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TMI Blog2017 (3) TMI 1165X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. In view of this, we hold that the sale consideration of Bangalore Land to the tune of 98,35,830/- and towards Belvedere Estate at 70,00,000/- should not be treated as part and parcel of slump sale of Rubber Chemicals Business Undertaking and the gains arising from sale of Belvedere Estate and Bangalore Land should be assessed only as Capital Gains as reported by the assessee. Arguments advanced by the assessee before the ld CIT(A) and findings given thereon in respect of sale of Rubber Chemicals Business Undertaking on slump sale basis has not been refuted by the ld DR before us. We find that the decision relied upon by the ld AR on the Hon’ble Jurisdictional High Court in the case of East India Electric Supply and Traction Co Ltd (2003 (5) TMI 46 - CALCUTTA High Court ) is well founded on the non-applicability of provisions of section 41(2) of the Act. Disallowance on account of depreciation claimed by the assessee on the WDV of the Block of Assets , the ld CIT(A) observed that the details filed by the assessee were sent to ld AO for remand who had agreed to the contentions of the assessee in the remand proceedings that the issue is covered in favour of the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been reported by them in their books, and if the same is found to be true, then the said addition made in the hands of the assessee company is to be deleted. Disallowance of bad debts - Held that:- From the details of bad debts placed on record, we find that the assessee had duly complied with the provisions of section 36(2) of the Act by offering the income in respect of such debts in earlier years. We find that the decision of the Hon’ble Supreme Court in the case of Goetze India Ltd reported supra does not apply to appellate authorities wherein it has been opined that although it is not open for the ld AO to entertain the claim of the assessee unless the same has been made by a return / revised return , the appellate authorities have the powers to entertain the same. We also place reliance on the decision in the case of T.R.F Ltd vs CIT [2010 (2) TMI 211 - SUPREME COURT] wherein it has been opined that it is not necessary for the assessee to establish that the debt, in fact , has become irrecoverable. It is enough if the bad debt has been written off as irrecoverable in the books of accounts of the assessee. Hence respectfully following the said decisions, we direct the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules worked out to ₹ 2,30,90,922/-. In appeal, the ld CIT(A) by placing reliance on the co-ordinate bench decision of this tribunal in the case of EIH Associated Hotels Ltd vs DCIT reported in 126 TTJ 246 (Kol Trib) held that only 1% of exempted income needs to be disallowed in the instant case. Aggrieved, both the assessee as well as the revenue are in appeal before us on the following grounds :- " Ground No. 1. For AY 2006-07 (Assessee appeal): 1. "That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the disallowance u/s. 14A of the Act." Ground No. 2 for AY 2006-07 (Revenue appeal): 2. "Whether Ld. CIT(A)-XII, Kolkata, was justified in accepting claim of assessee as slump sale of Rubber Chemical undertaking u/s. 50B considering the decision of the Hon'ble ITAT in the assessee's own case in ITA No.1020/Kol/2007 dated 29.02.2008 and concluded that the issue of determining opening WDV of Plant & Machinery is consequential to the order passed for AY 2006-07, whereas appeal against the decision of the CIT(A)in respect of issue of sale of rubber chemical undertaking is filed before the Hon'ble ITAT for AY 2006-07." Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CHEMICALS BUSINESS AND BANGALORE LAND AND DISALLOWANCE OF DEPRECIATION The brief facts of this issue is that the assessee during the year sold its rubber chemicals business to PMC Rubber Chemical India Ltd as a going concern on slump sale basis with effect from 28.12.2005, a joint venture company (JV) between PMC Group International Inc. USA and the assessee company with 51% and 49% share in the JV respectively. For the transfer of the business, the assessee company shall be entitled for cash consideration of ₹ 818 lakhs and securities of ₹ 982 lakhs (face value plus premium component) consisting of equity shares and optionally convertible debentures. In addition, the assessee company will also be entitled to receive consideration as 'earn outs' aggregating to a maximum of ₹ 360 lakhs , if the performance during the three year period 2005-06 to 2007-08 exceeds certain performance parameters. With only provisional figures of performance of Rubber Chemicals business during the year being available and in the absence of certainty about the actual performance meeting the aforesaid parameters for the respective years and following a prudent accounting policy, the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- a) Copy of Business Transfer Agreement between assessee and PMC Group International Inc for sale of Rubber Chemicals business as a going concern for a slump price b) Shareholders agreement pertaining to sale of Rubber Chemicals Business. c) Statement showing details of Written Down Value (WDV) blockwise relating to sale of Rubber Chemicals Business. 4.2. It was also pointed out that in respect of the equity shares and optionally convertible debentures, the PUT and CALL rights to the company and PMC Group International Inc. respectively are explained in Clause 18.4 of the Shareholders Agreement. In accordance with the said clause, there was no further consideration for the shares payable by PMC Group International Inc. as the business did not earn the minimum Earnings before Interest, Depreciation and Tax (EBIDTA) in respect of (both the first lot or the second lot) of shares. 4.3. The ld AO sought to adopt the total sale consideration on transfer of Rubber Chemicals Business at ₹ 21.6 crores (8.18 + 9.82 + 3.60) . The assessee objected to the same and reiterated that only cash consideration of ₹ 8.18 crores is to be taken while computing the loss on transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire sale consideration to capital gains. Similarly the assessee had Land and Building at Belvedere Estate which was sold for ₹ 70,00,000/- and disclosed long term capital loss to the tune of ₹ 58,19,463/- pursuant to indexation benefit. Accordingly, it offered the net long term capital gains of ₹ 40,16,367/- ( 98,35,830 - 58,19,463) from both Bangalore Lands and Belvedere Estate in the return of income. 4.6. The ld AO observed that the assessee had claimed depreciation of ₹ 1,69,870/- on residential building and ₹ 2,03,21,534/- on non-residential building. As the block of assets with respect to building -residential and building -non residential have been reduced to Nil after taking into consideration the sale consideration with respect to Rubber Chemicals Business as per registered deed, hence the depreciation of ₹ 1,69,870/- and ₹ 2,03,21,534/- are not allowable. Accordingly, the depreciation claimed by the assessee to the tune of ₹ 2,04,91,404/- was disallowed. Similarly the ld AO disallowed the depreciation on plant and machinery, computer and furniture to the tune of ₹ 1,84,15,641/- in the assessment by applying the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the Hon'ble Bombay High Court in the case of Premier Automobiles Ltd vs ITO reported in 264 ITR 193 (Bom) wherein the Hon'ble Court approved the sale of the undertaking to a joint venture company in which seller had a stake. With regard to the second allegation leveled on the assessee that sale deed has been registered by the assessee in respect of land and building and hence individual values could be assigned to individual assets so as to fall outside the ambit of slump sale, it was argued during the remand proceedings before the ld AO that in respect of registration of land by the assessee in favour of the purchaser post the slump sale, which was one of the reason for the ld AO to disallow the slump sale, relied on the provisions of Explanation 2 to section 2(42C) of the Act which read as under:- For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities. Accordingly, it was argued that land value registration should not come in the way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject matter of the transfer. The assessee also impressed upon the ld CIT(A) on the real income theory and placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs Shoorji Vallabhdas and Co reported in 46 ITR 144 (SC) in that regard. Based on these submissions, the assessee impressed upon the ld CIT(A) to adopt the sale consideration only at ₹ 8.18 crores on transfer of Rubber Chemical Business as the assessee had not received any amount from securities and 'earn outs' from PMC as the performance parameters were not met. The assessee also placed reliance on the decision of the coordinate bench of this tribunal in its own case for Asst Year 1994-95 wherein this tribunal had held that the sale of fertilizer / fibre undertaking in the financial year as a going concern was a slump sale and not an itemized sale. It was also pointed out that by placing reliance on the said tribunal order for AY 1994-95, the ld CIT(A) had accepted the contention of the assessee that all the undertaking sales in past years were slump sale while disposing off the appeal for Asst Year 2005-06. 4.9.2. It was also stated that the ld AO ought to have adopted sale consideration on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of disallowance of depreciation, it was pointed out that what has been sold always has been an undertaking along with all the related assets and liabilities without assignment of values to individual assets / liabilities. Hence the same need to be treated as a 'slump sale' under the provisions of the Act. The assessee placed reliance on the decision of the co-ordinate bench of this tribunal in its own case for the Asst Year 1997-98 wherein the tribunal allowed the claim of the assessee pertaining to opening WDV. It was also mentioned that the ld CIT(A) for Asst year 1994-95 and 1996-97 had accepted the contention of the assessee that the sale of undertaking is a slump sale and not sale of individual assets. Further, in AY 2000-01 , 2001-02 , 2003-04 , 2004-05 and 2005-06, the ld CIT(A) had directed the ld AO to allow the claim of the assessee for depreciation on adjusted WDV of the assets considering that the past sales should be regarded as slump sale. Similar direction was prayed for the years under appeal also by the assessee before the ld CIT(A). 4.9.5. The ld CIT(A) in respect of issues raised before him vide Grounds 1 to 5 together against the addition of ₹ 3,50,65,913 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising from sale of Bangalore land as business income as reducing the sale value of the land from the WDV of the building used for the purpose of business u/s 41(2) of the Act. The ld CIT(A) negatived the contentions of the assessee by observing as under:- "I have considered the finding of the A.O. and the written submission filed by the A.R. I think the assessee should not be allowed to take advantage on similar issues on two different occasions differently. Flat is also a capital asset, but on the sale of flat at Belvedere Estate the assessee has bifurcated the receipt on aldn and building separately and citing various case laws on this issue, taken advantage for the same. Here also the land and building at Bangalore were used for business purposes. Therefore, the action of the A.O. in reducing the sale consideration from the WDV of the building should be accepted by the assessee extending the same logic and argument that assessee itself has given in its favour related to sale of flat at Belvedere Estate. Accordingly, assessee's appeal on this ground is dismissed. Aggrieved, the assessee is in appeal before us on the following ground:- "Ground No. 2 of Assessee Appeal for AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st Year 1994-95 in ITA No. 1020/Kol/2007 dated 29.2.2008. Since this order is contested by the revenue before the Hon'ble High Court and the same is pending disposal, in order to keep the matter alive, the revenue had raised the grounds before this tribunal. 7. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We have gone through the slump sale agreement vide pages 154 to 211 of the paper book. We have gone through the sale deed executed in respect of Bangalore Land vide pages 328 to 337 of the Paper Book. We have also gone through the Remand Report of the ld AO filed before the ld CIT(A) vide pages 591 to 603 of the Paper Book. We find that the Rubber Chemicals Business has been sold as an independent undertaking to PMC Group. The ld AO in his remand report had agreed to the fact that the said undertaking has been sold on slump sale basis by placing reliance on Explanation to Section 2(42C) of the Act. We find that the assessee's sale of undertakings on slump sale basis has been accepted in the past by this tribunal for the earlier years. The sale in the instant year also had happened in the similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of the assessee by the order of this tribunal for Asst Years 1997-98 and 2004-05. Accordingly, the ld CIT(A) granted relief to the assessee in this regard. Hence we do not find any infirmity in the order of the ld CIT(A) in this regard. 7.4. In view of the above and respectfully following the decision of this tribunal in assessee's own case for the Asst Year 1994-95 in ITA No. 1020/Kol/2007 dated 29.2.2008 we hold as under :- (a) Ground Nos. 1 & 3 raised by the revenue in ITA No. 2121/Kol/2013 are dismissed. (b) Ground No. 2 raised by the assessee in ITA No. 1829/Kol/2013 is allowed. 8. In the result, the appeal of the assessee in ITA No. 1829/Kol/2013 for Asst Year 2006-07 is partly allowed and appeal of the revenue in ITA No. 2121/Kol/2013 for Asst Year 2006-07 is dismissed. 9. DISALLOWANCE OF PROPORTIONATE INTEREST ATTRIBUTABLE TO INVESTMENTS, CAPITAL WORK IN PROGRESS AND LOANS TO DIRECTORS AT LOWER RATE OF INTEREST FOR ASST YEAR 2007-08 The brief facts of this issue is that the ld AO observed that assessee had expended an amount of interest to the extent of ₹ 2.95 crores and accordingly was asked why the interest should not be disallowed in the same lines as l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rges for collection of outstation cheques. 2.4. That on the facts and in circumstances of the case and in law, Ld. CIT (Appeals) erred in hoc disallowance of 20% of the interest amount." 9.1. The ld AR argued that no loan was taken by the assessee company during the relevant financial year which is evident from the balance sheet of the assessee company. Further the interest expenditure incurred during the relevant financial year did not pertain to interest on borrowings but on account of bill discounting charges for discounting suppliers bills and cheque collection and other charges for payments received from customers spread across India. He placed reliance on the decision of the Hon'ble Apex Court in the case of Dhakeswari Cotton Mills Ltd vs CIT reported in 26 ITR 775 (SC) wherein it was held that the ld AO cannot make disallowance on pure guess work on adhoc basis without reference to any evidence or material. He further placed reliance on the decision of the Hon'ble Delhi High Court in the case of Additional CIT vs Jay Engineering Works Ltd reported in 113 ITR 389 (Del) from which an inference can be drawn that when the audited annual accounts of the company depicted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own funds. From a perusal of the assessment records, it transpires that the company had provided breakup of interest expenditure vide letter dated 22nd December 2009. From a perusal of the balance sheet for FY 2005-06, it transpires that no loan was outstanding as on 31.03.2006. From the aforesaid, it transpires that the amount of interest of ₹ 3.86 crores could not have been on account of short term loan taken by the company. Thus it may be concluded that no loan was outstanding in the books of the company as on 31.03.2006. Further no loan was availed by the company except the loan as stated for 10 days. In view of the above, since loan itself was not there, there should be no case of attribution of interest to investment in Quest International Ltd and towards Capital Work in Progress. With regard to notional interest on loan to directors, the company has stated that the said directors were employee directors who had availed loan as per company policy. Only because they were directors, interest should not be disallowed especially since tax had been paid on the interest perquisites. Based on these categorical findings of the ld AO, the ld CIT(A) deleted the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bring any thing on record to show how the profits of the business were arrived at. (b) the assessee company also did not provide details of expenditure and receipts of the business. (c) the company did not provide any evidence to substantiate that CCIPL has treated the profits of the business as its income and paid income tax on the same. (d) the assessee company did not provide any evidence to bring out that the business was carried out on behalf of CCIPL. The Ld CIT(A) upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds :- Ground Nos. 3 to 3.2 of Assessee's appeal for AY 2007-08: "3. That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in upholding the treatment by the AO of profits of ₹ 10,84,00,000/- pertaining to Uniqema Business as profits of the appellant. 3.1. That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in not appreciating that the risk and rewards of the Uniqema Business were assumed by the buyer from 2nd September 2006 onwards pursuant to the sale of the business and that these profits pertained to the period from 2nd September 2006 to 4th Janua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to Croda Chemicals (India) Private Limited ('Croda') on 5 January 2007, for a consideration of ₹ 286.83 crores (including ₹ 6.83 crores for working capital adjustment as on date of transfer of risk and reward of the business). (ii) As per the business transfer agreement, since the risks and rewards of the business were assumed by Croda from 2 September 2006, for the period 2 September 2006 to 4 January 2007 , the business was run by the company on behalf of Croda. Accordingly, operating results for the business for the period 2 September 2006 to 4 January 2007 have not been included in the accounts of the current year, the details of which are as below:- Rs lacs Gross Sales 5814 Other Income 77 Excise Duty (737) Materials Consumed (3193) Other expenditure (877) Profit before depreciation, interest and taxation 1084 The above amount was paid to Croda, after : - adjusting tax (including fringe benefits tax) thereon, aggregating to ₹ 347 lacs (which has been deposited with the Income Tax Authorities) , and - adjusting capital expenditure and working capital movement funded by the Company during the above period. (iii) Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the course of assessment. The ld AO did not consider the claim of the assessee as it was neither made in the original return nor in the revised return but claimed only by way of a letter at the time of assessment proceedings. The ld CIT(A) upheld the decision of the ld AO on the ground that during the appellate proceedings, the assessee did not file any details regarding the claim of bad debt. Aggrieved, the assessee is in appeal before us on the following grounds:- Ground Nos. 4 to 4.1 of Assessee's appeal for AY 2007-08: "4. That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in not admitting the claim of bad debts of the company for ₹ 14,43,106/- under the provisions of section 36(1)(vii) read with section 36(2) of the Act. 4.1.That on the facts and in circumstances of the case and in law, Ld. CIT(A) erred in holding that the appellant has not filed any details of Bad Debts without appreciating the fact that the party wise break up of the bad debts were duly filed during the course of the hearing before Ld. CIT(A)." 11.1. The ld AR argued that it was pleaded that the decision of the Hon'ble Supreme Court in the case of Goetze India L ..... 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