Recent Decisions Under The Income Tax Act, 1961
By Subash Agarwal, Advocate
1) CIT vs. Kanpur Plasticpack Ltd.
 95 taxmann.com 140 (SC)
Special Leave Petition (Civil) Diary No. 19775 of 2018
Order Dated : 03.07.2018
RATIO : Sec. 148 – service of notice - SLP dismissed against High Court ruling that reassessment proceedings initiated on the basis of notice served under section 148 on accountant of company were vitiated, as accountant was not Principal Officer of Company, nor was there any material to show that he had been authorised by company to accept any notice.
FACTS : Notice under section 148 was served on accountant of company. He had duly been given Power of Attorney to conduct assessment proceedings for that year. Tribunal held that reassessment proceedings were invalid and quashed assessment order on ground that notice under section 148 was not validly served. High Court held that accountant was not Principal Officer of Company, nor was there any material to show that he had been authorised by company to accept any notice and such being case.
FINDINGS : Reassessment proceedings initiated on the basis of notice served under section 148 on accountant of company were vitiated, as accountant was not Principal Officer of Company, nor was there any material to show that he had been authorised by company to accept any notice.
The Special Leave Petition is dismissed on the ground of delay as well as on merits.
Imp Note : SLP arose out of the order of Allahabad High Court in CIT v. Kanpur Plastipack Ltd. 390 ITR 381 (All.)
2) BPTP Ltd. vs. PCIT 95 taxmann.com 234 (Delhi)
W.P. (C) No. 7098 of 2018
Order Dated : 16.07.2018
RATIO : ITAT cannot pass an order for consolidation of appeals pending in different benches without giving notice of hearing to the other side and such order shall specify the reasons for consolidation.
FACTS : The Petitioner is aggrieved by the order of the Income Tax Appellate Tribunal consolidating 13 appeals pending before different Benches. The Petitioner is aggrieved by the cryptic and unreasoned order and relies upon the application filed by one of the parties requesting for consolidating of the appeals. It is submitted that these applications did not disclose any reason as to why consolidation of all appeals, which were pending for a long time and were adjourned at the behest of the revenue by various benches, should be consolidated and listed before one Bench.
The learned counsel for the Revenue seeks to justify the consolidation submitting that similar factual disputes are involved in Assessee's appeal and it was felt that in the interest of justice, it would be essential to consolidate all the appeals to enable the Bench to discern the common picture. The record nowhere discloses nor does the Revenue dispute that the ITAT did give any notice to the Petitioner/assessee before issuing the consolidation order.
FINDINGS : All these appeals preferred by the appellant were listed and heard repeatedly by different Benches. In these circumstances, the Tribunal has to follow the proper procedure.
In these circumstances, all the previous orders are hereby quashed. In case the Revenue wishes to consolidate all these appeals, it shall move a proper comprehensive application before the ITAT, serving a copy in advance to the assessee. The ITAT should issue notice to the Assessee before agreeing on the application and after considering the submission of both the parties, pass a reasoned order.
With aforesaid observations, the present petition filed by the petitioner is allowed and disposed of accordingly.
Cases relied upon :
(i) Olympia Paper & Stationery Stores v. Assistant Commissioner of Income Tax, (63 ITD 148)
(ii) Dr. Prannoy Roy v. The Deputy Commissioner of Income Tax & Ors, [W.P. (C) No. 4742/2018, decided on 04.05.2018]
3) Indian Galvanics Cyrium Foils Ltd. vs. DCIT, Circle- 4(4), Mumbai
 95 taxmann.com 259 (Bombay)
IT Appeal No. 199 of 2002
Order Dated : 06.07.2018
RATIO : Sec 37- Where assessee had incurred expenses for higher education and training of one of its director’s son but failed to place particulars on record like basic qualification, subjects in which he did his administration course; how such subjects had nexus to business activities of appellant, the expenditure cannot be held to be for business purposes.
FACTS : The Appellants - assessee company was engaged in manufacturing copper foils. The assessee had claimed certain amount as expenses incurred under the head 'Management Training and Development expenditure'. It was incurred for higher education and training of one of its director’s son, namely, Harsh Kumar, who was sent to USA for completing course in Business Administration. An agreement was executed with him, who had committed to serve assessee for ten years after completing his course.
The Assessing Officer, however, refused to accept the assessee's contentions and thus, rejected the claim of assessee. On appeal, the Commissioner (Appeals) allowed the claim of the assessee.
On second appeal of the revenue, the Tribunal allowed the appeal of the revenue and resultantly, disallowance was restored as made by the A.O.
FINDINGS : The amount which is claimed by the Appellant-Assessee as deductible allowance was not incurred wholly and exclusively for the purpose of business of the Appellant-Assessee. Appellant did not place better particulars on record like, basic qualification, subjects in which he did his administration course; how such subjects has had nexus to business activities of appellant and so on.
In the result, the appeal allowed in favour of the revenue.
Cases relied upon :
AR relied upon –
(i) Sakal Papers (P.) Ltd. v. CIT  114 ITR 256 (Bom.)
DR relied upon –
(ii) Shreenath Motors (P.) Ltd. v. CIT  365 ITR 536 (Bom.)
(iii) Divyakant C. Mehta v. ITO  365 ITR 423 (Bom.)
4) Sunrise Academy of Medical Specialities ) (India) (P.) Ltd. vs. ITO
 96 taxmann.com 43 (Kerala)
WA. No. 1297 & Wp(C) No. 3485 of 2018
Order Dated : 12.07.2018
RATIO : Section 56(2) (viib) is triggered at the stage of computation of income itself even though assessee had disclosed genuineness of persons who purchased shares ot a premium.
FACTS : A private limited Company, incorporated under the Companies Act, and in which the public are not substantially interested, issued shares at a premium above the face value.. A notice under Section 143(2) was issued and the appellant is said to have proved the genuineness of the persons, who purchased the said shares on a premium. The Assessing Officer then attempted to tax the amounts so received under Section 56(2)(viib) of the Income Tax Act, 1961. The assessee filed a writ petition before the High Court.
FINDINGS : As per Sec. 56(2) (viib), any premium received by a Company on sale of shares, in excess of its face value, if the Company is not one in which the public has substantial interest, would be treated as income from other sources, which cannot controlled by the provisions of Sec. 68. Sec. 68 on the other hand, as substituted with the provisos, treats any credit in the books of accounts, even by way of allotment of shares; for which no satisfactory explanation is offered, to be liable to income-tax. In this case, the aggregate consideration received for the shares exceeding the fair market value will be included as income from other sources. However, when the resident investor is not able to explain the nature and source for the credit seen in the books of accounts of the Company or the explanation offered is not satisfactory then the entire credit would be charged to income tax for that previous year. That is, the entire amounts credited in the books of accounts, for allotment of shares or application money, including the fair market value determined will be charged to tax. However if an explanation is offered and if it is satisfactory in the case of a Company in which the public are not substantially interested, then the charge to tax will only be to that portion exceeding the fair market value determined, which anyway has to occur under Section 56(2)(viib).
The appeal of the assessee was dismissed
Case relied upon :
M/s.State of H.P. v. Gujarat Ambuja Cement Ltd. (2005) 6 SCC 499)
5) Atul Ltd. vs. DCIT, Range1 1, Ahmedabad
 95 taxmann.com 161 (Ahmedabad - Trib.)
IT Appeal No. 1766 (Ahd.) of 2014
Order Dated : 11.07.2018
RATIO : Section 147 – Re-opening on the basis of Change of Opinion is not permissible even within 4 years.
FACTS : The Assessing Officer sought to reopen the assessment on the ground that loss on sale of stores was capital expenditure and hence not allowable.
FINDINGS : Having noticed the fact that the Assessing Officer had raised specific questions vide requisite notice dated 15-10-2010 with respect to allowability on 'loss on sale of stores' and that the assessee had explained the same - without any follow-up question by the Assessing Officer in this regard, the Assessing Officer had indeed formed an opinion about the deductibility of loss on sale of stores. It is also not in dispute that no new material has come to the light on account of which the present assessment proceedings were reopened. On these facts, the reopening was clearly on account of change of opinion by the Assessing Officer - something which is impermissible under the scheme of the Act and in the light of binding judicial precedent. Thus, the impugned reassessment proceedings were to be quashed.
In the result, appeal is allowed in favour of assessee.
Case relied upon :
Gujarat Power Corpn. Ltd. v. Asstt. CIT  350 ITR 266 (Guj.) for the proposition that where the A.O. has raised a query during the course of original assessment proceedings in regard to the issue to re-opening but in the final order he has not discussed anything, it cannot be said that he has not formed an opinion in regard to the said matter and also for the proposition that the principle of change of opinion is applicable even where the re-opening is sought to be done within the four years of the original assessment.
6) CLC & Sons (P.) Ltd. vs. ACIT, Circle-3(1), New Delhi
 95 taxmann.com 219 (Delhi - Trib.) (SB)
ITA no. 1976/Del/06
Order Dated : 19.07.2018
RATIO : In view of the judgment of the Hon'ble Summit court in CIT v. Smifs Securities Ltd.  348 ITR 302 (SC) in which it has been held: "that goodwill will fall under the expression 'or any other business or commercial rights of similar nature”, goodwill qualifies for depreciation u/s 32(1) of the Act.
FACTS : The assessee company took over all the assets and liabilities of M/s CLC & Sons, a partnership firm. An agreement for transfer of all the assets and liabilities was signed between them. As per clause 2 of the said Agreement, all the assets in the books of the partnership firm were taken over by the assessee company alongwith goodwill which was valued at Rs.10 crore, which was also transferred to the assessee company.
FINDINGS : The A.O. held that no depreciation can be granted on genuine goodwill in terms of section 32(1) of the Act, which opinion stands overturned in view of the judgment of the Hon'ble Summit court in CIT v. Smifs Securities Ltd.  348 ITR 302 (SC) in which it has been held: "that goodwill will fall under the expression 'or any other business or commercial rights of similar nature'" and, hence, qualifies for depreciation u/s 32(1) of the Act. Secondly, as regards A.O’s view that the firm has been succeeded by a company and net assets of the firm have vested in the company, and consequently there is no transfer of goodwill in real sense and further the valuation of goodwill done by the assessee in the instant case was erroneous, both the sides candidly accepted that the second broader limb involved in the instant appeal does not precisely emanate from the substance of the question referred to the Special Bench.
The bench agreed with such a common contention and, accordingly, sent the matter back to the Division Bench for disposing of the appeal in above terms.
Case relied upon :
CIT v. Smifs Securities Ltd.  348 ITR 302 (SC)
7) Customer Lab Solutions (P.) Ltd. vs. ITO, Ward- 1(2), Hyderabad
 95 taxmann.com 280 (Hyderabad - Trib.)
ITA no. 438/Hyd/2017
Order Dated : 04/07/2018
RATIO : Where the payment to the U.S. company, who does not have any P.E in India, is in the nature of affiliation fee not involving any transfer of technical knowledge or use of technical knowledge, liability to deduct TDS does not arise.
FACTS : The assessee entered into an agreement with US company for the purpose of its consultancy business and accordingly, paid a sum as fee. The A.O. held that the fee paid as royalty within the meaning of clause (vi)(b) of sub-section (1) of section 9 of the Income Tax Act and disallowed the amount under section 40(a)(i) on the ground that no TDS had been deducted. Before the CIT(A), it was contended by assessee that the amount paid by the assessee to US company was affiliate fee and amount was not in connection with use of any right to use any material or service provided by the non-resident as there was no income accruing in India. After detailed discussion, CIT(A) held that the payment was in nature of royalty under the Income-tax Act and DTAA as well.
FINDINGS : The agreement dated 31-03-2005 between the assessee and US company specifies various terms and conditions and the relationship, vision philosophy which CIT(A) has painstakingly considered and extracted in the order to indicate that there is arrangement for use of technical knowledge. However, as seen from the agreement itself, there are two types of payments. The affiliation fee is one-time payment which does not provide for transfer of any technology. However, there is further fee to be paid "Fees on consulting and reports" in the agreement. This fee will be paid based on the performance, targets achieved by assessee in consulting technology, tools etc. What assessee has paid and claimed was only an affiliation fee and not the fee on consulting and reports. The payment of affiliation fee does not involve any transfer of technical knowledge or use of technical knowledge. As seen from the paper book placed on record, what assessee got is in the form of two magazines which are published by the Harvard Business School with a title 'Balanced Scorecard Report'. This magazine, short of management jargon, is nothing but a periodical magazine with various write-ups, which cannot be considered as a right to use a copy right. Assessee being management consultant, the agreement with M/s. Balanced Scorecard Collaborative inc. of USA, had this high sounding management terminology, but put it simply, assessee has paid only the affiliation fee and not a fee for consultation or for technical knowledge. Since there is no transfer of technical know-how or technical knowledge or use of technical knowledge, the definition 'royalty' either under IT Act or under the DTAA does not apply to the present payment of affiliation fee. Since U.S. company does not have any PE in India, the payment itself per se does not attract any TDS provisions. Since the payment of affiliation fee alone does not result in either providing any technical service or use of technical knowledge, both the A.O. and CIT(A) have erred in considering the fee as in the nature of royalty. Since there is no transfer of technology or use of any technology and payment is only simply for affiliation, the above amount cannot be considered as 'royalty' either under the provisions of Income Tax Act or under the provisions of DTAA.
Cases relied upon :
(i) GE India Technology Centre (P.) Ltd. v. CIT  327 ITR 456/193 Taxman 234 (SC)
(ii) DIT v. Sheraton International Inc.  313 ITR 267/178 Taxman 84 (Delhi)
(iii) Hughes Escort Communications Ltd. v. Dy. CIT  51 SOT 356/21 taxmann.com 171 (Delhi)
(iv) Tata Consultancy Services v. State of Andhra Pradesh  271 ITR 401/141 Taxman 132 (SC)
(v) DIT v. Ericsson A.B.  343 ITR 470/204 Taxman 192/ 16 taxmann.com 371 (Delhi)
(vi) CIT v. Vinzas Solutions India (P.) Ltd.  77 taxmann.com 279/245 Taxman 289/392 ITR 155 (Mad.)
(vii) GE India Technology Centre (P.) Ltd. v. CIT  327 ITR 456/193 Taxman 234/7 taxmann.com 18 (SC)
8) Fidelity Business Services India (P.) Ltd. vs. ACIT
 95 taxmann.com 253 (Karnataka HC)
Ita no. 512 of 2017
Order Dated : 23.07.2018
RATIO: Tribunal has the power to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it which have not been investigated or enquired into by the lower Authorities earlier and which may result in enhancement of tax liability of the assessee.
FACTS : The appellant assessee company bought back its own shares from its holding company at Mauritius named M/s. FIS Holding Muritian Ltd. to the extent of 2,933 Shares having face value of Rs. 10/- per share at a hugely high price of Rs. 2,85,108/- per share during the relevant previous year. The learned Income Tax Appellate Tribunal, Bangalore Bench "B", vide its Order dated 22/02/2017 for AY 2011-12 held partly in favour of the Appellant – Assessee that Appellant Assessee was not liable to pay tax on 'Distribution of Dividend' as defined under Section 2(22)(d) of the Income Tax Act, 1961 in terms of Section 115-O of the Act on the pay-out by it for buy-back of its own shares from its foreign Holding Company, M/s. FIS Holding Muritian Ltd. incorporated in Mauritius. The learned Tribunal held that after insertion of Section 115-QA of the Act with effect from 01/06/2013, the purchase of its own shares by the Company in accordance with the provisions of Section77-A of the Companies Act, 1956 is chargeable to income tax as Distribution Dividend Tax (DDT) but since the transaction in the present case of buy-back of shares took place prior to 01/06/2013, such buy-back of the shares between the period 01/04/2000 to31/05/2013 would be taxed as 'Capital Gains' in the hands of the recipient in accordance with the provisions of Section 46-A of the Act and no such amount would be treated as dividend in view of exclusion part of Section 2 (22)(iv) of the Act. The Assessing Officer also held that the Capital Gains in the hands of the Holding Company (Mauritius Company) was also not chargeable to tax in India as per the provisions of Article 13(4) of the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA).
However, the learned Tribunal observed that there is another aspect of this transaction of buy-back at an abnormally high price of Rs. 2,85,108/- per share having face value of only Rs. 10/- per share and therefore the payment made by the Assessee - Indian Company over and above the fair market price of the shares of the Assessee would not be treated as part of the purchase price because, the transaction is between the two closely related parties and not at the Arm's Length Price (ALP) and therefore the payment for buy-back in excess of the fair market price of shares of the Assessee - Indian Company, would certainly fall within the ambit of Section 2(22)(e) of the Act and could be taxed as Dividends, in the hands of the Assessee Company.
The learned Tribunal said that since this aspect of the matter was not examined by the Authorities below and it could be treated as a device for transfer of substantial 'Reserves and Surpluses' by the Indian Company to the Holding Company at Mauritius as BEPS -Base Erosion and Profit Shifting and it could be a colourable device and a dubious method of avoiding tax in the garb of buying back of shares at a highly unrealistic and inflated price, therefore, the matter deserved to be examined again by the Assessing Authority on the said issue of fair market price of shares, vis-à-vis buy-back price of the shares by the assessee Indian Subsidiary Company.
FINDINGS : "SATYAMEV JAYTE" (Truth alone Triumphs) is the quote from Mundaka Upanishad, the concluding part of the sacred Hindu Vedas and it is the North Star of our Judicial System inscripted at the bottom of our National Emblem, Ashok Stambh and Dharm Chakra.
It tells us that, the 'truth' should be the Guiding Star in the entire judicial process. Truth alone has to be the foundation of justice. The entire judicial system has been created only to discern and find out the real truth. Judges at all levels have to seriously engage themselves in the journey of discovering the truth. That is their mandate, obligation and bounden duty. Justice system will acquire credibility only when people will be convinced that justice is based on the foundation of the truth.
Tribunal has the power to give directions for fresh enquiry into the aspects of the subject matter of appeal filed before it either suo motu or on any grounds raised by either party to the appeal which have not been investigated or enquired into by the lower Authorities earlier and which may result in enhancement of tax liability of the assessee.
In this case, the Tribunal was right and within its jurisdiction in directing the examination of the fair market value of the shares bought back by it for the A.Y.: 2011-12 in question.
The Appeal of the Appellant -Assessee Company was dismissed.
9) DCIT-1(1)(2), Mumbai vs. M/s. Gilbarco Veeder Root India (P) Ltd.
ITA NO. 1003/MUM/2017
Order Dated : 20/06/2018
( SOURCE : itatonline.org )
RATIO : Deemed dividend u/s 2(22)(e) can be taxed only in the hands of a registered shareholder. Apex court decision in the case of Gopal & Sons (HUF) is distinguishable on facts.
FACTS : Assessee company is engaged in the business of manufacture and sale of petrol dispensers, related accessories apart from carrying on maintenance services and research & development activity. An addition was made by the A.O. for a sum of Rs. 90 crores by invoking Sec. 2(22)(e) treating the same as ‘deemed dividend’.
Assessee had received a sum of Rs.90 crores from one, M/s. Portescap India Pvt. Ltd. There was common shareholder, both in the assessee-company and Portescap. The 100% shareholding of assessee-company is held by one, M/s. Kollmorgen India Investment Company, Mauritius. The A.O. held that every kind of lending would be covered by the expression ‘loan’ and ‘advance’ for the purposes of Sec. 2(22)(e) of the Act. On the alternate plea, the A.O. inferred that the impugned sum was covered by the second category of payments referred to in Sec. 2(22)(e) of the Act, namely, the recipient of the amount being a concern in which the shareholder has a substantial interest. For the said reason, the A.O. treated the receipt of Rs.90 crores from Portescap as deemed dividend u/s 2(22)(e) of the Act.
FINDINGS : Sec. 2(22)(e) covers within its sweep three categories of payments. Firstly, the payment by way of loan or advance to a shareholder; Secondly, payment to any concern in which such shareholder is a member or a partner; and, thirdly, any payment made on behalf of or for the individual benefit of any such shareholder. Ostensibly, assessee-recipient is not a shareholder in the payer company, i.e. Portescap and, therefore, it is not covered by the first category of payment. In fact, it is the second category which is sought to be invoked by the A.O. There is a common shareholder, both in the assessee-company and Portescap, and even if we were to assume that the amount received by the assessee-company is for the benefit of the stated aforesaid common shareholder, yet, it could only be assessed in the hands of such registered shareholder and not in the hands of the assessee-company.
In the result, this case is in favour of the assessee.
IMP. NOTE: The Tribunal in the instant case has distinguished the Apex court decision in the case of Gopal & Sons (HUF) 77 taxmann.com 71 in the following words :
“So far as the reliance placed by the Revenue on the judgment of the Hon'ble Supreme Court in the case of Gopal and Sons (HUF) (supra) is concerned, the same, in our view, is quite inapplicable to the facts of the present case. Firstly, the assessee before the Hon'ble Supreme Court was a HUF and the issue was as to whether the loans and advances received by the HUF could be treated as ‘deemed dividend’ within the meaning of Sec. 2(22)(e) of the Act. Notably, in the case before the Hon'ble Supreme Court, the payment was made by the company to the HUF and the shares in the company were held by the karta of the HUF. It is in this context that the Hon'ble Supreme Court upheld the addition in the hands of the HUF as factually the HUF was the beneficial shareholder. The fact-situation in the case before us stands on an entirely different footing inasmuch as the assessee-recipient of money is neither the registered nor the beneficial shareholder of the payer company, i.e. Portescap. Ostensibly, the common registered as well as beneficial shareholder of assessee-company and Portescap is Kollmorgen and not the assessee-company. Therefore, the decision of the Hon'ble Supreme Court in the case of Gopal and Sons (HUF) (supra) is inapplicable to the facts of the present case.”
Cases referred to :
(i) PCIT vs M/s. Ennore Cargo Container Terminal P. Ltd., T.C (A) Nos. 105 and 106 of 2017 dated 27.03.2017
(ii) CIT vs Universal Medicare (P.) Ltd., 324 ITR 263 (Bom.)
(iii) CIT vs Impact Containers, 367 ITR 346 (Bom.)
(iv) CIT vs NSN Jewellers (P) Ltd., [ITA no. 2312 of 2011] (Bombay HC)
10) DCIT, Circle- 2(1), Hyd vs. Inventaa Industries (P) Ltd.
 95 taxmann.com 162 (Hyderabad - Trib.) ( Spl Bench)
IT Appeal Nos. 1015 to 1018(HYD.) of 2015
Order Dated : 9.07.2018
RATIO : Sec 10(1) - Just because mushrooms are grown in controlled conditions, it does not negate the claim of the assessee that the income arising from the sale of such mushrooms is agricultural income.
FACTS : The assessee was treating the income from growing mushrooms (Edible white button mushroom) as "income from agriculture" and hence exempt u/s. 10(1) of the Income Tax Act, 1961. A survey operation u/s. 133A was conducted at the mushroom growing unit of the assessee-company. During the course of survey, statements were recorded from two Vice Presidents of the company.
FINDINGS : Basic operations are performed by expenditure of human skill and labour on land by the assessee, which results in the raising of the 'product' called "Edible white button mushroom" on the land and as this product has utility for consumption, trade and commerce, the income arising from the sale of this product is agricultural income and hence exempt u/s. 10(1) of the Act.
With the advancement of modern technology, most of the crops, fruits, vegetables and flowers are being grown in controlled conditions, in green houses and in pots. In these advanced scientific agricultural techniques, soil is removed from the land and is placed in different containers such as pots, trays and stands etc. and agricultural operations are performed on them to yield the desired results of production of products which have some utility.
Just because mushrooms are grown in controlled conditions it does not negate the claim of the assessee that the income arising from the sale of such mushrooms is agricultural income.
ITAT upheld the order of the Ld. CIT(A) on this issue in favour of the assessee.
Cases referred to :
(i) M/s. Venkateswara Hatcheries Pvt Ltd (237 ITR 174)
(ii) Chander Mohan v. ITO [52 taxmann.com 203] (Chandigarh- Trib)
(iii) CIT v. Raja Benoy Kumar Sahas Roy  [32 ITR 466]
(iv) CIT v. K.E. Sundara Mudaliar  18 ITR 259 (MAD.)
(v) Panadai Pathan v. Ramasami Chetti  ILR 45 Mad
(vi) Commissioner of Income-tax v. Soundarya Nursery  241 ITR 530 (Madras)
(vii) CIT, Chennai v. K.N. Pannerselvam  75 taxmann.com 98 (Madras)
(viii) DCIT v. Best Roses Biotech Ltd. (2012)17 taxmann.com 56 (Ahd.)
11) Titagarh Industries Ltd. vs. DCIT, Circle- 4(1), Kolkata
 95 taxmann.com 288 (Kolkata - Trib.)
IT Appeal No. 1052 (Kol.) of 2017
Order Dated : 04.07.2018
RATIO : Sec. 50- When assessee had sold plant and machinery along with capital WIP, cost incurred on capital WIP was required to be reduced as 'cost of acquisition' while arriving at taxable amount of capital gain/loss under sec. 50.
FACTS : During the relevant year, the assessee had sold its scrap paper manufacturing plant including capital work-in-progress ('Capital WIP') for consideration of Rs. 27.50 crores to M/s. Ajmera Steels Pvt. Ltd. (ASPL). The Commissioner took a view that in terms of section 50(2), capital WIP did not form part of block of assets and for that reason did not qualify to be called capital asset. In his opinion the cost of capital WIP would not be taken into account in arriving at short-term capital gain chargeable under section 50. In his opinion the subject matter of sale to ASPL was only scarp paper machinery and not capital WIP. He thus passed a revisional order under section 263 directing A.O. to compute short-term capital gain after excluding cost of acquisition of capital WIP.
FINDINGS : On the facts of the case, since the assessee had sold the plant and machinery along with the capital WIP, the cost incurred on capital WIP was required to be considered and reduced as and by way of 'cost of acquisition' while arriving at the taxable amount of capital gain/loss. On this count also the Principal Commissioner's allegation in the show cause notice that the cost of acquisition of capital WIP could not be considered for computing the short-term capital loss is rejected.
In the impugned order the only reason given by the Principal Commissioner for not accepting the cost of acquisition of capital WIP was required to be reduced from the sale consideration for arriving at the taxable capital gain/loss was that no evidence was furnished to show that the consideration was also received towards the capital WIP and not the plant and machinery alone.
In this regard, it is, however, found that the terms of the agreement between the appellant and ASPL sufficiently establish that the assessee had in fact sold the plant and machinery along with the capital WIP as can be seen from the subject agreement. This contemporaneous piece of evidence clearly goes on to show that the sale consideration of Rs. 27.50 crores was paid for purchasing the plant and machinery and the capital WIP lying at the assessee's factory. There is sufficient merit in the assessee's submission that no prudent businessman would spend Rs. 27.50 crores to purchase fixed assets whose useful value as per the provisions of the Companies Act, 1956 was Rs. 3,04,49,393 and the WDV for tax purpose was only Rs. 5,38,761. In fact the original cost of the fixed assets at the time of purchase by the appellant/assessee was Rs. 4,12,55,831.
In the circumstances, by no stretch of imagination one can argue that any blind person would pay a consideration of almost seven times of the actual cost at which the machinery was originally acquired but at the relevant time of sale have been used, old, depreciated and worn out scrap item. Indeed therefore, the assertion of assessee that the capital WIP was sold along with the plant and machinery which were lying idle in the appellant/assessee's factory whose business was under suspension is correct. Accordingly, both the assessee as well as the Assessing Officer were right on the facts and in law in taking into account the cost of acquisition of capital WIP for computing the overall loss accruing on sale of fixed assets including capital WIP. For the reasons set out above, the Principal Commissioner's finding in the impugned order that no evidence was furnished before him satisfying the claim raised by the assessee is not tenable and, therefore, the jurisdiction invoked for exercising his revision jurisdiction is not tenable in the eyes of law and, therefore, the impugned order passed by the Principal Commissioner is quashed.
In the result, appeal of the assessee was allowed.
Cases referred to :
(i) Malabar Industrial Ltd. v. CIT  243 ITR 83/109 Taxman 66 (SC)
(ii) CIT v. J.L. Morrison (India) Ltd.  366 ITR 593/225 Taxman 17/46 taxmann.com 215 (Cal.)
(iii) Jt. CIT v. Graphite India Ltd.  89 ITD 415 (Kol.)