income arose from the transfer of other assets. Thereafter, A.O. computed income from the transfer of stock in trade by assigning some market value to it. The resultant profit was held to be chargeable to tax as capital gain. - ITA Nos.6666 & 6667/Mum/2009 - - - Dated:- 13-2-2013 - R S Syal and Sanjay Garg, JJ. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to maintain the said minimum level of production till the end of five years from the date of amalgamation, as laid down in Rule 9C(a) of Income-tax Rules, 1962. Since amalgamation took place as on 1.4.2003 and a period of three years and nine months had already expired from that date till the passing of the assessment order, the Assessing Officer came to hold that the assessee was not eligible to claim set off of brought forward loss. (iv) The assessee-company also failed to furnish a certificate in the prescribed Form No. 62 duly verified by an Accountant showing particulars of production, which is one of the pre-requisite conditions for availing the allowance u/s.72A, as laid down in Rule 9C(b). 4. Considering these facts, the Assessing Officer held that the assessee was not entitled to claim set off and/or the carry-forward of the accumulated losses and/or unabsorbed depreciation of the amalgamating company as per section 72A of the Act. The assessee failed to convince the learned CIT(A) on its line of reasoning about the satisfaction of all the vital conditions for claiming benefit u/s 72A. 5. We have heard the rival submissions and perused the relevant material on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om page No. 60 of the paper book, which was also filed before the authorities below, it can be seen that the assessee got assets of BTPU on amalgamation worth Rs. 15,53,42,000/-. Assets worth Rs. 32.67 lakhs of BTPU were disposed in the previous year relevant to assessment year under consideration. Similar disposals of the assets of BTPU were effected in subsequent two years as well, thereby making such total disposal in three years at Rs. 1,56,55,000/-. What to talk of disposal of assets during the relevant previous year at 43.79%, it is evident that the disposal of assets by the assessee in all the three years combined is around 10% of the book value of total assets of BTPU. We find that the Assessing Officer, while calculating percentage of 43.79%, erred in including the disposal of assets of BSPPL also along with the disposal of asset of BTPU. The requirement for continuously holding at least 75% of the book value of the fixed asset of the amalgamating company for a minimum period of five years is qua the amalgamating company whose accumulated loss and unabsorbed depreciation are sought to be taken by the amalgamated company in its hands for set off and carry forward. Thus what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off and carry forward of accumulated loss and unabsorbed depreciation of BTPU that the assessee disposed more than 25% of the assets of BTPU is, therefore, not sustainable. Contention of the ld. DR reiterating the reasons recorded by the lower authorities for jettisoning the assessee s claim in this regard, is therefore, bereft of any force. Such argument advanced on behalf of the Revenue is liable to be and is hereby repelled. 6. The other point considered by the authorities below marring the benefit u/s 72A(1) is that the assessee company failed to lead evidence that the amalgamation was to ensure the revival of the business of the amalgamating company. Objections of the AO in points nos. (iii) and (iv) of para 3 of this order about the violation of the conditions prescribed in Rule 9C are also related to this very aspect of the matter. The case of the AO is that the assessee failed to substantiate the steps taken by it to revive business of BTPU and further it did not satisfy the twin conditions as per rule 9C, being, achieving the stipulated level of production of at least fifty percent of the installed capacity of BTPU and furnishing certificate in Form no. 62. Before examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee failed to produce and submit any details relating to production to substantiate its claim. In principle, we do not approve the view canvassed by the Assessing Officer as approved in the first appeal to press for enforcing compliance of achieving desired production before the end of stipulated period. Going even by the standard of the Assessing Officer himself, the period of four years had not expired at the time of completion of the assessment. The Assessing Officer is required to restrict himself only to the year before him for considering as to whether there is any violation of section 72A(2). As the previous year relevant to assessment year under consideration is not the fourth year from the date of amalgamation, the Assessing Officer was not required to examine this aspect at that stage. 7. The further opinion of the Assessing Officer that the assessee failed to place on record any material indicating the revival of business of the amalgamating company, in our considered opinion, is unwarranted in the year in question. The mention of ensuring the revival of the business of the amalgamating company in section 72A(2)(b)(iii) is only with reference to fulfillment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with . Sub-section (3) is a correcting provision and gives logical meaning to consequences flowing from the failure to comply with the requirements with in the specified number of years as set out in sub-section (2) after having availed the benefit of set off and carry forward of accumulated loss of the amalgamating company as per sub-section (1) of section 72A. It transpires on a conjoint reading of sub-sections (2) and (3) of section 72A that the amalgamated company is entitled to set off and carry forward the brought forward business losses and unabsorbed depreciation of the amalgamating company from the very first year of the amalgamation. If, however, the conditions given in clause (b) of section 72A(2) are not fulfilled with in the prescribed time, then the set off as allowed in the earlier year(s) shall be deemed to be the income of the amalgamated company of the last year stipulated for compliance of such conditions. 10. Thus it can be seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and offered for taxation the resultant profit twice, that is, a sum of Rs. 66.57 lakhs as business income and long term capital gains at Rs. 63.10 lakhs. The assessee s request of doubly offering of one income under two different heads was accepted by the Assessing Officer by deleting the long term capital gains of Rs. 63.10 lakhs from inclusion in the total income thereby allowing to continue a sum of Rs. 66.57 lakhs as business income. The claim of the assessee is that the converse should be done. In other words, the amount of Rs. 66.57 lakhs included in the business income ought to have been excluded by retaining the amount of long term capital gains of Rs. 63.10 lakhs. 14. The learned AR contended that the shares of the company were held as investment since long and hence profit from their transfer should have been charged to tax under the head 'Capital gains . From the impugned order as well the assessment order, it is clear that no material has been considered or referred to verify as to whether such shares were held as 'Investment or 'Stock in trade . Without going into the merits of the ground, we are of the considered opinion that the ends of justice would meet adequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness except all the trade payables for services rendered or supplies delivered prior to the closing date. As it received a lump sum consideration which was offered by the assessee under the head 'Capital gains , the assessee contended that the provisions of section 50B were applicable. Alternatively, it was contended that if the assessee s contention of slump sale was not to be accepted by the AO, then the loss of Rs. 2.10 crore should be allowed under the head Profit and gains of business or profession . The assessee also stated before the Assessing Officer vide its letter dated 27.11.2006 that the H R Business which was sold on 30.9.2002 could not be implemented due to pendency of legal compliance in India in respect of the aforesaid global decision. It submitted that in view of the pending legal compliance in India, it was decided to allow Bayer Material Science Ltd. to carry out business on behalf of the buyer as their custodian in India with the clear understanding that any profit/loss arising out of the operations would belong to the buyer . The Assessing Officer observed that the transfer of H R Business was not covered within the meaning of section 50B as it was not a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration and initiated reassessment proceedings for A.Y. 2003- 04 on the ground that the assessee failed to disclose income of Rs. 3.28 crore computed by him on the transfer of shares in the earlier year. 18. At this stage, it is relevant to note that the assessment for the A.Y.2003-04 was completed accordingly. When the appeals for both the years came up before the learned CIT(A), he upheld the action of the Assessing Officer in computation of profit of Rs. 3.28 crore on inventories and also approved the view that income was rightly taxable in the previous year relevant to A.Y. 2003-04. Second appeal of the assessee for the A.Y. 2003-04 is also before us. Main grievance raised in the appeal for such earlier year is that no computation on account of H R Business was called for in A.Y. 2003-04. As the transfer of business took place on 31.03.2004, the assessee contends the profit or loss on transfer of stock be considered in the A.Y. 2004-05 as was rightly declared by it. 19. We have heard the rival submissions and perused the relevant material on record. The ld. counsel for the assessee was fair enough not to press application of section 50B. It is noticed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the transfer of business took place on 31.03.2004. It is obviously irreconcilable. The assessee cannot be considered simultaneously as agent of the buyer and also the owner of the business between 1.10.2002 to 31.30.2004. It is vivid that when the assessee conducted the H R business during this period for and on behalf of Symrise Ltd. and also transferred income from such operations to them, then it cannot turn around and claim itself as owner of the business after 30.09.2002. The natural corollary which, thus, follows is that the transaction of transfer of business took place in the previous year relevant to the A.Y. 2003-04 and accordingly income from such transfer of business is required to be considered in such year alone. We, therefore, approve the view taken by the learned CIT(A) on this issue in considering the transaction having taken place in the previous year relevant to A.Y. 2003-04. 22. Computation of gain/loss Now we espouse the second issue, being the computation of amount of gain or loss from transfer of H R business. We have noticed above that the assessee did not transfer its H R Business as a slump sale, which is why the ld. AR has fairly agreed not to cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d dated March 26, 1960. The firm's accounts for the year 1960-61, which commenced on April 13, 1960, would normally have come to a close on or about April 13, 1961. The firm closed its accounts as on March 13, 1961, with effect from which date it was dissolved. Along with its income-tax return for the assessment year 1961-62, the assessee filed Profit and loss account in which a sum of USD 101,248 was shown as "Difference on revaluation of estates, gardens and house properties" on the dissolution of the firm on March 13, 1961. However, in the memo of adjustments for income-tax purposes, the above sum was deducted on the ground that it was not assessable either as revenue or capital. A statement was also made before the Officer that partner Ramanathan Chettiar forming one group and the other partners forming another group were carrying on business separately with the assets and liabilities that fell to their shares on the dissolution of the firm. For the subsequent assessment year 1962-63, the assessee filed a return showing nil income along with a letter pointing out that the firm had been dissolved on March 13, 1961. The Income-tax Officer opined that the revaluation difference of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act, 1961, as according to him the assessment order made by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue in valuing the stock in trade as on February 6, 1984 on the basis of cost or market rate, whichever is lower. Relying upon the decision of the Madras High Court in A. L. A. Firm v. CIT [1976] 102 ITR 622, the Commissioner of Income-tax came to the conclusion that the Income-tax Officer ought to have valued the closing stock at its market rate as on February 6, 1984. He, therefore, set aside the assessment order and directed the Income-tax Officer to pass a fresh order. The Tribunal set aside the revision order by holding that if on the dissolution of a firm, the business is also discontinued and the value of the stock realized, it may be possible for the ITO to insist that the value realized shall be taken as the value of the closing stock instead of any notional value on the regular principle of cost or market value, whichever is less. But where the business of the firm is continued, then the ratio in A.L.A. Firm (supra) cannot apply and as such the stock cannot be valued at market price. The High Court answered the question in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w taken by the authorities below that the case of A.L.A. Firm (supra) shall govern the facts of the present case as the assessee discontinued the business of H R unit, thereby necessitating the valuation of stock at market price. 28. Once again coming to the core of the judgment in A.L.A. Firm (supra), we find that where a business is discontinued, whether on account of dissolution or closure or otherwise by the assessee, then the profits cannot be ascertained except by taking the closing stock at market value. It is evident that the reference in this case is to the valuation of stock at market value and not on some hypothetical value computed mechanically by applying a particular gross profit rate. Adverting to the facts of the instant case we find that the assessee agreed to sell the assets of its H R unit including stock in trade for a total sum of Rs. 7.12 crore. Out of such total consideration, the AO has assigned a sum of Rs1.18 crore as the sale consideration received by the assessee towards stock in trade, which fact has not been disputed by the assessee. It is further relevant to note that the AO computed the market value of stock in the assessment order for the A.Y. 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the date of dissolution. On the contrary, we find that there is no such material available in the facts of the instant case to show that the market value of stock was more than what was actually realized from the buyer of the H R business. The ld. AR stated that it was only left over stock, which was correctly valued by both the parties to the agreement at its market rate. This contention has not been controverted by the ld. DR. When a sum of Rs 1.18 crore has been considered as the market value of the stock and also realized from the buyer, we fail to understand as to how a different market value can be perceived on a mathematical exercise. Before discarding the value received by the assessee for stock in trade, it was for the Revenue to show that the market value of the stock was more than the one which was actually realized from the buyer pursuant to the agreement. Both the transferor and transferee companies are unrelated to each other. It is not a case of the AO that there was some colorable arrangement between two independent parties to the agreement as the genuineness of the agreement has not been questioned. In such circumstances, the only conclusion which can be logical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has also challenged the considering of transaction on transfer of inventories of H R Business in this assessment year as against A.Y. 2004-05 claimed by it. 36. These issues have been dealt with by us supra in the order for the A.Y. 2004-05. We have held that the computation of income of Rs. 3.28 crore is wrong and there should be business loss of Rs. 2.10 crore on account of transfer of inventories of H R Business. We have also held that the transaction is required to be considered in the previous year relevant to the A.Y. 2003-04. 37. Next issue in this appeal is against the consideration of the amount of profit or loss from the transaction of transfer of stock of H R business under the right head. The claim of the assessee is that it should be considered under the head 'Profits and gains of business or profession as against the CIT(A) echoing the AO s decision on its inclusion under the head 'Capital gains . It has been noticed above that the AO took item wise value of assets (both fixed and current) of the H R business. He considered all other assets of H R business as having been transferred by the assessee at book value. In that view of the matter, it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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