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TMI Blog2014 (1) TMI 1123X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt to treat the intervening legal steps as non- est based upon some hypothetical assessment for the ‘real motive’ of the assessee - The court must deal with what is tangible in an objective manner and cannot afford to chase a will-o’- the-wisp. The transaction of purchase of WEGs by the assessee cannot be termed as a sham transaction - WIL sold 28 WEGs to IEL on 15.3.2006 and the same have been accounted for as sale in its books of account for the year-ended 31.3.2006 and also accounted for the income from the said sale proceeds for the AY 2006-07. No depreciation was claimed on those WEGs for the year ended 31.3.2006 by WIL or IEL - IEL confirmed the sale of WEGs to the assessee as on 15th and 24th of March 2006 which have been duly accounted for as sale for the year-ended 31.3.2006 - the assessee had purchased the WEGs from IEL on 15th and 24th March 2006 and as such it was the actual and legitimate owner of those WEGs as on 31.3.2006 and, accordingly, claimed depreciation for the year-ended 31.3.2006 - Neither WIL nor IEL had claimed depreciation for the F.Y. ending 31.03.2006 - income from the sale of power generated from WEGs for the period from 15.3.2006 ending on 31.3.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A)- I, Bangalore, dated 4.11.2011 and 3.11.2011 for the assessment years 2006-07 and 2007-08 respectively. I. ITA NO.1362/B/2011 A Y 2006-07: 2. The assessee company has, in its Memorandum of appeal, raised eight grounds, in which, ground Nos. 7 and 8 being general in nature and no specific issues involved, they do not survive for adjudication. The remaining grounds relate to the following two main issues, namely: (1) (Gr.Nos. 1 to 4) that the CIT (A) had erred in sustaining the disallowance of depreciation of Rs.9,73,54,400/-on Wind Mills; (2) (Gr.Nos. 5 6) that the CIT also erred in not allowing to set off of the loss pertaining to the rectified spirit Unit of Maruthi Organics Limited [MOL] even though the conditions specified u/s 72A of the Act had been duly complied with. II. ITA NO.1363/B/2011 A Y 2007-08: 3. Though the assessee company has raised nine grounds, ground Nos. 1, 7 and 9 being general in nature, they do not survive for adjudication. Ground No.8 is not maintainable as charging of interest u/s 234B and 234C of the Act is mandatory and consequential in nature. The remaining grounds relate to the following issues, namely: (1) (Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was highly erroneous; (6) that there was no physical movement of goods which can be verified for the correct date of transaction. The assessee had used this lacuna and tried to mislead the Department about the correct date of the transaction so as to avoid tax liability; (7) that the ruling of the Hon ble Supreme Court in the case of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) is squarely applicable to the case on hand. 5.2. With regard to the assessee s claim to set off brought forward loss of rectified spirit unit of MOL on the ground that as per the provisions of s. 72A of the Act which governs that the set off of losses doesn t warrant that the under-taking being transferred needs to be active etc, the AO had rejected the same on the premise that "15. If the definition section gives the definition of demerger, the word demerger wherever it appears in the Act is to be given that meaning, unless specifically stated in the Act that a transfer is deemed to be demerger or deemed not to be demerger. The mere blessing of the High Court for an amalgamation or demerger does not make it amalgamation or demerger as defined or as required by the I.T. Act. If that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had actually put them in use for the purpose of business in March 2006 to make it eligible to claim the depreciation. Such contradiction is not limited to statement only. So is also in the Directors Annual Report in Form No. A 3CD report of Auditor. In Director s report dated 6.9.2006 which though speaks about the purchase of WEGs does not say about its use in Form No. A. The auditors report also in the 3CD report reveal sale of some electricity while in the quantitative details no such production has been shown at all. In the meanwhile, in respect of 31 WEGs allegedly purchased by IEL from WIL and transferred to the appellant on the same day, the WIL has claimed that the ownership got transferred to IEL only on 17.4.2006 insomuch as on that day the conditions of devolution of these WEGs to KBDL, the appellant and since the title is defective, the appellant is not eligible for claim of depreciation thereon. I find justification in such allegation even if I hold that the concept of ownership embedded in s. 32(1) of I.T. Act has not been given a very liberal and loose interpretation even to include beneficial ownership far less the dejure or defacto ownership. However, I rely up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of set off, after amalgamation. 18.1. In this back-ground facts, AO has disallowed the set off on the ground that the demerged unit/industrial undertaking was not a going concern on the appointed dated and, therefore, as per the provisions of section 2 (19AAA) such set off is not allowable. 18.2. The AR on the other hand pleads that the relevant section is 72A of the I. T. Act which overrides even the provisions of s. 2 (19AAA) being beginning with the non-substantive clause notwithstanding . Besides, the intention of both sections were revival of weak units/undertakings and here also the purpose of demerger and amalgamation is to revive the activities of rectified spirit unit of M/s Maruthi Organics Ltd by utilization of the financial strength and personnel of the appellant company. Therefore, the concept of going concern is not at all applicable here to justify the denial of set off of brought forward loss of amalgamating company with the profit of the amalgamated appellant company. 18.3. I find in both cases the scheme of demerger and amalgamation has been approved by the High Courts of Andhra Pradesh Karnataka respectively. Such scheme is intend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the approval by the EGM was, in essence, a ratification of the sale transaction which was effected on 15.3.06 and accounted for in the books of accounts of WIL as having come into effect from 15.3.06; - that WIL had also stated in the same communication that it had given effect to the sale of 28 WEGs in its books of account for the year-ending 31.3.2006 and accounted for the income arising out of the same in the AY 2006-07 itself; that WIL had stated that it would reverse the entry if it does get a favourable order in the arbitration proceeding; and that it was clear that WIL had itself accounted for the sale in the month of March, 2006. Had it seriously questioning the sale, it would not have accounted for the same in the year ended 31.3.2006; - that WIL had, in its letter, stated that even though it recorded the sale of WEGs in its books for the year-ended 31/3/2006 and had finalised its accounts accordingly, it would actually be jeopardising its dispute against IEL, if it were to admit the same. This amply shows that the statement of WIL was purely self-serving and thus, it cannot be relied upon; Journal entries passed on 15.3.2006 24.3.2006: - that the journ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No staff including that of the Accountant had any knowledge of this purchase. Even then, the AO had not chosen to examine the MD of the company to find out the veracity of the transaction. Had the AO done so such exercise and if the MD was unable to throw any light on the same, then it can be concluded that the transaction was sham and an afterthought to avoid taxes etc., - that examining of the MD of the assessee company was paramount to establish the correct fact as the Accountant had, in his deposition, stated that only MD would be aware of the purchase of Wind Mills and that in the absence of any statement recorded from the MD, the conclusion reached by the AO was merely on suspicion and surmise. - that in response to the AO s queries, the end users have acknowledged that they came to know of the purchase of WEGs by the assesse from IEL only in the month of May, 2006 as they have made payments in lump sum only from the month of May, 2006, but, made payments to IEL in March for the powers supplied. Thus, the authorities below have considered the response received from the end-users as a vital evidence and came to the conclusion that no transaction of purchase of WEGs b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the journal entries dated 15th and 24th March 2006, though not made available during the course of survey, but, were created later on in the audited books and, thus, they cannot be held as evidence for ownership over WEGs and also put to use during March, 2006 so as to allow the assessee s claim for depreciation. In furtherance, it was argued that the sale deeds were not registered. Hence, the transfer of Wind Mills was illegal and it cannot be back-dated to 15th 24th March, 2006 to claim the date of transfer through journal entries, sales invoices and tripartite agreements. Since the ownership did not vest with the assessee, the disallowance of depreciation on Wind Mills was justified. It was, further, submitted that the CIT (A) had made out a case that the ownership was vested with the assessee only on 17.4.2006, the date of approval of transfer by WIL to IEL. Till then, it was argued, the issue of ownership was in suspense. The Directors report as well as the auditors report both were dated 6.9.2006 justify that the end-users have started paying to the assessee for Windmill electricity from September, 2006 for the period from April 2006 which shows no use of windmills ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee s premises, it was rebutted by the assessee that: - that the very fact that the survey was conducted even before the closure of the FY and the very purpose of such a survey was to enquire into the genuineness of the purchase itself which shows that even the Revenue was aware of such a transaction on 23.3.2006 itself which evidence that the transaction did take place in the FY 2005-06 itself; 6.5. Rebutting the Revenue s claim that the assessee became the owner of wind mills only on 17.4.2006 being the date on which the share-holders of WIL approved the sale of windmills to IEL in their AGB meeting held on the said date and, thus, IEL could not have conveyed the titles to the windmills in the FY 2005-06 etc., the assessee contended that though the date of ratification of sale of the shareholders of WIL was on 17.4.2006, the sale came into effect on 15.3.2006 itself. WIL had accounted for the sale in the FY 2005-06 and offered the income arising out of the sale to tax for the AY 2006-07 itself. The relevant information is available on the records of the I.T. Department. The assessee had placed reliance on the judgment of the Hon ble Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f wind mills were made available for verification. Subsequently, on 3.4.2006, the Accountant of the assessee deposed before AO, according to which, he appeared to have averred that the books of account were up-to-date. Taking into account the above facts, the AO came to the conclusion that the alleged transaction of purchase of WEGs on 15th and 24th March, 2006, as claimed by the assessee, cannot be considered to be genuine and that there was no credible evidence for the alleged purchase and subsequent use of Wind Mills as on 31.3.2006 so as to allow depreciation for the said WEGs. Moreover, it was the stand of the AO that the end-users, to whom power supplies were made, have stated that the payments were made only to the assessee from May, 2006 and the tripartite agreements between the assessee, IEL and the end-users were executed much later, say, in November, 2006. 7.2. It was, however, contended by the assessee that WIL had in its letter dated 28.10.2008 admitted that it had sold 28 WEGs to IEL by an Invoice dated 15.3.2006. In the said letter, WIL had, further, stated that though the invoice was dated 15.3.2006, the sale was approved in the EGM of WIL held on 15.4.2006 and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation of facts, the relevant portion of his deposition is extracted as under: "10. Please state; is there any person who knows about the maintenance of books of accounts or the transaction of purchase of windmill? Ans: No, there are no other persons other than me who knows the entire affairs of finance and accounts of M/s Karnataka Breweries Distilleries Ltd. Only the Managing Director Shri D.K. Audikesavalu will know about the transaction of purchase of windmill." [Courtesy: Para 12 of CIT (A) s order] 7.3. At this point of time, we refer to the letter of WIL dated 28.10.2008 addressed to the AO wherein, among others, it has been stated that- " We would like to inform you that there is a serious dispute pending between us and Indowind Energy Limited (hereinafter referred to as IEL) with regard to the sale of the 28 WEGs. The sale of the 28 WEGs was pursuant to an agreement dated 24.2.2006 between us and Subuthi Finance Ltd., who is the promoter of IEL and IEL, was the nominee for and whose behalf the agreement was entered into. It is pertinent to point out to you at this juncture that though the invoice for the WEGs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clearly proves that the sale of the 28 WEGs in favour of KBDSDL is sham and nominal and that IEL continues to claim ownership of 28 WEGs. We therefore fail to understand as to how KBDSDL has claimed depreciation as if they are the owners of the WEGs. We further understand that after entering into the sham and nominal sale in favour of KBDSDL, IEL has entered into an operating lease agreement under which they are operating the WEGs and selling the power generated from the WEGs. This further confirms the fact that the sale in favour of KBDSDL is a complete sham and IEL continue to be in possession and enjoyment of the WEGs. In any event, we are disputing the sale of the WEGs to IEL itself and demanding reversal of the sale in the arbitration proceedings. Our plea before the Arbitrator is to reverse the sale of the WEGs to IEL and handover the WEGs back to Wescare (India) Limited. Though we had declared the entire sale as income in Wescare Books during the year 2005-06, we would be reversing the sale should we get the award in our favour." [Courtesy: Pages 17 18 of the PB AR] 7.4. It was a fact that WIL had sold 28 WEGs to IEL by an Invoice dated 15.3.2006 which has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such, the statements of the end-users have of no consequence to determine the date of sale/transaction of WEGs. 7.4.1. Further, rebutting the WIL s allegation of the sale of 28 WEGs to the assessee was a sham, the assessee had extensively quoted the judgment of the Hon ble Apex Court in the case of Union of India v. Azadi Bachao Andolan reported in 263 ITR 706 [SC] wherein the Hon ble Court had dealt with the issue of sham transaction. For appreciation of facts, the relevant portions of the judgment of the Hon ble Court are extracted as under: "(On page 754) In the classic words of Lord Sumner in IRC v. Fisher s Executors (1926) AC 395 at 412 (HL): My Lords, the highest authorities have always recognised that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the Crown, so far as he can do so within the laws, and that he may legitimately claim the advantage of any expressed terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame.' Similar views were expressed by Lord Tomlin in IRC v. Duke of Westminster (1936) AC 1 (HL); 19 TC 490, 520 (HL) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and the authorities (see Yorkshire Railway Wagon Co v. Maclure (1882) 21 Ch. D 309; Stoneleigh Finance Ltd v. Phillips [1965] 1 All ER 513 (CA); [1965] 2 QB 537 (CA)) that for acts or documents to be a sham , with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a shammer affect the rights of a party whom he deceived. In Waman Rao v Union of India (1981) 2 SCC 362 at para. 45 and Minerva Mills Ltd v. Union of India (1980) 3 SCC 625 at para 91 this Court considered the import of the word device with reference to article 31B which provided that the Acts and regulations specified in the Ninth Schedule shall not be deemed to be void or even to have become void on the ground that they are inconsistent with the fundamental rights. The use of the word device here was not pejorative, but to describe a provision of law intended to produce a certain legal result. If the Court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounted for and offered to tax by the assessee and NOT either by IEL or WIL. This assertion amply exhibits that the assessee was the legitimate owner of those WEGs in the month of March, 2006 itself; surprisingly, in the instant case, the survey had taken place before the end of the previous year 2005-06 and also well before the due date for filing of the return of income for the relevant assessment year under dispute and that during the course of survey, the employees of the assessee were subjected to interrogation to ascertain as to whether they have any knowledge of the transaction of the purchase of WEGs by the assessee etc., lead to a feeling that the authority concerned was fully aware of the transaction of WEGs and was looking for any documentary proof of the same. 7.7. Taking into account the above facts and also in conformity with the judgment of the Hon ble Supreme Court (supra) with regard to sham or device , we are of the considered view that the assessee was eligible for depreciation on those WEGs for the year-ending 31.3.2006. It is ordered accordingly. Disallowance of set-off of brought forward of loss of Rs.7.00 crores: 8. It was the stand of the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined by s. 2 (19AA) of the Act inasmuch as sub-clause (vi) of s. 2 (19AA) of the Act stands violated and the CIT (A) termed it as a dead concern ; - that as per sub-clause (vi) of s. 2 (19AA), it only means that the under-taking shall be transferred in a manner similar to the transfer of an under-taking which is a going concern as on the date of transfer; - that the words used on a going concern basis hold the key to understanding the import of sub-clause (vi) of s. 2 (19AA). It only means that the transfer should be on the basis of a going concern and it does not mean that the under-taking being transferred should be a going concern as on the date of transfer; - that the scheme of demerger which stands approved by the High Courts of Andhra Pradesh and the jurisdictional Court clearly establishes the fact that the transfer of the undertaking is indeed on a going concern basis . The assets, liabilities, employees, debts, obligations, rights etc., of the undertaking, immediately prior to the demerger stand completely vested with the assesse upon demerger . This is what which amounts to transfer of the undertaking on a going concern basis ; - that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in KSDL on the appointed date, on a going concern basis, so as to become as and from the appointed date, the undertaking of KSDL." 8.1.4. We shall now proceed to analyse the provisions of s. 72A (4) of the Act. For ready reference, the relevant section is extracted as under: "72A(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall- (a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company; (b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertaking have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be." 8.1.5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity or unjust result or mischief is to be avoided." 8.1.7. The Hon ble High Court of Delhi in the case of Indo Rama Textile Ltd., In re reported in (2012) 23 taxmann.com 390 (Del) had, while analysing section 2 (19AA) of the Act, held as under: "41. Upon reading of the aforesaid section, it is apparent that the definition of Demerger in Act, 1961, would be satisfied if the undertaking that is being demerged is hived off as a going concern that means, if it constitutes a business activity capable of being run independently for a foreseeable future. To ensure that it is a going concern, the Court while sanctioning a Scheme can certainly examine whether essential and integral assets like plant, machinery and manpower without which it would not be able to run as an independent unit have been transferred to the demerged company." 8.1.8. Taking into account the fact that the merger as such is not in dispute and the issue as discussed in the foregoing paragraphs and also in conformity with the judicial views (supra), we are of the view that the authorities below were not justified in denying the benefit of the set off of the brought forward losses to the extent of Rs.7 crores. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance non-interest bearing loans does not arise; and that the opening balance of non-interest bearing funds available with the assessee at the beginning of the year i.e., as on 1.4.2006 was Rs.141.09 crores and that the amounts were sufficient to meet the outflow in the nature of non-interest bearing loans and advances of Rs.117.39 crores; - relies on the judgment of the Hon ble Bombay High Court in the case of CIT v. Reliance Utilities Power Ltd 313 ITR 340 (BOM) ; 9.3. In conclusion, it was asserted that in consonance with the judgment of the Hon ble Bombay High Court (supra), no disallowance of interest was warranted inasmuch as the non interest bearing funds available with the assessee as on 31.3.2006 was far in excess of the interest free loans made as on 31.3.2007 and, hence, the disallowance made was unjust which deserves to be deleted. 9.4. On the other hand, the learned D R supported the stand of the authorities below in disallowing the interest amount of Rs.10.97 crores being proportionate to the loans and advances given by the assessee free of interest. It was, further, submitted that as the assessee had failed to substantiate with any documentary proof of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency will arise only after it is proved that the interest free loans were given out of interest bearing funds. There was no bar as such on giving interest free loans out of interest bearing funds provided there exists commercial expediency to do so. It was, further, submitted that in the case laws relied upon by the Revenue, the question of proving commercial expediency came up as in those cases interest free loans were made out of interest bearing funds. However, in the assessee s case, it was argued, it was clear that the non-interest bearing funds were quite sufficient to cover those interest free advances. Relies on the following case laws: (a) Woolcombers of India Ltd 134 ITR 219 (Cal); (b) CIT v. Reliance Utilities Power Ltd 313 ITR 340 (Bom); (c) CIT v. Sridev Enterprises 192 ITR 165 (Kar) 9.5. We have carefully examined the rival submissions, perused the relevant materials on record and also documentary evidences adduced by the assessee in the form of Balance sheet, P L account etc. as on 31.3.2007. 9.5.1. As could be seen from the details furnished by the assessee during the course of hearing that the chunk of interest free loans to the tune of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue under consideration is identical to that of the matter dealt by the Hon ble Court. (ii) The Hon ble High Court of Gujarat had an occasion to deal with a similar issue in the case of CIT V. Raghuvir Synthetics Ltd reported in (2013) 354 ITR 222 (Guj). The issue before the Hon ble Court, in brief, was that the AO noticed that the assessee had incurred heavy interest expenses of Rs.59.83 lakhs and, on the other hand, it had given interestfree loans to the parties to the extent of Rs.19.45 crores. On examining the details furnished, the AO disallowed the interest to the extent of Rs.18.66 lakhs of the interest free loans advanced on the premise that the expenses were not incurred for business expenses. The CIT (A) set aside the order of the AO and deleted the addition, holding that the amounts advanced to the parties were not given during the year under consideration. The CIT (A) had also taken note of the fact that there were sufficient funds available with the assessee on which no interest liability had been incurred and, thus, held that the disallowance was unjustifiable. The Tribunal upheld the stand of the CIT (A), holding that the interest-free funds available with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wages paid to V.Vijay of Rs.1.89 lakhs: The said amount was expended during the year wholly and exclusively for the services rendered by him for the purpose of business from January 2004 to March, 2005. The same was not claimed as expenditure in the earlier AYs as no provision was made in respect of the same. Bonus paid to employees Rs.2,93,360/-: Certain employees who had left the services of the assessee during the previous year 2005-06 were paid in all during the course of settling their dues in this previous year. The said amount was expended during the relevant previous year wholly and exclusively for the purpose of business. Moreover, as per the provisions of s. 36(ii) s. 43B(c), any sum to be allowed as bonus as to have been necessarily paid during the relevant previous year and, hence, the same requires to be allowed as expenditure since the same was actually paid in the AY 2007-08. Ex-gratia paid to employees of Rs.3,94,000/-: Certain employees who left the services of the assessee during the previous year 2005-06 were paid while settling their dues in the previous year. This amount expended was wholly and exclusively for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perused the relevant materials on record. 10.6. At the outset, we would like to point out that the issue has not been dealt with properly either by the AO or the first appellate authority for that matter. As a matter of fact, the reasoning of the AO in disallowing the claim of the assessee as well as the finding of the CIT (A) in sustaining the stand of the AO is very cryptic. It doesn t throw much light as to whether the issue has been analysed in depth to arrive at such a conclusion. During the course of hearing, as already detailed supra, the assessee has justified its claim by furnishing the details of expenses incurred by it under various heads. These details, it looks, have not been examined/verified by the AO before arriving at a conclusion that the rest of the expenses [Rs.10,58,536/-] which are not allowable as per the provisions of the Income-tax Act. 10.7. Taking into account the facts of the issue and also keeping the interest of the principles of natural justice and equity in view, the matter is restored on the file of the AO with a specific direction to look into the issue afresh with reference to the details which will be furnished by the assessee and to take ..... X X X X Extracts X X X X X X X X Extracts X X X X
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