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TMI Blog2018 (2) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... further hold that the provisions of section 50B are not applicable to this case as it is a case of slump exchange and not a slump sale. Accordingly we set aside the order of CIT(A) and direct the AO not to tax the amount of capital gain - Decided in favour of assessee Disallowing software expenses relating to website portal - nature of expenditure - revenue or capital - Held that:- We find that the Ld. CIT(A) allowed the appeal of the assessee by following the earlier order for A.Y. 2007-08 which has attained finality. We have observed that order of Ld. CIT(A) is correct and does not suffer from any infirmity as it has been passed after considering the facts of the case in the light of the similar issue decided in A.Y. 2007-08 which attained finality. Also on merit the issue has been correctly decided as the expense are of revenue nature and therefore we are inclined to uphold the same.- Decided in favour of assessee - ITA No.3298/M/2012 And ITA No.3537/M/2012 - - - Dated:- 8-1-2018 - SHRI D.T. GARASIA, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER For The Assessee : Shri S. Venkataraman, A.R. For The Revenue : Shri Purushottam Kumar, D.R. ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mutual Fund Units- Unquoted 2,352 292 Equity Shares Unquoted 1 1 Equity Shares Subsidiaries Quoted 6,194 5280 Equity Shares others -Quoted 105,809 62,064 Mutual Funds Units 9605 9481 Equity Shares -Unquoted 60839 16532 Subsidiaries - Unquoted Equity shares 40546 37548 Preference shares- Subsidiaries 12,458 90 Preference shares- others 13183 4267 Average Total (B) 250,986 135,554 193,270 Total Assets (C) 600,38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a rapid growth path. The potential of steep growth in print business encourage the management to embark on a detailed expansion plan. The company has made additions of ₹ 510 crores to its fixed assets and its turnover has also increased and the capital borrowing has come down to very nominal level. During the A.Y. 2008-09 the company has incurred an interest expense of ₹ 23.04 crores, out of which ₹ 20.77 crores pertained to aforesaid borrowings and the balance pertained to statutory interest payments and interest on deposits. So far as other expenses are concerned, the assessee has carried out investments activities and said expenditure has to be allocated to the exempt income on the basis of total income in respect of which assessee himself disallowed ₹ 1,18,11,210/- under section 14A read with rule 8D(2)(iii). The Ld. A.R. submitted that before invoking rule 8D the AO has not recorded any objective satisfaction that how the interest on borrowing was includable for disallowance as well as how the claim of disallowance of ₹ 1,18,11,210/- made by the assessee at the time of filing the return was incorrect. The Ld. A.R. has relied upon the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserves and Surplus 2625 3119 3973 4347 Depreciation Reserve 523 669 843 1002 A 3180 3819 4848 5381 Application Investments on which tax-free income received 882 982 1996 2187 Investments in unlisted shares of subsidiary 313 374 514 807 Other Investments 173 324 613 812 B 1368 1680 3123 3806 SURPLUS (A-B) 1812 2139 1725 1575 It is clear from the records that the assessee has replied to show cause notice issued by the AO and furnished details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own funds were for more than the investments in shares and securities yielding tax free income. We notice that the assessee had sufficient own funds and is squarel covered by the ratio laid down by the decision of the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) which reads as under: 16. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (Rs.) Equity Shares 9,50,000 Rs.10 each 95,00,000 6% Redeemable Unsecured Debentures 1,25,00,000 Rs.100 each 125,00,00,000 125,95,50,000 The difference between the value of the shares allotted in exchange and the value of the net assets of the business transferred amounting to ₹ 82,87,31,848 has been included in Computation of Income as income u1s.50B of the Income Tax Act out of abundant caution and without prejudice to the contention of the assessee that the difference is not chargeable to tax under the provisions of the Income Tax Act, 1961. In the opinion of the assessee, the transaction of hiving off the business of Planet M division is not a Sale but is an Exchange . The same not being a sale therefore does not fall within the definition of Slump Sale u/s 2(42C) of the Income Tax Act, 1961. In the circumstances, the transfer of the division on a going concern basis being a slump Exchange , no va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant here is that an undertaking has been transferred to a company, consideration for which has been paid in the form of shares and debentures issued bthe company (which are not assets held by the transferee company) and not goods or assets held or owned by the company. It is not the case of exchange of goods or assets owned or held by two parties. The payment of consideration by way of shares is very common in cases of mergers, demergers, takeovers etc and merely for this incidental fact the whole substance of the transaction cannot be equated with that of an exchange. In the elaborate business transfer agreement entered into by the assessee with Planet M Retail Limited ( the transferee ), the assessee has agreed to transfer the entire business of retailing music and other products as a going concern to the transferee on a slump exchange basis.While the assessee has taken care to use the word 'exchange' in the agreement,nowhere else in the agreement there is any reference to any 'exchange'. The substance of the agreement is that of transfer of all assets and liabilities of the running business including intangible assets described in the agreement under 'Art ic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business for which the consideration for the transfer is determined as a lumpsum amount by mutual agreement between the parties to the transaction. The issue has been decided by the Supreme Court In the two Judgments in CIT vs. Artex Mfg. Co. (1997) 227 ITR 260 (SC) and CIT vs. Electric Control Gear Mfg. Co. 227 ITR 278 (SC) ) and a perusal of both the decisions of the Supreme Court would show that the surplus realized on sale of depreciable asset to the extent of the difference between the written down value and the actual cost being the depreciation actually allowed would be chargeable to tax as deemed business profits under section 41 (2) and the excess over the actual cost of the capital asset realized would be taxable as capital gain. If, however, there is no evidence to indicate the price of the plant, machinery, building, etc., and the depreciation already allowed to the firm is not determinable, the depreciation so allowed cannot be taxed as balancing charge. This is because of the fact that the price identifiable and attributable to each machinery, plant or building will have to be ascertained and then only the question of computation of balancing charge under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by taking into consideration the value of the plant, machinery and dead stock as assessed by the valuer at ₹ 15,87,296. This is not a case in which it cannot be said that the price attributed to the items transferred is not indicated and, hence, section 41(2) of the 1961 Act cannot be applied. We are, therefore, unable to agree with the view of the High Court that section 41(2) of the 1961 Act is not applicable . It was further held that- Since we are of the view that the income was chargeable to income-tax under section 41(2) the decision of the High Court that it was chargeable to tax as capital gain cannot be upheld. But the liability under section 41(2) is limited to the amount of surplus to the extent of difference between the written down value and the actual cost. If the amount of surplus exceeds the difference between the written down value and the actual cost, then the surplus amount to the extent of such excess will have to be treated as capital gain for the purpose of taxation. 5.8 In the case of Electric Control Gear Mfg. Co the net consideration of ₹ 8,00,000/- payable by the company by allotment of shares of equivalent value to the partners of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the true nature of the transaction, the Court must take into consideration the substance of the transaction and not the legal effect of the agreement entered Into and the Supreme Court accepted the proposition. In Sir Kikabhai Premchand v CIT [1953] 24 ITR 506, the Supreme Court had observed It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. 5.11 These observations were made the basis for the decision of the Bombay High Court in CIT v Sir Homi Mehta's Executors [1955] 28 ITR 928 Further the Supreme Court in B M Kharwar's case held that the observations in Sir Kikabhai's case to the effect that in revenue cases regard must be held to the substance of the transaction rather than to its mere form and it cannot be read as throwing any doubt on the principle that the true legal relation arising from a transaction alone determines the taxability of a receipt arising from a transaction. 5 12 The recent decision of Mumbai ITAT in the case of Bharat Bijilee Ltd v Additional Commissioner of Income Tax, ITA No.6410/Mum/2008 heavily relied upon by learned AR does not discuss the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. A.R. relied on number of decisions in defense of his arguments namely- 1. CIT vs. Motor General Stores (P) Ltd. 66 ITR 692 (SC) 2. CIT vs. Bharat Bijlee Ltd. 365 ITR 258 Bombay High Court 3. CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 4. PNB Finance Ltd. vs. CIT (307 ITR 75) 14. Finally the Ld. A.R. submitted that since undertaking has been transferred under business transfer agreement the cost thereof is not possible to be arrived at or ascertained and therefore the charging of provisions of section 45 fail and consequently the capital gain of ₹ 84,26,04,286/- could not be brought to tax. Therefore, the Ld. A.R. prayed for reversal of order of Ld. CIT(A) and issuing necessary direction to the AO to exclude the said amount from the computation of income. 15. The Ld. D.R., on the other hand, vehemently submitted that the amount of ₹ 84,26,04,286/- has already been taxed as there has been transfer by hiving off Planet M. division consisting of leisure and retail products, on a going concern basis. The Ld. D.R. relied upon the orders of the authorities below. The Ld. D.R. relied on the decision of CIT vs. Artex Manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the assessee that the said surplus was not chargeable to tax under the provision of the Income Tax Act. According to the assessee the transaction of hiving off a business of Planet M. division was not a sale but an exchange and consequently does not fall within the meaning of definition of slump sale under section 2(42C) of the Act. According to the assessee the said transfer of division on a going concern basis being a slump exchange, therefore no value could be arrived and ascribed to any assets that were transferred as going concern in a consolidated manner. Further, the contentions of the assessee are that the computation provisions qua capital gain are incapable of being applied and therefore the charging of provisions of capital gain cannot be applied. For the purpose of better understanding of provision 2(42C) is extracted below: ( 42C) slump sale 72 means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation 1.-For the purposes of this clause, undertaking shall have the meaning assigned to it in Explanation 1 to clause (19A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 692), the jurisdictional High Court held that the provisions of section 50B were inapplicable to the transaction. In the case of CIT v. B.C. Srinivasa Setty reported in [1981] 128 ITR 294, the Hon ble Supreme Court held that section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. In other words, it charges surplus which arises on the transfer of a capital asset in terms of appreciation of capital value of that asset. In the said judgment, the Hon ble Supreme Court held that the asset must be one which falls within the contemplation of section 45. It is further held that the charging section and the computation provisions together constitute an integrated code and when in a case the computation provisions cannot apply, such a case would not fall within section 45. In the present case, the banking undertaking, inter alia, included intangible assets like, goodwill, tenancy rights, man power and value of banking licence. On the facts, we find that item-wise earmarking was not possible. On the facts, we find that the compensation (sale consideration) of ₹ 10.20 crores was not allocable item-wise as was the case in Artex Manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the disallowance of ₹ 50,64,781/- by the Ld. CIT(A) as made by the AO by disallowing software expenses relating to website portal as capital in nature. 24. The facts in brief are that the assessee is in the business of printing and publishing of newspapers and periodicals on various online additions of Times of India, Economic Times, Mahabharat Times, Navbharat Times as well as various portals viz. Property Times, Education Times etc. The assessee incurred various expenses during the year in order to maintain its online portals. During the course of assessment proceedings, the AO called for the details of these expenses which was accordingly submitted. During the year the assessee incurred a total expenditure of ₹ 74,73,026/- being software application expenses incurred in relation to website/portals out of which ₹ 50,64,781/- was treated as capital expenditure by the AO and consequently disallowed on the ground that ₹ 50,64,781/- related to development of website yielding benefit of enduring nature. The details of the said expenditure is given in the assessment order in para 10.2. In the appellate proceedings the Ld. CIT(A) allowed the appeal of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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