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TMI Blog2019 (8) TMI 1617X X X X Extracts X X X X X X X X Extracts X X X X ..... d valuation report, which states value against each of the assets and liabilities, it should not be treated as a slump sale. Thus, in the case of Polychem Ltd. [ 2012 (2) TMI 327 - BOMBAY HIGH COURT] and Premier Automobiles Ltd. (supra), it has to be inferred that transfer of textile division by the assessee on a going concern basis for a lump sum consideration is in the nature of slump sale. Further, once the transaction is held to be in the nature of slump sale, the manner of computation of Long Term Capital Gain / (Loss) is provided for in the Section 50B of the Act; and, the Assessing Officer is not empowered to substitute the same. Thus, assessee succeeds on this aspect. Prior period expenditure - suo-moto disallowance of such expenditure in assessment year 2005-06 since such expenses pertained to assessment year 2004-05 - HELD THAT:- Admittedly, the tax rates for corporate assessees have remained the same for this year as well as next year. Once that is so, relying on the decision of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders P. Ltd [ 2012 (7) TMI 158 - BOMBAY HIGH COURT] we don t find any justifiable reason for the CIT(A) to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders Trust and Morarjee Brembana Ltd ( MBL ) on the restructuring of the assessee group - HELD THAT:- Subsequent to transfer of shares by the assessee, MBL went through an exercise of capital re-structuring wherein, the transferee Trust landed up tendering these shares for capital reduction at ₹ 0.10 per share. Thus, timely sale of shares by the assessee company helped in avoiding a situation of higher capital loss in future. The assessee has sufficiently explained the basis of determining the share transfer price. Merely because the shares are transferred to related party, it cannot lead to an ipso facto inference that assessee has attempted to evade tax. Thus, we do not find any error on the part of the CIT(A) in accepting the Long Term Capital Loss and Short Term Capital Loss arising on transfer of Equity Shares of MBL. Preference shares of MBL - Assessee had obtained a valaution report and based on the same the transfer price was fixed at ₹ 54.53 per share. The Assessing Officer has not pointed out any defect in the valuation report so submitted by the assessee; in the absence of any adverse finding by the Assessing Officer on the quality of the valuation repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rembana Ltd, as a slump sale on the alleged ground that the Assets and liabilities have been individually valued for arriving at the sales value consideration. 2. He failed to appreciate and ought to have held that the textile division was sold in its entirety and all the Assets and Liabilities relating to the business were transferred and the sales consideration is based on the valuation report of an independent valuer. 3. The Appellant prays that the sale of textile undertaking be held as a slump sale and the Long term Capital Loss of ₹ 34,47,24,138/- be allowed. Without prejudice to ground I: GROUND II : 1. On the facts and circumstances of the case and in law, the CIT (A) erred in disallowing the loss on sale of textile business to the extent of ₹ 3,86,86,330/- out of total loss of ₹ 34,47,24,136/- as Business loss under section 28 of the Income Tax Act, 1961 ( the Act ). 2. In doing so, the CIT (A) upheld the action of the AO of treating loss in respect of deposits with others of ₹ 76,15,921/-, BMC Deposit of ₹ 15,00,000 and Excise Duty Deposit of ₹ 2,95,70,409/- aggregating to ₹ 3,86,86,330/- as capital in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump sales basis; disallowed the loss on sales of shares of ₹ 67,91,97,223/-; denied the claim of deduction of certain expenses of ₹ 4,50,49,311/- which were treated as prior period expenses in assessment year 2005-06 and added it back to the total income; and, rejected assessee s claim of deduction of Fair Market Value of land purchased before 01.04.1981. The assessment was thus finalised at an income of ₹ 32,48,92,350/-. On appeal to CIT(A), part relief was allowed to the assessee. In this background, both assessee as well as Revenue are in appeal before us on the respective Grounds of appeal. The assessee has challenged the sustenance of additions/disallowances by the CIT(A), whereas the Revenue has challenged the relief allowed by the CIT(A). 4. We may first take-up the appeal preferred by the assessee. The Ground nos. I, II and also an Additional Ground raised by the assessee pertain to denial of Long Term Capital Loss of ₹ 34,47,24,138/-, which is stated to have arisen on transfer of its textile undertaking on a slump sales basis. The relevant facts on this issue are that, in order to consolidate the textile business in one entity and focus more on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000/- and excise duty deposit of ₹ 2,95,70,409/- to be capital in nature . In other words, the CIT(A) allowed loss on slump sale to the extent of ₹ 30,60,37,807 to be a business loss. 6. In this background, the Learned Representative for the assessee referred to various clauses of the agreement dated 04.09.2003 and pointed out that the transfer agreement does not assign any values to the individual assets or liabilities. Further, it was pointed out that 'consideration' as defined in clause 1.1(i) of the agreement, inter-alia, means the purchase price being a lump sum amount agreed for transfer of textile undertaking on a going concern basis. In this context, our attention was drawn to the Page No. 41 of the Paper Book 1 wherein consideration for transfer is defined to mean a lump sum amount. Further, Learned Representative for the assessee referred to various clauses of the agreement dated 04.09.2003 to contend that the transaction was in the nature of slump sale. The Learned Representative referred to the definition of slump sale contained in Section 2(42C) of the Act and pointed out that the expression, in such sales contained in Section 2(42C) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dual values were ascribed. Thus, those cases are distinguishable on facts and ratio of the said decisions is not applicable to the facts of the case, as in the present case agreement only provides for lump sum amount. 10. The Learned Representative for the assessee also made an alternate plea that in case capital loss is not allowed, then loss of ₹ 34,47,24,138/- be allowed as business loss. The second alternate argument advanced was if the capital loss is not allowed, then loss pertaining to 'deposit with others', BMC deposit' and Excise duty deposit' aggregating to ₹ 3,86,86,330/- be allowed to it as a Capital loss under Section 45 of the Act. 11. We have carefully considered the rival submissions. The first and the foremost issue for our consideration is whether or not the transfer of textile division by the assessee is on a slump sale basis; and, thus whether or not the claim of Long Term Capital Loss of ₹ 34,47,24,138/- arising on such transfer is admissible. Section 50B of the Act contains the provisions relating to taxation of slump sale which states that profits or gains arising from the slump sale effected in the previous year shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is defined to mean the purchase price being a lump sum amount, agreed for the sale of the Textile Business, as a going concern including its assets and liabilities, to be discharged by the Purchaser in accordance with Clause 3 . Similarly, in clause 2 it is stated that ...... the Vendor agrees to sell/transfer and the Purchaser agrees to purchase/acquire from the Vendor the Textile Business as a running business/on going concern basis with effect from the Appointed Date, including but not limited to the following: (a) The Purchaser s right to represent itself as carrying on such business in continuation of the Vendor and/or as successors to the Vendor; (b) All the Assets and Liabilities belonging to the Vendor in connection with the Textile Business; (c) All the contracts, rights, powers, authorities, allotments, approvals, consensus, licenses, etc. pertaining to the Textile Business. Thirdly, in clause 3 containing the quantification of consideration, it is stated that The Purchaser shall satisfy the lump sum Consideration by payment to the Vendor of the sum ₹ 4,32,00,000 as and by way of the Consideration for the purchase of the Business. It is also releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the labor force which was being transferred to the purchaser. The transaction involved a slump sale. There was no itemized valuation of the fixed assets and other assets which formed part of the undertaking. What was sold comprised of the undertaking and the business as a whole. 8. The Judgment of the Division Bench of this Court in Premier Automobiles Ltd. (supra) contains an elucidation of the distinction between a slump sale agreement and an agreement for the transfer itemwise of the fixed assets of an undertaking. In the case of a slump sale the sale is for a lump sum price and there is a transfer of the entire business for a fixed price. The sale consideration is, in other words, not attributable to the individual assets of the assessee. Both in the case of a slump sale as well as in the case of itemized assets a transfer of land, building, plant and machinery may and probably would be involved. However, where there is a slump sale, the transfer of land, building, plant and machinery forms part of the transfer of the entire business. On the other hand where there is an itemized sale the transfer of land, building, plant and machinery takes place in specie. This distincti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovals and intangibles including intellectual property and transfer of the work force of the undertaking or business, it would be impossible in a case such as the present to attribute or allocate the sale consideration as between the fixed assets on the one hand and the intangibles on the other. (underlined for emphasis by us) Notably, the Hon ble Bombay High Court has explained the distinction between a slump sale agreement and an agreement for the itemwise transfer of the fixed assets of an undertaking. Undisputedly, in the present case also, the Transfer Agreement does not postulate sale of individual items of assets and liabilities, and instead what has been transferred was the entire textile division as a whole. 14. Further, in the case of M/s. Novartis India Limited vs. DCIT in ITA No. 498/Mum/2003 dated 25.09.2013, our coordinate bench has analysed the above issue and following the judgment of the Hon ble Bombay High Court in the case of Premier Automobiles Ltd.(supra) held as under: 17. A perusal of sale agreement at page 1 to 82 of the paper book shows that the sale consideration is not itemized which means that it is not a case of itemized sale. If it is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to substitute the same. Thus, assessee succeeds on this aspect. 16. The next Ground in assessee s appeal pertains to allowability of expenses of ₹ 4,50,49,311/- as an allowable expenditure for the instant assessment year, which are accounted for a prior period expenditure in the accounts for next assessment year of 2005-06. The assessee made an additional claim during the course of assessment proceedings in the instant year pertaining to expenditure of ₹ 4,50,49,311/-, after making suo-moto disallowance of such expenditure in assessment year 2005-06 since such expenses pertained to assessment year 2004-05. The Assessing Officer placing reliance on the decision of Hon ble Supreme Court in the case of Goetze India Ltd. vs CIT, 284 ITR 323 (SC) denied the claim as it was not made by filing a revised return of income for instant year and even complete details of such expenditure were not furnished. On appeal, the CIT(A) upheld the action of the Assessing Officer on this issue. 17. Before us, the Learned Representative for the assessee placed reliance on the decision of the Hon'ble Bombay High Court in case of CIT v. Pruthvi Brokers and Shareholders P. Ltd., 349 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s containing even fresh claims, which were hitherto not made in return of income. Notably, the said decision has been rendered after considering the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT (supra). Thus, there was no bar on the CIT(A) to have considered the claim of the assessee. Moreover, at the time of hearing, Learned Representative for the assessee relied on the judgment of Hon'ble Bombay High Court in case of CIT V. Nagri Mills (supra) and the Hon'ble Supreme Court in case of CIT v. Excel Industries Limited (supra) wherein it has been laid down that if the tax rate remains same for present and subsequent assessment year, then an expense which was otherwise allowable, ought to have been allowed as the entire issue regarding year of taxation becomes academic in the absence of tax effect. Admittedly, the tax rates for corporate assessees have remained the same for this year as well as next year. Once that is so, relying on the decision of Hon'ble Bombay High Court in the case of Pruthvi Brokers and Shareholders P. Ltd (Supra), we don t find any justifiable reason for the CIT(A) to have denied assessee s claim of expenses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in taking inconsistent view by confirming the disallowance of capital loss on alleged slump sale of textile business on one hand and, restricting such disallowance only to transfer of deposits with public bodies and others at ₹ 38686330/-, on the other. 2.(b) The learned CIT(A) erred in holding that the debtors, stock, advances etc. transferred by assessee being subjected to levy of tax in the earlier, the same are allowable, though not as loss on slump sale. 2.(c) The learned CIT(A) filed to appreciate that such assets being a mere assignment, cannot be held on par with any trading transaction for being allowed as a revenue loss. Long term capital loss - 3.(a) On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing the long term capital loss of ₹ 65,29,19,139/- on the transfer of shares, share-application money to M/s. MGM Shareholders Trust M/s.Morarjee Brembana Ltd. on the ground that the said transfers were properly effect due to restructuring of the assessee-group. 3.(b) The CIT(A) erred in not appreciating the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee vide letter dated 16.02.2005 and 13.12.2005, for the Assessment Years 2002-03 and 2003-04 respectively, submitted the Valuation Report according to which the Fair Market Value as on 01.04.1981 was determined at ₹ 240 per square feet for PC-I and ₹ 260 per square feet for PC-II. Accordingly, the revised Computation of Capital Gains was filed during the assessment proceedings of Assessment Years 2002-03 and 2003-04. 26. During the year under consideration, the assessee further sold part of land 45,662 sq. ft. of PC-I and 2,770 sq. ft. of PC-II. The cost of acquisition taken for calculation of income from Capital Gains was taken at ₹ 240 per sq. ft. of PC-I and ₹ 260 per sq. ft. of PC-II, being the value determined in the aforesaid valuation report and the same was filed along with the Return of Income. In the course of assessment proceeding, the Assessing Officer noted that as per section 55(2)(b)(i) of the Act, the cost of acquisition in relation to a capital asset acquired prior to 01.04.1981 means actual cost of acquisition of the asset to the assessee or the fair market value of the asset on the 01.04.1981, at the option of the assessee. Accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital Gain, which was raised in the course of assessment proceedings, instead of cost of acquisition claimed by the assessee in its return of income. The Tribunal approved the decision of CIT(A) and held that assessee can exercise its right to claim fair market value of the land as on 01.04.1981 even in the course of assessment proceedings; and, the matter was restored to the file of Assessing Officer for determination of the fair market value as on 01.04.1981. 30. We have carefully considered the rival submissions. In sum and substance, the issue involved is limited to the fact that whether assessee was justified in adopting the fair market value of the land as on 01.04.1981 as cost of acquisition to arrive at the Long Term Capital Gain. Notably, the lands in question, being PC I and PC II were acquired during the year 1934-35. The said lands were converted into stock-in-trade in the assessment year 2002-03. The assessee developed the units and sold part of land in PC II in assessment year 2002-03 and part of the land in PC I in assessment year 2003-04. Since lands were acquired prior to 01.04.1981, the assessee had an option to adopt the fair market value as on 01.04. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the aforesaid, it is directed that the fair market value as on 01.04.1981 should be allowed to the assessee based on the final outcome of the appeal filed by the assessee for assessment years 2002-03 and 2003-04 challenging the determination of valuation. The Ground of appeal raised by the Revenue is thus dismissed. 32. The second Ground relates to inconsistent view of the CIT(A) wherein on one hand he has confirmed the disallowance of Capital Loss on the impugned slump sale and on the other hand he has restricted such disallowance only to the transfer of deposits with public bodies and others, amounting to ₹ 3,86,86,330/-. Further, the Department has contested the decision of the CIT(A) in holding that debtors, stock, advances, etc. transferred by the assessee are allowable as business loss, though not a loss on slump sale. It is also canvassed that the CIT(A) failed to appreciate that such assets being a mere assignment, cannot be treated on par with any trading transaction for being allowed as a loss of revenue nature. 33. Since we have already held the transaction to be in the nature of a slump sale and adjudicated the main Ground of appeal no. 1 in assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares of MBL to MGM S.B. Trust amounting to ₹ 2,62,78,084/-. The said losses were duly reflected by the assessee in the return of income for the instant assessment year 2004-05. The Assessing Officer disallowed the entire long term and short term capital loss treating the same as non-genuine on the ground that shares and share application money were transferred to related parties at unduly low prices with the intention to create losses and to avoid taxes. According to the Assessing Officer, the transactions of sale of shares were non-transparent, since Long Term losses were created so as to set them off against Long Term Capital Gains arising from conversion of Capital asset into stock-in-trade. In nut-shell, the Assessing Officer disallowed the above capital losses on the ground that the transactions of sale of shares were structured in a way to evade tax liability and to benefit the promoters by diverting the profits. The Assessing Officer also held that share application money could not be regarded as a capital asset. Without prejudice, the Assessing Officer applied the Explanation to Section 73 in the context of the losses, and held them to be speculative in nature. 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not at reduced prices as made out by the Assessing Officer. It was explained that the Assessing Officer never doubted the genuineness of such valuation report. The Learned Representative explained that in order to establish genuineness, assessee submitted the details of sale of shares as recorded in the meeting of Board of Directors dated 26.11.2003. In relation to Transfer of shares of MBL to MGM S.B. Trust, Learned Representative submitted that transfer of shares of MBL to MGM S.B. Trust was a part of corporate restructuring scheme of the assessee and was done with commercial purpose and accordingly, it cannot be alleged as non-genuine. The transfer of shares by the assessee by way of sale was undertaken at fair value based on a valuation report, whose genuineness has not been doubted by the Assessing Officer. It was also pointed out that the issue as to whether the transfer of shares was genuine or not, was examined in the hands of the purchaser MBL by the Hon'ble Bombay High Court vide order dated 24.01.2017 in ITA No. 738 of 2014. It was also pointed out that the timely selling of shares by the assessee company helped it in arresting its loss and avoiding a situation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that it pertained to assessment year 2005-06 and the issue involved in that case was whether Assessing Officer is empowered to substitute the full value of consideration with fair market value, whereas in the present case the issue of substitution of full value of consideration with fair market value is not quite relevant; rather, it is a case where assessee has not submitted the necessary evidence to support the instant transaction resulting in long term/ short term capital loss. 45. We have carefully considered the rival submissions. At the outset, we tabulate below the details of the transactions which resulted into Long Term Capital Loss and Short Term Capital Loss: Long Term Capital Loss: Nature of Asset Shares Transferred No. of shares Indexed purchase Cost Sale Proceeds Profit/ (Loss) Equity Shares Morarjee Brembana Ltd 1,64,38,000 22,14,93,710 4,76,70,200 (17,38,23,510) Morarjee Castiglini Ltd. 10,00,000 1,31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of MBL were completely eroded. It was further pointed out that subsequent to transfer of shares by the assessee, MBL went through an exercise of capital re-structuring wherein, the transferee Trust landed up tendering these shares for capital reduction at ₹ 0.10 per share. Thus, timely sale of shares by the assessee company helped in avoiding a situation of higher capital loss in future. The assessee has sufficiently explained the basis of determining the share transfer price. Merely because the shares are transferred to related party, it cannot lead to an ipso facto inference that assessee has attempted to evade tax. Thus, we do not find any error on the part of the CIT(A) in accepting the Long Term Capital Loss and Short Term Capital Loss arising on transfer of Equity Shares of MBL. 46. Now coming to the preference shares of MBL, in this regard assessee had obtained a valaution report and based on the same the transfer price was fixed at ₹ 54.53 per share. The Assessing Officer has not pointed out any defect in the valuation report so submitted by the assessee; in the absence of any adverse finding by the Assessing Officer on the quality of the valuation report, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out by the appellant that the break up value of MBL was negative and in fact these shares of MBL were subsequently surrendered @₹ 0.10 only per share under the Court approved capital reduction scheme under section 100 of the Companies Act, 1956. 5.17 It is pertinent to note that by doing the above exercise, the appellant been able to arrest its future loss to the extent of ₹ 2.80 per share only. 5.18 In the totality of the facts and circumstances, the undersigned is of the considered opinion that the AO was not right in treating the above transactions as non-genuine and accordingly he was not right in disallowing these losses as claimed by the appellant. The appellant is therefore entitled to the claim of long term capital loss on sale of equity shares, share application money and preference shares and hence the main portion of the ground is allowed. 5.19 In view of the above discussion, the AO is directed to allow the claim of the long term capital loss of ₹ 65,29,19,139 as claimed by the appellant. 5.20 The AO without prejudice to the above, held that the share application money is a capital asset and thereby had alternatively denied the long te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore it cannot be relied upon for the subject Assessment year. The impugned order of the Tribunal further placed reliance upon the decision of its Coordinate bench in the case of MGM Shareholders Benefit Trust (Income Tax Appeal No.316/Mum/2009) rendered on 26th November, 2009 in case of a group company of the respondent assessee on a similar issue of revaluation of shares by substitution of full value of consideration by fair market value and held the same to be impermissible. (b) The grievance of the Revenue before us is that these transactions are all between companies belonging to the same group. Therefore it is urged that the transaction are colourable transaction and different considerations would apply. (c) At the hearing of the admission, the Revenue did not point out any facts which would evidence that the transaction was not genuine. In such a case where the genuineness is not disputed with any evidence, it is not open to discard the documents and/or transaction on the basis of some supposed object/intent. In the present facts the Revenue accepts the documents but only substitutes the consideration. Therefore, the issue is whether such substitution of full cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s; and, the aforesaid stand of the Assessing Officer is only a bald assertion and it is not proved that the assessee had in fact received more consideration. The reasoning taken by the Hon'ble Bombay High Court in the case of Tainwala Chemicals Plastics India Ltd. [2013] 215 Taxman 153 (Bom) is clearly applicable in the instant case. 50. We thus reject the grounds of appeal raised by the Revenue challenging the allowance of Long Term Capital Loss and Short Term Capital Loss and uphold the decision of the CIT(A). 51. Now, coming to the issue whether share application money can be termed as capital asset or not. In this regard, the ld. DR relied on the decision of Rainy Investments (P.) Ltd v. ACIT, 30 taxmann.com (Mum) and S.R. Thorat Milk Products (P.) Ltd v. ACIT, 70 taxmann.com 261 (Pune) to submit that share application money is not a capital asset. The Learned Representative for the respondent-assessee relied on the decision of the Hon'ble Supreme Court in the case of Ahmed G. H. Ariff and others v. Commissioner of wealth tax, 76 ITR 471 (SC), and on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Tata Services Limited, 122 ITR 594. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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