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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 ..... Income Tax, Ward 6 (3), Mumbai ("the AO") in not treating the sale of textile business to M/s Morarjee Brembana 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 Rs. 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 Rs. 3,86,86,330/- out of total loss of Rs. 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 Rs. 76,15,921/-, BMC Deposit of Rs. 15,00,000 and Excise Duty Deposit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king on a slump sales basis; disallowed the loss on sales of shares of Rs. 67,91,97,223/-; denied the claim of deduction of certain expenses of Rs. 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 Rs. 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 Rs. 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 real es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09/- to be capital in nature . In other words, the CIT(A) allowed loss on slump sale to the extent of Rs. 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 the Act, clearly means the document or agreement which evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 Rs. 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 Rs. 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 shall be chargeable to income tax as capital gains arising from the transfer of long ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, 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 Rs. 4,32,00,000 as and by way of the Consideration for the purchase of the Business." It is also relevant to refer to clauses 11 and 12.1 dealing with non-compete and employees of the business under transfer. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 distinction which was noted in the judgment of Premier Automobiles Ltd. (supra ) must equally apply to the facts of the present case.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 case of "no sale of itemized assets", we have to hold that the transaction amounts to slump sale as held by the Hon'ble Bombay High Court in the case of Premier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Rs. 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 ITR 336 (Bom.) wherein it has been held that the assessee is entitled to raise before appellate authorities Additional Grounds in respect of claims hitherto not made in return fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the instant assessment year of 2004-05, which were suo-moto disallowed by the assessee in assessment year 2005-06 treating the same to be prior period expenditure. Merely because the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business on one hand and, restricting such disallowance only to transfer of deposits with public bodies and others at Rs. 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 Rs. 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 the intra-group transaction in the shares and application money suffered from want of transparency and it had obtained the blemish of colorable device and tax avoidance. (c) The CIT(A) also erred in equating sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uare feet for PC-I and Rs. 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 Rs. 240 per sq. ft. of PC-I and Rs. 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. Accordingly, Assessing Officer concluded that as per the provisions of the Act, the assessee had already exercised its option to adopt the original cost of acquisition as against the fair value as on 01.04.1981 in Assessment Years 2002-03 and 2003-04, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 01.04.1981 instead of the actual cost of acquisition, while computing the Long Term Capital Gain. The assessee in its return of income for assessment years 2002-03 and 2003-04 computed the Long Term Capital Gain taking cost of acquisition, but attached a Note wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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 Rs. 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's appeal in favour of assessee, the instant Ground raised by the Department becomes infructuous, and we refrain from adjudicating the same. Thus, the Ground of appeal of the Revenue is hereby dismissed. 34. The third Ground raised by the Revenue is against the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-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. However, the abovestated stand of the Assessing Officer did not find favour with the CIT(A). As per the CIT(A), the shares were not sold with the intention of setting-off long term losses against long term capital gains as contended by the Assessing Officer. On the contrary, the same was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 higher capital loss in future. In relation to Transfer of shares of Morarjee Castiglioni Limited ("MCL") and PMP Components Private Limited, it is submitted that such shares were sold based on the value determined by an independent valuer whose valuation report was furnished before the Assessing Officer. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt; 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 1,31,90,883 64,10,000 (67,80,883) PMP Components Ltd. 22,50,750 18,88,47,349 4,07,38,575 (14,81,08,774) Morarjee Legler Ltd 9,960 1,03,165 100 (1,03,065) Preference Shares Morarjee Brembana Ltd 10,00,000 12,56,40,376 5,45,30,000 (7,11,10,376) Share application money Morarjee Brembana Ltd 2,50,00,000 27,70,67,578 7,25,00,000 (20,45,67,578) Morarjee Legler Ltd 31,90,040 4,84,25,583 900 (4,84,24,953) Total (65,29,19,139) Short Term Capital Loss: Nature of Asset Shares Transferred No. of shares Purchase Cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent valuer whose valuation report was furnished before the Assessing Officer. The Assessing Officer has not given any specific reasoning for disallowing the capital loss in respect of sale of shares of MCL and PMP Components Pvt. Ltd. Further, the purchase of shares of PMP Components Pvt. Ltd. by MBL also figured in the case of MBL before the Tribunal in ITA No.1979/M/2009 dated 10.05.2013 (supra). The said decision of the Tribunal in the case of MBL (supra) has been upheld by the Hon'ble Bombay High Court in its order dated 24.01.2017 (supra), wherein the Hon'ble High Court has categorically held that the Department does not have any power to substitute the full value of the consideration by the market value of shares. We may now examine the manner in which the CIT(A) has allowed the claim of Long Term and Short Term Capital Loss, whose relevant portion reads as under: "5.15 The undersigned has carefully perused through the rival contentions. It is observed that the shares were not sold with the intention of setting off long term capital losses against long term capital gains on sale of converted stockin-trade and on contrary, the same were done as a part of rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on: (i)Ahmed GH Ariff and others vs. Commissioner of wealth tax 761TR471(SC) (ii) CIT vs Tata Services Ltd. 122 ITR 594 (Bom) 5.21 The undersigned has carefully perused through the rival contentions. 5.22 It is observed and held that the right in the share application money, isa capital asset. However, since the main portion of the ground of appeal has been already allowed, this subsequent portion of the ground has become redundant which is not necessary to be adjudicated upon, as the same is already covered in the decision with regards to the main portion of the ground." 48. At this stage, we may also refer to the ratio laid down in the judgment rendered by the Hon'ble Bombay High Court in the case of MBL in ITA No.738 of 2014 (supra), the relevant portion of the said judgment reads as under: "4. (a) The issue which arises herein for consideration is whether it is open to the Assessing Officer to substitute the 'full value of consideration' received on sale of shares by its 'fair market value' in the subject Assessment Year. The impugned order of the Tribunal allowed the respondent assessee's appeal by inter alia holding that the reliance by the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h fair market value in respect of shares came into the statute only on introduction of Section 50D with effect from 1st April, 2013. Moreover, such a power under Section 50D of the Act is only to be exercised if the Assessing Officer comes to a finding that the consideration received is not ascertainable or cannot be determined.Moreover the decision of the Coordinate bench of the Tribunal in the case of MGM Shareholders Benefit Trust (supra) on identical facts situation has been accepted by the Revenue, as no appeal from the same has been filed by Revenue. (d) In the above view, the question as formulated does not give rise to any substantial question of law. Thus not entertained." (underlined for emphasis by us) The aforesaid decision, rendered in the case of assessee's group concern, clearly supports the finding that during the relevant time there was no power vested in the authorities under the Act to substitute a full value of consideration received for sale of shares by fair market value in respect of stocks and shares. In the present case also the Assessing Officer has questioned the genuineness of the transaction based on the low transfer price of shares resulting into l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guishable on facts. Coming to the decision relied upon by the ld. DR, we find that the Pune Tribunal in the case of S.R. Thorat Milk Products (P.) Ltd (supra) has held that share application money cannot be equated with share capital as obligation to return money is always implicit in event of non-allotment of shares. The relevant part of the decision is reproduced hereunder: "In the light of the decision of the Co-ordinate Bench of the Tribunal, there are considerable merits in the argument of the assessee. There is also substance in the various contentions raised on behalf of the assessee. It is viewed that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of share are subject to certain regulations and restrictions as provided under the Companies Act. Therefore, receipt by way of share application money is not receipt held towards share capital before its conversion." (underlined for emphasis by us) In order to term the asset to be capital asset falling with the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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